Repenting From Secular Capitalism

The Recovery of Christian Stewardship

The Christian Church in the West has in many ways lost its moorings.  It will not make progress again until it repents and returns to the fundamentals of faith.  Where can those fundamentals be found?  In Scripture, of course.  But there are also helpful doorways to Scripture available.  The most useful of these are the universal creeds (Apostles, Nicene, Athanasian).  

Many of the bulwarks of Western civilisation were built over time on these fundamentals of faith.  But the Unbelief of the West, commencing with the Enlightenment and eventually running at breakneck pace until our days, has effectively destroyed the foundations of Christian culture.  With the foundations gone, the superstructure cannot last.  If we are to avoid the inevitable calamity falling upon us--which is the judgement of God upon the apostate West--Christians and churches must return to our fundamentals--to the "once-for-all-delivered-to-the-saints faith [Jude 3].

We also need to discern what is happening in our generation and come to some understanding about what must needs be done.  It is well past the time when we could focus upon what "society" needs to do to reform and recapture the truths, conventions, and institutions of of Western Christendom which made the West so culturally potent.  Rather, we need to focus upon ourselves, our families, and our Christian communities.  We must also strive daily to conform our living (individual, familial, ecclesiastical, and communal) to the Scriptures and the fundamentals of faith revealed therein.

We Christians are now a remnant.

The Mystery of Capital

Of Course!

We have just completed reading Hernando De Soto's The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Perseus/Basic Books, 2000.)  It is a seminal piece of work and deserves wide readership.

De Soto's thesis can be summarised in a series of seven propositions (which he sets about establishing in the book).

1.  The existence of capital is inextricably related to establishing a system of legal title for property.

2. Once legal title is established, property can be transformed into other forms of wealth.  Land to which one has legal title, for example, can be used as collateral for a bank loan.

3. Long before a system of legal title is established in a country or state, an informal system of ownership usually exists which recognises (amongst the participants) a person's title to property.

Chinese Prognosis

No Virtuous Circle of Creative Destruction

The Communist Chinese regime has had to walk a tightrope over Mao Zedong and his disastrous Cultural Revolution.  On the one hand, Mao is portrayed as the revered Father of the Nation; on the other, his Cultural Revolution is acknowledge as a cruel, barbaric fiasco.  

Associated Press has reported:

China’s official media reaffirmed on Tuesday the Communist Party’s longstanding judgment that the Cultural Revolution was a catastrophic mistake after staying silent on Monday’s 50th anniversary of the start of the decade-long upheaval.

The official party mouthpiece People’s Daily published an opinion piece on its website precisely at midnight on Tuesday unequivocally praising the 1981 party resolution that condemned the bloody political movement launched by Mao Zedong to enforce a radical egalitarianism. “Our party has long taken a solemn attitude toward bravely admitting, correctly analyzing and firmly correcting the mistakes of our leadership figures,” the piece read.

What, then, is the lesson of the Cultural Revolution?  The (official) People's Daily confirmed what the government thinks should be the "takeout" from Mao's great leap forward.

Too True

Mmmmmm

Tickld

A Great Oxymoron of the Age

Christian Socialism

We have recently read R. H. Tawney's, Religion and the Rise of Capitalism. (London: John Murray, 1923).  Being published in the period historian, Richard Overy has called the Twilight Years [The Twilight Years: The Paradox of Britain Between the Wars (New York: Viking/Penguin, 2009)]), Tawney's work is significant in that it cannot help but reflect the radical, revolutionary changes taking place in the intellectual and spiritual history of Britain and the West at that time. (For a summary and interaction with Overy's Twilight Years, readers can refer to a series of eight pieces, published in Contra Celsum in early 2010, the first of which can be found here.)

Tawney was both a professing Christian and an ardent socialist.  In these days, when socialism has become thoroughly secular, racked with the deadly sins of avarice, envy, and covetousness, "Christian socialism"  ranks amongst the seven most infamous oxymorons of the modern world, along with "Christian capitalism".

Crass and Crasser

Ignorance Extraordinaire 

The economic ignorance and illiteracy of the Left wing is well documented.  All heat and no light.  Consider the following piece of antediluvian ignorance from a Labour candidate.

The back-story is the the government's proposal to build some new government schools using a private/public partnership approach.  This erudite Labour candidate shows she can jump right to the chase, putting front and centre the ignorant prejudice which bedevils the Left when it comes to economic reality.  No wonder they struggle for  electoral traction.  There are few things more telling than this post.

It is always the assumptions which kill in these matters.

The Wisdom of Ages

Bono, Africa, and Aid

Age and experience is reputed to bring wisdom.  Sometimes sadly this is not the case.  Growing years can cement the foolishness prejudices and simplicities of youth, which makes aged folly all the more ridiculous.  But often as people grow in experience, they become more subtle, discerning, and wise.  They learn that things are not always what they seem.  They realise that truth often lies beneath, not on the surface.  

David J. Theroux, writing in The Beacon, gives us an example of the latter.

Bono (nee Paul David Hewson) is the lead singer in the rock group U2, one of the most successful rock groups in history. Bono also became a major proponent of greatly expanded U.S. foreign aid and other government programs (including debt cancellation) to alleviate the dire plight in the world of HIV/AIDS, malaria, abject poverty, and other issues.

Bono's name and fame is synonymous, not just with U2, but with charitable activities in Africa.  He has publicly and passionately taken up the cause of that needy continent for most of his public life.  Bono is a professing Christian.

Douglas Wilson's Letter From America

Book of the Month/August

Posted on Thursday, August 1, 2013 

by Douglas Wilson 

I owe a lot to George Gilder, and with his release of Knowledge and Power, that debt has increased significantly.

Decades ago, I first read Sexual Suicide, a book that later became Men and Marriage, and which I have read again several times in that form. I was greatly influenced by Wealth and Poverty when it first came out, and have enjoyed other books as well, the most recent example being The Israel Test. This book is a worthy companion to the others in a long line of worthy companions.

There are three things I want to say about this book, and then I will leave you to get your own copy.

The first is that Gilder is a contrarian, but a sane one. He is what any sane person would look like in an insane world, provided that sane person had the guts to say what he thought out loud. The book provides kind of a grab bag of examples. He has a delightful chapter on the need for insider trading, for instance. By outlawing insider trading, we are requiring people to trade stupidly, blindly.

Capitalism's Ozymandian Moment

Looking Upon Mighty Works and Being Afraid


Jeffrey Sachs is an insider.  He is part of the financial-academic-media-political complex.  But he is also a heretic.  He is a strident opponent of the theft and corruption of the finance sector in the United States.  In addition he  is also a fierce critic of the corruption of Washington and how it has become suborned to the love of money.  Other people's money--being siphoned off into the back pockets of politicians and political insiders. 

In April this year he spoke at a Philadelphia Federal Reserve conference.  In the course of his remarks he had this to say:

The Last Dodo

RIP, "Think Big"

In the early 1980's the government in New Zealand decided that it was smarter than the average joe when it came to business.  The government was going to pick some economic winners.  The policy was dubbed "Think Big" which had more than a communist, central-economic-planning ring to it. 

It had been the oil shocks jolted the government into action.  Borrowing vast sums of money on world money markets, the government persuaded lenders that huge government sponsored and endorsed energy projects were pretty much risk free.  Whilst they could never stack up on a risk/return basis in the open market, they sure could if the gummint were the borrower.  In time, Think Big delivered, according to Wikipedia:

Letter From the UK (About Spain)

The European Disease Virulent in Spain

The systemic corruption now coming to light within the Spanish banking system is breathtaking.  But, as is always the case, such large scale, systemic graft and corruption can only exist and (temporarily) flourish if the state and politicians run interference and cover. 

