The Theory of Not Telling the Whole Truth

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It would be nice to have only the greediest bastards to have their asses blown up periodically. Unfortunately, we live in a mirage. Things went very far into this hidden mess. But we all pretend everything is under control.

Hey dad, do you have a minute?

I remember I was 5 years old, when I ask my dad about communism. It was 1989, 3 years after the Chernobyl incident. The amazing series produced by HBO touched upon the subject in 2019. It was the mental state presented by the creators — not necessarily the obvious catastrophic chain of events — that recently made me thinking again about a human nature. Mainly about socio-economical systems we create and how dangerous they can be.

I pay particular attention to a banking system due to my professional background. Quite strange in the context of the above power generation case and the brief mention of some kind of virtual particles, but it has been making me headaches for years. It has one great analogy, though.

As a kid I witnessed a transformation between two opposite economic systems. This gave me an interesting perspective comparing both almost on the spot.

I know memory is basically a spontaneous projection from unstructured snippets of information hidden inside our brains, but there are some moments, when you have a feeling, a scene was basically recorded. Like a photo, or maybe with some sort of movement, like a GIF file, with its natural poor visual quality.

It was grey in 1989. Even yellow tone of a wallpaper in my room was grey-like. My town was grey. My kindergarten was grey. And people were grey. This is communism from a kid’s perspective.

Communism in Poland was about to collapse. Unfortunately, so was our economy.

It was almost like Venezuelan today. However, in our case, we could smell something fresh in the air. A quiet, peaceful revolution. I could feel it as a kid as well. People were talking, the regime was backing off, a new liberal system was introduced. I was young, curious and access to knowledge was from then on unlimited. Pretty good starting point to learn, how things really work.

What I understood then, with my limited skills for understanding things in a broader perspective, is that communism is a program based on a classless society, about collectiveness and centralisation of every aspect of an economy.

The system was ineffective, though. As a sad result, people were just cogs in a machine, learned how to pretend living.

They were shadows of their true potential.

Liberal wind that everybody felt then in the form of capitalism is about deciding for yourself, willingly initialising cooperation or simple exchanges. People would be described as actors in a big game, property is decentralised, money in its nature is more important.

With its curse…

Lies

Throughout my education in the country that was redefining itself, I learned life is brutal for people that were totally integrated with the previous system.

Mostly, they were not advocates, they just figured out how to live day by day in one environment and was lost, with how the things were changing, and how real was the necessity to take care of yourself (like the former authorities even care…)

However, there is much brighter side. Opening hidden potential to the global markets created over decade-long boom in Polish economy. I also learned, what is the essence of the communism in its true form. As I mentioned earlier, Chernobyl series brilliantly presented that essence.

Lies. Those are the pillars of the disgraced system.

Complexity

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Before I jump into the middle of my problem with banks I need to share one more thing.

To describe an economic system you should use incredible amount of variables and parameters embedded in mathematical models. This is probably, why there is a perception of a mathematical-like nature of economics, instead of a domain of social sciences.

Mathematics is just another language, a framework to understand reality. In its simplest possible form it is very useful in my case here.

So, let’s picture simple Cartesian coordinates, meaning just x-axis and y-axis, set at the right angle. Don’t draw it, please.

Only imagine the x-axis describes one economic system with its characteristics, and the y-axis the other system. Just abstractly. The beauty of using this abstract chart is that any point in this space is just a combination of both systems (axes). Yes, let’s think about some blend.

Not pure forms, but a mixture. In the end, a particular economic system may be just a synthesis of both in any proportion — a dot somewhere between two axes. For example: no regime, just democratic way of deciding who should set the rules, but still central public school system.

Or, central government that infiltrates every aspect of your life, but a free market acting to a large degree. This is how things work in most of the countries.

I should also add who owns what in case of communistic and capitalistic formula. This should be simple.

In communistic utopia, the people. But do you remember the lies part? The owner of goods in that system is an abstract form of the classless society. However, it means whoever is in charge, takes everything, leaving others enough just to keep existing.

Nothing else, just enough not to be forced to confront the rage in the French revolution’s style.

As for capitalism, in a nutshell, this is a rampage as many would say. Zero sum game as others mistakenly might consider, with huge amount of uncertainty and more visible inequality. Everybody is allowed to own almost anything. A question — how to afford this endless possibilities — is for over 99% the hardest part. Everyone is in charge of its own destiny. Right?

Enough of introductions and blending communism with capitalism. We have the bricks laid down. Let’s build a structure of the matter I am trying to deal with. So you can see, what I see, and you will decide, how you interpret it.

The banks

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Something central brings lots of risks. Mistakes of a narrow decision body are dangerous, when the body is in charge of enormous systems. Sometimes it works, sometimes not.

Systems of commercial banks are the problem here.

Throughout the crisis period of 2007–2009 you could have seen the results. However, the main issue is placed one step higher in a hierarchy. Central banks.

Centralised. Banks.

This is the the idea that bothers me the most.

A centralised whole economic system is one thing. Such as in a pure communistic country.

