Guest Post: A World Without Banks

Submitted by Chindit13

A World Without Banks

Imagine a world without bankers. 

That thought either rattles you to the core of your being, or it brings on the kind of ecstasy heretofore only available in a Southeast Asian massage parlor.  If you are a Congressman, addicted to the effluent from the wallets of your owners on Wall Street and their lobbyists in Washington, if you are a real estate developer who believes no amount of office space and no amount of luxury condominiums is too much, or if you summer in the Hamptons and Nantucket, then you are clearly in the first camp.  If you are a typical ZH’er, spending your weekends at the range with your Beretta or sharpening the tines on your pitchfork, then welcome to SE Asia and the world of your wildest fantasy.

Yes, there is a country without banks as we know them, where no one knows the meaning of subprime, Alt-A, securitization, HFT, prop desks, insurance---portfolio or otherwise---CDS’, CDO’s, CDO^2’s, CLO’s or Too Big to Fail.  There is a country where the financial crisis went almost unnoticed, where no bank assets went toxic because there are no bank assets.  No depositors faced loss because there are few depositors.  Mortgages did not take a hit because there are no mortgages.  No car loans, student loans, or HELOC’s went bad.  The country is the Union of Myanmar, known to many in the West as Burma.  It is also called the Golden Land, which is entirely apropos given its wealth of natural resources.

Many reading this might have a political view on the country and its leadership, to which you are most welcome.  Other websites, other writers, and the activist community address that issue elsewhere and have been doing it almost as long and almost as successfully as America has been enforcing sanctions against Cuba.  I’ll leave politics to them, for this is not a political fluff piece; it is an economic fluff piece.

While much of what you will read here will seem odd, please don’t let the bizarre nature of this system scare you off.  What they have, albeit in a different form, is workable even in a large society.  If any of you find humor in this piece, then that is good enough, for at times like this humor is what keeps some of us going. More than that, however, I write this to attempt to counteract the fear mongering foisted upon us all by the likes of Hank Paulson, Timmy Geithner, Ben of the Inkjet Bernanke and that drooling, semi-embalmed cadaver who goes by the name of Representative Paul Kanjorski.

“We were that close”, so they told us ad nauseum in order that we accept the passage of TARP and all of the other alphabet soup of programs that shifted the wealth of America’s savers, elderly and Middle Class to the same people on Wall Street who nearly brought the system---their system---down.  Yes, the collapse of the financial system would have had dire consequences---for the ones who caused its near demise.  Their world almost did cease to exist, and it would have eviscerated them, one and all.  Sadly, we lost an opportunity.  Our world, on the other hand, though difficult, would have survived, and we would have found a way to continue.  Humans are resourceful.   Humans adapt.   Anarchy creates its own communities, its own bonds, out of necessity and the will to survive. Burma is an example.  Now I’ll tell you why.

Let me begin by getting a salient point right out front:  Burma’s economy probably grew 15% in 2009.  Fifteen percent.  Their currency was the world’s strongest currency in 2009, climbing against everything from the dollar to euro to swissie to loon.

Nobody really knows the actual GDP number, because no one really bothers to keep track.  Much of the economy is of the underground variety, and even the official economy is cloaked in secrecy.  Fifteen percent---which would be the top growth in the world amongst countries with a population  greater than 50 million souls---is my own estimation based on what I see, and comparing it to what I have seen there over the last fifteen years, or over the last thirty in places as diverse as Saudi Arabia, Japan, China, Thailand and Burma.  2009 was staggering in the amount of development, as anyone who spent time in the country could attest.  Why I am there and why I know this is a long story.  Suffice it to say I left a host of Wall Street prop desks when I thought my pockets were full enough, and when I wanted to try to find a way to add value in the world while I was still young.  As most of you believe, if not know for a fact, Wall Street adds precious little value to the greater good of the human species.  It’s a nice place to visit but I wouldn’t want to live there.  I mean Wall Street, not Burma.

