Finance at the Threshold This book is dedicated to the late Freya von Moltke Finance at the Threshold Rethinking the Real and Financial Economies Christopher Houghton Budd © Christopher Houghton Budd 2011 All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher Published by Gower Publishing Limited Wey Court East Union Road Farnham Surrey GU9 7PT England Gower Publishing Company Suite 420 101 Cherry Street Burlington VT 05401-4405 USA www.gowerpublishing.com Christopher Houghton Budd has asserted his moral right under the Copyright, Designs and Patents Act, 1988, to be identified as the author of this work British Library Cataloguing in Publication Data Budd, Christopher Houghton Finance at the threshold : rethinking the real and financial economies (Transformation and innovation) Global Financial Crisis, 2008-2009 International finance Interbank market Economic policy Economics History I Title II Series 338.5'43-dc22 ISBN: 978-0-566-09211-4 (hbk) 978-0-566-09212-1 (ebk) I Library of Congress Control Number: 2010940026 Contents List of Figures Acknowledgements Foreword Prologue PART I �� vii ix xi xiii Why Nobody Saw It Coming When the Banks Stopped Lending to One Another 25 2007 – A Threshold in Financial Evolution 67 It’s the Epistemology, Stupid 91 PART II ��� �� 117 Rudolf Steiner’s Conception of Society 119 Rudolf Steiner’s Monetary Analysis 139 PART III ���� �� 151 The Twentieth Century 153 Keynes vs Friedman – A False Debate 163 The Flattened Economy 177 PART IV ��� �� 183 10 Beyond Banking 185 11 Deep Accounting 195 12 Banking on Youth and Trade 219 13 From Threshold to Bridge 225 Bibliography Index 227 231 Transformation and Innovation Series Series Editors: Ronnie Lessem, University of Buckingham, UK Alexander Schieffer, University of St Gallen, Switzerland This series on business transformation and social innovation comprises a range of books informing practitioners, consultants, organization developers, and academics how businesses and other organizations set in the context of whole economies and societies can and will have to be transformed into viable 21st Century enterprises A new kind of R&D, involving social, as well as technological innovation, needs to be supported by integrated, active and participative research in the social sciences Focusing on new, emerging kinds of public, social and sustainable entrepreneurship originating from all corners of the world and from different cultures, books in this series will help those operating in the area of interface between business and society to mediate between the two in the way that business schools once did until, as is now argued, they lost their way and business leaders came, in many cases, to be seen as at best incompetent and at worst venal and untrustworthy Published and Forthcoming Titles in this Series: Transformation Management Ronnie Lessem and Alexander Schieffer Integral Research and Innovation Ronnie Lessem and Alexander Schieffer Integral Economics Ronnie Lessem and Alexander Schieffer Finance and Society in 21st Century China Junie Therese Tong African Economic Humanism Mfuniselwa J Bhengu Spiritual Capital and Economic Transformation Samuel D Rima Culture and Economics in the Global Community Kensei Hiwaki Islamic Values and Management Practices Maqbouleh M Hammoudeh Transforming Trade Policy in an Arab State Mohammad Al-Zoubi List of Figures Figure 2.1 Figure 2.2 Sketch 6.1 Sketch 6.2 Sketch 6.3 Chart 8.1 Sketch 10.1 Sketch 10.2 Sketch 10.3 Sketch 10.4 Sketch 11.1 Sketch 11.2 Sketch 11.3 Sketch 11.4 Sketch 11.5 Sketch 11.6 Sketch 11.7 Sketch 11.8 Sketch 11.9 Sketch 11.10 Sketch 11.11 Sketch 11.12 Sketch 11.13 Sketch 11.14 An Aristotelian taxonomy Two aspects of money Gold standard Bretton Woods Federally co-ordinated economies Monetary aggregates Credit as a sub-set of cash Cash as a sub-set of credit Cash and credit in reflexive relationship Cash and credit as a resolved polarity Two different logics From ‘me’ to ‘we’ Two orders; two lower modalities Keynes’s thesis – I Keynes’s thesis – II Modern central banking (and the global financial architecture) Functions of money Kinds of money Deep accounting The structure of accounting Counterpart accounts Cross-sectoral accounting Profit and capital as flow The nature of exchange 29 29 149 150 150 171 189 189 189 190 196 197 197 199 200 201 202 203 204 212 212 215 216 217 This page has been left blank intentionally Acknowledgements I have to thank Ronnie Lessem for asking me to write this book and Martin West for guiding me through the production processes Many others have provided crucial stimulation, though they may not be aware of this The result is something of a synthesis, bringing together a diverse range of views and experience, including life-long ideals and reactions to recent events Thanks are due, too, to Anita Isherwood Murphy for faithfully converting page upon page of faxed scribblings sent from far-flung corners of the world into intelligible copy then promptly emailing it back to me And to my wife, Tessa, who continues to be the supportive wife of an often intemperate author But I have dedicated this book to Freya von Moltke because of her unswerving conviction that the fate of mankind depends on its future generations This is not a tautology or a platitude In economic life, especially as regards the thinking on which it is based, very much depends on the experiences, notions and habits of thought one develops in one’s formative years, most of which, economics today being what it is, are reinforced by practical life If there is anything awry in economic life, and it would be unwise to suggest otherwise, the starting point for lasting change must be with young people, and with the subtlety of thought they bring to bear on economic events, their own lives in particular Throughout my life, I have been certain that what matters is that young people develop a sense of their purpose in life, and that this depends to no small degree on the acquisition of financial literacy, along with being provided with the finance that can give credence to this sense Rather than indebting students, for example, I believe they should be capitalised in ways appropriate to their life paths but so that the funding they receive puts air beneath their wings In ancient Samothrace the statue of Nike once adorned the prow of a ship in a specially created lake It is usually said that this represented a naval victory, but I am not convinced For me, the ‘clue’ to understanding Western civilisation, which owes so much to Aristotle who sojourned on Samothrace, is that, however down-to-earth, our thinking does not spring from there It knows itself to be self-supporting The initiative of youth, if it is not hopelessly overlain by a culture that does not, at bottom, believe in it, and if it is not directed away from a sense of itself by the many distractions on offer today, needs to spread its wings, Nike-style, and prevail victorious over the circumstances of existence In this, especially in the future, the financing of youth has the most important part to play Christopher Houghton Budd Centre for Associative Economics, Canterbury, England chapter 13 From Threshold to Bridge What is one to conclude from this discussion? One may think that the global financial crisis should not have been allowed to happen, or that it will be prevented from continuing or repeating itself in the future Or, like the respected London economist, Andrew Hilton, and others, one may suspect that the really serious recession has yet to come, though much depends on how one defines and measures such things But once the soundbite has passed, the ‘official’ funding has become yesterday’s news and the balance sheet manipulations have bedded down, it may be that people will wonder if there ever was a crisis The thought underlying this book does not operate on this level, however The modern economy, precisely because it is so value-creative, has much room for manoeuvre, for absorbing ‘shocks’, as the mechanical image has it, or accustoming itself to ‘surprises’ Most economists trust that serendipity will come to their aid when their explanations are found to be wanting Life can indeed go on as before Whether to does or not depends in part on where one is standing when making the conclusion Behind a computer screen in an air-conditioned office in a ‘Third World’ country things look very different than if one steps outside the building IMF officials rarely leave their five-star environments, except perhaps to tell a farmer the problem is that his cows are a cost too many Politicians always have the get-out that they can resign or be voted out and that in any event no policy can be binding on a successor Such is the nature of politics, but it is a bad fit for economic life, for financial continuity How different things would be, could be, if every major finance house partnered with a slum project or a Rwandan coffee farmer in order to provide both financial literacy (of the kind meant here) and uncollateralised capital How different if a coffee shop in the City of London would simply contract to buy all the coffee from such a farmer at the price he needed in order to stay viable, feed his family and educate his children Any extra cost would be unnoticed in the foam, that great source of coffee shop profits But the ethos would have to be a matching of the development of which the producer and his farm and circumstances were capable; not abstract balance sheet growth How different if peasant farmers in the southern Philippines could be taught balance sheet management, not just how to keep expenses below income Then they would escape their dependency on external capital, and realise they are their own source of capital The loans come as a reflection of their ability Everyone of these instances, which could be multiplied a thousand-fold, every time an individual seeks to take responsibility for his own economic life, is an opportunity for aspirational capital to come into being, for the financial markets to be given a fresh focus Access to markets or credit is never so free and self-directed as when based on financial literacy; finance is never so stable as when it provides the wherewithal for an initiative rather than trying to exist unto itself There would be casualties along the way Extortionate local lending would have to stop World