Voices are heard these days calling for a fundamental restructuring of the global financial system.  I suspect that what most people ultimately want is to return to a system that is familiar – the system that, when times were good, was the engine of growth we have known since the Second World War.  This is the same system, however, that encouraged the towering cathedral spires of debauched derivatives and wealth zealotry that came crashing down last year.  The ruins of those lofty towers continue to crumble further still, and I doubt that the rubble has even now settled as far as it is going to.

     People want things to “go back.”  They want their money back.  They want to regain their security.  Markets seek restored confidence.  Bankers wish to rebuild.  Governments strive to return to global stability and order.  Going back is not any kind of restructuring, however – nor is continuing on the same path, or even the same sort of path.  Old paths just lead in old directions, too – old origins, old destinations.  If the world is serious about fundamental change, try this:  rethink the fundamental concepts of “asset” (activo) and “liability” (passivo) right down to their subterranean foundations.  In fact, rethink the very accounting system that underpins their conceptualization as a duality that must be recorded simultaneously – otherwise known as the double-entry bookkeeping (DEB) method.  This is a very tall order, indeed, but so is finding a new global financial system.  A new system is not going to come casually.  I suspect that if we are to achieve such a paradigm shift, it should begin with vocabulary.  To this end, I am going to abandon “asset” and “liability”, and go for something simpler and more visceral:  “good” and “bad.”  Those who are wiser than me can work on the fine tuning later.

            Good is something I want – cash in my hand or a thing completely owned (paid for).

            Bad is something I don’t want – a debt or an outstanding loan.

     Here’s a change.  Accountants and financial managers want to see an outstanding loan recorded on the right-hand (the “plus”) side of the balance sheet (under “receipts”, which I would prefer to call “optimistic wishes”) because the service on that loan represents guaranteed future income… a “plus” thing.  This they do even while simultaneously debiting the amount of the loan from their cash on the left-hand side – a more intuitive recognition that lending is intrinsically a “minus” thing.  In order to keep this brutally simple, let’s gloss over the issue of provisions.  Two problems with the old thinking:  1) the future income is not guaranteed;  2) the notion that the transaction is good for the lender while it remains unpaid is fundamentally flawed, because…

            1.  If I have a euro in my hand, it is good (surely this requires no convincing)

            2.  If I lend my euro to you, it is bad (for me), because…

                        a.  I no longer have my good thing

                        b.  I may never get my good thing back.

     Consequently…

3.      There is no “plus” concept for me attached to lending you my euro.  You have a plus.  You have my euro.  I am in the red, pure and simple.  Forget the future.  I’m down, you’re up.

     DEB is seriously challenged here, and I understand the grumbling that I can hear even in advance.  However, the key word is “challenge,” and launching a new financial system on a planetary scale has challenges – and we are challenged to think in the unknown zone, outside of the box if we are serious about finding something new.  I suspect that it will be necessary to convert DEB into something else (the grumbling grows louder).  I acknowledge the grumbling and remind you of the challenge.  No one said that changing the planet’s financial order would be easy.

     Back to the illustration and our excursion into the unknown zone – the “badness” for me disappears only when my money is returned to me in full.  The hope that you will pay me back is simply not something to record as a “plus” – the repayment is – the restoration of my money is entirely good.  Until it is restored it is bad, and my world is not in balance – so why should my books be?  Think of it this way:  my money in someone else’s pocket is just not a good thing, and I gain no comfort from the “possibility” (i.e. contract) that my debtor will return my money – even with interest (that, too, is only a “maybe”).  I breathe easy only when my money is back in my hand.  Then, and only then, balance has returned to my finances and my world is good again.

     In the DEB way of things, however, my loan to you is an asset (DEB word – not mine), and financial managers trade the obligation as if it were something desirable or fully paid for.  It is neither.  Whether bundled, or bent out of recognizable shape in some opaque derivative deal, or even in its simplest, light-of-day form, an outstanding loan should never be confused with a good thing – not ever.

