Structuring financial institutions for catabollic collapse

Further developing on the work of Joseph Tainter, one of the most important thinkers of our time, John Michael Greer, has developed the theory of catabolic collapse, which caters for a weakness in Tainter's thesis. Namely the extended time frame, often measured in centuries, over which civilisations such as the Western Roman Empire and the Mayans collapsed.

Greer argues that each step of collapse is inherently self limiting due to a society's resource requirements falling below the resources available to a society which enables a civilisation to stabilise at a lower level of complexity. The net result being that collapse, if graphed, looks like a downwards stair case with periods of stability, potentially lasting decades, and even periods of growth in a trend that is ultimately heading in one direction: down.

This is the context that any review of our banking and financial system should be assessed against.

Selection and maintenance of the aim is the first and most important principle of war and for good reason. Any military commander who gets this wrong is at best likely to incur unnecessary casualties, at worst be defeated.

So what is the primary purpose of our financial system? Is it to facilitate the transfer of goods and services? Is it to boost home prices and stock markets? Or is it to maximise profit to generate wealth for banking executives and shareholders? This is a vital question.

While the financial system obviously facilitates the transfer of goods and services, it has become increasingly focused on the creation of wealth, as demonstrated by both bank profits and the size of the financial services industry. Whilst this may have been acceptable in a growing economy, in an economy at risk of catabolic collapse, such a focus is extremely damaging.

When generating wealth becomes the primary focus of the financial system, banks and other investment agencies will invest to maximise profits. As the converging crises of the 21^st century unfold, the volatility and instability in traditional investment classes will require banks and other financial institutions to take greater risk to chase returns. In turn this will negatively impact upon society as a whole, something that we are currently seeing in commodities markets.

The USA, which according to Greer commenced its first wave of catabolic collapse in 1974, has taken a path where the maximisation of profit appears to be the primary motive of the financial system as evidenced by the profits and bonuses in the corporate world while main street suffers with actual unemployment, as opposed to Government measured unemployment, that could be as high as 22% while house prices continue to fall and many states and cities are verging on bankruptcy despite the best efforts of the US Government and Federal Reserve. The USA has taken a maladaptive approach to catabolic collapse, one that is likely to end badly. What then would be an adaptive approach to dealing with catabolic collapse for Australia?

First of all, we need to ensure that the primary purpose of our financial system and banks is one of ensuring the ability for individuals, business and government to transfer goods and services. This raises the question of who should own our banks. Currently what is good for the banks (i.e. profit) is not necessarily good for the country, particularly in the long term. A prime example is the home mortgage market, which has generated much of the banks' enormous profits while increasing Australia's mortgage debt to GDP ratio to record, and in the face of catabolic collapse, potentially ruinous heights.

This being the case, perhaps we need Australia's banks to be owned either by the state or preferably at the community level with the primary role of providing basic banking services, at low risk, to the community that they serve. These banks should still be operated on a profit basis but with moral hazards contained through paying bank employees on a salary only basis and the bank board being directly accountable to the community that they serve. This would remove the incentive for risk taking that is embedded in the current banking system.

The second major consideration is the role of debt in the financial system. The onset of catabolic collapse suggests that much, if not most of the debt currently on issue around the world will never be repaid. The deflationary spiral will take years, if not decades to play out. Credit worthy customers will decline drastically and lenders will become increasingly reticent to lend out of fear of the losses they might incur.

Whether we like it or not, the majority of the world's debt will and must be purged before anything like a sustainable and stable financial system can be established. The result will be major falls in the value of many asset classes such as real estate and equities and the failure of many financial institutions.