Doubtless the ignorant critics will decry the evils of capitalism.  They will call for more social controls and political direction, declaiming capitalism (or the economic system based upon the rights of private property) as hopeless flawed due its spawning greed and exploitation.  The reality is that the "capitalism" of Spain (and the West in general these days) is not free market or private property based.  It is crony capitalism, where the political authorities and the government act as patrons of favoured businesses and certain monied barons who pay. 

The Guardian exposes just how corrupt the Spanish banking system has become.

Basic Truths

Socialism Versus the Redemer

The Acton Institute is an ecumenical organization devoted to the study of the religion and liberty.  One of its principal scholars is Rev Robert Sirico, who has authored a recently released book entitled, Defending the Free Market: the Moral Case for Capitalism.  You can order it from Amazon, here.

Here is Robert Sirico being interviewed by Stuart Varney of Fox Business.  Definitely worth a look.
Hat Tip: Maria at NZ Conservative.

Siren Songs of Populism and Easy Money

Becoming Serfs in Our Own Country

Economic xenophobes.  Welcome to the wonderful world of New Zealand populist politics.  Actually, it's a bit worse than that.  We are economic racist xenophobes. How cute to see the Green party revealing its anti-Chinese prejudice on the matter.  This from Kiwiblog:

When Bill English is over in Australia talking about how more and more Australian companies want to invest in New Zealand, and no politician says a word. But then you have a Chinese leader visit and promote investment from China, and the Greens rush out a press release. It is absolutely playing to xenophobia. Not all opposition is xenophobic, but much of it is – and politicians play to it.

But, there is an argument on the other side to be made.  The Prime Minister, John Key has said that he does not want a New Zealand where citizens are serfs in their own country.  That is a powerfully visceral line.  It raises a spectre that is not unrealistic at all.

High Stakes Poker

We Deserve Job Security and High Wages . . .

The Qantas grounding was a big deal.  High stakes negotiation.  Reverberations in lots of places--if you were flying Qantas at the time.  But the whole mess illustrates the commercial realities of the early twenty-first century.  Realities that can be ignored only to one's commercial demise.  Regrettably, it is a lesson few in New Zealand have learned.

Qantas competes in what has become a global business.  Meanwhile it is an airline which has been nurtured under a cocoon of protections and indirect support by successive Australian governments.

Douglas Wilson's Letter From America

The King of Missions

Church Government - Theses on Missions
Written by Douglas Wilson
Monday, August 08, 2011

Missionaries should know the gospel, and be trained in the great doctrinal themes of the Bible. They should also be good-hearted people, but the good-heartedness does not supplant the need for craft competence. This is also true of the other areas that surround mission activity. Missionary pilots should be really good pilots. It is not enough that they "love Jesus."

Fast Following

Despotism and Universal Avarice

Despotic states produce universal avarice. When rules concentrate on exacting the maximum amount from those they control, their subjects become notably avaricious too, and respond by consuming, hoarding, and hiding the fruits of their labor, and by failing to produce nearly as much as they might. And even when some people do manage to be productive, chances are that in the end their efforts will merely enrich their rulers. The result is a standard of living far below the society's potential productive capacities.

Late in the tenth century, an iron industry began to develop in parts of northern China. By 1018, it has been estimated, the smelters were producing more than thirty-five thousand tons a year, an incredible achievement for the time, and sixty years later they may have been producing more than a hundred thousand tons. This was not a government operation. Private individuals had seized the opportunity presented by a strong demand for iron and the supplies of easily mined ore and coal. . . . Soon these new Chinese iron industrialists were reaping huge profits and reinvesting heavily in the expansion of their smelters and foundries. Production continued to rise rapidly. The availability of large supplies of iron soon led to the introduction of iron agricultural tools, which in turn rapidly increased food production. . . . But then it all stopped as suddenly as it had begun. By the end of the eleventh century, only tiny amounts of iron were produced, and soon after that the smelters and foundries were abandoned ruins. What had happened?

The Land of the Long White Shroud

A Cautionary Tale

Economic development in medieval Europe provides us with many lessons. One is that, like time and tide, economic growth waits for no man. Because capital and labour are fungible—that is, mobile and transferrable—an economy which attempt to protect from free competition for both soon fades. This is precisely the threat which faces us in New Zealand.

Late medieval Venice provides a cautionary tale in this regard.

Venice was the only one of the four major Italian city-states that did not succumb to Spain. But, surrounded on three sides by Spanish possession, Venice also slipped into oligarchy and then, over-taxed and overregulated, losts its ability to compete with the English, and to a lesser degree with the Dutch, even in its home Mediterranean market. It is a cautionary tale worth telling.

In the early 1500s Venetians still dominated the fine glass industry. Their textiles were still luxurious, Spanish fleeces having proved an adequate subtitute for the now unavailable English wool. Their mirrors were in a class by themselves. So was their soap, th eir lace, and their porcelain. And Venetian printers, using secret techniques for casting lead type, were the best and most affluent in the world. Things had never been better. Fifty years later the Veneitan economy was in a shambles and still rapidly declining.

The first phase in the decline of Venice cam when some of its most valuable master craftsmen deserted, most of them to England, taking their trade secrets with them. (Labour is fungible!, Ed.) For example, some Venetian master glass makers earned more per day in England than they could earn in a week at home. They allowed the English to become competitive in the fine glass market, augmenting their rapidly expanding dominance of the manufacture of cheap glass.

The question arises as to how the English could be price competitive with Venice when they bribed their master craftsmen to immigrate (that is, enticed them away with higher wages, Ed)and also had to ship their goods much farther to compete in the Mediterranean market. This question become even more compelling when it is recognized that the English overwhelmed Venice and other competitors by selling goods of equal or superior quality and other competitors by selling goods of equal or superior quality for far lower prices! For centuries all European capitalists had embraces the principle of “selling dear”--charged the highest possible prices. But English capitalists, in “a fundamental departure in economic thought . . . [adopted] a new way of thinking about competition and prices . . . [to sell] as cheaply as possible.” That is, they took volume into account when computing potential returns. And when they did so they realized that they had unbeatable cost advantages, especially vis-a-vis Venice and other Italian industries.

One of these advantages was lower production costs. This was partly a result of lower labor costs, greater mechanization, and better organized and managed industries that were very receptive to technical innovations. In contrast, the Venetian state gave unwavering support to the various trade and craft guilds, and these, in turn, kept labor costs very high and blocked all efforts to innovate. . . .

In addition, the English had discovered mass markets for goods of lower quality, such as cheap woolens. These returns soon far exceeded those earned by luxury items. But the Venetians were forbidden to enter these markets; the government felt it far more important to maintain the city's reputation for excellence. (Compare with “maintaining New Zealand's clean, green image”, Ed.)

Even so, taxation played by far the major role in pricing Venetian goods out of the market—the government imposed excessive, and ever-increasing, taxes and duties. . . . The import duty alone allowed the English to price their woolens 15 percent below Venice. And since English taxes on industries were very low and export duties minimal, in combination with lower production costs English merchants often could make excellent profits while charging half the Venetian prices. (In today's scene, think England as Asia; New Zealand as Venice, Ed.) Of course, Venetian merchants made many attempts to convince the government to reduce taxes and to permit adoption of cost-cutting technologies. Unfortunately, when despots begin dipping into golden eggs, the goose is soon cooked. (Socialised health, education, and welfare make it impossible to reduce taxes and costs to a competitive level in New Zealand. Once our “soft-despotic” rulers begin to bribe the electorate to secure and maintain political power, and once the people are prepared to accept the bribes, it's all over rover. Ed.)

In 1635 the Venetian bailiff at Constantinople wrote: “The English devote their attention to depriving our people of the little trade that remains to them in the mart of Constantinople.” But it was not the English who overwhelmed Venetian capitalism, it was the Venetian state.

So much for the glories of medieval Italy.

Rodney Stark, The Victory of Reason: How Christianity Led to Freedom, Capitalism, and Western Success, pp. 173—175.

And so much for New Zealand—the land of the long, white shroud--of cotton wool.

Christian Capitalism

Thankfulness to God

In his remarkable book, The Victory of Reason Rodney Stark documents the rise of nascent capitalism in Italy in the 13th century. This was not planned: it happened.

A pejorative distortion of free market economies is that they bring out the worst impulses in human beings--particularly greed and a disdain for fellow human being. "Get all you can; can all you get; poison the rest" is purported to be the motto of free-market enterprise. Ironically, the motto only becomes accurate in a private enterprise economy when it becomes "mixed": that is, free marketeering is combined with the monopolistic power of the state. Corrupt, venal merchants and business people always stand ready to support rules and regulations that would be an advantage to themselves and an impediment to their competitors, or at the very least would force the public to use their particular goods and services.

If one were a manufacturer of children's car seats, one's commercial success is far more assured if the government can be successfully persuaded to promulgate a regulation making them mandatory. Sadly, the modern "mixed" economic model frequently facilitates rapacious activity. Capitalism nurtured in a humanist womb all too often deserves its pejorative press.

Historically, capitalism nurtured in a Christian womb proved to be quite different in some respects.

It would be inappropriate to conclude discussion of the financial affairs of Italian capitalist firms [in the 13th century] without noting their commitment to charity. "Each time they drew up or revised a budget, a fund for the poor was created with some of the capital of the company. These funds were entered in the books in the name of 'our Good Lord God' as representing the poor, who in this way, were made partners in the company. When dividends were paid, a proportional part went to the poor."

In fact, when a company was liquidated the poor were always included among the creditors in proportion to their share of the capital. Most companies also maintained a petty cash box from which the apprentices were assigned to distribute money to any beggars who showed up asking for alms. All of this was in keeping with the frequent asides offering thanks to God made in the ledgers and account books of these companies.

"State" Insurance Makes a Comeback

The Dangers of Being a Commercial Not-For-Profit

Private property is theft--or so said French anarchist, Pierre-Joseph Proudhon way back in 1840. The implication is that public property is much more righteous.

The antipathy to private property lives on today. Actually, that's an understatement. It does not live on--it has triumphed. Most Unbelievers, and more than a few Believers, think that in a choice between the government owning, say, a power station and a private company, state ownership is superior and will produce superior results.

One animus of the prejudice against private ownership is that a private business exists to make a profit--therefore, it needs to charge more than actually required to produce its goods or services, which in turn means that its customers are being "ripped off" or stolen from. Privately owned businesses, therefore, exploit their customers. Ergo, private businesses are intrinsically evil, being institutions of exploitation and theft.

Now this is all nonsense, of course, but the truth or validity of an argument has never been allowed to get in the way of a "good story".

One device put forward to counter the purported implicit thievery of all private business has been the co-operative. Often times co-operatives eschew profit making and simply circulate cash back into the business. Customers are supposed to get a better deal from this. Prices are supposed to be lower. Another version of the co-operative idea is a mutual company--most often found in the insurance industry. Here the "noble idea" is that the policy holders "own" the company, which means that all trading surpluses are supposed to be put back into the company, thereby lowering premium costs for consumers. Win-win, non?

"We don't take a profit, so our trading surpluses drop straight to the policy holder's bottom line". AMI, the Christchurch based mutual insurance company which has just gone (virtually) bankrupt, used this argument--as all mutual's do. But it turns out (at least according to its critics) that it has been undercharging its policy holders for years (to fulfil the promises of a mutual having lower premium charges), while taking enormous risks in an aggressive expansion drive. According to the NZ Herald:

Bitterness has emerged against cash-strapped AMI Insurance for undercutting rivals' policy premiums then being forced into a $500 million Government bailout.

Competitors lashed out at what they said was a cheapskate business which grew too fast, took ridiculous risks, undercharged, failed to accumulate enough capital and was then hammered by the disaster. "They price everyone else out of the market with their stupid rates and then go running to the Government for a handout. Now it's just another socialist free ride for the people of Christchurch after AMI has been run like a cheap shop," said one angry insider.

There at least two great weaknesses in mutual companies. Firstly, over time they tend to disguise the true costs of doing business. Not under compulsion or obligation to make a profit, all surpluses (theoretically) get ploughed back into the company's operations, so that the company becomes bloated and wasteful of capital.

A profit making company intrinsically has a far higher discipline riding it. In the end, the owners of the business will only approve re-investing profits into the business, rather than distributing them to the owners, if the business will produce a greater return on those re-invested profits than the owners could earn in their own endeavours. This means that everyone is far more focused upon what the true costs of doing business are, and what the actual returns any new investment will generate. If the returns are likely insufficient, profits are unlikely to be reinvested. In a mutual, profits are reinvested willy nilly, without rigorous discipline.

The second core weakness in the mutual ownership structure is that when additional capital is needed--as is the case with AMI now--it has no-one to turn to. No investors, no shareholders, no real "soul-to-damn, butt-to-kick" owners. Moreover, no new investors, since any new investors will not be allowed to own the company.

So AMI has had to go begging to the Government. And the Government has "had" to bail them out since that is our system of mixed market socialism in New Zealand. If the problem is big enough the Government will end up owning it.

Now there is a straightforward solution to the inherent flaws in mutual insurance companies. The regulators ought to require a significantly higher level of capital reserves for all mutual companies on the ground that such companies cannot access capital markets for fresh capital in the event of a significant calamity. Such change would be a good outcome from a bad mess.

In the meantime, we also hope that the government will take full ownership rapidly, sell off the saleable parts of the business, and wind the rest down.

Profit is not theft. It is not a dirty word. It is the canary in the coal mine that alerts everyone to weakness and commercial dangers.

Prudence and Risk Awareness Go Together

Risk Reduction Leads to Speculative Booms

Capital markets, like all markets, are bi-polar. Periodically they go through a boom/bust phase. If this is unpalatable, the only other option is state control (ownership) of capital and labour. This was tried in the Soviet Union where it resulted in distortions and shortages for nigh on seventy-five years--all of which was blamed on serial and relentlessly bad weather.

Surely there has got to be a middle way, someone will opine. Surely if you keep capital in private hands (that is, out of government control) but regulate the worst excesses of private capital markets, keeping those markets on an even keel, so to speak, or within the railway tracks, the train of unending growing prosperity can ride off into the sunset in perpetuity. Boom and bust will no longer apply.

This sort of solution of regulation, controls, maintaining moderation, keeping the system working within reasonable bounds--all of this may work reasonably well when it comes to transport systems, which explains why the railway analogy is appealing. But the analogy breaks down when applied to capital markets.

A capital market is an exchange of capital where folk, who have some surplus money, supply it (at a cost) to those who need it. A market is, by definition, a decentralised decision making institution. Markets, in order to get transactions taking place, must be implicitly free, because value, worth, needs, goals, aspirations and ambitions vary amongst human beings. What is sauce to the goose is not necessarily sauce to the gander. One person may choose to invest his surplus capital in electricity producing windmills because that it highly valued by him. Others may choose to invest in Vegemite because it pays a regular dividend. Different strokes for different folks.

But all participants in capital markets tend to have one common concern: they implicitly measure the risk of their capital being wasted or destroyed. Implicitly providers of capital are reckoning up the likelihood that the return they are wanting would not transpire, were they to entrust their spare capital to a bank, or a windmill company, or a food conglomerate, or whatever. The vast majority of capital investors seek a monetary return on their capital. They want their original capital returned, plus some gain.

When does the boom occur? Booms always occur when perceptions of risk become cloudy. Simply put, when people believe they are investing in a "sure thing" they will be comfortable with investing. Booms occur when it is believed that not only is an investment a virtual guaranteed gain, but that the gain will be substantial and quick. When you see around you friends and acquaintances, colleagues and business rivals enjoying these gains--when everyone is doing it--the boom is on. It is not just that the potential returns have to be seen as substantial, but that they have to be understood as virtually certain. No doubts. No worries.

