Home > Economic policy, Economics - General > State capitalism on the instalment plan

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. Father Mercy
    October 8th, 2008 at 18:30 | #1

    Why not suspend the taxation office operations in each teetering or financially troubled country and divert the taxes of the great unwashed directly to the banks and financial institutions? Seriously, the only thing that will satisfy our appetite now is the sight of corporate cowboys, financial savants and other camorrists experiencing the sordid distress of penury.

  2. SJ
    October 8th, 2008 at 19:04 | #2

    John Says:

    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.

    But it’ll be called a return of socialism, and will be derided by governments and corporates alike, and it’ll turn into another government run theft campaign.

    We already have the terminology for it – “privatize the profits, socialize the risk”, which comes from the 1930s (as far as I know). So there’s nothing new here, and it isn’t really the end of anything. And unless things get really really bad and persist for a couple of years, the program will start up again next year.

  3. rog
    October 8th, 2008 at 19:31 | #3

    You need to better disguise your glee John (ps it wont happen)

    State capitalism is an oxymoron and anathema to any free thinking person. Deciding between free thinkers and morons maybe a hard pick.

  4. rog
    October 8th, 2008 at 19:44 | #4

    The ‘financial capitalism’ that you depict as being finished is the socialist capitalism that has been previously identified as being the cause – once socialist fiddling is removed markets can perform more properly,

  5. Joseph Clark
    October 8th, 2008 at 19:50 | #5

    Wow! This is a change of tone. Now you want to “nationalize the sector.” I can’t imagine how anybody who is in a position to imagine what that would be like could possibly say that. You cannot be serious.

    SJ, that’s absolutely nuts! You are hoping for maximum misery and distress so society can return to socialism.

  6. SJ
    October 8th, 2008 at 20:11 | #6

    SJ Says:

    But it’ll be called a return of socialism, and will be derided by governments and corporates alike…

    I guess I should have said “governments, corporates and idiot commenters on blogs alike…”

    And Joseph, you aren’t smart enough to understand what I might or might not be hoping for.

  7. jquiggin
    October 8th, 2008 at 20:52 | #7

    Rog & SJ, let’s keep it civil.

    SJ & Joseph, if you have arguments/alternative proposals rather than exclamations of horror to put forward, this would be a good time.

  8. Chris Warren
    October 8th, 2008 at 20:57 | #8

    Nationalisation ????

    All the billions and billions that is being poured into capitalist economies is a complete proof of the irrationality of capitalist economics.

    But this is not a criticism of market economics.

    Consequently nationalisation may not be the appropriate response, as it is far too easy for managers of nationalised corporations to operate on a capitalist or monopolistic basis and borrow, and invest just like the rest, even seeking maximum profits.

    Society as a whole needs an appropriate economic system. This is easy to say but what this should be, is a difficult question that needs development. Unfortunately too many ‘hollow men’ from one end, and dogmatic Trotskyites from the other, have clogged up the processes and there is too much gibberish wihtin present day discourse.

    Many commentators believe that the present crisis is a ‘natural correction’ [see Glenn Mumford's weird column in today's Aust Fin Review, p37]

    This appears to imply we are simply repeating 1987 in different terms or at least this is the wish of some AFR and BRW pundits.

    We certainly need a new economic paradigm, but what?

    I would not rush into any judgement just yet. But the present events were all predicable.

  9. gthorpe
    October 8th, 2008 at 20:59 | #9

    Well spoken John – and WE know the realistic value of a bank because we sold one within the past 20 years.

    Just so long as when WE buy it back WE pay not one red cent more than what WE sold it for.

    With a government bank again maybe the margins charged by the banks will become reasonable again.

  10. SJ
    October 8th, 2008 at 21:07 | #10

    I ain’t offering any alternative normative proposal. I’m just giving my positive assessment, which is really kinda negative. ;)

  11. LuxuryYacht
    October 8th, 2008 at 22:15 | #11

    In what way were the margins charged by the banks reasonable when the government owned the Commonwealth Bank? I remember when deposit rates were close to zero when home loan rates were close to 13 and inflation was around 10. Reasonable, you say? The only time margins got reasonable was when they were in competition for mortgages from the mortgage originators, a sector that has seized up lately. It’s not government ownership or oligopoly that leads to low margins, it’s competition. And competition is something that the banks are not facing at the moment (and even less as they start to gobble up their regional competitors).

