May 4, 2014 For the People Owning the Too-Big-To-Fail Corporations

May 4, 2014 For the People Owning the Too-Big-To-Fail Corporations

By Charles Brown

It is important to point out that the Too-big-to-fail banks and corporations did in fact fail back in 2008; even though they were bailed out. The demand the Wall Street rulers made to Washington for a bailout was a confession that the whole financial system was insolvent. The USA's, We the People's, bailout brought the finance system back from the dead. Capitalism does not add up. After 500 years, it ends up that capitalism is bankrupt and insolvent by its own generally accepted accounting principles.

The shadowy finance ministers who ordered President Bush to bailout Wall Street, said that certain financial institutions are "too big to fail". If they fail they will destroy the financial system, and so the federal government must save them in order to avoid total economic disaster for America and the world.

So, they were given trillions of dollars of what amounted to semi-gifts ( sort of "pay it back if you can at your own pace"; would that we could get such terms in loans from these same banks) , and the concept of "too-big-to-fail corporations" gained wide public awareness.

Although, there was not total collapse , the bank failures that did occur triggered the so-called Great Recession. We, the 99%, suffered and suffer still enormously from that recession as it resulted in all around economic distress for tens of millions of Americans over the last six years. These failures of the leading private institutions of our Economy, led to an excruciating economic Depression for the Many. Large swathes of the middle and "lower" classes suffer poverty, foreclosure, unemployment, and the many ways of misery, premature deaths, disease, divorce, crime, etc, that are generated by economic downturn , especially in a jobless recovery only for corporate profits and exploitation by the 1%

It is objectively true that this would have been worse for the 99% if the Too-big-to-fails had not been bailed out. So, it is not the case that these corporations should not have been bailed out, but that their Creditor, The People, should get more for their bailout money than they did: ownership of the big debtors.

To reiterate,_circa_ 2008, with the insolvency of financial institutions designated Too-big-to-fails by our nation's highest financial ministers ( in other words straight from the horse's mouth), We, the People, learned of or were reminded of a category of economic life that had not been so explicit in the national discourse. These Big Banks were bailed out and avoided bankruptcy with guarantees or assurances of anywhere from $16 to 29 trillion by the United States of America, because the national unelected , financial ministers declared that their failure would bring down the entire financial industry of the US and perhaps "the West". In other words, the insolvency of the Too-Big-To-Fail corporations was in fact the insolvency of the whole financial system. It was a confession that capitalism doesn't add up; it fundamentally cannot meet its own standard of moral hazard. Wall Street's debts exceeded its assets by a dozen or two trillion dollars, at that historic moment.

Any debtor of Wall Street creditors who reaches such a moment , must not be bailed out because of the danger of moral hazard. If we apply Wall Street's own standard to itself, the 2008 bailout represents the biggest moral hazard in history, pretty much. So, the principle of moral hazard is dead.

General Motors and Chrysler, two of our largest corporations, though evidently an order of magnitude smaller than the Wall Street Too-big-to-fails, were also bailed because they arer too big to fail without devastating economic impact. . The bailed out Too-big-to-fails, owned and controlled and expropriated by the 1%, continue to live in fabulous luxury greater than any ruling class in history, There is a long history of government bailout of corporations ( (History of U.S. Gov't Bailouts http://www.propublica.org/special/government-bailouts

http://en.wikipedia.org/wiki/Too_big_to_fail)

The Great Recession caused many states ,including, California and Illinois, actual insolvency , though it was not declared; and they were bailed out of deficits by the Obama Stimulus plan.

What is to be done now so many years from The Financial Big Bang ?

Well, like the Big Bang, it is still affecting us.

We, the People, who bailed out the Economy, must have ownership and control of all Too-big-to-fail corporations. Private owners , who put private interests above public interests always, cannot be trusted with control and distribution of the products of the Economy's Too-big-to-fail Economic Units, because their failure does not impact the incomes of the 1% current owners, but only the lives of the masses of people. The failure of Too-big-to-fails is dumped on the 99%, and avoided by the 1% who own them now. The 99% must own them, therefore.

We must reverse the current circumstance in which , essentially, the Too-big-to-fails own The People, as demonstrated by their ordering the Presidents and Congress to give them dozens of Trillions of dollars without their giving up ownership of themselves in exchange as would occur in any such transaction in the "free" market. The Too-big-to-fails still owe the People for the Bailout. We, The Creditors, are coming to Collect.

