The Weekend American Capitalism Died 17 comments
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The first thing I thought of when I heard of the Government takeover of the Mortgage GSEs was: "is American style capitalism dead?" Can we claim to have a free market, lightly regulated economic system when our government steps in (with taxpayer funds no less) to back-stop the risk created by irresponsible corporate managers? Does capitalism even exist in an environment where companies above a certain size are deemed too big too fail, and can always count on some sort of government intervention?
While removing risk from the equation may be appealing to some, risk is what guides capitalist activities, allocates capital effectively, separates the wheat from the chaff, etc, remove risk from the equation and capitalism dies. American Capitalism may have died this day as the government has sent the message that companies over a certain size will be prevented from failing, and set the economic policy goals of removing risk from capitalism, to impede natural economic cycles and to do whatever it takes to prop up the economy/avoid economic downturns.
The actions of the government in this situation could be the beginning of a form of "pseudo-socialist-capitalism " where we abandon the concept of free markets, and instead try to use the government to prop up the economy in a fashion that is reminiscent of children's soccer games where neither team loses.
Another issue is the sheer lack of accountability on the part of the executives and politicians whose job it was to steer the mortgage GSEs in the right direction. Despite nearly unleashing an economic weapon of mass destruction on the global economy (let alone the domestic one), they will not face any significant penalties aside from a few top executives losing their jobs whilst probably keeping all of the bonuses received, salary, separation packages, retirement benefits, etc.
Mind you there are plenty of losers in situations like this, people have lost their jobs, shareholders may not have been 100% wiped out but the journey to this point wasn't pretty, etc, etc, but the people at the helm of this disaster will not face any significant penalties and will keep the benefits generated by the very actions that caused this situation.
If a situation where corporate managers can act like gamblers that can only win but never lose isn't the definition of a moral hazard, than I don't know what is.
Another issue is that if the government is to assume the role of "protecting the economy" from the risks imposed by various companies failing, then it should take the necessary steps to offset that risk by better monitoring & regulating business activities that could lead to a bailout in the first place.
"You can't have your de-regulation and eat your near penalty free bailout cake too."
It's patently fatuous to have an economic policy that says that certain companies can't be allowed to fail, while simultaneously allowing irresponsible managers to run amuck and create the need for the bailouts in the first place.
Moving forward Detroit is asking for billions in Government sponsored loans, and there is a strong likelihood that there could be retail and/or investment banks that require bailouts as well. Where will it all end? How will a government that cannot afford to pay its pending liabilities for debt, social security, Medicare, etc, afford to prop up the economy via regular intervention and bailouts? Where does the dollar go as the cost of these actions begin to hit the national balance sheet?
How long before our government needs a bailout of its own?
Finally what do these actions say to the average person who is struggling with their own financial issues? You can't get a government bailout for your own expenses because it's not posing a big enough risk to the economy, but we're going to take your tax dollars and bailout someone else whilst letting irresponsible managers keep their bonuses?
Perhaps the biggest problem here is that the average citizen has zero awareness of what just happened, Capitalism died this weekend and no one noticed.
Disclosure: None
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this cannot be good news but the markets reacted differently on day 1...when the hype is over all bad realities remain.
at beginning of the year I thought things were going to get pretty bad in second half of this year but this...
it does send one clear message that shareholders of bad companies will be left with worthless paper and any foreign organisation that is looking for a stake should get bargain basement deals!
Between 1946 - 1976 Mao allowed almost 40million to die of starvation and lead poisioning and today Shanghai Sally is dancing in the street celebrating Chinese government - they don't really know what is happening.
The Jeffersonian Declaration of Independence and Madison Constitution is completely unknown by 90% of the homeowners who just inherited the Government as their mortgage banker. They think it's a good thing. Tell me again why advocation of state soverignity over centralized authority is a bad thing.
Now that the death party is over, the reality of the financial markets still in crisis will set in. When the investment banks open their books next week, we are going to get to see how bad it really is.
Everybody's an armchair quarterback here. "It's a bad idea" they say.