    Prove me wrong.

  12. sean
    October 8th, 2008 at 22:21 | #12

    The only thing that frightens me more than a bunch on bonus hunting bankers running banks is a bigger bunch of power hunting politicians running banks.

  13. melanie
    October 8th, 2008 at 22:35 | #13

    I guess that when a government with a large fiscal surplus buys an indebted financial institution the net debt might be reduced. But when the world’s most heavily indebted government buys a insolvent bank/insurance company with huge debts, the insolvency is simply transferred from the shareholders to the taxpayers.

    Not surprising that there’s a debate in the US about the wisdom of the bailout. But can anyone here suggest a viable alternative? (Viable being the operative word)

    I presume that the sharp rise in the USD in the past week against both the Euro and the AUD is the result of ongoing Chinese transfers to the US so that the latter will continue to purchase Chinese manufactures? Surely it cannot be related to any inherent strength of the USD?

  14. Donald Oats
    October 8th, 2008 at 22:48 | #14

    Rather than take the view that the current calamity marks the end/failure of free marketeer financial capitalism, I reckon the Great Mother of a Mess should be more properly seen as a perfectly valid realization from the statistical universe of free market runs.

    If the people want financial capitalism with free markets that have bug**r all regulation/oversight/government meddling, then the people must accept that these sorts of crises will happen; they are an inseparable part of free market dynamics.

    Whether a nationalised banking sector could prevent such crises is a whole other question.

  15. Ikonoclast
    October 8th, 2008 at 23:07 | #15

    It is now crystal clear that economists like John Quiggan and Steve Keen were correct just about all along the line. I wonder if the right wingers, neocons and so on have started to notice a pattern yet?

    The much derided leftist tree hugging greenies (and scientists) warn about dangers of environmental damage and climate change. They are proven right. Corporate capitalist endless growth boosters are wrong.

    The much-ignored sientists (and greenies) warn about peak oil. They are proven right. Corporate capitalist boosters are wrong.

    The much derided social-demo bleeding hearts warn Iraq will be a costly, inhumane quagmire. Three trillion dollars and half a million lives later they are proven right. Corporate captialist boosters are wrong.

    Social democratic nutbag economist John Quiggan and absurdly logical Steve Keen warn financial system of circa 1990 to 2005 unsustainable. They are proven right. Corporate captialist boosters are wrong.

    Do the right wing, neocon, corporate capitalist boosters get it yet? Will they ever get it? How long will they go on denying reality? I might even read a Janet Albrechtsen column again just for a screaming laugh. She must be at an insane level of denialism by now!

    As for me I am sick of the surfeit of the age. I look forward to a new austerity. It will do us good. One only has to look at the astonishing obesity levels in any Australian city to realise that short rations will do a lot of people a lot of good. That’s the plain fact.

  16. Katz
    October 8th, 2008 at 23:16 | #16

    You folks need to be more empathetic towards Bernanke, Paulson, Bush, et al.

    They had to destroy capitalism in order to save it.

  17. Smiley
    October 8th, 2008 at 23:21 | #17

    It’s not government ownership or oligopoly that leads to low margins, it’s competition.

    So how did the big banks continue to make such large profits in times of higher competition? Thats right, they “cannibalised” their customers by increasing fees and charges. And because the big banks did it all at once, it gave the consumers little choice.

    So much for the idea that competition alone increasing competitiveness.

  18. observa
    October 9th, 2008 at 03:42 | #18

    “they “cannibalisedâ€? their customers by increasing fees and charges. And because the big banks did it all at once, it gave the consumers little choice.”

    Piffle smiley. At my bank Westpac,(and they’re all similar) for $5/month you can have an unlimited transaction account (Westpac Choice)and if you couple that with an esaver electronic only ‘jam jar’ and sweep savings into and out of it at the click of a mouse that pays 6.8% calculated daily, payable monthly. Westpac lend that out at a record low margin now, perhaps for the nephew’s variable home mortgage at around 8.6%. At the same time they cover fee free banking to my pensioner father in the price and have to cover any loan defaults. Sixty bucks a year to cover all my banking needs and poor me apparently has little choice? I only wish my Rego Dept or local council put that sort of admin price gun to my head.