Enact a .law :requiring the Federal Reserve to report and list quarterly on all too-big-to-fail corporations, and initiate proceedings to take them over. Use the same criterion as was used in the bailouts.

Enact a Law: One of the rationales for exploiting interests from debtors, recipients of loans, is that the creditor puts its money at risk. Since, the Too-Big-to-Fails will be bailed by the government if too many of their loans fail, their interest rates should be abated or negated, because they are not taking the risk they claim.

Reassert federal ownership of General Motors and Chrysler. Chrysler has been bailed out twice by the federal government. Take Federal ownership of JP Morgan, Citibank, Wells Fargo, Goldman Sachs, AIG and all Wall Street, Too-big-to-fails. before they fail again.

Subject: Wall Street Meltdown Primer

Bello is mostly on here, though his accounting of the 1997 Asian financial crisis may need some revision, i.e. There is substantial evidence that the 'crisis' was a purely US state-manufactured one: The Clinton Administration was demanding that Thailand and Indonesia fully open their financial markets to US finance and capital sectors. When they objected, Clinton's Commerce Secretary, Robert Rubin, instructed America's giant hedge funds to launch a speculative attack on the Thai baht. The devastation then spread to Indonesia and then South Korea. Lesson learned.

Tony Published on Friday, September 26, 2008 by Foreign Policy in Focus Wall Street Meltdown Primer

