JOURNAL: Financial Capitalism's Failure?

Here's an article from the premier financial newspaper in the world, the Financial Times, on a situation that I believe is catalyzing the current crisis (hoisted from Paul Kedrosky's blog).  

Just why is there so much debt in the Anglo-Saxon world? Bankers and regulators know well that it is in nobody’s long-term interests to have allowed borrowing to escalate to a position where the US now owes far more, as a multiple of the economy, than at the start of the Great Depression.  

The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite.  The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all. According to Société Générale economists, the inflation-adjusted income of the highest-paid fifth of US earners has risen by 60 per cent since 1970, while it has fallen by more than 10 per cent for the rest. As was recently pointed out in the New York Review of Books, the Walton family, of Wal-Mart fame, is wealthier than the bottom third of the US population put together – about 100m people. These are staggering statistics, confirmed by measures such as the US and UK’s ever-rising Gini coefficients, which estimate income disparity. Another way of putting this is that the share of profits in gross domestic product is at a 100-year high, or was until very recently.

More GG posts that relate to this topic:

Open Decision Making.   

America's Economy and Open Decision Making.

Parasitic Predation.  

Economic Cancer. 

NOTE:  The reason I posted about this and think it is interesting is simple.  Like Kennan (the intellectual architect of Cold War's "containment" policy), it's important to recognize what really generates a long term victory in a protracted conflict.  Then, like now, real victory requires a long term improvement in the quality of life -- from incomes to wealth to societal trust to fairness -- of the maximal number of people (to slow/reverse communism in his case and to slow/reverse disorder in ours) while at the same time, blunting the kinetic advance of the collective opposition at the least possible expense/disruption to the first goal.  We appear to be failing at both of the goals required for long term victory.  Incomes and societal trust are evaporating while we spend tens of millions to kill each insurgent (of which there is an endless supply, particularly if you seek them out).

Comments

[dagezhu]

This is an excellent find, thanks for putting the matter so succinctly.

I am somewhat amazed by your daring. You are closely connected to the insiders who hold the levers of power. I'm surprised that you can write such a thing under your real name, without fear of reprisal.

Of course, communism didn't work very well in the USSR. Chavez's system doesn't appear to be anything awe-inspiring. Sweden and the UK have socialism, but they're losing their hearts and souls.

Transitioning to something other than financial capitalism could be hard.

[andrewdb]

This does not seem to include any provision for increasing standard of living from lower costs from places like Wal Mart.

Debt is certainly too high, but calling for increased productivity and investment means we have to make investment attractive - right now the us seems to be adding regulations, which is to say adding barriers to such investment and new start ups.

[WarLord]

The USA has ruthlessly almost gleefully sent its manufacturing base off shore. There is almost nothing of substance left. The home equity and credit card debt masked this erosion of domestic productivity and lack of JOBS.

The only jobs left?

Counter at Mickey D and Greeter at Wally World - The 70% of the GDP that is driven by consumer spending? Ahh there's the rub...

And when the cost of the energy to ship products from China exceeds the value of the products themselves? Then what happens to the fuits of globalization?

[Mark]

"The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all."

This opinion has it exactly backwards. Regulation is the /means/ by which the elite get richer. They use government to force restrictions on their competitors to which they are either exempt or can meet at a lower cost per unit.

The article's statement assumes that government is the antagonist of the elites, but the briefest examination of political funding shows this is incorrect.

[Brian]

While I certainly agree that the income disparity is the root problem in our economic system. Blaming it on "unfettered capitalism" is a silly straw man argument. There has been nothing of the sort during this time of wanton accumulation by the ultra rich. Since 1913 our currency has been controlled by and for the benefit of the private interests that have used this incredible power to enrich themselves so obscenely. Thats not capitalism, its corporatism/fascism.

"If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered." -TJ

[Duncan Kinder]

"excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite."

This situation actually has reached comic proportions. Hyacinth Bucket and "Keeping Up Appearances" comes to mind. As does "Colbert Platinum" membership.

So to answer this, we need ways to keep up appearances without spending all that much money. Maybe we can't outspend the Waltons, but we can still outclass them.

And expertise on this point abounds - the British aristocracy, who have been maintaining a shabby gentility for over a century now.

Let me point you to some basic texts.

_The Official Sloan Ranger Handbook: How the British Upper Class Prepares Its Offspring for Life_
http://www.amazon.com/Official-Sloane-Ranger-Handbook-Offspring/dp/0312582293/ref=sr_1_2?ie=UTF8&s=books&qid=1246543347&sr=8-2

_Noblesse Oblige; An Enquiry into the Identifiable Characteristics of the English Aristocracy_ by Nancy Mitford
http://www.amazon.com/Noblesse-Enquiry-Identifiable-Characteristics-Aristocracy/dp/0837173876/ref=sr_1_2?ie=UTF8&s=books&qid=1246543441&sr=8-2

Country Life Magazine ( How to be resilient with style! )

http://www.countrylife.co.uk/magazine

I'm tempted to set up a blog on this topic. Feedback or flames would be welcome.

