In his April 15, 2009 speech, Iranian President Mahmoud Ahmadinejad told America:
We say to you that you yourselves know that you are today in a position of weakness. Your hands are empty, and you can no longer promote your affairs from a position of strength.
… with the grace of God, and thanks to Iran’s national unity, the recommendations of Supreme Leader, and the following of his [path], nearly 7,000 centrifuges are spinning today
I have been seeing a lot of references to “a speculative bubble”
Nope. They were not speculating.
The crisis consisted of people, mostly members of protected minorities with nothing to lose, buying houses they could not afford with borrowed money in the expectation that they would go up, and if they went down, it was the bank’s problem.
So the people who bought houses were taking no risk, since mostly they bought them with 100% loans, had no credit rating and no assets to lose.
So were the banks making the loans taking a risk?
No, because it was not the bank’s problem, because the loans were for the most part guaranteed by Freddy, or Fannie, or AIG – all of which had implicit government guarantees, and all of which had an AAA rating.
So why did AIG and the rest have an AAA rating?
AIG and the rest were issuing naked puts greatly exceeding their total capitalization, which pretty much guaranteed that sooner or later they would go broke in a big way. So why AAA?
Moody’s, who issued the ratings, was tweaked on this, and replied that it was unthinkable that the government would allow these institutions to fail. So it was not true that nobody knew what was happening. All the insiders knew what was happening, the regulators knew what was happening: they knew that businesses were taking big risks for big money in the expectation that if they won, they won, and if they lost, the government would take care of them. It was government policy. People have been complaining about this for years.
The fundamental cause of this crisis is government regulation: Governments cannot be trusted with money. They think only of short term political gain, so dispense money to the loudest pressure group, in this case those represented by ACORN, rather than to people who are likely to repay it with interest. In this case, the regulators decided that “traditional” standards of credit worthiness were racist and discriminatory, because too many Jews, and not enough Blacks, met “traditional” standards.
“Naked capitalism” explains what has happened, and observes that the Bush-Obama policies caused it, are causing it, and are likely to cause a lot more of it.
Government guarantees will be abused – and the broader the guarantees, and more chaotic the situation the more they will be abused. The solution is that existing guarantees must be reduced, and existing government initiatives curtailed or at least allowed to expire. Extensive state intervention is extremely difficult to do right, easy to do badly, and the arrogant interventionists lack the necessary humility to do it right.
Ten years ago, Japan had a banking crisis very like the one we just had. It was discovered that financiers and big businessmen had blown staggering sums of money, whereupon the government massively intervened to keep those that had screwed up from losing their jobs.
The Japanese economy has been stagnant ever since, even though, or perhaps because, the government has poured huge amounts of “stimulus” over the economy, so much “stimulus” that the Japanese government is now approaching bankruptcy.
President Barack Obama correctly observed:
There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade”. They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.
Obama then proceeds to explain why we are going to do what failed for Japan:
we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.
No we don’t. We want to retain a strong sense that businessmen who succeed, win, and businessmen that foul up, lose their shirts. It is not capitalism when the capitalists are kept in power by the state.
To work, capitalism has to be run by people who are smart. The entrepreneur unites other people’s money and other people’s labor, to create value. The Wall Streeters revealed themselves to be idiots who massively subtracted value.
Similarly General motors, who managed to destroy the amazing sum of about four hundred billion dollars of value over the last decade.
The big factor in downturns is that people attempt to continue saving, while holding back from investing, whereupon the economy bogs down, thus the big factor is distrust of financial intermediaries. In this sense, recessions are largely supply side problems rather than demand side problems. In the last three years, vast numbers of financial intermediaries have been revealed as untrustworthy and incompetent.
In Japan, in a similar crisis thirteen years ago the insiders were revealed to be incompetent and corrupt. In a similar response, the Japanese government intervened to protect insiders from the consequences of exposure, keeping them in charge of other people’s wealth.
This in Japan as here led to massive decline in investment and demand, to which the Japanese government responded with “stimulus” – building bridges to nowhere, paving rivers, and so on and so forth.
This led to a massive increase in Japanese government debt, now the highest in the world, but failed to cure the recession. The government could manufacture demand, but not supply.
Japanese government debt is the highest in the world not because no other government was prepared to borrow so much, but because all other governments that attempted to borrow as much, have gone bust.
Bridges to nowhere will not fix the supply side problem, and tax cuts can have only limited effectiveness. Rather, a new crop of productive entrepreneurs must arise, the creation side of capitalism’s creative destruction. But in a world of bailouts, the way to success is connections, political correctness, and getting on with the rest of the elite, which gives us the sort of capitalist establishment that got us into this mess.
The banks that were run by bankers of the Ebenezer Scrooge type, who accepted CRA with the same enthusiasm as they turned up at their dentist for a root canal, tended to be taken over by banks of the Washington Mutual type, who were rewarded for their political correctness in embracing CRA with genuine enthusiasm, by regulatory favor in their takeovers. And that crowd, the Washington Mutual sort, is the crowd that is still in charge, government guaranteed to be in charge. We need a finance sector run by the likes of Ebenezer Scrooge, and an automobile industry run by the likes of Hank Rearden. To get that, badly run businesses have to go bankrupt, and their assets need to be auctioned off at the block.
My explanation for high oil prices is the collapse of oil states. Arnold Kling argues that instead the problem is that investors fear the collapse of advanced states, so are reluctant to take their money.
My explanation is that oil states are increasingly short of the competence to pump oil, the ability to provide security to people pumping oil, and the credibility to make deals with people who are competent to pump oil — for example it is difficult for foreign companies to pump oil in Nigeria, because there are too many different bandits and terrorists to pay them all off, and difficult for foreigners to pump oil in Venezuela or Mexico, because the government cannot credibly promise not steal everything, and difficult for the Venezuelan government to pump oil, since it could not run a pie stand, plus the security situation in Mexico, though better than Nigeria, is deteriorating.
Arnold Kling, however, argues that the problem is the increasingly scary on book and off book debt levels of the advanced nations, in particular the US. Investors fear hyperinflation. Where to put their money? Answer: Buy commodities that are underground, and leave them underground.
Observe in this video the British police are as frightened and weak before Muslims, as the British police are terrifying and dominating over Britishers in other videos. The British state is as contemptible to its enemies as it is terrifying to its subjects.
The fear and weakness we see in this video, we also saw when the Iranians over ran the British in the Persian gulf, and when the British fled before the Shia militias in Basra.
In this video, the Muslims rule the streets, and not only are the British frightened, weak, ashamed, and apologetic, but the British police, normally so arrogant, violent, and destructive, normally filled with brutal contempt for the merely law abiding middle class British civilians, are frightened, weak, ashamed, and apologetic.
The British state that has such contempt for Britishness, that it confidently will remake the British in its own image, in this video shows its true weakness and shame before Islam.
Pollsters report a world wide drop in support for the free market system.
This was apparent in the US presidential party primary, where the most anticapitalist candidate of each party won or appears to be winning his party’s nomination. Recently in Nepal, Maoists won democratically, an almost unprecedented event for communists.
I have no idea what is causing this problem. Perhaps the problem is that with the collapse of communism, the constant reminder of how dreadful the alternative to capitalism is has gone away.