Todays financial system is still broken...
2023-09-14
For good or for worse, I was too young to consciously perceive the global financial crisis that took place from 2007 to 2009, but I can imagine how terrifying it must have been to see formerly well-established banks all over the world collapse like dominoes lined in a row. Unfortunately, this wasn't an unlikely accident, but the inevitable result of a decades-long development towards extremely complicated financial products nobody can really put a grip on. Even more frightening is the fact that virtually none of the systematic issues that led to the crisis have been fixed, so let's take a look at some of them...
Before we get into the juicy details, I want to make it very clear that I am in no ways an economics expert and these are just my humble findings, opinions and advices - each of which should be taken with at least some grains of salt. With that said, I immediately want to address to common conception that nowadays money is created out of thin air and just an established mass hallucination by confirming that this is absolutely true. At least since president Nixon cut the last remaining bits of gold backing for the US dollar in 1971, not only the US financial system, but the whole world (since the dollar still is the number one reserve currency) has been running on a system of trust , which certainly is one key aspect to keep in mind. However, this isn't necessarily bad, as money is just one of the countless models we humans use to enable our monkey brains to understand the world and as long as everyone is on the same page about it, money still beautifully fulfils its function of making trade between foreign partners all over the globe not only easier, but even possible.
All of this only works of course as long as everyone has trust in banks, currencies and ultimately the stability of nations to back the system, which leads us to my next point. I believe the principle "Debts must be repaid at all costs" to be much more problematic than our money system itself. You might argue that this principle is just a basic fact everyone has to live with, but that isn't true in the broader picture. Sure, in your microcosm of friends, family and colleagues it absolutely applies, even most countries have to deal with it, but not such much for the leading industrial nations like the USA or most European countries. Since they are the backbone of financial system providing trustworthy curriences to base giant transactions and deals on, they are effectively the highest-level sources of trust and can therefore pretty much get as many credits as they want without having to worry about actually paying them back.
This leads to some morally intolerable situations where other nations (especially developing ones that might not have another choice to keep their head above the water) are animated to make debts with sometimes terrible conditions and then later on get forced to pay them back by enacting stifling tax reforms or cost-cutting policies in order to press the needed money out of their citizens. Making matters even worse it the fact that the creditors didn't even need to have the money they lent in the first place due to how our credit system works. You see, a bank or nation can create virtual money by providing willing customers with loans that are primarily backed by their trustworthiness and therefore accepted by others as if they were real money. The only requirement they have to fulfil in order to be allowed to give such a debt is depositing a so-called minimum reserve of 1 or 2 percent of the amount credited at their responsible central bank. The moment the credit is fully payed back, they managed to pull of the magic trick of turning nearly nothing at all into a large amount of real money - and that legally.
Another really concerning aspect is the nearly non-existing moral responsibility of the chief executives at publicly traded companies, since the only important variable for them is the profit to make the shareholders happy - if they don't conform with this rule, they won't stay in their positions for any time at all. However, this can and in fact does lead to some truly unethical decisions, which they (at least hopefully) would never have made, if they were on their own. These concerns naturally raise the question of whether or not it is morally justifiable to participate in the stock market as a private person and thereby (indirectly) encourage such a behaviour. Personally, I think that it can be somewhat justified, since you alone won't change the system from the ground up - which really expresses to the constant struggle between idealism and practicality I already wrote this article about. Fortunately, in the stock market the simplest solution is also the most demonstrably sensible - specifically investing in as widely diversified ETFS as possible instead of individual stocks - so you don't have to invest too much time and can still make some profit in the long run.
Since I can't let you go with such a negative message, I feel like it is only appropriate to also acknowledge the advantages and achievements of this financial system despite all of its shortcomings. Unlike all the attempts at command economies it managed to survive for far more than 50 years (I'm looking at you USSR), it not only survived by also endorses the development of new technologies, which can open up the world of marvellous new possibilities, and ultimately is the reason I am able to live such a comfortable, secure and free life. What I want you to do is not to generally condemn how things work right now (or anything in general), but to openly discuss the pros and cons and ultimately come up with something even better. Nothing is set in stone and we need people to think outside the box - also and especially regarding finances...