Some insight into problems with market economy

[vagabonddreamer]

interview on CBC this morning with the author of a book called Lords of Finanace...which chronicles the depression of the 30's...there are amazing parallels to the present debacle...

interestingly with respect to our own current MINI-depression the author indicates that economists in general point the finger at Alan Greenspan with his deregulation of banking and faith in the free market system to regulate itself as being the problem...

DONT shoot me with Cottons colt...i am only the messenger...but do you guys TRULY think that in an absolute free market that there is ANY chance of greed not being the eventual victor?? vs

[classicalliberal]

And why do you think the government can do better? Is there anything that they run that is efficient or effective or are they only good at redistributing wealth?

[classicalliberal]

This is hardly a free enterprise system that we have in finance. A free-enterprise system allows those who fail to fail such as AIG, General Motors with no bail-outs. It is not free-enterprise when you get government money and then give up equity shares in your company to the government which is a less socialist version of nationalization which is socialist.

Free enterprize would allow those companies to fail and thus teaching those a lesson not to take too big of risks.

When you have governments like the US and Canadian who are bailing out banks and uncompetitive auto industries, etc, this creates extreme moral hazard which means that since they know they will get bailed out when they lose, they will take bigger risks, give more to unions.

I suggest reading this article and sorry for being too texty. The last line is the most important


Capitalism at bay
Oct 16th 2008
From The Economist print edition



What went wrong and, rather more importantly for the future, what did not

ONE hundred and sixty five years ago, a Scottish businessman set out his plans for a newspaper. James Wilson’s starting point was “a melancholy reflection”: “while wealth and capital have been rapidly increasing” and science and art “working the most surprising miracles”, all classes of people were marked “by characters of uncertainty and insecurity”. Wilson’s solution was freedom. He committed his venture to the struggle not just against the protectionist corn laws but against attempts to raise up “barriers to intercourse, jealousies, animosities and heartburnings between individuals and classes in this country, and again between this country and all others”. Ever since, The Economist has been on the side of economic liberty.

Now economic liberty is under attack and capitalism, the system which embodies it, is at bay. This week Britain, the birthplace of modern privatisation, nationalised much of its banking industry; meanwhile, amid talk of the end of the Thatcher-Reagan era, the American government has promised to put $250 billion into its banks. Other governments are re-regulating their financial systems. Asians point out that the West appears to be moving towards their more dirigiste model: “The teachers have some problems,” a Chinese leader recently said. Interventionists are in full cry: “Self-regulation is finished,” claims France’s Nicolas Sarkozy. “Laissez-faire is finished.” Not all criticisms are that unsubtle (the more pointed ones focus on increasing the state’s role only in finance), but all the signs are pointing in the same direction: a larger role for the state, and a smaller and more constrained private sector.

This newspaper hopes profoundly that this will not happen. Over the past century and a half capitalism has proved its worth for billions of people. The parts of the world where it has flourished have prospered; the parts where it has shrivelled have suffered. Capitalism has always engendered crises, and always will. The world should use the latest one, devastating though it is, to learn how to manage it better.

Extreme measures in the defence of liberty
In the short term defending capitalism means, paradoxically, state intervention. There is a justifiable sense of outrage among voters and business people (and indeed economic liberals) that $2.5 trillion of taxpayers' money now has to be spent on a highly rewarded industry. But the global bail-out is pragmatic, not ideological. When François Mitterrand nationalised France’s banks in 1981 he did so because he thought the state would run them better. This time governments are buying banks (or shares in them) because they believe, rightly, that public capital is needed to keep credit flowing.

Intervening to prevent banking crises from hurting the real economy has a strong pedigree. Wilson’s son-in-law, Walter Bagehot, recommended that the Bank of England lend generously (but at a penalty rate) to illiquid banks (but not to insolvent ones). In modern times governments of every political stripe have had to step in. Ronald Reagan and Margaret Thatcher oversaw the rescues of Continental Illinois and Johnson Matthey. In the 1990s the Finns and Swedes nationalised banks—and privatised them again later. This rescue is on a different scale. Yet the justification is the same: the costs of not intervening look larger. If confidence and credit continue to dry up, a near-certain recession will become a depression, a calamity for everybody.

Even if it staves off disaster, the bail-out will cause huge problems. It creates moral hazard: such a visible safety net encourages risky behaviour. It may also politicise lending.

