Posts Tagged ‘capitalism’


Wednesday, May 6th, 2009

From the point of view of oligarchs and crony capitalists, the crisis is not that a lot loans were made to no hablo English wetbacks. The crisis is that people are rejecting securitization of debt.

The Obama regime’s capitalism smashing measures are intended not to destroy capitalism, nor to install socialism, but to restore securitization of debt. This is socialism for the financiers, not for the proles:  Crony socialism, crony capitalism, a fascist economic order.

Regular old fashioned loans are going through just fine. There is no credit crisis, the financial system is not freezing up. Securitization is freezing up, and it @#$% well should freeze up.

When debts are securitized, many different debts of many different borrowers are piled together into a great big pool of debt, and then shares in the pool are sold to lots of creditors – which means that there is no one person responsible for verifying that any one particular loan is sound, that the assets securing the loan are worth what they are supposed to be worth, that the person responsible for making payments on the loan can read and write, that he speaks the language that the papers that he signed were written in, that he was sufficiently sober when he signed them to remember signing them, or even that the paperwork exists and is in good order.

For securitization to work, the particular organization that arranged the loan, and the particular people in the particular organization, would have to remain responsible for that loan.  The debtor would have to be making payments through the people that arranged the loan for the life of the loan.

Securitization leads carelessness with large sums of other people’s money. Such carelessness leads to crime. Crime destroys the trust that is necessary for the economic system to work. Securitization must stop. If securitization continues, capitalism will end. By and large, those who favor continued securitization are wealthy criminals, who personally benefited from stolen money, as over the years carelessness slowly became indistinguishable from deliberate fraud.   The problem before Obama was not lack of regulation, but that the foxes were regulating the chickens, and now under Obama the foxes are still regulating the chickens.  Each Obama intervention has the effect of keeping the criminals in power over other people’s money, resisting the natural propensity of capitalism to purify itself through creative destruction.

Securitization was born in fraud:  The original motivation for securitization was the 1995 Community Reinvestment Act. If the government is pressuring you to make loans on the basis of race, rather than willingness and ability to pay one’s just debts, you want to get rid of the politically correct mortgages to some other sucker as fast as possible.

Securitization of debt is only legitimate when the people that arranged the loan remain linked to the loan.  Otherwise, securitization is a scam, as the origins of mortgage securitization demonstrate.

Galt strike or inadequate aggregate demand?

Friday, May 1st, 2009

The Randian concept of a Galt Strike is that if the elite slack off, the masses will be impoverished – that countries are rich or poor according to whether the elite is productive, while the masses and resources do not matter much, except in extreme cases such as oil rich sheikdoms.

There has been a large fall in GDP over the past six months:

The Keynesian explanation of this fall is inadequate aggregate demand – the economy could easily produce more, but no one is spending due to depression of animal spirits, in which case a big spending government will make everything rosy.

The Austrian and Chicago explanation is complicated, and perhaps confused.

The Randian explanation is that it is a Galt Strike – the elite are slacking off, and focusing on hiding their wealth and economic activities from the government, rather than creating value, in which case big government spending will merely result in inflation or massive borrowing from abroad.

Core CPI will in time tell us which account is correct. We will know by about November 2010.

  • If  late in 2010 core CPI is substantially higher, nominal GDP substantially higher, but real GDP still woeful, then Randians will have been proven correct.
  • If  late in 2010 core CPI is lower or unchanged, then both sides can argue they were right, and the Austrians will probably have some explanation that I will be disinclined to follow.
  • If  late in 2010 core CPI only rises moderately, but real GDP rises substantially, then Keynesians will have been proven correct.

I am betting on disturbing levels of core inflation with a distinctly unimpressive recovery in real GDP.

The crisis explained

Saturday, March 28th, 2009

I have been seeing a lot of references to “a speculative bubble”

Nope. They were not speculating.

The crisis consisted of people, mostly members of protected minorities with nothing to lose, buying houses they could not afford with borrowed money in the expectation that they would go up, and if they went down, it was the bank’s problem.

So the people who bought houses were taking no risk, since mostly they bought them with 100% loans, had no credit rating and no assets to lose.

So were the banks making the loans taking a risk?

No, because it was not the bank’s problem, because the loans were for the most part guaranteed by Freddy, or Fannie, or AIG – all of which had implicit government guarantees, and all of which had an AAA rating.

So why did AIG and the rest have an AAA rating?

