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Mon

29

Dec

2008

Who must manage the bailouts
Monday, 29 December 2008 07:25
by Stephen Bindman

The government has taken extraordinary measures to keep this economy that most people have thought was capitalist and dominated by a free market from collapsing: the Federal Reserve has been buying trillions of dollars of assets of poor quality. This is something that central banks aren’t ever supposed to do in Capitalism. They are supposed to buy only sound assets, in so doing, preserve good banks, and let the dunderheads collapse. Then the market will once again do its magic. They tried that in the Great Depression however and it didn’t work very well.

These new measures haven’t been working either. Alan Abelson, the perennial senior columnist in Barrons, Dow Jones’ Sunday magazine, points out on December 21 that Dr. Bernanke's latest nostrum for the ailing economy: or the Federal Reserve's approach to resuscitating the economy and the financial system is not doing well. The US economy is laid low “by a serious malady brought on essentially by a huge accumulation of debt accompanied by mindless consumption.”

Chairman Ben Bernanke's ingenious remedy is to effectively slash interest rates to zero, to entice people to -- what else -- borrow more and, of course, buy more.

“but if banks remain inordinately shy about lending money, it's a little difficult to fathom just how a zero-interest policy will induce them to loosen up.”


Alan Blinder who was vice chairman of the Fed under Clinton has thrown up his hands, writing in the New York Times December 20. TARP was designed to buy and refinance home mortgages, and to buy what came to be called “troubled assets.” The legislation signed in October “empowered the TARP to do both. Sadly and amazingly, it has done neither.”

Blinder points out that Paulson is opposing Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, who wants to use a little of the TARP money to refinance millions of mortgages. “Her plan may not be perfect — whose is? — but she’s pushing in the right direction.” Paulson disagrees and refuses to devote any money to this purpose.


“Regarding mortgage-related securities — the “troubled assets” themselves — Mr. Paulson stunned markets on Nov. 12 by announcing that he wouldn’t spend a dime on that purpose, either. Oh? As one of my students asked me the next morning, shouldn’t they at least change the name?”

He finds Treasury Secretary Henry M. Paulson Jr frequent changes of direction are not only embarrassing, they also upset the very markets this program was designed to calm. Blinder therefore no longer supports the bail out.

Nobel laureate Paul Krugman on December 19, 2008 in the New York Times. comes close in his description of what is happening to my understanding, discussed in my new book, PSEUDO-CAPITALISM, Socialism for the Rich.

Writing of the Ponzi scheme of Bernard Madoff Krugman says “how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.”

Doubts are now raised about other exotic solutions with the total of guarantees already of 9 trillion dollars. And now the Bush government wants to engage in other maneuvers that amount to printing money. Who are they going to give this money to? Why the very people, the bankers who destroyed the economy. Who is in charge of this? Why Henry Paulson who was one of the leading members of the elite that profited enormously from the system which turns out to be totally hollow. His partner Ben Bernanke who believed that there was nothing wrong with the free market system of 19th-century capitalism when it collapsed in the great depression bringing us Nazism, the Popular Front, Japanese Militarism, and Stalin’s total domination of Russian communism. A few cleverer moves by the central bank could have stopped it all according to these academics. There was nothing fundamentally wrong with capitalism then. FDR’s response was foolishly independent of the free market from their point of view. These are the people who kept saying that our current problem was small or would be contained or would go away or would be solved by their policy moves for the last year. Now with the most aggressive moves ever there is some optimism once more that the system will be saved.

What these brilliant fellows are leaving out is psychology and sociology; that is the class struggle in its current form. They act as if there is no human agency involved. They instead see only ordinary human failings, and ignore why and how they have arisen in this time, under these conditions. Importantly, during this period the concentration of wealth has returned to levels not seen since the Edwardian age, before World War I. Conspicuous consumption came again to the fore. This new dominant elite however is different then the old capitalist elite, which was itself different from the feudal master class.

It is also not what Orwell imagined in 1984. Orwell’s vision reflects the totalitarian societies of Germany, Italy, and Russia. The repulsion the world felt for the totalitarian order we had barely escaped at the end of WWII has contributed to the nature of this new elite. While James Burnham had imagined an appropriately dutiful caste of technocratic and managerial executives fulfilling the mandates of science and needs of the state Orwell knew what totalitarian society was really like. In the post totalitarian epoch that developed, with freedom from police power to a great degree, those with their hands on the levers of power have enriched themselves by ignoring their fiduciary responsibilities as well as their patriotic ones. They rip everybody off, creating shell companies, not paying much in taxes, privatizing the companies they were hired to run which become theirs to the detriment of their stockholders. Enron, Bear Stearns, Lehman Brothers, AIG, Madoff, the Russian Oligarchs, the Chinese bureaucrats, have used their freedoms to enrich themselves while claiming to serve Capitalist corporations. They have enriched themselves beyond previous criminals wildest dreams.

It is in this context that Alan Blinder concludes that based on Paulson’s performance to date, Congress should not approve the next installment of TARP unless Paulson agrees to fulfill its stated purposes.

Unfortunately, even that will probably not work very well: The current economic model is broken: the one pithily described by Alan Abelson above as buying a lot of what we don’t need on credit. Done at the hands of this new elite which has profited inordinately and corruptly as it runs with its money to the banks and currencies it believes safe. This elite is not the group that can plan ahead for the greater good. Those plans most come from others who will set different goals and have the organizational means to help bring them about. The Tennessee Valley Authority is an older example of something needed that was constructive. I don’t expect anything like that from Paulson’s buddies. In fact, the ability of private investment to help the economy revive has never been less.

Senior bond commentator and journalist Randall Forsyth comments for Barrons online Christmas Eve 2008 "Now, mistrust runs so high that investors accept zero interest rates on paper bearing Uncle Sam's promise to pay. Meanwhile, they demand higher yields on common stocks than on government bonds for the first time in a half century and a greater margin of safety on corporate bonds than since the Great Depression." Thus the engine of Crapitalism, the alliance of private capital with science and technology to construct productive facilities is not possible now or in the near future. But even in the recent past investment was in fraudulent and funny paper, or as Forsyth describes the investors loss of belief in their own free markets, the intellectual pillar of capitalist thought,

“Unique in this boom-and-bust cycle is the lack of skepticism that permitted the most elaborate structures the world has ever seen to be foisted on a credulous investment public, in this case almost exclusively supposed sophisticated institutions around the globe.

"Financial engineering" based on statistics and using advanced mathematics and massive computing power could produce what medieval alchemists could not: Turn lead into gold.

What distinguished both the sellers and buyers of these complex instruments is that, in most cases, they all shared the same advanced degrees from top universities, where they all were indoctrinated with the same theories.

Why was this? Forsyth is showing that the capitalist investors were looking to eliminate risk. They only wanted to be betting on a sure thing. They had the faith at core “that risk could be eliminated by employing the right structure; or if not eliminated entirely, then at least transferred.”

With investors so drained in belief in the creative powers of capitalism, as they have been to a great extent for a long time they had essentially abdicated their progressive power to create. That’s why other institutions, essentially national governments had taken over much of the risk aspect of investment, underwriting basic and applied research, encouraging economically stimulative activities like the arms race, the space race, the war against cancer, the industrialization of China against Russia, etc. Now, private investment is more timid than ever. The government must set the goals, and the people must continually supervise their choices closely, with an intellectual discipline that the public has rarely shown. Or else, sadly, things seem destined to get worse.
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