Saturday, April 24, 2010

Some Wild Speculation on Financial Reform

I promised in my very first post on this blog that I'd throw out a crazy idea now and then so here's the first one. Financial reform presents a bit of a conundrum, our current system doesn't exactly work wonderfully but more than a few people rightly feel that we don't want that much power concentrated in the hands of the state. We need different kinds of power spread throughout different types of institutions.

So, for a somewhat wacky look at the problem, the reason we're having an issue is that we basically only have two arrangements for controlling power in the modern day. We have the state, which has most of the means of power not in the economic realm (simplification and it also dips its greedy fingers into the economy as well) and the private sector which we've attempted to give as much of the economic powers as possible to. Controlling the power in the two realms relies on very different methods, the state is controlled via force of law and through an institution of one person one vote (in theory) democracy (to use a term that covers most modern nations if used loosely, also I'm setting aside other means of political control in say, China). Corporations however have their control rooted in private property and a belief that people should have authoritarian control over "their" property, within legal limits set by the state.

This works well enough for most things. Finance is funny though. It is something of a more traditional sphere of power, it often reminds me of a very complicated version of a clientage network, someone wants to do something and asks the bank if the can provide backing, the bank promises to back that person's actions, and voila, money appears, stuff gets done and the original person does whatever it was the bank asked them to do (hopefully give more money or the banks up to something naughty). Simplified greatly of course, but it often reminds me more of a system of mutual obligations than it does the simple exchange economy we often think of with real goods.

So how does this relate back to the idea of controlling power? First of all, because unlike most of what happens in the rest of the private sector, finance fills a roll more akin to that of the state, than say an industrialist does. It relies on mutual obligations and requires that there is faith or trust (rather similar to authority) in the bank. It also doesn't simply impact the investors, the finance system touches on many other parts of the economy and impacts many people indirectly. There are a lot more stakeholders. Because of the additional power held by the financial sector and the proliferation of stakeholders, I get something of a feeling that how we normally manage the private sector is insufficient to finance. We need a system that will continue to recognize the private property right of the shareholders, but we also need a system where the operations of the sector can receive more direct input from other interested parties, whether debtors or the members of society at large.

Which leads to the question of how to build this system. I don't know. But to borrow a bit from earlier societies it seems we need some sort of authority more mixed than our normal means of dividing power between the two sectors. We already have shareholder votes so there is a small, though often ignored democratic element there. What we need is a means to recognize the shareholder's increased right, since their money is directly at stake, but to also give some more limited rights to other interested parties. Since banks have been entrusted with the ability to expand the money supply through lending they're already fulfilling a role beyond that of their depositors and shareholders that seems more akin to the systemic role of government so they already have a function that goes beyond simple property right. What I'm trying to get at, is that they fill a mixed role, neither entirely public or private, and that we don't have a means of dealing well with this in modern society since we are not used to a mixed nature of authority. We give it to the state or to the private sector but rarely mix things up much. I've no idea how to get from here to there but it seems that earlier concepts of mixed authority and mixed means of controlling authority seem appropriate here.

Of course, this is wild speculation. What we're going to get is regulation by the state, which will be seen by some as the state meddling where it shouldn't. This will help things for awhile, possibly long enough I won't care by the time it's a problem again, but I'm guessing no one will really feel this issue is well solved by the current division of powers. I'm just suggesting there may be another way of looking at this issue as one of how does society divide and check different kinds of power, and while it has no hope of happening, may benefit someone who would like to look at the issue from a radically different angle.

Let me know if these wild musings are beneficial, or at least interesting.


  1. Interesting, I'm surer about than useful. The most intriguing portion, I might restate: fiat currency is clearly a product of the state and the basis of our money supply. Credit expands the money supply, so creditors legally and appropriately but nonethelesst, are performing a function of government. In that regard, it seems appropriate for the state to usurp the creditors a little in return.

  2. Doug,

    I certainly agree that under fiat money the state certainly has the right, and the responsibility to seek to regulate the financial sector. I am also struck by how finance seems to provoke strong reactions from people, no matter where or in what historical area you're looking at it. This is making me think that this is a particular area that may require its own particular institutions to govern, neither those of the state or the market. Kind of like the separate ecclesiastical structures of the medieval era, a part of society so important that it needed its own independent institutions to fulfill its role.

    The one thing I've gotten out of thinking about this is that the fringe that is out for some sort of radical restructuring of finance does have something to their arguments, though I think they are going in completely the wrong direction. If the financial sector was being adequately governed by existing institutional arrangements I don't think anti-financial sentiment would be shared so widely and with such fervor. There seems to be a crisis of legitimacy which isn't something faced by other industries.