prices in food would become a thing of the past, for they are economically 226 F i n a n c e a t t h e T h r e s h o l d nonsensical Local ‘mafia’ would have to stop exploiting their fellow citizens as they begin to wake up Well-meaning westerners would have to ease back on their intent to westernise the economics of everyone they come into contact with Fijian islanders will have to learn not to put a real-estate value on their exotic villages as collateral for ‘inward investment’ from thrusting foreign tourism entrepreneurs The list is extensive and becomes dirge-like Many would rather leave things as they are than take on the world But there are those who know that the forces needed to bring about real change arise when one undertakes the change, not when one contemplates it There are many examples of people acting out of a new understanding, a wider understanding of finance Grameen Bank, microfinance generally (though why the money has to be lent rather than invested or given is a moot point), Fair Trade, Transition Towns, online investment schemes for ‘poor’ people, and much more There is much good news And the examples are everywhere, not just in the so-called Third World or with a Third World focus And not just in connection with food, important though that is Other books in this series, as indeed beyond it, detail and chronicle these developments What is missing, perhaps, is a match for such developments at the level of ‘official thinking’ and in the business schools of the world But this may be a matter of time only One thing is certain, however, that the interface, the threshold between the real and financial economies, between the past and the future, has another form of expression, namely, the continuing disregard for finance on the part of many social changers and the ‘outlier’ status, at best, of the existence of such people in the mind of the financial community This book hopes to have helped overcome this phenomenon by wandering, as it were, in and out of those worlds, indeed by wandering in and out of various dimensions To that extent it is autobiographical and may therefore be idiosyncratic But the experience of going from a slum in an old car in the morning, dressed in slacks and no tie, then switching cars and clothes to have lunch in a golf club ‘where the money is’ or to interview a central bank president leaves its mark As does spending a weekend in a field in Kent at a Green Party monetary policy conference then the next day heading for a meeting at the Bank of England The main impression is that, while many people experience the threshold between modern finance and the real economy, most choose to be on one side or other of it Few walk along it, thereby bridging it Bibliography Angels – Messengers in a Modern World The Economist, 18 December 2008 Alagiah, R, (2008) Writing the Future: A Theoretical Justification for a Single Global Currency in Accounting for Inflation Critical Perspectives on Accounting Conference, New York, 24–28 April Andrews, E (2009) Life inside the Great Meltdown New York: WW Norton Barfield, O (1928) Poetic Diction: A Study in Meaning London: Faber and Gwyer, Ltd Barfield, O (1944) Romanticism Comes of Age London: Anthroposophical Publishing Co Barfield, O (1971) What Coleridge Thought Middletown, CT: Wesleyan University Press Begg, D., Fischer, S and Dornbusch, R (1991) Economics London: McGraw Hill, 3rd edition Bezemer, D (2009a) Why Some Economists Could See it Coming Financial Times, September Bezemer, D (2009b) ‘No One Saw This Coming’: Understanding Financial Crisis Through Accounting Models Munich Personal RePEc Archive Paper, June Black, J (2007) The Secret History of the World London: Quercus Blinder, A.S (1995) Central Banking in Theory and Practice Marshall Lectures, Cambridge University (Restated as the 1995 Lionel Robbins Lectures.) Bobbitt, P (2002) The Shield of Achilles: War, Peace, and the Course of History New York: Alfred A Knopf Bobbitt, P (2009) Terror and Consent – The Wars for the Twenty-first Century London: Penguin Bronk, R (2009) The Romantic Economist: Imagination in Economics Cambridge: Cambridge University Press Brunner, K (1986) The Disarray of Macroeconomics In Capie, F and Wood, G (eds) (1989) Monetary Economics in the 1980s London: Macmillan Britain and Overseas Economic Research Council Summer 2009, Vol 39, No Buckle, M and Thompson, J.L (1992) The UK Financial System in Transition Manchester: Manchester University Press Capie, F.H and Wood, G (eds) (1989) Monetary Economics in the 1980s London: City University, London Capie, F., Goodhart, C., Fischer, S., and Schnadt, N (1994) The Future of Central Banking Cambridge: Cambridge University Press Cassidy, J (1996) The Decline of Economics The New Yorker, December: 50 Cheffers, M and Pakaluk, M (2005) Understanding Accounting Ethics Manchaug, MA: Allen David Press Chick, V (2003) On Open Systems Published (perhaps in slightly different form) in Revista de Economia Politica (Brazilian Journal of Political Economy) 24(1), January–March 2004, 3–16 and as Sobre sistemas abertos, Revista da Sociedade Brasileira Economica Politica 13, December 2003, 1–13 Churchill, W (1930) Romanesque