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« Do Not Propose Solutions | Main | Convergence 08 »

September 15, 2008

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TB

Surely authoritarian capitalism would be a better term than the ugly, oxymoronic, communist capitalism .

I find it hard to believe that the USA is prepared for social capitalism (even if it is a far superior system to their present dog eat dog capitalism). They still can't cope with the idea of social democracy.

Economics like life is paradoxical, triumph will probably be ephemeral.

regulation will become the norm for a while, just as it did after the 30's.

Then people will forget and the deregulators will rule again.

Brian Wang

The current financial shock does not look bigger than the

Savings and loan crisis of the 1980s and 1990s when the size of losses is compared to the size of GDP.

747 financial institutions went under in that crisis 160 billion. But that was to a smaller economy, government and mortgage market.

Failures of banks is not necessarily the thing to be avoided. Japan propped up zombie banks for a decade or more and that hurt them more.

China is also facing and has also faced real estate bubbles.

The Russians/Soviet union also had a financial crisis which was related to
The collapse of its central planning system


vv111y

Here's a take on it:
http://ajayshahblog.blogspot.com/2007/11/authoritarianism-20.html

China, Russia could be better described as fascist, except for the expansionary empire building.

David Brin

Good thoughts, Mike. But the present situation is pretty easy to diagnose. What we see in the US is not normal capitalism, but precisely the damaged markets that Adam Smith wrote about, under which capitalism's synergies are spoiled by cheating, theft and market meddling by "cronies of the king."

You'll notice that defenders of the last eight years still claim to be "capitalists" but they never mention Smith. He has become a non-person. Because they know that he would be against them, in today's situation. If you look across history, vastly more market systems were wrecked by aristocratic cheaters than by socialists or bureaucrats.

Marx knew this. In fact, he predicted that it was impossible to prevent it, since the rich and powerful would cheat as a natural function of human nature. Marx seemed to have been disproved by the western system that balanced law, supervising bureaucracy, competition and relentless transparency, in order to get the best benefits of markets without allowing their decay from cheating. We did pretty well, for a while.

Hence, what we see is capitalism threatened by its regular and persistent "contradictions." The question is whether we can see the problem and correct it... primarily through transparency and accountability... instead of falling for the blandishments of those who want a new feudalism.


With cordial regards,

David Brin
http://www.davidbrin.com

Perry

The current crisis was largely spawned by collectivist policies, including the collectivization of the risk of the GSEs, which were about the largest instances of moral hazard on the entire planet.

It is hardly surprising to me that people would question whether "capitalism" is a good idea following the current crisis -- collectivists have been suggesting that the failures of collectivism were failures of capitalism for hundreds of years now.

Indeed, nearly any time a collectivist program fails in some manner, we can almost instantly expect to hear the suggestion that this demonstrates how capitalism is unworkable and stupid.

Although I am not surprised to see such reactions, I do, however, find myself disappointed that ignorance of economics runs so deep in our society that seemingly intelligent people continue to think this way.

James Hughes

This is certainly one of capitalism's major, regular and predictable crises, produced in this case by inadequate capitalist self-regulation. As a capitalist party the US Republicans should have maintained independence from sectoral interests like the banks, and imposed regulations that would have prevented such a major crisis. But the GOP and Bush administration are riven by drug company reps appointed to regulate drugs, oil company reps setting energy policy, and so on. That leads to stupid, short-sighted public policy melt-down, and then the socializing of capitalism's losses, leaving the profits in the pockets of the lucky rich.

If the US corporate elites were smart they would back the Dems to come in and clean up the mess, and take the blame for Bush's economic crisis, ballooning deficits, and catastrophic foreign policy. But Sarah Palin, the religious right and the revanchist neo-cons look like they may perpetuate Republican/lobbyist control of the White House, accelerating the collapse of the US economy, its over-extended Pax Americana, and the model of democratic capitalism it represents, as you suggest Mike.