by Walden Bello Many on Wall Street and the rest of us are still digesting the momentous events of the last 10 days. Between one and three trillion dollars worth of financial assets have evaporated. Wall Street has been effectively nationalized. The Federal Reserve and the Treasury Department are making all the major strategic decisions in the financial sector and, with the rescue of the American International Group (AIG), the U.S. government now runs the world's biggest insurance company. At $700 billion, the biggest bailout since the Great Depression is being desperately cobbled together to save the global financial system. The usual explanations no longer suffice. Extraordinary events demand extraordinary explanations. But first... Is the worst over? No. If anything is clear from the contradictory moves of the last week - allowing Lehman Brothers to collapse while taking over AIG, and engineering Bank of America's takeover of Merrill Lynch - there's no strategy to deal with the crisis, just tactical responses. It's like the fire department's response to a conflagration. The $700 billion buyout of banks' bad mortgaged-backed securities is mainly a desperate effort to shore up confidence in the system, preventing the erosion of trust in the banks and other financial institutions and avoiding a massive bank run such as the one that triggered the Great Depression of 1929. Did greed cause the collapse of global capitalism's nerve center? Good old-fashioned greed certainly played a part. This is what Klaus Schwab, the organizer of the World Economic Forum, the yearly global elite jamboree in the Swiss Alps, meant when he said in an interview earlier this year: "We have to pay for the sins of the past." Was this a case of Wall Street outsmarting itself? Definitely. Financial speculators outsmarted themselves by creating more and more complex financial contracts like derivatives that would securitize and make money from all forms of risk - including such exotic futures instruments as "credit default swaps" that enable investors to bet on the odds that the banks' own corporate borrowers would not be able to pay their debts! This is the unregulated multi-trillion dollar trade that brought down AIG. On December 17, 2005, when International Financing Review (IFR) announced its 2005 Annual Awards - one of the securities industry's most prestigious awards programs - it had this to say: "[Lehman Brothers] not only maintained its overall market presence, but also led the charge into the preferred space by...developing new products and tailoring transactions to fit borrowers' needs...Lehman Brothers is the most innovative in the preferred space, just doing things you won't see elsewhere." No comment. Was it lack of regulation? Yes. Everyone acknowledges by now that Wall Street's capacity to innovate and turn out more and more sophisticated financial instruments had run far ahead of government's regulatory capability. This wasn't because the government was incapable of regulating but because the dominant neoliberal, laissez-faire attitude prevented government from devising effective regulatory mechanisms. But isn't there something more that is happening? We're seeing the intensification of one of the central crises or contradictions of global capitalism: the crisis of overproduction, also known as overaccumulation or overcapacity. In other words, capitalism has a tendency to build up tremendous productive capacity that outruns the population's capacity to consume owing to social inequalities that limit popular purchasing power, thus eroding profitability. But what does the crisis of overproduction have to do with recent events? Plenty. But to understand the connections, we must go back in time to the so-called Golden Age of Contemporary Capitalism, the period from 1945 to 1975. This was a time of rapid growth both in the center economies and in the underdeveloped economies - one that was partly triggered by the massive reconstruction of Europe and East Asia after the devastation of World War II, and partly by the new socio-economic arrangements institutionalized under the new Keynesian state. Key among the latter were strong state controls over market activity, aggressive use of fiscal and monetary policy to minimize inflation and recession, and a regime of relatively high wages to stimulate and maintain demand. So what went wrong? This period of high growth came to an end in the mid-1970s, when the center economies were seized by stagflation, meaning the coexistence of low growth with high inflation, which wasn't supposed to happen under neoclassical economics. Stagflation, however, was but a symptom of a deeper cause: the reconstruction of Germany and Japan and the rapid growth of industrializing economies like Brazil, Taiwan, and South Korea added tremendous new productive capacity and increased global competition. Meanwhile social inequality within countries and between countries globally limited the growth of purchasing power and demand, thus eroding profitability. The massive increase in the price of oil aggravated this trend in the 1970s. How did capitalism try to solve the crisis of overproduction? Capital tried three escape routes from the conundrum of overproduction: neoliberal restructuring, globalization, and financialization. What was neoliberal restructuring all about? Neoliberal restructuring took the form of Reaganism and Thatcherism in the North and structural adjustment in the South. The aim was to invigorate capital accumulation, and this was to be done by 1) removing state constraints on the growth, use, and flow of capital and wealth; and 2) redistributing income from the poor and middle classes to the rich on the theory that the rich would then be motivated to invest and reignite economic growth. This formula redistributed income to the rich and gutted the incomes of the poor and middle classes. It thus restricted demand while not necessarily inducing the rich to invest more in production. In fact, neoliberal restructuring, which was generalized in the North and South during the 1980s and 1990s, had a poor record in terms of growth: global growth averaged 1.1% in the 1990s and 1.4% in the 1980s, whereas it averaged 3.5% in the 1960s and 2.4% in the 1970s, when state interventionist policies were dominant. Neoliberal