Governments will need to minimise these risks. They should avoid rewarding the bosses and shareholders of the rescued banks. They must not steer loans to politically important sectors. And they should run the banks on a commercial basis with the explicit aim of getting out of the banking business as quickly as possible (and at a profit). From the taxpayer’s point of view, it might make sense to limit dividend payments to other shareholders until the government’s preference shares have been paid off. But governments need to avoid populist gestures. Banning bonuses, for instance, would drive good people out of companies that badly need them.

The politicians all claim they understand this. Of course, they have no intention of revisiting Mitterrand’s mistakes, of trying to run the banks themselves, or of taking stakes elsewhere. Yet already voices (including Lady Thatcher’s Tory heirs) are pushing to limit executive pay. It will be a brave president who goes to Detroit and explains why the 45,000 well-paid folk at Morgan Stanley should get $10 billion of taxpayers' money, but the 266,000 people at General Motors should not. Brave too would be any politician who proposed deregulation as a solution to a public-sector problem.

Smoot-Hawley in the rear mirror
Given this, it is inevitable that the line between governments and markets will in the short term move towards the former. The public sector and its debt will take up a bigger portion of the economy in many countries. But in the longer term a lot depends on how blame for this catastrophe is allocated. This is where an important intellectual battle could and should be won. Capitalism’s defenders need to deal with two sorts of criticism. One has much more substance than the other.

The weaker, populist argument is that Anglo-Saxon capitalism has failed. Critics claim that the “Washington consensus” of deregulation and privatisation, preached condescendingly by America and Britain to benighted governments around the world, has actually brought the world economy to the brink of disaster. If this notion continues to gain ground, politicians from Beijing to Berlin will feel justified in resisting moves to free up the movement of goods and services within and between their economies. Arguments for market solutions in, for instance, health and education will be made with less conviction, and dismissed with a reference to Wall Street’s fate.

In fact, far from failing, the overall lowering of “barriers to intercourse” over the past 25 years has delivered wealth and freedom on a dramatic scale. Hundreds of millions of people have been dragged out of absolute poverty. Even allowing for the credit crunch, this decade may well see the fastest growth in global income per person in history. The free movement of non-financial goods and services should not be dragged into the argument—as they were, to disastrous effect, in the 1930s.

A second group of critics focuses on deregulation in finance, rather than the economy as a whole. This case has much more merit. Finance needs regulation. It has always been prone to panics, crashes and bubbles (in Victorian times this newspaper was moaning about railway stocks, not house prices). Because the rest of the economy cannot work without it, governments have always been heavily involved.

Without doubt, modern finance has been found seriously wanting. Some banks seemed to assume that markets would be constantly liquid. Risky behaviour garnered huge rewards; caution was punished. Even the best bankers took crazy risks. For instance, by the end of last year Goldman Sachs, by no means the most daring, had $1 trillion of assets teetering atop $43 billion of equity. Lack of regulation encouraged this gambling (see article). Financial innovation in derivatives soared ahead of the rule-setters. Somehow the world ended up with $62 trillion-worth of credit-default swaps (CDSs), none of them traded on exchanges. Not even the most liberal libertarian could imagine that was sensible.

Yet the failures of modern finance cannot be blamed on deregulation alone. After all, the American mortgage market is one of the most regulated parts of finance anywhere: dominated by two government sponsored agencies, Fannie Mae and Freddie Mac, and guided by congressional schemes to increase home-ownership. The macro economic condition that set up the crisis stemmed in part from policy choices: the Federal Reserve ignored the housing bubble and kept short-term interest rates too low for too long. The emerging world’s determination to accumulate reserves, especially China’s decision to hold down its exchange rate, sent a wash of capital into America. There was something of a perfect storm in which policy mistakes combined with Wall Street’s excesses.

Heavy regulation would not inoculate the world against future crises. Two of the worst in recent times, in Japan and South Korea, occurred in highly rule-bound systems. What’s needed is not more government but better government. In some areas, that means more rules. Capital requirements need to be revamped so that banks accumulate more reserves during the good times. More often it simply means different rules: central banks need to take asset prices more into account in their decisions. But there are plenty of examples where regulation could be counter-productive: a permanent ban on short-selling, for instance, would make markets more volatile.

Indeed, history suggests that a prejudice against more rules is a good idea. Too often they have unintended consequences, helping to create the next disaster. And capitalism, eventually, corrects itself. After a crisis investors (and for that matter regulators) seldom make exactly the same mistake twice. There are, for instance, already plans for clearing houses for CDSs.

Turning back the incoming tide
Sadly another lesson of history is that in politics economic reason does not always prevail—especially when the best-case scenario for most countries is a short recession. “Barriers to intercourse, jealousies, animosities and heartburnings” loom.

