10 to Midnight in the Garden of Credit: Socrates Wonders About Cardinal Rules, Historical Precedents, Matter-Antimatter, and the Fantasy Era of Fiat Money Creation

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  • Dr. John E. Charalambakis is the Chief Economist at Blacksummit Financial Group, Inc. Lexington, Kentucky. He is also with the  Adjunct Faculty at Patterson School of Diplomacy, University of Kentucky.

This article is contributed by the author for publication in the Business Thinker. It has also been published by the Blacksummit Financial Group Blog.

The unfolding events – by the hour – in Cyprus shine light to a historical precedent: When the next crisis comes around bank deposits may not be spared. This is presented to the public as a “just” decision due to the Cypriot “banking sins”. We will be exploring justice issues in this commentary, but before doing so, shouldn’t we be asking why such justice was not also applied to the banking sins uncovered during the 2008-’09 crisis? Why did we choose to bailout with trillions of dollars all those banks in Germany, France, England, Ireland, Switzerland, US, Spain, Italy, Belgium, Holland, etc., that seem to have created the financial catastrophe? (See pertinent tables with the amounts at the end of this commentary). And, if we couldn’t afford to do so back then, why don’t we break them now?

In Plato’s Republic we find Socrates asking the fundamental question that has been with us for centuries, “What is justice?” It seems that for Plato, as well as for Aristotle who followed him, justice is the essential virtue of a society. Socrates taught his disciples that justice is giving and getting one’s due. Plato describes that justice must be counted as desirable for its own sake. Justice in other words is harmony in the soul and harmony in the state. Furthermore, Plato tells us that responsibility should be delegated in accordance to one’s ability and place. I believe that nowadays, the latter should be the foundation for viewing international decisions regarding bailouts and bailins (where depositors lose a good chunk of their savings).

In this framework of thought, justice is viewed as fairness, power is restrained, and the interests of the society as a whole are being advanced. If that is the case, then, sectors in the economy would work together in harmony (nowadays that would apply to the production and financial sectors), while convergence would be observed across nations through the creation and sustainment of middle classes. However, the unfortunate result these days is the divergence of financial interests from the production sector, increased instability (economic, political, social, and financial), and the destruction of middle classes across nations. When the financial interests of collateralization and securitization, are separated from production interests at a global level, then Pandora’s jar is being opened, financial crises take place, and the reverse route starts i.e. the destruction of the middle class and injustice prevails.

In the Republic, Socrates refuses and rejects the argument of Thrasymachus who argued that justice always serves the interests of the rulers of the society, the interests of the stronger in our midst. Moreover, Socrates rejects Glaucon’s argument who suggested a more modest approach, that justice is ultimately a matter of self interest and that people observe justice to avoid punishment. Both of these negatives views about justice have been rejected by Socrates who insists that justice is the ultimate responsibility of the person, and should be delegated according to ability and place. Justice cannot be viewed as punishment, retribution or revenge. In the ancient time, in Platonic terms, justice is a matter of social harmony and in Christian ethics it is a matter of mercy/grace. In economic terms we can talk about just wages, just distribution of rewards and of income. Issues of justice come at the forefront when there are exchanges. In his famous 1971 book, The Theory of Justice, John Rawls takes the liberal approach to find the proper balance between liberty and equality, with a particular concern for the least advantaged. A few years later his colleague, Robert Nozick takes a more libertarian approach to justice defending a strong notion of entitlement where everyone gets what he or she is entitled to based on endowments, without any reference to needs or inequalities.

I have the impression that any reference to justice by neglecting the concept of community would have horrified Plato, Socrates, Aristotle and their followers. Cicero has long argued that the leading virtue in a society is justice and that the definitive ingredient of justice is merit. Therefore, meritocracy in society is a necessary condition for justice to be administered. Meritocracy at the same time requires the observance of the rule of law, because the rule of law distributes rights and a just law advances fairness. When you break the cardinal rule of banking and confiscate deposits then you plant the seeds of destruction. If production responsibilities are designated according to merit and ability (Plato and Cicero) then, the responsibility of justice is to enable the individuals across nations to produce according to their natural and enhanced capabilities and endowments, i.e. to advance their competitive advantages. When decisions taken destroy those competitive advantages (services in the case of Cyprus), then economic truncation occurs that ultimately lead to segmentation and the breakup of the chains that hold that community together (the Euro in this case which has become a fetish since means and ends have been confused by those who executed the single currency).

