Saving Capitalists from Capitalism

The main reason this depression is being talked about now as a “second recession” is that the governments of this world propped up the initial phase of this global depression with all the cash they could manufacture — more cash than has ever been pumped into the U.S. economy at any time in history. Thus, we started into a depression, got propped up, have come near the end of that prop, and are now falling back into the depression. It will be a great depression in that it will last a long time. Whether it will be as bad as the Great Depression remains to be seen.

To prop us up near the beginning of this depression, the U.S. Federal Reserve and U.S. Treasury worked in consort to print money with no backing at all — money they did not even fund with bonds sold to other nations because they could not sell bonds fast enough. In essence, the U.S. government incestuously bought its own bonds to finance its own debt. Federal Reserve Chairman Ben Bernanke called this loop “Quantitative Easing.” It was an unprecedented move of creating money with nothing behind it to pump up the deflated economy … and it has utterly failed.

The Unsustainable Illusion of Economic Recovery

When “quantitative easing” was first announced, I predicted in newspaper articles at the time it would prop up the economy for awhile and make it appear that we were recovering. I also predicted it would only make the recovery more painful down the road. We are now down the road. We cannot see the end, but we are past the point of no return as for any hope of a soft recovery.

I stated two years ago (see “Downtime” articles) how long I thought the artificial props would hold before the government would run out of steam and become unable to continue such measures. I stated why quantitative easing (Q.E.) was not sustainable and why it would not create any actual recovery but just an illusion of recovery that would look like a double-dip recession once the Q.E. ran its course. The so-called “recovery” was nothing but a rise in the belly of a great depression caused by artificial supports. It would last only as long as the supports lasted.

I predicted that the government would try a second round of quantitative easing as soon as the first one they approved ended and downward reality began to reappear of a hard road in front of us. I have even stated the government would be strongly tempted to try a third round when the second ended and the ugly reality, again, began to reappear. Anything to avoid this austere reality. Stark realities mean angry voters. Politicians seek by nature to avoid angry voters.

Sooner or later, the government’s ability to do quantitative easing would end … without any sustainable recovery in sight. It is now later.

The Great Recession’s Great Reality Check

That is the bleak landscape we now face (and are still trying to deny). The artificial recovery made it appear for awhile as if we were just going through another bursting economic bubble and were on our way out. In real fact, ALL of those efforts did nothing to correct the underlying problems of the economy. That is why this is the same recession, not a second recession. It is due to continuation of the same cause. It looks like two recessions or a double-dip only because it was falsely propped up in the middle by the unsustainable effort to create funny money.

The worst part of Ben Bernanke’s solution is that he actually perpetuated the problem and even made it worse by using up limited government resources that could have been used to create jobs for the innocent who are swept away by all of this. Now, that credit resource has been used to its maximum capacity. Bernanke (and all the elected officials that follow his lead because they have no solutions of their own) sought to solve the problem of too much debt by doing everything possible to get banks to extend more credit (create more debt). They also sought to solve the problem of banks that were too big to fail by merging them with other failing banks, creating even larger banks that are all-the-more too big to fail. It was like putting a cancerous tumor into a sick patient as a way of getting rid of someone else’s tumor. They should, instead, have broken them down into sustainable parts in a controlled manner (which we call bankruptcy).

Ben Bernanke sought to prop up the failed housing market by expanding debt once again. Yet it was this highly indebted housing economy that led us into this mess. The actions of the U.S. government have been nothing more than a desperate attempt to keep the old economy alive. No one wants to face the arduous task of creating a new economy from the ground up. Nor do they have the vision to know how to do that.

That vision is lacking because ideologues filter everything through their beliefs of what works. Thus, they can only see to do that which is in their view “tried and true” — meaning only that which has been done before. If the problem is that what was done before worked for awhile but has now reached its logical end, they have no solutions. They failed to see that what was working was not sustainable for the longterm, so they keep trying to sustain it.

What Ben Bernanke did (and is still doing) was nothing more than CPR — breathing hot air into a moribund economy. His solution was not sustainable economically for one simple reason that should have been evident to everyone: the U.S. government (as with many other national governments) was already so deep in debt that it could not continue to transfer all of this bad private debt into the government’s debt for very long. Nor could it risk creating more money by taking out more debt. Most of all, economic growth that was financed by debt everywhere could not be sustained once everyone’s debt capacity was maxed out.

Prior to the economic collapse, the U.S. government was already nearing inability to pay its own debt. Many would argue with this, but the simple fact is the U.S. has already reached the point where the interest alone on U.S. debt is greater than all the revenue the government takes in. Therefore, the federal government has reached the point logically where it can take on no more debt. The U.S. was close enough to that point when this economic collapse began that it clearly could not continue with a debt-driven economy much further before hitting a wall. Yet, easing the flow of credit has just about been the government’s sole solution. It is “old think” by old thinkers.

Saving Capitalism from Capitalists

To people like myself, it was clear from the beginning that the actions taken by governments around the world to transfer the massive debts of capitalists to the government (meaning to all taxpayers) could not create sustainable recovery. That’s because the capitalist solution to bad banking is supposed to be that the bad fail. The fittest survive, and the corrupt become extinct.

Capitalism without bankruptcy is like Christianity without hell.” – Frank Borman

Instead of letting bankruptcy happen and then using government resources to ease the pain of the innocent as much as possible, we shifted all the pain onto the innocent! We shifted the greed of corporate giants onto the backs of average taxpayers and now insist on not raising the taxes of the corporate giants and capitalist titans.

