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Capitalism, Crisis and Bureaucracy

The real question about capitalism isn't how best to manage it, but whether it should be managed in the first place...

THE CONCEIT of modern public finance is that those people who have good political skills can do a better job of deciding which banks are solvent than the marketplace, writes Bill Bonner in the Daily Reckoning.

'Raw capitalism,' is just too impulsive, they claim. It makes hasty decisions, often throwing out the baby with the bath water, and the bathtub too. By contrast, wise bureaucrats keep their wits about them, even in a crisis.

The Financial Times is running a series it calls "Crisis in Capitalism." The writers claim capitalism needs adult supervision. Samuel Brittan, for example, says it "requires...the use of monetary and fiscal policy..." to keep it doing what it is supposed to do. What's that? He thinks he knows. It is "a means to freedom and prosperity, not an end itself."

We disagree on both points. Capitalism could care less whether people are prosperous or poor. As to fiscal and monetary policy...he presumes settled the very point that is at issue — whether central planning, by bureaucrats, improves market outcomes.

Last Thursday, the US Fed helped to resolve the doubt we never had. It released records of its internal discussions in 2006, when the US housing and finance bubble was reaching its peak. On the evidence provided, the feds never had their wits about them, even when the going was good. 

Resumed in The New York Times, we discover that:

"...top Federal Reserve officials marveled at the desperate antics of home builders seeking to lure buyers. The officials laughed about the cars that builders were offering as signing bonuses, and about efforts to make empty homes look occupied. They joked about one builder who said that inventory was 'rising through the roof.' But the officials, meeting every six weeks to discuss the health of the nation's economy, gave little credence to the possibility that the faltering housing market would weigh on the broader economy...instead they continued to tell one another throughout 2006 that the greatest danger was inflation — the possibility that the economy would grow too fast."

While the American authorities couldn't spot a crisis, the Euro- fixers were actively creating one. Draghi is a veteran of the World Bank, the Italian Treasury, and Goldman Sachs. He was on the job in Rome while Italy was building up the debt it now finds so hard to pay. 

Christine Lagarde, now head of the IMF, was French finance minister from 2007 to 2010 — when France increased its public debt by about 50%. Dust any financial crime scene from the last 20 years and you will find prints from them and the whole confrerie of public payroll dunces who now claim to be fixing the system. They are the very same people who brought Europe...and the world...to the brink of financial disaster. And now they preside over more monetary and fiscal policy tweaks, more controls, more regulations, more 'stress tests.'

Most likely, the leading financial institutions...as well as most of the sovereign nations of the developed world... are already insolvent. We say "most likely" because neither we nor anyone else can know. Real solvency — like the value of the ECB's collateral — is not judged by earnest ratings, phony stress tests, or bureaucrats. It's determined by the real stress test of the marketplace.

No one ever knows what anything is really worth — especially what financial institutions with complex holdings and obscure business models are worth. Not even their owners know. The accountants had to interrupt Jimmy Cayne, CEO of Bear Stearns, during a bridge tournament in 2008, to tell him his company was broke.

Insolvency is like death. When conditions change, so does life expectancy. You discover when a company is broke by testing it. We saw, for example, what the banks were worth under the benign credit conditions leading up to 2007. Then, market conditions changed. Under the stress of the market's new challenge, Bear Stearns and Lehman Bros. died. This caused investors to wonder about the rest of them. But instead of allowing the process of price discovery go on, US authorities stopped the test.

What a pity. We don't know which bank...or which nation... is insolvent. Most likely, they all are.

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Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

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