Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Structuring financial institutions for catabollic collapse

By Cameron Leckie - posted Thursday, 3 March 2011


$6.35 billion, $5.6 billion, $5 billion, $4.58 billion. These numbers are the big four banks profits for financial year 2010. Big numbers, big profits, record profits! Is it any wonder that the Australian Bankers Association proudly states that Australia has a strong, successful and stable banking sector. This being the case, is there any need to worry about our banks or our financial system? On the face of it, the obvious answer would be no. But dig a little deeper and the obvious answer could well be wrong! And if the obvious answer is wrong, then we may well need revolutionary change to our banking system, our financial system and indeed the very fabric of the way we live our lives.

It is easy to get wrapped up in the masses of information released each day about the economy. The ASX was up, the dollar down, oil stronger, gold weaker, RBA minutes, Treasury forecasts, profit announcements and the list goes on and on. Being bombarded with so much information makes it difficult to see the big picture. So let's tune out the white noise and have a look at the historical and strategic context at this juncture in history from which we can examine Australia's financial system.

We live in a globalised industrial civilisation, the likes of which has never been seen on earth before. Just because it is the biggest, most complex civilisation in the history of mankind, does not however, make it immune to the cycles of history. The rise and fall of civilisations is something that occurs with historical regularity and there are a number of reasons to suggest that our current civilisation will be no different.

Advertisement

Perhaps the best explanation for the decline of civilisations is that provided by Joseph Tainter in his seminal work, The Collapse of Complex Societies. Tainter argues that as civilisations attempt to solve problems they increase in complexity until they reach a point where further increases are subject to declining or even negative marginal returns. At this point civilisations become vulnerable to collapse, unable to cope with new problems or external shocks. Industrial civilisation is already facing declining marginal returns in many areas, such as energy production (bio-fuels and tar sands), fiscal stimulus and health.

Additionally there are plenty of indicators to suggest that a multitude of new problems and external shocks are on the horizon. No doubt over the course of this century we will have plenty of opportunity to test the validity of Tainter's thesis.

The strategic context is one of converging crises. Globally, we face a climate crisis, where by some estimates, the annual damage bill from weather related events could equal global GDP by mid century.We face a liquid fuel crisis with conventional oil production having already peaked, according to the International Energy Agency, with the alternatives being far inferior in both quantity and quality.

We face a financial crisis with the global financial system being effectively insolvent and only maintained through fraudulent accounting practices and the creation of money out of thin air to temporarily maintain financial stability. We face a food crisis where large parts of the worlds poorest are struggling to afford the increasing price of food.

We face a population crisis, with a rapidly growing world population placing ever greater demands on the earth's resources.

Each of these crises are interlinked and interdependent, culminating in the most deep seated crisis, namely that of dysfunctional political systems.

Advertisement

Our political systems are failing on two counts. First they are struggling to meet the expectations and in many cases needs of the people they govern and secondly, their responses to the aforementioned crises are woefully inadequate. The net result is that we are likely to see increasing levels of political unrest in the years ahead whether that is the benign type such as the minority government in Australia or more extreme levels as recently demonstrated in Egypt.

These crises are setting the pre-conditions for, if not actually triggering, the decline of industrial civilisation.

Enter catabolic collapse.

Further developing on the work of Joseph Tainter, one of the most important thinkers of our time, John Michael Greer, has developed the theory of catabolic collapse, which caters for a weakness in Tainter's thesis. Namely the extended time frame, often measured in centuries, over which civilisations such as the Western Roman Empire and the Mayans collapsed.

Greer argues that each step of collapse is inherently self limiting due to a society's resource requirements falling below the resources available to a society which enables a civilisation to stabilise at a lower level of complexity. The net result being that collapse, if graphed, looks like a downwards stair case with periods of stability, potentially lasting decades, and even periods of growth in a trend that is ultimately heading in one direction: down.

This is the context that any review of our banking and financial system should be assessed against.

Selection and maintenance of the aim is the first and most important principle of war and for good reason. Any military commander who gets this wrong is at best likely to incur unnecessary casualties, at worst be defeated.

So what is the primary purpose of our financial system? Is it to facilitate the transfer of goods and services? Is it to boost home prices and stock markets? Or is it to maximise profit to generate wealth for banking executives and shareholders? This is a vital question.

