ECB, Free money, Sun and Moon Philosophy

26 Dec 2011    

News: European banks flock to ECB's free money (Bloomberg)

The European Central Bank has a responsibility to keep the banking system functioning, and it has decided to do that by offering banks very cheap long term loans. In fact these loans are so generous that Bloomberg and others have described them as "free money".

Of course there is no such thing as free money, free money is just a magic trick that shuffles the money about, and if you watch what is going on carefully enough you see it just a sleight of hand trick that benefits one at the cost of the other. In this case what we are really talking about is a transfer of wealth to European banks from everyone else. This kind of operation is inequality promoting because "the ripped off lied to little people" don't have the skill to hedge against inflation, nor exploit financial anomalies, and the spread between their mortgage rate and the "risk free rate" widens dramatically. So this action is like giving the rich a money printing press, and shutting the little people out of the party, and increasing the margin the rich earn on the little people's loans. You can hear them all outside screaming as we pop open the champagne bottles, and we lean out of the window and say "don't worry it will trickle down!". Those of us who run hedge funds in Switzerland are laughing all the way to the bank, but the journalists and politicians who are supposed to represent the people's interest and are now breathing a sign of relief at the stabilization of the banking system don't think about the long term picture. They don't realise that the trickle down is an illusion because the value of the Euro is being destroyed at the same time, it's actually a completely trickle up operation, at least at the longer term time perspective.

Newspapers complain that austerity costs jobs, they say look at the USA - it's growing at 2%-3% per year racking up debts instead of implementing budget cuts, so stimulus is the logical choice. A word that is suddenly fashionable in the West today is "pragmatism", unfortunately populist democracy is an intuitive morality based political system not a technocratic political system, and the economic numbers the politicians have clutched onto have no long term predicative power anyway so they are all but useless to pragmatists anyway. Everyone knows that tremendous socioeconomic system reforms are required across the Western world, but the whole topic is so far above both the average man and the politicians and the journalists that the big picture economic debate is essentially dead, at least in the Anglo-Saxon world - yet history is filled up with examples of countries that blew up trying to keep the car on the road shuffling money instead of thinking about the longer term picture, from Germany in the 1930s, to the United States in the 1970s, to Zimbabwe today.

The crisis reminds me of story told by Plato. The Great Philosopher Tharles was walking along one day studying the stars looking upwards when he fell into a pit. An attractive and witty Thracian serving girl jeered at him for being so eager to know the things in the sky that he couldn't see what was before him at his very feet. It's a joke about philosophers who are so long sighted and starry eyed they come across as bumbling idiots or mat hatters in ordinary conversation. Yet the crisis today brings to mind another vision. It makes me think of great statesmen crawling in the dirt, studying the consistency of soil through microscopes like the medieval doctors who studied stool samples. They turn an inch to the left and an inch to the right looking for the optimal path, but the crisis just keeps getting worse. A Thessalian witch screeches why didn't you Emperors of Wisdom turn left three hours ago, can't you see you're driving the mule train into a volcano. There's a yell from the crowd "the emperors are wearing no clothes", then a hail of laughter, then a sudden violent shift in the mood.

So what are the real numbers pragmatists need to look at? In the Apology Socrates was accused of studying the things in the stars or the depths or the earth instead of studying real life. Perhaps I could say there are philosophers who look up at the sun and philosophers who look down at the moon. To understand this idea ask yourself these questions which all circle around a certain difference in thinking between people in the West and East: Which matters more, who you are, or what you do for a living? Do you want to the world to become an image of yourself, or do you want the world to rely on your skill? Do you want to show your son the bright colours of your personality, John Wayne style; or do you show him how you have achieved the mysterious every changing dehumanized shape of perfection, Bruce Lee style? Would you rather be loved by billions of ordinary people, or by a handful of the smartest people in the world? When you die will the gods say you were an all round superguy or a single pointed genius, and which do you think the gods value more?

The Western world is by in large Dionysian, we want people to love our human side, we are the sheep in the herd who hope all the other sheep will turn into images of ourselves. The skill of the elite is to look the part, they have to win people's hearts without being abrasive, so they develop a certain charisma and smoothness and personality that impresses everyone, but deep down they are bozo actors not scientists, and if they meet a Socrates they fall to pieces. The big fish in the Western world are as insatiable as Alexander The Great or Hitler; the little people don't care about anything except going to the pub and watching TV. In the East it's a negative image, people are naturally focused on something other than themselves, they try to discard their human colour and become atoms in the hive. In the East good comes naturally from their way of thinking, like a male scientist who has dedicated himself to his work, in the West evil comes naturally from our way of thinking, like a female poet who is constantly thinking about herself. Just as a good woman is sweetness and light but a corrupt woman is the ultimate evil, so the Western way can triumph when it connects with something divine, as it did during Ancient Greece or the Age Of Enlightenment, but for most of history it is the channel by which the devil injects all the evil into the world. Both the Greeks and the Puritans saved the west by teaching people to be less Dionysian, the Greeks in philosophy, the Puritans in hard work. Today, however, the West is full of attention deficit disorder self obsessed twitter poets, and just as hell hath no fury like a woman scorned, so we are beginning the move from erotic love to anger.