[Duncan Kinder]

Snark aside, here's a blog from _Country Life_ describing resiliency in Transylvania ( yes, Transylvania )

"In 1988, when Ceausescu announced his plans to bulldoze the villages, the trust led the movement to save them. But, when Jessica returned to Romania in 1993, she found the villages were wastelands of neglect, with streams clogged with rubbish, wooden bridges replaced with concrete slabs and impoverished gypsy families crowded into derelict houses. She immediately redirected the trust to save these rare and special villages before it was too late. Called the Whole Village Project, the work involves everything from sustainable farming to the revival of ancient crafts, such as handmade roof tiles and weaving.

The trust has now restored 500 houses, including Apafi Manor, bringing craftsmen from England to supervise and teach long-lost techniques to the team of locals. From the locks on the doors to the sheep’s-wool insulation, the woven curtains and the stucco walls, it’s comforting proof that the skills live on."
http://www.countrylife.co.uk/blogs/article/343170/Carla-Carlisle-on-visiting-Romania.html

Reverting to snark mode, I note this gives rise to a Count Dracula theory of resiliency.

Which certainly would be a black swan. No? John?

[Edwardo]

I've been saying this for decades. What a seer I am. Allowing the lower echelons access to credit, excuse me, debt, was a massive compensation mechanism-literally and figuratively- devised to give cover to the fact that the nation's rentier class had connived to strip their less well off denizens of access to the sorts of jobs that heretofore had provided real security.

Between the replacement of decent paying work with the creaking (and now collapsing) edifice that was the once vaunted FIRE economy, and the pillaging by Wall Street of the middle and lower echelon's savings, much of the U.S. population is now, for all intents and purposes, impoverished.

[Chris]

John, your conclusion is correct but what you see as causation is false. As a previous poster said we haven't had capitalism here for quite a while. All we have is the plutocracy concocting schemes (credit) to keep the rest of us beholden.

[JR]

Chris, that sounds similar to the arguments forwarded by the defenders of communism.

[Adam]

This certainly describes an anti-competitive/price-fixing 'Crony capitalism' or 'State capitalism' AKA 'Corporatism/Fascism/Communism' all being conditions of a "regulated", government-funded, oligarchy.

Let's be clear, these wealth inequalities are certainly not caused by a 'free to compete'/price-discovering 'Free-market capitalism'.

The appropriate distinction between various 'capitalisms' is *vitally* important.

[Alpwalker]

Life is good! I can buy all kinds of cheap, shoddy products even though my real salary hasn't increased versus *reported/revised/manipulated* inflation in years. Adjust the FT article numbers for real inflation and I am sure the situation looks even worse. Yes, the swells live and buy in the same inflationary environment but I’d argue it impacts them far less – another way real wealth gets sucked upwards in our klepto-plutocracy.

I am not anti-WalMart. They are what they are. However, without things like the US Navy, an expansive fed monetary policy, a regulatory blind eye to food safety, trade policy centered on short term profit, they would be a very different and far less wealthy company/family.

Happy Independence Day!

[WarLord]

Another take on crony capitalism from SALON: How The World Works:

"America gets laid off, Goldman Sachs employees get a raise"

http://www.salon.com/tech/htww/2009/07/02/good_times_bad_times/index.html

[Alpwalker]

John, in your note you compare the strategic response to the Cold War with a lack of response to today's disorder. I understand the comparison but I wonder wasn’t the Cold War was just another manifestation of the elites expanding power by finding enemies and sowing fear. How is today's disorder different? What is the cause of the disorder? Isn't the disorder merely a symptom of the root cause which is wide spread disenfranchisement and economic marginalization? We are on the Road to Serfdom but it appears to me that the map makers are the corporatists and kleptocrats.

[free_way_4_life]

I've wrapped my head around this concept all winter and all spring, and am now realizing that the corporate elites are just a bunch of sillies. Silly in the sense that they are not stupid, but so self centered and greedy that they do not see the roots of their own self destruction.

I mean, they are raking in their money chips for themselves, allowing no one else to make any chips to pay for the goods and services that made them rich in the first place.

This is the sort of greed that I refer to as "the snake eating its own tail," and a surprising critical mass of mainstream attendees at the Baltimore Harbor 4th of July fireworks (where I worked a resiliency type temp job, of course) agreed with the meaning of that metaphor.

So the snake either stops eating its own tail, or the people start creating a new snake. As much as the American middle and working classes seem dumbed down, they are not stupid and will not starve when they can trade goods and services with each other "under the radar/over the non-casino table."

Interesting times we live in ... so we shall see the workings of the resiliency as the people soon figure out that 500000 lost jobs a month shouldn't mean that we have 500000 extra deaths a month.

Chris Johnson

[pills]

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