Securitizing people

Mike T in the comments to the post below:

To make it even easier on “salt of the earth” types, it comes down to this:

When banks behave morally, they securitize property; when they engage in the sin of usury, they securitize people.

Banking castles built with black magic

Lots of folks will tell you that fractional reserve banking ‘creates money’.  When I was getting my MBA this was taught as if it were some sort of anti-realist magic, the conjuring of wealth out of nothing, the creation of money through a trick of math. But the reason it looked like anti-realist magic was because of the presumption of usury.

In the absence of usurious contracts, fractional reserve banking doesn’t ‘create money’: it securitizes property.  To securitize property is just to issue title to some sort of claim against that property.  That is where every kind of currency gets any real value that it actually has: currencies entitle the bearer or owner to something other than the currency itself, and the value of that entitlement is the intrinsic value of the currency.  When a non-usurious fractional reserve loan is made, the bank issues a new demand deposit account – a claim against its balance sheet – in exchange for a collateral interest in the (new, at least to the bank) property which collateralizes the loan. It would be similar if the bank had issued new stock in exchange for its claim against the new-to-the-bank property. The main difference is that a deposit account is a different kind of security from capital stock, with a different structure of claims against the bank’s balance sheet.

A demand deposit account entitles the owner to fiat currency on demand from the bank, up to the amount of the deposit account — backed by the bank’s balance sheet, or all of the property in which the bank has a stake.  If you want to buy something you can go to the bank teller, exercise your title to some cash, and buy something with the cash that the teller gives you.  Or you can go to the merchant and electronically transfer title to a portion of your deposits to the merchant in return for the merchandise.  Most merchants these days will accept a portion of your claims against a reputable bank’s balance sheet in lieu of paper cash.

This all works fine, and does not create any wealth out of nothing, but it is of course still possible for the bank to fail [1].  If the bank does not stay liquid enough – keep enough cash and credit on hand to meet demand for fiat currency, or, said differently, maintain a balance sheet which is strong enough and of the right composition – then it won’t be able to issue all of the cash that depositors want. Prudent bankers don’t over expose their balance sheets to risk, but there is always risk involved in owning property and it always costs something simply to maintain property against the forces of entropy.

If you don’t want to take that particular risk you can instead pay the bank to keep your money in a safe deposit box, where it literally still belongs to you and is not at risk in the bank’s business operations.  But if you want the bank to look after your property without paying a fee, perhaps even earning interest, you become an investor in the bank.  A deposit account is a securitized investment just as much as capital stock, bonds, or all sorts of other more complex contracts.  And there are always inherent risks to being an investor.

When you introduce usury, though, is when the black magic appears. If the loan issued by the bank is usurious then the bank is issuing a new security against its balance sheet in return for a wink and a promise by the borrower. The bank then enters the wink-and-promise of the borrower onto its balance sheet as if it were actual property.  So in the case of banks which issue usurious loans, many of the loan ‘bricks’ in their balance sheet castles are imaginary; and in the case of collateralized full-recourse loans the ‘bricks’ are made of weaker material than they appear.

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[1] I am ignoring the whole regulatory environment and things like FDIC insurance, since my goal here is to help with conceptual understanding not to talk about every detail.  Part of the regulatory requirement is that the bank has to keep a certain amount – a certain fraction – of unproductive cash or federal reserve deposits in ‘reserve’ to meet depositor demands; thus the term ‘fractional reserve banking’.

Where to find me until the orcs come

Folks are always asking me what we should do from a practical standpoint, given the pervasive triumph of the satanic lies of progressive leftism even within Catholicism. Mostly I think we are just in the hands of Providence. Prayer and fasting and the sacraments are the best things, and living our own lives in the best way we can. Feed the hungry, admonish the sinner, and engage in the other works of mercy. Mostly that is really all anyone can do, all Christians have ever been able to do in the Vale of Tears.

But every now and then, you might feel like picking up a shovel and scooping another little bit of dirt away from the foundations of Barad-dûr.

