Bank bail-outs have been a cultural catastrophe for those of us who support free markets, low taxes and enterprise. During the 1980s and 1990s, much of the British public came to accept and even embrace capitalism, in return for a simple deal: profits and losses would both have to be privatised. Clever entrepreneurs, savvy traders or brilliant footballers would be encouraged to make money; but companies and investors that placed the wrong bets would be allowed to fail, with no pity. Not only did this trigger an explosion in prosperity, it also helped shift the British mindset towards a much more pro-enterprise position. The rules of the game felt fair: risk and reward went hand in hand. The government would serve as an umpire, not a supporter of vested interests.But the crisis of 2007-09 put an end to this implicit bargain, at least in the eyes of vast swathes of the public.
Bailouts are a disaster for pro-capitalists. It is almost as if it was deliberate. My only slight caveat here with what is a typically incisive article is that I am not sure how deep the greater support for capitalism really ever went. It certainly never penetrated academia, and parts of the policy maker world. But I am an optimist: the continued respect that seems to be shown among ordinary people for genuine entrepreneurs (not crony capitalists) shows that something has taken root.
The monetary expansion (by the Bank of England, the Federal Reserve and so on) was not deliberately designed to wreak the economy – but it might as well have been.
And the government takeover of the City of London (with the Orwellian name of “deregulation” – for the government power grab) in the mid 1980s was the final death blow for the old financial system of individual share owners, and honourable dealings in the markets (where a hand shake mattered) – although it was as long ago as 1965 when most shares were owned by actual share owners, Capital Gains Tax and Inheritance Tax have undermined things).
The financial system now is dependent on the credit money flow from the Central Banks – there is (basically) nothing else.
Real savings have been destroyed (ultra low interest rates have done their work), and small investors who go into the markets will be mercilessly looted, as the old independent Stock Brokers (responsible to their customers alone – Stock “Jobbers” being the people who dealt with share issues from the companies), being a thing of the past.
Bailouts? Inevitable under Keynesian ideology – indeed Walter Bagehot (third editor of the Economist magazine) was laying the “intellectual” foundations for them, a century and a half ago.
Hope?
Perhaps there is some – but I can not see it.
On the subject of hope, I’ve taken to avoiding the term “capitalism” and instead use the more cumbersome (but more accurate) “right to own the product of one’s labour.” Even in a fairly left-leaning community, I have yet to find someone who did not support the right to own the product of one’s labour. That puts a very useful crack in the wall. Start with owning the product of one’s labour, from there show how the current system does not respect that right (including such things as bailouts; it’s not difficult to be non-partisan on that subject), and finish off with the market theory of value (if they let you get that far).
Re the bank bailout, aren’t we being a bit blase with the help of hindsight here? Yes things have turned out OK(ish) now, but there is no guarantee that things would have done if the banks had been let go. We are talking uncharted territory here, we’ve never had a global systemic financial crash since the fiat money system kicked in fully in 1970, or since the electronic interconnectedness revolution of the last 20-30 years, or since the massive increase in debt over the last 30 years. We don’t know what would have happened if NR, RBS, Lloyds et al had gone to the wall. Barclays were teetering too, probably would have gone as well. We could have been talking no cash withdrawals, no cards working, basically no money for people to spend. And people not getting paid, mortgage payments missed, insurance payments, tax payments etc etc. The knock on effects would have been massive. And thats just the UK. The effects and counter effects from abroad as others collapsed would have increased the trouble.
I personally cannot see how a free market solution could have reasonably been applied to the banking system in 2008, given that there is nothing like a free market in banking to start with. The State had allowed systemic risk to build up to the point that the entire edifice was threatened. In such circumstances it would be ludicrous to throw the system to the free market wolves – such an action would impact so many individuals negatively as to destroy totally any public desire for free markets that might have existed, and make them demand even more collective action. Indeed its not a fanciful to say such a scenario could kill free market capitalism stone dead.
@Paul Marks, I really disagree with your pessimistic message. Don’t get me wrong, bailouts were a disaster, and we are still suffering the pain from them today. But the Internet has changed things a lot in favor of the smaller investor. Much more information, and the large number of low cost trading organizations that find their genesis in the Internet and very liberating. In times past only rich people could trade stocks and shares, and they’d pay hundreds of dollars to trade. Me? I can trade for $7 any number of shares, I don’t have to call anyone, and they even give me free trades. Of course there is a cost in the spread, but I can tell you for sure that I have made some good money in the stock market, something my grandfather and father could simply never have done.
Is the game rigged? Yup. But it is a lot less rigged than it used to be.
But in case anyone misunderstands me, let me reiterate — quantitative easing, big bank bailouts, too big to fail, printing trillions of pounds and dollars, changing the rules of bankruptcy post facto — all are the biggest acts of theft in history, and all have been absolutely disastrous for the world economy. I was going to say “too big to fail” is the worst of all because of its very long term implications, but I’m not sure that is true. They are all so utterly terrible it is hard to choose the worst.
@ Jim’s comment: I agree, but only in part. By 2008 financial institution risk had certainly grown to massive levels, and there hasn’t been any truly “free” market in banking since at least the 1970s (I think the first real breach was the bailout of Continental Illinois Bank in 1974, but a good argument can be made that its roots stretch back to the creation of the FDIC under the Banking Act of 1933). But I think you’ve swallowed whole the panic-mongering propaganda being spouted at the time by Hank Paulson (that tool of Goldman Sachs), Little Timmy Geithner (who was in so far over his head that he couldn’t even see the tops of the weeds) and Helicopter Ben Bernanke (the ivory-tower academic who, it is now evident, had no coherent strategy in mind but was simply making it up on the fly). The “systemic risk” they were asserting was vastly overblown, and the system should have been permitted to correct itself.
At the core of the whole problem was the “credit default swaps” (essentially bond insurance) issued by AIG. When the world awoke to the true extent of defaults on the loans underlying so many of the mortgage-backed securities AIG had insured, the market for such securities essentially froze. With no trading occurring, there was no “market price”. Goldman Sachs used its own computer model to generate a faux “price” and, based solely on that irrationally low number, demanded that AIG put up additional collateral to support its CDSs (none of which had been triggered, by the way, because no bond defaults had occurred; and as it turned out, very few ever did). When AIG couldn’t come up with the requisite cash it teetered on the brink of bankruptcy. That’s when Paulson stepped in and bailed it out. But had bankruptcy been permitted to occur (as it should have), there would have been no catastrophic result: the bankruptcy court would have sorted things out in an orderly manner (and probably called “BS” on Goldman’s ridiculous model and cash demand); the “assets” on Goldman’s books would have been disclosed for the crap they were; time would have disclosed that notwithstanding a far higher than expected default rate on the loans most MBSs would have survived intact, and in the end there would have been few calls on the CDSs; and the market would soon have returned to normal. AIG’s insurance companies were all separate well-capitalized entities (AIG was just an insurance holding company) so their insurance customers would all have been just fine. If necessary, some of those companies could have been sold off to other insurance holding companies under the auspices of the court to pay AIG’s debts. A routine bankruptcy, even of a company as large as AIG, while initially scary would have eventually calmed the markets and shown that the system works. In the very worst case an AIG bankruptcy would have cost Goldman something less than one year’s profits. A disaster to its executives, certainly, but not to the rest of the world. Instead we were treated to massive bailouts whose only real purpose was to protect the bonuses of Goldman’s executives (remember the flap that arose when it paid massive bonuses only a few months later?).
And that is where we remain today: Quantitative Easing is the gift that keeps on giving, but only to Wall Street and the City (or, more properly, to their senior executives). It is destroying the middle class and preventing any real economic recovery. Ben Bernanke claims to be an expert on the Great Depression, and I suppose that must be true because he has done such a fine job of replicating its worst feature: turning what should have been a short, sharp price correction affecting a few thousand speculators into a decade-long period of abject misery for millions. The Great Depression ushered in the era of Big Government. The Crash of 2008 has ushered in the era of Gargantuan Government and rampant crony capitalism, from which our only hope of escape is a complete collapse of this unsustainable house of cards.
Thanks for nothing.
Incidentally, I agree that the linked article is very good, and the solution as outlined by Mr. Heath seems to make much sense. (Of course, as always the devil is in the details, so we’ll just have to wait to see exactly what the BofE actually proposes. And then we’ll have to wait for the next crisis to see if they actually have the courage to follow through on the plan!) I only wish the US were on that path. But instead of the eminently sensible approach of working to ensure that if a big bank finds itself on the brink of collapse it can be handled as a controlled demolition, we are taking the approach of pretending (through various “capital adequacy” measures, etc.) that no such collapse could ever occur. In other words, we have now institutionalized Too Big To Fail, rather than (as was proclaimed to be the intent of the Dodd-Frank Bill) eliminating it. I suppose that should be no surprise; given the two names immortalized in the title of that bill it is no wonder that it is an endless cornucopia of deliberately bad policy and unintended consequences. Both men are long gone from the Senate but their foul stench endures.
Had the big banks been allowed to fail, it would have created a lot more space for people like ‘Dave’ – remember him ?
http://www.londonlovesbusiness.com/entrepreneurs/famous-entrepreneurs/bank-of-dave-is-coming-to-a-high-street-near-you-would-you-bank-there/8709.article
Did Dave really tell Brussels to Foxtrot Oscar when they demanded more cash?
What are they going to do, take your birthday off you?
Actually, the centenary of Waterloo was a missed opportunity by Germany and Britain to celebrate kicking the Frog’s arse.
One of the points that Russ Roberts made about the bailouts (IIRC) was that they were expected. That was one of the reasons people were prepared to take the risks they were. I remember Johnathan banging on about the “moral hazard” bailouts created as long ago as 1998. He was bang on the money.
Jim, it is true that there would have been some pain but it is not likely it would have been the catastrophe that the doom-and-gloomers would have us believe. When a company goes bankrupt, it does not (always) mean the end. If there is any business worthwhile left, it will be bought up by someone else and some continuity of service. Sure, a lot on innocent people will take a haircut but at least they will be associated with the problem business in question and the general public at large will be mostly unaffected. It also becomes much more likely that those responsible get shown the door with some high velocity leather up their rear end than given bonuses.
Unfortunately, a pretty terrible job has been made of getting the message out that bailouts are not capitalism.
“It is almost as if it was deliberate.”
ALMOST!?!? It was ABSOLUTELY deliberate, designed by the socialists to collapse the world economy and leave them at the top of the rubble pile. They intend to rule, even if they could only rule in Hell.
Ken,
Socialism needs capitalism to feed off. Hitler was very aware of this.