Savage Capitalism's Failure
Back in March, in a post called Savage Capitalism, I wrote the following.
A picture of what is really going on in the Shadow Banking System is beginning to emerge. It makes the coming slump much more troubling than those of the last 50 years. To begin with, we never had such large opaque pools of capital and derivatives before. The Growth of Credit Default Swaps (above) to more than $47 Trillion in the last two years is just one indication.
The Darwinian Laissez Faire world Alan Greenspan and Milton Friedman celebrated has failed us. We need to throw out our “End Of History” narratives that said the free market democratic capitalism represented the final step in political organization. I am not saying a command economy of the Fascist or Communist model is any solution. What I am saying is that we essentially need to reinvent capitalism in a way that tames the animal instincts that Ayn Rand (Greenspan’s intellectual mentor) celebrates.
Yesterday Larry Fink of Blackrock made a very clear statement that, “Any institution that manages over $5 billion should be regulated, whether it’s public or private, an insurance company, bank or private equity fund.”We have to bring the “shadow financial system” of off balance sheet SIV’s, hedge funds and private equity out into the light of transparency.
The second thing we have to realize is that the government will be a lot more enmeshed in the economy, not less. Rush Limbaugh and his band of brownshirts can rail all they want about “creeping socialism”, as this report from the frontline Republican Panic attack shows.
And Thursday, at a campaign town hall in Wisconsin, one Republican brought the crowd to its feet when he used his turn at the microphone to offer a soliloquy so impassioned it made the network news and earned extended play on Rush Limbaugh’s program.
“I’m mad; I’m really mad!” the voter bellowed. “And what’s going to surprise ya, is it’s not the economy — it’s the socialists taking over our country.”
Roubini makes clear some of the steps that will be needed. They all involve large sums of government investment.
a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
- massive and unlimited provision of liquidity to solvent financial institutions;
- public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
- a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;
- a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;
Fortunately as was evidenced by this morning’s oversubscribed Treasury Bill auctions, the world still wants to buy our government debt. The next twelve months will be very painful as America and the world rethinks what a fair economic system should look like. There will be lots of finger-pointing from Europe, Latin America and Asia towards the U.S. concept of capitalism and its role in the global recession we are about to enter. We need to be open to new ideas as to what the balance between markets and the public good actually is.
This seems like a great time to adopt the language of clear markets vs. dark markets, and abandon the language of ‘regulation’, which has proven to be problematic since it can just as easily lead to either.
‘Governance’, on the other hand, can find a moral basis for entering just about any market if its intent and effect is to move markets from the dark into the light, where price signals are clear indicators of underlying economic reality, and market participants are free to respond accordingly.
In my view, the ‘Shadow Banking System’ could not have been more aptly named.
This seems like a great time to adopt the language of clear markets vs. dark markets, and abandon the language of ‘regulation’, which has proven to be problematic since it can just as easily lead to either.
‘Governance’, on the other hand, can find a moral basis for entering just about any market if its intent and effect is to move markets from the dark into the light, where price signals are clear indicators of underlying economic reality, and market participants are free to respond accordingly.
In my view, the ‘Shadow Banking System’ could not have been more aptly named.
I’ll say it again: This isn’t a recession.
As I recall, today the market went down 650, then up 520, then down further, then up 770, then down 330. The market closed roughly unchanged (in comparison to the other days this week anyway), but only in the sense that a man is unchanged after chugging 15 beers, then 10 gallons of coffee, then two bottles of whiskey, then a hanful of amphetamines.
This is economic manic depression, and the manic part will drop out soon. This is October 1929, at least. Banks will start to fail as credit illiquidity continues, and then more banks, and then more banks, and then say goodnight, Dick. FDIC insurance won’t mean much when all of the banks are dead. I’m already hearing that big retailers won’t even be able to stock their stores for Christmas because there’s no commercial paper to finance moving the inventory from the warehouses to the stores. That means big retailers go down, which means a lot of people are thrown out of work, which is just that much more weight thrown onto the camel’s bank.
I still think we’ve seen only the tip of the iceberg as far as the toxic debt goes. I’m reminded of the scene in Catch-22 when Yossarian is patching up a leg wound on Snowden and thinks he’s doing OK, then he pulls Snowden’s jacket open and his insides come slithering out in a heap.
Bernanke and Paulson are crouched over Snowden, and neither of them wants to peek inside of that jacket.
As always, I sure hope I’m wrong.
I’ll say it again: This isn’t a recession.
