As a result of the bailouts and the socialization of the mortgage agencies, the financial system is now fully infected with moral hazard. The disastrous effects of these government interventions will show up soon. The major task of bringing the capital structure in order is still ahead and more pain is in the waiting.
John Cruddas MP at The Guardian:
The future demands an active state redistributing wealth to balance a dysfunctional economy – the Labour Party’s founding principle.
As I have written, our economic system has been subject to too much of the wrong state intervention, so capitalism cannot be blamed for a dysfunctional economy. What has failed is an excess of state intervention in a system fundamentally flawed through reliance on credit expansion and through firms growing so large they surpass market forces, only to be rescued from their folly by the taxpayer acting under duress.
Believers in liberty under the law must seriously refute proposals for increased intervention and make the case for fundamental reform back to a capitalism which allows market forces to act. As Reagan said:
You and I are told increasingly that we have to choose between a left or right, but I would like to suggest that there is no such thing as a left or right. There is only an up or down — up to man’s age-old dream, the ultimate in individual freedom consistent with law and order — or down to the ant heap of totalitarianism, and regardless of their sincerity, their humanitarian motives, those who would trade our freedom for security have embarked on this downward course.
The Guardian:
A £12bn takeover of Britain’s biggest lender, HBOS, failed to halt the deepening crisis in world financial markets last night, as a wave of fresh speculation on global stock markets saw two of Wall Street’s most prestigious investment banks targeted as the latest victims of the credit crunch.
So, irrespective of whether this was or was not the correct crisis measure, over the years four financial institutions have become one — with consequent effects on competition and therefore the effectiveness of market forces — and still the rot has not stopped.
I see the Prime Minister personally intervened in this business arrangement. I note that the present solution to firms being too big to fail — that is, too big to be subject to market forces — is to make them bigger and less subject to market forces.
Lex reports on AIG’s rescue:
AIG was not too big to fail, but too connected. Bankruptcy would have in effect cancelled the debt insurance that AIG provided, and triggered emergency capital raisings from counterparties around the world. The Fed’s rescue is on punishing terms, AIG must repay the $85bn loan at a storecard-like 8.5 percentage points over Libor…
The Fed is making three kinds of bad loans. First, the Fed is lending to banks that are in bad shape and need the funds badly. They are simply bad risks. If the Fed were a profit-maximizing banker, it would not make such loans, throwing good money after bad. The Fed is simply gambling (not wisely speculating) that in time these banks will recover. The gamble is huge; the amounts it is lending are a huge portion of its assets.
According to the FT:
AIG, the troubled insurer that sits at the heart of the financial system, has one more day to come up with the capital to stay afloat, according to David Paterson, New York governor. … Asked how much time he thought AIG had, Mr Paterson replied: “I think they have a day.”
AFP reports:
An unprecedented auction of works by British artist Damien Hirst was headed for the record books Monday, making more than 43 million pounds (78 million dollars, 55 million euros) in the first 90 minutes.
… and so the bubble flows into the next asset class.
According to the FT:
The head of equities at one of the UK’s biggest investors said the repercussions should AIG fail were “potentially bigger than Lehmans. It is too big to go bust. If it does, we will be eating baked beans out of a tin.”
Alarmist perhaps, but the article is worth reading: it does appear that AIG, like Fannie and Freddie, is too big to fail.
Reflecting on the demise of Lehman Brothers and on Bank of America’s purchase of Merrill Lynch, I revisited an article by recent US presidential candidate Ron Paul, posted on mises.org:
Capitalism should not be condemned, since we haven’t had capitalism. A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank. It’s not capitalism when the system is plagued with incomprehensible rules regarding mergers, acquisitions, and stock sales, along with wage controls, price controls, protectionism, corporate subsidies, international management of trade, complex and punishing corporate taxes, privileged government contracts to the military-industrial complex, and a foreign policy controlled by corporate interests and overseas investments. Add to this centralized federal mismanagement of farming, education, medicine, insurance, banking and welfare. This is not capitalism!
It’s hard to agree with Paul on the requirement for a gold or other commodity-based currency: another great believer in freedom, Friedman, dismisses the idea convincingly in Capitalism and Freedom, before asking:
If we can achieve our objectives neither by relying on the working of a fully automatic gold standard, nor by giving wide discretion to independent authorities, how else can we establish a monetary system free from irresponsible governmental tinkering, a system which will provide the necessary monetary framework for a free enterprise economy yet be incapable of being used as a source of power to threaten economic and political freedom?
We need some fine minds on this problem, minds that can find a sound alternative to the present system that will enable the restoration of competitive, free market capitalism and the prospect of avoiding boom and bust.
I see the European Commission is pressing ahead with legislation to “beef up” bank supervision: let’s hope they get it right.
According to the FT:
Wall Street was in turmoil on Monday as Merrill Lynch found shelter in a $50bn takeover by Bank of America and Lehman Brothers said it would file for bankruptcy protection.
Now we get to find out what happens when the public is not forced to support a major financial institution. And what of competition among investment banks?
Hold tight.