Now I am pointing out a bit smaller, but incredibly impactful centralised economic system, based on banks — characteristic for capitalistic systems.

It is neoliberalism that dominates most economic debates nowadays. USSR is long gone, even China needs to obey some capitalistic rules (lessons learned from Mao’s times). Since neoliberalism was a response to fix the communistic inefficiencies, it is often presented as a dogma. Socialistic movements have some similarly tough dogmatic rules, so the debates about the opposites rarely are productive. Nevertheless, we live in a system that is a combination of both.

Is it now about reducing free market inefficiencies, though?

Monopoly game

Erasing central, authoritarian body brings chaos because it’s a system’s own centre of gravity. This is my problem with the idea the banking system works.

A central body decides how much money is in circulation, how much credit is out, how much wealth and where might be created.

Knowingly doing so, this body wouldn’t be that bad. At least we would know who does what and what are the exact implications. But we don’t. Bankers don’t either.

We are too deep inside this mess, we don’t even know who should be accountable, even historically.

You may recollect some phrases from the media about money printing presses launched on demand, especially when it was very hot during the latest global economic crisis. But it’s not about it.

It’s about the whole ecosystem in its general form — basically the mindset. It’s mostly about commercial banks, even if I’m focused here on the central ones. Commercial bank do what they do. They do, what they are allowed to do. Central banks and governments set the game’s rules.

There are lots of instruments they can apply. Regulations, limits, risk management policies, forced transactions on specific terms, with particular securities and — my favourite part — putting a price tag on money — the interest rates.

Dogmas

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The idea that the price of money itself would be discovered by market participants with their natural interactions is today a total abstraction.

I’d like to remind you that one of pure liberal dogmas is something like: free markets solve basically everything.

I will never forget one of my job interviews in a financial service firm. During a more relaxed talk I stated a controversial hypothesis that central banks shouldn’t exist, meaning in their known powerful form, being able to artificially set up money markets.

It is debatable. What isn’t? Religion? Sure, it’s debatable. But I remember the response of my future coworker:

Who would set the interest rates, then?

Like somebody just has to do this…

In one of the temples of capitalism one guy was shocked that something like money would be a commodity and its price would be an outcome of the free-market-style play.

During my education I was taught: market finds its equilibrium, just learn how to model it. At the same time I was fed with the idea that central banks should be there to take care of inefficiencies of the money market.

A paradox?

Of course, you also learn about the concept of a monopoly and its bad effects, but rarely you hear about the greatest monopolies in the human history.

Thinking about Rockefeller or today’s digital behemoths, like Amazon or Google? There is a much powerful monopoly as you may have deduced already…

How did it all start, though?

A bench somewhere in Italy

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The idea of money is basically ancient. The origins of the system we know are a bit younger, though.

A transition from medieval ages to modernity is smeared across almost 400 years.

One of the things that were revolutionised during this period is trading. It started with primitive coin currency exchanges on benches in Italy. The word bench in Italian is banco. From banco to a bank it’s just one linguistic step. Above all, it was about a new business model, not a medium of exchange itself.

No more carrying precious metals with you, as long as you have a system of trust, stable enough to store your money in one place. Only paper confirmation that you indeed have your treasure stored at a trusted place. It was so comfortable, you rarely saw your gold or silver. And rarely you were seen as well.

Somebody suddenly got a new idea. Why not use the money stored in vaults to finance different initiatives.

Collecting interests during a process. Obviously.

A probability of withdrawing all deposits at once was incredibly low. However, low doesn’t mean impossible.

As a result when the system of trust was just barely scratched, things were turning into house-of-cards-like structures.

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The new business model survived and expanded, though. Especially through 19th and 20th century.

Nothing is something

I like quantum mechanics. It’s the most advanced framework we can use to describe the reality. I was amazed it might be useful to present an analogy in the context of a banking system.

An empty space is not empty at all.

Due to the famous trade-off called Heisenberg’s Uncertainty Principle, different fields of energy (probably space itself) might be spontaneously turned into particles. It is like almost out of nowhere there is a pop up of a pair of a particle and an antiparticle.

The phenomena is incredibly fascinating, but I like to think of analogous fields in a banking sector — fields of greed.

Out of nowhere, based just on a decision, money via credit may be created almost the same way the virtual particles come into existence in a vacuum.

Imagine the simplest scenario, please. I’m a banker, you are a customer. I have zero on all the accounts, you have zero on the one you have in my bank.

I encourage you to take a loan. You take the offer because we have Christmas, for example. I lend you $1,000. You get it on your account in my bank. Now, I have as an asset this loan. And on the other side of a balance sheet your account as a deposit.

For me this deposit, at the same time is a liability to give the money back on your call. But those position annihilates each other (like matter and antimatter), since you owe me what I owe you.

Well, there’s the part of the interest from the loan, but let’s put that aside.

In this simple world you buy gifts in a shop that also has an account in my bank. Cashless payments involved. From zero we have in our small system $1000 and nothing leaves the system.

There might be more banks, more accounts, more loans. As long as not too much cash is outside the system, the mechanism is like I’ve just presented.