If we take the concept of justice a step further, we would probably understand that justice is inseparable from righteousness, at least in the Platonic and Aristotelian paradigms. In that sense, Plato’s central claim of righteousness is “performing the functions for which ones nature is best fitted” (a.k.a. competitive advantages as discovered by Adam Smith about 2200 years later). It is also interesting to note that both Plato and Aristotle defend inegalitarian views of justice.

In The Ethics, Aristotle gives us a complex concept of justice. He divides justice in two broad categories as the lawful and the concept of fair and equal. It is the latter that is advanced in Aristotelian ethics. The literal meaning of the word justice in Aristotelian ethics is the meaning of righteousness, which is the form of justice that represents complete virtue of the soul which cannot be understood unless it is comprehended within the framework of community, i.e. in relationships. Aristotle divides this kind of justice into distributive and rectificatory. For Aristotle, the student of Plato, justice should be viewed as fairness. Distributive justice for Aristotle is primarily concerned with what people deserve. We also need to keep in mind that Aristotle is particularly concerned with the justice of transactions. When Aristotle talks about justice in transactions, he refers to commutative justice in voluntary exchanges such as buying, selling and lending, or involuntary matters where we have victims of insults, thefts or assassinations. When Aristotle talks about equality and justice he refers to proportional, or what he calls geometrical proportion in distributive justice. Through the centuries since then, we understand that in Aristotelian ethics we need to treat equals equally, while unequals deserve unequal treatment in proportion to their merit, in proportion to their abilities, and in proportion to their enhanced capabilities.

The applied solution to the Cypriot banking problem violates the above principles, create a confiscation historical precedent, undermines the foundations of community (let’s not forget that the EU is the advanced form of a European Community), while it betrays the concept of fairness.
I believe that central to Aristotle’s overall argument is the concept of justice as a state of attitudes, habits, customs and cultivated policies that advance and enhance the capabilities of persons, groups and nations. The enhancement of that capability leads to the development of character and to the development of a nation. When individuals are deprived from their potential and competitive advantages, their nations cannot prosper. This kind of justice according to Aristotle is complete virtue, not complete virtue unconditionally, but complete virtue in relation to another (signifying the communitarian dimension).

St. Thomas Aquinas synthesized the Christianity of the Church with Aristotelian ethics and came up with some articles relating to justice that can be summarized as follows (Solomon and Murphy, 1990): First, justice is a habit whereby a man renders to each one his due by a constant and perpetual will. Second, justice is always towards another, and third, justice is a virtue and actually it’s the chief of all the moral virtues. Aquinas concludes his thesis on justice by echoing St. Augustine and Cicero by suggesting that charity, generosity, and liberality is an essential part of justice, especially to the ones who are the least among us. I am wondering then if the measures applied comply with any notion of what we consider justice in the West.

Now, if we go further back and examine the ancient Chinese and Far Eastern philosophies, we will discover that there are two concepts that summarize the moral elements of the mind and of the soul. Those two elements are the concept of “Li” and “Ren”. The idea of “Li” is what is known in Confucian thought as the rules of conduct. Without any doubt the applied solution violated the cardinal rule of banking conduct. The second concept is the idea of “Ren” or what we would call today agape, the benevolent love toward others exhibited by rulers as well as the average person. In the Far Eastern thought when the soul loses its sense of justice it loses its moral compass and as Confucius said it’s like a mountain that has lost its trees. As the EU passes through the circle of violence in the inferno they have created (see the March 18th commentary) they may have crossed the point of no return in the eventual destruction of the dysfunctional currency that not even Germany can afford.