As I recall, today the market went down 650, then up 520, then down further, then up 770, then down 330. The market closed roughly unchanged (in comparison to the other days this week anyway), but only in the sense that a man is unchanged after chugging 15 beers, then 10 gallons of coffee, then two bottles of whiskey, then a hanful of amphetamines.
This is economic manic depression, and the manic part will drop out soon. This is October 1929, at least. Banks will start to fail as credit illiquidity continues, and then more banks, and then more banks, and then say goodnight, Dick. FDIC insurance won’t mean much when all of the banks are dead. I’m already hearing that big retailers won’t even be able to stock their stores for Christmas because there’s no commercial paper to finance moving the inventory from the warehouses to the stores. That means big retailers go down, which means a lot of people are thrown out of work, which is just that much more weight thrown onto the camel’s bank.
I still think we’ve seen only the tip of the iceberg as far as the toxic debt goes. I’m reminded of the scene in Catch-22 when Yossarian is patching up a leg wound on Snowden and thinks he’s doing OK, then he pulls Snowden’s jacket open and his insides come slithering out in a heap.
Bernanke and Paulson are crouched over Snowden, and neither of them wants to peek inside of that jacket.
As always, I sure hope I’m wrong.
Shucks. “camel’s back,” not “camel’s bank.”
I have banks on the brain.
Shucks. “camel’s back,” not “camel’s bank.”
I have banks on the brain.
Calling all informed optimists (if that’s not a contradiction in terms these days) to provide counterpoint to Dan’s dire prognosis? I’m not arguing w/ Dan here, just looking for an alternate and less Depressing take on things. JT Himself seems to think we’re closer to a bottom than this, anyone else?
Calling all informed optimists (if that’s not a contradiction in terms these days) to provide counterpoint to Dan’s dire prognosis? I’m not arguing w/ Dan here, just looking for an alternate and less Depressing take on things. JT Himself seems to think we’re closer to a bottom than this, anyone else?
Anybody who can provide information to lessen my gloom has my eyeballs to command, I assure you.
Anybody who can provide information to lessen my gloom has my eyeballs to command, I assure you.
Dan- About half of what you say will probably come true in my view. In other words, quite a few small and medium sized banks will go bust. But FDIC will cover the deposits and leave you with a bigger stronger bank. Thats why Citibank, JPM Morgan/Chase,Wells Fargo, and Bank of America are basically dividing up the spoils , so to speak.
On the retail side, many stores-both chain and Mom and Pop-many restaurants and bars will close. There will be fewer malls. Online retailers will flourish as people shop from their couch.
As I’ve said before, this is all dependant on the government playing a much larger role in the economy, but jumpstarting the next generation of American technology manufacturing in GreenTech. In others words, this is the best case scenario.
Dan- About half of what you say will probably come true in my view. In other words, quite a few small and medium sized banks will go bust. But FDIC will cover the deposits and leave you with a bigger stronger bank. Thats why Citibank, JPM Morgan/Chase,Wells Fargo, and Bank of America are basically dividing up the spoils , so to speak.
On the retail side, many stores-both chain and Mom and Pop-many restaurants and bars will close. There will be fewer malls. Online retailers will flourish as people shop from their couch.
As I’ve said before, this is all dependant on the government playing a much larger role in the economy, but jumpstarting the next generation of American technology manufacturing in GreenTech. In others words, this is the best case scenario.
Dan- About half of what you say will probably come true in my view. In other words, quite a few small and medium sized banks will go bust. But FDIC will cover the deposits and leave you with a bigger stronger bank. Thats why Citibank, JPM Morgan/Chase,Wells Fargo, and Bank of America are basically dividing up the spoils , so to speak.
On the retail side, many stores-both chain and Mom and Pop-many restaurants and bars will close. There will be fewer malls. Online retailers will flourish as people shop from their couch.
As I’ve said before, this is all dependant on the government playing a much larger role in the economy, but jumpstarting the next generation of American technology manufacturing in GreenTech. In others words, this is the best case scenario.
Sorry Chris, not me. I’m thinking Dan is right on the money here. There has to be some logical reason for me to believe in a recovery and hope is not enough. The financial bubble was built on the hope that crazy leverage would cough up super returns before the magnified risk came home to roost. We can’t go back to believing once we’ve seen how false the premise was. In order to recreate all that “wealth” we’d need to believe enough to pretend we didn’t see what a house of cards it was. Face it, your house was never really worth what you thought it was. Nor was your mortgage backed fund. Nor your CDO based hedge fund.
The light I can see at the end of the tunnel is two-fold. First, change always causes opportunity. Catastrophic change will present plenty of opportunities to be taken advantage of if you stay on the ball. (At least that’smy hope
Second, while this mess doesn’t lead toward any particular result, the shakedown period and peoples reactions give us a window of opportunity to bring about real change in our society. Like the high cost of oil making alternative energy relatively affordable, the collapse of the finance bubble gives us the opportunity to reinvent.
This crisis makes many changes I’m in favor of more palatable and therefore more likely. Things like reducing consumerism and pushing for more of a balanced GDP with local production. Like reducing exurban sprawl and eating local foods to reduce both transport costs and as a side-benefit pollution. We can now look at positive changes in corporate governance and ways to reduce the inherent fascism of a life form with no standard lifetime and no conscience (the corporation).
I could think of a hundred opportunities here, from how we as a nation treat government, science, energy, architecture, investing, education and health care. This kind of crisis opens the door to big thinking. And potentially to big changes.
Sorry Chris, not me. I’m thinking Dan is right on the money here. There has to be some logical reason for me to believe in a recovery and hope is not enough. The financial bubble was built on the hope that crazy leverage would cough up super returns before the magnified risk came home to roost. We can’t go back to believing once we’ve seen how false the premise was. In order to recreate all that “wealth” we’d need to believe enough to pretend we didn’t see what a house of cards it was. Face it, your house was never really worth what you thought it was. Nor was your mortgage backed fund. Nor your CDO based hedge fund.
The light I can see at the end of the tunnel is two-fold. First, change always causes opportunity. Catastrophic change will present plenty of opportunities to be taken advantage of if you stay on the ball. (At least that’smy hope
Second, while this mess doesn’t lead toward any particular result, the shakedown period and peoples reactions give us a window of opportunity to bring about real change in our society. Like the high cost of oil making alternative energy relatively affordable, the collapse of the finance bubble gives us the opportunity to reinvent.
This crisis makes many changes I’m in favor of more palatable and therefore more likely. Things like reducing consumerism and pushing for more of a balanced GDP with local production. Like reducing exurban sprawl and eating local foods to reduce both transport costs and as a side-benefit pollution. We can now look at positive changes in corporate governance and ways to reduce the inherent fascism of a life form with no standard lifetime and no conscience (the corporation).
I could think of a hundred opportunities here, from how we as a nation treat government, science, energy, architecture, investing, education and health care. This kind of crisis opens the door to big thinking. And potentially to big changes.
Sorry Chris, not me. I’m thinking Dan is right on the money here. There has to be some logical reason for me to believe in a recovery and hope is not enough. The financial bubble was built on the hope that crazy leverage would cough up super returns before the magnified risk came home to roost. We can’t go back to believing once we’ve seen how false the premise was. In order to recreate all that “wealth” we’d need to believe enough to pretend we didn’t see what a house of cards it was. Face it, your house was never really worth what you thought it was. Nor was your mortgage backed fund. Nor your CDO based hedge fund.
The light I can see at the end of the tunnel is two-fold. First, change always causes opportunity. Catastrophic change will present plenty of opportunities to be taken advantage of if you stay on the ball. (At least that’smy hope
Second, while this mess doesn’t lead toward any particular result, the shakedown period and peoples reactions give us a window of opportunity to bring about real change in our society. Like the high cost of oil making alternative energy relatively affordable, the collapse of the finance bubble gives us the opportunity to reinvent.
This crisis makes many changes I’m in favor of more palatable and therefore more likely. Things like reducing consumerism and pushing for more of a balanced GDP with local production. Like reducing exurban sprawl and eating local foods to reduce both transport costs and as a side-benefit pollution. We can now look at positive changes in corporate governance and ways to reduce the inherent fascism of a life form with no standard lifetime and no conscience (the corporation).
I could think of a hundred opportunities here, from how we as a nation treat government, science, energy, architecture, investing, education and health care. This kind of crisis opens the door to big thinking. And potentially to big changes.
John Kelly- The things you mentioned in your last three paragraphs are all the kind of thing that could help us rebuild a savings/investment economy rather than a debt / consumption economy.
And then it will take the government to invest in the infrastructure projects that can put our country back to work.
John Kelly- The things you mentioned in your last three paragraphs are all the kind of thing that could help us rebuild a savings/investment economy rather than a debt / consumption economy.
And then it will take the government to invest in the infrastructure projects that can put our country back to work.
Jon – Exactly my hope!
Jon – Exactly my hope!
Jon – Exactly my hope!
One thing that must be stressed, because it requires the long-term view, which is always hard to hold in times of immediate crisis and panic.
Growth is not the solution to the problem. Growth is the problem.
We can’t grow our way out of this, because already we are drawing more out of the Earth than the Earth is providing; we have been doing this for a long time, and the withdrawals have been accelerating.
‘Economic stimulus’ is the language of growth, unfettered growth, infinite growth.
One thing that must be stressed, because it requires the long-term view, which is always hard to hold in times of immediate crisis and panic.
Growth is not the solution to the problem. Growth is the problem.
We can’t grow our way out of this, because already we are drawing more out of the Earth than the Earth is providing; we have been doing this for a long time, and the withdrawals have been accelerating.
‘Economic stimulus’ is the language of growth, unfettered growth, infinite growth.
Pond- I agree that our fixation with growing GDP annually is self-defeating. However, some sectors (GreenTech, digital commerce and distribution) will continue to grow and become more efficient, so that general standards of living could be maintained at lower rates of GDP growth.
Pond- I agree that our fixation with growing GDP annually is self-defeating. However, some sectors (GreenTech, digital commerce and distribution) will continue to grow and become more efficient, so that general standards of living could be maintained at lower rates of GDP growth.
Pond- I agree that our fixation with growing GDP annually is self-defeating. However, some sectors (GreenTech, digital commerce and distribution) will continue to grow and become more efficient, so that general standards of living could be maintained at lower rates of GDP growth.
pond – I’m looking for growth in different areas than we have in the past. Even different conceptually – like quality of life versus quantity of money. But I don’t really see how to reduce our draw on the Earths resources without serious population decline. And somehow I can’t even see an old mean cynic like me suggesting how to start on that one. I think we’ll just have to reduce and conserve and push forward in new research and eventually get back to my early 60′s dreams of working to move beyond Earth.
pond – I’m looking for growth in different areas than we have in the past. Even different conceptually – like quality of life versus quantity of money. But I don’t really see how to reduce our draw on the Earths resources without serious population decline. And somehow I can’t even see an old mean cynic like me suggesting how to start on that one. I think we’ll just have to reduce and conserve and push forward in new research and eventually get back to my early 60′s dreams of working to move beyond Earth.
Things like the Great Pacific Garbage Patch, rising sea levels, more severe weather, our growing mounds of nuclear waste, and now our renewed push to expand the number of nuclear plants around the world, and therefore the increased chance of more Chernobyls (or worse), along with probably several other nasty surprises we haven’t heard about yet, will, I’m pretty sure, do a pretty good job of taking care of the population problem over the coming decades. Even if we don’t see any horrendous global wars.
The population of exclusive offshore money havens will continue to swell, however.
Things like the Great Pacific Garbage Patch, rising sea levels, more severe weather, our growing mounds of nuclear waste, and now our renewed push to expand the number of nuclear plants around the world, and therefore the increased chance of more Chernobyls (or worse), along with probably several other nasty surprises we haven’t heard about yet, will, I’m pretty sure, do a pretty good job of taking care of the population problem over the coming decades. Even if we don’t see any horrendous global wars.
The population of exclusive offshore money havens will continue to swell, however.
Things like the Great Pacific Garbage Patch, rising sea levels, more severe weather, our growing mounds of nuclear waste, and now our renewed push to expand the number of nuclear plants around the world, and therefore the increased chance of more Chernobyls (or worse), along with probably several other nasty surprises we haven’t heard about yet, will, I’m pretty sure, do a pretty good job of taking care of the population problem over the coming decades. Even if we don’t see any horrendous global wars.
The population of exclusive offshore money havens will continue to swell, however.
There is the Gaia theory…that Mother Earth will protect herself from disastrous decline. That kind of predicts a sort of population control that is drastic and inevitable if we don’t head it off ourselves. Populations can only grow to a certain point and be healthy before Malthusian issues arise, before high density provides perfect conditions for plagues, and before the rats just go crazy…we being the rats.
There is the Gaia theory…that Mother Earth will protect herself from disastrous decline. That kind of predicts a sort of population control that is drastic and inevitable if we don’t head it off ourselves. Populations can only grow to a certain point and be healthy before Malthusian issues arise, before high density provides perfect conditions for plagues, and before the rats just go crazy…we being the rats.
There is the Gaia theory…that Mother Earth will protect herself from disastrous decline. That kind of predicts a sort of population control that is drastic and inevitable if we don’t head it off ourselves. Populations can only grow to a certain point and be healthy before Malthusian issues arise, before high density provides perfect conditions for plagues, and before the rats just go crazy…we being the rats.