The Greatest Threat to Capitalism: Capitalism Itself

by: Cam Hui, CFA

For many people, this is a time of year for reflection (instead of year-ahead forecasts which I already touched upon here). So let me share with you my personal concerns about those who are less fortunate.

A growing class-based chasm?
This is a theme that I have expressed concerns about in the past. A fraying social fabric and a threatened middle class which endangers political stability.

Who is in the middle? Consider the following video, which depicts income distribution in the United States. While there are some inaccuracies (median household income is about 50K, not 40K), it does make the point about inequality.

The social elite these days is mostly Wall Street. Consider the I-am-more-deserving-than-you attitude in this Barron's article where bankers were asked as to whether they owed a social debt to society because of the bailouts (if you don’t have a Barron's subscription, see some excerpts here).

The greatest threat to capitalism is the capitalists themselves
In the past, this kind of "let them eat cake" mindset has led to peasant revolts. Already Moody’s has picked up on this theme and warned of social unrest. The UK is calling the bankers’ bluff to pick up and move elsewhere, but the US has caved to virtually every one of the bankers’ wishes. Yves Smith at Naked Capitalism has suggested that the proper response by the UK government would be a combination of harassment or punitive tax policy for the likes of Goldman (NYSE:GS) or any other investment bank who leaves.

Policy-bias favoring Wall Street is already institutionalized. The New Republic has an interesting article which indicates that the US may not be able to revitalize its manufacturing base because business schools are turning graduates oriented towards finance, not operations or manufacturing.

What’s more, no less than former Federal Reserve Chairman Paul Volcker has picked up a pitchfork and appears ready to join the peasant revolt. Joseph Stiglitz believes that banking troubles are worse than pre-Lehman crisis.

Others, like John Hussman, are outraged at the bailouts:

It's clear that financial institutions have made a mad dash to repay TARP money in hopes of being able to pay year-end bonuses, but what is not so clear is what happens after the year actually ends. Various policy makers (particularly Ben Bernanke, who is currently up for reappointment) have begun to take on a self-congratulatory tone, suggesting that the recent crisis is not only behind us, but that it has been resolved at a profit. What is not evident from these comments is how small these “profitable” inflows have actually been, in relation to what has been spent.

I will be convinced that the crisis has been resolved at a profit when the Fed disgorges the $1.5 trillion in Fannie Mae (FNM) and Freddie Mac (FRE) securities it has bought for us, and if the U.S. government does not end up having to bail those securities out because the cash flows from the underlying mortgages prove inadequate. Having no such assurance, the smug “mission accomplished” remarks of Bernanke and Geithner are reminiscent of a veterinarian who walks out of the operating room saying “I saved the life of your rabid dog … by giving it the vital organs of your children.”

The rebirth of the American Dream, or end of Pax Americana?
Most people who read a financial blog like this belong in the top 10% and a considerable number in the top 1%. I believe that those of us who are in the top distribution of society must realize that unless America acts to restore the American Dream and dismantle the nascent class system that was formed with financiers at the top, the end of Pax Americana is at hand.