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Posts Tagged ‘Finance’

Finance and Free Markets

A very interesting piece in the New Yorker explores the way that finance has begun to swallow up capitalism, sucking money, talent, and bailouts into its orbit, while doing a mediocre job at its most socially beneficial function:  raising capital for productive enterprises.  Increasingly, big banks engage in trading for clients and themselves through the prop desk, while doing much less (and earning much less) from ordinary finance activities like raising capital for companies to expand, invent, and distribute whatever it is they make.

It’s become increasingly clear to me why European conservatives have harbored a certain suspicion of capitalism.  In addition to destroying traditional societies–especially agricultural ones–the big bank capitalism of the last 150 years has often allowed a small group to accrue great power, its leaders have shown little attachment to one or another nation-state, and speculative bubbles of one kind or another have often crashed creating great harm to innocent bystanders, including most recently American homeowners.  Where ordinary businesses, even big ones, rise or fall on their merits, banks are closely tied to big government players and have obtained bailouts and other special favors, while in effect holding the government and the broader society hostage through their infamous powers in the bond market.

Americans of all stripes have long believed in some version of free markets.  But equally dominant in our history is a suspicion of “eastern finance,” as represented in such movements as the National Grange, the support for various protective tariffs in the 19th Century by nascent industries, and the anti-trust movement of Teddy Roosevelt.  Those Americans knew that banking, at best, was supposed to be a modestly paid middleman, and not the hyperdominant player it has become of late (and had become in Europe in the late 19th Century under the Rothschilds et al.).

The post Great Depression era of a smaller, less dynamic, and thereby more stable banking and finance sector appears in many ways superior to the present.  And conservatives should avoid a knee jerk support for free markets among fair-weather-friends of capitalism that benefit from various government largese including access to artificially low interest rates, FDIC insured deposits, and most recently the TARP.  If Obama were a more serious person and not a dilettante stuck in the ideas of his youth he’d hire guys like Jeremy Grantham and Paul Volker to come up with appropriate regulations to prevent speculative bubbles and other abuses of finance.  Instead, he is selling last year’s model and ignoring most of what goes on on Wall Street to our collective detriment.

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Steve Sailer and others have observed how the combination of changing demographics, Bush’s commitment to an “ownership society,” cheap dollars, securitized mortgages, and the emerging importance of the relatively obscure Community Reinvestment Act, were major factors that in combination render the housing crisis a “diversity recession.”

Critics have countered that a lot of other factors, including rampant speculation and “greedy executives” were far more dominant factors.  Perhaps those are important factors too, but banks don’t generally lend money to losers without some external factor.  After all, as Obama liked to tell us not too long ago, these are the evil guys that invented red-lining.

Consider this chart:

cra-commitments-by-year-small2

That is some big bucks, with an order of magnitude jump right before the big bubble.  Ahuge percentage of foreclosures are substandard Alt-As and Subprime loans lent in part to avoid discrimination suits by the likes of people like Obama.  The fact that the CRA funding went from a paltry sum of several billions for two decades and jumped to several trillions in CRA funding for poor, minority homeowners right before the big bubble came on the scene, it’s hard to say that this factor is being overstated by mean conservatives who don’t believe in equality.

You’re damn right we don’t believe in equality when it comes to banks lending money.  The banks were supposed to be discriminating, not on racial grounds, but rather discriminating against bad credit risks! Concerning oneself with equality of outcome when different groups have different credit-worthiness, different habits and cultures of saving, and different levels of earnings is economic suicide, as WaMu and so many others have found out. Such new progressive banks “made history” all right, just not quite as they planned.

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I thought Mitt Romney’s op-ed opposing the Detroit bailout had the right combination of free market instincts, industry knowledge, patriotic compassion, and credibility. It reminded me of why I voted for him.  I say that as someone who recognizes the unfairness of bailing out Wall Street while letting this strategically important industry suffer.  But there’s no reason to throw good money after bad.  The Unions have screwed themselves, management has done little more than make excuses, and the only way to get it right is a “cut to the bone” slashing of workers, debt, and other costs in a Chapter 11 proceeding.  I don’t buy the criticism that Chapter 11 is the death of GM or Ford, not least b/c the actual products are decent enough and warranties can always be exempted from the stay, something that occurs routinely in manufacturers’ bankruptcies.  But without changing their cost structure, all these companies are dead, to our collective detriment as their well-paid workers do not have skill sets that can be easily transferred, and there are a lot of reasons America should be making its own cars.

This bearish report by Gerald Celente predicting tax riots and mass homelessness rivals my own bearishness and, sadly enough, comes from a guy that has been right on everything from the Panic of 2008 to the Asian Financial Crisis of 1997.

This analysis of the ebb and flow of “idealism” in American politics was interesting. Some of my favorite homeboys like Burke and Oakeshott make an appearance.  I’m glad the author noted that Obama is at best a pragmatist but, more likely, a purveyor of washed up 60s-era Welfare-statism.  One thing I wish Obama and his supporters would remember is that deficit spending is not wealth-creating, the government rarely “invests” right, and that all this money for bailouts to failed sectors and infrastructure and healthcare must be siphoned out of the healthy parts of the economy, which risk suffocation under the burden of “spreading the wealth around.”

The David Brooks thing on the “formerly middle class” is depressing, but worth absorbing.   I’ve met more such people (or people on the brink) in the last 12 months than I have in my entire life previously.

On a related note, I perused gunbroker.com recently. It’s the ebay of gun buying.  Colt 6920s are now going for $1700.  CMMG, STAG, and other generic M4s are north of $1000.  Thirty round PMAGs have crept north of $20, though they were previously available for about $14.  Ammo prices remain ridiculous, in spite of the drop in commodity prices.  This panic will probably last a while, both from the fear that Obama, the former Brady Campaign/Joyce Foundation board member, will make guns now available banned forever and untransferrable to boot.  I think the overall conditions also suggest fear of increasing crime, disorder, and Depression-era conditions.  My gut instinct on this is reinformed by the ridiculous premiums over spot–20-30%–for silver and gold coins.

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