Here is where regulations and rules can indirectly cause booms. Instead of preventing booms and busts more often than not regulations and government controls cause them. Why? Because regulations are supposed to reduce risk. They implicitly are supposed to make returns more certain. A recent article in Foreign Policy magazine provides a telling picture of how regulation and inappropriate governmental interference actually indirectly caused the collapse of 2008. The author, Paul Seabright argues that we face a paradox in the matter of capital market regulation: the more clever the regulation, the more likely it will distort markets, and the bigger the collapse will be.

There are important lessons to be learned from the crisis. But we'll learn them better if we realize that the intellectual and political architects of the system that failed us were not naive at all, but immensely clever and subtle; it was their cleverness and subtlety that undid them. And that is bad news for all of us, for naivete can give way to learning, but cleverness has no obvious higher state.

The more people believe that central banks can control bubbles and deflate them before bursting, the more a truly destructive collapse will happen. Why? Because providers of capital think that the authorities have effectively removed risk from the investing equation. Therefore they are prepared to take huge risks, telling themselves the risks do not really exist.

In effect, the second and third lines of defense came down to this: trusting the other to do more of the work than either was prepared to shoulder. The better the central bankers performed, the more everyone else was content to rely on them to sort out the obvious tensions in the system, such as the fact that real U.S. housing prices rose nearly 150 percent from 1995 to 2006. Everyone knew it couldn't go on forever, but if Greenspan had taken care of the crises of 1987, 1991, 1998, and 2000, surely he would be on hand if there were a crisis this time. Not everyone agreed there was a bubble, but the danger lay not with those who didn't believe in bubbles. It lay instead with those who thought there might be a bubble but that we could handle it.

Here is the paradox: the more a financial system is engineered and regulated to reduce risk, the more likely systemic risk will break out causing a collapse of the system. The less regulation, the more risk is controlled and booms less likely to occur.

Banking creates the illusion -- the necessary illusion -- that there exist islands of stability in a sea of risk. Depositors who settle payments with a check need not worry -- most of the time -- whether a check drawn on one bank is worth the same as a check in the same nominal amount drawn on another. As the economist Gary Gorton has put it, banking does for the nonexpert in finance what the electricity grid does for the nonexpert in electricity: allowing one to use the system and benefit from its technical sophistication as reliably as the expert can. How? By enabling most who ultimately bear the risk not to have to worry about it on a day-to-day basis.

But as we discovered once the crisis broke, it was not just nonexperts who had stopped worrying about risk on a day-to-day basis. Most professional investors had also gotten into the habit of not worrying about it either, including those who had money invested in the repo markets and other parts of the vast shadow banking system. Before we rail against their stupidity, we should remember that not worrying about risk is precisely what a modern banking system enables its customers to do. That the lack of worrying had gone too far is now undeniable, but it happened precisely because of how impressively the modern banking system works when it is working well.

There is one egregious component in the most recent debacle, however. Governments stepped in as the liquifier of last resort: the cost of capital loss was cast forth upon future generations. This left most of us solvent. In terms of behavioural economics, this sets us up for a much bigger collapse to come--because, once again, the regulators have prevented loss; they have reduced our risks. The moral hazard mounts.

Reaffirming the need to take responsibility will require not just that individuals who are exposed to risk should realize that fact and act on it, but also that individuals who create risk bear more of the consequences. The fact that creditors have borne so little of the cost of recapitalizing failing banks is one of the great scandals of modern times. It is a scandal due to panic and not only to capture by special interests -- policymakers bailing out creditors were rightly terrified of the consequences if the bailouts failed -- but it is no less unacceptable for that. This massive bailout of imprudent creditors will matter for many reasons, not least of which is that crises will recur in the future and we shall need to anticipate how to manage the bailouts that will be needed when they do.

A risk-aware market is a prudent market. In capital markets there is a lot to be said for "caveat emptor". If it fails, you are on your own. Rules and regulations should focus upon honesty, integrity, and disclosure and not on ensuring safety. Risk-reducing regulations and bail outs perversely create far more systemic risk over the long term.