The Financial Times continues its series on “Capitalism in Crisis.” I'm getting a little tired of it. We were hoping at least one of the writers might tell us what the crisis was. Instead, we’ve gotten a variety of opinions; none offering much light on the nature of the crisis and several offering more darkness about how to make it worse.
In yesterday’s instalment, for example, we discover that in 2008, “leaders of rich and rising nations sidestepped their differences to avert a worldwide slump.”
Really? If the writer had any appreciation for capitalism at all he’d know that the politicians did no such thing. Instead, they sidestepped their differences to prevent capitalism from doing its job. In 2008, after the fall of the House of Lehman, capitalism was aiming its wrecking balls at the House of BAC, the House of Deutsche Bank, the House of Goldman…and many others. But the feds stepped and stopped the wrecking balls in mid-air. The process of price discovery halted.
Instead of allowing capitalism to fix the problem, the feds made it worse. They gave more money to the very institutions and managers who had proved they couldn’t be trusted with it.
We don’t want to rehearse the whole sequence of events that got us to where we are. But it’s important to understand what happened.
The FT writers – along with practically every financial journalist, economist and two-bit big mouth – get the whole story wrong. They seem to think that Lehman Bros. was a failure of capitalism. Symptomatic, they say, of a larger failure, which almost all believe came from a lack of effective regulation.
“Too much capitalism…” is how one sage put it.
“The big lesson from all this is the extent to which globalised capitalism has outstripped the ability of governments to manage it,” says the FT.
Manage it? They must be dreaming. If the guys who ran Lehman Bros. couldn’t manage their own business, how were a group of bureaucrats going to do so? On the evidence, the feds had even less idea of what was going on than the ‘capitalists’ themselves.
The real problem was not too much capitalism. Instead, there was too little, especially when we needed it in 2008. The financial industry had been corrupted by government. Federal subsidies to the homebuilding industry… along with artificially low interest rates from the Fed… created a bubble in the economy and a frenzy on Wall Street. The financial industry became obsessed with fast profits. Bank managers learned that they could earn fees by making loans; who cared about collecting them?
Also, most Wall Street firms had ceased to be genuinely capitalistic. The benefits and the control were no longer in the hands of real capitalists, but in the hands of the managers. Over the last ten years, for example, the owners of financial industry stocks have made zero. Not a penny. But the managers – employees – have gotten rich. Goldman Sachs alone transferred $125 billion of shareholders’ money to its labour force over the same period that the shareholders themselves made nothing.
This left the employees with nice pads in the Hamptons, but it left the shareholders will little in real value. Today, many major banks have equity of less than 2% of their assets. That means, if their holdings of government debt – for example – go down 2%, they are broke. And it leaves them vulnerable to the next crisis…. just as they were to the last. When the crisis came in 2008, there was not enough equity – real shareholder value – to prevent bankruptcy.
This was not a crisis of real capitalism. It was a problem of geriatric capitalism… a simple problem that real capitalism knew how to fix. Left to do its work, these banks would have gone out of business… as they should have.
Bill Bonner
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