I am not, as some might think at this point, writing an anti-capitalist argument. It is a pro-capitalist argument. The problem we face now is that capitalism was not allowed to function because its staunchest advocates abandoned it. It turns out that many Republicans (and Democrats) love and preach capitalism like a religious savior so long as it is producing bull markets, but they do not like it at all when it is producing corrections to corrupt and greedy markets. They are proponents when capitalism is making them rich, but they seek socialist solutions as soon it does not.

It was none other than free-market champion George Bush II who proclaimed at the very beginning of this economic collapse that he would have to abandon his capitalist principles in order to socialize failing banks for the good of the nation. (In other words, the federal government would have to take ownership in some of the banks and stake out positions on their boards in order to save them with taxpayers’ money.) Thus, Senator Barney Frank said …

We are going to have to save capitalism from the capitalists.”

For decades, the U.S. government deregulated banks with near abandon in belief that capitalism does best with no regulation of human greed to strangle its aggressive expansion. Alan Greenspan and many others preached that capitalism is self regulating. In fact, the government and capitalist proponents were right in stating that capitalism is inherently self-correcting. What they didn’t say was that it only corrects after the problem occurs. That’s the difference between correction and regulation. Regulation is created to avoid the problem in the first place. (Granted, it can go too far and stifle capitalism.) Had bankers been watched more closely so that the free-wheeling loans of the 90’s and the first decade of 2000 had not been allowed, we would not be in this mess. (But then the 90’s and the first decade of 2000 would not have been as wildly profitable either.)

Capitalism corrects with a heavy hand. If greed spreads broadly enough due to no regulation, capitalism corrects via total economic collapse. (Here we are!) In short, we have regulation to avert the greed before it occurs so as to avoid the painful correction that must, otherwise, happen after. We put a governor on the economic engine in order to prevent it from blowing itself up or to keep people from running the engine too fast and too hot.

The problem with the so-called “economic recovery” has been that the governments of this world all rushed in to avoid the correction. The profligacy of bankers was fostered by deregulation. When the capitalist systems finally did kick in to correct the bad judgements of those bankers, the major capitalists, more than anyone, were ready to abandon their principles in order to avoid their punishment!

Many Republicans, it turns out, want the benefits of unbridled capitalism without its painful corrections. (I single out Republicans in this instance, even though I am an equal-opportunity critic, only because they have been the loudest advocates of deregulation; but Democrats also participated in deregulation.) Republicans who loudly preached deregulation now fight the natural capitalist correction by doing all they can to socialize the cost of failure; i.e., to spread the cost across all of society! It seems Republicans want deregulation without the painful correction that often results when nothing is regulated for the public good.

The Many Must Pay for the Sins of the Few

Corruption, such as known-but-undisclosed risks, became so great under deregulation that the economic correction necessary would consume the entire nation. We sought to avoid that pain by socializing it, making the failures of the greedy few the burden of the many because the greedy few were giants. If they were allowed to fall, they might crush us all.

Yet, their gigantism is also a result of deregulation. Massive banks were allowed to consume other massive banks until they became a corporate colossus “too big to fail.” If allowed to die a natural death for their gluttony, they would fall on all of us. Having allowed that to take place, it became the burden of all of us to save greedy capitalists from themselves, lest they crush us all. So, we have all been told. It would have been more accurate for Barney Frank to turn his phrasing around and say, “We had to save the capitalists from capitalism.” . (The policies for the “recovery” have shared many traits of Economic Fascism).

Let me end with a qualification that, by saying “greedy capitalist,” I am not saying that all capitalists are greedy; nor am I saying that capitalism inevitably or inherently leads to greed. I am only saying that greed exists among capitalists as much as among any human beings, and the only mechanism capitalism has to correct for it is failure after greed has finally run too far. Until that point, it often rewards greed. That is why unbridled capitalism is not a good economic system. Capitalism needs regulation because people need regulation. Capitalism’s correction for bad bankers is bank failure. Failure is its correction for all bad investment. But where banks are not regulated from becoming too big, the failure of one can become the failure of all.

That is what wholesale deregulation got us — massive banks full of unmitigated greed … too big to fail. There are other things the government could have done other than bail out banks — laying a new framework of sustainable economics for a better future after the crash — but that is for other posts to come and has also been dealt with under the “Downtime” topic.

Further reading/viewing on bank failures and bank bailouts:

[amazon_enhanced asin=”1451617925″ /][amazon_enhanced asin=”1598130498″ /][amazon_enhanced asin=”B002PHQAZ0″ /][amazon_enhanced asin=”0307459691″ /]


  1. Ping from Phil Davis:

    It is refreshing to read articles regarding what our government is doing to “help” us without the political rhetoric. I am not astute in economic matters but I do know (through trial and error) that it is not fruitful to try and spend more than you have, and you cannot pick money off the money tree. One of the frustrating things is to stand on the sideline and watch is these idealogs from academia attempting to “force-feed” a model on society (our society) that clearly is not wanted, and clearly doesn’t work. They obviously missed the day in school when surely some teacher commented on how learning from history opens ones eyes to repeating past mistakes. The only explanation is to have power over their constituents as they clearly do not care much about our well-being.
    Well done David.

Leave a Reply

Your email address will not be published. Required fields are marked *