Lecture on ‘Parliamentary Government and the Economic Problem’ given at Oxford, 19 June 1930 Clifford, A.J (1965) The Independence of the FRS Philadelphia PA: University of Pennsylvania Press Cochrane, J (2009) How did Paul Krugman get it so Wrong? http://faculty.chicagobooth.edu/john cochrane/research/Papers/krugman_response.htm (accessed October 2010) 228 F i n a n c e a t t h e T h r e s h o l d Cohen, B (1971) The Future of Sterling as an International Currency London: Macmillan Coleridge, S.T (1983) Biographia Literaria The Collected Works of Samuel Taylor Coleridge Princeton, NJ: Princeton University Press Congdon, T (2007a) Keynes, the Keynesians and Monetarism Cheltenham: Edward Elgar Congdon, T (2007b) Playing with Monteary Fire London: Economic Research Council Davis, J (2004) The Normative Significance of the Individual in Economics: Freedom, Dignity, and Human Rights World Congress of Social Economics, Albertville, France Desaules, M (2004) A Human Response to Globalisation Canterbury and Neuchatel: Associative Economics Institute Edwards, A (2009) Three Kinds of Money – Rudolf Steiner and the Development of Monetary Economics Unpublished MPhil thesis, School of Economics, University of Buckingham, September 2009 Fisher, I (1911) The Purchasing Power of Money London: Macmillan Friedman, B (1999) The Future of Monetary Policy The Central Bank as an Army with only a Signal Corps NBER Working Paper 7420 Cambridge, MA: National Bureau of Economic Research Friedman, M (1966 [1953]) Essays in Positive Economics Chicago, IL: Phoenix Galbraith, J.K (1954) The Great Crash London: Penguin Galbraith, J.K (1987) A History of Economics London: Hamish Hamilton Gall, N (2009) Millions, Billions, Trillions Braudel Paper No 43, July Sao Paulo: Fernand Braudel Institute of World Economics Gilbert, E (2006) Eat, Pray, Love: One Woman’s Search for Everything New York: Viking Goodhart, C (1988) The Evolution of Central Banks Cambridge, MA: MIT Press Gormez, Y and Capie, F (2000) The Final Frontier for Cash Bank of Finland, Bulletin 2000, 74(3) Greenspan, A (1966) Gold and Economic Freedom In Capitalism, the Unknown Ideal New York: Signet, 1967 Haldane, S (2009) Rethinking the Financial Network Speech to Financial Student Association, Amsterdam, April Hanke, S (2001) Balance Sheets, Please Central Banking Quarterly, XI(4), May: 99–101 Hayek, F (1945) The Use of Knowledge in Society American Economic Review, XXXV(4): 519–30 Hayek, F (1990) Denationalisation of Money: The Argument Refined London: The Institute of Economic Affairs, Hobart Paper Special, No: 70, 3rd edition Heilbroner, R and Milberg, W (1996) The Crisis of Vision in Modern Economic Thought Cambridge: Cambridge University Press Houghton Budd, C (2002) Islamic Economics and Capitalism – Islam’s Challenge to Western Economics Canterbury: New Economy Publications Houghton Budd, C (2005a) Auditorial Central Banking Canterbury: New Economy Publications Houghton Budd, C (2005b) Freeing the Circling Stars – Pre-funded Education Canterbury: New Economy Publications Houghton Budd, C (2005c) Rare Albion – Further Adventures of the Wizard from Oz Canterbury: New Economy Publications Houghton Budd, C (2005d) The Right-on Corporation – Rehabilitating the Stock Company Canterbury: New Economy Publications Houghton Budd, C (2006) From Aristotle and Thomas Aquinas to Rudolf Steiner – A Study of Today’s Prevailing Positivism in Economics in Contrast to Rudolf Steiner’s Approach Unpublished Huntington, Samuel P (1997) The Clash of Civilizations and the Remaking of World Order London: Simon & Schuster B i b l i o g r a p h y 229 Jenkins, S (2009) We are Paying an Enormous Price for the Myth that Banks are Too Big to Fail Guardian, 16 October Keynes, J.M (1919) The Economic Consequences of the Peace London: Macmillan Keynes, J.M (1923) A Tract on Monetary Reform London: Macmillan Keynes, J.M (1930) A Treatise on Money London: Macmillan Keynes, J.M (1931) Essays in Persuasion London, Macmillan Keynes, J.M (1936) The General Theory of Employment, Interest and Money London: Macmillan Khoury, S.J (1990) The Deregulation of the World Financial Markets New York: Quorum King, M.R (2000) ‘New Lady of Threadneedle Street Central Banking Quarterly, XI(4): 82–91 Klamer, A (1989) An Accountant among Economists: Conversations with Sir John Hicks The Journal of Economic Perspectives, 3(4): 167–80 Krugman, P (2009) How did Economists get it so Wrong? New York Times, September Kurtzman, J (1993) The Death of Money: How the Electronic Economy has Destabilized the World’s Markets and Created Financial Chaos New York: Simon & Schuster Labour Party (1995) A New Economic Future for Britain London: Labour Party Laum, B (1924) Heiliges Geld Tubingen: Mohr Lefevre, E (1994 [1923]) Reminiscences of a Stock Operator New York: Wiley Maturana, H.R and Varela, F.J (1980) Autopoiesis and Cognition Boston, MA: Reidel Mayer, M (1999) Lecture given to Fondad, a joint subsidiary of the Netherlands National Bank and the Hungarian National Bank, Budapest, June Milne, A (2009a) The Fall of the House of Credit INbusiness, Summer: 21–3 Milne, A (2009b) The Fall of the House of Credit Cambridge: Cambridge