Credit bubbles

Being too big to fail is an astounding notion, a justification of the wildest hubris. It goes against ancient wisdom concerning pride, and it contradicts history. But then, how big is too big? Neither the brontosaurus nor the megaloceros were, nor were Babylon and Rome. In fact, getting too big seems a sure path to failure, but the temptation is there, both genetic and cultural, and life falls for it every time. So the central organ that circulates money grows and leverages, and moves more and more value around faster and faster. It becomes hypertrophic but cannot stop, because capitalist profit needs an ever more abundant flow of credit. This organ cannot fail, not because it is too big but because it is essential to all exchanges. The possible failure does not concern the social institution of token value, but it does concern those organisations that control its circulation and take usury.

Whether metal or paper, money has no intrinsic value. Its value is decided by the economic actors who use it as the intermediary measure of exchanges. The early bankers were money-changers, exchanging worn and foreign coins for local currency, and doing some lending on the side. Modern banking really took form when merchants granted credit to one another, to their customers and then to the world. This probably started in Venice or Hamburg, but it spread to other trading cities and Amsterdam seems to have built the first stock exchange where credit was negotiated, bought and sold. Soon all major commercial centres would do the same. Merchant bankers took control of credit and left to the state the costly task of minting money and pursuing counterfeiters, a prerogative that was often abused until central banks were instituted, somewhere between bankers and governments, to take on the job of monetary creation.

Anyway, money only represents a fraction of payments, most of which are settled with credit. So banks in effect control payments and can expand or contract them at will, with profit as their only motive. The expansion of credit inflates bubbles, and when they burst there is a sudden contraction of credit. This happens time and time again, and is actually giving the S&P 500 index a beating, just as it battered the housing market a few years ago. The next to be thrashed are bonds, whose interest rates are far too low for the growing risk they represent. This looks like the mother of credit squeezes, and by the time the flying paper settles the capital write-off will be huge. Who will be too big this time, banks, pension funds, insurance, health, education, cities, states, and how much bailing out is possible with the public purse? These questions will probably be answered in the coming months.