AIG and the rest were issuing naked puts greatly exceeding their total capitalization, which pretty much guaranteed that sooner or later they would go broke in a big way. So why AAA?

Moody’s, who issued the ratings, was tweaked on this, and replied that it was unthinkable that the government would allow these institutions to fail. So it was not true that nobody knew what was happening. All the insiders knew what was happening, the regulators knew what was happening: they knew that businesses were taking big risks for big money in the expectation that if they won, they won, and if they lost, the government would take care of them. It was government policy. People have been complaining about this for years.

The fundamental cause of this crisis is government regulation: Governments cannot be trusted with money. They think only of short term political gain, so dispense money to the loudest pressure group, in this case those represented by ACORN, rather than to people who are likely to repay it with interest. In this case, the regulators decided that “traditional” standards of credit worthiness were racist and discriminatory, because too many Jews, and not enough Blacks, met “traditional” standards.

The Stimulus bill

Tuesday, March 3rd, 2009

Bryan Caplan wonders why Brad Delong cannot comprehend those who doubt the effectiveness of the stimulus bill.

Assume that creating value is easy, any brainless fool can do it, even the brainless fools at Washington Mutual. It is then immediately obvious that the government can make everything lovely by printing money and giving it to the morally worthy. Are car production lines shut down while unemployed workers idle? Just print money and give it to bureaucrats in government schools, or other similarly wise and worthy people, and lo and behold, those car production lines will start up again, and all will be well.

If, on the other hand, producing value is hard, then falling nominal GDP may well reflect the discovery that we were producing less value than we thought – that we were providing houses to people who were not in fact willing to pay for them, and building cars that were not in fact the cars that people wanted, in which case issuing enough money to stimulate the economy may well stimulate inflation, rather than the production of real wealth.

This brings us to Japan: Did Japan lose a decade because it refused to allow the free market to remove the power over assets held by incompetent people, or because it failed to borrow enough and spend enough?

Those who believe Japan failed to run a big enough deficit may well now get the chance to put their theory to the test in the US. If spending enough borrowed money to keep the incompetent running businesses stimulates the economy, then they will have proven themselves right.

Warren Buffet explains how to lose a trillion

Monday, March 2nd, 2009

Warren Buffet explained how to lose a few trillion, here and there.

Well managed companies, like Warren Buffet’s, don’t get government guarantees.  Badly managed companies with good political connections get government guarantees.  So naturally all the  capital floods to companies with a track record of losing it.This is capitalism in reverse.  For capitalism to work, the people who are good at managing stuff have to wind up in charge of stuff, and the people who are bad at managing stuff have to wind up out in the street.

In the nature of things, every bailout tends to be very quickly followed by an even bigger bailout – AIG has been bailed out more times than I am able to keep track of, each bailout bigger than the last – the next AIG bailout looks to be a hundred billion or so.  General motors, having recently got a ten billion dollar bailout, tells us it can only last a few months unless it gets a twenty five billion dollar bailout.

People are calling this socialism, but perhaps a more informative description is reverse capitalism.

Reverse capitalism can make us all poor even faster than socialism.  The budgeted deficit is 1750 trillion dollars, sufficient to do seventeen Iraq wars simultaneously, but this purported deficit is based on the rosy scenario that all the people who have been bailed out henceforth are productive and efficient and make lots of money, when reality is that each bailout digs the hole deeper.  The bailouts inject more money into circulation, but they also reduce the production of goods.

Money is a medium of exchange, a measure of value, and a store of value.  The problem is that when functioning as a store of value, it is in large part a claim against values that have not yet been produced.  For it to work in this way, it must either represent things of value stuffed in warehouses, or treasure buried in the ground, such as gold, or represent investments in things that produce value – such as houses occupied by creditworthy people with adequate income to pay the mortgage, or profitable businesses.  If, however, savings  merely represent claims against taxpayers, taxpayers that have “invested” in all sorts of massive money losing boondoggles, big trouble will ensue, for we are close to the Laffer maximum.  When people attempt to draw down their savings, perhaps frightened by disturbing levels of inflation, their stored value will not be there.

There is a lot of ruin in a nation.   The US government can smash the capitalist economy and draw on debt for a while.  At present it is doing so at near two trillion a year, which may well rise quite a lot.  If, however, it runs up debt at two trillion a year or so, then in eight years or so, the debt to GDP ratio will increase by a hundred percent or so, which is a lot of ruin.

