November | 2014 | Barataria - The work of Erik Hare

The plotters are angry that their faith is persecuted and decide to strike back. Their plan is an outrageous act of terrorism, the destruction of the entire government in one big explosion. Fortunately, it is foiled in time but as news of the conspiracy leaks out the population is enraged. Soon, every member of this minority religious faith is viewed as a potential terrorist and things only go downhill from there.

If this sounds like today’s news, it isn’t. This is the story of the Gunpowder Plot of 1605, when Guy Fawkes led a Catholic group to plan the violent and public destruction of Protestant King James I and the entire Parliament. It reverberated through years of increased persecution of Catholics in England and all her colonies – including what became the United States.

And every year it is still celebrated on its anniversary, the Fifth of November, when Guy Fawkes is still burned in effigy in bonfires across the UK.

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In the old days, if you needed money you went to a bank. They might loan you money for your home, your car, or your business based on an interest rate slightly higher than the net paid out for deposits. They made their money on the “spread” between the two, matching up assets they had with liabilities (like you) outstanding. It was a quiet, conservative life. It was boring.

Today, most loans wind up not being held by banks in anything like the traditional sense. Nearly all liabilities are packaged up and sold to a “shadow banking” system where people buy these “asset backed securities” and make money based on the float. It’s a more flexible system that allows nearly all risk to be offloaded onto investors – who bear it as a system. It’s good for the borrower, it’s good for the bank – but the risk is held by the investment world as a whole.

That “brittleness” is the bane of the modern financial world – and the future. How we learn to manage it is the future of finance and the difference between a world that is stable and reliable or capricious and impossible to understand.

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