But it need not be so. If the bail-outs are well handled, taxpayers could end up profiting from their reluctant investment in the banks. If regulators learn from this crisis, they could manage finance better in the future. If the worst is avoided, the healthy popular hostility to a strong state that normally pervades democracies should reassert itself. Capitalism is at bay, but those who believe in it must fight for it. For all its flaws, it is the best economic system man has invented yet.

[tower]

There's some good points in this.

I have a couple of exceptions to it in these points... the author states that "After a crisis investors ... seldom make exactly the same mistake twice." I suggest that the mistake that they make is that easy money can go on indefinitely, and they go on doing it over and over again.

That leads to my second point which is that the author, and the newspaper, and the big time capitalists they serve, sit in their towers of gold and don't get the idea that money has to be worth something for them to be actually rich.

Can you imagine having fourty three billion and expecting to be able to leverage it into a trillion worth of income assets? This isn't mistakes were made country this is regulate these fools and have an ongoing elected body soley responsible for keeping an eye on them.

[Fransisco]

Looks like I've been out of the loop here for a bit. I want to back up to the subject of so-called free market oil. Take a look at this chart

http://en.wikipedia.org/wiki/File:World_Oil_Reserves_by_Region.PNG

Most of the oil in the world is off limits to private companies.

Even in the good 'ol USA there are huge restirictions they have a total of more than the known oil reserves of Iran, Iraq, Russia, Nigeria or Venezuela, respectively off limits.

Anyone who thinks what's going on with oil is the result of a free market, hasn't done their homework.

[Fransisco]

BTW- I've put my definition of Capitalism up, how's about you guys who hate it so much fill us in on what your definition is?

[vagabonddreamer]

actually francisco...the points were with respect to the refining end of things...the point being...there are NEVER differences in the price at the pumps...why is that??? why doesnt the free market drive the price of fuel at the pumps??? and no i dont think the government could do a better job as classylib and you keep alluding to...thats an easy out...to say...the government couldnt do it better...we KNOW that...

its a GOOD thing that the government has SOME sort of control over the actual reserves of oil...dont tell me you think that natural resources should be left to the multinationals to divy up??? i cant IMAGINE if it was just a race willy-nilly to drill holes in the ground by anybody that wanted to...come to think of it...in a FREE market Capitalist system...who WOULD regulate the mess that would happen to natural resources (not just oil)??? when a foreign company purchases land or purchases a canadian natural resource company and comes here to **** the land...who would step in to control the situation?? or are we to assume that oil companies, tobacco companies, mining companies etc...(some of which have a bigger GDP than our entire country)..all have a stellar enough record to police themselves??? the POLICE cant even police themselves!!!! Canada is rich in resources but very poor in Savoire-faire...even with poor government intervention we are still predominently foreign owned and operated...

certainly you must not have thought that one out completely??? vs

[Fransisco]

Okay, now you're back to being a typical paranoid socialist. Take a deep breath and try the following exercise.

http://www.youtube.com/watch?v=5513mXmQbw4

When left to themselves buyers and sellers do a much better job of regulating the supply and demand of natural resources. And Private ownership for the most part does a much better job of conservation than does public ownership. When everyone(the public) owns a piece of property no one does and no one is actually responsible for it.

Take a look at the following link on the history of government managed forestry in Canada.(it's a quick read)
http://www.environmentprobe.org/enviroprobe/pridon/chapter9.html

Talk about raping the land!

[tower]

Good call vagabondreamer,

fransisco, I mentioned that I think all the isms are religious at heart. And as with religions, the people who are paid are the ones who extoll the virtues of the brand the most. Like advertising in the sense that you have agencies and consumers. The people that are buying the product are the ones who see how it can benefit them.

Like religion it also has a functional side, making people feel good about themselves and the future, providing rules of conduct for the masses which are largely smiled at by the elite.
Amassing fortunes for those near the top.

I'm not an atheist fransisco, i'm an agnostic. Show me how the system is good.

[Fransisco]

You don't believe the easily verifiable data comparing the closed market government wheat board system and the open market. Why would you believe any other comparisons? And what measurements would you consider proof that the freer and more Capitalistic a society is the better off they are?

[tower]

I would need a proof that is verifiable, one that compares some equally resource filled states, with similar education levels, and looks at the before and after pictures. One capitalist, one socialist, one communist, one bhuddist, a catholic, and probably a couple of others.

[Fransisco]

I can show you evidence that the poorest people in freer more Capitalist countries have higher incomes than the poorest people in less free countries. I can show you that life expectancy is greater,there is a higher standard of living, that there is less corruption and that the environment is better looked after.

Would these be acceptable measurements?