While the financial system obviously facilitates the transfer of goods and services, it has become increasingly focused on the creation of wealth, as demonstrated by both bank profits and the size of the financial services industry. Whilst this may have been acceptable in a growing economy, in an economy at risk of catabolic collapse, such a focus is extremely damaging.

When generating wealth becomes the primary focus of the financial system, banks and other investment agencies will invest to maximise profits. As the converging crises of the 21st century unfold, the volatility and instability in traditional investment classes will require banks and other financial institutions to take greater risk to chase returns. In turn this will negatively impact upon society as a whole, something that we are currently seeing in commodities markets.

The USA, which according to Greer commenced its first wave of catabolic collapse in 1974, has taken a path where the maximisation of profit appears to be the primary motive of the financial system as evidenced by the profits and bonuses in the corporate world while main street suffers with actual unemployment, as opposed to Government measured unemployment, that could be as high as 22% while house prices continue to fall and many states and cities are verging on bankruptcy despite the best efforts of the US Government and Federal Reserve. The USA has taken a maladaptive approach to catabolic collapse, one that is likely to end badly. What then would be an adaptive approach to dealing with catabolic collapse for Australia?

First of all, we need to ensure that the primary purpose of our financial system and banks is one of ensuring the ability for individuals, business and government to transfer goods and services. This raises the question of who should own our banks. Currently what is good for the banks (i.e. profit) is not necessarily good for the country, particularly in the long term. A prime example is the home mortgage market, which has generated much of the banks' enormous profits while increasing Australia's mortgage debt to GDP ratio to record, and in the face of catabolic collapse, potentially ruinous heights.

This being the case, perhaps we need Australia's banks to be owned either by the state or preferably at the community level with the primary role of providing basic banking services, at low risk, to the community that they serve. These banks should still be operated on a profit basis but with moral hazards contained through paying bank employees on a salary only basis and the bank board being directly accountable to the community that they serve. This would remove the incentive for risk taking that is embedded in the current banking system.

The second major consideration is the role of debt in the financial system. The onset of catabolic collapse suggests that much, if not most of the debt currently on issue around the world will never be repaid. The deflationary spiral will take years, if not decades to play out. Credit worthy customers will decline drastically and lenders will become increasingly reticent to lend out of fear of the losses they might incur.

Whether we like it or not, the majority of the world's debt will and must be purged before anything like a sustainable and stable financial system can be established. The result will be major falls in the value of many asset classes such as real estate and equities and the failure of many financial institutions.

In this environment debt will need to be used much more strategically than it is today, that is for productive purposes, and with far less leverage. This will require business and individuals to save significantly more than present to qualify for loans and it is highly unlikely that consumer and business credit will be as widely available as presently for day to day spending/operations.

The final consideration to be discussed here is the nature of our money. The great credit expansion of the last century saw virtually all nations abandon currencies backed by something tangible to be replaced by fiat currencies, money issued by the decree of governments. If our money is to end up being worth more than that contained in a game of Monopoly, we need to back our money by something tangible, whether that is gold, other precious metals, energy reserves, agricultural commodities or a combination of the above.

This will provide a firm basis for our monetary system and reduce the ability of governments to resort to ultimately counter productive policies such as printing money rather than acting in a financially responsible manner.

Of course there is virtually no chance that any of the suggestions I have made will be implemented in the immediate future. That is not the point however.

Sooner or later, one or more of the crises mentioned will trigger the first step on the downwards staircase of catabolic collapse at the global level. At some point a critical mass of people will come to realise that the conventional wisdom as portrayed by the media and our politicians is wildly off the mark. Unfortunately when we get to that point, it is likely to be under extreme duress.

That it is why it is important to be thinking about how we manage catabolic collapse now. There are other options to the manner in which our society and financial system currently function. Well thought out alternatives ready for implementation when crisis makes the seemingly impossible possible could very well make the process of catabolic collapse far less difficult than might otherwise be the case.

  1. Pages:
  2. 1
  3. 2
  4. 3
  5. All


Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

7 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Cameron Leckie has a Bachelor Science and a Graduate Diploma in Education. Employment experience includes a range of management positions both in Australia and overseas in the telecommunications industry. He is a member of the Australian Association for the Study of Peak Oil and Gas (ASPO Australia). Since finding out about peak oil in 2005, he has written extensively on the topic and in particular, its impact on the aviation industry.

Other articles by this Author

All articles by Cameron Leckie

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 7 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy