Tuesday, February 1, 2011

Global Capitalism Doesn’t Believe in Capitalism

One of the hallmarks of the age we are living in is a lack of belief in capitalism.

Sure, people today believe in pursuing their own best interests—but they are unwilling to allow capitalism’s creative destruction to run its course.

Case in point: Iceland.

During the Global Financial Crisis, the Icelanders allowed their banking system to fail. Shareholders were wiped out, creditors took a beating—and blamed the Icelandic government. The international financial sector punished Iceland severely—reasonable commentators said Iceland would go back to the stone-age, in terms of its economy and financial credibility.

But now, two years after the crisis, Iceland is doing just fine: It took the short-term hit—a 7% drop in GDP, a 58% devaluation in the krona, lots of nasty words from the banksters who got hit—but now, Iceland is back on track: 2011 GDP growth is expected to be 3%, and the country has not needed any bailout. Its excessive—nay, ridiculous—banking sector is gone the way of the dodo, replaced by a more sensible financial sector for the country that Iceland actually is.

Now look at Ireland.

During the height of the Global Financial Crisis, the Irish government guaranteed the Irish banks—and the Irish people have never recovered. The Irish state has consistently run monstrous budget deficits, to the point where they finally had to essentially surrender their sovereignty in order to receive an IMF/ECB/UK bailout. Worst of all, Ireland still has the teetering zombie banks, which share their balance sheets with the Irish government, and ultimately the Irish people.

At the time of the crisis, Prime Minister Brian Cowen’s boneheaded move to back the Irish financial sector was spoken of in the financial press in glowing terms: “Restoring stability to the markets”, and all that bullshit.

But now—finally!—two years after the Global Financial Crisis, Bloomberg is out with a piece: “Iceland Proves Ireland Did ‘Wrong Things’ Sacrificing Taxpayers”. They get the title from Joseph Stiglitz, who is quoted as saying, “Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks.”

It’s odd that Stiglitz—a renown Neo-Keynesian—should be cheerleading Iceland; but that’s for another day.

Capitalism depends on creative destruction. There is no business so essential that it cannot be allowed to fail.

How different would the U.S. economy be, if the so-called “Too Big To Fail” banks had actually be allowed to fail?

The fact that all sides in the political and financial leadership did not allow them to fail shows that that leadership does not believe in capitalism—it believes in cronyism


  1. Sorry Gonzalo, things are a little more subtle than that.

    OF COURSE the US Government did not let the big banks fail! They are "TBTF" for a reason - they run the payments system, and one element going bankrupt immediately means another element not getting the money owed from that first element and so ITSELF going bankrupt, thereby leading to other elements going bankrupt etc. in a horrible chain-reaction. The only way to stop this once it has gotten started - and this obviously only works for the moment - is for the government to declare a bank holiday so that the banks are not even allowed to be open.

    End result at the man-in-the-street level: People lose the money they thought they had deposited in banks, which kicks off in a similar fashion a chain-reaction of bankruptcies among private individuals. I merely need to refer you to the waves of bank collapses in the early stages of the American Great Depression, which can fairly be said to have put the "Great" into that expression.

    So you DON'T let the banks fail, and this has nothing at all to do with any sort of "cronyism." What DOES indicate cronyism is injecting the necessary capital to keep the banks on their feet (i.e. the payments system still functioning) without extracting the leverage to punish the careless/prosecute the criminally liable and in general reshape things to push any repetition of such an episode as far into the future as possible. If you then go so far as to fail to do this to the point that the same bank personnel are soon enough paying themselves enormous bonusses again, essentially with the public money that ensured their (absolutely vital) survival, THEN there is truly valid talk of cronyism!

  2. Very good synopsis.

    What happens next, now that the US has bailed out banksters, et al with the present value of future taxes?

    I mean, I don't think Americans can afford the future taxes compounded by present debt. I think I see a squal-line on the horizon and am just wondering when we meet it.

    Maybe the Irish will show us how to meet it.

  3. With hindsight, I wish we had never bailed out the 2B2F banks. If we could have seen the enormous hit against the governments of the world, I don't think Congress would have funded Hank Paulson's plan.

    All total, the world bailout of the financials has come to what? $10T, $20T? GL, maybe you could figure out the total.

    Roubini was right when he said that the biggest banks needed to be broken into small pieces. We are doomed because the next big blow-up will be here within 5 years.

    -Dave in MO

  4. "We are doomed because the next big blow-up will be here within 5 years."

    And if we are lucky, it will be the same banks.

    If we are unlucky, it will be the governments that bailed the banks out.

    If we are really unlucky, Quantitative Easing will have proved successful,.... and we will be left in a world with worthless currency and no trade.

    Bail-outs have consequences.


Knock yourself out!

The cult of stability is a culture of death.