If you buy the premise that the current progressive freak show is a product of metaphysical anti-realism, and that popular metaphysical anti-realism is a result of pervasively practiced anti-realism in modern economic life, then where to plant your shovel starts to reveal itself. Direct confrontation with progressivism over sex and marriage isn’t likely to get anywhere, because sex and marriage sit at the top of the anti-realist edifice, right next to the Great Eye with all of its current attentions and ministrations. In order to be there at all you have to stand atop a vast tower of unreality.

It seems to me that it makes more sense to take a shovel to the foundation, not the ramparts. The bottom of the anti-realist Tower of Mordor sits in darkness, a haze where little can be seen. For the most part, most people don’t even know what usury means anymore. Most people think that authority is the problem. But every new person who learns, who understands, who accepts is a tiny shovelful of dirt carried away from the foundations sitting in the rock miles beneath the Great Eye.  We might be able to spade away there for quite some time without attracting too much notice.

If you do decide to dig there, make sure you don’t get distracted by the anti-realist rats scurrying around the foundations, infectious modernist ideas whispering lunatic missives against fiat currency and fractional reserve banking, murmuring about the virtues of hoards of gold and how greed is good. They too, witting or unwitting, are just servants of Mordor, creatures embracing unreality as if it were Being, darkness as if it were light. The fact that they don’t sit next to the Great Eye in the Circle of Sodom doesn’t make them servants of the light. They are there to chew out your eyes while you sleep, so that reality becomes obscure as you wander about blind and desolate in the darkness on the barren plains of Mordor.

Maybe there is a Frodo out there somewhere, carrying a great and terrible Ring toward the Mountain of Fire as I write this.  I don’t know. We don’t even get the comfort of knowing that there is a frail Ring-Bearer out there with his lone companion; just the comfort that in the end, the light has already triumphed and this darkness too shall pass.

But in the meantime you’ll sometimes find me down here in the murk, digging one little shovelful at a time in the rocky and treacherous ground.  I have no great hope of toppling this vast Dark Tower with my little shovel, or even with an army of thousands of shovels.

But I’ll still dig. It is worth digging simply for the sake of defying the Evil One in the name of what is good, true, and beautiful.

There is some good in this world; and it is worth fighting for.

If we are going to name a new heresy, we should get the etymology right

At One Peter Five, Michael Lofton writes:

It would seem that a new heresy is being created before our very eyes. What is this new heresy? If Arianism was named after the priest and theologian Arius, who championed the denial of Christ’s divinity, it seems fitting to call our present corruption of Catholic belief, “Kasperism” – inasmuch as it has been promoted most vigorously by the German Cardinal Walter Kasper. What is Kasperism? It is the view that dogma is to be left intact in theory, but may be contradicted in practice.

This is giving Cardinal Kasper far too much credit.  If we want to give credit where credit is due, we’d be better off calling the position that dogma is to be left intact in theory, but may be contradicted in practice Castiglionism or Capellarism.

Where the modern sexual freak show comes from

It is actually rather difficult to get regular, salt of the earth human beings to stop believing in objective reality.  But nevertheless, when you look around at the modern sexual freak show, you can see that it is a result of lots of ordinary human beings denying the existence of an objective sexual reality which transcends subjective human perceptions and preferences.  I could give examples, I suppose, but things are so perversely surreal there is simply no need.

Getting regular salt of the earth people to stop believing in reality takes generations of inculturation.  It requires introducing anti-realism into their everyday lives in a basic way which involves their constant participation: through a pervasive process in which opting out is simply not reasonable or even possible for most people.

This could never have come about through sex on its own, because sex is too private a thing.  But most men simply cannot isolate themselves from the world economically.  There has to be food on the table and a roof overhead.

Which is why when the Diabolical decided to introduce and cultivate anti-realism broadly throughout human society, he did not choose sex as his entry point. The destruction of sex and marriage was a strategic achievement: a prize, not the race itself — a prize which could not have been achieved without centuries of preceding indoctrination in economic anti-realism, with usury at its center. Combined with a moderate liberalism riddled with plenty of unprincipled ‘common sense’ exceptions as the public creed, centuries of anti-realist indoctrination of everyman in his immersion in economic life set the stage for the present freak show.

Where the value of money comes from

[18] But Jesus knowing their wickedness, said: Why do you tempt me, ye hypocrites? [19] Shew me the coin of the tribute. And they offered him a penny.[20] And Jesus saith to them: Whose image and inscription is this?

[21] They say to him: Caesar’ s. Then he saith to them: Render therefore to Caesar the things that are Caesar’ s; and to God, the things that are God’ s.

Matthew 22:18-21

All paper or electronic currencies (other than bitcoin and the like) have intrinsic value, because they are all options which entitle the bearer/owner to something else – something other than the currency itself – which is (that something else) of value. Fiat currency entitles the bearer to settlement of tax liabilities. Bank deposits entitle the owner to on-demand access to fiat currency, backed by the balance sheet of the bank. Gold-backed sovereign currency entitles the bearer to settlement of tax liabilities and, at least notionally, a quantity of gold.  Stock (often used as currency) entitles the owner to profits from a business and liquidation value of any excess over liabilities. Stock options entitle the owner to the purchase of stock at a particular price. Etc, etc.

Bitcoins entitle the owner to nothing at all.  Their ‘value’ actually is purely conventional, based on the deluded notions that people trading in them have about money.  They have approximately the same intrinsic value as a photograph of someone doing something stupid.

Note: I am sure there are old posts here, which I leave in place for the record, where I accepted the fairly conventional view that money is ‘nothing in itself’: that it was simply based on a vaporous ‘full faith and credit, so use it dammit’ assertion by the sovereign.  I was never especially comfortable with that view, and in recent years I’ve come to better understand why.

Valuing nothingness

19 Their silver shall be cast forth, and their gold shall become a dunghill. Their silver and their gold shall not be able to deliver them in the day of the wrath of the Lord. They shall not satisfy their soul, and their bellies shall not be filled: because it hath been the stumblingblock of their iniquity. Ezekiel 7:19

I’m a metaphysical realist.  What that means to me in very general terms is that I accept that things have objective essences independent of the subjective perceptions or projections of human beings onto things.  It isn’t that the perceptions of the subject are irrelevant; it is that objective reality is not reducible to nothing but the perceptions or projections of subjects. Objective reality is not reducible to perception, will, or desire. Intentions and desires matter, but they are not all that is the case.

This affects how I approach everything, and in particular it affects how I approach questions about property, money, finance, etc. This puts me in conflict with all modern schools of economic thought, because all modern schools of economic thought are metaphysically anti-realist. To modern schools of economic thought, economic value is reducible to the subjective perceptions or projections of groups of people (markets).

So the fact that markets – groups of people – perceive gold as valuable and act on that perception is taken as proof that gold actually is just as valuable as they perceive it to be. And the fact that this value arises almost entirely from purely subjective evaluations, as opposed to arising from any useful objective qualities of gold, is taken as a virtue of gold qua ‘store of value’. Gold’s relative independence of any actual objective usefulness is the very thing that makes it a pure store of value.

The most pure form of anti-realist value is distilled and concentrated human subjective evaluation: value with no object. The only thing more pure than gold would be nothing at all, but of course even the most ardent anti-realist cannot escape from objective reality.  Because he cannot store pure concentrate of human will in a vault, the anti-realist stores gold; because at least as an historical matter gold is the substance that human beings have most irrationally desired, desired in a way most purely disconnected from objective reality.

What is fantastically ironic about the whole situation, from my perspective, is that so many people flee to the idea of gold and gold-backed currencies in order to escape what they think of as the unreality of finance.  Indexing all of economics to gold, they think, will somehow anchor economies so that they cannot be manipulated by banksters and plutocrats.

But you can’t escape from unreality by fleeing into it.

UPDATE: Added epigraph.

Old MacDonald had a cap table

For some readers a little background may be helpful before I talk about commercial banks and deposit accounts. Others may prefer this over the use of pharmaceutical sleeping aids or alcohol.  I’ll try to keep it short.

Ownership, broadly understood, is simply to have a legitimate claim staked in some actual property.  There are many different forms of ownership.

