Reform Greedy Creed and Contain Usurious Credit Growth

October 10, 2008

Sankarshan Acharya
Pro-Prosperity.Com and Citizens for Development

October 10, 2008

Written to U.S. Senators

Sub:    Reform Greedy Creed and Contain Usurious Credit Growth

Dear Senators ,

Let’s ascertain dispassionately if the following could be the fundamental causes of the current financial market meltdown.

1.      Fannie Mae and Freddie Mac took more and more risky mortgage debt.

2.      Banks and insurers did not have adequate capital to write (short-sell) financial securities like debt, equity, and derivatives.

3.      Regulators were lax in monitoring financial institutions closely enough.

4.      The Security and Exchange Commission did not monitor markets closely enough.

5.      Deregulation as a model for trickle-down prosperity did not work.

6.      Debt holders (households, corporations and government) have been irresponsible to live beyond their means by borrowing.

Consider a hypothetically rosy scenario: Fannie, Freddie and other federally insured banks did not engage in risky lending to the irresponsible sub-prime borrowers and always held sufficient capitals under strict regulatory supervision. 

Where would then the growing credit have gone in this scenario, given that the total credit in an economy must equal the total debt?  The growing credits should and would have gone to only the prime borrowers, as argued by the elite: the pundits, economists, journalists, politicos and think tanks.  The non-elite would also agree with this view.  Thus, the unanimous agreement is that prime borrowers should have been choked with debt at lower and lower interest rates.  But then the growing debt burden would have eventually made the prime borrowers sub-prime. 

In reality, the vast majority of mortgage holders were considered prime due to a historically low average rate of default of about one percent.  The growing credit thus flowed to the prime home mortgage borrowers at lower and lower rates of interest.  The prime borrowers have been the prime producers.  They piled up debt as their incomes and savings eroded beyond their control.  The economy’s custodians and chieftains have usuriously eroded prime producers’ incomes and savings to usurp the same for self as new credits.  The usuriously usurped credits were loaned back to the prime producers.  The prime producers have propped the economy, but the stealthy erosion of their incomes and savings made them financially shaky and sub-prime.    

The fundamental problem:  The custodians and chieftains of the economy have for decades wielded their power to grow their credits by usurping both the incomes and savings of the prime borrowers who are indeed the prime producers of globally competitive goods and services.  The prime borrowers/producers have been thus jolted.  They lost trust in this system.  This is a prelude to a lasting depression because the usurpers can no longer bank on shaky props: the prime producers who have become sub-prime.  The government-reported high productivity simply depicts an increasing workload on the prime producers during unaccounted off-regular hours.  The high productivity has not resulted in growing net worth or financial strength of the prime producers.  The increased productivity (or growth in GDP) has gravitated to the few usurping custodians and chieftains of the economy.[1] 

It is not the economy, stupid.  The economy has grown rather vigorously since 1993 or so. Yet it has taken the U.S. and the world to the precipice of Great Depression II.  The true refrain for a democratic, capitalistic economy should be: it is the usurious credit growth, stupid

I believe that the chieftains and custodians genuinely want to protect, as they too cherish, the democratic capitalistic system of governance, which is now challenged by the financial market meltdown.  The chieftains and custodians could not be deliberately undermining the prime producers who prop this system of governance.  Do they not care?  Do they not get it?  I doubt that to be the case. 

I believe that the fundamental reasons for the usurious growth in credit are:

1.      Greedy creed, instilled by college education which hammers very talented human brains with a credo of maximizing (the utility of) own net-worth or wealth or market value.  This greedy creed makes the minds nonchalant and oblivious of common good because they remain immersed or mired in an unsustainable dogmatic behavior.  It is not sustainable because the process of usurious usurpation eventually thrusts the top players into an inextricable prisoners’ dilemma of the type they are facing today.   

2.      Overconfidence punctuated by military superiority due to nuclear power.    

The Greedy Creed unfortunately drove the investment banks, the hedge funds, the Federal Reserve and the SEC to protect the interests of a few.  This drive has willy-nilly killed the real economy, continually.  In a way, the Greedy Creed at these institutions was successfully exploited by the inflexible Chinese exchange rate policy that offered little room to game through trading and forced the Chinese workers to work for pittance. The Greedy Creed lured the elite to short-sell the workers in the developed world to establish shops (by going long in the workers) in China and other parts of the developing world. My courses on arbitrage pricing over the last ten years at the University of Illinois have invariably emphasized how this wage/labor arbitrage has enriched a few in Wall Street and its patrons at a huge expense to the multitude of productive workers. Short-selling the productive workers in the developed world has effectively pruned the roots of the trees (the prime producers in USA and Europe) that bore fruits and gave shades to the rulers, the poor and and the unproductive lots as in Wall Street as well as Main Street.  

The U.S. recovered from the Great Depression due to a decisive victory in WW-II and then entered an era of prosperity and stability.  While this is factually true, the underlying forces of recovery are immigration of talents and willingness of the defeated nations to work under American suzerainty.  The reasons for why the U.S. is now facing a potential decline in prosperity are emigration of trained talents and unwillingness of the peoples that did not join and were not defeated in WW-II to work under American suzerainty.  The war then was not the motto of the U.S.  Americans were provoked by an unjust war and were drawn into it as liberators and were widely eulogized as good Samaritans.  The subsequent passage of civil liberties made America a nonpareil destination for talents around the world to immigrate and flourish, making the nation the envy of the world.  It is, therefore, not the war, per se, that should be end goal of the U.S.  It must be prosperity and stability, as it was in the wake of WW-II. 

The philosophy of greed (due to enunciation of the economic theory of maximizing own utility) and invincibility (due to invention of nuclear bombs) must, therefore, give way to the true founding principles of America: equity and liberty within the nation and elsewhere in the world.  Equity does not refer to quota or entitlement.  Equity refers to:

(i)                 Equitable flow of money to the effective producers of globally competitive goods and services.

(ii)               Stopping surreptitious trading games of Wall Street aided by rulers and government agencies to usurp income and savings of the effective producers. 

Only the effective producers can feed and protect the weak and poor as well as the rulers.  A nation or the world cannot afford to undermine the effective producers.  China paid little to its effective producers, but used the surplus to expand its weak infrastructure and manufacturing base.  But the U.S. engaged in usurious credit growth for a few by clandestinely undermining the income and savings of the effective producers. 

Capturing of the oilfields in the middle-east by engaging and defeating the rest of the world could have brought prosperity through copious supply of oil.  Even if feasible, this could not be a long-term optimal strategy because it would only dwindle the global oil supply faster, maybe after making the Americans a little more obese and a little less productive.  The optimal strategy is to search for optimal rules for democratic, capitalistic governance that would tap the inexhaustible power of human mind to discover renewable sources of energy and to keep the earth cool for the posterity.  This strategy will automatically defeat, nonviolently, the philosophy of terrorism and obscurantism.  Military strength is still necessary, but it should be jointly maneuvered by the peoples following the philosophy of democratic capitalism.  

With profound regards,

Sankarshan Acharya

[1]These are illustrated in my book, “Prosperity: Optimal Governance” and in some of my earlier memos.  A numerical example is also available on the internet here: