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State capitalism on the instalment plan

October 8th, 2008

With the financial meltdown accelerating in the wake of the US bailout, and the recognition that many more failing banks will have to be nationalized, the British government is moving to get ahead of the game by offering equity injections across the board. But already this seems inadequate. Now that the taboo on nationalization has been broken, wouldn’t it make better sense to for the UK (and others) to nationalize the whole sector? With full control, governments could then ensure the resumption of interbank lending at least among their own banks. This would provide a feasible basis for co-operative moves to re-establish international markets.

For this week at least, such an idea is beyond the range of political acceptability. But it’s striking to look back a month and realise that in that period the US government has become the main mortgage lender, the guarantor of the short term money market, the effective owner of the world’s largest insurance company, the potential future owner of much of the banking sector and now the purchaser of last resort for commercial paper. Since the reluctance of banks to buy commercial paper must reflect a significant probability of default, it seems inevitable that some of this commercial paper will end up being converted into claims on the assets of defaulting issuers, extending the scope of nationalisation beyond the finance sector and into business in general.

This kind of instalment-plan nationalisation seems to offer the worst of all worlds. At some point, a more systematic approach will have to be adopted, and given the rate at which markets are plummeting, the sooner that point comes the better. This isn’t the return of socialism, but it certainly looks like the end of the kind of financial capitalism that has prevailed for the last few decades.

  1. observa
    October 10th, 2008 at 10:26 | #1

    You’re not wrong rog. Fiat money is like claims in a pyramid/ponzi game where most of the players understand the nature of the game now. Meanwhile, the regulators are scratching their heads trying to work out how to let the game down gently with an orderly withdrawal, in the hope they’ll be able to regulate against such a game in future.

    So much for fiat money now. Gold is the only safe haven because it’s a commodity that is valued in its own right, unlike say oil at present which is valued for its use. I must say my Perth Mint gold warrants are doing just fine after I liquidated my share portfolio in July and switched. The ASX index has largely held the 5000 level since then but has dived toward 4000 in the last week with my hunch the bottom is around 2000. My other hunch is fiat money is finished now and the market is demanding a return to a gold standard. I reckon the Austrians are right and I’m prepared to put my fiat money savings on it. So should you all, although there is a wee problem there if you’re slow off the mark, dollar or rouble. In the long run we’ll all be better off with a reliable and incorruptible money supply, but there is another wee problem with the long run too.

  2. Joseph Clark
    October 10th, 2008 at 11:23 | #2

    observa,
    I like your attitude. You backup your calls with trades while most people prefer cheap talk. I have a question though. Why would you prefer gold to private fiat currency?

  3. observa
    October 10th, 2008 at 11:38 | #3

    “Why would you prefer gold to private fiat currency?”
    I’m a man of the world and like universal acceptance but need to me mindful of exchange rate risk from the Louie Leeches and the Gordon Geckos. Other than that I’ll look at any reasonable proposal.

  4. jquiggin
    October 10th, 2008 at 11:39 | #4

    Joseph, assuming that comment was directed at me, I have backed up my calls with trades. I’ve taken all my money out of shares and put them into government-backed cash/bonds, and have done very well (or avoided doing very badly) as a result.

    The idea, which you’ve put repeatedly, that my calls imply that I should take a plunge into the kind of derivative instruments that are rapidly being rendered worthless is just plain silly. Once the banks and other financial institutions are fully nationalised, I’ll be taking another look at whatever investments they have on offer. So, take this point up again, say, end of next week.

  5. Joseph Clark
    October 10th, 2008 at 12:03 | #5

    Comment not specifically directed at you. Don’t misunderstand me, the point isn’t that I think you *should* be investing in anything in particular, just that by not making certain available investments you are revealing your confidence in your own predictions. The argument that you can’t invest in derivatives because of counterparty risk doesn’t wash. Most derivatives are margined daily and the exchange is generally the counterparty to both sides of the trade. My offer to help you structure a trade still stands.

  6. Joseph Clark
    October 10th, 2008 at 12:11 | #6

    observa,
    I’m on board with the logic for gold, I just think it would be more flexible to enter into a contract with a private company who you could sue if they broke the contract by inflating the money supply. It make most sense for multiple competing currencies, including gold and government fiat currency, and people can decide what suits them best.

  7. Damocles
    October 10th, 2008 at 12:51 | #7

    “So much for fiat money now. Gold is the only safe haven because it’s a commodity that is valued in its own right,…”

    In other words, the value attached to it is irrational and arbitrary and subject to change based on factors completely irrelevant to the real economy.

    Do you really want a world economic system hostage to trends in the Indian wedding industry?

  8. Damocles
    October 10th, 2008 at 13:04 | #8

    There is, of course, one major economy in the world which has “private fiat currency”.

    Hong Kong’s banknotes are issued by private banks – Hong Kong & Shanghai; Bank of China and Standard Chartered Bank – which are required to redeem their notes for US dollars at a fixed rate on demand.

    I don’t see any evidence Hong Kong has fared any better than other economies as a result.

  9. Damocles
    October 10th, 2008 at 13:07 | #9

    “a reliable and incorruptible money supply,”

    Have you read ANYTHING about how the gold standard worked in practice?

  10. jquiggin
    October 10th, 2008 at 13:16 | #10

    “Have you read ANYTHING about how the gold standard worked in practice?”

    Damocles, I think it’s safe to say, No, not even the links to the Panic of 1873 and other 19th century panics I posted on another thread a couple of days ago. As I said there, the only reason this pseudo-Austrian stuff gains any plausibility at all is that people can’t remember the gold standard era.

  11. observa
    October 10th, 2008 at 13:23 | #11

    “Do you really want a world economic system hostage to trends in the Indian wedding industry?”

    Personally I have no beef with how infinitesimal, individual market players want to exchange or give away their market based claims on production and neither should you. OTOH I do have a beef with how large oligopolists from Greenspan to Bernanke to Stevens want to manipulate the market for their particular brands, for their own perceived ends and that of their immediate paymasters and flunkies. You stick with their artificial fiat brand full of preservatives, colourings and flavourings. Me? I’m going organic!

  12. observa
    October 10th, 2008 at 13:32 | #12

    Personally John I don’t think gold standard will cut it after this lot gets washed up. It will be the real stuff, fully redeemable gold notes or barter by the looks of things. The usual suspects printing more monopoly money has given the game completely away now.

  13. Ernestine Gross
    October 10th, 2008 at 14:01 | #13

    On the small probability big impact event that observa et al will succeed in lots of people buying gold, some people will go into growing veggies – easier to digest than gold bars.

  14. Damocles
    October 10th, 2008 at 14:06 | #14

    Yeah, nothing like that could ever happen in a commodity market.

    http://en.wikipedia.org/wiki/Silver_Thursday

  15. Damocles
    October 10th, 2008 at 17:40 | #15

    There’s something almost touching about Observa’s confidence that he’s secured his savings by swapping scraps of paper denominated in dollars or in shares of stock for scraps of paper denominated in ounces.

    Especially given his profound distrust for governments.

    “Although Federation occurred in 1901, the Mint remained under the jurisdiction of Britain until July 1, 1970, when it became a statutory authority of the Government of Western Australia. It is now owned by Gold Corporation which is in turn wholly owned by the Government of Western Australia.”

    http://en.wikipedia.org/wiki/Perth_Mint_Certificate_Program

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