Monday, September 29, 2008

A New (Old) Kind Of Capitalism...Updated

The bail-out deal finally got done got killed. The bailout was ushering in a new era of government-private enterprise matched only by our friends in China. The lessons of how this crisis was created will be forgotten before the votes are counted on Monday. The first new lesson will be that Chinese style capitalism can be very profitable for our government and nothing excites congress like new money to project in out years. Our government has discovered the benefits of "buying low" and the promise of "selling high."

How high?
The proposed legislation also calls for the financial sector to help make up the difference if the government does not recoup its investment in five years, the official said, but details were unclear.Also, the government would receive stock warrants in return for the bailout relief, giving taxpayers a chance to share in financial companies' future profits.

The Chinese have figured out that government operated capitalist enterprises are more efficient. You get to provide your own oversight, and you can change the rules as necessary. Other considerations such as worker rights and environmental protections are preserved by bureaucratic whimsy and not by rule of law.

And that's why this bailout scares me far more than a precipitous drop in the S&P 500. Our government is now acting without boundaries. The federal government created conditions that would forseeably cause this crisis, then they sifted the ashes to find the valuables left behind.

I understand that as these institutions fail, their assets are sold in bulk leading to distressed prices approaching zero. And that in turn brings the barely solvent banks assets down to the new market prices, prompting cash calls they simply don't have. And yes, for a time there will be reductions of already-scarce equity for everyone. I agree that the government needs to help establish a market for the debt, so these banks can re-establish credit with each other, but invovling the Federal government in stock warrants and other instruments will only encourage more nanny-state experimentations like those that got us here in the first place.

The second lesson our government has learned is that Roman fire sales work. Instead of throwing fire bombs, the government created a phony market of loans (sub-prime) that would never have existed if the lending institutions were left alone to make decisions of credit-worthiness based on a persons ability to pay it back. Instead, the Feds demanded socially conscience loan making. The ability to pay the loan back was secondary. And from this small fire, created with the 1995 changes to the Community Reinvestment Act, a bonfire was created that ONLY the Feds could put out. Like the old Roman trick of having the fire-fighters "standing-by" until a deal for the contents is agreed to, the Feds watched this problem burn until this become profitable for them to fix.

The only lesson NOT learned is that this new style of capitalism comes with some really unintended consequences. The rule of law will now be whatever congress says it means. Liberty will mean freedom from and not freedom to as we live through a never-ending cycle of these manufactured crises.

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