I wrote an answer to one of the rare posters on my blog yesterday and, in hindsight, I liked the answer so much that I thought I should make it into a post in its own right.
Poster David, offered a link to a 60′ segment discussing the how and why of the crisis coming to the conclusion that it all happened because of corruption.
Below is my comment on the link only slightly amended from the original.
Those are great links. There is absolutely no doubt that corruption and criminal dereliction of duty on the part of our leaders and regulators has been established. Take your pick. Corruption has been evident going back a good many years but has become more evident as of the LTCM debacle and blatant as of the Enron fiasco. Not to mention that two years after the Enron spectacular, Fannie Mae announced it was unable to publish its books for a period of eighteen months… 18 months!!… and nobody thought of going in to take a closer look at what was happening… ? It beggars belief. And then Madoff… and then Skilling and his gang… and then … and now even Gordon Brown admits to having made “mistakes”… but considering that what he did was against the letter of the law, Gordon Brown should really be admitting guilt rather than mistakes… I think the trend is clear no?
Corruption has been proven beyond any reasonable doubt. But most people are still blind sided as to the how and the why this should have been allowed to happen.
Is it just corruption? Of course not. There must be something else at work. Considering the number of agencies and regulators that have a say in anything that is done, it is unlikely that corruption was the only enabler. Rather, the enabler is the necessity to allow corruption to happen for the “sake” of the monetary system.
What it comes down to is the efficiency of money.
In a fiat monetary system, the system is predicated on inflation. However, as you by now know, inflation is exponential in character. Therefore, inflation conforms to the law of diminishing returns.
Now! If inflation is necessary (it is or else we would not need a fiat monetary system) but its effects wane over time, it follows that the system must regularly be allowed to be purged.
However, if the authorities do not wish to allow the system to reset naturally and insist on maintaining it on a constant expansionary trajectory, it follows that the authorities must employ unorthodox practices in order to short circuit the natural tendency of the system to purge itself. In this regard, bailouts and subsidies are the clearest and apparently most benign tactics to short circuit a fiat monetary system.
However, not only do bailouts and subsidies create overcapacity but they also lead to entities that become too big to fail thus become inherently corrupt. The direct result of overcapacity and too big to fail entities is that more economically viable entities are at best stifled or, in the worst case scenario, smothered at birth.
All this is perpetrated for the sake of the monetary system. That is because if the monetary system collapses then so does the state. Therefore, the monetary system is directly correlated to a sovereign’s raison d’etat.
Thus, the genius of a fiat monetary system is lost the minute it is subordinated to political expediency – and in a society based on personal and political freedoms, the monetary system will always and everywhere be subordinated to political logic. And by the way; political logic is no logic at all.
Hence in an unchecked fiat monetary system, corruption is an implicit instrument of state in order to maintain the system going.
This is also the reason why in a fiat monetary system government eventually becomes the largest actor in the economy (the largest employer and the largest spender). And this is why, in turn, in a fiat monetary system, the economy loses efficiency over time – ergo, towards the end of the inflationary cycle, financial value runs away from intrinsic value. In fact, large government is the hallmark of an under developed country that uses government as a way to buy political favor within society (think Mugabe as an extreme example).
What most people are omitting to see or do not want to discuss is this. If as is clearly evident the efficiency of money decreases over time, it is obvious that you can only keep the system going for a finite period of time. However, the longer you postpone the day of reckoning, the bigger the reckoning.
Fiat monetary systems should be allowed to purge regularly. If we insist on refusing to take small hits regularly, we are bound to one day take a big hit that will annihilate society and the social order.
I think we are there.