  19. sean
    October 9th, 2008 at 05:00 | #19

    “As for me I am sick of the surfeit of the age. I look forward to a new austerity. It will do us good. One only has to look at the astonishing obesity levels in any Australian city to realise that short rations will do a lot of people a lot of good. That’s the plain fact”

    Astonishing! authoritarian with a capital A. This is the thing with the left. (yes the right display it too but not in the bounty that the left do) Left wing politics is driven by what they think is a scientific approach, and when you think you have a scientific answer they go directly into Friedrich Nietzsche’, POWER TO TRUTH mode, this is why they get so Bolshoi and they cannot make VALUE JUDGMENTS.

  20. sean
    October 9th, 2008 at 05:01 | #20

    Ive read it again, Ikonoclast at post 15 has to be a wind up right?

  21. Mr Denmore
    October 9th, 2008 at 05:22 | #21

    I’m all for free, open,fully informed and competitive markets. But we’re in this mess precisely of an absence of those things. Banks were allowed to shift trillions of dollars in risk off their balance sheets through the creation of opaque, heavily geared derivative products.

    When the SIVs hit the fans, counterparties called in their loans, and the banks foumd themselves insufficiently capitalised to cover their contingent liabilities.

    The systemic consequences of this hugely reckless risk taking by the supposed pillars of the global financial system we are all now living with and paying for through our taxes, our retirement incomes and our jobs.

  22. Spiros
    October 9th, 2008 at 07:34 | #22

    “wouldn’t it make better sense to for the UK (and others) to nationalize the whole sector?”

    Many British banks, including some big ones, have had 90+% of their equity wiped out (this was before last night’s rout). It might just about end up being a full nationalisation.

    All of this is supported by the party of Margaret Thatcher. The great roll back of the state which began 30 years ago has been reversed in full in 2 weeks.

    And despite the pathetic naivety of the diehards (“we don’t need more regulation, we need better regulation”) what we are about to get, to borrow a phrase from the other disaster of our time, the Iraq war, is a surge of regulation.

    No doubt the wheel will turn again, and perhaps in the middle of the century we’ll see a whole lot of reprivatisations and deregulation. But for the next 30 years, it’ll be 1945 – 1975 all over again.

    Plus ca change …

  23. Helen
    October 9th, 2008 at 09:33 | #23

    this is why they get so Bolshoi

    A good quality where some fancy footwork is needed, I’d say.

  24. James Haughton
    October 9th, 2008 at 10:23 | #24

    How about this for a compromise: We remove all regulation from the banking sector (ie drop the four pillars policy, the ACCC oversight, etc), and then, when the free market has produced its natural outcome, one bank with a monopoly of all finance in Australia (cf current movements: Westpac snapping up St George and Commonwealth grabbing Natwest), we nationalise it. That way everyone’s happy.
    May the FSM damn Menzies for stopping Chifley sorting out this mess fifty years ago.

  25. Ian Gould
    October 9th, 2008 at 10:24 | #25

    Spiros: “And despite the pathetic naivety of the diehards (â€?we don’t need more regulation, we need better regulationâ€?) what we are about to get, to borrow a phrase from the other disaster of our time, the Iraq war, is a surge of regulation.”

    I think what we need is a return to stricter and more transparent bank regulation for savings banks- higher prime asset ratios; no “off balance sheet vehicles”; restrictions in derivatives trading to a pretty short list of stuff like currency futures for the purposes of covering foreign currency debt repayments.

    That might actually translate into less regulation, if so I really don’t care.

  26. observa
    October 9th, 2008 at 11:43 | #26

    Essentially ‘we’ have a massive 2 pronged problem which is abundantly clear. We want a singular currency which is a reliable unit of account, medium of exchange, store of wealth and at the same time truly represent our claim on current production. However it’s patently obvious that the Louie Leeches and Gordon Geckos have other agendas and we need to constantly guard against their depradations. Essentially between them they have debased the grease for the wheels of our free market economic conveyance and we know full well that conveyance should be Toyota, Mazda, Mitsi, Ford, Hyundai, etc, etc , rather than the singular offering from the Dept of Trabants.