It is possible not every country could do what Burma has done.  Few countries in the world have the breadth and depth of natural resources Burma has, which include economically significant deposits of gold, platinum group metals, silver, antimony, molybdenum, copper, nickel, iron ore, zinc, tin, uranium, chromite, rare earths and gypsum.  Burma also has approximately eighty-five percent of the world’s remaining tropical hardwoods, including the world’s best teak, plus stunningly beautiful woods such as padauk, pyinkado and yemane.  Burma has most of the world’s top jadeite, gobbled up to the tune of a billion dollars a year by the emerging Middle Kingdomites.  It has precious gemstones such as rubies, sapphires and spinels.  Its biggest source of wealth in recent years has been natural gas, plus some oil, which accounts for upwards of 80% of government revenues.  Major investors in the country---mostly in mining and oil/gas exploration---include China, (both public and private sector), Singapore, Thailand, India and Russia.  Also trying to exploit Burma's vast natural wealth are companies from Malaysia, Vietnam and Australia.  A gas pipeline run by France's Total and US Chevron (oddly exempt from the sanctions that prevent me from even buying a home-sewn shirt) is single handedly responsible for nearly 25% of total Myanmar Government revenues via a long term sales contract with Thailand.  As with the financial industry, lobbying Congress has its benefits, allowing Chevron privileges denied to you and me and the other lesser members of our egalitarian society.  TransOcean (RIG) is also allowed to lease drilling rigs, at $210,000/day, to a project controlled by a company called Asia World, run by a man name Lo Hsing Han and his Harvard MBA educated son Steven Law.  Google that and ask US Dept of Treasury, Office of Foreign Asset Control, why RIG gets an exemption.  I am not criticizing the Burmese here;  I am calling America a hypocrite nation, however.

At present China is constructing two new pipelines from the Arakan (Yakhine) Coast on Burma’s western side to Kunming in China's Yunnan Province.  One line will carry Burmese natural gas;  the other will carry oil obtained from the Middle East, enabling China to bypass the dangerous Straits of Malacca and save 14-20 days shipping costs.  Burma will reap billions from this, despite the odd fact that 35% of its standing army will be involved in guarding the two lines. India just paid $1.4 billion for gas exploration rights in an offshore block off Yakhine and for a 12.5% stake in the twin pipelines.  Of course that’s small money for a hedge fund type who bet on TBTF in America, but it’s enough to make it boom time in this all but bankless society.

Situated between the two largest populations on Earth---China and India---both of which are hungry for resources, has undoubtedly benefited Myanmar and helped it pass through the crisis the rest of the world experienced full bore.  Still, the other thing that helped it avoid financial calamity was its lack of banks, because people were always forced to pay as they went.  Lack of banks and insurance does not prevent dealmaking or trade, it just means that it must be self-financed and self-insured.  Projects are carried out only when they are paid for up front, and if a project fails, the loss is born by the owner.  Goods are moved with the acceptance that losses are possible, but goods are still moved, potential loss factored in to prices.  There’s trucks on the highway carrying manufactured goods, produce, and people.  Homes get built, as do office buildings, restaurants and shopping centers.  People only buy what they can afford because if they cannot afford it, nobody will sell to them.  Other than neighborhood loan sharks who charge upwards of 5% per month, there is almost no debt. Growth comes only from what one can pay for in the here and now.  That encourages saving, though most savings are of the cash-under-the-mattress variety. Business still gets done.  Banks can be an aid, but they are not a necessity.  Eating and having shelter are necessities, and these will happen with or without banks, whether it's in Burma or America.

In the end, rather than shift risk around the economy so that it eventually ends up in the hands of those least able to weather it (AIG), risk stays with the risk taker in a bankless/insurance-less world.  People, or firms, do not impose their own burdens or ineptitude on to others.  One might argue it’s a better form of capitalism.  It is certainly more fair than you and me paying for AIG’s FP Desk stupidity.

The Greeks used to say “everything in moderation”, though the last few months have shown the world that that belief is as decayed as the frescoes on the Parthenon (except for the ones ‘liberated’ by Lord Elgin).  Humans, if given the chance, will forever shy away from moderation.  Too much is never enough. Banks may occasionally do a little bit of God’s work in congregating and allocating capital, but they do much more of the devil’s work.  Bank profits come from Oscar Wilde-ing society (“the only thing I cannot resist is temptation”), whether it is in the form of indebted consumers or customers chasing yield (these are the ones Blankfein, in a bold faced lie in front of a Congressional hearing, called “sophisticated investors”.).  Easy credit encourages people to over consume, and over consumption always leads to obesity, either in body or in debt.  Americans are textbook examples of both:  fat and indebted.  They are addicted to immediate gratification, so much so that it is almost held up as entitlement.  The junkie, however, does not get rich;  the pusher does.  If the pusher becomes rich enough, he eventually owns society.