Suppose we have a farm which is owned by a group of investors.  In anticipation of future discussions I’ll sometimes out of habit refer to the collected assets of the farm as the balance sheet of the farm; in fact the balance sheet more strictly speaking includes not just the assets (inventory of what is owned) but also an inventory of what is owed (liabilities + equity), that is, what the farm “owes” to various parties (workers, investors, customers, suppliers, etc).  These always ‘balance out’ to zero[3]; thus the name ‘balance sheet'[1].

The farm is not a person, of course, so to say that it ‘owes’ something to Bob is simply to say that Bob is entitled to that something to the extent that it can be recovered from the operations and assets of the farm.  I’ll sometimes habitually refer to things that the farm ‘owes’ to various parties as ‘claims against the balance sheet’ or the like.

These various claims come in two flavors.  The operating flavor is what the investor/creditor is entitled to while the farm is up and running, producing crops and making profits (or incurring losses).  The liquidation flavor is what the investor/creditor is entitled to when the farm is being liquidated, that is, when the farm itself or its assets are being sold off.

A capitalization table (cap table) is just an inventory of the investors and their claims.  The claims each has depends upon the kind(s) of security (investment contract with the farm) he owns.  Securities come in all sorts of flavors and a virtually infinite variety of contract terms, but for the sake of simplicity we can speak of two basic kinds: equity (stock) and debt (bonds)[2].

Debt is entitled to repayment of principal and a fixed rate of interest on a predetermined schedule, and has liquidation preference over equity. That is to say, if the farm is in liquidation the principal and accrued interest on the debt are fully paid from the assets before the equity holders get anything at all.  Debt is obviously lower risk than equity.

Equity gets whatever is left over after all other claims have been satisfied.  Equity has more profit potential than debt, but is much riskier.  While the business is operating equity gets all of the profit in excess of expenses (including, in the expenses which have to be paid first, payments on outstanding debt).  When the business is liquidated equity gets everything that is left over after all of the ‘fixed’ claims have been paid.  So the profit potential for equity has no theoretical maximum; but misfortune can easily reduce its value to nothing.

Notice that nowhere in this basic capital structure has any person made a personal guarantee of repayment.

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[1] The reason a balance sheet balances out to zero – that the sum of what is owned is equal to the sum of what is owed – is because once all of the creditors of various sorts have been paid what they are owed, any left over assets belong to the holders of equity.  Equity is often itself referred to as ‘ownership’, although this is obviously a more narrow category which simply means ‘entitled to whatever is left over after everyone else has been paid’.  There are kinds of equity which do not involve any formal ‘say’ in how the company is run, and the market does take that difference into consideration: a contemporary example is the difference between GOOG and GOOGL.

[2] I’m ignoring matters of operating control for present purposes.  Usually debt investors are passive, whereas equity investors are active – that is, equity investors elect the board of directors.

[3] Assuming that no claims extend beyond the assets of the farm-as-actual-property to personal guarantees: that is, assuming no usurious contracts.

Gold backed currency: fiat dollars in a house of mirrors

In the previous post I gave a basic explanation of fiat dollars.  In this post I will argue that gold backed currency (or other sovereign-issued commodity-backed currencies) are actually less transparent than fiat dollars as a medium of marketplace exchange. Gold-backed dollars, in other words, simply are fiat dollars; but a perverse and distorted form of them.

Gold became a medium for barter, particularly over extended distances and time, because it had characteristics which made it particularly suitable.  A valuable quantity of it takes up very little space compared to alternatives, so it can be easily transported and defended; and it is very durable, so it doesn’t lose its intrinsic value quickly the way food and other perishables do.

Every useful application of a thing affects the market value of that thing, so the use of gold as a medium for barter (that is, as a currency) affects its market value.  If 90% of the time gold is used as a currency and only 10% of the time it is used for other applications, then its use as a currency will dramatically affect its market value.

