I wrote a comment on Anatoly Karlin's blog today about the 1990s in the former USSR, and that started me thinking about politics and economics in general. One such thought led to another, so that in the end I decided to describe my attitude to credit here on my little blog.
I'll start with a simple observation: the more responsible, conscientious, hard-working a person is, the less likely he is to ask for a loan. But this is exactly the kind of person who's most likely to repay a loan if he gets one.
So the people who come to a banker, asking for his services, giving him business, are disproportionately of the kind who aren't likely to repay him. The people who are most likely to repay him need him the least. How does a banker normally solve this problem, this contradiction?
Very simply. He establishes private relationships with government officials. Loans on favorable conditions, bribes, job opportunities in his bank after the officials retire. When debts go bad, as they always do, the government bails out the banker with taxpayer money.
In this way a responsible person (the taxpayer) is made to subsidize an irresponsible one (the debtor). Remember that the more responsible, hardworking individuals tend to pay more in taxes than the less responsible ones.
At this point everyone remembers the 2008 economic crisis which was caused by banks loaning money to irresponsible people. Sub-prime loans, zero down payments, no checking of credit histories. And of course there was a government bailout afterwards. Too big to fail, etc. At about the same time in Europe German taxpayers were bailing out Greeks. A couple of decades before that there was the Savings and Loans scandal.
I don't think the average person realizes how common this is. A few years ago I read Niall Ferguson's 2-volume history of the Rothschilds. Since the Rothschilds were the world's chief bankers from about 1815 to about 1914, Ferguson's work comes close to being the financial history of the world in that century.
Banking crises followed by government bailouts happened all the time then. What do I mean by banking crises? Loans going bad, debtors not paying. The bailouts weren't exceptional events. They were an essential part of the banking cycle, of the business model of banking. As they still are I think.
Ferguson described a hierarchy of credit-worthiness among 19th century countries. Of course Britain and the various German states were on top, France a little below, Spain and Italy lower still, and Latin American states in the gutter. It was every stereotype confirmed.
At one point in the books the Rothschilds start loaning money to the pasha (or whatever he was called) of Egypt. And you think "well, this pasha doesn't seem like a very creditworthy person. How would they get their money back?" As I remember, Ferguson was good at creating a feeling of suspense here.
They asked their friends in the British government, one of whom was Gladstone I think, to invade Egypt, making it a colony. After that the British government assumed responsibility for Egypt's debts to the Rothschilds. So in effect the average British taxpayer (shopkeeper, colliery owner, whatever) ended up subsidizing the pasha's harem. For a while at least. Think of all those orientalist paintings.
To me this is a symbol of how credit works in general. It's a transfer of money from responsible people to irresponsible ones, from those who do to those who spend. Often on bling.
Would it be possible to eliminate the corruption factor from the banking cycle? I don't know of any countries where that was ever done. I recently reviewed here a book about the history of Florence from 1200 to 1575, and it was full of banking crises and taxpayer bailouts. By the way, all of the biggest bankers there were Italians.
I know of countries that completely dispensed with debt internally. The post-WWII USSR, modern Saudi Arabia. Though obviously I don't know the latter from the inside. And I know of countries where credit works in the corrupt manner that I described above. But I don't know of any places where it's ever worked honestly. And of course, if bribery and bailouts were eliminated, the banking business would shrink considerably. Bankers would only loan to those whom they truly considered creditworthy, and that's not a lot of people. And these are exactly the kind of people who need credit the least.
Why is bribery so hard to eliminate in this context? Because the bankers' profits exceed government officials' salaries by many orders of magnitude. This is almost like gravity. Why does the Moon revolve around the Earth?
I'm sure that this reality is partly behind the condemnation of banking by several religions and by much of humanity's wisdom literature. Quoting Shakespeare, "neither a borrower nor a lender be."
I freely admit to being hypocritical on the issue of immigration, but I've never been a hypocrite on this. I've taken out zero loans in my life. I bought the apartment in which I'm typing this outright, by saving money when I was working while living with my parents in my younger days. The only bits of debt that I've ever had were two or three overdue credit card bills. I've always had enough money to pay them, but I sometimes forgot to do it on time. So I've been assessed a little interest. Probably $20 or $30 in total. Never had any other debt of any sort.