What stops me from doing this over and over again?

Well, some bankers for centuries have tried that. After some incredible market crashes and induced recessions, governments put more and more limits on such behaviours. It’s called risk management.

Financial sector is one of the most regulated sectors in the world, yet still creates the biggest problems.

The order of events is always the same. Only after some huge mess created by greed, regulators know, what went wrong and what regulations to apply.

What they may not think of during a particular clean-up would be explored later by inventive financiers. There’s also a political aspect, since cheap credit is always good, no matter the potential consequences for economies (even if central banks are often formally independent from governments).

Order

When things start looking really bad, more drastic measures are taken. Central banks have been with us for about 300 years, but relatively recently the system we know was created. Very early 20th century. Mainly due to the Federal Reserve System in the United States of America established not long after big financial crash in 1907. It is called The Panic of 1907.

When people stop trusting the banking system, it may collapse in one day.

It’s called a bank run. If one occurs, Black Friday runs — known for its rampage-like sell outs — will be considered just a walk in a park of a bunch of friends.

I have no desire to deconstruct here almost 500 years history of crashes caused by financial sector and analyse it implications. But it’s always about money. Or the essence of money — the trust that it holds some real value.

If there is a huge turmoil, people are just scared. This may be banks collapsing, hyperinflation or hunger caused by a war. This is a fertile ground for populists and other freaks, who, based on a zeitgeist and their personal charisma, may take the power.

It’s about fear and authoritative solutions. It’s about easy explanations for scared ones and about order.

I don’t know exactly, why something big, ordered, central calms some terrified people. Even a hope that somebody might take care of them is addictive for many. But are those reasonable solutions? Out of hand applications of some kind of cures — sometimes. What about long term solutions? Unfortunately 20th century was a platform for such experiments in the real world. Some implications and conclusions are obvious.

A concept of a central bank is one of such applications. A primitive manifestation of order. There is one body on the top of the structure that governs everything that concerns money. Not in a direct way, of course. Historically, this facade have helped making the decisions to let the show go on. The whole structure is still a house of cards, in my opinion.

The theory of not telling the whole truth

It’s only a matter of time to experience another financial crisis. We will not be doomed, as long as the money creation mechanism within a banking sector is productive.

It means that money supply (the loans created) are associated with real goods and services, real jobs — just real economy.

But when this supply is directed into stock exchanges, speculative real estates or other hazardous bets on complicated financial instruments, only inflating their prices, we are placing ourselves on a time bomb.

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For those of you, who are advanced in economics, check how a contribution of a financial sector is calculated in case of GDP or similar measures. Hint for all of you: in most cases you should objectively establish what value the financial sector adds to the economy.

How to do this — you may ask yourself — since the whole idea is about taking provisions from moving money from one pocket to another?

It’s an oversimplification, though. There is a value creation, but a speculative segment of a banking sector blurs the image drastically.

It would be nice to have only the greediest bastards to have their asses blown up periodically. Unfortunately, we live in a mirage. Things went very far into this hidden mess, but we all pretend everything is under control.

I remember when I first experienced a shock in that matter. For me difficult subjects are differential equations, Riemann’s hypothesis or physics of black holes. However, I spent enormous amount of time reading, rereading and finding different sources when I discovered there is a whole branch of scientific methods dedicated only to signalling intentions within monetary policy. Not only a spectrum of instrument and methods of using them — a signalling of a possibility to use them.

I don’t know whether it’s working, but I can smell a paradox.

Within neoliberal or similar economic systems you need to research how the intentions to change money supply are broadcasted.

You need to establish frequency, words that may be used by central bankers. Even how much of what a central bank knows about a future of a particular economy can be announced. And similar tricks. I put strong emphasis on a word „central” here. It’s like monitoring a mood of a king in medieval ages.

Bankers know one thing for certain. There is no way the system could be changed just like that. Getting rid of those piles of virtual money fuelling financial instrument exchanges would cause harm only.

Banks would experience damages and — at first — the supply of credit to the real economy would vanish. Unimaginable economic depression would be a reality. So this signalling and the broader monetary policy is just a necessity now. However, some directions of reforms can and should be declared.

There ale plenty of solutions. Unfortunately, I’ve read it’s impolite to post very long pieces on Medium, so…

But jokes aside. Brighter than me present the solutions in the academic sphere.

As a final word. It’s a kind of a game for a higher good. Intentions are theoretically rational, but making even small mistake, having such concentrated power is very dangerous. Spreading information carefully may be crucial. So were thinking communistic apparatchiks about the nuclear power plant in Chernobyl or the entire economy of the Soviet block. They honestly believed they were doing the right thing (decades of ideological brainwashing), when it came to informing what had happened.

There was the incident or the accident in Chernobyl, as I mentioned in the lead of the piece. Then the world found out it was the Chernobyl… catastrophe.

Both cases, of the nuclear power plant in USSR and a liberal banking system architecture are far away from each other at a first glance. However, both are examples of an application of rather undefined theory of not telling the whole truth.

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