Bitcoin Forum

Stanford endowed professor Anat R.Admati makes her detailed indictment:

It Takes A Village To Maintain A Dangerous Financial System (http://www.zerohedge.com/news/2016-06-06/it-takes-village-maintain-dangerous-financial-system)

I am tempted to provide my highlights of the highlights:

On finance:

"...banks effectively compete to endanger."

"...the financial system distorts basic notions of responsibility and liability. Financial crises affect employment and the economic well-being of many segments of society, but those who benefit most from this system and who enable it tend to suffer the least harm."

On financial regulation:

"Revolving doors contribute to excessive complexity of regulation, because complexity provides and advantage -- and creates job opportunities -- to those familiar with the details of the rules and the regulatory process.  Complexity also opens more ways to obscure the flaws of the regulations from the public and create the pretense of action even if the regulations are ineffective."

On economists and academics:

"Economists and other experts become apologists for the status quo and enablers of ineffective policies when they fail to point out problems or, worse, when they provide 'scientific' support that contributes to and obscures or justifies flawed rules."

"Even... academic economists, are not immune to the forces of capture (Zingales 2013, 2015).  Their incentives may be colored by the desire for job or consulting opportunities, positions on advisory or corporate or policy boards..."

"Someone with sufficient background to understand the academic literature, who has been employed by major financial institutions, quipped recently when discussing some statements by academic economists: 'with such friends, who needs lobbyists?'"

On central banks:

"By providing excessive supports, central banks enable weak, even insolvent 'zombie' institutions that are dysfunctional and do not help the economy, to persist for extended periods of time."

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The reality is actually more sinister still.

We'd like to think that the rot is confined to politicians, bankers, regulators, the corporate media, the money managers, and economists.  It likely afflicts almost everyone reading these words.

Modern Western economies have taken a totally different path, as compared to the truly free-market path, due to monetary and financial distortions at their core.  Do we really need so many finance professionals, computer programmers, florists, and indeed sales clerks?  The entire set of demand is distorted.  If the system is reformed in any significant way (say, by making banking safer,) and financial asset values change, all the forces of contagion, built into the system by the elites for their benefit, will work to make everyone miserable.  A healthy economy needs a totally different set of skills from what are available today.

So every one of us is addicted to the system.  But the status quo is also unsustainable.  In the short term, financial and political instability may force some significant changes.  In the much longer run, only after we understand the system, and are happy to endure the pain of reform, will things really change.

Financial institutions evolve.
The Central Bank itself is a recent phenomenon, set up to support banks and prevent bank failures from disturbing the overall system.
Yes, everybody is complicit in maintaining the status quo of the financial sector.

I don't believe that real change will ever be initiated by those in charge of the system. Even knowing the bad outcome, the personal risk is far too huge for anybody inside the system to endorse change. Rather change will be forced upon the system by the external circumstances that it helped to create. The transformation to something better will not happen in an orderly fashion. It will be accompanied by disorder and misery.

Bitcoin can be a factor that will accelerate the transformation process. Hopefully a new financial system will evolve that relies on free market economics, where mistakes and scams are really accounted for by those in charge. With Bitcoin, banks might become obsolete which is clearly a leap forward in that regard.

ya.ya.yo!

The central bank came into being after the political and financial elites realized they could profit more by working together than against each other.

The last time the relationship was adversarial was during the first modern global empire, Spain.  Bankers enticed royals and nobles to borrow to the hilt, and when the debts became clearly unpayable, the political elite solved its financial problem by using the Spanish Inquisition against the bankers.  (We may see our own version of this saga, if the US fails to pass its hegemony to India quickly enough, and to get India to help support US financial claims in the same way the US helped Britain -- already politicians like Sanders and Elizabeth Warren are sharpening the knives.)

From the Dutch empire on (the next dominant global empire,) the central bank became the guarantor of the co-operation between the two elites, by having the power to make sure neither side endangers the entire system by taking too much too quickly.  If the government incurs too much debt, the central bank can refuse to print more money to buy and stabilize the value of the debt.  If a bank takes too much risk, the central bank can refuse to rescue it when it crashes.

From that time on, the extraction of wealth was directed solely at the rest of society.

Central Bankers maintain the facade of 'independence' and say that they act in the interest of financial stability, irrespective of the wishes of their political masters.
I am surprised that you see India (and not China) as the inheritor of America's legacy.