Banks also over consume, in that they continue to rope in consumers and institutional customers until the bank itself becomes obese.   Unbridled greed, or uncontrolled appetite, as we have come to learn all too well, leads to Too Big to Fail.  No limits on the consumer leads to no limits on the banks which then leads to the dire situation in which we find ourselves now.  Indebted consumers, however, lack the ability to manipulate our democracy.  Bankers do not.  That is why Goldman Sachs get bailed out and why you and me must pay for it. 

The Burmese, whose society lacks this negative feedback loop, are puzzled by what happened to us.  Exploding debt?  What’s that?  For them , it is buy what you need or want only when you can afford it.  Given the chance they would have become like us.  That lack of opportunity saved them from what we now have.

A change of lifestyle, necessitated by a sudden change in a society where debt is almost impossible to obtain, would not be easy for spendthrift Americans, but living on a pay-as-you-go basis imposes a kind of discipline most Americans need.  It would hurt, but it could be done.  Losing Bank of America, Goldman Sachs, JPMorgan, Citibank and Wells Fargo would not have destroyed America, though it would have given a kick in the teeth to Lloyd and Jamie and their ilk. Like the Burmese now do, however, we would have survived and found a way to deal with the new reality.  We might even be better off, rather than having to pay off---and having our offspring continue to pay off---the mistakes of the Blankfeins and Dimons and Fulds and Mozilos and McMansion buyers.  We will never know, because the powers that be did not allow us to see that alternative.  They tried to scare us, then ignored the vehement public opposition to TARP and passed it anyway.  And some criticize Burma for a lack of democracy!  Congress and the powers that be did not allow big bank failure, because for them the alternative would have been horrible in lost bonuses and lost contributions.  For the rest of us, we may well have been better off.  At the very least, we wouldn’t be working until May each year to fund, via our taxes, the bonuses and lifestyles and re-election campaigns of those who blew it.

Another plus is that if we as a society jumped off the over consumption bandwagon for a while, we might have had time to rediscover each other, which might also have necessitated that we all develop personalities again.  I'll end this segment with a curious observation.  I am two days out of Yangon at this moment and in Tokyo.  In Yangon I often take a break in a local tea shop, full of crowded tables where people are chatting, joking, romancing and just passing time with others of the same species.  In Tokyo today, which is a society very much like the US, I sat in a Starbucks and saw twenty people, all sitting alone, playing with their laptops, iPods, iPhones, Kindles and assorted other gadgetry that allows them to exist alone in their own soul-less world.  Is that what we really want?

If you wish to continue reading, it gets a little fluffy and travelogue-ish here, but you might find it amusing.  What the heck, have a read.

Now banks do exist in Burma, they just are not like any bank you know.  The best description is that they are glorified Western Union offices, since almost all bank business involves domestic cash money transfers.

I should mention here that Burma is a cash society.  Credit cards were tried for a period in the earlier part of the decade, but were just as quickly eliminated.  If you come here, forget your Visa, Mastercard or Amex;  they are not accepted.  All purchases are cash and none is on credit.  That includes real estate and cars. If you want to buy a house, you deliver the purchase price in physical cash to the seller.  The same thing for a car.

At first you might not think this is such a big deal, suspecting as you probably do that since Burma is a poor country (per capita income around $250/year), prices cannot be too high.  You would be wrong to think that, for two reasons.

The first reason is that up until very recently, the largest note in circulation in Burma was the one thousand kyat note (they just introduced a five thousand kyat note).  Converted to dollars, that makes the largest piece of fiat paper in circulation the equivalent (at current black market rates) of one US dollar.