In the midst of the seventeenth century Thomas Hobbes in his classic work The Leviathan, describes the state of nature and a state of affairs as one underlined by fear and insecurity. It’s a state of affairs where there is no right or wrong, no right to property, no mine or thine, no law and justice or injustice, only force and fraud (circle #8 in Dante’s Inferno). It is in this state of affairs and in this climate of uncertainty where all members in the society feel the need for a mutual social compass, a social contract that becomes a matter of rational necessity. The need for this kind of social compass forms the basis of Hobbes’ argument that people have a basic ability to do damage to one another and in the absence of any sense of duty towards one another, in the absence of any power over the people, people become competitive, insecure, and mutually defensive. From a trade perspective Hobbes views international exchanges as a zero sum game where life on earth and exchanges are nothing but unhappy transactions of a life where there is no justice. Obviously Hobbes portrays a horrifying state of relationships maybe one before the statecraft of treachery (circle #9) is unfolded.

Scientists these days intensify their discussions on the mystery that there is more matter than antimatter in our universe and are contemplating about the neutrinos – those subatomic particles whose mass cannot be measured and which are nearly invisible – and their consequential role in the cosmos. In the financial world the neutrino called Cyprus can create what physicists call a beta decay (or a double beta decay), where the equivalent of an isotope (or a handful of isotopes e.g. Germanium 76 or in the financial world Germany, Holland, and Finland of the community called EU) decays by shedding electrons and antineutrinos in the process. In the financial world the shedding of the rules and faith in the credit mechanisms has the potential of turning upside down the asymmetry between matter (monetary reserves) and antimatter (money supply) in the financial world. As the imbalance follows a course of reversion then, dark matter (the cosmological force that prevents expansion and in our terms recessionary forces) takes over from dark energy (the force that expands the universe i.e. the growth force in market economies).

Let’s close by reviewing a couple of tables that show the amounts used by central banks in bailing out the banks that were on the verge of collapse in 2008. All tables are taken from the Fed’s audit conducted by the GAO (Government Accountability Office).
The first table below shows that more than $10 trillion were used in swap lines, with the ECB being the recipient of almost 80% of the Fed’s generosity in bailing out EU banks! (I will let the readers divide the $7.5 billion that Cyprus’ mess was about by the $10 trillion shown in the table below, and then reflect on “just” solutions).

I believe that instead of offering a conclusion we should review the lyrics of Bob Dylan’s song titled “License to Kill” and as we review them we may be thinking of the Cypriot Banks destruction.

Man thinks ’cause he rules the earth, he can do with it as he pleases
And if things don’t change soon, he will
Oh, man has invented his doom.

Now, they take him and they teach him
And they groom him for life
And they set him on a path where he’s bound to get ill
Then they bury him with stars
Sell his body like they do used cars

Now, there’s a woman on my block
She just sit there facin’ the hill
She say who gonna take away his license to kill?

Now, he’s hell bent for destruction
He’s afraid and confused
And his brain has been mismanaged with great skill
All he believes are his eyes
And his eyes, they just tell him lies

But there’s a woman on my block
Sitting there in a cold chill
She say who gonna take away his license to kill?

Now he worships at an altar
Of a stagnant pool
And when he sees his reflection, he’s fulfilled
Oh, man is opposed to fair play
He wants it all and he wants it his way

Now, there’s a woman on my block.
She just sit there as the night grow still.
She say who gonna take away his license to kill?

One thought on “10 to Midnight in the Garden of Credit: Socrates Wonders About Cardinal Rules, Historical Precedents, Matter-Antimatter, and the Fantasy Era of Fiat Money Creation”

  1. In Plato’s Republic, we find Socrates discussing about the art of ruling over others. Socrates says that the good ruler’s task is to look after the advantage of the ‘weaker, who are ruled’ by him, rather than after his own advantage. So the sea captain will look after his sailors and not after his own benefit. From this perspective, Socrates sees justice as looking after the others’ good.

    Considering the recent banking changes in Europe, the question that the Socratic position gives rise to is whether the new way of responding to banking crises introduces economic principles which will in the long run benefit the people who use the banks. Can it be that they will lead banks to change their practice and develop morality-profiles which will guarantee their credibility, so as to gain the
    clients’ trust, in the future?

    I would like to emphasise that I am not discussing the treatment of the Cypriot people, but only the new code of practice introduced in banking. The question of the soundness and justice of these principles needs to be addressed independently of how we treated Cyprus.

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