Tuesday, September 30, 2008

Death of American Capitalism

Before I start bloviating, I would like to take a moment to talk about Prof. No am Chomsky. Because, thanks to today's bizzare set of circumstances, a lot of Prof. Chomsky's assertions regarding American economic policy have come astronishingly true. If he were a malicious soul, he would be saying "I told you so".

Prof. Chomsky contends that America is a socialist state to a great degree - and cites all "high technology" - which is almost always due to taxpayer money - as evidence. Where it differs from a socialist state is that the profits due to these high technologies are privatized. Today's bail-out is pretty much a text-book case of the taxpayers assuming risk and saving large private institutions that are "too big to fail".

Prof. Chomsky's contention that democracy is America is an illusion often draws a lot of flak. But looking at the house of representatives turn down a bill and then pass it on the second iteration gave one the feeling that they just did not have an option - because if they did not pass it today, it would come back tomorrow.

Prof. Chomsky's media-propaganda model stands vindicated by the shameless advocacy in the media for this plan. Fox, CNN, CBS, MSNBC, NY Times - you name it. Everyone told you you had to get this plan voted for - otherwise....

If I were Prof. Chomsky, I would certainly say "I told you so".


This blog would have lost all credibility had it not sounded off on the current demise of capitalism in America. I had contended earlier that American capitalism was incredibly robust and fail-safe - and this robustness made up for its apparent heartlessness. Turns out, it was not robust. And that's why, it went bust (that's a miserable doggerel - the kind I keep talking about in thet title of this blog)

Let me summarize how the Goliath that is American capitalism was felled.

Companies such as Fannie Mae and Freddie Mac (and other mortgage under-writers) decided one fine day to make some money from the toil of poor people who do not have good "credit scores". Since these people were less likely to get loans (and everyone in the world wants to build a dream house), they were prepared to pay a little more for the loan. So they borrowed money at higher "sub-prime" rates.

So far so good. Good for the poor people - they at least got a loan and had an honest stab at living happy lives in their own roomy homes.

At that time, house prices were increasing every day. People borrowed X to buy a house with "adjustable rate" mortgages. The mortgage would charge a lower value in the beginning and would reset to a higher rate a little while later. The house would probably be worth 1.05X next year - and the 0.05 X was profit. They could then "re-negotiate" their mortgage to a lower rate - bascially using the profit to pay off some more of the principal.

All was well when everything went well. But everything can't go on perfectly forever. The housing bubble burst. Home prices did not keep going up every year. People were stuck in mortgages which they just could not afford - especially when the rates reset. Having eaten a sumptuous meal in a pricey restaurant, Americans reached for their wallet and found it empty. And the equivalent to doing their dishes was, well, foreclosure.

It does not end here. The "mortgages" were packaged and traded (before people realized that all was not well). The local banks that made these loans - well, they sold these loans (they actually sold the "risk") to investment banks and other institutions. Lehmann brothers, AIG, Bear Sterns - they all failed to see the downswing coming - and were basically destroyed by these "toxic" mortgages.

To "rescue" the market, the govenment had to do what Indian Mythology contends Lord Shiva did. It (the government) had to swallow the toxic assets (much like Lord Shiva had to swallow poision to save the angels (devas)).

One hopes that these latest developments silence the rhetoric of "small government" once and for all - but one knows that they will not. Political spin is such a powerful tool.


Anonymous said...

Rappie. These are very fascinating times that leave me with the uneasy feeling that I should have learned more about finance rather than pseudo science.

While I agree with you on the cheapness of the big broadcasting channels and the air of populism that it radiates (one feels that the many of the folks preaching their high minded wisdom don't know any better than one; and even worse, the political men are a bunch of morons who don't have any idea what this is all about) I am not too anxious about the future of capitalism, or even that this is the end of capitalism (though it is, as we know it perhaps).

1. Capitalism is only a model, one that has been known to work and if anything, it has a dehumanizing influence on the operations.

2. The socialism, while serving some people more than others may be necessary. Although the stock market does not by itself mean too much (it is, after all, expected that it fluctuates) the ordinary person stands to lose immensely from a collapse.

3. They have done these things in the past -the rescuing of the car 'giants' in the early 80s.

4. America is a goliath and this is not the end of capitalism by any means. Again, while I have no credibility to bad mouth giants such as Greenspan, it seems that the philosophy of deregulation has its limits.

5. All this is fascinating testament to the flexibility afforded by a great democracy; such an about-face from an ideology that is seemingly etched in gold.

Anonymous said...

"Liar's Poker" gives a fairly good idea of the buying and selling "risks"(hedging),junk bonds,etc that goes on wall street.I guess it is really a jungle out here.

Guess what happens when one get fired when one's wife is 8 months pregnant, the first thing one would worry other than the paycheck is affordable health insurance!!

From East Coast.