The Christians look into the sun, they ask what is the moral course of action. The Asians look into the moon, they say what is human personality and what is wrong with it, which is the Spartan idea of "Know Thyself". For example, I can talk about "the good" as the concept of doing things for the community, or the concept of heading away from psychological selfishness. One is honour seeking by action, one is shame avoiding by motive. One is looking up seeking to do something, one is looking down seeking to not be something. The Puritans described morality in terms of building a better world, the Samurai described virtue in terms of avoiding human weakness. One calls God "something", one calls God "nothing". One is looking into the stars for guidance, one is looking down on the body and ridding itself of corruption.

So the numbers that we need to solve the crisis are twofold, one pertains to the functional effectiveness of society and learns by thinking about the future, and one pertains to the nature of human personality and learns by analysis in the now. Focusing on the first issue, we need to think of numbers which relate to the efficiency of the economy. For example, Germany is top dog because it has avoided fat cat bankers and internet zillionaires and concentrated on building a real value added economy. Let's take an example: Do you know what the difference between Tesco's Toothpaste and Colgate's toothpaste is? Can you tell them apart in a blind tasting? Do you know which is better for your health? Do you even know what the basic ingredients of toothpaste are? No? Then how can you possibly call yourself a rational agent maximizing utility? All those toothpaste brands are a waste of time that enrich stock holders at the people's expense, we could set up one factory in Greece that made all the toothpaste in Europe and save a fortune and improve economic efficiency.

Focusing on the second issue, we can talk about the types of thinking that make people smart and the types of thinking that make people sloppy and muddle headed. For example, Germany is top dog because it has avoided media, journalism, advertising, sales and other Dionysian occupations and instead focused on science, engineering, craftsmanship and design. One of the big points that Socrates made is that oratory, retailing and poetry are all activities that destroy the human brain because they are intuitive hand waving emotive subjects that frequently revolve around hoodwinking and massaging people's minds instead of pursuing the sort of unwavering objective truth we associate with expert consensus. For example, financial markets are Dionysian because they blow around like the wind and anyone can join the party, but building rockets is Orphic because experts are infinitely better at it than non-experts. Likewise pop art is Dionysian because it plays to the mob, but elite art is Orphic because it demands skill and concentration from both the performers and the audience. So another example is what is going in China today with cultural forces, the Chinese are suppressing populism and encouraging elite aesthetics, also purging the journalists, micro-bloggers and reality TV shows.

How does all this relate to the EBC? What Draghi needs to understand is that at the epicentre of this crisis are a lot of banks which have both negative value added economic efficiency, and a lot of muddle headed over paid Dionysian senior executives whose real skill is acting and politics not technical expertise. The "know thyself" concept is more intellectually taxing and requires a larger brain, so the better philosophers are generally found in the east. The Chinese People's Daily published an article about the Eurozone crisis recently saying "Any system of reform must damage some part of the vested interests", with trade unions on the left and banks on the right. China.org.cn published an article about Russia recently saying Russia must focus on vested interests and the fight against oligarchy is commonly called socialism, so the Russian's should love not hate that world. What Draghi needs to understand is that low interest rates, money printing and feeding the vested interests is both un-idealistic and shameful.

What alternative does the ECB have? The alternative is to walk away from capitalism in banking, to think of these banks as vested interests who can be burnt and resurrected like a phoenix arising from the ashes. In order to understand that think back to the opening move in this crisis of capitalism - the bankruptcy of Northern Rock. I think the UK government should have nationalised Northern Rock wiping out shareholders and unsecured bondholders because that's both the functionally and psychologically superior solution, but policy makers didn't want to wipe out bondholders because they were worried about destroying bond holder support for all banks, and also because they are uncreative thinkers who worry about current laws. So the Northern Rock was saved at considerable cost to the UK taxpayer, and now banks across Europe are being saved in more magical way which still costs European taxpayers money but in a less transparent way.

Mr Draghi is the shepherd who cares for the banks. Socrates said a good shepherd is not a tyrant who kills his sheep, but I think this crisis upends the usual logic. Mr Draghi has a useless and ugly flock of sheep and his job should be to kill them and build a new flock. Instead he is behaving like a farmer who can't tell weeds from wheat and is just watering everything. If I was Draghi I would think about insisting upon the nationalization of perhaps 80% of the banks in Europe wiping out shareholders and unsecured bondholders and ordering the new government owned banks to pile into sovereign bonds. In this way he could make Europe a better place rather than just pumping yet more rocket fuel into his clapped out old car creating a greater calamity in the future.