    We delegated the responsibility for reliable currency to central bankers who in turn delegated that to private banks. Ultimately if our Reserve failed in the task, which they have, then we’re stuck with underwriting their mistakes as taxpayers now. Either that or we go back to bartering which is not an option, so underwriting the banks is it. We have to have reliable currency in future. That doesn’t mean individuals can’t make mistakes and lose their shirt from time to time, but that the currency can’t be created out of thin air to cloud any reasonable market signals to all of us as market players. This deliberate targetting of 2-3% inflation is nonsense and suits the Louie Leeches with their taxation by stealth. With productivity gains over time, there’s no reason our money shouldn’t appreciate in purchasing power over time ie 1 and 2c pieces should never disappear, nor should we need to create new $100 bills. If money is quietly appreciating over time, everyone is much more circumspect about lending that forgone consumption to others and rightly so. It is monetary inflation that sets in train the disaster we have before us now. Communal animal spirits may rise or fall from time to time, but it is the rigid discipline of quietly appreciating money that would ration out just which real investments everyone wants to get spirited about and what ones they have to trade off to do so. Money from thin air can never do that and that’s our fundamental dilemma now.

  27. rabee
    October 9th, 2008 at 12:08 | #27

    Hank reads your blog

    “Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.”

  28. Ernestine Gross
    October 9th, 2008 at 14:22 | #28

    Throwing money at the banking system doesn’t work because the ill designed system (belief based)is dead.

    The following measures indicate to me there are people in some governments that do not allow ‘emotional intelligence’, public relations ‘strategists’ and other weasel word mergents to gloud their reasoning power:

    1. The UK ‘nationalised’ (ie took over) North Rock (logical)
    2. The CEO of Hypo-Real Estate (Germany) has been fired immediately (logical).
    3. The French-Belgium-Luxumbourg governments are considering splitting of the ‘toxic assets’ from Dexia. (This amounts to a sorting of debt securities, including derivatives, into ‘trash’ vs ‘worthwhile keeping’.)

    http://news.smh.com.au/world/govts-to-take-toxic-assets-off-dexias-hands-report-20081009-4x8a.html

    The absence of an adequate financial record keeping system doesn’t help. But, for the time being we are stuck with the ‘balance sheet’ approach.

    It seems nothing of significance will happen in the USA until after 4 November.

  29. O6
    October 9th, 2008 at 14:50 | #29

    What about the US nationalising AIG and spending USD145,000,000,000 (so far) on the purchase? When will the USD begin to look toxic?

  30. smiths
    October 9th, 2008 at 15:05 | #30

    state capitalism in a depression, serious stuff eh?

    but for america a coincidence of incredible timing should help …

    rewritten rules of warfare so that “The U.S. military can secure the peace until we can conduct stability operations in a collaborative manner with civilian government and private entities at home and abroad”

    and

    Beginning Oct. 1 for 12 months, the 1st Brigade Combat Team will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.

    http://www.washingtonpost.com/wp-dyn/content/article/2008/10/04/AR2008100402033.html?hpid=moreheadlines

    http://www.armytimes.com/news/2008/09/army_homeland_090708w/

  31. Ernestine Gross
    October 9th, 2008 at 16:01 | #31

    “When will the USD begin to look toxic?”

    I suppose the answer is: When the Treasury Department hires private ranking agencies to make a risk assessment. (Perhaps this comment should be filed under the thread headed Irony)

  32. Smiley
    October 9th, 2008 at 16:38 | #32

    observa,

    I wasn’t particularly talking about deposits. But even so, there are probably other costs you have not accounted for in the new streamlined banking system. For example, did you take into account the $30-$50 a month you pay for your internet service to do online banking. And then there’s the cost of anti-spyware and other internet security issues. But really it is probably unimportant.

    The revenue streams of banks changed as a result of competition. To make up for the reduction in lending margins banks charged higher fees and reduced the number of store fronts.

    But the real argument here is about how deregulation has somehow reduced the ability of bankers to judge risk. As a result we’ve ended up with most of the middle class heavily in debt.