University Press Monroe, A.E (ed.) (1924) Early Economic Thought Cambridge, MA: Harvard University Press Pack, S.J (2008) Aristotle’s Difficult Relationship with Modern Economic Theory In, Foundations of Science 13: 265–80 Parker, M (2008) Raconteur The Times, 27 November Paxman J (1999) The English, a Portrait of a People London: Penguin Pepper, G and Oliver, M.J (2001) Monetarism under Thatcher: Lessons for the Future London: Edward Elgar/IEA Polanyi, K (1944) The Great Transformation: The Political and Economic Origins of our Time New York: Farrar & Rinehart Powell, E (1966 [1915]) The Evolution of the Money Market, 1385–1915 – An Historical and Analytical Study of the Rise and Development of Finance as a Centralised, Co-ordinated Force New York: Kelley Prospect (2009) How to Tame Global Finance Prospect (September), 162: 34–41 Rand, A (1957) Atlas Shrugged New York: Random House Rayment, T (2009) What Does a Trillion Dollars Look Like? Sunday Times, 17 May Richardson, G (1979) The Prospects for an International Monetary System In Capie, F and Wood, G (eds) (1989) Monetary Economics in the 1980s London: City University Rockoff, H (1990) ‘Wizard of Oz’ as a Monetary Allegory Journal of Political Economy, August: 739–60 Rodrik, D (2000) How Far will International Economic Integration Go? Journal of Economic Perspectives, 14(1): 177–86 Roll, E (1992) A History of Economic Thought London: Faber and Faber Rowbotham, M (1997) Confronting Tyranny, the Case for Monetary Reform and Economic Democracy Self-published Schumacher, E.F (1974) Small is Beautiful London: Abacus 230 F i n a n c e a t t h e T h r e s h o l d Schwartz, Anna J (1986) Real and Pseudo-Financial Crises In Capie, F and Wood, G (eds) (1989) Financial Crises and the World Banking System New York: St Martin’s Press Soros, G (1994 [1987]) The Alchemy of Finance – Reading the Mind of the Market New York: Wiley Steiner, R (1977 [1919]) Towards Social Renewal London: Rudolf Steiner Press Steiner, R (1996a [1920]) Rudolf Steiner, Economist Canterbury: New Economy Publications Steiner, R (1996b [1922]) Economics, the World as One Economy Canterbury: New Economy Publications Steiner, R (2003 [1898]) The Social Question In Social and Political Science Forest Row: Rudolf Steiner Press Swary, I and Topf, B (1992) Global Financial Deregulation: Commercial Banking at the Crossroads Oxford: Blackwell Taibbi, M (2009) The Great American Bubble Machine Rolling Stone, 1082–3, July Tawney, R H (1929) Religion and the Rise of Capitalism: A Historical Study Gloucester: Smith Thornton, H (1978 [1802]) An Enquiry into the Nature and Effects of the Paper Credit of Great Britain New Jersey: Fairfield Turk, J (2006) The Barbarous Relic – It Is Not What You Think Charlotte, NC: Committee for Monetary Research and Education, Monograph 55 Vercelli, A (2005) Rationality, Learning and Complexity: From Homo Economicus to Homo Sapiens Siena: University of Siena Williamson, J and Mahar, M (1998) A Survey of Financial Liberation Princeton, NJ: Princeton University Withers, H (1909) The Meaning of Money London: Smith Elder & Co Wood, G (2009) Central Banking, Monetary Stability and Financial Stability Economic Affairs 29(3): 2–5 Wright Mills, C (2000 [1959]) The Sociological Imagination New York: Oxford University Press Index Bold page numbers are used for illustrations 20th century see twentieth century 1930s depression 155, 158 A abstraction 52–3, 58–61, 85, 136–7 accounting banking as 195 ethics and 209–10 for/not for-profit divide 214–15, 215 IASB role 210–11 international standards 140 as link between economics and real world 203–4, 204 link to economics 81–2 link with associative economics 205 macro economic considerations 214 practicalities of 211–18, 212 price 218 and profit 148 profit and surplus value 216, 216–17, 217 as science 207 as synonymous with money 140 universal consciousness of 139 use in global financial crisis 213 agencies dangers of reliance on 62 use of 60 Alchemy of Finance, The (Soros) 106–8 Altmann, Ross 37 American Insurance Group (AIG) 35, 38–41 Andrews, Edmund 35, 37–8 angels 109–10 Anglo-Saxon bias 10 defined 21 Appeal to the German People and the Civilised World (Steiner) 157 aptness in finance 74 Aquinas, Thomas 29–30 Aristotelian taxonomy 27–9, 29 aspiration 84, 94, 144–5, 147 assets price buoyancy 146 as source of income 145 trading of 207 associative economics accounting and profit 148 asset price buoyancy 146 capitalising of real estate 146–7 from competition to cooperation 136–7 and cycles 95 differentiation 147 epistemological considerations 12 exploitation 98 as formal discipline 13 inclusive of all 83 interface with crisis 219 key precepts of 13, 146–50, 149, 150 knowledge, nature of 102–4 link with accounting 205 and output gap monetarism 167–75 and Rudolf Steiner 7, 12–17, 12n7 threefold society 122–6 wearing out of money 147 atavism 99 Atlas Shrugged (Rand) 97 Austrian school, Steiner and 16–17 B Bank of England 46–7 banking as accounting 195 changes in through history 60–1 citizenised 191–3, 207–8 232 F i n a n c e a t t h e T h r e s h o l d crises delinking of cash and credit 188–90, 189 demise of 190–3 disintegrity of 76–7 going