restructuring couldn't shake off stagnation. How was globalization a response to the crisis? The second escape route global capital took to counter stagnation was "extensive accumulation" or globalization. This was the rapid integration of semi-capitalist, non-capitalist, or precapitalist areas into the global market economy. Rosa Luxemburg, the famous German revolutionary economist, saw this long ago as necessary to shore up the rate of profit in the metropolitan economies: by gaining access to cheap labor, by gaining new, albeit limited, markets, by gaining new sources of cheap agricultural and raw material products, and by bringing into being new areas for investment in infrastructure. Integration is accomplished via trade liberalization, removing barriers to the mobility of global capital and abolishing barriers to foreign investment. China is, of course, the most prominent case of a non-capitalist area that was integrated into the global capitalist economy over the last 25 years. To counter their declining profits, many Fortune 500 corporations have moved a significant part of their operations to China to take advantage of the so-called "China Price" - the cost advantage of China's seemingly inexhaustible cheap labor. By the middle of the first decade of the 21st century, roughly 40-50% of the profits of U.S. corporations were derived from their operations and sales abroad, especially China. Why didn't globalization surmount the crisis? This escape route from stagnation has exacerbated the problem of overproduction because it adds to productive capacity. A tremendous amount of manufacturing capacity has been added in China over the last 25 years, and this has had a depressing effect on prices and profits. Not surprisingly, by around 1997, the profits of U.S. corporations stopped growing. According to one index, the profit rate of the Fortune 500 went from 7.15% in 1960-69 to 5.3% in 1980-90 to 2.29% in 1990-99 to 1.32% in 2000-2002. What about financialization? Given the limited gains in countering the depressive impact of overproduction via neoliberal restructuring and globalization, the third escape route became very critical for maintaining and raising profitability: financialization. In the ideal world of neoclassical economics, the financial system is the mechanism by which the savers or those with surplus funds are joined with the entrepreneurs who have need of their funds to invest in production. In the real world of late capitalism, with investment in industry and agriculture yielding low profits owing to overcapacity, large amounts of surplus funds are circulating and being invested and reinvested in the financial sector. The financial sector has thus turned on itself. The result is an increased bifurcation between a hyperactive financial economy and a stagnant real economy. As one financial executive notes, "there has been an increasing disconnect between the real and financial economies in the last few years. The real economy has grown...but nothing like that of the financial economy - until it imploded." What this observer doesn't tell us is that the disconnect between the real and the financial economy isn't accidental. The financial economy has exploded precisely to make up for the stagnation owing to overproduction of the real economy. What were the problems with financialization as an escape route? The problem with investing in financial sector operations is that it is tantamount to squeezing value out of already created value. It may create profit, yes, but it doesn't create new value. Only industry, agricultural, trade, and services create new value. Because profit is not based on value that is created, investment operations become very volatile and the prices of stocks, bonds, and other forms of investment can depart very radically from their real value. For instance, in the 1990s, prices of stock in Internet startups skyrocketed, driven mainly by upwardly spiraling financial valuations rooted in theoretical expectations of future profitability. Share prices crashed in 2000 and 2001 when this strategy got completely out of hand. Profits then depend on taking advantage of upward price departures from the value of commodities, then selling before reality enforces a "correction." Corrections are really a return to more realistic values. The radical rise of asset prices far beyond any credible value is what what fosters financial bubbles. Why is financialization so volatile? With profitability depending on speculative coups, it's not surprising that the finance sector lurches from one bubble to another, or from one speculative mania to another. And because it's driven by speculative mania, finance-driven capitalism has experienced scores of financial crises since capital markets were deregulated and liberalized in the 1980s. Prior to the current Wall Street meltdown, the most explosive of these were the string of emerging markets crises and the U.S.tech stock bubble's implosion in 2000 and 2001. The emerging markets crises primarily included the Mexican financial crisis of 1994-95, the Asian financial crisis of 1997-1998, the Russian financial crisis in 1998, and the Argentine financial collapse that occurred in 2001 and 2002, but they also rocked other countries including Brazil and Turkey. One of President Bill Clinton's Treasury Secretaries, Wall Streeter Robert Rubin, predicted five years ago that "future financial crises are almost surely inevitable and could be even more severe." How do bubbles form, grow, and burst? Let's first use the Asian financial crisis of 1997-98, as an example. First, capital account and financial liberalization took place Thailand and other countries at the urging of the International Monetary Fund (IMF) and the U.S. Treasury Department. Then came the entry of foreign funds seeking quick and high returns, meaning they went to real estate and the stock market. This overinvestment made stock and real estate prices fall, leading to the panicked withdrawal of funds. In 1997, $100 billion fled the East Asian economies over the course of just a few weeks. That capital flight led to an IMF bailout of foreign speculators. The resulting collapse of the real economy produced a recession throughout East Asia in 1998. Despite massive destabilization, international financial