The ugly N word. What a conundrum we find ourselves in where the leader of the free-market world, the United States of America, is faced with the word nationalization on and for it's banking industry.
Well, not surprisingly, it will be the Democrats to do it. Not because they are in power, now. And, not because they are the ones who are more inclined, under any circumstance, to nationalize than the Republican party. But, because it is now with President Obama, which is not surprising, seeing his overall disdain for the free-market as it is.
It's no secret President Obama abhors the free market system. These Wall St. fat-cats, epitomize all that is wrong with equity for poor people and all that keep poor people, perpetually poor.
In this event, President Obama is a man for the people. However, another conversely surprising man of the people, is Allan Greenspan, the former Federal Reserve chairman.
Some have likened Allan Greenspan to that of "high priest" of laisser-faire economics. The keeper of the free markets. Fighter of inflation. The purveyor of all that is free trade. However, for this once revered free-marketeer, to now, not suggest, but, say quite boldly "It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring...", leaves the rest of his disciples more than disillusioned.
But, not to say I'm jumping on the band-wagon with Greenspan and Co. And, not to say that I am not a free-market averse personality in any regard. But, nationalization, is the best option for one reason; nationalization, will set in place the government systems, so that the banking system, in this case, has the tools to regulate itself post crisis.
Only government can do this. The free-market, can't and won't regulate itself against malfeasance and fraud. In fact, they never have and never will. Regardless of what folks say about the decreases in regulation in the market, in fact, it is quite the contrary. Sarbanes Oxley and a host of other anti-trust regulation as well as corporate governance amendments, speaks otherwise.
The issue has and never will be the regulations put in place, but it is the fact that the actors in the free and private market, are just that smart to get around the rules and regulations put in place.
There is no law to prevent that before the fact. Just laws for blatant theft.
But, not to stray from the point any further than I have, nationalization, is the best option to change this system and set up a new set of operating rules, which would give the government and the system, some time, of, meaningful recovery, before private actors find a way around the system again.
Private actors like Bernie Madoff, and, now, Sir Allen Stanford.
In any event, the best case scenario is obvious. In fact, has been obvious for quite some time now. It was the big pink elephant in the room since the Savings and Loan's debacle of the 1980's.
The democrats have the will and the US has the global power to get it done, however. But, does President Barack Obama have the political guts to risk his second term, on a temporary fix?
We will have to wait and see!
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12 comments:
Hello Youri,
"Some have likened Allan Greenspan to that of "high priest" of laisser-faire economics."
Perhaps those people don't realise that he ran the Fed for many years? The institution that has the state granted monopoly to specify what money is used and how much there is? Where's the free market in that?
There simply isn't a free market in money it is a state run monopoly. That is why it blew up so badly, not because of the free market.
Think about it, we're able to choose whatever ever products we want to use... except when it comes to the product we use to aid in the exchange of goods and services - money.
If you give banks the ability to legally counterfeit money (which is fraud and pretty much explicitly forbidden by capitalism) via the fractional reserve mechanism, then make it quite clear that you'll bail them out if anything goes wrong, is it any surprise that things go wrong? This doesn't happen in the free market.
Regards,
Tim
Hi Tim,
You raise an excellent point about Greenspan and his administration of the FED.
But, I have to disagree with the fact that the FED, did not blow up as a result of the free market.
All sides are at fault. Government for being to flaccid and greedy at the same time, aka Dodd, Frank and few others; the free market players (bank CEO's) for being too smart and willingly taking advantage of DC greed and ignorance and; the FED for facilitating this meltdown, under the facade of such ridiculously misleading assumptions on the role and abilities of the FED.
The FED is not, was not and never will be fully autonomous and able to mitigate all of the market risk, from the backdrop of it being tied solely to the market, as Greenspan tried to make it appear. This led Greenspan to cover up and smooth over, all of the bumps in the road, which were tell tale signs of the impending disaster to come.
