The financial road less traveled by

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I--
I took the one less traveled by,
And that has made all the difference.
Robert Frost

BIS Working Paper No. 193, ponders the profound question, Procyclicality in the financial system: do we need a new macrofinancial stabilisation framework? Very deep. Very serious. But, if you chip away at the big words, breaking them down to a level of tangible meaning the paper admits and then almost asks, the system is broke, should we fix it? I say almost asks because it seems to me the listed "fixes" are just variations of the same themes that created the mess in the first place.

I like to think of free will as a gift of the word to man. It is, I believe, by virtue of language that man can, if he avails himself of it, see forks in the road. To me, Robert Frost's poem inspires thoughts of free will; seeing a fork in the road, contemplating which path to take with full knowledge that to take one is to not take the other, and finally taking the road less traveled by because we have a sense where the other leads.

It seems to me the thinking which informs the past century's trend towards greater financial centralization isn't really much thinking at all but simply walking the same well worn path. In yesterday's musing I noted one key aspect of the creation of the Federal Reserve, centralization of reserves.

The Federal Reserve and the Income Tax Acts, in my view, effectively ended the period of true faith in protestant democracy, by which I mean the view that any man, if he so chooses, can discern the truth for himself and moreover, the individual decisions of the many would lead to better outcomes than decisions for the many by the few. However clever the few might be at first, the power, as Tolkein's trilogy argued, and Lord Acton stated, will eventually corrupt its users.

Since the creation of central banks, in virtually each and every instance, man's designs have become bigger-bigger projects, bigger wars, and bigger problems. Getting back to the profound question asked by the BIS, I think it is fair to argue that there would be no way this problem would have ever gotten so out of hand but for the centralization of reserves in the hands of a few.

The BIS working paper, after recognizing that external imbalances are a problem that needs to be fixed offers a few options:

This leads on to the question of whether there are institutional changes that might be recommended to strengthen the international adjustment process. Three possibilities might be considered.

First, consideration could be given to going back to a more rule-based system. A number of academics and others have suggested reverting to the gold standard or establishing a single international currency. More realistically, one might recommend a small number of more formally based currency blocks (say, based on the dollar, euro and renminbi/yen), but clearly they would have to float more freely against each other.

Second, consideration could be given to a system more like that of Bretton Woods, but with the IMF accorded substantially more power to force both creditors and debtors to play their appropriate role in the international adjustment process.

Third, consideration could be given to informal cooperative solutions, based on the mutual recognition of interdependencies and the need to avoid circumstances that could lead to systemic disruptions. At the very least, this would require representatives of large creditor countries to share views with debtors as to whether problems were emerging and, if so, what policies might help resolve them.

Notice that all solutions are institutional, even when the Gold standard is raised it is in the context of a Central Bank administered, by which is meant with centralized reserves, system. These solutions seems to me to be a form of doubling down. They hope that if even greater centralization of reserves is achieved, the problems might be solved. Yet this will be so only if centralization is not the cause of the problem. If centralization is the problem, a solution of this sort merely delays the inevitable.

What's my solution? Make currency convertible, preferably but not necessarily into Gold on an individual level. Decentralize the reserves, distribute decision making. Essentially, make the financial system more like the internet, where pieces can go down but the system remain robust. If even the BIS can admit there is a large and growing problem, perhaps it is time to take the road less traveled by. After all, insanity, they say, is defined as doing the same things and expecting different results.

Formulating all these thoughts reminds me that William James both foresaw the problem and offered the solution in a much more elegant form. I'll defer to my betters and let him end this essay.

I am against bigness and greatness in all their forms, and with the invisible molecular moral forces that work from individual to individual, stealing in through the crannies of the world like so many soft rootlets, or like the capillary oozing of water, and yet rending the hardest monuments of man’s pride, if you give them time. The bigger the unit you deal with, the hollower, the more brutal, the more mendacious is the life displayed. So I am against all big organizations as such, national ones first and foremost; against all big successes and big results; and in favor of the eternal forces of truth which always work in the individual and immediately unsuccessful way, under-dogs always, till history comes, after they are long dead, and puts them on top.—You need take no notice of these ebullitions of spleen, which are probably quite unintelligible to anyone but myself.