The most likely future political-economic alternatives, however, aren't nation-state models of Chinese authoritarian capitalism or from Euro-socialism, but from the transnationalization of those models. Since WWII there has been growing transnational regulation of finance and capital, growing
transnational investments in nation building and other social needs, transnational peacekeeping and policing, etc. All of these are already in place and they need to be ramped up. The only question is whether they (a) fall apart completely, leading to depressions and wars, (b) remain opaque, unaccountable, and dominated by nuclear states and corporate lobbies, or (c) become more transparent and accountable, as David Brin, suggests. Making existing and future
transnational governance transparent and democratically accountable is an ongoing struggle, and the profound global economic, ecological and security crises coming will undoubtedly give us many opportunities to
press the case.

But even my most optimistic or pessimistic globalist scenarios don't amount to "the end of capitalism," just its regulation in various ways. I reserve the "end of capitalism" for something like Iain Banks' The Culture, where wages, work, money and markets have all become irrelevant.

Of course if Sarah Palin becomes the first true Holy Roller U.S. President in 2010 after McCain succumbs to cancer, and has her chance to bring on the Rapture by showing her PTA/hockey-mom toughness to Russia, well, that would also mean the end of capitalism.

Giulio Prisco

Transnational governance is certainly a good trend. I think fragmentation of nation states is another trend to encourage. We need a world were global decisions are made on a global scales and local decisions are made by all and only the persons concerned.

David, Marx has not been disproved: the rich and powerful (actually, everyone) still cheat as a natural function of human nature. Only, cheating is easier with some forms of economic organization and more difficult with others.

Marx saw clearly that we are all greedy (deleted), and that this fact causes problems in capitalist economies. Of course, we remain greedy (deleted), and this fact continues to cause problems, also in socialist economies.

I think the problem of capitalism is in its runaway processes - more money and power makes it much easier to get even more money and power, and with enough money and power one can cheat as much as she wants. We need ways to prevent excessive accumulation of money and power. Of course at the same time we need to find a cure that is not worse of the disease.

kurt9

You guys have got it all wrong. The sub-prime mortgage crises is not a result of market failure. It is the result of flawed government intervention in the banking system in the 90's as instigated by Clinton. Have a look at the following link if you do not believe me:

http://ibdeditorial.com/IBDArticles.aspx?id=306370789279709

Also, if Obama get elected, I will most likely be relocating to somewhere in Asia (I have not decided where) permanently. Everything I read about Obama indicates that he will be a mega-disaster for the U.S. economy. Again, read the following link:

http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html

It is the farce of democratic socialism that is doomed, not free market capitalism.

Benjamin Abbott

Personally, I would like to see molecular manufacturing and advanced AI lead the world into technocracy. We already have the technology to replace scarcity with abundance. Those two revolution will make the possibility painfully obvious.

I'm not optimistic about the chances of my dream coming true. I suspect the mix of market and state practiced by basically all countries will continue. It's not accurate to describe China as capitalist or Europe as socialist. Both have a bit of each system.

kurt9

The whole editorial slant of this blog is completely off base. If drexlerian nanotech really is possible (which is the position of the blog masters themselves) and it is developed in an open source manner, why do we need any large government or centralized authority at all? After all, drexlerian nanotech is supposed to be the ultimate in self-empowerment for the individual. In which case, there is nothing that centralized authority can do for us that we cannot do for ourselves. The development of drexlerian nanotech will obsolete the very concept of centralized authority.

I would think that the development of drexlerian nanotech would lead to the kind of post-scarcity social system as depicted by Jim Hogan in "Voyage from Yesteryear". It would make both socialism as well as finance capitalism as obsolete as the dodo bird.

Also, this blog seems to be completely blind to the possibility of settlement of space on a grand scale, which is one of the most obvious applications of drexlerian nanotech. I know many people who are interested in using nanotech to get the hell out of dodge city and getting out into space. Indeed, Drexler himself first conceived of his concept of nanotech when a member of L-5 Society.

The blog masters clearly do not understand the implications of drexlerian nanotech, assuming that it is possible.


Hal

The reason for the financial crisis can be traced to the bursting of the real estate bubble. What went wrong? Why did the bubble form originally, and why did so many people put themselves into positions where they would be so badly damaged when it burst?

Let us start with homeowners. Why did they feel free to use their homes as ATMs, refinancing and using the proceeds to buy big screen TVs, RVs and other luxuries? Well, because they could, to put it bluntly - the loans were widely promoted. Why did so many people buy homes they couldn't afford? Because they hoped that the homes would appreciate and allow them to refinance or sell for a profit.

