Bill Bonner

The Financial Times continues its series on “Capitalism in Crisis.” We’re 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 installment, 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 Deutschebank, the House of Goldman…and many others. But the feds stepped in 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 2-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 globalized 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. (About which, more below…)

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 labor 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.

Collapsing banks would have meant the collapse of many other things too. Greek debt, for example. The banks’ holdings would have been subject to fire-sale prices…driving down their own prices…and putting Greece and other major debtors into bankruptcy too.

This, of course, is just what the feds wanted to avoid. Today, more than 3 years later, they’re still trying to avoid it. That’s the drama we follow in Europe almost every day.

But far from illustrating ‘capitalism in crisis,’ it shows the crisis caused by the fixers themselves. Now they’ve got banks that would be bankrupt…if Mr. Market were allowed to fully express himself. The bankrupt banks are kept in business by governments, who should be bankrupt too.

And since Mr. Market is sidelined…he can’t solve the real problem. The bankrupt institutions stay in business…shifting more and more real resources to zombie institutions run by incompetent, but highly paid, managers.

This leaves the illusion of repairing things to the managers themselves and their fixer friends in government.

The FT gives a claptrap solution:

“…extend and refurbish the multilateral order to make economic integration with great global governance.”

We’re not sure what that means. But we know it is a mistake.

People may not know what capitalism is, but they know they don’t like it. A poll by Globescan found that support for capitalism has fallen by 20 percentage points in the last ten years. A few years ago too, Mitt Romney’s success at Bain Capital would have been a plus on the campaign trail. Now it is something he needs to explain and defend.

The poll found higher levels of support for capitalism in China, Brazil and Germany too.

Here is Qin Xiao, a businessman from China who has experienced state planning in a direct and personal way. In the 1960s, he was exiled to the countryside of Inner Mongolia to be “re-educated.” The purpose of the re-education was to help him learn that “government was the savior of the poor and free enterprise was evil.”

Instead, what he learned…and observed since…was that the free enterprise system works. A planned economy doesn’t. His advice to China:

“An economy now dominated by the government needs to become one led by the market…the government must scrap procedures for approving economic and market activities…it must stop interfering with market prices and transactions…”

What gives? Are these emerging market thinkers naïve?

Nope. We don’t think so. Here at The Daily Reckoning, we expected them to be pro-free market. Why? Because people are neither bad nor good, smart nor stupid. They are subject to influence.

They will favor market systems when market systems are making them rich.

US capitalism — fettered by zombies…managed by incompetents… regulated by bureaucrats — no longer makes people rich. It has cut the real hourly wage of a non-high school grad by 47% over the last 32 years. No wonder Americans don’t like it.

In the emerging world, on the other hand, real wages double every ten years or so. They like capitalism. They want to practice it.

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • Jim smither

    So let me get this right. The govt creates more dollars with no backing. Thus making all existing dollars worth less. The result is they have # 1 stolen the value of my dollars and # 2 increased the paper value of property , stocks gold etc as a result. And the items are the same as when I acquired them in real terms but the weakened dollars take more to buy the property and they have the nerve to tell me I have a Capitol gain and want to tax me on their theft ?

  • filonn1

    yes bill, you are correct, unfetted capitalism was not allowed to fulfill its function and completely destory the U.S. economy. all of the real productive jobs are gone (as you regularly remind us). in order to get the jobs back and be competitive we must lower our wages to the slave level, see:
    with the help of of the candidate that you endosed for president Newt Gingrich,the country will have no problem getting to those slave wages, see:
    since these are the principles that you adhere to.I ask you Bill where do you fit in this New World Order ?

  • le petomane

    Don’t know who you’re talking to Jim but that sounds about right.
    You forgot though that if the govt is the borrower you’re also in the hole for the interest owed to the central bank who created the money.

  • Rusty Fish

    System is meant for someone to use or abuse. Keep trying to harbour those culprits and keep blaming the system would only spur a worldwide collective doom scheme to zenith. Borderless, beliefless, raceless effort in eradicating
    big scam could be the most effective solution.

  • Rusty Fish

    No doubt, capitalism has the productivity.
    But … initially sugar tastes sweet. Later, this monstrous machinery simply could not be controlled. As time goes, lifestyle changes, additional comfort befalls, it is impossible to regulate human behaviour. Surely, it will lead to the great debt of USA or Japan. Or, paper shortage of Greece. Worse, if a big landed property like USA breaks into tiny soccer fields. Please check capital system with a macro eye before actual implementation. Sometime when we are poor but at least under a warm roof.

  • le petomane

    Have I gone bonkers or is it the rest of you?

  • Rusty Fish

    let’s put it this way. We don’t like to see in future time big land lord, USA has it landed property split into countless farm estates with UN strata title deeds issued.

  • Le Petomane

    I see

  • Rod

    You say the emerging world wants to practice capitalism the most. China is the biggest emerging economy by far and is also the most centrally-controlled. Yet Chinese growth now keeps capitalism afloat. Without centrally planned investment in China, what would “the market” do? Capitalism(the global variety) would collapse, would it not?

  • Holistic Hypnosis & Hypnotherapy – Los Angeles

    I always enjoy your point of view, and the writing and language you use to express it. At times though I feel you overstate your case. Also, because one alternative is bad or untrue, it does not make another alternative, “defined” as the opposite, good or true. And vice versa. There is probably a name for that in the field of Rhetoric or Logic. A false inverse syllogism or something. Inventing as I go along. Nevertheless, keep up the good wok. hypnohotshot

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