open Democracy News Analysis - The end of American capitalism, Willem Buiter - Comments

trimmerb1234 on "The end of American capitalism (as we knew it)"

trimmerb1234 — Thu, 25 Sep 2008 13:42:07 +0100

The article is all well and good but we are in a sinking boat situation. Or perhaps more aptly we are menaced by a ravenous beast. The calculation now (24th September) is how much of the contents of our larder do we have to throw at him? Do we, as Congress is urging, throw small pieces of meat one at a time and see what effect it has? Or will that provoke him into immediate attack? Or throw almost all of our food in one go in the hope that he will be satisfied and turn away. Or will he just eat it then sit waiting for more? Or eat it first - then us immediately afterwards?

Could we, as the beast speaks English, throw him a small piece first and promise the rest later - then, when we are in a safer position, break our solemn word? Does he deserve anything better?

Not an easy choice

Future relationships with the ravenous beast is for the future but as it is our food they should be on our terms - not his.

Cash&Burn on "The end of American capitalism (as we knew it)"

Cash&Burn — Mon, 22 Sep 2008 13:37:16 +0100

A factual update: AIG wasn't brought down by its monoline exposures - it really isn't a monoline. As such, the claim made in para 3 is incorrect and makes one wonder about the author's wider knowledge.

A comment: the author draws an unnecessarily strong distinction between state and markets, and appears to have a a-historical perspective.

He does not appear cognisant of the fact that the state has always been deeply embedded in the workings of finance. And in many ways, the actions of the US state is quite typical of state behaviour in modern history.

alfredo.bremont on "The end of American capitalism (as we knew it)"

alfredo.bremont — Sun, 21 Sep 2008 19:15:02 +0100

Normal
0
21

The
problems capitalism is experience this days it seems are habitually related to
people, individuals rather than the specifics of the business functioning’s. A breakdown
that occur periodical every 7 years is in my opinion because science has a tendency
to separate the different components of the individual. For instance, Newton is as well a mystic, a
philosopher and a scientist and all this particulars form and shape his
discoveries. However today, he is, considered separately as if there were each different
person that took each different task separately rather than a whole. That same
takes place in economics, as the lender and the borrower are both interlinked.

The purpose
of the lender should be a well being of the borrower, rather than his own
profit. The dehumanization of our society and the dominance of the selfish ego drive
individuals to think entirely of his individual profit. The result is desolated
environments were each individual rather than form a human society and promote
a complete a human evolution; becomes individually concern about himself and
disregards the existence of his fellow men. This absolute need to preserve and
enrich the subjective self and denied any well-being for the objective human
creates a drawback by which, the real outcome becomes the opposite of his intend.

The way to correct
this ill guided habit is by transposing the subjective as the objective and the
objective as the subjective. In practice it means that it is the other the one
that you should care for, with the aim that the benefit of the other is a
benefit for you. By this method, you help your fellow men and he in consequence
will return the goodwill.

The actual behavior
of most humans, becomes directed towards the object and by this method when you
meet someone your conclusion stand on what he objectively possess rather than
his subjective qualities.

Somewhat than
looking at the men you look at his Rolex, therefore you never meet the men but
his possessions. However, it is the end of capitalism, as you knew it.

MJ on "The end of American capitalism (as we knew it)"

MJ — Sun, 21 Sep 2008 07:34:35 +0100

Glass-Steagall Act...

Bob Taylor on "The end of American capitalism (as we knew it)"

Bob Taylor — Fri, 19 Sep 2008 21:15:24 +0100

This all suggests, albeit mildly, that the taxpayers ultimately own all the nation's capital and are ultimately responsible for all its liabilities. A rather scary thought. However, if true, how can I get my hands on my proportionate share of the wealth and responsibility? I'll gladly try to manage it. On the other hand, I wouldn't know what to do in the first instance. So, I'll sit back and watch the action. I wish I could understand what the heck is really happening.

