In response to an FT article by Philip Stephens on 17th December 2015, entitled 'Politicians are paying bill for the crash
“The crash and the subsequent depression broke the confidence of a generation of political leaders. All the guff they had learnt about a new financial capitalism, self-equilibrating markets and the end of boom and bust was shown to be, well, guff. Seven years on, bankers are once again clinking champagne glasses. By and large, they got off scot free. Not so politicians who believed their own propaganda and embraced the laissez faire Washington Consensus as the end of history. Capitalism survived the crash, but at the expense of a collapse of trust in ruling elites”
I think this is a very important statement. Here are some thoughts on it:
A) ‘The crash and the subsequent depression broke the confidence of a generation of political leaders’
Not quite - our political leaders abdicated responsibility for the crash because they didn't understand it, and didn't want to own their part in it. The crash was a result of decades of Ponzi monetary policy and 'guns and butter' fiscal policy, which combined to produce an unsustainable credit boom - which ended as credit booms always do - it crashed. In 2008, our leaders effectively sub-contracted the economy to a group of academics and central bankers, who have continued with the monetary side of it, whilst they themselves have been only too willing to squabble amongst themselves, arguing about what the band should be playing whilst the ship goes down.
B) ‘All the guff they had learnt about a new financial capitalism, self-equilibrating markets and the end of boom and bust was shown to be, well, guff’
Indeed, except they still don't get it. We didn't have self-regulating markets then and we don't have them now - we have a system better described as cronyism. The misunderstanding of how market capitalism works, and it's continuing abuse by vested interests was encapsulated by two huge mistakes:
1. Mistake number one was unleashing the banks from Glass-Steagall, effectively giving them casino licenses. This was a decision made by President Clinton on the advice of his Treasury Secretary Robert Rubin, formerly of Goldman Sachs and the Teflon coated Professor Larry Summers. It was a decision made by and for Wall Street.
2. Mistake number two was bailing out the banks in 2008 and effectively institutionalising moral hazard - this is very important - capitalism can ONLY work when companies are allowed to fail as well as succeed. The mechanics of how this could have been handled are superbly described by David Stockman in his book: 'The Great Deformation - The Corruption of Capitalism in America'. In a nutshell what could have been done was this:
Lehman could have been 'ring fenced', the shareholders wiped out, the bond holders given a haircut, the management sacked, anyone who committed crimes could have been prosecuted under the rule of law...meanwhile...the deposit holders could have been fully protected.
The junk could have been segregated and allowed to die peacefully or recover on it's own merits. The good stuff could have been returned to private ownership with new shareholders and new management, and the world would have had a wonderful opportunity to re-learn the lesson of free capital markets. Moral Hazard would have been defeated not glorified.
C) ‘Seven years on, bankers are once again clinking champagne glasses. By and large, they got off scot free’
Absolutely. Wall Street even managed to put the tax-payer back on the hook for derivative losses just before Christmas 2014 when they wrote an amendment to Dodd Frank and got a few of their sheep in Congress to attach it to the budget just as the rest of the flock were leaving for their holidays.
D) ‘Not so politicians who believed their own propaganda and embraced the laissez faire Washington Consensus as the end of history’
Again, spot on about the propaganda, except this is NOT laissez faire capitalism - these markets have been bent out of all shape by QE and ZIRP, policies which:
i) Enabled the casinos on Wall Street to leverage money to the sky and front fun a Federal Reserve who clearly haven't got the foggiest idea of how real wealth is created in a real capitalist system and
ii) Enabled a clueless, irresponsible government to continue to kick the can down the road until an eventual crisis in sovereign debt and/or pensions forces the issue
Capitalism doesn't do zero interest rates Mr. Stephens - never in a million years would money be free in a capitalist system. It is however, an inevitable consequence of a government and a banking system clinging on to the debt sodden Frankenstein Monster they created in capitalism's name.
E) ‘Capitalism survived the crash, but at the expense of a collapse of trust in ruling elites’
Cronyism survived and that is why there is a collapse of trust in ruling elites. Deep down people know that there is something badly wrong with the way our economy is being manipulated in the interest of governmental and banking elites. They may articulate it in different ways, but they are pretty sure about three things:
a) The geniuses that presided over the last fiasco are still running the show
b) Policy makers have done nothing to address the fundamentals, as evidenced by the still mounting piles of debt
c) When the system crashes again, which it will, they have a sneaking suspicion that it won't be the bankers or the politicians who pick up the tab this time either...it will be Joe Fourpack (he recently had to cut back from six)
Free market capitalism is not dead because it is a natural expression of people's desire to create wealth, look after their families and pursue their dreams in life. But please don't call this monstrosity by that name - call it what it is - crony capitalism and/or socialism for the rich.