    I do however find some merit in your idea that an economy with very low inflation or even slight deflation would discourage the sort of speculative bubble that has caused our current crisis and might even encourage saving. But I also believe that the way inflation has been measured is somewhat to blame.

  33. Chris Lloyd
    October 9th, 2008 at 17:58 | #33

    Luxuty yacht: “I remember when deposit rates were close to zero when home loan rates were close to 13 and inflation was around 10.” I remember it to. It was actually a great deal for investors, because the whole 13% was tax deductable.

    Try to come up with a better and more coherent example of why bank nationalisation is bad. Not every single bank. Just some of the majors. Anyway, I do not believe JQ is advocating a nationalisation program in Australia. He is suggesting that ownership will be more effective than just throwing more money/molasses into the system.

  34. Michael of Summer Hill
    October 9th, 2008 at 18:07 | #34

    John, maybe the faltering economies should look for some divine inspiratiion and take note of what is happening in the global sukuk market which at present stands at around $100 billion and expected to grow to US$200 billion by 2010 as a potential future source of funding.

  35. rog
    October 9th, 2008 at 19:42 | #35

    Well so far the more the govt intervenes the worse it gets (With the financial meltdown accelerating in the wake of the US bailout) – you would be more inclined to ban govt from capitalist ventures rather than encourage them.

  36. Ubiquity
    October 9th, 2008 at 19:49 | #36

    Smiley

    “But the real argument here is about how deregulation has somehow reduced the ability of bankers to judge risk.”

    Remove the word “deregulation” and add “regulation” in its place and you have the answer.

  37. melanie
    October 9th, 2008 at 20:02 | #37

    Interestingly (to some of us anyway), the most successful economies of the late 20th century (S. Korea, Taiwan and the PRC) all embarked on their extremely high growth periods with a state-owned banking sector. Public ownership of the banking sector, at a time when substantial restructuring is needed, seems like quite a good idea!

  38. stockingrate
    October 9th, 2008 at 20:56 | #38

    “Based on our analysis within the Government, we have no information available to us which causes us to conclude other than that we will continue to generate positive economic growth in this country,” Rudd
    new PM please -left/right/conservative/progressive- just not this nonsense.

  39. melanie
    October 9th, 2008 at 21:08 | #39

    Btw JQ, heard your soundbite about Marx on News Radio. Circa 1970 I’d have said that KM was right on both counts because the market economy had changed so far since the 19th century that workers actually had as much control over it as the bosses (or almost). That was a period in which things like ‘worker participation’, ‘worker control’ and the Swedish model were popular. I later thought that Friedman & co did a good job of rolling back most of the gains made by democracies. But maybe it isn’t permanent? Or were you suggesting that things were no different in the C20th than in mid-C19th England?

  40. Ernestine Gross
    October 9th, 2008 at 21:23 | #40

    “Since the reluctance of banks to buy commercial paper must reflect a significant probability of default..”

    Not necessarily. Perhaps some banks have outsourced risk assessment to private rating agencies for too long and they now have lost trust in these agencies.

    Smiley, I think you have a point when you write: “But the real argument here is about how deregulation has somehow reduced the ability of bankers to judge risk”.

  41. observa
    October 9th, 2008 at 21:55 | #41

    smiley, it’s true esaver type accounts require internet access and there’s extra private cost in that unless you pop down to your library/community centre. Nevertheless, you can still have $60 pa traditional banking with telephone banking and EFTPOS at your local supermart, servo, etc for cash out, not to mention ATMs, so naturally traditional branch banking has declined. Time warps can even have a passbook account would you believe? Pensioners and beneficiaries have fee free banking, no doubt contributing to that $60 pa which might be lower in their absence. Most of us have no problem with that cross subsidy. There are NO other fees unless you cause my bank administrative costs through your incompetence, negligence or plain slackness and then it’s user pays and rightly so. Don’t bitch about parking fines and speeding tickets, or late payment fees for rates and govt licensing either in that regard. Also at 18 and the fine upstanding beneficiary of compulsory public or private education, don’t bitch to my bank that you didn’t understand the commitments you signed on for when borrowing or transacting your accounts. I want my bank to be as empathetic to your feeble excuses as my Govt’s rates, fees and licences collectors, not to mention those tax gatherers.