beyond 135–6 links with trade 135 modern central 200–1, 201 banks, states’ bailing out of 93–4 Barfield, Owen 14–15, 112–14 Bean, Charlie Begg, D 201 Bezemer, Dirk 35, 49 biases in the book 10 in data 9–10 blame for financial crisis 25, 88 Blinder, A.S 124 ‘blue sky’ thinking 104 Bobbitt, Philip 16, 126, 127–30 boundaries and liberalisation 70 Bourlet, Jim 110 Bowsher, Charles 40–1 brains, two-sidedness of 115 Bronk, Richard 111–12 Brunner, K 202 Buckle, M 64 Buiter, Wilhem 36 C Capie, F 124n2, 201, 201n3 capital Aristotelian taxonomy 27–9, 29 excess liquidity as too much of 85 as independent of labour 26–7 relationship to labour 156–7 removal of excess 86–8, 89 as source of income 145 use of for power 126 vs labour 154–5 capitalising of real estate 146–7 capitalism as in adolescent phase 52, 54 metamorphosis of 125–6 transformation, need for in 88 cash, delinking from credit 188–90, 189 causation and propensity to divide 99 reflexive 59 understanding of 77 central banks as auditorial 148, 149–50 independence of 63, 87, 123–4, 143–4, 178 and international cooperation 70–1 in modern banking 200–1, 201 Cheffers, Mark 209 Chicago Business School, economics of 79–80 Chick, V 196 choir of cultures concept introduced and defining a ‘people’ 19–20 as governing single world economy 16, 82 market state view compared to 129–30 need for in single global economy 82 new financial instruments for 82–3 power of as image 130 chronology of global financial crisis Aristotelian taxonomy 27–9, 29 goods-market to money market, move to 26–7 liberalisation in England 30–1 Thomas Aquinas 29–30 trade/mercantilism, rise of 30 Church opposition to rise of trade 30 Churchill, Winston 124, 143 citizenised banking 191–3, 207–8 Clash of Civilisations (Huntington) 125–6 closed/open-system thinking 195–8, 196, 197 Cochrane, John 49, 50–2 cognition, left-right 115–16 Cohen, B 202 Coleridge, S.T 112, 113 collaboration in single world economy 70–1 collateral debt obligations (CDOs) 37, 61 commentary on global financial crisis Adair Turner 45–6, 46–7, 48–9 Alistair Milne 44 alternative perspectives 52–5 American Insurance Group (AIG) 38–41 I n d e x 233 Dirk Bezemer 49 Edmund Andrews 37–8 Goldman Sachs 41–3 John Cochrane 49, 50–2 John Gieve 47 London School of Economics seminar 36–7 Matt Taibbi 42–3 Norman Gall 34–5, 38–9, 41–2 Paul Krugman 49–50 Paul Woolley 46, 47–8 summary 33–6 variety in 72 Will Hutton 37 computer modelling 58, 61–2 confidence as a technique 63 Congden, T 12–13, 101–2, 163, 165, 166, 168–70, 170, 172, 173n12, 175 cooperation from competition to 136–7 as consequence of single global economy 70–1 without collusion 104–5 coordination as consequence of single global economy 70–1 costs and benefits of education 220–1 ‘Crash - How the Banks went Bust’ (TV programme) 37 credit, delinking from cash 188–90, 189 credit-default swaps (CDSs) 39, 40 crises, financial see also global financial crisis cross party economics 167 currency single world 16, 104, 126, 140 world reserves 70 curriculum for financial literacy 222 cycles 95, 204–9 D Danielson, Jon 36 data, bias in 9–10 Davies, Brandon 36 Davis, J 196 deep accounting 203–4, 204 definition of terms 19–23 delinking of cash and credit 188–90, 189 democracy, sovereignty and 132–3 denationalisation of economic life 6, 134–5, 187–8 depreciation 147 depression of 1930s 155 derivatives 61 differentiation, money 147, 179, 206 disintegrity of banking 76–7 diversity global consciousness of 69 trade consequent on 83–4 divided world in the twentieth century 154 division, propensity towards 97–9, 102, 161–2 Dornbusch, R 201 double dip recession, likelihood of 73 double entry bookkeeping 115, 215, 215n6 dual nature of economic life 186–7, 195 E economics, biases of 21 education for young people 220–1 Edwards, Arthur 175 efficient markets hypothesis 50, 59, 75, 79–80, 120 embedded finance 52–3 employment levels 159, 163 Englishness 7, 18–19 ephemera 59 epistemology 58 considerations for associative economics 12 constriction of understanding through 104–5 and finance 100–1 and financial crisis 114–15 problems of facing economics 112–13 role of 96 weaknesses in 97–8 ethics and accountancy 209–10 financialism 208–9 perspective on crisis 52 excess liquidity 64, 85–6 removal of 86–8 as result of trade 135 in a single global economy 69––70 234 F i n a n c e a t t h e T h r e s h o l d F faux physics 58 finance aptness in 74 and the real economy 136 relationship to in this book 72–3 financial crises see also global financial crisis financial economy, intangible aspects of 72–3 financial instruments need for innovation new for choir of cultures 82–3 Financial Services Authority (FSA) 46–7 financialism, ethical 208–9 financial/real economy 7, 22–3, 136 First World War I, events following 154–5, 157–9 Fischer, S 201 forecasting of crisis 49 freedom economic 69 Friedman, Milton 13, 16, 130, 164, 168, 198–9, 201n2 G Galbraith, J.K 155, 158 Gall, Norman 34–5, 38–9, 41–2 General Theory (Keynes) 164–5 geo-politics 15–16 Germany 157–8 Gieve, John 47 Gilbert, Elisabeth Glass-Steagall Act, repeal of 62 global economy see single global economy global financial crisis alternative perspectives on 52–5 blame