ISIS Report 19/08/08
Announcing Science in Society #40 - Winter 2008
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From the Editors - Financing Poverty
 Rescuing the rich instead of the poor
More than 116 million people around
the world demonstrated on October 17-19 to demand that the governments of
22 wealthy nations meet the promises they made at the Millennium Summit 2000
to wipe out extreme poverty and disease in the developing world by 2015. The
rich nations had undertaken to dramatically increase their foreign aid, and
this commitment is reaffirmed every year by the leaders of the G8 nations.
But shamefully, not only has foreign aid not increased, it has actually shrunk
in real terms for the past two years.
Within the past few months, a financial crisis of unprecedented proportions
has hit Wall Street and rapidly spread to Europe and the rest of the world.
And in complete contrast to the slow, miserly way in which the wealthy nations
have treated the poor, they sprang to action with the utmost generosity to
rescue the rich.
By the end of October,
£1.8 trillion have been wiped off the global economy, according to Bank of
England’s latest estimate. The US bailout
alone has already cost the taxpayer more than US$1 trillion. That’s a huge
amount, but still small compared with the total value of the world’s economy
at $65 trillion, and a mere drop in the ocean against the $596 trillion in
outstanding global derivatives (financial contracts). The taxpayer’s money
is being thrown into a “bottomless pit”, says David Korten, a long-time critic
of the financial system and author of international bestseller, When Corporations
Rule the World (1995, 2001). The danger is that if governments continue
to misdirect massive public funds towards rescuing the financial system, its
collapse will bring down the real economy.
It is important to
distinguish between the real economy of people trading in goods and services
based on real value, and the financial system, which trades in money as such,
in sub-prime mortgages, derivatives, hedge-funds, and private equities that
have become “reckless speculation that produces nothing of real value”. It
is the difference between “Main Street” and “Wall Street”.
What’s more, it is
the financial system that has impoverished people and planet because mainstream
economists and governments advised by them are committed to the dominant model
of unlimited growth based on the ideology that competition in the “free market”
will fix all, and because they cannot see the difference between money and
real wealth.
Market is not free, and money is not wealth
Conventional wisdom in economics
has it that markets freed from government interference will self-correct.
That’s an important assumption for the theory and much of the justification
for opposing regulation, but it is simply not the case. As George Soros (“speculator,
investor, philanthropist, political activist”) – someone who understands the
system well enough to have benefited enormously from it - describes
in his book, The New Paradigm for Financial Markets: the Credit Crisis
of 2008 and What It Means, whenever there is anything more than a minor
fluctuation, the authorities generally have to come to the rescue, though not to the extent of imposing
the necessary regulation
What is happening today
is unusual only in the magnitude of the necessary intervention; there are
many earlier examples, including the bankruptcy of Continental Illinois in
1984 and the failure of Long Term Capital Management in 1998.
Korten
writes: “We can now see clearly that the more Wall Street freed itself from
regulatory oversight, the more its most powerful players manipulated markets
and politics to their personal benefit. The more reckless their risk taking
became, the greater the instability of the financial system, and the greater
the threat to the rest of the economy.”
Korten clearly distinguishes
money from real wealth. Money is an essential medium of exchange, and makes
modern economic life possible. “In our current money system, the money that
Main Street depends on to facilitate productive economic exchange and investment
is created when Wall Street’s private banks issue loans. You might say that
the business of Wall Street is creating money. This does not in itself create
wealth. Money is only an accounting chit
useful as a medium of exchange. Wealth creation is the business
of Main
Street. This suggests that the only legitimate reason for the existence
of Wall Street is to provide an orderly flow of money to meet the needs of
Main Street.” [emphasis added].
So long as appropriate
public regulation was in place after the financial crash of 1929 to hold it
accountable to Main Street, Wall Street performed its appropriate tasks
reasonably well. As it became less and less accountable, however, it turned
from serving Main Street to preying on it, creating “a mind boggling variety
of ‘heads I win, tails you lose’ financial games.” People were encouraged
to run up credit card and mortgage debts beyond their means, then hit with
fees and usurious interest rates as they fell behind in their payments. The
banks sold the high-risk mortgages on to brokers who packaged them into tradable
securities and sold them on again to other banks, and used the proceeds to
finance more lending to unqualified borrowers. Many of these overrated securities
ultimately ended up in the portfolios of retirement funds, and so the risk
is passed to unsuspecting Main Street workers
and pensioners.
Wall Street also
found it profitable to merge regulated banks with unregulated investment houses
to facilitate insider dealing and finance a proliferation of highly leveraged
hedge funds and private equity funds that specialize in gambling with other
people’s money using exotic financial instruments no one fully understands.”