    Some of you have listened too long to Labor bank bashers in Opposition(my haven’t they suddenly gone quiet now?)and need to remember the good old days of fee free banking. Basically the banks gave you 3-4% on your passbook savings and rationed it out on first mortgages only, at 9-10% to the old school tie network. The rest, if they were lucky to get a sniff would need a second mortgage at higher rates, including mortgage insurance from the CUs and Building Societies. Definitely no sheilas and I’ll leave you to guess who else missed out. Welcome to fee free banking Chasps! The nostalgia of the left for the good old days astounds those of us who still remember. We used to smoke on buses and in offices too would you believe? Strictly the kind the doctors smoked of course! Perhaps ‘Warning borrowing is a wealth hazard’, unless it’s strictly to forgo rent or back yourself in business mightn’t be a bad idea. Hmm..on second thoughts, wasted ink on the Ipod generation. Uhuh! (removing earplug) Where do I sign?

  42. SJ
    October 9th, 2008 at 22:55 | #42

    Throat Warbler Mangrove Says:

    In what way were the margins charged by the banks reasonable when the government owned the Commonwealth Bank? I remember when deposit rates were close to zero when home loan rates were close to 13 and inflation was around 10. Reasonable, you say? The only time margins got reasonable was when they were in competition for mortgages from the mortgage originators, a sector that has seized up lately. It’s not government ownership or oligopoly that leads to low margins, it’s competition. And competition is something that the banks are not facing at the moment (and even less as they start to gobble up their regional competitors).

    Prove me wrong.

    OK. At the times when home loan rates were around 13 percent, basically 1982-1992, the rate margin was about 4 percent.

    If anything, the margin has grown wider since then.

  43. sean
    October 9th, 2008 at 22:57 | #43

    “But the real argument here is about how deregulation has somehow reduced the ability of bankers to judge risk�.

    That is a easy one to answer, experience. Believing that you can get a kid out of university, send them on a few courses and hey presto a banker is born, all to the instruction manual is the real financial industry fallacy.

    And how did the central bankers not understand the risk of massive capital inflows coming in from Asia to inflation/growth/banking system risk, and adjust interest rates accordingly? was that a regulation issue? It affected continental Europe just as much as the Anglo’s both with different regulatory systems.

    http://www.washingtonpost.com/wp-dyn/content/article/2008/10/05/AR2008100501253.html

    Once again in this world you have to be able to make value judgments, instead of systematic judgments, and most people do it all the time.

    Why would you not put you money in the Dollar? yes they have a lot of debt, Europe has more. Why not put your money in China? do you trust a nation that is not a democracy and the rule of law is at the whim of the central committee who display their lack of respect for law by human rights abuses?
    At the end of the day the US is a very productive nation, that does not have any ethnic or crippling political issues, and of course it does not have the demographic time bomb ticking under it like Europe, Russia and to a lesser degree china does.

    And strangely enough it could well be the rise of the East that puts a check on a Western return to collectivism, how will we compete if we make ourselves less competitive in a global market place, this is not the Seventies revisited.

    The left need to take a rain check, throw out Karl Marx and get in David Ricardo. The poor stay poor because of income tax and the payback you get in land values, Land taxes should deal with inequalities, and stop asset bubbles. But the left do not wish to participate in the Market system as they don’t understand it.

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

  44. Ubiquity
    October 9th, 2008 at 23:03 | #44

    Briefly, If the money supply wasn’t inflated, the interest rate not regulated and numerous regulatory bodies trying to encourage home ownership at all costs, would all of this have happened ? Could it possibly be that the banks are actually looking at their balance sheets knowing for the first time in a long time buying commercial paper might be a bet they can’t afford to lose ? as JQ implies.

    I think its good to see the banks taking more responsibility for themselves rather than relying on overpayed rating agencies to make the decisons for them. The difference this time is that most banks are on the brink of financial oblivion. So the decisions made will always be more conservative, when your head is on the chopping block and you can’t hide behind various financial instruments.

    Of course we could safely assume a government regulated rating agency would be completely honest, particulalry in tough times when our markets need encouragement…..