If things continue as they are going, expect the US to collapse around 2017 or so.

Obama promises to fix the deficit by taxing the rich (though past experience is that the more you tax the rich, the less money you get – taxes on the rich are already beyond the Laffer maximum) and by a carbon tax.  A carbon tax could raise a lot of money – mostly from the working class, the one part of the population that is at present taxed well below the Laffer maximum.  That will work – provided that the bailouts stop sucking up ever bigger quantities of money.

The lesson of Japan’s failure

Thursday, February 12th, 2009

Ten years ago, Japan had a banking crisis very like the one we just had.  It was discovered that financiers and big businessmen had blown staggering sums of money, whereupon the government massively intervened to keep those that had screwed up from losing their jobs.

The Japanese economy has been stagnant ever since, even though, or perhaps because, the government has poured huge amounts of “stimulus” over the economy, so much “stimulus” that the Japanese government is now approaching bankruptcy.

President Barack Obama correctly observed:

There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade”. They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.

Obama then proceeds to explain why we are going to do what failed for Japan:

we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.

No we don’t. We want to retain a strong sense that businessmen who succeed, win, and businessmen that foul up, lose their shirts. It is not capitalism when the capitalists are kept in power by the state.

To work, capitalism has to be run by people who are smart.  The entrepreneur unites other people’s money and other people’s labor, to create value.  The Wall Streeters revealed themselves to be idiots who massively subtracted value.

Similarly General motors, who managed to destroy the amazing sum of about four hundred billion dollars of value over the last decade.

The big factor in downturns is that people attempt to continue saving, while holding back from investing, whereupon the economy bogs down, thus the big factor is distrust of financial intermediaries.  In this sense, recessions are largely supply side problems rather than demand side problems. In the last three years, vast numbers of financial intermediaries have been revealed as untrustworthy and incompetent.

In Japan, in a similar crisis thirteen years ago the insiders were revealed to be incompetent and corrupt. In a similar response, the Japanese government intervened to protect insiders from the consequences of exposure, keeping them in charge of other people’s wealth.

This in Japan as here led to massive decline in investment and demand, to which the Japanese government responded with “stimulus” – building bridges to nowhere, paving rivers, and so on and so forth.

This led to a massive increase in Japanese government debt, now the highest in the world, but failed to cure the recession.  The government could manufacture demand, but not supply.

Japanese government debt is the highest in the world not because no other government was prepared to borrow so much, but because all other governments that attempted to borrow as much, have gone bust.

Bridges to nowhere will not fix the supply side problem, and tax cuts can have only limited effectiveness. Rather, a new crop of productive entrepreneurs must arise, the creation side of capitalism’s creative destruction.  But in a world of bailouts, the way to success is connections, political correctness, and getting on with the rest of the elite, which gives us the sort of capitalist establishment that got us into this mess.

The banks that were run by bankers of the Ebenezer Scrooge type, who accepted CRA with the same enthusiasm as they turned up at their dentist for a root canal, tended to be taken over by banks of the Washington Mutual type, who were rewarded for their political correctness in embracing CRA with genuine enthusiasm, by regulatory favor in their takeovers.  And that crowd, the Washington Mutual sort, is the crowd that is still in charge, government guaranteed to be in charge.  We need a finance sector run by the likes of Ebenezer Scrooge, and an automobile industry run by the likes of Hank Rearden.  To get that, badly run businesses have to go bankrupt, and their assets need to be auctioned off at the block.

Cause of International Inequality

Tuesday, March 11th, 2008

Arnold Kling is much puzzled by the inequality of nations. I don’t know why. The answer is pretty obvious.

Firstly, you require capitalism, which requires not mere formal laws recognizing private property, but a culture of respect for entrepreneurship, for property rights in productive capital and freedom to do business. With that respect, the laws are unnecessary, as in today’s China. Without that respect, the laws are useless, as in Argentina and Russia.

Secondly, given capitalism, you require people able to operate modern capitalism, able function in a business encompassing numerous people – you require people whose verbal IQ is higher than 105. By and large, the capitalist portion of the economy, the portion that produces wealth, will be proportional to number of people with an IQ higher than 105.

If we look at countries that are reasonable capitalist, and these days a large part of the countries of the world are reasonably capitalist, the GDP per head is fairly closely proportional to fraction of the population with a verbal IQ higher than 105, the smart fraction.