Wall Street’s Implosion In Simple Terms

By Terry Mollner

         I think I can explain in simple terms what has happened on Wall Street and to some degree in our collective consciousness.

            In a few words, credit can be an unhealthy addiction.

            My parents did not buy anything until they saved enough money to pay cash. It was considered a big risk to borrow some of the money to buy a house.

            However, once we get into the credit game we discover that if we can borrow money at 5% and invest it where we are confident we will receive 10%, we will borrow as much as we can borrow. If we can issue stock and get money where we don’t even have to promise a return that is obviously even better. Finally, if we are confident that this along with our other income will continue along just fine, we will buy any house, car, or widget that we want using credit confident that we will have the cash flow in the future to make the monthly payments.

            There is just one little problem with many people doing this which is easily understood if we think of it on a village level.

            If there are ten families in a village and they are all doing this, there are no people to work to cover the 5% value between the money borrowed at 5% that is giving all ten families a return of 10%. Oh, yes, the ten families could be producing the extra 5% of value, but then it would make no sense to be borrowing money from each other and have this system in place. It only makes sense if some people are smart enough to be working the credit game to be making more than others who have to do the extra work. Then, if they are really smart, they will keep putting some of their profits aside in a safe place (like Treasury Bills) so they will be rich and financially safe if the credit game gets broken so they can’t play it anymore.

            If all ten families get together and agree to end the credit game except only in short term loans for productive activity, like for seed and fertilizer or to expand the customer space in the restaurant, all would work in activities that served each other’s needs. This system could last forever.

            However, if everyone is hooked on the credit game, then everyone is trying to borrow as much capital from others as possible to make even greater profits instead of doing activities that serve real needs of others. Those ever greater profits can only come from activities of others who are meeting real needs. When all ten families get hooked on the credit game, they stop going to the fields to plant corn or to the restaurant to prepare food or to the garage to fix cars and real needs are no longer getting met.

            This is what has happened in our global village. More and more people every day are being seduced into the credit game in the hopes that they will succeed at being one of the winners who does not have to work anymore and can live off of the difference between the cost of the money borrowed and the return on the money invested and eventually become so rich that it is not even necessary to play the credit game…even that little bit of work is not necessary.

            Oh, I am sure you are seeing a positive side to the credit game I have described: those with good ideas, initiative, and skills can build companies that serve real needs better. This is true. However the danger, as we have seen, is that people can easily forget about serving real needs and become solely focused on getting the financial returns. They can even get smart enough to not break any laws, even have extra money to lobby for laws that only serve the interests of the credit game, and justify making lots of money because it’s just a game and in all games there are winners and losers. They can even be cleaver enough to set up the game inside something called “a corporation” which can allow them to keep all the money they take from it but not have any responsibility for the money they borrowed. After all, it is a game. They are just smart enough to be big winners.
           
            The big problem for the real needs of people, especially those not in the in-crowd who know how to play the credit game at a high level and who have to actually work every day, is that when the corporations start collapsing it is the people extremely good at playing the credit game who usually get put in charge of solving it by the government. Thus, rather than saying that we have to end our unhealthy credit addiction and all get back to serving real needs of people again they see the biggest problem as the lack of easy access to credit. The problem is the opposite: now everyone has too much debt. Even those serving real needs now also have too much debt because they learned how to play the credit game also…and many of them have to retire soon or are already retired. They trusted that the credit game experts were correct when they offered to take their money, invest it, and be able to give them a good retirement.

            The Securities and Exchange Commission (SEC) should have stopped the hedge funds, sub-prime mortgage funds, and credit default swaps before they even got started. They didn’t because the credit game experts were put in charge of the SEC. It appears that they genuinely believed that it was good for us to have a few winners and millions, even billions, of losers…even having them losing a safe retirement.

Only addicts think life is a game. Healthy people think life is love.

            Addicts don’t care about the losers. It’s just a game; there have to be winners and losers. They even naively think they will be happy living off of their riches rather than participating with the rest of us in meeting the real needs of each other. Even the winners in the credit game are losers. It is very sad for everyone.

            Let’s hope our new President and his team give priority to ending finance as a game and suggest a context of agreements that we can all follow that give priority to meeting real needs; that is, building a system that can last forever. One based on love.