  45. Ikonoclast
    October 9th, 2008 at 23:17 | #45

    Let’s count the strikes against us;

    1. Environmental collapse.
    2. Climate change.
    3. Mass extinctions.
    4. Resource depletion.
    5. Severe overpopulation.
    7. Oncoming financial depression.
    6. High levels of militarisation.

    If there is a portion of the human race left to carry on, I think it will be crucial for any new culture(s) to remember and deride the system which wrecked a verdant planet. And I think they will remember. The events soon to unfold will go deep into the cultural memory.

  46. sean
    October 10th, 2008 at 00:35 | #46

    All large corporations to one degree or another are agents of the state, none more so thank banks who pump the cash around the system. Once again the way of dealing with this is simple.

    If you are too big to fail you are too big to regulate, if you are not too big to fail you don’t need regulating.

    Moving to bigger banking corps. as it whats happening now is a very big mistake. The price for government support should be to break themselves up into smaller chunks.

  47. rog
    October 10th, 2008 at 06:35 | #47

    What we have now is a market correction of misguided government policies in the US housing market – to use this correction to assume more govt power is to exacerbate the condition.

    Central bankers, politicians etc are fools if they think that government policy can restore market confidence

  48. ehj2
    October 10th, 2008 at 07:00 | #48

    Rog,

    Since the market can’t restore market confidence (interbank lending is dead and ONLY govt is trusted for liquidity or commercial paper), and you assert the govt can’t do it (in spite of the fact that the ONLY institution the banks will deal with right now IS the GOVT), I wonder if you’re expecting aliens to restore market confidence.

    If so, we might need another plan.

  49. October 10th, 2008 at 07:33 | #49

    ike, i hope the lesson they will take is, “if you want it done right, do it yourself”, applied to politics.

    the list of endemic and emerging horrors happened while the sheeple were in the ‘care’ of politicians. since many of the financial problems arise out of sight, where corruption and incompetence flourish in the dark, the power of citizens in a democracy to compel public execution of public affairs will be a cure.

    many of the horrors are the natural result of the structure of society. politicians can not make long-term policy effectively, as short-term electoral pain may result in their removal. a nation with citizen initiative can make long-term policies. worse yet: since the electorate ‘buys’ a bundle of policies when voting for a party, they are commonly selecting many policies they know are bad for the nation, to get one they hope will benefit themselves.

    perhaps worst of all, an electorate with no real input to national policy loses interest and doesn’t seek knowledge. ultimately, they regard the activities of government as ‘the weather’, to be avoided but uncontrollable. in all the discussion above, some learned, some nit-picking, there is no suggestion some one should actually do something to achieve a better society. it’s all in the hands of god, as ozzies regard their anointed politicians.

  50. rog
    October 10th, 2008 at 08:14 | #50

    It was loose monetary policy that inflated asset values and I doubt if more of the same will inspire any confidence at all, even if mandated

  51. observa
    October 10th, 2008 at 10:26 | #51

    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.

  52. Joseph Clark
    October 10th, 2008 at 11:23 | #52

    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?

  53. observa
    October 10th, 2008 at 11:38 | #53

    “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.

  54. jquiggin
    October 10th, 2008 at 11:39 | #54

    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.

  55. Joseph Clark
    October 10th, 2008 at 12:03 | #55

    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.

  56. Joseph Clark
    October 10th, 2008 at 12:11 | #56

    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.

  57. Damocles
    October 10th, 2008 at 12:51 | #57

    “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?

  58. Damocles
    October 10th, 2008 at 13:04 | #58

    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.

  59. Damocles
    October 10th, 2008 at 13:07 | #59

    “a reliable and incorruptible money supply,”

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

  60. jquiggin
    October 10th, 2008 at 13:16 | #60

    “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.

  61. observa
    October 10th, 2008 at 13:23 | #61

    “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!

  62. observa
    October 10th, 2008 at 13:32 | #62

    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.

  63. Ernestine Gross
    October 10th, 2008 at 14:01 | #63

    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.

  64. Damocles
    October 10th, 2008 at 14:06 | #64

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

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

  65. Damocles
    October 10th, 2008 at 17:40 | #65

    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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