Hearing after hearing, Greenspan, was grilled on the FED secrecies, how it sets rates, why it gave market based investment advice and so forth. The FED is in the business of market regulation of currency, not how a market player should invest their money.
As it turned out, people listened to Greenspan like he was a great sage because, he WAS giving you (investors) nuggets of gold every time he spoke—because not only he was in on what was about to transpire, he also knew how it was about to transpire and how it will transform the behavior of what was already taking place.
For him being a purveyor of the “free-market” and fighting for the rights of the market and being in the position of chairman for so long, it is obvious that he should be and is culpable-- as is government and greedy bank CEO’s-- of the mess we have now.
To his credit, he is trying to make amends, by calling policy shots from the sidelines. Like his call for a possible, short term, nationalization.
I am not as much of a free market proponent, to know that the free market and its various inter-connected markets--from consumers, to bank's, to industry...etc. -- needs an intermediary to settle the disputes and cock-up's from time to time.
Only government can fill this role now. All sides know and agree.
Best,
Youri
Hi Youri,
Thanks for your reply. I'd like to get back to my central argument, that there is no free market in money. I thought it would be useful to review the characteristics of a 'free market' and look at these applied to money.
I'm using the standard definition of money, as a medium of exchange, unit of account and store of value - for example, wikipedia.org defines it as "anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and a store of value."
We can now look at the characteristics of a 'free market' and see if they are present in the market for money (Taken from : http://www.acs.ucalgary.ca/~jwhunter/Social9/lesson12.htm)
"Consumer Sovereignty. The decisions about what a society will produce must be made by consumers. They make these decisions by buying products. Every time a consumer buys something, he/she is voting with money."
Here, the 'something' or 'product' we're dealing with is money. So, are decisions about what money a society will produce made by consumers? I would argue that it is not at all, our money is mandated by government decree. There is no consumer choice, I can't decide to be paid in or pay my debts in gold, or shells or salt or anything else that has been used as money over the centuries (before government took control of it that is). The government enforces this through legal tender laws and requiring that taxes be paid in the money they produce.
"Free Competition - Sellers of goods and services must have the freedom to sell whatever they want for any price. There must be competition between firms in order to keep prices low."
I would argue that there isn't actually any competition in the market place at all, free or otherwise. There are no different providers of money competing with each other for customers, naturally they would compete on relative strengths of their monetary forms. As a case in point the government provided money provides a very poor 'store of value' given that the dollar, for example, has lost about 90% of it's purchasing power since the end of World War II. In a free-market consumers would move away from dollars in favour of other forms of money that held their value better, for example.
"Prices are Set by the Forces of Supply and Demand. The prices of goods are set by how much of a given good is available and how much the consumers want to buy it."
This doesn't apply to our government supplied money either. The government, in concert with its central bank, decides, in command economy style, how much money should cost. In the UK the government targets an inflation rate of 2% (quite how they get away with deliberately devaluing their money by 2% a year is beyond me), previously they have targeted measurements of money growth etc. I'm not going to go into the side effects that government control over the cost of money has had, particularly on the current crisis as I want to stick to the issue of whether we have a free market in money.
"Private Ownership and the Freedom to Buy and Sell. The goods and services must be able to be owned by individuals who are free to buy them or sell them at the best price they can get. "
I'm not exactly sure who legally owns dollar bills, pound notes or euros. And consumers have the ability to purchase money with goods and to sell money and receive goods, so I suppose our current money does at least fulfil this criteria. But, the key thing is, that they don't have any choice in what form of money they buy or sell, you have to use pounds or dollars or euros depending on where you live.
"Profit Motive. Businesses will try to make as much money as possible. They will only be able to do this by providing the goods and services that the people in the society want and need."
Governments certainly profit from the ability to create, for free, the money which people must use.
Further to these 5 characteristics of a 'free market', wikipedia also provides the following definition:
"A free market is a market that is free of government intervention and regulation, besides the minimal function of maintaining the legal system and protecting property rights"
I have deliberately avoided talking about the external actors in the government money system, because I want to focus on the core question of whether there is a free-market in money.
Thanks,
Tim
Hi Tim,
The government owns the money. We use it to purchase things, over a clear, secure and open medium.
If you remember, I also said that the FED is and never will be fully autonomous. They don't own the money they regulate--to some extent.
Now, we own the items; property, goods, services and so forth. But, we can barter those at any time we please. Just that we can't have third party exchanges; i.e., we can't use the goat we got from Ms. McKay for fixing her fence, to buy a PC from Circuit City during their close-out sale.
It's about the property rights as you said and I agree. That's where the true equity is and this is why we have to help people with their homes and access to credit, so that they can stabilize what they have and, for some, accumulate more.
The fact is the downfall is half their fault. Many folks could have held their heads, if, they could have gotten their hands on credit and they can extract good money for value from their homes--which are being devalued, because "some" can't, or, could not have afforded to keep their homes, taking down their neighbourhoods with them.
This is why I blame the government as much as the financil system, for not regulating the prices of these items, more carefully.
Best,
Youri
Hi Youri,
Thanks for your reply. Cutting to the chase somewhat... do you believe that there is a 'free market' in money or not?
Thanks,
Tim
Hi Tim,
In a short answer--NO!
There was never a free market for the purchase of goods. There is an ownership society, however.
There are varying degrees to which government allows you the right to afford certain goods, with THEIR money.
You can even accumulate THEIR money, at a taxable rate.
You can't send accross borders THEIR money, at a non taxable rate or without certain requirements.
As long as there are governments, nothing will be free from regulation.
Best,
Youri
Hi Youri,
So, given that we agree that there is no 'free market' in money, can we also agree that blaming the 'free market' for the bubble and subsequent bust in the quantity of money is to misunderstand both what a free market is, and who controls money?
Thanks,
Tim
Hi Tim,
I see you like my blog and this topic. Thank you in advance for the debate.
However, I must say that all sides, yet again, are at fault.
The government, for not regulating and keeping in tune witht he "private" market. This includes the FED. Anf, greedy, and, in most instances, short sighted government officials.
The private market, "lobbying" government officials and, taking advantage of the rules of the game--knowing that it would be deleterious.
Now, I would go as far as to say that there is a "private" market. But, to say that it is totally "free" would not speak truthfully to the issues.
Transparency, would make it less of a private market. But, if you want greater return to scale, you have to be willing to give up something--in the short term.
Why I say in the short term, because the private market is and always will be, quicker on the draw in regards to innovation.
So, just as soon as the government, puts in place ANY law/regulation, there are some cats who will find a loophole.
Best,
Youri
Hi Youri,
:) I do indeed find this topic & your Blog interesting.
My real concern is that we end up moving further away from free-market capitalism in the mistaken belief that it is to blame for the current crisis. In doing so we risk moving closer and closer towards fascism and socialism (central planning etc.), two approaches to economics that have been proven authoritatively not to work.
Yes, governments, banks & individuals have done stupid things and acted irresponsibly - but I see this more as an inevitable result of the way the system is structured. The solution is to change the flawed system, rather than to attempt to patch it up with 'better' regulation, which as you identify, someone will soon enough find a way around.
IMO the non-capitalist, non-free market system of central banking & fractional reserve banking is what should be getting the blame.
Central banking creates inflation (the cruel transfer of wealth from the poor to the politically and financially connected) and causes the business cycle.
Fractional reserve banking is fraud and introduces inherent structural instability into the system.
If you haven't already, I would urge you to read M. Rothbard, H. Hazlitt & Mises. An excellent place to start is Rothbard's audio book : http://mises.org/media.aspx?action=category&ID=92
Regards,
Tim
Hi Tim,
Thank you for the compliment. Please, feel free to comment on anything at anytime. Or, you can suggest a topic for me to write my sentiments about—I am not a stuffy, stuck up, holier than though blogger, which allows you to read what I write, but not he ability to argue, share your views or respond as you like; respectfully, of course.