institutions opposed efforts to impose both national and global regulation of financial system on ideological grounds. What about the current bubble? How did it form? The current Wall Street collapse has its roots in the technology-stock bubble of the late 1990s, when the price of the stocks of Internet startups skyrocketed, then collapsed in 2000 and 2001, resulting in the loss of $7 trillion worth of assets and the recession of 2001-2002. The Fed's loose money policies under Alan Greenspan encouraged the technology bubble. When it collapsed into a recession, Greenspan, to try to counter a long recession, cut the prime rate to a 45-year low of one percent in June 2003 and kept it there for over a year. This had the effect of encouraging another bubble - in real estate. As early as 2002, progressive economists such as Dean Baker of the Center for Economic Policy Research were warning about the real estate bubble and the predictable severity of its impending collapse. However, as late as 2005, then-Council of Economic Adviser Chairman and now Federal Reserve Board Chairman Ben Bernanke attributed the rise in U.S. housing prices to "strong economic fundamentals" instead of speculative activity. Is it any wonder that he was caught completely off guard when the subprime mortgage crisis broke in the summer of 2007? And how did it grow? According to investor and philanthropist George Soros: "Mortgage institutions encouraged mortgage holders to refinance their mortgages and withdraw their excess equity. They lowered their lending standards and introduced new products, such as adjustable mortgages (ARMs), 'interest-only' mortgages, and promotional teaser rates." All this encouraged speculation in residential housing units. House prices started to rise in double-digit rates. This served to reinforce speculation, and the rise in house prices made the owners feel rich; the result was a consumption boom that has sustained the economy in recent years." The subprime mortgage crisis wasn't a case of supply outrunning real demand. The "demand" was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money that has flooded the United States in the last decade. Big-ticket mortgages were aggressively sold to millions who could not normally afford them by offering low "teaser" interest rates that would later be readjusted to jack up payments from the new homeowners. But how could subprime mortgages going sour turn into such a big problem? Because these assets were then "securitized" with other assets into complex derivative products called "collateralized debt obligations" (CDOs). The mortgage originators worked with different layers of middlemen who understated risk so as to offload them as quickly as possible to other banks and institutional investors. These institutions in turn offloaded these securities onto other banks and foreign financial institutions. When the interest rates were raised on the subprime loans, adjustable mortgage, and other housing loans, the game was up. There are about six million subprime mortgages outstanding, 40% of which will likely go into default in the next two years, Soros estimates. And five million more defaults from adjustable rate mortgages and other "flexible loans" will occur over the next several years. These securities, the value of which run into the trillions of dollars, have already been injected, like virus, into the global financial system. But how could Wall Street titans collapse like a house of cards? For Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, and Bear Stearns, the losses represented by these toxic securities simply overwhelmed their reserves and brought them down. And more are likely to fall once their books - since lots of these holdings are recorded "off the balance sheet" - are corrected to reflect their actual holdings. And many others will join them as other speculative operations such as credit cards and different varieties of risk insurance seize up. The American International Group (AIG) was felled by its massive exposure in the unregulated area of credit default swaps, derivatives that make it possible for investors to bet on the possibility that companies will default on repaying loans. According to Soros, such bets on credit defaults now make up a $45 trillion market that is entirely unregulated. It amounts to more than five times the total of the U.S. government bond market. The huge size of the assets that could go bad if AIG collapsed made Washington change its mind and intervene after it let Lehman Brothers collapse. What's going to happen now? There will be more bankruptcies and government takeovers. Wall Street's collapse will deepen and prolong the U.S. recession. This recession will translate into an Asian recession. After all, China's main foreign market is the United States, and China in turn imports raw materials and intermediate goods that it uses for its U.S. exports from Japan, Korea, and Southeast Asia. Globalization has made "decoupling" impossible. The United States, China, and East Asia in general are like three prisoners bound together in a chain-gang. In a nutshell...? The Wall Street meltdown is not only due to greed and to the lack of government regulation of a hyperactive sector. This collapse stems ultimately from the crisis of overproduction that has plagued global capitalism since the mid-1970s. The financialization of investment activity has been one of the escape routes from stagnation, the other two being neoliberal restructuring and globalization. With neoliberal restructuring and globalization providing limited relief, financialization became attractive as a mechanism to shore up profitability. But financialization has proven to be a dangerous road. It has led to speculative bubbles that produce temporary prosperity for a few but ultimately end up in corporate collapse and in recession in the real economy. The key questions now are: How deep and long will this recession be? Does the U.S. economy need another speculative bubble to drag itself out of this recession? And if it does, where will the next bubble form? Some people say the military-industrial complex or the "disaster capitalism complex" that Naomi Klein writes about will be the next bubble. But that's another story. Copyright © 2008, Institute for Policy Studies http://en.wikipedia.org/wiki/Too_big_to_fail Too big to fail From Wikipedia, the free encyclopedia This article is about a theory in economics. For the 2009 Andrew Ross Sorkin book, see Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves. For the film based on the book, see Too Big to Fail (film). The "too big to fail" theory asserts that certain financial institutions are so large and so interconnected that their failure would be disastrous to the economy, and they therefore must be supported by government when they face difficulty. The colloquial term "too big to fail" was popularized by U.S. Congressman Stewart McKinney in a 1984 Congressional hearing, discussing the Federal Deposit Insurance Corporation's intervention with Continental Illinois.