     Look at it another way.  When a bank lends money, it looks into its crystal ball and sees principal and interest streaming back over a fixed period.  Good.  If I lend money I just see my money in someone else’s hand.  I see risk.  I already regret this.  Bad.  I think we need to find a system of accounting that emphasizes my pessimism and downplays the bank’s rosy buoyancy – is it wrong to say “the bank’s daydreaming” in light of recent history?  If I make an error in doing this, at least I err to the side of caution and investments that don’t evaporate.  At the moment, DEB accountants record hope (that the loan will be repaid) on the right-hand page, along with cash.   For me, that is counting the chickens before they hatch.  A friend of mine from Missouri once expressed this long-known peril slightly differently – he said, “collect your money in one hand and your hope in the other, and see which one fills up first.”

     If this conservative (I might even suggest “prudent and pragmatic”) reasoning does not resonate with you, I challenge you to try to make it resonate, and to help build this (re)conceptualization into the restructuring of the world’s economic order.  I know that it runs contrary to your familiar thinking, but if the fundamental nature of assets and liabilities – and the way that they are treated in accounts – remains unchanged, the world’s finances will simply go back, restore, rebuild, and return to the earlier, unsustainable house of cards.

     Bankers and regulators and accountants of the world… attention please.   Keep lending money – yes – but recognize (somehow) and adopt accounting methods that (somehow) represent your loan as bad things for you until they are paid off.  There is room for duality here.  The loan is bad for the lender but good for the borrower.  How to translate this into ledger entries that make sense to auditors without falling back on the conventional yin/yang entries… I confess that I haven’t got that worked out yet, even to my radical, institution-challenging satisfaction.  I hope that those who are wiser than me will give some thought to the following, too:  as brilliant (and obvious?) as DEB may seem, has it really served us that well?  Look what these accounting practices allowed to occur as regulations were relaxed in recent years.  I wonder if double entry would be better described as “two faced?”

     Critics may say that double-entry ledgers have been around a lot longer than I have (about five centuries, in fact) and that my visualization of assets and liabilities does not reflect the complexities of the real world – that it is a simple view coming from a simple mind.  My reply to this is… yes – precisely.  Complexity is what got us here, by the way.  Simplicity might get us out.

     And about simple… and the idea of “building” a new “structure”… an architectural metaphor is appropriate.  Consider the simple, solid Doric order of the Parthenon vs. florid, gothic exuberance – Chartres, Cologne cathedral or Milan.  Both styles are beautiful, even I agree on that, but from the standpoint of comprehension and transparency, give me the Parthenon.  Recall the origin of the name:  Athena Parthenos (Athena the virgin – parthenogenesis, virgin birth).  In mythology she was not born the usual way, but sprang from the head of her father (Zeus) fully grown and wearing her armor.

     I suggest that the world needs to find a parthenogenic structure for the new financial order – one that springs, like Athena, fully grown from the intellect – not the emotions – and does not “grow” further after birth into gothic intricacies and soaring spires, out of sight from where we stand down on Earth.  Let this new structure be, like Athena, well armored from the start – protected even to the point of prescribing the ponderous mobility of the hoplite.  The alternative, which was unfettered freedom (loose regulation and no regulation), led matters to soaring new heights – but the higher these matters went, the further they fell.  Let it be simple in its plan and embellishment, and like Athena’s temple on the Acropolis, let it derive its strength and beauty from its pure simplicity – clean lines, straight and certain – right angles – regular spacing – all the columns and elements in neat, predictable rows.  The elaborate gothic style, reaching ever higher into the clouds, with its convoluted twists, dazzling details, and myriad hiding places is the wrong model.

     Bankers and regulators and accountants of the world… please do hammer out a new financial system for the world, and please fashion it on a new distinction between good and bad, and use the right model – the trim lines of the Parthenon’s Doric order.  If this means changing the world’s bookkeeping practices along with redefining good and bad… so be it.  Join me out here in the unknown zone and think some unknown thoughts.

     One other thing to consider… Athena was the goddess of wisdom.  Perhaps her time has come around again.