As for a response to your concerns; it was more of a "freer" market society when the wealth was concentrated into hands of a few, in regards to the intelligence and ability to capitalize--the industrial revolution, etc.
However, as we grow in sophistication as a world and as poverty levels have been receding (to some extent) and, more importantly, bringing more people above the middle income bracket (although not far, fast or penetrative enough) more people can and will have more access to wealth and wealth creating infrastructure/institutions; education and financial products and affordable homes for re-financing, etc...
The issue in regards to the FED is that in their fight against inflation--which really is their core battle--they have, in fact, neglected price regulation and price management.
Makes me wonder what Central Banks around the world have been doing all of this time1?
The price mechanisms-- and I hate to sound like a warped Ricardian as Marx was-- but, it was severely out of whack!! I feel cheated and so should everyone, who paid that extra 30% for gasoline, food and/or basic private services, as a result of it [market price mechanisms] being so criminally out of whack.
It’s almost as if the prices were being controlled by issues which were more than what it took to produce, in regards to the supply chain. It was mote value chain controlled. I don’t think that was fair.
However, to your point; I do not agree with the fact that Central Banking creates inflation. In fact, they have done a good job in balancing inflation with unemployment--especially in the Euro-zone and in the USofA.
As said, bringing more people out of pervasive poverty and upwards from the lower middle class "at risk" levels, to an upper level or even a wealthy level, is what they were doing and should have been doing, in regards to the distributive effects of the Central Banker's.
It's the pricing mechanisms and Wall St.’s "mark to market" that are at fault this time.
The FED, BOE and ECB, let it happen. So too did the governments.
Best,
Youri
Hi Youri,
"However, to your point; I do not agree with the fact that Central Banking creates inflation. In fact, they have done a good job in balancing inflation with unemployment--especially in the Euro-zone and in the USofA."
Inflation, as commonly defined ("a rise in the general level of prices of goods and services in an economy over a period of time") occurs largely as a result of an expansion of the money supply - this much is pretty uncontroversial.
And who controls the money supply? The central banks, ergo, they are the root cause of inflation. Just look at Zimbabwe!
Regards,
Tim
Hi Tim,
Well, I am sort of a controversial writer.
The Central Bank is not as responsible for prices as many people believe. For example, if you read my response, I said that no one can induce you to pay for an extra can of soda, loaf of bread etc...if you don't need it.
So, the assumption is that as money supply is increased, folks have more access to money and spend more--this does not have to happen.
The instance where rates were being lowered and we have a massive devaluation and deflation in stocks!
So, rates being lowered has not helped inflation at all. In fact, things got worse.
QE, in this case, is ineffective.
Thusly, by no other means, we need another explanation.
I posit strongly that the only thing that moves the "value of goods" are the cost it takes to make the good. The value chain and the supply chain--value added.
In addition, if we are to have price changes, due to the increases and decreases in interest rates, then, we would have to discount allot of issues around the value of goods; employment; investment; neccesity; access; availability and; value/supply chains!
Also, just to relate that to what has happened in Zimbabwe, it is more of a devaluation of their currency [Zimbabwe] and a distortion in their domestic valuation mechanismds, which are insulated form international price setting/valuation mechanisms--on purpose.
However, goods per value have not changed--it is the price it takes to produce or manufacture the goods, which is the issue in regards to the value of their money and the relationship between that and the true price of goods.
Distortion. The Central bank is printing worthless money to begin with, because, the Zimbabwean goods and services, have no domnestic value--because their market is distorted and operate almost, virtually, in autarky!
To me, the price mechanisms, only has value when set up against country to country basis.
Best,
Youri.
p.s.
Thank you for the audio book. Mises seems to be a leader of many!
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