The second reason you would be wrong is that both real estate, and car prices in particular, are quite high.  Real estate appreciation over the last seven years in some of the most sought after parts of the former capital city of Yangon (the new capital of Naypyidaw is only a few years old) approaches five thousand percent.  That is, a piece of land that sold for $100K in 2003 now sells for $5 million.  Car prices are worse, impacted by import restrictions that keeps the supply of vehicles significantly less than the demand.  How much below demand?  Try this:  a 1981 Toyota Corolla Station Wagon in white (until 2000 this vehicle represented approximately 80% of all road going passenger vehicles) currently sells for US$20,000.  A 1992 Toyota Mark II, the present fan favorite, fetches US$46,000.  Top-of-the-line Toyota Landcruisers recently went for US$540,000, though prices have come down a bit as of late.  These prices are not for pristine, cherry examples;  these are for all of a given make/model/year, as if it were a commodity.  The lack of internal upholstery, bare metal roofs and floors, hand-held windshield wipers operated by a long-armed front seat passenger (me)...none has any impact on the value.  One is as another.  My typical ride has four of six windows, which may or may not open, little or no side upholstery, and a hole in the floor through which I can see the passing road.  In some of them zero to sixty times are still being determined.

Banks do not make car loans, though one bank tried in the past and went bust.  Lessons were learned from that, as they should be in a capitalist system.  A car buyer must ferry the bales of cash to the seller before he or she can take delivery of the chariot, which creates a kind of barrier to entry for car ownership in that one almost needs to already own a car to carry all the cash required to buy one.

A real estate purchase is done the same way:  all cash, baled up and stuffed into the kind of nylon sacks migrant workers from developing countries carry their lives in when they return home.  Years ago another bank tried to introduce the concept of mortgage, or at least a home equity loan.  Many recipients did not know they had to repay, thinking that the loan was some kind of reward for owning a home.  (I guess Americans are not that much different from Burmese after all.)  That bank went bust, too.  Capitalism works if allowed to work.
A visit to the buildings known as banks is quite an experience, one from which I have yet to tire.  Some of the buildings are rather grand, while others look as if a good strong wind could bring the entire edifice down.  Inside one would be hard pressed to find a loan officer or even someone to open an account.  Indeed, I have never seen either one.  What they do have are facilitators who arrange for fund transfers, a slew of strong young men to lift the heavy sacks of money that get carried inside, and a gaggle of barely-out-of-their-teens women behind the counter, each manning a bill counting machine.

The banks are crowded and the atmosphere is hectic.  A flat panel TV hanging precariously from the ceiling blares out the latest local music video.  Children play around on the floor.  Bales of money are tossed about like medicine balls, often over the heads of the rows of customers sitting on primary color plastic chairs awaiting word that their money either arrived or was successfully sent.  There are no formal lines, but the crowd gushing around the counters seems to follow a natural law that allows first come first served.  Forms are filled out, ID cards shown, the obligatory stamps and signatures obtained, and the money is sent, arranged via a telephone call with the receiving branch.  A truck arrives in the front, and five barefoot young men pile out and begin tossing sacks of money passed the security guards into the bank lobby.  Customers make room, though there is not much free space.  Soon, the bags are ripped open and bales tossed on to the service desk, from which the women, faces smeared with yellow thanaka paste, then begin the long process of counting what might be fifty or even a hundred thousand pieces of fiat paper. If the money is part of a real estate deal, the number might be in the millions.  The whirr of the machines is constant, the women focused.  The scene has a simple beauty.

As the piles of money move from in front to behind the counter, a kind of makeshift furniture is formed which sometimes serves as a place for staff to sit and take a tea break.  Five money bricks for a seat, ten for a table.  When the money is counted, a receipt is given, and the customer walks out just in time for another truck of money to arrive.  It is mayhem.  Cacophony.  It certainly ain’t Bank Pictet, but it works.

Most of the banks have vaults where the excess from a day of inflows and outflows is stored.  Some banks do not have vaults.  I can only assume that with the denomination of the currency being as small as it is, it would take a robber so long to remove enough cash to make theft worthwhile, that by the time he finished, the work crew would be arriving for the new day and would catch him in the act.  It might also be that the people are pretty honest.

My favorite treat is to arrive early and watch the staff in banks where vaults do exist, unload cash into the counter area in preparation for customers’ arrivals.  In assembly line style, three or four men spread themselves out in a line, from vault to counter, and pile stacks of notes baled in thousand piece packs.  Ten of these packs are piled, but not bound, then tossed from man to man, bucket brigade style.  That’s $10K equivalent per toss, by the way.  In ten minutes perhaps a million dollars has been tossed from vault to floor, and not a single brick has been dropped.  Tinkers to Evers to Chance would play second fiddle to this display.  I seriously doubt Lloyd Blankfein could pull it off.  In things that excite and fire the soul, he is a man of lesser talents.

So there it is.  A world without banks.  It could have been us.