Monday, January 26, 2009

Endgame 5: Maintaining a Facade of "Free Market Capitalism"

As the Federal government sinks ever larger sums in the flailing U.S. banking and financial-services sectors to cover privately held bad debt, ideology and a conduit for future private profits require that a facade of "Free Market Capitalism" be maintained at all costs.

Charts and metrics are useful tools, but they provide little explanatory force when it comes to greed and ideologically driven decisions. Thus we can study the charts of money supply, credit expansion, bad debts, illiquid CDS and CDOs, plummeting real estate values and the insolvent balance sheets of U.S. banks, and conclude that outright liquidation of Citicorp et al. and the nationalization of what's left is the only rational way forward.

But instead we have public money being used to backfill private losses to "recapitalize" the banks and mortgage industry while leaving current shareholders in place: in other words, socialize the risks/losses but leave a conduit for future private profits at taxpayer expense.

Thus even as private-sector banks are essentially being socialized on a heretofore unimaginable scale (and government agencies take small "preferred shares" positions in lieu of 100% nationalization), private ownership is being "saved" so that once the sector is stabilized the profits will again flow to private hands. You know the drill: socialize risks, privatize (future) profits.

One way to accomplish this was to arrange "shotgun marriages" between failing financial houses like Merrill Lynch and (apparently) better-capitalized cousins like Bank of America. As the Wall Street Journal reported:
"(BofA CEO) Lewis thought about scrapping the deal (to acquire Merrill) but decided against it after federal officials urged him to reconsider."

"Urged him to reconsider." That's rich. You mean if I keep you awake for 24 hours under hot lights and twist your arm behind your back to the breaking point until you agree to marry a massive liability, I'm simply "urging" you? How very cricket of you to agree. No doubt Wells Fargo was similarly "urged" to acquire the collapsing Wachovia.

Why not liquidate the losers and sell off what's left to the survivors? Or if we're picking up the tab, why not ensure taxpayers own the entire bank so future profits (if any) flow to those making the investment?

A facade of "private ownership" is being maintained, at enormous public expense. Why? Clearly, the one obvious reason is to protect the assets and incomes of current players and owners; were a bank to be nationalized in all but name, as was the case with AIG, then current owners get a mere fraction of their once-mighty asset.

So why not pay off the current owners and fully nationalize the banks? There appear to be powerful ideological reasons for U.S. banks to be socialized behind a facade of "free market capitalism."

The implosion of the entire global banking/mortgage industry has essentially delegitimized the "free market capitalism" ideology which the U.S. has been pleased to espouse as the royal road to prosperity for decades.

To nationalize the U.S. banking, financial services and mortgage sectors entirely would be a total capitulation, admitting that this model was fatally flawed.

Now we all know the U.S. financial system is "free market capitalism" in name only; the Federal Reserve (itself a private institution) manipulated interest rates to dangerously unprecedented levels for years, for instance; that was hardly a free-market mechanism.

Nonetheless, that "capitalism in name only" is still a powerful global "brand" which the U.S. seeks to maintain at all costs for macro geopolitical reasons: The Great Crash, 2008: A Geopolitical Setback for the West (Foreign Affairs)

"The financial and economic crash of 2008, the worst in over 75 years, is a major geopolitical setback for the United States and Europe. Over the medium term, Washington and European governments will have neither the resources nor the economic credibility to play the role in global affairs that they otherwise would have played. These weaknesses will eventually be repaired, but in the interim, they will accelerate trends that are shifting the world's center of gravity away from the United States.

A brutal recession is unfolding in the United States, Europe, and probably Japan -- a recession likely to be more harmful than the slump of 1981-82. The current financial crisis has deeply frightened consumers and businesses, and in response they have sharply retrenched. In addition, the usual recovery tools used by governments -- monetary and fiscal stimuli -- will be relatively ineffective under the circumstances.

This damage has put the American model of free-market capitalism under a cloud. The financial system is seen as having collapsed; and the regulatory framework, as having spectacularly failed to curb widespread abuses and corruption. Now, searching for stability, the U.S. government and some European governments have nationalized their financial sectors to a degree that contradicts the tenets of modern capitalism.

Much of the world is turning a historic corner and heading into a period in which the role of the state will be larger and that of the private sector will be smaller. As it does, the United States' global power, as well as the appeal of U.S.-style democracy, is eroding."

I doubt if anyone is fooled by this facade or the legerdemain of treating taxpayer bailouts as "investments." (I also doubt the debt-serfs (I am certainly one) will arise to overthrow the Manor House Lords; we're too atomized and distracted by the pressures to make ends meet/pay our debts. That's what they're counting on, of course....)

But with this ideologically loaded "cloud" darkening U.S. influence and policy, I think it is a very safe bet indeed that Bank of America and Wells Fargo will never be allowed to go under or be nationalized. Their "show weddings" to Merrill and Wachovia have significance far beyond our own shores, and for this reason alone the "marriages" will be "made to work" to the benefit of all parties--including current shareholders of BAC and WFC. Only the hapless taxpayers will be left with the trillion-dollar bill.

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