Perhaps these people are understandably naive. But what about the banks, now foreclosing right and left, having to sell at fire sale prices, taking enormous losses and sometimes going under as a result? They were financially sophisticated. Why weren't they more careful? To a large extent it is because in the last 20 years the nature of mortgage banking has changed. Most banks are basically middlemen who pass through the mortgages. After making loans, they bundle and sell them to larger banks and other institutions. Most banks are relatively insulated from direct losses from real estate.

So what about these other institutions? Why were they willing to keep putting money into what must have been increasingly risky investments as real estate prices grew more and more out of reach? Many institutions did get out of the business, but others, such as Fannie Mae and Freddie Mac took their place. They found an insatiable demand from investors for bonds and derivatives backed by mortgage assets.

So we turn to the investors, who were generally highly sophisticated financially. Why were they willing to put money into these bonds? Here is where we come to the crux of the matter.

It appears that many of these investors were working on the assumption that they were in a no-lose situation. As long as the bubble continued to inflate, they would be richly rewarded. But if the bubble burst, the government sponsored enterprises that would normally go bankrupt, taking the investors down with them, would be protected. It was widely believed and understood that these GSEs had, in practice if not in theory, the backing of the U.S. government and would not be allowed to fail. Investors then could reap huge profits with essentially no risk.

And indeed, that is exactly what has happened. Fannie Mae, Freddie Mac and other institutions have been protected from failure. The government has responded to the crisis exactly as international investors predicted. The U.S. taxpayer will end up bailing out these investments.

Ultimately, then, this was not a pure market failure. Without the perception of U.S. government backing of the mortgage agencies, and implicitly of other large financial institutions that were "too large to (be allowed to) fail", investments would not have poured in as the real estate asset bubble inflated. Without those investments, the huge supply of mortgage money would not have been present. Without those mortgage bundlers, banks would not have made loans confident that they could pass the buck to someone else without getting burned. And without easy bank loans, the real estate bubble would not have inflated and collapsed as explosively as it did.

In short, what we have seen is ultimately the result of an implicit attempt by the U.S. government to in effect guarantee that investments in mortgages could not lose. This was never official policy, but it was understood, and in the end it turned out that the understanding was correct. The government would never have made that obligation official because it would have represented a huge obligation on the part of taxpayers that would have made the whole government essentially bankrupt. Even now it is fooling itself by pretending that it is on the hook for only $200 million for the GSEs, when in fact they have liabilities in the $ trillions.

It remains to be seen how this all plays out, but by establishing this policy of bailouts, the government is in effect committing itself forever more. This is ultimately likely to produce even more distortions as people find new ways to profit while bubbles inflate, and expect the government to save them when the bubble dies. As long as the bubble is big enough that letting things take their course will produce too much pain, savvy investors will continue to exploit this unfortunate policy.

The only alternative is that things turn out so badly that the policy is forever discredited, and that such revolutionary changes occur that the new government can be seen as almost not even the same government as the old one, hence policies and precedents set under the old regime would not be binding on the new one.

Obviously either alternative portends disastrous developments.

Mike Treder, CRN

Here is another thought-provoking (but grim) analysis of the present situation from someone I respect.

Benjamin Abbott

I think you're being overly optimistic, kurt9. Many dangers accompany the productive potential of nanotechnology. Personal nanofactories will have the ability to create absurdly deadly weapons within hours. Do you honestly think governments would simply accept that and offer up the world to newly empowered individuals? I hope so, but I can't imagine such a scenario. I suspect they'll regulate nanotechnology and grow mightier than ever. I wouldn't even count on realizing the possibility of eliminating scarcity. Given abundance in digital form, our society's response has been to create artificial scarcity through coercion. Why should we expect better once the physical mirrors the digital?

EW Dedelow

We have witnessed long periods of growth in spite of massive interference in the free market by government. US spending and most state and local budgets have doubled, not to mention growth in regulation and litigiousness. How do you reconcile this with the end of capitalism, rather it is the endurance, the flexibility, of capitalism in the face of these incredible increases. Perhaps our "Economist's measurement" of the economy is majorly flawed and thus government controls of the economy is greater than we realize. You may visit my web site at the scientificcapitalist.com for a different opinion of economics.

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