[1] The term had previously been used occasionally in the press.[2] Proponents of this theory believe that some institutions are so important that they should become recipients of beneficial financial and economic policies from governments or central banks.[3] Some economists such as Paul Krugman hold that economies of scale in banks and in other businesses are worth preserving, so long as they are well regulated in proportion to their economic clout, and therefore that "too big to fail" status can be acceptable. The global economic system must also deal with sovereign states being too big to fail.[4][5][6][7] Opponents believe that one of the problems that arises is moral hazard whereby a company that benefits from these protective policies will seek to profit by it, deliberately taking positions (see Asset allocation) that are high-risk high-return, as they are able to leverage these risks based on the policy preference they receive.[8] The term has emerged as prominent in public discourse since the 2007–2010 global financial crisis.[9] Critics see the policy as counterproductive and that large banks or other institutions should be left to fail if their risk management is not effective.[10][11] Some critics, such as Alan Greenspan, believe that such large organisations should be deliberately broken up: “If they’re too big to fail, they’re too big”.[12] More than fifty prominent economists, financial experts, bankers, finance industry groups, and banks themselves have called for breaking up large banks into smaller institutions.[13] In 2014, the International Monetary Fund and others said the problem still had not been dealt with.[14][15] While the individual components of the new regulation for systemically important banks (additional capital requirements, enhanced supervision and resolution regimes) likely reduced the prevalence of TBTF, the fact that there is a definite List of systemically important banks considered TBTF has a partly offsetting impact.[16] Definition Federal Reserve Chair Ben Bernanke also defined the term in 2010: "A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences." He continued that: "Governments provide support to too-big-to-fail firms in a crisis not out of favoritism or particular concern for the management, owners, or creditors of the firm, but because they recognize that the consequences for the broader economy of allowing a disorderly failure greatly outweigh the costs of avoiding the failure in some way. Common means of avoiding failure include facilitating a merger, providing credit, or injecting government capital, all of which protect at least some creditors who otherwise would have suffered losses...If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved."[17] Bernanke cited several risks with too-big-to-fail institutions:[17] These firms generate severe moral hazard: "If creditors believe that an institution will not be allowed to fail, they will not demand as much compensation for risks as they otherwise would, thus weakening market discipline; nor will they invest as many resources in monitoring the firm's risk-taking. As a result, too-big-to-fail firms will tend to take more risk than desirable, in the expectation that they will receive assistance if their bets go bad." It creates an uneven playing field between big and small firms. "This unfair competition, together with the incentive to grow that too-big-to-fail provides, increases risk and artificially raises the market share of too-big-to-fail firms, to the detriment of economic efficiency as well as financial stability." The firms themselves become major risks to overall financial stability, particularly in the absence of adequate resolution tools. Bernanke wrote: "The failure of Lehman Brothers and the near-failure of several other large, complex firms significantly worsened the crisis and the recession by disrupting financial markets, impeding credit flows, inducing sharp declines in asset prices, and hurting confidence. The failures of smaller, less interconnected firms, though certainly of significant concern, have not had substantial effects on the stability of the financial system as a whole."[17] http://billmoyers.com/episode/full-show-too-big-to-fail-and-getting-bigger/ http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/09/29/bailout-marks-karl-marx-s-comeback.aspx Bailout marks Karl Marx's comeback Posted: September 29, 2008, 8:03 PM by Jeff White Martin Masse, mortgage crisis Marx’s Proposal Number Five seems to be the leading motivation for those backing the Wall Street bailout By Martin Masse In his Communist Manifesto, published in 1848, Karl Marx proposed 10 measures to be implemented after the proletariat takes power, with the aim of centralizing all instruments of production in the hands of the state. Proposal Number Five was to bring about the “centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.” If he were to rise from the dead today, Marx might be delighted to discover that most economists and financial commentators, including many who claim to favour the free market, agree with him. Indeed, analysts at the Heritage and Cato Institute, and commentators in The Wall Street Journal and on this very blog, have made declarations in favour of the massive “injection of liquidities” engineered by central banks in recent months, the government takeover of giant financial institutions, as well as the still stalled US$700-billion bailout package. (Editor's Note: Scholars at the Cato Institute have not supported Washington’s $700-billion financial bailout plan. The