I was in Chicago last Friday for a conference of the American Monetary Institute, so I only got to hear a bit of the financial news as I left the hotel room. The bit I heard, however, was extremely interesting. The reporters for CNBC, the financial network, were waxing indignant on two points: one, that capitalism was the greatest system in the world, and; two, Congress ought to pass the $700 billion bailout without delay and without modification. Now, one can make a defense of either of these two statements, but surely the combination should at least raise some questions. The combination of “get the gov't out of the market” and “get the gov't to bail-out the market” should, at a minimum, lead to some cognitive dissonance. But apparently not; the statements were offered without any hint of irony. Yet, if one believes in “free markets,” one might question the freedom of a market that requires such a great raid on the public purse.
As to whether capitalism is the greatest system, I couldn't say. One can only judge such things by looking at actual systems and their actual functioning. But nobody, in the entire history of the world, has ever seen a capitalist system for any sustained period of time. What attempts there were to establish such systems have always led, and that rather quickly, to economic chaos and social disorder. The history of capitalism is the history of government rescues of capitalism; the greater the capitalist power, the greater the use of government power to defend it and make it work. The accumulation of property and the accumulation of government power to defend that property go hand in hand. So the most recent request for the public funds to support private privilege are hardly surprising, at least to anyone who owns a history book.
What distinguishes the current bailout is not merely the size and scope, but the threat under which the money is being extracted. In our system, money is created by credit rather than by the production of goods and services. That is, money only exists when it is lent. The amazing thing about modern money is this: when you sign a note for a car of a home, or a credit slip for a hamburger, the money to buy the car, the home, or the hamburger does not exist until you sign the note. Money is called into being by the act of borrowing it. This power of creating money from notes has been granted to the banks, that is, to private entrepreneurs. But of course the banks have to find solvent borrowers who can pay them back, or otherwise the whole thing collapses. Just as it is doing right now. The poor are getting the blame for taking out mortgages they could not afford, but that is only a small fraction of the problem. The greater problem is that the banks and other institutions made loans for “derivatives,” which are complex bets on these and other loans, bets which magnified what would otherwise have been a manageable problem. The result is that the banks have lost all their capital, and they need to keep a fraction of what they lend on hand to continue making loans (this is called “fractional reserve banking.”)
Now the banks are in a position to make what amounts to a terrorist threat: give us all your money, or we will not make a single loan; you will not be able to sell a single car, house, or hamburger except for cash. Without surrendering to them our future, they will take away our present; hence we must make a great present to them of $700 billion (which everybody things will rise to perhaps double that amount). The President, the Fed, the Congress, and the candidates are all for surrendering to this economic terroism, the argument being that we have no other choice.
But is this correct? Banks go insolvent all the time, even if not all at the same time. But when they do go insolvent, there is a well-established procedure and some clear choices. The bank needs more capital, and the current owners can supply it, or they can sell off some assets at whatever they can get for them to raise new capital, or they can sell themselves, in whole or part, to new owners. But what the banks want the government to do is none of the above. They want the public to purchase their toxic paper, and purchase at well above its market value. In other words, they want the public to take the loss and the banks to keep the profit.
The current owners are unwilling or unable to supply the new capital, the banks' assets have little or no market value, and the banks do not want to take on new owners, even if such investors could be found. That is to say, the banks do not want to rely on market mechanisms to fix their problems. Too bad. But that being the case, I suggest that the government act as a market player in behalf of the people and use the established market mechanisms. We'll buy the paper, at market price. Or we'll buy the bank, also at market price, and then supply the capital to keep them in business. This would, of course, amount to a nationalization of the banks, but only of such banks that wanted to be. Those who can find another solution in the free market are free to do so, much as Goldman Sachs did with Warren Buffet.
Once we own the banks, we can make prudential decisions about what to do with the bad loans, whether to extend them, renegotiate them, or to liquidate them. We can also decide what the CEO's pay will be. We can decide anything we want. We will be the owners. Further, it would return the money creation power to where it belongs: to the public. We would finally gain control of our own finances, and would not have to pay interest (now amounting to $430 billion/year) to the banks and foreign governments to get the money we could ourselves create at no interest.
The original plan was three pages and gave Henry Paulson dictatorial powers over the economy with no review of his actions by the courts or any other public body. It was the greatest giveaway to the people who plundered the public in the history of capitalism, a history already filled with such plunder. And it is completely unnecessary. The current bill is 110 pages, but the additional 107 pages are mostly window dressing designed to soothe the consciences of “conservative” and “liberal” alike without actually doing anything different than the original three pages.
I am not one of those who say that we cannot negotiate with terrorists. I do say that we should not surrender to terrorism. I do say that we negotiate from our strengths, and play our high cards. And in this game, we have all the trumps—700B of them—and we should not throw these cards away, or give them to the economic terrorists.