A Conspiracy of Paper and the Spiderweb of Credit
"A system of credit is like a great spiderweb - you cannot see it until you are trapped within it, and you cannot see the spider until she dangles above you, poised to devour."
Now here's a description that fits like hand in glove for the many personal accounts I've heard on people who've found themselves trapped in the credit snare, and I wonder if the description doesn't feel familiar to all those (media) company owners currently struggling to restructure the mountain of debts they've accumulated in happier times. The memory of Mecom-boss David Montgomery telling a group of journalists, myself included, that the company didn't have enough debt back in April 2007 springs to mind, but I'm digressing.
The quote is from a book I was reading last week, called "A Conspiracy of Papers", and, even though it is set in eighteenth-centry London and deals with the origins of today's financial markets, I was struck by the parallels to today's financial realities. The book is historical crime of the kind I must admit I have penchant for, Neal Stephenson's triology "The Baroque Cycle" is another good example, and, amid all the action, the characters find time to discuss things like the soundness, or lack thereof, of shifting from coin to banknotes e.g in paragraphs such as this:
"But silver is silver. Coins are clipped because you can take them to Spain or India or China and exchange it for something that you desire. You cannot do that with a banknote, because there is nothing to support the promise outside its point of origin... these financial institutions are committed to divesting our money of value and replacing it with promises of value. For when they control the promise of value, they control all wealth itself."
Now, it gets rather philosophical, most things do if you look deep enough, but this currency-debate has not gone away: you still find those who advocate that currency should be based on real or objective values, like gold, today. More to the point, imagine how we've gone from debating a gold-based vs paperbased economy to one where a complicated web of derivatives and credit can bring down the global economy, as happened with sub-prime, collateral debt obligations (CDOs), credit default swaps and what have you not.
I'm reminded of this brilliant visualisation of the credit crisis, and I'm afraid I belong to those who think we're not out of the woods from that crisis yet, far from - especially not media companies who are struggling to deleverage, find a more viable business model and at the same time suffering the effects of the collapse in the advertisement market. Things are not looking great.
But back to the macroperspective: while reading the book I found myself wondering how much and how little has changed, and how, even if the financial market and its instruments have grown ever more complex, many of the arguments remain very similar. Just listen to this bit from Newsweek International editor Fareed Zakaria:
Finance has a history of messing up, from the Dutch tulip bubble in 1637 to now. The proximate causes of these busts have been varied, but follow a strikingly similar path. In calm times, political stability, economic growth and technological innovation all encourage an atmosphere of easy money and new forms of credit. Cheap credit causes greed, miscalculation and eventually ruin. President Martin Van Buren described the economic crisis of 1837 in Britain and America thusly: "Two nations, the most commercial in the world, enjoying but recently the highest degree of apparent prosperity and maintaining with each other the closest relations, are suddenly plunged into a state of embarrassment and distress. In both countries we have witnessed the same [expansion] of paper money and other facilities of credit; the same spirit of speculation...the same overwhelming catastrophe."