National Post apologizes for the error.) Some of the same voices were calling for similar interventions following the burst of the dot-com bubble in 2001. “Whatever happened to the modern followers of my free-market opponents?” Marx would likely wonder. At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments. So why throw this sound free-market analysis overboard as soon as there is some downturn in the markets? The rationale for intervening always seems to centre on the fear of reliving the Great Depression. If we let too many institutions fail because of insolvency, we are being told, there is a risk of a general collapse of financial markets, with the subsequent drying up of credit and the catastrophic effects this would have on all sectors of production. This opinion, shared by Ben Bernanke, Henry Paulson and most of the right-wing political and financial establishments, is based on Milton Friedman’s thesis that the Fed aggravated the Depression by not pumping enough money into the financial system following the market crash of 1929. It sounds libertarian enough. The misguided policies of the Fed, a government creature, and bad government regulation are held responsible for the crisis. The need to respond to this emergency and keep markets running overrides concerns about taxing and inflating the money supply. This is supposed to contrast with the left-wing Keynesian approach, whose solutions are strangely very similar despite a different view of the causes. But there is another approach that doesn’t compromise with free-market principles and coherently explains why we constantly get into these bubble situations followed by a crash. It is centered on Marx’s Proposal Number Five: government control of capital. For decades, Austrian School economists have warned against the dire consequences of having a central banking system based on fiat money, money that is not grounded on any commodity like gold and can easily be manipulated. In addition to its obvious disadvantages (price inflation, debasement of the currency, etc.), easy credit and artificially low interest rates send wrong signals to investors and exacerbate business cycles. Not only is the central bank constantly creating money out of thin air, but the fractional reserve system allows financial institutions to increase credit many times over. When money creation is sustained, a financial bubble begins to feed on itself, higher prices allowing the owners of inflated titles to spend and borrow more, leading to more credit creation and to even higher prices. As prices get distorted, malinvestments, or investments that should not have been made under normal market conditions, accumulate. Despite this, financial institutions have an incentive to join this frenzy of irresponsible lending, or else they will lose market shares to competitors. With “liquidities” in overabundance, more and more risky decisions are made to increase yields and leveraging reaches dangerous levels. During that manic phase, everybody seems to believe that the boom will go on. Only the Austrians warn that it cannot last forever, as Friedrich Hayek and Ludwig von Mises did before the 1929 crash, and as their followers have done for the past several years. Now, what should be done when that pyramidal scheme starts crashing to the floor, because of a series of cascading failures or concern from the central bank that inflation is getting out of control? It’s obvious that credit will shrink, because everyone will want to get out of risky businesses, to call back loans and to put their money in safe places. Malinvestments have to be liquidated; prices have to come down to realistic levels; and resources stuck in unproductive uses have to be freed and moved to sectors that have real demand. Only then will capital again become available for productive investments. Friedmanites, who have no conception of malinvestments and never raise any issue with the boom, also cannot understand why it inevitably leads to a crash. They only see the drying up of credit and blame the Fed for not injecting massive enough amounts of liquidities to prevent it. But central banks and governments cannot transform unprofitable investments into profitable ones. They cannot force institutions to increase lending when they are so exposed. This is why calls for throwing more money at the problem are so totally misguided. Injections of liquidities started more than a year ago and have had no effect in preventing the situation from getting worse. Such measures can only delay the market correction and turn what should be a quick recession into a prolonged one. Friedman — who, contrary to popular perception, was not a foe of monetary inflation, but simply wanted to keep it under better control in normal circumstances — was wrong about the Fed not intervening during the Depression. It tried repeatedly to inflate but credit still went down for various reasons. This is a key difference in interpretation between the Austrian and Chicago schools. As Friedrich Hayek wrote in 1932, “Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about ...” The confusion of Chicago school economics on monetary issues is so profound as to lead its adherents today to support the largest government grab of private capital in world history. By adding their voices to those on the left, these confused free-marketeers are not helping to “save capitalism”, but contributing to its destruction. Financial Post Martin Masse is publisher of the libertarian webzine Le Québécois Libre and a former advisor to Industry minister Maxime Bernier. Photo: Karl Marx Editor's Note: Scholars at the Cato Institute have not supported Washington’s $700-billion financial bailout plan. The wording of a sentence in Martin Masse’s September 30 commentary, “Karl’s Comeback,” mistakenly implied otherwise. The National Post apologizes for the error. Read more: http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/09/29/bailout-marks-karl-marx-s-comeback.aspx#ixzz1PqPla4hM https://www.facebook.com/WorkingAmerica/photos/a.10150179024053118.326871.92021268117/10152556474333118/?type=1&theater Sometimes you have to translate what the banks are saying. http://bit.ly/1jFytQ8 Text JOBS to 30644 to join our fight for corporate accountability. (Graphic via The Blue Street Journal)