Tuesday, March 03, 2009
Pecking at the Issues
I hope you don't mind my pecking at a few cracks here.
Capitalism is a system where people invest their resources in an endeavor. On successful completion of that endeavor, they reinvest a portion of their proceeds on their next endeavor on the next endeavor.
With capitalism, people gradually build up equity through their efforts.
Capitalism, per se, is a self regulating system. When people over-invest in a crowded market, their returns drop. They then look for a better use of their capital.
The collapse of the financial system shows that we live in a credit economy and not a capital economy.
This economy is typified by extremely large banks making extremely large loans while using increasingly complex insurance and derivative combinations in an attempt to create an unending fixed high rate of returns.
When one looks at turn of the millennia society, one finds very few people directly involved in the creation and re-investment of capital. Most people are simply working at jobs. They borrow money to buy a house. The buying of a house is a leveraged margin play and not a real investment.
The investment community is now dominated by short selling and option plays and not in the development of capital.
I had been wandering around and photographing towns. My direct observation is that the state of physical capital in this country is in shambles. The little businesses that typified America at the height of its game are gone. We have a land covered with really expensive houses. Extremely expensive public schools, and a lot of office space. Our manufacturing and industrial base has diminished.
The credit economy is something different from capitalism.
The credit economy is driven by mathematical formulas pushed in play by central banks and private bureaucracies. Notably insurance companies like AIG.
This house of cards had become increasingly separated from real capital.
The problem that investors face at the moment is the massive gap between the financial system and real equity.
Pundits repeat the talking point that the problem is lack of regulation. This is an odd argument as we live in a massively regulated world. Most of the really bizarre financial tools were designed expressly for the purpose of regulation capitalism.
The short sell is an artificial construct which lets brokerages sell stock in any company. This allows insiders to increase the float of a company when it misbehaves. Hedge funds are all about using derivatives to shield the richest of investors from the inevitable risks that incur when living a human life. Above all, Allan Greenspan of the central bank sat in an ivory tower regulating the flow of credit through loans from a central bank.
The point I wish to drive is that the financial system is largely independent of the political structure of a nation. The world financial system that we see can exist in a semi-free nation like the United States, in a fascist regime, or even a socialist nation.
The financial system we see actually exists and evolved through all of these regimes.
The collapsing of this house of cards says little about the merits of a free market v. socialism. It simply shows that as an economy becomes divorced from reality, reality has a way of coming back and biting.
IMHO, the best way to return to normalcy would be to encourage the development of financial securities that were directly backed by real equity.