So then you geniuses, what would you have us do instead? Let them go bust and default on GIGANTIC amounts of debt...?
Who's going to clean up the mess then?
"Endless money forms the sinews of war." : Marcus Tullius Cicero -
(106-43 B.C.) Roman Statesman, Philosopher and Orator“The process by which banks create money is so simple that the mind is repelled.”Professor. J. K. GalbraithYou are living in a totalitarian tripartite dictatorship, viz Elected, Press and financial. The last sustaining the two former, due to the fact that money is created out of NOTHING as an interest bearing DEBT enslaving you all from cradle to grave. Any other legislation is only cosmetic, giving a semblance of democracy. What is needed is a basic paradigm shift in the Noe classical economics which governed by interest bearing DEBT, get the money lenders out of the market, get the elected government to issue the money towards productive capacity as interest free loans, to be repaid and debt cancelled, hence counter inflationary.
The insidious and invidious practice of usury is NOT necessary or inevitable.Cindy you are doing a good job but running in the wrong direction just as the rest of the poor devils.Unless you addresses the question of Money Supply, you all will remain enslaved, and the enslaved will do any thing as they are ordered to do and be willing connon foder to fight illegal illicit wars based on liesIn the Third World a child is killed EVERY THREE SECONDS, the HOLOCAUST is alive and well and had been for decades, you all have been blind
Too many executives collect their $100M incomes for a few years of manipulated books and then disappear with all that money before the results of their escapades cripple or destroy the company. Even with honest books, there is too much incentive in existing compensation systems to sacrifice future interests for current profits. Many executives do take a responsible approach to management for the long term. However, the system allows a smaller number to create economic havoc.
An appropriate compensation plan would have executives work for a modest stipend with much larger deferred compensation paid over many years depending on the performance of their company over time. This would allign the risks of executives, stockholders, employees and customers. If longer term performance falters, deferred compensation would disappear.
This revised compensation system would allow competent business builders to profit handsomely from their efforts, but would prevent manipulative charlatans from making their fortunes and leaving rubble behind. If rubble results, they get nothing more than the modest salary they receive in real time. Wealth from poor performance would no longer occur.
As an armchair QB I'm not saying that the Government shouldn't have stepped in, because Fannie & Freddie collapsing would've had a cataclysmic impact on our economy. What I am saying that is that various policies/actions have been killing capitalism for decades, the takeover of the Mortgage GSEs was merely the sign, not the cause per se.
SO what would I have done different?
Managed the GSEs better and reigned them in years ago especially during the credit crunch, as opposed to recent policies that had them expanding their investment activities despite their suspect capitalization levels.
Better managed the banking system during the housing boom, especially with respect to lending standards.
The credit crisis could've easily had been prevented if people had been willing to make inconvenient decisions, as opposed to telling taxpayers how great things are and celebrating faux housing wealth.
-M
Remember when the federal government broke up AT&T and we were all happy with the "baby" bells?
The problem is monopoly and oligopoly big business which supports an underlying plutocracy which is mostly hereditary but remarkably open to ambitious people of talent who have no entrepreneurial skills and no other ambition other than to rise in a massive and moribund bureaucracy.
What we need is to find ways to to flummox monopoly capitalism and stimulate free enterprise to convert scientific and technological discoveries and inventions into products to make our lives better.
We have so many recent examples: cell phones, the internet, cable television ....
When these businesses become successful they turn into monopolies. At that point, they are dead or at least discourage any more innovations in their fields.
When are Republicans and Democrats going to take on the REAL enemy and stop complaining about big government which is, of course, also the enemy when it creates massive debts and obligations for future generations?
But big government (which is US) can help when it (we) helps small business men and women start up new companies to exploit technology.
It will require far more courage for television and radio newscasters and talk show hosts to take on their monopoly bosses. Ditto for the politicians.
But we can do it on the internet without paying the price of our necks, so let's start yelling while we still can!
And yes, this obviously goes beyond the Democrat and Republican party platforms. Let's just call ourselves Independents!