apportioning 25 complexity of defining as defining moment in history 67, 73–4 double dip likelihood 73 as epistemological 114–15 forecasting of 49 implications of global nature 92 institutional solutions 93–4 interface with associative economics 219 moralising on 76 as physical mechanism 101–2 products and techniques involved 61–5 reality of 73 reflexive causation 100–1 technical details 55–7, 55–61 understanding of 92 see also chronology of global financial crisis; commentary on global financial crisis globalisation 160 see also global financial crisis global/local defined 20 gold standard 21, 98, 109, 140, 159 Goldman Sachs 35, 41–3 Goodhart, C 36, 124, 124n2, 201n3 goods-market to money market, move to 26–7 Gormez, Y 201 governance by choir of cultures 16, 82 delinking of states from the economy 134–5 economic 139–44 global economic 125 Great Detour of the twentieth century 153–61 Greenspan, Alan 97 H Haldane, Andrew 86, 101 Hanke, S 81–2 hard/soft science, defined 21–2 Hayek, F 17, 82, 102, 103, 132, 150 Heilbroner, R 95 hiatus in history, global financial crisis as 67, 73–4 Hicks, John 81–2 high-frequency trading 64 History of Economic Thought, A (Roll) 27–8 human nature as essentially/partially selfish 120 human weaknesses 58 human will 94–6, 205 Huntington, S.P 125–6 Hutton, Will 35, 37 I n d e x 235 hyper-production costs and benefits of education 220–1 education of young people 220 I imagery meta-economic role of 78–9, 96 as primary 120 imagination, role of 78–9, 96–7 inflation 1945-70 159 causes of 170 innate Englishness 7, 18–19 innovation in financial instruments integrity of banking 76–7 International Accounting Standards Committee (IASB) 210–11 intuition J Johnson, Simon 41 jubilee 86–8 just price 30 K Keynes, J.M 5–6, 109, 201n2 monetary reform thesis 198–200, 199 on Newton 112 and Steiner 141–2 on Treaty of Versaille 154, 157 Keynesianism 79–80 as basis of western economics 164–5 monetarist:Keynesian divide 163–6 Khoury, S.J 65 King, Matt 37 Kiva 193 Klamer, Arjo 81–2 knowledge, nature of 102–4 Krugman, Paul 49–50 Kurtzman, Joel 185, 186 L labour loss of elasticity 155 relationship to capital 156–7 vs capital 154–5 left:right divide 162, 168 leverage 63 liberalisation, financial 156 beginnings of 27 moves to centre stage 31 unbounded world as consequence of 70 Liddy, Edward 41 light-touch regulation 40 literacy, financial curriculum for 222 need for 141 Local Exchange Trading Systems (LETS) 192–3 local/global defined 20 London as financial centre as a financial centre 48–9 future role of 84 London School of Economics seminar 36–7 Lucifer 110 M macro policy 59 Mahar, M marginal utility theory 26–7 market failure, new sense of 121–2 market states 127–30 Masters, Blythe 81 mathematics 198 Maturana, H.R 22 McChesney Martin, William 124 mercantilism, rise of 30 Merchant of Venice, The (Shakespeare) 30 meta-economics 96 metamorphosis of capitalism 125–6 methodology 8–12 Milberg, W 95 Milne, Alistair 35, 44, 76–7 Mises, Ludwig Von 17 modelling the economy 58, 61–2 monetarism compared to Keynesianism 79–80 genesis and development of 164 Keynesian:monitarism divide 163–6 output gap 166–75 money as a commodity 206–7 delinking cash from credit 188–90, 189 236 F i n a n c e a t t h e T h r e s h o l d differentiated 179 differentiation between types 147, 206 functions of 201–2, 202, 206 narrow subverted by broad 185–6 one-world 179 Steiner’s threefold conception of 172–3 as synonymous with accounting 140 three kinds of 131, 172–3, 179, 202–3, 203 two kinds of 170–2, 171, 186–7 money market, move from goods-market to 26–7 moral hazard 63 moralising on the crisis 76 N nation states see states nationality, economy based on after WWI 157–8 Newton, Isaac 101–2, 101n6, 112 Newtonian thinking, going beyond 101–2 O objectivism 97 off-balance sheet business 64–5 Office of Risk Assessment 4040 Oliver, M.J 82 one-world economy see single global economy open/closed-system thinking 195–8, 196, 197 output gap monetarism 166–75, 177, 178, 180 ‘outside the box’ thinking 104 P Pakaluk, Michael 209 Parker, Mushtak 53 partnership, economic life as Paulson, Hank 41 people defined 19–20 Pepper, G 82 perennial systemic jubilee 86–8, 222 perfect competition, new sense of 121–2 periodicity 204–5 poetry and science 112–14 polar continuum of economic life 174–5 policy, macro 59 polity, one world 133–4 positivism 80–1, 82, 83, 99 power, use of capital for 126 predictability of economic events 5, 204–5 presounding 62 price 218 price buoyancy of assets 146 price stability 177–8 private:public divide 161–2 products and techniques agencies 62 central banks, independence of 63 collateral debt obligations (CDOs) 61 computer modelling 61–2 confidence 63 derivatives 61 excess liquidity 64 Glass-Steagall Act, repeal of 62 high-frequency trading 64 leverage 63 moral hazard 63 off-balance sheet business 64–5 presounding 62 and relaxed regulation 60 short selling 62 profit and accounting 148, 216, 216–17, 217 for/not for enterprises 162, 214–15, 215 proof in economics public:private divide 161–2 Q quantitative easing 33, 33n10 R Rand, Ayn 78, 97 rationalism, Anglo-Saxon as 21 Rayment, Tim 35, 39, 40–1, 85–6 readers of this book real