Given the complex and diverse societies we live in, financial/credit systems are incredibly important. Banks, CBs, dealers/traders, and governments all play a vital role in helping society function in a reality that is inherently uncertain and interdependent. A variety of entities work to create a network which allows us to engage in very complex exchange across time. Given the nature of the system where many diverse communities are connected, money-tokens (paper notes/coins etc) were never an adequate placeholders to store "promises." Therefore the monetary system as a network that records transactions using primarily a digital points system (your account balance is the number of points you have) is vital. Now factor in the rise of globalization and the internet both of which add another layer of complexity. The US banking/payment (which creates accounts and certain contracts) and financial system (which creates and trades contracts) is more dependent on foreign networks than ever.
There is a lot of trust involved. That said, trust isn't
enough because these systems are prone to abuses. Close-knit communities
can monitor one another in a way in which actors in the modern complex network
can't. Without these interconnected networks we simply cannot engage in
everyday life. They are indispensable. They have also become so
complex that it takes a tremendous amount of time to conceptualize the
inter-linkages that exist throughout the global interconnected networks.
This complexity is prone to being gamed where individuals can
place there institutions at vital parts of the network (or form relationships
with other parts of the network) where their failure threatens the entire
system as a whole (Systemically Important Financial Institutions).
This imbalances the power structure and such entities can then obscure
the social discussion* while lobbying to change the regulatory structure
in favorable ways.
Again credit/money= access to the network across time.
Credit/money are the records which represent a claim somewhere and
sometime on the system. Credit/money and debt are two sides of the same
transaction. A person who issues a loan agrees to accept access to the
system today (to acquire something of need via spending), but must return the
access "key" (a deposit balance + interest) at a future specified
date (repayment). As mentioned before, if the buyer of the loan is a bank
then new deposits (keys) are created. If the loan is purchased by a
non-bank financial institution then this an asset swap where the financial
institution forgoes access to the payment system today in exchange for a claim
on the individual.
Where can the system go wrong? Systemic issues may arise
when the “keys” are purposely made scarcer than need be or if the keys are
hoarded. This creates a situation where the debtor class as a whole
cannot actually repay their obligations.
*A vast array of economists and financial types understand that
today the supply of power within the network (financial wealth) is being
concentrated. This results in the denial of access to large subsets of
the population which depend on the network (exacerbating the imbalance).
A potential solution is to challenge the existing power structure by
having the institution of government (Congress/Treasury, central bank) become
more powerful within the network which would allow them to freely grant access
more broadly. Unfortunately, because we have tokenize money in the minds
of the population, way too many believe money is something that can be run out
of.
This isn't to suggest that there aren't any constraints to the
creation of credit/money. Too much access at any one time can create
physical strains associated with overproduction (which can lead to a rising
price level as the system adjusts), but as we have seen since the recession too
little access creates imbalances, desperation, and exploitation.
Therefore a socially responsible monetary, banking, and financial system
service a great social purpose. These institutions play a vital role
in the allocation of credit and in doing so help to determine how society's real resources are utilized. Ideally, those that are able to make the best use of the real resources within society are able to attain the credit they need to transact within the system. In enabling this, the financial system helps promotes the very productive investment that will cause financial claims to retain their real value in the future.
Financial wealth is the accumulation of deposit accounts and financial
securities. This accumulation can imbalance the power structure where
these entities have excess claims on others thereby making them powerful constituents
in the economy. This can become problematic if this financial wealth is used to distort the political process in a way that perpetuates this
imbalance rather than facilitate productive investment. In the former, concentrated financial wealth risks inhibiting diversity and resilience within the system which can produce a wasteful use of real resources.
It can also allow for powerful groups to totally obscure the debate
by promoting misconceptions pertaining to the function of the monetary and financial system (the bank of
England video talks about this where they state the text books being taught are
wrong!). Some of these prior poor assumptions which have been rooted out since the crisis as being false were certainly believed to be true prior to these course of events. Humans are fallible! Honest ideological errors were certainly made and are always being
made. Reality transforms rapidly rendering certain prior assumptions obsolete.
Here are just a few:
-The government creates most of the money supply =
false.
The financial system creates different forms of money, bank
deposits being the dominant form. Governments grant this privilege to the
private banking system while also providing them with legal
support. The Fed insures the orderly functioning of this system by
providing lender of last resort services especially in times of
crisis. This is done with the understanding that the government
is allowed to regulate banking. -Money multiplier/fractional reserve lending = false as causality runs in the opposite direction as lending creates deposits and the need for reserves.
Deposit account is a claim that allows access to the payment system today whereas a financial security is contract/claim that allows access to the network at a specified future date.
-Money is a finite good = false.
Whatever we deem to be money is a record of a social interaction (social relationship) which cannot be tangibly exhausted.
Inspired by:
What is Money?...and Why Does it Matter? Felix Martin talks
at St Paul's Cathedral
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