Tuesday, November 27, 2007

Speculation: Private Profit, Public Losses?

Astute reader Ken K. sent in this wonderful insight into investors and speculators:

My grandfather always said an investor was a speculator who made a mistake and wouldn't admit it!

Which brings us to the looming question: just who is going to absorb all the losses coming to light as banks and other institutions admit their speculations have soured? In pure capitalism, the answer is obvious: those who took the risk in hopes of earning the return must suffer the loss.

But in statist capitalism (i.e. the U.S.), huge private losses have been absorbed by the public--most directly, in the late 80s when the savings and loan debacle was "cleaned up" with $150 billion in taxpayer money.

So perhaps the real credo of our "statist capitalism" is: the profits are private, but the losses are public.

Knowledgeable reader Zeus Y. made the following thoughtful comments on this issue:

"Do I think the U.S. economy is healthy? Heck no, but again, in my own idiosyncratic view, markets are not connected to reality. They are only connected to the emotions and views of the investors/speculators." (CHS, November 26)

I agree, and I think it might be helpful to add the dimension of personal power over the market, especially in how personal power disproportionately exercised in the market can augment and magnify emotions and views. Just as our elections are much closer to "one dollar, one vote" than "one person, one vote," so are the prejudices, interests, and emotions of some market players much more consequential and powerful in the market than others.

This has a way of intensifying the warping of market "reality" (how things should work in theory if there is basic equality between investors in a market and/or voters in a democracy). Basic theories assume all investors or voters can access the same information, equally execute choices given that information, and experience proportional consequences.

Both in our markets and in our democracy these basic assumptions have become unglued, and this tends to destroy the ability of democracy or the market system to buffer irrational excesses. People do not have access to the same information. From the Bush administration’s ability to use "national security" to lock out scrutiny to market insider trading, there is no equality or transparency of information.

Not all "voters" in a democracy or investors in a market have the same power execute choices. Witness the disproportionate power claimed by the executive branch in the US government (especially under a state of perpetual war) to trump the legislative branch, and the power of mutual and hedge fund managers to trump the vast majority of stock holders when it comes to decisions over how companies should be run.

Finally we are seeing that the economically privileged are allowed to have their way in the markets, harvest profits on questionable ventures, and when they screw it up, slide the consequences on to the taxpayer in terms of bailouts. The motto seems to be: "Use manipulative tricks to rally the market (buying one’s own stock to create false demand, etc.) to eke out yet another multi-hundred million dollar year-end bonus before everything blows. Get a 100-200 million dollar golden parachute after everything blows." Nothing succeeds like fake success and failure.

You look at how George Bush simply decided to issue "signing statements" saying he wasn’t going to execute the law if he didn’t like what it says. You look at how the Bush administration has used the veto and a craven minority to prevent the will of the people from going forward with regard to the Iraq War. You look at the extreme manipulation of the election system in 2000, 2002, and 2004 and of the political patronage system to reward incompetent yes-men and fire wise counsel.

And then when the awful consequences of these policies and actions come due, and our reputation as a country is shattered, our middle class is demolished, national debt has tripled, and the US dollar is in the toilet, the self-same individuals who started this mess indicate that this is a reason to give them "emergency" power to do more of the same.

Something similar is happening in the market. We’ve already seen how banks, hedge fund managers, mortgage agencies, and ratings agencies like Moody’s colluded to pass off junk as AAA rated securities. This has led to a collapse in real value of purportedly solid investments, based on outright fraud. Yet no criminal or civil penalties are in the offing.

You have the collapse of government and corporation into one another. You have the complete privatization of markets (look at private equities buying up public companies with funny money), just as you have a nearly complete privatization of government, not only in terms of eliminating public jobs but in eliminating public benefit.

And this is seen as "good" by those who have benefited immensely from their own vastly outsized personal power to sway supposedly impersonal governmental and market mechanisms, including Mr. Dick Cheney, who has taken advantage of both arenas to package together governmental war policy with Halliburton’s private war profiteering.

It is not surprising in a system that has devolved so badly to see the Federal Reserve, itself a private corporation, essentially dictating that the US taxpayer absorb the losses from this shell game and even reward multinational banks and equity/fund traders for their malfeasance.

Of course, it is also crushing to witness the end of innocence of your country, but also heartening to realize, the game is really afoot now. Are we going to answer the call and take back our democracy, run for office ourselves, elect progressives, refuse to buy into these scams, and demand accountability and integrity, or are we going to roll over? We are not staring at a possible oligarchy, but we are undeniably witnessing, what has been since the election of Reagan, the evolution and culmination of almost 30 years of oligarchic rule (not coincidentally linked directly with debt-driven "growth") aimed at the privatization of all public benefit and the public absorption of all private risk.

Now it is time to act. I’ve never been a pessimist or even a cranky realist. I believe in the entrepreneurial and innovative democratic spirit this country has exhibited in its best times can rise yet again, if we act critically and creatively to reassert the power of the people in the market and in democracy.

In the spirit of civic democracy and in the conviction that markets will once again be free and public,
Zeus Y.

Put another way--the profits are mine but the losses are "ours" (i.e. yours). Thank you, Zeus, for this cogent analysis.

Thank you, Jerry and Rosanne A.., ($21), for your thoughtful contribution to this humble site. I am greatly honored by your readership and support. All contributors are listed below in acknowledgement of my gratitude.

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