Give Me Some Credit!
(Im)personal lending is broken. This negatively affects our view of financial relationships, and puts pressure on government spending to pick up the slack.
At worst, banking and lending are fraudulent machines for social theft, extortion, racketeering and oppression. This is an important issue, but we won’t discuss it here.
We’re going to look at more subtle problems that arise from modern lending systems, even when they are conducted with personal integrity and follow all legal rules. Some of these issues extend far beyond the 4 walls of a bank, and create problems that, on the surface, seem to have little to do with banking.
Modern banking does a lot of good. At best, it is fair and well regulated, and contributes to public good. Lending gives people access to important resources which allows them to give back to their community, benefiting all of us.
Let’s ignore the role that money and contracts play in these interactions, for a minute, and just look at the activities that happen because of banking and lending.
A borrower is given access to an important resource like a home, a car, or capital for a small business. These resources help people be productive and give back to the community.
It’s a virtuous cycle!
But even when it turns out well for all parties, “debt” makes us uncomfortable. It conjures up images of chains and shackles. It doesn’t have to be this way!
The harm of debt is directly related to impersonal and easy credit.
By accounting convention, credits and debits go together. When someone gives you “credit”, a “debit” is created as well. They are simply balanced entries in an accounting sheet. For the sake of fairness, this makes sense. But when accounting balance is the only consideration in “lending”, it becomes problematic. When the goal of lenders is only the abstract notion of “profits”, we forget that such paper gains are only social and legal relationships between people. Blind pursuit of profits can undermine the foundation that makes these profits valuable.
The message of this publication is that we need to apply our free resources according to priorities that we recognize socially together. This applies to credit and lending as much as anything.
Credit is a social activity. I give you credit because you convince me that something you want or need is worthwhile, or it will benefit me as well.
Credit can have many forms. If I help you build a house, that is a form of credit. If I help you with your business idea in exchange for shares, that is a form of credit. To give someone credit is to recognize merit, value, or worthiness.
Credit doesn’t have to require reciprocity, but social norms usually dictate such. We formalize these expectations through legal accounting financial relationships.
By skipping the social processes involved in how and where we engage our free resources, we turn credit into an impersonal legal trap for borrowers.
The legal process of lending money replaces social processes of sharing free resources, working together, and sharing rewards. Ideally, legal and social processes should work hand in hand.
Conventional wisdom asserts things like “Don’t lend money to friends”. This is sound advice in our world, but only because of the precarious and impersonal nature of modern financial relationships. Lending to a friend money puts your personal relationship into a complex legal and social environment filled with hazards.
But what if all parts of lending cycles were socially aware?
- Who can most benefit from these resources?
- What obligations to lenders and the community should those granted resources assume?
- What activities satisfy fulfillment of these obligations?
- What happens if those to whom we allocate resources are unable or unwilling to fulfill obligations?
In those points, I emphasized words like “grant”, “allocate”, and “fulfill”, over words like “loan”, “borrow”, and “owe”. The allocation of resources and the imposition of obligations are separate acts, even if we choose to associate them contractually and legally. By recognizing “allocating” and “obligating” as distinct steps of the lending process, we can design resource relationships deliberately, even when we choose to follow the social conventions of lending and borrowing.
Peculiar Institutions
In our financial world, the law specifies a framework of lending, and lenders seek to make as many viable loans as they can within this framework. I think this is the wrong approach. This approached is focused on a pursuit of dollar profits.
Dollars serve a useful function, but when the dollar is everyone’s primary goal, we are looking to the dollar to give us information that it simply cannot provide. The dollar cannot highlight problems in our personal relationships or local community resource problems.
The dollar is the asset of the U.S. federal government. No matter how cleverly we design rules for allocating and using dollars, it can only represent interests and programs implemented by the U.S. federal government. Ideally, through democratic and representative processes, it should represent common interests, but it can’t manage all local and personal financial concerns.
With modern banking, we see institutions struggling very hard to overcome the limited powers of the dollar. Anyone can participate in allocating dollars through banking processes, although the dollar allocations are resolved after the contractual obligations are created, based on the inner workings of our banking systems.
By using banks as proxies for local resource management, our policy makers hope to overcome the limitation that ALL FINANCIAL ACTIVITY IS DOLLAR BOUND. That is, the flow of dollars is the sole determinant of whether an activity is sustainable or not, according to the rules we have crafted.
But our populations don’t explicitly understand that the process of entering into financial covenants is what facilitates the illusion of dollar creation under the peculiarities of our institutional arrangements.
Dollars flow, but do not exist in and of themselves. It is a magic trick.
When a bank makes a loan or accepts a deposit, they grant an account balance. This costs them nothing and essentially does nothing. Only until that balance is redeemed do we know if there is anything there.
When you spend a balance or withdraw it for cash, the underlying asset is revealed.
But what is cash? It is a Federal Reserve note. It is simply a balance at the federal reserve bank that you can carry around with you in your pocket.
Remember how bank balances cost nothing to create? It is the same for our dollars. The dollar IS a bank balance at the Federal Reserve. The fed allocates dollars how they see fit according to their public mandate. Dollars are a scorekeeping/accounting system.
The need to access socially defined resources with public governmental oversight makes us beholden to seek and serve dollars. Our labor and our promises are the real asset being bought, sold, and traded with the dollar.
Without the covenant to serve up more dollars in the future, either in the form of personal loans or public bonds, the illusion of dollars is unavailable, while the real resource perishes, or is squandered on unimportant distractions.
Free People, Free Resources
If we lend or give away our free resources by recognizing important priorities, we will be less angry when a borrower can’t reciprocate.
If someone borrows resources for indulgences and throws elaborate parties, we will think poorly of them when they can’t pay it back.
However, if they use borrowed resources for an important and critical purpose, we will be sympathetic even if it doesn’t work out. We will be willing to help them, and work together to fix the problem that caused this failure in the first place.
Social processes need to be an important part of credit and debit relationships. When social relationships are formalized into legal and financial relationships, there are complex issues involved, but the same considerations need to be made as if a friend were asking for help.
I am a fan of using public credit for public purpose as suggested by a Job Guarantee. With a Job Guarantee, people give public institutions credit by applying their free time to work for public objectives. The public gives people credit by paying them which allows them to get the resources they need to survive and thrive. It doesn’t crowd out the free market or force people to work for a communist state, it’s simply a channel of productive public engagement we create for all those with free time to spare.
But even if you have reservations about MMT’s Federal Job Guarantee, we can do a lot to improve our financial relationships.
No matter the policies we create or the polities we participate in to organize important resource programs, these issues need careful attention.
And now for some entertainment, here’s a classic. Relax, and enjoy:
