State Capitalism: Ideology Now Bonds Russia, U.S.

The British and American decisions to purchase stakes in major commercial banks are not, by any means, exercises in financial innovation. In fact, they kick start an economic process which Vladimir Putin consolidated and formalized more than three years ago: state capitalism.

The stated intention of the Treasury Department and the Federal Reserve is to ensure that the bailout package results in money flowing through America’s financial and business matrix. However, as Moscow’s post-Cold War economists realized at great cost, equity infusions by way of common or preferred shares purchased by a government do not necessarily result either in stronger banks or in a resurgence of financial and business activity.

As the experience of Russia shows, state capitalism (semi-socialism, as some of Prime Minister Putin’s critics call it) is a system which turns the state into a blanket provider of business risk insurance. For example, in the wake of the recent liquidity crunch, the Kremlin plans to help Russian companies refinance near $400 billion of foreign debt coming due in the first half of 2009. Almost two times that amount has been earmarked for the country’s deeply troubled financial institutions. In addition, President Medvedev has just instructed his finance officials to find ways to assist Russian companies whose existence is vital (whatever that means) to the Russian economy. Sound familiar?

While the exact nature of the Federal Reserve’s involvement in the commercial paper market remains unclear as of today, it is obvious that a huge number of corporate issuers will be provided with a much-needed financial lifeline in forthcoming weeks. Detroit’s automakers are likely to pursue a make-or-break appeal to Washington within days. Some high-profile measures for direct state intervention in the housing market have already been initiated, and more initiatives will inevitably follow, regardless of who wins the presidential election. And wait for the credit card mess to surface before another bailout package is placed before Congress.

Any doubt that, at least in terms of economic ideology, Russia and America are now on the same page, is quickly erased by the fundamental similarities in the methodologies applied to bailout packages: an absence of pre-rescue valuations, a commitment to protect (as far as possible) existing shareholders, a lack of specificity in applicable capital adequacy ratios and a complete failure to check the viability of business models in the dramatically changed global environment (see latest IMF report).

To get an early insight into the fate of the equity markets under state capitalism, first review the underlying factors influencing the historical performance of the key Russian market indexes over the previous three or four years. Then, simply substitute the energy and commodity sectors (Russia) with forecasts governing the health of housing and consumer credit in America, and one can start envisioning Wall Street’s future.

Since the state itself is the insurer of last resort under state capitalism, short selling in times of distress becomes an extremely risky proposition. The business of credit default swaps dies a natural death, thankfully for many regulators. Market bottoms can be identified by the convergence of an imminent corporate collapse and a rescue package. Upside is constrained by the potential dilution from stakes held by the government agencies. And there is little use for extensive research when studied analytical conclusions can easily be offset by state policy considerations.

One final point: state capitalism is not about Main Street. If the process of capital formation, triggered primarily by bailouts, creates jobs and boosts home prices, then so be it. If not, the man on the street continues to enjoy the freedom to fend for himself.

Comments

[Eagle-Chief:]

Rakesh - call a SPADE a SPADE. It's state MARXISM / SOCIALISM / ELITISM, but not capitalism. This is the antithesis of a free market system. It is government interference and manipulation of the free market system, which can no longer be called a free market system.

Marxism. Socialism. Let's call a spade a spade.

2008 Oct 14 03:52 PM

[CLH:]

State capitalism is also called Nazism. Becasue both Communism and Nazism have the same mother it doesnt matter. Everything is being prepared for Obama.

2008 Oct 14 04:06 PM

[akapital:]

Actually that's not a spade, that's a shuffle...but seriously what we have is neither capitalism nor socialism. We have a sort of hybrid where the gov't facilitates/manipulate... competitive markets - so we don't actually have true competitive markets. And where markets facilitate/manipulate gov't - so we don't actually have a true democracy. It's all hybrids nowadays...

2008 Oct 14 04:07 PM

[Lex Luz:]

Eagle, I'd argue that it's not socialism and it's emphatically not Marxism (have you read Marx?). Benito Mussolini said it best (and I'm paraphrasing) - fascism should really be called "corporatism" because it is the combination of state and corporate power.

The only reason to indulge in this kind of quibble is this: Norway is a Socialist state; Sweden is a Socialist state. They've traded some possible economic growth for a societal model in which people's needs (as defined in those countries) come first. Under the United States' model of fascism, we put corporate power first on the assumption that supporting economic growth will allow more people sufficient wealth to meet their needs and their comforts.

Say what you will about these tradeoffs, but to call the new politico-economic regime in the United States "Socialism" is a distortion. We live under a fascist regime and we will very soon see its other, uglier manifestations - for example, arresting and holding people without charge. Oh, wait...

2008 Oct 14 04:14 PM

[Babeouf:]

It's tedious this constant name calling. In America knowledge of Marx seems to run down from no to low. Marx did mention the financial system. His commment, to paraphrase. At full employment the smaller it is the better.
He had the strange belief that making things that people found useful. cars, computers, pizzas was more socially beneficial than managing and manufacturing debt.

2008 Oct 14 04:40 PM

[Eye Forget:]

The Marxist state is financing its business due to the mass flight of foreign capital out of the Marxist state. That in and of itself defines a very significant difference. I wonder how much deployable reserves the Marxist state will have once its finished? With the wealthy not paying taxes, the rest barely making ends meet (except a few spots of a nascent middle class in Moscow), not to mention a free fall in commodities, who will cover the cost?

Russia has been around longer than we have and has been endowed with natural resources and the ability to feed itself the whole time. Where are they? The RTS sells for about a 6 multiple. Companies are selling for less than cash on hand.

Yawn ...

2008 Oct 14 08:13 PM

[carey_jim:]

It doesn't help to simplify economics and politics but it is necessary.

"God save the Queen." Disraeli

"When I hear the word "culture" I reach for my gun." Goebbels

"How can one conceive of a one party system in a country that has over 200 varieties of cheese?" Charles de Gaulle

"Democracy substitutes election by the incompetent many for anointment by the corrupt few." George Bernard Shaw.

"Who's Virginia?" Rose Kennedy (when told that her daughter-in-law lived Joan lived in Boston while her son Ted lived in Virginia.)

"The stock market will fluctuate." J.P. Morgan

2008 Oct 15 11:00 AM

[Chris B:]

CLH,
Are you saying that the Bush administration and Wall Street are colluding to make Obama the owner of all industry? That's pretty wild.

You're right though about the similarity between communism and fascism. I would suspect the American version of authoritarianism would incorporate more features from fascism, probably justified and legitimized by religion.

Lex Luz,
You're also right about the difference between socialism and either of the above models. The government runs healthcare, utilities, energy, and other industries in a number of dynamic democracies. Here in the U.S, the government runs the defense, police, highways, education, firefighting, and now banking industries. Let's hope that Obama is smart enough to sell the government's banking stakes as soon as prices return to normal. That possible profit might be the only chance we have at maintaining solvency.

2008 Oct 15 04:44 PM