Failure or Sabotage?

by Rob Kirby, Kirby Analytics. February 23, 2009

As our beloved fiat financial system continues its ‘long predicted’ systemic melt-down, it has been most interesting to observe the jockeying of establishment Keynesian acolytes; positioning themselves and their revisionist rhetoric to obfuscate / obscure the nascent havoc that their ideology has cast upon humanity.

Just last week, the much celebrated and followed Noriel Roubini wrote and published this gem in Forbes;

Noriel Roubini: Laissez-Faire Capitalism Has Failed
Laissez-Faire Capitalism Has Failed
Nouriel Roubini 02.19.09, 12:01 AM ET
It is now clear that this is the worst financial crisis since the Great Depression and the worst economic crisis in the last 60 years. While we are already in a severe and protracted U-shaped recession (the deluded hope of a short and shallow V-shaped contraction has evaporated), there is now a rising risk that this crisis will turn into an uglier, multiyear, L-shaped, Japanese-style stag-deflation (a deadly combination of stagnation, recession and deflation)…

… It is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed. It relied on several factors: self-regulation that, in effect, meant no regulation; market discipline that does not exist when there is euphoria and irrational exuberance; and internal risk-management models that fail because, as a former chief executive of Citigroup put it, when the music is playing, you've got to stand up and dance…

Roubini’s assertions about the failure of supervision and regulation are well taken but to characterize Laissez-Faire Capitalism as a “failure” is at the very least Keynesian Revisionism and more accurately a false claim. The hallmark of a truly committed Keynesian, of course, being their undying faith in the State to ‘put things right’. Says Roubini;

“…Unfortunately, the euro zone is well behind the U.S. in its policy efforts for several reasons. The first is that the European Central Bank is behind the curve in cutting policy rates and creating nontraditional facilities to deal with the liquidity and credit crunch. The second is that the fiscal stimulus is too modest, because those who can afford it (Germany) are lukewarm about it, and those who need it the most (Spain, Portugal, Greece, Italy) can least afford it, as they already have large budget deficits. The last reason is that there is a lack of cross-border burden sharing of the fiscal costs of bailing out financial institutions….”

Ladies and gentlemen, Free Market Capitalism has not failed, State Interventionism has.

As Pascal Salin recently wrote in an article, Austrian Economics: The Ultimate Achievement of an Intellectual Journey, it is STATE INTERVENTIONISM that has failed – IN SPADES. Here is an excerpt with my emphasis in bold;

…But, although it is obvious that the crisis has not been caused by an excess of capitalism — quite the contrary — all over the world, the same statements are endlessly repeated: self-adjustments by markets have failed and we have to celebrate the coming back of the state.

A lot of important things have been said by Austrian economists and it is not my intention to try to analyze the financial crisis in detail. Allow me just to make some remarks about this crisis in order to emphasize that this crisis is not a crisis of capitalism but of state interventionism.

There is a lack of real savings, at least in many developed countries, and more precisely a lack of equity capital, i.e., a lack of real property rights on capital, a lack of capitalists. Capitalism means ownership of capital, property rights on capital. But we have more or less a pseudo-capitalism without capital and capitalists. The world needs more capitalists. One major reason for this low level of equity capital comes from tax policies. Contrary to what is usually said, capital is overtaxed in most tax systems.

Monetary authorities try to find a substitute for this lack of voluntary and real savings in money creation and credit.

The business cycle of our time is a sort of joint outcome of tax policy and monetary policy:

In the present crisis, due to the expansionary monetary policy of the Fed in the beginning of the 21st century, the world has been flooded with huge amounts of liquidities that could be obtained at a low interest rate, so that there were huge opportunities for short-term financing for financial institutions.

Anyhow, one may wonder why financial institutions have been so short term and were unable to forecast the future. One reason may be ignorance: most bankers do not know the Austrian theory of the business cycle. But there is another reason, namely the existence of a shortfall of real capitalists, i.e., owners of capital. Big banks are bureaucracies in which the decisions are not taken by the innumerable shareholders but by managers. Managers are wage earners and not capitalists. And wage earners — contrary to capitalists — are shortsighted: they rationally try to maximize their incomes in the short run. If their bank fails, they do not lose any capital. They may lose their job for a while, but their human capital remains intact.

Banks in the 19th century were owned by real capitalists and the equity capital of banks was about 60–80% of their balance sheets: bankers were lending or investing their own money, so they were responsible and did not accept excessive risks.

We are now in a world of limited capitalism, with central banks and banking decisions made by managers and not capitalists. This is the deep cause of the financial crisis.

Contrary to what is claimed by the French President Nicolas Sarkozy — along with so many politicians, journalists, or academics — there is no need to regulate capitalism and to improve the morals of capitalism. There is a need for a revival of capitalism.
VI. Curing the Crisis and Restoring Capitalism
How to do it?

In the short run, it seems that only states are able to save the financial system. There is a general lack of confidence, making banks reluctant to lend to each other for fear of the failure of their potential partners. The state appears to be the only possible intermediary because it cannot fail — it benefits from this unique privilege. Ironically, people interpret this fact as a proof that state intervention is necessary. More precisely, it seems to justify the idea according to which a financial system needs a lender of last resort and that this lender has to be a public institution. But, as happens so often, it seems that the one who destroys something is the only one who can also save it. But instead of celebrating monetary authorities for their rescue decisions, one ought to blame them for having created the problem.

The threat of a general collapse of financial institutions is one of the main arguments offered by the supporters of state intervention. Had it not existed, more banks would have failed, as is normal in a system of responsible capitalism. But it is characteristic, anyhow, that in recent months, several failing banks have been bought by other banks, which means that there is a great diversity of situations within the financial system. It is also obvious that the managers of failing banks prefer to be saved by the state, because they may keep their job, whereas in the case of a purchase by another bank, they would probably be fired.

The solution in the long run is certainly a revival of capitalism. It implies a decrease in the role of the state and tax systems more friendly to capital accumulation. It implies the end of monetary policy and, if possible, the disappearance of central banks.

As many readers of this space have learned over the years and by now are well aware, it is the unsustainable nature of so many of these well documented, nefarious, obscured-from-view interventions in allegedly “Free Markets” [gold, interest rates / bonds, equities] which have brought us to this point – macro economically speaking.

Make no mistake; it is these undeclared nefarious interventions which have prevented the inherent self-correcting features of Laissez-Faire Capitalism from manifesting themselves.

Because so much of what has been done to our “Free Markets” has been obscured, with corroborating data [inflation, employment, etc.] falsified, an accurate and logical accounting [like another Chicago icon Arthur Andersen, perhaps?] of where we are would amount to a confessional by the powers-that-be, punishable by law.

Without an accurate assessment, admitting exactly where we are, proper and adequate State mandated solutions / remedies have not and will continue not-to-be forthcoming.

Got physical gold yet?

Today’s Market

Overseas equities began the week on a sour note with Japan’s Nikkei Index losing 40 points to 7,346. North American markets fared worse with the DOW off 250.90 to 7,114.80, the NASDAQ falling 53.51 to 1,387.72 and the S & P giving up 26.70 to end the day at 743.35. NYMEX crude oil futures fell 2.03 to 38.00 per barrel.

In the interest rate complex the benchmark 5 yr. government bond finished the day at 1.83% while the 10 yr. bond was last seen at 2.77%.

On foreign exchange markets the U.S. Dollar Index advanced .43 to 87.28.

Precious metals endured a whip-saw session and ended the day mixed with COMEX gold futures finishing flat at 994.20 per ounce while COMEX silver futures added .07 to 14.51 per ounce. The XAU Index lost 3.94 to 128.70 while the HUI Index lost 3.84 to end the day at 317.61.

On tap for tomorrow, at 9:00 a.m. Dec. S & P / Case Shiller Home Price Index data is due, last reported -18.18%. At 10:00 a.m. Feb. Consumer Confidence data is due – expected 35.0 vs. prior 37.7. Also at 10:00 a.m. Fed Chairman Bernanke is slated to begin his semi-annual Monetary Policy Report to law makers on Capitol Hill.

Wishing you all a pleasant evening and a happy tomorrow!

Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail