I wonder why people use leverage in the financial world. Why do they borrow to make investments they couldn’t normally make? While other ethical, legal and business systems in the world may disagree, it’s not abnormal to borrow money for business here. So why do I say it’s the root of a loss of integrity?
I’m not saying borrowing is bad all together. There’s good borrowing too. In any economy that’s big enough to create things that person couldn’t create by himself in a brief period of time, someone will need to borrow someone else’s excess capital in order to complete the project. We can tell the difference between good borrowing and bad borrowing by looking at the goal of the borrowing. Are we borrowing to consume or to create. Borrowing to consume may be an emergency necessity, but as a way of life it’s unsustainable.
Handled correctly, borrowing and leverage are tools to create something. They are powerful tools as they let people have the time and resources to create what they could not otherwise have done. As with any tool, handled well, leverage can be a force for creation; handled poorly, it can be a force of destruction. A backhoe is an amazing tool for clearing land and used skillfully by a trained operator, can greatly aid in construction. Can you imagine the havoc if everyone drove a backhoe, even the people who weren’t trained to? That’s what’s happened with leverage. Our society has taken a tool that is supposed to be handled by a few expert tool handlers in order to construct bigger things, and, instead, has given everyone the ability to borrow other people’s money to consume more without constructing anything.
With a few people using leverage to construct projects in their area of expertise (building factories, starting companies, etc) the risk was manageable. A few of these experts would make mistakes and fail. They would go bankrupt and the lenders would not get all their money back. That’s the nature of risk. Some people lose and end up stressed, but others don’t. But with everyone using leverage the risk has become systemic. It’s all over and there’s nowhere safe.
I want to be clear that I’m not blaming people who borrowed money to buy a house. When I’m talking about excess leverage I’m talking about Wall Street brokers creating 40 to one or 100 to one leverage. And since they all did it, they all borrowed money to lend to each other. Instead of the normal person’s 5 to one leverage when they buy a house, these firms have leverage that’s so high that they have to get out at the first sign of something being wrong.
So what’s this got to do with addiction and the brain? Our brain is designed handles acute stress differently than chronic stress. Acute stress is not problem. Chronic stress, on the other hand, is a big problem. Our brain interprets all chronic stress as famine. That makes sense because it’s the only source of chronic stress that our ancient ancestors faced. So when bankers are living on a knife’s edge, and they know that if the brokers they lent money to lose even a little they’ll go bankrupt and if they do the bank won’t be able to pay the people it borrowed the money from in the first place, everyone in the system is living in chronic stress. I know several people who work in and around Wall Street and it’s been this way for a long time.
What happens in chronic stress is that the stress response blunts the brain’s ability to feel the dopamine release of reward. To feel good it needs more and more dopamine signal. The midbrain reward system doesn’t work right and the pre-frontal judgement area doesn’t get enough signal to work right. We become more motivated by hunger and less by rational thought. We become selfish and unthoughtful. It’s how we’re designed to act in a famine to protect our own lives.
So to bring these two posts to a conclusion, over use of leverage creates situations of chronic stress. In chronic stress, the very thing we need to act rationally becomes less powerful and baser needs gain in strength. We feel hungry and become greedy. We worry that what we’ll have will never be enough and we need to get more and more. Integrity goes into the background to some degree and people will increase leverage more and more, to get more and more in an unsustainable cycle. I’m not just making this up, the cycle has repeated itself again and again in history. Hopefully, if we understand that this is not a problem of “bad” people, but of humans under stress, we’ll make the systemic changes we need to prevent it from happening again.
© Howard C Wetsman MD FASAM