The "independence" bit is usually the bankers' cry that the central bank not go too far to enable the government to issue cheap debt (which is the way politicians get free political capital by putting the burden on people who are of negative age and thus can't vote.)  Nowadays, though, we're at a point where bankers don't have much leverage since most people, rightly or wrongly, blame the last crisis mainly on them.  (An extreme case of this was during and after the Great Depression -- the state-bank alliance almost completely broke down, as symbolized by the Glass-Steagall act, and the alliance wasn't re-established until the 80s.)

The US has made it clear it doesn't want China to inherit the empire, and China has heard the message.  India, meanwhile, has enjoyed all kinds of special favors through at least three presidents.  I think it's probably because the US doesn't believe China will expend resources to help the US ease into decline, for a variety of reasons (cultural, historical, etc.)  Indians are one of the few major populations who have a very good opinion of America, and this has probably been cultivated through the last couple of decades.

I also think that change will be disorderly and miserable, and will come sooner rather than later.  Prominent members of the elite circles like Martin Wolf and Mervyn King have written as much.  Though the exact timing and manner of the collapse of such a huge bubble as the dollar-imperial one will be hard to judge.

I think someone will always need to judge the merits of investments and help savers channel their money, so in a healthy system there'll be a role for banks.  (Though not the deceptive type today that invest in illiquid assets and pretend investors can always get their money out at a moment's notice -- and rely on what is effectively a public subsidy to make that possible.)

But banking is deceptive precisely because politicians allow and want it to be.  The value of bank-issued assets are propped up by public institutions because this increases the demand for the money and debt issued by the state.  (For centuries, people would have run to gold or silver if there had been no interest bearing deposits for their paper money, that was "safe" for the time being.)  From this perspective, "banking reform" can hardly be anything but a sad joke.

Since politics and politicians are intimately tied to the "scam," real change will require a popular awakening, which, unfortunately, might have to take time.  What I hope people will eventually realize is that no human is trustworthy enough to be custodian for money and finance, and demand that an additional post-Enlightenment prohibition, against any interference in monetary and financial markets, be imposed on the state, just as US governments are officially forbidden to engage in for-profit business.

The problem with a lot of critics is they don't understand republics. Republics are messy. It's been that way since the ancient Roman republic. Republics have a bunch of decision-makers responding to different interests. That's messy.

The above quote regards this messyness as "distortions." Distortions from what? Distortions from how an utopian society would be if one genius were in charge of defining a free market? Do we need someone to decide the proper amount of florists and sales clerks, and the appropriate set of skills for society? No thanks.

A free market is whatever a republic decides it is, even it's messy.

The main problem with all those who denounces the financial system, government etc is that none of them can actually provide a perfect solution. All they're doing is shifting priorities, they uncover flaws by covering up/glossing over other flaws. It all sounds very convincing to those who are wooed by impeccable credentials and big words but effectively nothing's changed, all you're doing is replacing existing flaws with new ones, kind of like the whack-a-mole game  :D
The whole concept of betterment through evolution is highly overrated. But what else is there.. right?

It's hard to respond to the above.  I characterized today's world as being distorted by elite manipulation of markets that pushed the economy on a path totally different from the free-market path.

You argue that the truly free-market path is politically impossible -- I can respect that (though I have different thoughts about it.)  On the other hand, you imply that I want the state to control the economy even worse than it is controlled today.  I want no such thing.  Plus, this seems to contradict your own other point.

I can't respond properly to an improperly formulated set of arguments.

The perfect solution would be to ban government from money and finance.  After the Enlightenment, there have been bans against government from torturing people for confession, searching homes without a warrant, and engaging in for-profit business.  The idea was to avoid concentration of power and the perverse incentives for those with the power.

State-free money and finance was more or less in effect during the Italian Renaissance and Scottish "free banking" era in the 18th century, for one accidental reason or another.  Both economic growth and financial stability were spectacular.

I agree that, if we don't get to the root of the problem, we would just be shifting the flaws from one place to another.  That's why I'm not with those who blame everything on bankers, or who blame everything on the government.  Nothing has really changed, ultimately, because the public are still gullible enough to hand monetary and financial power to the state.

I also wouldn't call today's system 'betterment through evolution,' assuming that's how you see it.  I'm not naive enough to think that it's possible to have a system where the elites must fully earn their power and wealth.  But this modern system gives constant incentives to the elites to destabilize their own system, and the entire fiber of society along with it.  In the old days, you might have plundered and murdered your way to the throne, but once there, you generally wanted order and justice to prevail.  Today's system is a fundamentally different beast.