In short, Wall Street
players created and profited from financial and real estate bubbles and debt
pyramids “that used borrowed money to create paper assets that became collateral
for more borrowing to create more paper assets to justify compensating packages
for themselves in the hundreds of millions of dollars.” In 2007, the 50 highest
paid private investment fund managers got an average $588 million in compensation,
which is 19 000 times the average worker’s pay. As Korten says, and many
would agree, “It may be legal, but it is not wealth creation. It is an act
of theft.”
Toxic money
Wall Street and its globally extended
financial system create not wealth but paper money based on usury at the expense
of unbearable debt, misery and poverty to the most vulnerable people and the
most vulnerable nations.
Worse still, the enormous
paper assets created out of nothing go to fuel conspicuous consumption and
exploitation of the earth well beyond what it can thermodynamically sustain.
Indeed, money in an economic system is often compared with energy in the living
system. When money ceases to flow, the economic system collapses, just as
the living system cannot function without energy flow. This analogy holds
so long as Wall Street is held accountable to the real economy, but breaks
down completely with the proliferation of the unregulated financial sector.
Be warned: all money is not equal; that created in the financial sector is
not energy as much as pure entropy, the toxic dissipation that ultimately
kills the system. In healthy systems, money, like energy, flows symmetrically
in just exchange based on real values of goods and services, so little entropy
or waste is generated (see The
Rainbow and the Worm, The Physics of Organisms for a
detailed exposition on a new theory of the organism relevant to this discussion).
Rein in the financial predators and shift to a circular economy of nature
Korten argues that instead of
trying to bail out Wall Street’s financial predators, we need a proper plan
to rid Wall Street of its predatory elements and create a new system accountable
to the needs of the real economy. Hedge funds and private equity funds should
be dismantled, as they “pose great risks to society while performing no beneficial
function” Anti-trust laws should be used to break up all excessive concentrations
of corporate power, especially the banking conglomerates that have been fuelling
speculation in global financial markets. A system of federally regulated community
banks should be created that act as intermediaries between local people who
want to deposit their savings securely and others who need a loan to buy a
home or finance a business. (Until recently, the UK had a large number of “building societies” which traditionally
played this role for mortgages. Over the past 10 or 15 years, almost all of
them, including Bradford & Bingley, Halifax and Northern Rock, have turned
themselves into banks, with disastrous consequences that are all too
well known. Korten’s plan would reverse the process.) Finally, proceeds
from “taxes on the ill-gotten gains of those who created the financial mess”
should compensate pensioners and home-owners and others they victimized.
In addition, we would
like to see the dominant model replaced by a circular economy that mimics
nature, in maximising the efficient use of renewable energies, the sequestering
of carbon from the atmosphere, and the recycling of “wastes” into resources.
This circular economy will prove itself most effectively in organic, localised
food and energy systems that can free us from fossil fuels while feeding and
energizing the world (see Food
Futures Now: *Organic *Sustainable *Fossil Fuel Free
, ISIS publication) . After all, if you grow your own food without
having to buy fertilizers, pesticides, or seeds, you are not only safe from
financial predators, but also from corporations like Monsanto that aim to
monopolize your food supply In that way, we can save ourselves, the economy
and the climate all at once.
Contents
From the Editors – Financing Poverty
GM-Free
GM is Dangerous and Futile
We Need Organic Sustainable Food and Energy Systems Now
GM is Not the Way to Sustainability
Why Prince Charles is Right
We Need GMO-Free Food and Agriculture for Food Security
Prince Charles Speaks for the People and for Many Scientists Too
USDA Gift to Monsanto
Biogas Economy
The Biogas Economy Arrives
Dream Farm 2 a Work of Art
Converting Waste Paper to Biogas, a Class-room Project
Letters to the Editor
Climate Watch
Organic Agriculture and Localized Food & Energy Systems for Mitigating
Climate Change
Old Growth Forests Are Carbon Sinks and Must Be Protected
Quantum information
Quantum Computer or Red-Flag?
No Nuclear
Nuclear Renaissance Runs Aground
Close-up on Nuclear Safety
Nuclear Industry’s Financial and Safety Nightmare
Old Nuclear Cash Cows Exposed
The Nuclear Black Hole
Science & Art
Salvador Dalí, Paranoia and Dissolution of Time
Technology Watch
DNA Identikit - Barcode for Biodiversity & Fingerprint for Everything
Else
Food
The Full Monty on Food
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