Subprime mortgages are being blamed as the culprit in the current financial crisis, but are they just the canary in the coalmine? It's looking more and more like the real problem is that we are bankrupt as a nation and have been for some time. If this is the underlying cause of the meltdown, the problem is solvable in the long run: just spend less. But there may be a root cause more systemic than just spending beyond our means, a cause so fundamental it threatens to bring down the whole Ponzi scheme which is the American financial system--the global system, too, for that matter.
To understand what this cause may be we have to consider the implications of the financial mechanism at the heart of the capitalist system: the charging of interest for the use of capital. Only in a constantly growing economy can such a system work. Consider a manufacturer of widgets who borrows $100 to expand his business (or, to make it more realistic, use any multiple thereof). Let's assume he is charged 10% interest for the use of his creditor's capital. Let's assume further that widgets sell for a dollar each. If the manufacturer is successful and turns his $100 investment into 200 widgets, he can not only repay the loan but invest his profit in further widget production. Thus, his business grows and grows, and the production of widgets cascades until the economy is awash in widgets. (Fractional reserve banking - the time-honored practice under capitalism of a bank lending out more than it holds in deposits - has the effect of turning the cascade into a Niagara).
But what if the manufacturer is not so successful? Unless he is able to turn his $100 investment into the production of at least 110 widgets, he won't be able to repay his loan. He goes bankrupt and his creditor (be it a bank, stockholders, or his Aunt Sally) is out whatever he is unable to repay. This may in turn hamper his creditor's ability to repay his creditors, initiating a cascade of bad debts that can turn into, well, the tsunami we are experiencing today. (The manufacturer might have an out if he is able to manufacture at least one hundred widgets with his $100 investment and the price of widgets has risen to $1.10 by the time his loan comes due, but, on a societal level, inflation as the solution to a financial system based on charging interest for the use of capital is just a shell game shifting the pea of insolvency from one group to another, a sleight of hand lethal to the economy in the end.)
Hence, the success of an economy based on capitalistic finance is dependent on constant growth. Not surprisingly, that's what we've seen over the last 200 years: unprecedented economic growth, admittedly with some bumps along the way. But can the American economy, or, more pertinently, the global economy, keep on growing forever? Can the sort of growth we've experienced over the last 100 years be repeated over the course of the next hundred? Seems unlikely in a finite world, a world in which resources have a limit.
Could it be that we have reached the limits of growth? Could this - not some transient housing bubble, not some risky bets made by unscrupulous high-rollers, not even the profligate ways of us Americans - lie at the heart of the current crisis? If so, no bailout scheme - no matter how wisely or justly crafted - is going to rectify the situation. It's going to take a complete restructuring of our financial system, the abandonment of a system based on the charging of interest and the adoption of a system promoting stability, not growth. But to accomplish this quasi-religious transformation may require the Church re-discovering that hallowed precept it adhered to through the first 1500 years of its existence: that usury is a sin.
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