Can the financial system be changed?

Bitcoin, virtual money, barter systems, IOU's, etc, etc. In this "talks at Google'' session with David Graeber (

) he touches on all of these things and it got me thinking, is it even possible with all that's happened since 2008, to change the financial system as it's currently constructed? I'm curious to hear what you finance intellectuals have to say.

Here's the excerpt that got me thinking -

"We're doing things backwards......we have to set up some system to protect debtors........now we do set up giant institutions, but what do we do? We set up the IMF to protect creditors against debtors. Basically did it backwards, you know S&P and all the other institutions like that. They've come up with this idea that no one should ever default, which is absurd. And sure enough, we have endless series of debt crisis' "

 
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Without watching the video, it seems a rather extreme view point. In what way he is proposing we protect debtors? From that quote in isolation, I’m interpreting that as debt forgiveness.

Conceptually, creditor protection also benefits debtors, insofar as it makes credit more freely available. In contrast, debtor protection constrains credit, and makes it more expensive. Indirectly, risk is being pooled. This might be desirable in insurance, because risk is far more random, but in credit, where there is more personal onus for negative outcomes, I can’t see this as an attractive feature. The non-defaulting borrowers are instead bearing the penalty. It is a continuum though, not binary extremes, so it’s about finding the right spot. Risk obviously should be held by both parties.

Using his example of the IMF, even if you look at Greece, which was arguably a disaster, you can’t necessarily conclude that “creditor protection” was an outright failure. The alternative may have destroyed the EU, and left Greece unable to borrow at a reasonable rate for another lifetime. That pales in comparison to the current contraction. Now, I’m not saying that as a matter of fact, but the point is, you can’t just spot problems in the world and conclude that as evidence against the status quo. You must be able to rationalize and defend an alternative, including its downsides.

 

But you didn't watch the video?......soundbites don't exactly convey nuanced viewpoints from a whole, and lengthy might I add, conversation. You mention that it's an extreme viewpoint, but in reality, it's not based on the history of the world (which is what his whole book is...). "Conceptually", is one of the biggest issues because yes, conceptually a lot of things should work, but reality isn't so kind. Risk isn't held on both sides, he points this out. Please watch the video.

 
Stephen A. Smith:
But you didn't watch the video?......soundbites don't exactly convey nuanced viewpoints from a whole, and lengthy might I add, conversation. You mention that it's an extreme viewpoint, but in reality, it's not based on the history of the world (which is what his whole book is...). "Conceptually", is one of the biggest issues because yes, conceptually a lot of things should work, but reality isn't so kind. Risk isn't held on both sides, he points this out. Please watch the video.

You just said that defaulting on debt was considered a normality for a considerable amount of history. In what periods of history was this considered normal? I won't pretend to be a historian, but in previous centuries, this has literally been reason for war. Only since globalisation has there really been an incentive for creditors to support a defaulting party, because of the systemic ripple it brings.

I use 'conceptually' to explain my argument in an abstract manner, so that you can better understand the mechanics of it. This idea is empirically observed in credit markets regularly. One could look at recent macro-prudential changes in the Australian mortgage market, as an example. You are arguing that it's empirically untrue, but provide no examples of this. You almost go as far as to imply that rationalism provides no indication of empiric truth.

Please explain how risk is not held on both sides. Are creditors worse off when default occurs? Are debtors? Honestly, I will be very impressed if you can say 'no' to either of those questions with a straight face. If you can't say 'no' to exactly one of them, your statement is untrue.

I'll watch the video when I get time (i.e. never - already waste too much here), but so far, you haven't sold his argument very well :/

 

Agreed, and to go further, debtors in fact currently have far too much protection which is why there have been so many problems stemming from individuals, companies and sovereigns taking on way too much debt without having to suffer the negative consequences.

Be excellent to each other, and party on, dudes.
 

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