“Present day capitalism is sometimes attacked for being nothing but a “casino economy”. But I know of no casino where the head of the central bank and the finance minister accompany customers to the roulette table, kindly offering to cover any losses.  If there were such casinos, I am convinced that we would all be gambling much more.”

From “Financial Fiasco” by Johan Norberg

From Financial Fiasco

by John Norberg

“The financial strategist George Cooper, who wants to rehabilitate a Keynesian analysis of the financial market, sees similarities between interventionist economist John Maynard Keynes’s desire to stimulate demand in times of crisis and the behavior of the serial rate-cutters at the Fed-interestingly, however, he thinks the latter are more Catholic than the Pope in this respect.  Keynes believed that an economy should be stimulated to escape from a deep depression.  The Fed and the politicians of today have systematically stimulated the economy to keep it from ending up in a recession in the first place.”

“This is what Cooper terms “preemptive Keynesianism.”  The difference is subtle but important.  Recessions send important messages to market players, telling them that their investments have failed and that they have borrowed too much.  That forces them to give up bad projects and get out of bad investment positions, moving the money to more productive parts of the economy.”

“If the central bank and politicians step in every time to save the economy from a recession, it will lull borrowers and lenders into a false sense of security that will make them take ever-greater risks.  They will be pushing a growing mountain of debt in front of them, and eventually the stimuli will not be a large enough to prevent a collapse.”

HKO Comments:

While many consider the meltdown a failure of capitalism and the free market, it would be more correct to see it as a failure to let the free market function.  The Fed appeared infallible under Greenspan because he avoided so many small crisis by pushing liquidity into the system. But by not allowing the excesses to correct themselves, it only made the underlying problem and the eventual reckoning worse.

“In the modern capitalist world, in which the historical extremes of poverty have been widely overcome, the most acute moral issues relate to recognition of accomplishment and superiority- treatment not of the poor but of the excellent and gifted people whose work is indispensable to providing opportunities for the poor and everyone else.  In capitalism, as I wrote in ‘Wealth and Poverty’ some thirty years ago, the great conflict is not between rich and poor but between incumbent elites and existing forms of capital and the new elites and superior forms of capital that must necessarily displace them if economic progress is to occur.”

“Thus the paramount conflict in capitalism is between the established system-entrepreneurs, business,political movements, and bureaucracies- and the superior minds and methods, vessels of excellence and innovation, that threaten to usurp them. On one side stand the alliances of government and elites, in democracies and tyrannies alike, that distort economies around the globe by protecting the past in the name of social fashions and special interests.  On the other side are the inventors, entrepreneurs, industrial innovators, and visionary artists who challenge every establishment.”

from George Gilder’s “The Israel Test.”

I watched this interview with Eliot Spitzer by Fareed Zakaria from March of this Year on Zakaria’s show called GPS.  I was impressed with Spitzer’s view and his depth on the subject of the economic collapse.  (There are two other portions also on YouTube.)  A few salient points he made:

There was not a want for regulators or regulations. Spitzer felt we had more than enough regulators to do the job, but were missing people with the judgment and creativity to do the job.  New regulations and new agencies will not be a substitute for judgment.  We passed new regulations such as Sarbanes Oxeley after the dot com bubble and it did nothing to prevent the housing bubble.

Spitzer referred to a problem with “libertarians masquerading as capitalists” advocating no regulation.  But capitalism in his judgment REQUIRES prudent regulation.  At the same time he warned against “populist legislation” that would strangle the innovations of capitalism and economic growth.  He faulted the firms on Wall Street for selling self regulation and he equally faulted the legislators for buying it.

He also noted how the financial sector lost its bearings and instead of being a mere conduit to those who actually create wealth, became deluded into thinking they themselves could create wealth.

The bonuses paid by AIG at that time were wrong in his opinion, but the dollars were small compared with the bailout money that was passed on to counter party investors such as Goldman Sachs.  With so many people taking a haircut it was just wrong to reimburse their positions 100%.

Spitzer had investigated AIG as Attorney General of New York (before he was governor) for misleading accounting practices and noted that the board had pushed Hank Greenberg out. He was doing his job more aggressively than the federal prosecutors.

It is unfortunate that Spitzer will be remembered for his sexual indiscretions when his investigative work proved to be prescient.