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With a Moslem Beat?

Looking back through history may not seem like a good way to determine our future, but it’s all we have.  We can reasonably guess that if all the trends continue the current Depression will run its course by 2017, give or take a few years or a major meltdown. We can also be pretty sure that this current period of evening out between the developed and developing world will be followed by relatively low growth as working age populations flatten across the planet.

Where this gets tricky is the realization that Western finance, including stocks and bonds and constant price inflation, is not remotely set up for a low-growth world.  Something has to change.  The best recommendation any of us can make is what is working in economies built around sustainability and resilience today as well as strategies that functioned well before the great wave of industrialization.  And that’s where I’m going to start with a few suggestions and predictions as to how finance as we know it could change.

HagiaSophiaThe first concept that I’d like to riff off of is the idea that the dominance of Western culture since about 1500 has come down a few “killer apps” that can be “downloaded” or adopted around the world.  Nial Ferguson’s “Civilization: The West and the Rest” is a thesis that is a bit too pro-Western most of the time, but it has a point – something went very right.  My counter to this as the world evens up through this Depression and into the bull market that likely lays beyond it is what I call “The Beatles Effect” – where trends that once defined us become dormant, are picked up elsewhere, and eventually come back to us reinvigorated.

This brings us reasonably to the international banking system, one of the great products of Western innovation in the 20th Century.  What globalized into “Too Big to Fail” morphed into “Too Big to Understand” and eventually “Too Big to Be Useful”.  Last December we witnessed global giant HSBC, a bank that has linked developed and developing worlds for 150 years (previously the Hong Kong and Shanghai Bank) move this to a new level.  They became “Too Big to Prosecute” when fears that true justice for their blatant money laundering for pariah states and drug cartels would cause them to fail and trigger a global collapse.  There is no better proof that banking, as we know it, has become more of a threat than a benefit.

But what could possible come next?  What could replace the models that demand constant growth, even when that requires the loss of morals and even laws?

The answer may well come from the developing world in the form of what we now know as “Islamic Banking”.  The Qu’ran prohibits charging interest, so banks were developed based on a partnership model rather than a wholly convertible securities model.  Adopting this is not an example of “creeping Sharia”, but more like algebra and the number zero – when the Moslem world has a good idea it’s best to take it.  The last time the West picked up such good stuff we had this thing called the “Renaissance”, and even picked up a few interesting concepts like “checks” along with the fancy math.

How might this work?  It’s not as wild as it sounds.  Small banks have been making a big comeback lately, seeing return on equity rise 223% since 2008.  Most of these work with an old fashioned method of managing risk, building partnerships in the community rather than relying on market forces.  They typically invest in what they can see – as Warren Buffett claims to do.

In a low-growth environment, banks that are partners with businesses and individuals will gain insight into their customers’ needs and work with them to be better.  Think of a Credit Union or a co-op that has an incentive to encourage its members to build skills and be wiser about how they manage money.  In a stable environment, the highest profit comes from those who can manage and promote stability, not those who take excessive risks.

In other words, big banks like JP Morgan and the Ponzi scams they run with Credit Default Swaps are a sign that their entire model has become antique already.

We can not only expect that everything we know about global finance is likely to be rendered useless – and may have been already.  More interesting is the fact that there is at least one other model that could reasonably take its place.  It just happens to come to us from a place we haven’t been used to copying for about 500 years or so.  Whatever.  That’s the beauty of history – while it doesn’t precisely repeat, it sure does rhyme like a street poet working to a driving, lilting worldbeat.

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21 thoughts on “With a Moslem Beat?

  1. In Hamlet we find the following lines

    Neither a borrower nor a lender be,
    For loan oft loses both itself and friend,
    And borrowing dulls the edge of husbandry (domestic thrift)

  2. I think you’re trying to be provacative. 🙂 Banks are horrible and rate low on every customer satisfaction survey. You would think that something has to change but it never seems to, they only get worse. Credit unions are the way to go no doubt and they already provide the service you are talking about here mostly. Good to see that small banks are doing well & that only makes sense.

    • I wanted to dig up info on Credit Unions but I have had trouble finding reliable info. I do suppose they are growing largely because everyone I know banks with one now (and I do mean everyone!). You too?
      The idea of a bank as a partner is standard small-town procedure so this isn’t really a foreign idea (perhaps I was being provocative!) but I can see it changing. The increase in profits that we see is consistent with things happening at a small scale generally in the economy.
      The way I see this is that 2012 was the year we built the base, 2013 is the year that it should take off. I also see this Depression era as the time when the world evened out, and after 2017 is the time when the new economy is defined. It all comes in stages. But small banks are definitely the ones profiting now and they will definitely be the ones that drive whatever happens.
      JP Morgan? Seriously, I can’t help but think that the sooner they fail, the better. Too big? Naw. Eff ’em.

