Wednesday, August 13, 2008

Pseudo-Capitalism Again


It's the wee and the weak condemned to be fair. The modern pseudo-capitalists are protected from such inconvenient realities. Their profits are likewise safe.

I don't have to be an expert on this, just another blowhard blogger. There's expertise aplenty.

Start with stockbroker and founder of Greenlight Capital David Einhorn. His April speech Private Profits and Socialized Risk has been in the media (like the NYT) raising and finely sketching the outrageous issues.

We see his points too clearly...and repeatedly. My high eyebrows a few years ago seeing taxpayers paying to dismantle and clean up nuclear plants on which private investors had scooped in high-interest, government secured bonds are nothing compared to now. Taxpayers (and two of three U.S. corporations pay any taxes) are looking at billions, maybe trillions, of bail-out bucks for companies who have made bad investments.

As Einhorn said, "If market participants accept as an article of faith that the (Federal Reserve) will bail them out, it reinforces risk-taking without the need for credit analysis. As night follows day, it is certain that in the absence of tremendous government regulation this (Bear Sterns) bailout will lead to a new and potentially bigger found of excessive risk-taking."

We simple-minded folk hearing the joys, perils and moral strengths of capitalism. Even we can see that this is not capitalism. The money folk in these cases are taking no risks, but receiving either guaranteed profits and/or profits no matter what wise or stupid decisions they make with others' money.

A few centuries ago, it was the aristocracy and monarchy who got such benefits at the expense of the larger society. Of course, they had their private armies and inherited position.

In much of the 19th and early 20th centuries, our unfettered capitalists in days before income taxes had other protections. Their oligopolies and cartels virtually owned the U.S. and often worldwide markets, from oil to bananas.

The myths then included that without the freedom to "create wealth," capitalists would not start companies, which in turn generate jobs and income for all. Ta da. Moreover, they should not be bothered with child-labor law, unions or other such artificial restraints. It is in their own interests to have happy, healthy, productive workers. We know how that worked out.

The Reagan era myths tweaked capitalism's PR. Allegedly savvy investors and managers created jobs and their profits would trickle down to ordinary mortals (those clearly not smart enough to be real capitalists). Of course, we saw both in Reaganomics and the current version that it pee-on instead of trickle-down capitalism. Those who do the work and take the daily risks have lost pensions, jobs, homes, and more.

If we instead put our faith in the conclusions of Arthur F. Bentley, we receive a cynical but supportable set of claims. A century ago in his The Process of Government, he dismissed ideals, progressivism and larger ideas. Instead, he wrote (again and again) that government and all politics are related to the narrow desires and activities of interest groups.

The New Yorker's Nicholas Lemann update on the book includes the definitive:
For Bentley, every political force that matters is an interest group, regardless of whether it cops to the charge. States and cities are “locality groups,” the legal system is a collection of “law groups,” income categories are “wealth groups,” devoted followers of a popular politician are “personality groups”; interest groups lie at the heart of monarchies and dictatorships as well as of democracies. “When the groups are adequately stated, everything is stated,” Bentley declares. “When I say everything I mean everything.”
Bentley's implication in the financial cases is too plain. The interest group taking the risk out of capitalism have done their lobbying, bribing, cajoling and regulatory work better than anyone who would protect the vast majority of us.

Vaguely Related Flashback: As I recall the WABC radio ad from my high-school evenings, Dennison Clothiers on Route 22 in Union New Jersey used money talks nobody walks as their earworm slogan. They sure got the first part of that right, even if you had no interest in a sharkskin suit at any price. The point remained; Dennison's was a capitalist establishment. Make an offer.
Now those of us who grew up after WWII heard the glories of capitalism and free markets. It's not hard to extrapolate what Adam Smith would think of the current bluster about capitalism from U.S. politicians and policy makers.

We simple-minded boomers heard the liturgy of capitalism along the lines of Smith's invisible hand. The market took care of prices, rewarding those who projected and acted wisely and perceptively, while punishing those who did not. There is a decided gambling aspect to that. You snooze, you lose. If you choose, you may lose anyway. Risk is integral to capitalism. Those who want the rewards, put what they have of value on the line for the chance (just a chance) of profit.

So, now the version we have is that our Presidents and most in Congress, including Democrats, are socialists as far as the nominal capitalists are concerned. Words, words, words...say these blowhards are all for the free market. There'll be winners and losers. It's the American way.

Yet, as early as the 1979 Jimmy Carter loan-guarantee bailout of Chrysler we have seen situation ethics dominate and replace market forces. Oops, I meant capitalism and the free market are good, unless high companies might fail and increase unemployment (or even friends running the companies may lose their high-paying positions).

How is it now that the many illogically and undeservedly wealthy financial executives continue in their failed positions? How is it now that the financial houses that gambled on unsecured and unsecurable loans — that word gambled again — get government financed bailouts? How it it come to what Einhorn so perfectly describes as socialized risk?

It would take stainless steel guts for a candidate for President to proclaim a real belief in the free market, to say let the failures fail. Also as Einhorn notes, until that becomes the attitude among those who control our national funds, the protected gamblers in the financial world have no incentive to behave responsibly. If they don't bear the consequences of their impulsive ineptitude, why shouldn't they keep on keeping on?

As painful as it may be in the short term, letting the incompetents fail is necessary now. We have seen the hundreds of billions of dollars as gifts to them when we don't. This is not the time, and really there should never be a time, for socialism for only the wealthy.

The complicity of the Democrats is bad enough, but spare me the Republican Presidential campaign's talk of free markets. They don't believe in them.

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