estate, capitalising 92–3, 146–7 real/financial economy 7, 22–3, 136 redefinition of terms 19–23 reflexive causation 59, 100–1 regulation as crucial 59 I n d e x 237 as enabling 60 inherent 205–6 responsibility economic 69 joint and several 137 reversed causation 59 Richardson, Gordon 70–1 right:left divide 162, 168 rights life 20, 68, 69, 122, 123, 126, 127, 128 risk transfer 40 Rodrik, Dani 149, 149–50, 150 Roll, Eris 27–8, 30, 205 Romantic Economist, The (Bronk) 111–12 Romanticism and economics 109–14 Rothbard, Murray 17 S Satan 110 Schnadt, N 124n2, 201n3 Schumacher, E.F 96 Schwartz, Anna 123 science accounting as 207 hard/soft , defined 21–2 Second World War II, events following 159–61 Shakespeare, William 30 Shenandoah Corporation 158–9 Shield of Achilles (Bobbitt) 127 short selling 62 single global economy as Anglo-American 125 choir of cultures, need for 82, 130 closed 131 from competition to cooperation 136–7 coordination and cooperation as consequence of 70–1 delinking states from the economy 134–5 diversity, global consciousness of 69 division, propensity towards 97–9 economic governance 139–44 excess liquidity 69––70 features of 130–2 financial literacy 141 implication of crisis in 92 interdependency of all nations need to understand 68 one world polity 133–4 sovereignty and democracy 132–3 spiritual, economic life as 69 and state jurisdiction 68 threshold crossed to 5–6 variables, scenarios concerning 149, 149–50, 150 world currency 16, 104, 126, 140 sketches, use of 197–8 Smith, Adam 180–1 social lending 192–3 socialism 156 society, as threefold in nature 122–6 soft/hard science defined 21–2 Sokobin, Jonathan 40 Soros, George 8, 72–3, 77, 106–9, 126, 200 sovereignty and democracy 132–3 spiritual, economic life as 69 states bailing out of banks 93–4 delinking from the economy 134–5, 187–8 interdependency of all jurisdiction in single global economy 68 market 127–30 role of after market failures 76–7 validity of outlived 127 Steiner, Rudolf on Adam Smith 180–1 associative economics and associative economics 12–17, 12n7 and the Austrian school 16–17 compared to Bobbitt 129 on and compared to Keynes 141–2 and cycles 95 excess liquidity as result of trade 135 and geo-politics 15–16 ideas on polar continuum of economic life 174–5 image of the brain 102 interests of the individual 105 invention as saving labour 115 on jubilee 86–7 knowledge, nature of 102–4 238 F i n a n c e a t t h e T h r e s h o l d minimal impact of ideas 153 mission of the German Empire 157 money, threefold concept of 172–3 prices 218 problems presented by analysis of 14–15 reflexive causation 100 reputation 13–14 shell of a nut metaphor 69, 85 single, closed global economy 131 sovereignty and democracy 133 threefold society 122–6, 128 trade and surplus value 144 treatment of in this book 10–11 true price of products 98 stock market crash of 1907 95 sub-prime mortgage market 37 super-production costs and benefits of education 220–1 education of young people 220 surplus value and accounting 216, 216–17, 217 and trade 144–5 Swary, I 64–5 trade essence of 139 excess liquidity as result of 135 rise of 30 and surplus value 144–5 Treaty of Versailles 154, 157–8 Turner, Adair 45–6, 46–7, 48–9, 78, 85 twentieth century 1930s depression 155, 157–8 1980s onwards 159–60 1990s 160–1 capital/labour relationship 154–7 divided world in 154 division, propensity towards 161–2 threshold of 156–7 World War II, events following 159–61 twin nature of economic life 186–7, 195 two-sidedness 115–16 T V Taibbi, Matt 42–3 taxpayers defined 20 technical basis of economic life 53 technical details abstraction, emergence of 58–61 list of 55–8 products and techniques 61–5 Terror and Consent (Bobbitt) 126, 127–30 terrorism 73, 128 Tett, Gillian 36, 81 themes of the book 3–8 theory, reliance on 59 Thompson, J.L 64 Thornton, Henry 123–4 threefold society 122–6, 128 threshold economics 60 threshold of physical thinking 91–2 Topf, B 64–5 Tract of Monetary Reform (Keynes) 199–200 Varela, F.J 22 variables, scenarios concerning 149, 149–50, 150 Vercelli, Alessandro 198 Versailles, treaty of 154, 157–8 U Understanding Accounting Ethics (Cheffers and Pakaluk) 209–10 usury 28 W Western defined 23 ‘Why Some Economists Could See It Coming’ (Bezemer) 49 will, human 94–6, 205 Williamson, J Wood, Geoffrey 13 Woolley, Paul 46, 47–8 World War I, events following 154–5, 157–9 World War II, events following 159–61 Y young people financial literacy, curriculum for 222 I n d e x 239 focus on, grounds for focus on, need for 222–3 investment in, need for 221–2 new products for, need for 219 production of education 220 Z Zopa 192 .. .Finance at the Threshold This book is dedicated to the late Freya von Moltke Finance at the Threshold Rethinking the Real and Financial Economies Christopher Houghton... phenomena in finance, or in economics for that matter Who has ever touched a financial instrument or product, a market, or the relationship between finance 10 Finance at the Threshold and the state?... for Los Angeles and ‘achieve’ for New York, then perhaps London’s synonym is ‘liquidity’ 1.1.11 At the Threshold – Between the Real and the Financial Economies Maintaining the patient’s health