JB on "The end of American capitalism (as we knew it)"

JB — Fri, 19 Sep 2008 16:12:38 +0100

A large contributing factor was US Government policy that encouraged many lenders to substantially weaken their lending practices - in short, encouraged them to make loans to people who should not have been given loans.

http://www.foxnews.com/story/0,2933,424945,00.html

This kind of government interference and poor-decision making would have occurred under a "socialized" system. Except it would be worse, because in a free market the vast majority of banks continued to adhere to reasonable lending practices. The ones who did not (Countrywide, Fannie Mae and Freddie Mac) are now paying the penalty for their mistakes.

Unfortunately, it now seems the taxpayer may pay the price.

Bai He on "The end of American capitalism (as we knew it)"

Bai He — Fri, 19 Sep 2008 12:23:31 +0100

Of course it's serious, but surely Mike's little joke was pretty benign. Interesting thoughts, but you are still coming from that place that I find dualistic - free market but with a 'human face'. It is, and has always been as evidenced by the Northern European social democratic model, both possible and desirable to have a sustainable welfare society with some extent of free trade.

Not logged in Lawrence Efana on "The end of American capitalism (as we knew it)"

Not logged in Lawrence Efana — Thu, 18 Sep 2008 15:04:25 +0100

The article is no direct case against capitalism. The author surely, like many of us is prompted by the logic of an embarrassing 'trend', coinciding with a sudden timely recognition of the consequences hence the call for change. Idea of socializing financial institutions is to my understanding selective - a piecemeal process induced by the weight of circumstances at hand: a mark of flexibility in economic and financial policy or call it "reassessing the logic of mixed economy" in crisis times to curb total break-down of the system - a worse alternative! Capitalism makes sense thanks to this unpleasant inner logic - or call it "enforced" flexible approach. Perhaps it is one of the ways to manage its inner conflicts: fluctuations in trade and business cycles.

However, this is not a time to "tease" but to be "serious" for those who believe that money makes the world go round! Most writers about the crisis in [American] world financial system are also putting across the silent message that good morals and practices could even make the world go round in better and more sustainable ways, seeking thus implicitly to balance the spirit of capitalism with religion in our 'secularized' world - what we unfortunately increasingly ignore. Perhaps there is unfinished work with Keynesianism now that we have lived with Neo-liberalism to see the devastating consequences of being abnormally flexible with capitalism.

Yet that need not mean denying it as a sound workable system. History is said to repeat itself - a question to that effect could be: did Keynesianism also mean taming: regulating/deregulating, hence disciplining its processes to strengthen progress - growth] but not loose "human face"? The answer could offer a lot to reflect for those putting change in perspective, as I understand why they are hesitant to define their "change concept". Politics is not timid but cautious and that we see in Obama and McCain! There might still be nuances in mid-field runs.

Lawrence Efana [Finland]

Mike Talbot on "The end of American capitalism (as we knew it)"

Mike Talbot — Thu, 18 Sep 2008 07:26:46 +0100

Does this mean that the USA should now be known as the USSA (United Socialist States of America) and the UK as SUK (Socialist United Kingdom)???.

The end of American capitalism, Willem Buiter

Willem Buiter — Sat, 20 Sep 2008 19:55:41 +0100

This is what I read this morning, 17 September 2008, on FT.com: "The US Federal Reserve announced that it will lend AIG up to $85bn in emergency funds in return for a government stake of 79.9 per cent and effective control of the company - an extraordinary step meant to stave off a collapse of the giant insurer that plays a crucial role in the global financial system. Under the plan, the existing management of the company will be replaced and new executives will be appointed. It also gives the US government veto power over major decisions at the company" (see "US to take control of AIG", Financial Times, 17 September 2008)
Willem Buiter is professor of European political economy, London School of Economics and Political Science; former chief economist of the European Bank for Reconstruction and Development (EBRD); former external member of the Monetary Policy Committee
Willem Buiter writes the Maverecon blog in the Financial Times's ft.com website, where this posting was published on 17 September 2008
I almost decided to go back to bed, convinced I must be dreaming.

The proximate cause of the demise of AIG as a private firm was its "monoline" activities, its exposure to massive amounts of credit-risk derivatives such as credit default swaps (CDS), many of them linked to the United States real-estate sector.

The largest insurance supermarket in the world, with a balance-sheet in excess of $1 trillion nationalised because it was deemed too big and too globally interconnected to fail! The fear that drove this extraordinary decision is that AIG's failure would increase counterparty risk - actual and perceived, throughout the financial system of the US and the rest of the world alike - to such an extent that no financial institution would have been willing to extend credit to any other financial institution. Credit to households and non-financial enterprises would have been the next domino to fall - and, voilà!, financial Armageddon.

I cannot judge the likelihood of the disaster scenario, but if there ever was a case for applying the precautionary principle in economic analysis, then this is it. It was also done in the right way, by insisting on controlling public ownership, i.e. nationalisation, of the company.

The existing management is gone - again as it should. We will find out whether they left with golden parachutes or with just a cardboard box packed with their personal belongings. The precise implication of the deal for the old shareholders will also matter for the ultimate judgment on its fairness and on what it does to incentives for future risk-taking. Since the existing shareholders were obviously not completely wiped out by the deal, they do well out of it - probably too well. The public takeover appears to imply that all creditors other than the ordinary and preferred shareholders will be made whole. From the perspective of incentives for future excessive risk-taking, this is regrettable. A charge on the creditors, modulated according to the seniority of the debt, would have been preferable.

But perhaps my concern about incentives for future risk-taking is moot, because it assumes that private, profit-seeking enterprises will again, in the future, pursue the kind of financial activities engaged in by AIG. If financial behemoths like AIG are too large and/or too interconnected to fail but not too smart to get themselves into situations where they need to be bailed out, then what is the case for letting private firms engage in such kinds of activities in the first place? Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the taxpayer taking the risk and the losses? If so, then why not keep these activities in permanent public ownership?

Also in openDemocracy on the global financial crisis of 2007-08:

Ann Pettifor, "Debtonation: how globalisation dies" (15 August 2007)

Robert Wade, "The financial crisis: burst bubble, frayed model" (1 October 2007)

Avinash D Persaud, "The dollar standard: (only the) beginning of the end" (5 December 2007)

Ann Pettifor, "Globalisation: sleepwalking to disaster" (11 December 2007)

Fred Halliday, "Sovereign Wealth Funds: power vs principle" (5 March 2008)

Ann Pettifor, "America's financial meltdown: lessons and prospects" (16 September 2008)The logic of collapse

There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer. Even where private-deposit insurance exists, this is only sufficient to handle bank-runs on a subset of the banks in the system. Private banks collectively cannot self-insure against a generalised run on the banks. Once the state underwrites the deposits or makes alternative funding available as lender of last resort, deposit-based banking is a license to print money. That suggests that either deposit-banking licenses should be periodically auctioned off competitively or that deposit-taking banks should be in public ownership to ensure that the taxpayer gets the rents as well as the risks.

The argument that financial intermediation cannot be entrusted to the private sector can now be extended to include the new, transactions-oriented, capital-markets-based forms of financial capitalism. The risk of a sudden vanishing of both market liquidity for systemically important classes of financial assets and funding liquidity for systemically important firms may well be too serious to allow private enterprises to play. No doubt the socialisation of most financial intermediation would be costly as regards dynamism and innovation, but if the risk of instability is too great and the cost of instability too high, then that may be a cost worth paying.

These are issues that must be pondered not just in Washington but everywhere modern financial intermediation has taken root or is threatening to do so - in the financial heartland (Wall Street, the City of London, Frankfurt, Zurich, Tokyo and Dubai) and in the emerging markets that until recently were having their ears bent on the desirability of precisely the kind of financial institutions and markets that have now turned into trillion-dollar collapsing dominos.

From financialisation of the economy to the socialisation of finance. A small step for the lawyers, a huge step for mankind. Who said economics was boring?

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