Your word salad is much more confusing than anything I said. Let me make my point super simple for you.

The gist of your argument is that there is currently no free market, right? I responded to that by saying:

Is that so confusing? Apparently you're confused, because then you say:

But I never said that. Are you drinking? Let's roll the videotape again to see what I said:

Do you see how you misquoted me? A free market is not only politically possible, it's a byproduct of a republic. But you seem to define a free market differently. Maybe you think a free market is whatever Wikipedia says it is, or whatever Zero Hedge says it is.

How do you see this happening, as I see things going exactly in the opposite direction? After every "financial crisis" the regulations and restrictions on banks increase. Governments and financial institutions are becoming more intertwined, not less. We are moving away from a "free market" system, not towards it.

It seems our major difference is the definition of 'free market.'  I still like mine better as it's truly 'free!'  'Crony capitalism' might be a better term to describe your condition.

I'll take crony capitalism. I don't advocate limitless cronyism. But I also don't trust utopian theories. Crony capitalism is what happens when there is freedom of association. There will always be people associating for profit.

But the more modern Western republics do a decent job of encouraging competition and restraining anti-competitive practices. Again, it's a messy market. But it's very functional for the overwhelming majority of people.

It's true (and par for the course) that, after a financial bust, the elites have incentives to keep what remains of the bubble going by using regulation, capital controls, bailouts, etc.  (E.g. before the euro, Italian savers were forced to stay in the lira which everyone knew was always going down.)

But I was talking about the long term.  Imperial and other financial bubbles and busts have occurred for about 500 years in the West.  They are not going away overnight.  Only when the public wakes up to the core problem, which is quite simple when phrased properly, will they endorse the right solution, which is also simple.

The key is to come face to face with the very essence of the problem: the over-reach of the state into the monetary and financial markets.

WRT utopian theories, I can see how one might lose hope in their success sometimes, but I don't see a problem with 'trusting' them.  Perhaps you have some insight?

WRT associating for profit, true, it's human nature to take when you can -- as long as it doesn't go too explicitly against the values you claim to espouse.  But the whole point of having institutions and rules is to protect the public (ie you and I) from this taking.  It's true that neither the public nor the elites easily win totally -- the back-and-forth has gone on for eons.  That is no excuse to declare defeat unilaterally.

This is especially so since all that separates us from major progress is a little more understanding of how the system works.

The current system is 'functional for the overwhelming majority' only because most of the economic pain of financial busts is offloaded from people at or near the top of the system (ie those who are most responsible for, and benefit the most from, creating the crisis condition) to people further down.  In the most severe busts, such as the Great Depression and since 2007/2008, even many people high up in the pecking order, e.g. US and European citizens, are suffering, and a huge amount of pain did and will go to vulnerable populations, such as prewar Germany, China today, the Mideast, etc. through lack of demand.

It's no surprise, then, that war and terrorism are objectively an integral part of how the system works.  War and terrorism also, eventually, help bail out the Western system as these countries ride in glory to fight evil forces, reshape the world to their liking after their victory, and blame any financial 'irregularity' on the cataclysm.  (In fact, the Western elites have the incentives to stoke the flames of conflict beforehand -- and I'll stop there for now.)

Another facet of the system is that, since the elites are constantly issuing money, debt and financial assets to benefit themselves, they need real economic growth to provide demand for these assets, or the system will eventually implode from lack of trust in the assets.  So, led by the elites, everyone in the economy is incentivized to pursue profit at all cost, and here you see the roots of pollution, social alienation, addiction and psychological problems.  (Now I'm not claiming I or anyone knows or should dictate the proper work/life balance for anyone -- I'm only saying the system creates a real bias away from what people would normally do, in favor of making money.)

I'm guessing a good part of what you perceive as 'functional' is based on this artificial need for economic growth.  In pursuit of growth, many systems must function better (this piece is closely related to what is known as supply-side economics.)  But, as we can see, the core mechanism is pretty ugly, to say the least.

Well, the idea of "public waking up" is pretty optimistic and I doubt that will happen. And if they "wake up" and demand a different financial system, there's a very good chance it will be worse than what we have now. I would never trust "the public" to come up with a financial system.


I don't think it is true that the current system incentivizes to pursue profit. At least in my country it is very much the opposite, there are very strong incentives for not working/pursuing profit. All these government welfare programs with dozens of different payments that a person may be eligible for. And if you do even little work at the side, you lose them. But it's perfect system for the government, as those people picking up a check from the government are guaranteed to vote in a way which keeps those checks coming.

Also, the current system is not geared for economic growth. The elites want to stop/hinder economic growth. So they manufacture all these fake "social" and "environmental" reasons why we shouldn't have economic growth because "it's bad for the planet". The latest such scam is the idea of "global warming", but that is just one among many.

I don't understand your infatuation with the notion that so-called elites want to benefit themselves.  Everybody wants to benefit himself. Or do you think the so-called elites have a monopoly on the desire for profit?

One of the oldest practices in business is to use other people's money to invest and generate profits. Is that a conspiracy? Is that practice limited to so-called elites?

You understand that the masses demand that politicians create jobs, right? How would politicians create jobs sooner than later without relying on debt?

If it weren't for all that debt fueling demand and stimulating economic growth, billions of people in developing countries would be in even more impoverished conditions. There wouldn't be remotely enough job growth to match population growth.

Politicians cooperate with the so-called elites that peddle debt because the masses demand it, one way or another. Debt provides higher standards of living that the masses demand. If there is a conspiracy, the masses are involved enthusiastically in it.

I need a bank. Where better to store my paper wallet than a bank vault?  ;)

You could make a wallet with electrum, send bit bitcoins in it, format your hard drive and remember the seed. If you have enough trust in yourself (and have a good memory) it's a truely safe storage method.

Maybe for now.  But this is a one-thousand-year issue.  It's highly complex, so you never know, and you can't expect progress immediately.

The best way forward is not for the public to design a financial system.  It's to acknowledge that no one knows enough and can be trusted to design such a system, so the state must not get involved.

The first step to such an understanding is to know that today's system is not just sub-optimal, it's downright dangerous, and not far from evil, because of the perverse incentives it provides to the top elites and their professional mouthpieces in the media and academia.


I'm glad you bring this up.  This is just part of how the system works.  The farther from the top of the imperial pecking order, the more dysfunctional a country's system.  In the Third World, the elites print money outright to fund their constituents' benefits directly.  All of this creates trust and demand for the paper issued by the top imperial powers.  Savings flow up the pecking order, and economic pain flows down.

In effect if not by intent, this is an alliance among the elites in all countries.  All elites benefit -- near the top of the system, the elites benefit from issuing trusted money and debt.  Near the bottom, the elites benefit directly from the obvious corruption.  The periodic economic problems flowing from the top keeps these populations poor and ignorant, and keeps these elites in power.  In the middle, you have a mix of both.

Absolutely, this is not a problem of individuals -- it's a problem where the system is dysfunctional so individuals have the incentives to impoverish and destabilize, ultimately, the world.  And these incentives work most insidiously when they apply to the richest and most powerful members of society.

Not the least problem is that these people are most able to distort the picture, one way or another, and make the public think the problem lies elsewhere.  I guess the real problem is the amount of trust we the public are happily giving to these people, believing in their public-mindedness, in the final analysis.

There is no question, as you point out, that debt and other financialization are required to fuel real economic growth.  The question is who or what forces should drive the valuation of these financial assets.  The Italian Renaissance and the Scottish "free banking" era have demonstrated that letting these asset values be determined by market forces is totally fine -- in fact, these economies enjoyed excellent growth and stability.

The problem with most other modern economies is that, with the state control of money and 'safe' debts, debt and other financial asset values are artificially promoted by the elites, so their values generally sit above what real-world conditions warrant.  Furthermore, since the elites have every incentive to maximize the issuance of assets and hide bad news from the public, they not only destabilize their own system, but make any adjustment painful.

If savers were not pushed by manipulated interest rates to buy riskier assets, if they were left alone to conserve the value of their savings if they were so inclined, we would not have so many bubbles and busts.  And as I mentioned in my original post, artificial asset values create artificial supply and demand in the real economy, and this is the real source of pain from a demand collapse -- and this problem is the worst in developing and poor countries.  (And of course, this pain is used to justify the 'need' for centralized control, to enable the authorities to rescue demand at such times.)

So, in the end, the question is whether we want a centrally planned or a market-based system.  The analogy with the difference between capitalism and socialism is spot-on.  In the socialist system, the elites will have us believe that, if the state doesn't control key products such as food, God forbid, people might starve.  The truth is the opposite.

Well I suggest that you just hide it yourself in something you always bring with you. For example the back cover of your phone, your wallet, and many more. It's much better to store that in something you always bring than in a bank vault well my pick to store it is in my wallet because it is safer there than the back cover of my phone.