  3. While it may seem attractive to do everything on a partnership basis I don’t think that standard loans based on interest will go away any time soon. The model you are talking about has also been used extensively in Spain and Latin America showed good results. But of course Spain is not in great shape right now so perhaps it is a mixed bag. As far as sustainability goes it is probably a good idea to be more based on a partnership but I agree with Dale that credit unions are already doing that here and they are probably going to continue to grow. I have seen figures on their growth and it has been rapid. The latest figure I saw was that nearly 1/3 of all Americans belong to a credit union now or will soon at the rate they are expanding.
    So what you are saying is not a big change and it is already occurring. It is probably best to not think about investment banks since they do have their own world and really don’t seem to operate at all like commercial banks. I expected you to call for a renewal of Glass-Steagall again.

    • I didn’t mean to say it was a big change, per se, but I can see things going that direction. Thanks for the support on Credit Unions – that wasn’t exactly what I meant, but I can see that it is more or less what it happening. And yes, the less said about investment banks the better, IMHO.

  4. During the latter part of the depression and the early war years the US had Tommy Dorsey and Frank Sinatra to cheer the nation up. When you think about Dorsey, you think: when was the last time you listened to the trombone. The women in the factories could dream of their boyfriend coming home in a few years. Bergan and Bogie were in the Hollywood lots fliming Casablanca. We gladly welcomed Mexicans to help with the farm crop. And from ’42 to ’45 we bought the entire sugar crop from Cuba, giving them some prosperity. Spam was something you ate.

    • Funny, my daughter gets all wistful about the War years and how everyone was working together. I told her to be careful what she wishes for. Also, her grandparents got her on track as to how awful everything was with the anxiety.
      As for Big Bands, don’t get me started – another one of those strange things I’m into that I never, ever talk with a date about. 🙂
      Seriously, I don’t know anyone who doesn’t think this is a kind of Depression, at least. But we’re sure not acting like it nor working together. It does seem strange.

  5. Alf Landon, a Republican from Kansas, was FDR opponent in ’36. I think the idea of his campaign is that he accepted the need for the innovation of the New Deal. He said he would do it more efficiently however. He lost. FDR received 61 percent of the vote. Gone are the days.

    In the middle of the decade of the 1930s Germany quit the League of Nations, The world just watched that shit from Hitler and he moved his troops into Rhineland. Then he annexed the parts of Czechoslovakia, which was a democracy. If anyone had anyone foresight, the forces of good should have crushed Hitler at that stage. Sometimes it makes me so mad, because the same cast of characters who were involved in WW1 were involved and Europe had to be repeat the same things they were doing years before. The US didn’t really want to get involved; perhaps we were hoping it would all just go away.

    Britain alone had lost 673,000 in WW1. In WW1 and after there were a lot social policy innovation. They wanted to create a land fit for heroes. They wanted to console themselves that they had build a better world when a part of a generation of men was missing from Europe.

    • I think the “Dime Store New Deal” was a healthy exercise. Even when one party is clearly right on the direction, the other party can be very useful by saying, “Yes, but …” and proposing a more moderate version or getting the voice of their own affected constituency into the debate. I miss those Republicans and wish they were around to make better decisions. Then again, I wish the Democrats were bold enough to need moderation.
      The desire to avoid another WWI was genuine and good, but the practice was horrible. There is a lesson there for people like me. The world is not “perfectible”, but things can always be better. There’s a yin and a yang to it. Those lessons are worth remembering through today’s turmoil.

  6. I would like to hear more about your predictions for the future. They are fascinating and seem to be grounded in real data.

    • I am working on it. I was drawing a real wall at 2017, when the “Spring” arrives, but I think I can envision it now. The most important things to me are not the individual technologies, which I would never want to predict, but how technology will be the only real engine of growth – and what that means.

  7. I wish I knew more about innovation, but I am not a science person.
    That said, here are the number of patents in 2010
    1 Japan 502,054
    2 United States 400,769
    3 China 203,481
    4 South Korea 172,342
    5 Germany 135,748
    6 France 47,597

    China is up there

    Innovation for all I can observe is a brutal process where you need a Ph.D and lots of time in the lab and workshop

    You know more about this Erik than most of us.

    • A lot of those US filings are by foreigners (I’ve helped a few! 🙂 ) So it’s hard to say.
      Yes, real innovation is a matter of dedicated industrial research most of the time. It involves crews of people working together, usually very close to sales staff (who identify needs) and/or production (where the stuff has to be made). Losing production facilities overseas really impedes a lot of industrial research in the US.
      The other thing that is very important is that a company has to be set up for a “quiet life”. It can’t live quarter to quarter and expect real innovation to define it. Our current values in the market simply do not generate the kind of patient capital on a large scale that is necessary for big, new things – but we do innovate small things that require little capital well.
      What makes researchers happy? They are rarely motivated by money. Most like a spirit of competition and “playtime”, and need a very skilled management team to stay focused. But they typically like a very quiet life, too, where they get to do what they are best at.
      It’s a tricky thing, something I’ve thought about writing about more. Now that we’ve determined this is the main engine of growth a decade from now perhaps it’s probably worth some more thought and organization.

  8. Pingback: DJIA: Yes and/or No | Barataria - The work of Erik Hare

  9. Ha Ha, Islamic banking. You mean the banking system that Islam copied off the Norman Templars? You mean also the system developed to transfer funds from Europe to the East where pilgrams could get access to their funds?

    • No, the modern concept of pooled investment. It’s an interesting system developed to get around the lack of interest payments as a standard.

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