corruption of american capitalism

Discussion in 'Economics' started by zdreg, Apr 1, 2013.

  1. zdreg

    State-Wrecked: The Corruption of Capitalism in America

    GREENWICH, Conn.

    The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should be very afraid.

    Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.

    Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.

    So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.

    When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.

    THIS dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.

    As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another — smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (“clean” energy, biotechnology) and, above all, bailing out Wall Street — they have now succumbed to overload, overreach and outside capture by powerful interests. The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating “demand,” even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls.

    The culprits are bipartisan, though you’d never guess that from the blather that passes for political discourse these days. The state-wreck originated in 1933, when Franklin D. Roosevelt opted for fiat money (currency not fundamentally backed by gold), economic nationalism and capitalist cartels in agriculture and industry.

    Under the exigencies of World War II (which did far more to end the Depression than the New Deal did), the state got hugely bloated, but remarkably, the bloat was put into brief remission during a midcentury golden era of sound money and fiscal rectitude with Dwight D. Eisenhower in the White House and William McChesney Martin Jr. at the Fed.

    Then came Lyndon B. Johnson’s “guns and butter” excesses, which were intensified over one perfidious weekend at Camp David, Md., in 1971, when Richard M. Nixon essentially defaulted on the nation’s debt obligations by finally ending the convertibility of gold to the dollar. That one act — arguably a sin graver than Watergate — meant the end of national financial discipline and the start of a four-decade spree during which we have lived high on the hog, running a cumulative $8 trillion current-account deficit. In effect, America underwent an internal leveraged buyout, raising our ratio of total debt (public and private) to economic output to about 3.6 from its historic level of about 1.6. Hence the $30 trillion in excess debt (more than half the total debt, $56 trillion) that hangs over the American economy today.

    This explosion of borrowing was the stepchild of the floating-money contraption deposited in the Nixon White House by Milton Friedman, the supposed hero of free-market economics who in fact sowed the seed for a never-ending expansion of the money supply. The Fed, which celebrates its centenary this year, fueled a roaring inflation in goods and commodities during the 1970s that was brought under control only by the iron resolve of Paul A. Volcker, its chairman from 1979 to 1987.

    Under his successor, the lapsed hero Alan Greenspan, the Fed dropped Friedman’s penurious rules for monetary expansion, keeping interest rates too low for too long and flooding Wall Street with freshly minted cash. What became known as the “Greenspan put” — the implicit assumption that the Fed would step in if asset prices dropped, as they did after the 1987 stock-market crash — was reinforced by the Fed’s unforgivable 1998 bailout of the hedge fund Long-Term Capital Management.

    That Mr. Greenspan’s loose monetary policies didn’t set off inflation was only because domestic prices for goods and labor were crushed by the huge flow of imports from the factories of Asia. By offshoring America’s tradable-goods sector, the Fed kept the Consumer Price Index contained, but also permitted the excess liquidity to foster a roaring inflation in financial assets. Mr. Greenspan’s pandering incited the greatest equity boom in history, with the stock market rising fivefold between the 1987 crash and the 2000 dot-com bust.

    Soon Americans stopped saving and consumed everything they earned and all they could borrow. The Asians, burned by their own 1997 financial crisis, were happy to oblige us. They — China and Japan above all — accumulated huge dollar reserves, transforming their central banks into a string of monetary roach motels where sovereign debt goes in but never comes out. We’ve been living on borrowed time — and spending Asians’ borrowed dimes.

    This dynamic reinforced the Reaganite shibboleth that “deficits don’t matter” and the fact that nearly $5 trillion of the nation’s $12 trillion in “publicly held” debt is actually sequestered in the vaults of central banks. The destruction of fiscal rectitude under Ronald Reagan — one reason I resigned as his budget chief in 1985 — was the greatest of his many dramatic acts. It created a template for the Republicans’ utter abandonment of the balanced-budget policies of Calvin Coolidge and allowed George W. Bush to dive into the deep end, bankrupting the nation through two misbegotten and unfinanced wars, a giant expansion of Medicare and a tax-cutting spree for the wealthy that turned K Street lobbyists into the de facto office of national tax policy. In effect, the G.O.P. embraced Keynesianism — for the wealthy.

    The explosion of the housing market, abetted by phony credit ratings, securitization shenanigans and willful malpractice by mortgage lenders, originators and brokers, has been well documented. Less known is the balance-sheet explosion among the top 10 Wall Street banks during the eight years ending in 2008. Though their tiny sliver of equity capital hardly grew, their dependence on unstable “hot money” soared as the regulatory harness the Glass-Steagall Act had wisely imposed during the Depression was totally dismantled.

    Within weeks of the Lehman Brothers bankruptcy in September 2008, Washington, with Wall Street’s gun to its head, propped up the remnants of this financial mess in a panic-stricken melee of bailouts and money-printing that is the single most shameful chapter in American financial history.
  2. zdreg


    http:/ There was never a remote th...: The Corruption of Capitalism in America.”
  3. I think I'd weight my portfolio towards war industry stocks actually. It's getting ugly out there...
  4. Forget all of that. Just tell us when the "Final Top" will occur. :D
  5. FED has incited global currency war???

    That's not the way I see it

    maybe someday

    Japan needs a weak yen and USD has been very accomodating, the whole thing is very peaceful, just the opposite of a war

    if anything we have all come to an agreement that we will allow devaluation to those that need it most

    How come they never quote me when I say, stock market looks good?

    I've been 100% long since 2006, and I've heard all this crap on the way up, the way down and just about everywheres in between

    it's all psycho man, some people just constantly need to be warning, has nothing to do with facts

    where were they in 2009 warning everybody that they must go all in right now immediately?
  6. piezoe


    I have great respect for Stockman, I believe he means well, though he's been disastrously wrong in the past. He was woefuilly unqualified as Reagan's budget director, but he has learned much from his mistakes. When it comes to the Gold Standard in his tirade zdreg has posted above, Stockman does not mention the impossibility of maintaining gold at 35/oz when he writes: " 1971, when Richard M. Nixon essentially defaulted on the nation’s debt obligations by finally ending the convertibility of gold to the dollar. That one act — arguably a sin graver than Watergate — meant the end of national financial discipline...

    While it is true that "fiscal discipline" seems to have ended with the "Nixon shock," those exchanging gold backed notes for gold, chiefly France, were able to get gold for 35$/oz and turn around and sell it on the open market for 45$. This was unsustainable.

    I'd like to hear Stockman's view on that, and his suggestions for alternatives to what was done.

    Hindsight always seems more clear than foresight.
  7. whatever, the meda needs a disaster, it has nothing to do with reality, they can't sell advertising with, "More of the same, little or no change."
  8. zdreg


    why do you focus on some historical irrelevance about france making a $10 profit on gold and miss the big picture that gold is up 40X.

    central banks are nothing but engines of inflation acting on behalf of the ruling party.
  9. piezoe


    ? were you responding to my post or someone else? Oh, OK. I guess I was unclear. What you see today is simply a reflection of what I was referring to, i.e., the inability of central banks, in the long run, to control the gold price. I expressed interest in knowing what alternative to going off the standard Stockman would have suggested, as he was critical of Nixon's action; yet something had to be done. What would Stockman have done differently?
  10. zdreg


    did you not write that france made a $10 profit on gold?

    "While it is true that "fiscal discipline" seems to have ended with the "Nixon shock," those exchanging gold backed notes for gold, chiefly France, were able to get gold for 35$/oz and turn around and sell it on the open market for 45$"

    is the above not written by you?

    central banks cannot control the price level of anything if they print money.
    #10     Apr 2, 2013