Debt capitalism self-destructs

[bemildred]

In a period of less than a year, what had been described by US authorities as a temporary financial problem related to the bursting the housing bubble has turned into a fully fledged crisis at the very core of free-market capitalism.

A handful of analysts have been warning for years that the wholesale deregulation of financial markets and the wrong-headed privatization of the public sector during the past two decades would threaten the viability of free-market capitalism. Yet ideological neoliberal fixation remain firmly imbedded in US ruling circles, fertilized by irresistible campaign contributions from profiteers on Wall Street, methodically purging regulatory agencies of all who tried to maintain a sense of financial reality.

This ideology of "market knows best" has allowed the nation to slip into an unsustainable joyride on massive debt giddily assumed by all market participants, ranging from supposedly conservative banks, investment banks and other non-bank financial institutions, to industrial corporations, government sponsored enterprises (GSEs) and individuals.

The once-dynamic US economy has turned itself into a system in which it is difficult to find any institution, company or individual not over their head in speculative debt. Undercapitalized capitalism, also known as debt capitalism, has been the engine of growth for the US debt bubble in the last two decades. This debt capitalism cancer is caused by a failure of central banking.

http://www.atimes.com/atimes/Global_Economy/JG22Dj06.html

[OmahaBlueDog]

1. Even in a deregualted market, failure to follow the fundamentals = disaster

Why did the dot.com bubble burst? Because, for 3 years, investors large and small ignored basic indicators such as market capitalization and p/e ratio and bought wildly overpriced shares of unproven companies.

I'm in my early 40's; when my parents went to buy a home, there were 15 and 30 year mortgages available. To get one, a buyer had to come up with a 20% downpayment. Flash forward -- houses got more expensive, and people saved less and less. Products increasingly allowed buyers to enter the housing market with less and less equity, and service less and less debt. The end result is that buyers were allowed to buy homes with no money down and only servicing interest on the loans they made -- and this on the assumption that home prices would always rise.

I am a firm believer in market capitalism. I believe in the innovation it brings and the demands it meets. However, we need to recognize (as we did 100 years ago) that as much danger lurks in big business as big capital. Government needs to robustly protect all against the expediency of the marketplace. This is a fine line, since a business needs to operate efficiently, but ultimately needs to serve society's greater good.

Oil is the most glaring current example of this. Despite the warnings about global warming, and despite the moral compromises nations make in obtaining oil from unsavory regimes around the world, we continue to use oil-based petroleum and hear demands to drill for more. Why? Because it's expedient. Oil is there; oil is cheap to get out of the ground; making products from oil is an established practice that favors entrenched businesses. Yet continued use of oil is not in America's interest. Even if you don't believe one word about global warming, you can't deny that oil has forced us to send huge sums of cash to nations that share none of our values.

Without government regulation, we will continue to use oil. Only government can create and enforce milage standars. Only government can herd the markets toward producing alternative fuel vehicles, and only government can stand up and tell oil companies that they cannot drill anywhere they want.

[Joe Chi Minh]

10. Most insightful, though I think you are understating it when you attribute it to expediency,

rather than the viciously narrow, material self-interest of, at best, largely conscienceless businessmen Adam Smith so roundly castigated - in this case, the moguls of the oil and armaments industries.

[Alcibiades]

2. Good article

Its conclusion:

"The argument for Third World debt forgiveness contains large measures of lender liability and predatory lending. Debt securitization allows predatory bankers to pass the risk to global credit markets, socializing the potential damage after skimming off the privatized profits. The housing bubble has been created largely by predatory lending without any lender liability. The argument for forgiving Third World debt is applicable to low- and moderate-income home mortgage borrowers in the US as well. Let's hear some proactive commitments from the presumptive candidates of both political parties instead of empty populist campaign rhetoric."

The degeneration of capitalism into ever-more spurious ponzi schemes that create no real value was predicted by that bearded fellow in volume three. Assuming that regulation will work to stabilize this part of the economy (and fat chance, there), they will just find some other way to reap private gain while making the downside risk public.

[Swagman]

3. look into the Islamic lenders in the US-no homes are being re-possessed

because they abide by the principles of "non usuary". ie: no greed-just enough profit to keep going and financing new homes.

[Joe Chi Minh]

11. Were it not for the ubiquitous and grievous suffering of so many non-Moslems,

you'd have to laugh out loud, wouldn't you? Why weren't the likes of fundamentalist preacher Pat Robertson protecting THEIR people from all this madness? And for that matter, our Catholic leaders, clerical and secular? Would it have been possible? Was there enough rentable accommodation, as an alternative?

[sinkingfeeling]

4. Very good article. Explains how de-regulation has led to our downfall.

[Joe Chi Minh]

5. It sounds to me as if Milton Friedman has significantly contributed towards

making a Nobel prize for economics a badge of infamy. The extent to which right-wing politics taints everything it touches never ceases to appal, does it?

[bemildred]

6. Yeah.

But the whole idea that a lack of regulation leads to stability is stupid on it's face. Equilibrium systems have feedback loops, corrective mechanisms. People who want to gut the corrective mechanisms want chaos and "bifurcation points".

[Joe Chi Minh]

9. It's interesting to read that it has a corresponding technical underpinning.

Thank you. That makes sense. Conservatism was always a misnomer, for sure.

Of course, when the right when had a degree of common sense, they preferred a stable society in respect of their subordinates, but as for their own activities, they were always "red in tooth and claw" - which meant a moral anarchy that denied their subordinates the basic Christian right of survival; and we have seen a recrudescence of it post-Thacher and Reagan.

It's not that there were never good guys on the right, but they have always had to fight a rear-guard action against the psychos, eventually losing all together and disappearing.

Chaos and anomie by courtesy of our lords of misrule, since their anarchy has been considerably democratised. However, the atheist left has at least as much to answer for with regard to the latter.

[bemildred]

12. "Lords of misrule"

Exactly the right phrase.
:thumbsup:

[Joe Chi Minh]

15. Thank you, Bemildred.

[glitch]

7. "free-market capitalism" should always be in quotes. just a pet peeve of mine. :) nt

[BryMan]

14. Thank you

I was about to say the same thing myself, then I saw your post. This isn't actual free-market capitalism in the slightest we have been witnessing. Actual free-market capitalism doesn't have any regulations, but does have legal enforcement to protect the market from corruption....we've seen neither applied EVER. So therefore the incorrect term used for this mercantilism/foolishness run by mental midgets for the last 30 years shouldn't even be allowed without them being struck by a stick each time they utter the term they choose to apply.

We'll probably never see true free-market capitalism since the powers that be won't allow themselves to be accountable like that......perish the thought that the important ppl be accountable! *sarcasm*

[unblock]

8. there are actually quite a lot of companies with cash on their hands

sure, some companies have too much debt and are in trouble, but others have plenty of cash and are waiting for better times to expand or acquire.

[flashl]

13. Although these companies may have followed ethical guidelines, if the financials are in trouble,

how can they be safe and expect to expand?