Back to first principles: money we can trust

When money was gold, Kings had their likenesses struck on the coinage. A coin struck with the Royal likeness could be trusted; it showed not only who was boss but also that the coin was pure. But it’s easy to tell gold; it’s shiny, yellow and very heavy.  With paper money, it’s more important to be able to trust the notes that circulate freely; modern banknotes have highly sophisticated anti-counterfeiting features.

But much more significant that the trust we place in metal or paper is the trust we place in people and institutions. We have a credit crisis; it is a crisis of trust, both etymologically (the root of “credit” is belief) and in fact: we don’t believe that we’ll get our money back, so we don’t lend it.  We’ve stopped trusting people and institutions, because there are so many broken promises.  Promises that could never have been kept,  so should never have been made. This, fundamentally, is the core of the problem (if not yet the solution…. I will get there: that’s one promise I will keep!).

If the core of the problem is a pile of unkeepable promises, the cause is a financial system which rewards the extraction of these promises. The financial services industry, the shoal of vampire squid, has a business model which takes its fees, and thus its profits,  not when promises are kept, but when they are made. It is, therefore, in its interests to keep getting us, our governments and everyone else to keep making promises, whether or not they can be kept.

In my last post I pointed out that we have to consider the people involved, rather than the institutions, in any economic or competitive analysis.  It’s particularly true in this case. Most people who work in financial services are paid with some form of commission scheme. The mortgage broker who sold me my endowment mortgage in 1989 was paid for getting two promises: one from me and my partner to pay interest and premia for the next 25 years, and one from the insurance company to pay us enough to repay our mortgage in 2014.  That promise won’t be kept; it couldn’t be kept, it should never have been made, but the broker swanned off with a commission for getting it made.  Small beer compared to the promises that have been made and are still being made, although it should be obvious they cannot be kept. The promises the Greeks are making about their debt. The promises governments are making about our pensions. And still, bankers are being paid for getting people to make promises that can’t be kept.

So an essential part of the solution is to start paying bankers only when promises are kept.  If promises are keepable, we might start learning to trust money again, and we might then see a change.

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