When Caesar puts his face on gold coins and pledges to accept his minted coins for payment of taxes, those gold coins become a fiat currency – tax vouchers issued by Caesar – printed on gold.  So now the market value of each coin, and the corresponding value of equivalent weights of gold, are further altered from the value of gold apart from its application as a marketplace currency and tax voucher.  What has happened is that what used to be an advantage in a case of pure barter – how much a small volume of gold is valued in itself for applications other than currency or tax voucher – has become a distorting and obfuscating factor.

What we have at that point is still a fiat currency: it is just a fiat currency viewed through a house of mirrors.

Fiat dollars explained

The king has legitimate authority to levy taxes.  As with all human authorities this particular authority is inherently limited.  (We’ve discussed some possible moral limitations on the sovereign’s authority to tax before).

Suppose that initially the king decides to levy taxes in gold.  Gold is a useful industrial commodity and is relatively portable, which makes it convenient, and people are already using it for marketplace exchanges for those reasons.  So when a citizen comes to the king to pay his taxes, that citizen has to first get some gold. Perhaps the farmer sells some of his wheat in the marketplace for gold, and he brings some of that gold to the publican to pay his tax liability.

The king has many things that he has to pay for himself.  For example he has to pay wages to his soldiers.  He pays them with gold, which he acquires in all sorts of different ways, only one of which is through taxation.

But dealing directly in gold is rather unwieldy, for a variety of reasons.  The problems of physical transfer and security can be mitigated by keeping the gold stockpiled and, instead of physically transferring gold around, using a system of ‘banking’ to transfer title to gold around.  We call these titles-to-gold ‘dollars’, and everything proceeds as before except that now we don’t have to take unnecessary risks and waste resources moving lots of physical gold around.

(This ‘banking’ system will later develop into a system of fractional reserve lending, which I’ll probably discuss again in a later post.  For the time being and for the purposes of the present post the banks simply hold the gold for us and transfer title – ‘dollars’ – around, for a fee which we pay.  It is worth it to ‘depositors’ to pay the banker’s fees, because using the ‘bank’ is both more convenient and more secure.  Taking care of real property always and without exception carries risks and costs).

However, the king notices that using gold and titles to gold (‘dollars’) in this way for transactions creates market distortions.  Some people in niche markets still value gold for its usefulness as an industrial commodity, of course, but most people also value it as a means for settling tax liabilities and as a general currency for buying and selling in the marketplace. The settlement of public and private debts via gold and gold-titles however is itself distorted by the gold-qua-gold niche market: most people as it turns out have a lot more use for food, clothes, shelter, land, tools, etc than they do for gold, but a shortage (or overabundance) of gold can still cause all sorts of problems for a town or city or region when fluctuations occur.  Large numbers of people whose lives objectively depend not a bit on this one niche industrial commodity nevertheless find their flourishing has become slave to this one narrow market: the use of gold as universal currency distorts both the gold market qua industrial commodity and the markets in all sorts of other things.

So the king decides to issue tax vouchers, entirely independent of gold or other industrial commodities, which he pledges to accept from citizens to settle their tax liabilities.  Just to be confusing he calls these tax vouchers ‘dollars’, the same label which was previously given to gold-titles.  These fiat dollars have value, not because they entitle the bearer to some quantity of gold, but because they entitle the bearer to settlement of tax liability in the denominated amount.  These tax vouchers (fiat dollars) then replace the use of gold titles (so-called ‘hard currency’) as a convenient marketplace currency, precisely because using them to temporarily store and carry value is very convenient.  People are of course welcome to use whatever currency they like in private transactions, but when tax liabilities arise they must be valued in fiat dollars and settled by giving the king back the vouchers that he issued.

Because these tax vouchers have intrinsic value to the bearer, the king himself can use them to pay for things — the wages of soldiers, for example.  And like a corporation with theoretically plenary power to issue capital stock, the king has theoretically plenary power to issue more vouchers whenever he chooses.  However this power is, like the aforesaid corporation, limited by numerous practical and moral considerations.  If he issues too many at once (for example) then they become worth less, and his outstanding tax claims against citizens become correspondingly worth less.  In general the stability of the king’s fiat currency will reflect the supply of his tax vouchers (‘dollars’) in the marketplace and the public’s faith in his long term viability as a tax authority.