Wednesday, December 31, 2008

Capitalists On The Way Up; Socialists on Way Down. During Crises, Balance Always Tilts Toward Gov't.

Many are finding it hard to make merry in the aftermath of this year’s financial crisis. Collateral damage from the crisis is extensive—unemployment is rising in the US, exporters are hurting in emerging markets, global stock markets are depressed, and each day seemingly brings new cries for government help from struggling industries.

Some see these effects as proof of capitalism’s failure. After all, this year saw the crumbling of a financial nucleus under its own weight, necessitating the US government to rescue the few straggling survivors. Capitalism, it’s argued, encourages greed and self-interests above the public good (Madoff is a “shining” example), and the solution is government and regulation.

But will larger government and more regulation help? History shows regulation does little to curb excesses. This is because excesses exist not because of the capitalist system, but because they are perpetuated by the participants. No amount of tinkering can regulate innate human characteristics.

There’s an old saying: “Everyone’s a capitalist on the way up and a socialist on the way down.” People want it all—to reap the benefits of free markets, but be protected against any downside. Capitalism won’t abide. And that’s a good thing. It’s a system of inherent checks and balances, which can be swift and brutal during the pruning process. In rough times, we seem willing to sacrifice free markets’ benefits for perceived security from this process (investors accepting 0% return on Treasuries is a recent example). Still, if free markets were restricted, what would happen to those checks? Subprime problems (or Madoff’s) were not revealed by regulators, but by markets. Note, politicians are human, too.

Capitalism and free markets are not ever-stable. They work precisely because they compel folks to take risks and seek to create excess value out of existing capital, in whatever form that might be. They’re examples of constant change and innovation. Change isn’t always comfortable—and much of it will fail—but when it moves society in a more efficient direction, society certainly becomes more profitable.

During crises, the balance always tilts toward government and away from capitalism. This doesn’t mean capitalism is done. But such things are always said in times like these. For months now we’ve applauded coordinated government efforts to provide monetary and fiscal liquidity and stimulus to the shocked financial system and to provide much-needed confidence. We tend to draw the line, however, at government “ownership” of assets and/or direction of those funds. Government “solutions” can only carry the economy so far—it’s up to capitalism to drive real, sustained growth. That is, it’s up to the people who make an economy, not its turgid overseers.

~Fisher Investments


At 12/31/2008 5:15 PM, Blogger wcw said...

My brother worked for Fisher for a bit. He has never had a good thing to say about Ken, and neither do I.

A better class of political opponent, please.

FD: my brother is conservative politically. Disdaining Ken Fisher's mind is not a partisan issue.

At 12/31/2008 5:33 PM, Blogger QT said...


What are your thoughts regarding the content?

Imagine if you did not know who the author was. Would this change your impression?

At 12/31/2008 6:22 PM, Anonymous Anonymous said...

A fun example is New York City, a big finance-based city wanting to make it big in the great nation of the United States of America. Over the years—in good times and bad—the city government used taxpayer dollars to fund its own brand of stimulus. They’ve either fronted all or part of the money, or engineered deals for various pet projects throughout the years: a $220 million ballpark for the New York Yankees, an $80 million Jack Nicklaus-designed golf course in Ferry Park with a 20 acre waterfront promenade, and $26 million since 1982 for Art. And so on. Set aside for a moment the dubious wisdom of using taxpayer dollars for what appear to be superficial glamour projects, and consider why all three projects either floundered or outright failed—most in a short time. There are many factors, but in broad terms, in each case there was little counterparty risk: The developers had great upside potential, but no real downside risk since the worst that would happen is they default on their loans to the city—which in retrospect, bore relatively lesser risk than defaulting on a private loan.

Did I read (crib)Fisher's article, okay, QT?

America is all about privatising corporate profits and socializing corporate losses. So far to the tune of $8.3 trillion. And when the laissez-faire, recession-denying (now depression-denying) libertarians like Mark J. Perry realize it, it is too late.

Game (the Yankees never make the post-season again), set (scratch golfers die from methane poisoning on the 6th tee), match (David Lee was a superior artist than Sammy) :-)

At 12/31/2008 8:24 PM, Blogger wcw said...

QT, my response went something like, "wow, this is tendentious and stupid. Who wrote it?" If it hadn't been Fisher, I wouldn't have had any personal connection, so I would have had to limit my observation to "wow, this is tendentious and stupid."

Don't know the personal connection, either. My father worked for Chevron back when they wanted to get into energy trading. They looked at buying or partnering with Enron, and passed. When I asked him around 2000, back when Enron was going to change the world, was that he didn't trust Lay back then, and wouldn't now (2000).

Sometimes personal connections help.

At 1/01/2009 8:46 AM, Blogger Michael Smith said...

Anonymous wrote:

America is all about privatising corporate profits and socializing corporate losses. And when the laissez-faire, recession-denying (now depression-denying) libertarians like Mark J. Perry realize it, it is too late.

Under *actual* laissez-faire capitalism, there are no government economic “bailouts” and no way to “socialize corporate losses” -- because, under actual laissez-faire, government does not have the power to do such things. By definition, laissez-faire capitalism is characterized by a complete separation of economics and state, in the same was as, and for the same reasons as, there is a separation of church and state.

The bailouts and “socialized losses” you bemoan are possible only under the sort of economic system that exists in America today: namely, a mixed economy, i.e. an economy with a few (shrinking) elements of capitalism combined with a massive regulatory/welfare state. Such a set-up, wherein government has enormous powers to influence or, indeed, dictate economic behavior, inevitably leads to the sort of economic problems we’ve seen over the last 75 years: inflation, unemployment, “stagflation“, recessions, depressions, endless “bubbles” like the “savings and loan bubble“, the “dot-com bubble“, the current “housing bubble” -- an endless series of economic crises brought on by government’s attempts to “manage” the economy through regulations and “stimulate” economic growth through the arbitrary creation of phony credit.

There is, of course, a massive, panic-driven propaganda effort by the left today to convince you that all of our economic problems are the result of laissez-faire capitalism. But such a claim bears the same relationship to reality as does the claim that our economic problems are the result of an invasion of Martians. If you are gullible enough to believe the latter then I suppose you are a candidate for being taken in by the former.

At 1/02/2009 5:27 PM, Blogger QT said...


"tendentious and stupid" at least tells me something although it does not offer any counter argument. At least, it tells me that you believe the purpose of the piece is to "advance a cause".

All argumentation presents a resolution and data to support/prove that proposition. Isn't all argumentation intended to advance a cause (ie. the resolution)? Isn't argumentation intended to persuade?

You have not provided any counter argument that would persuade others to consider alternative views. Without presenting a counter argument or deconstructing the argument and refuting the logic, the audience is left with 2 choices..1. what appears to be a relatively logical argument which is confirmed by our own observations (ie. government intervention does tend to intensify during economic crises) vs. 2. personal likes/dislikes ie. using adjectives to describe the piece and the author rather than actually being able to formulate any reasoned counter argument

Under the circs, how can you possibly imagine that your argument can persuade me or anyone else. It leaves the original Fisher position completely unassailed and therefore, the better argument by default.


You summarize the position very well although I don't see how a minority of libertarians can change an overall broadbased public consensus for government intervention?

At 1/02/2009 7:18 PM, Blogger QT said...


Something about this piece doesn't smell right to you. You just have not yet put your finger on what it is.

The author's assertion that all bubbles are a result of governmental meddling as though markets do not ever fail does not seem to bear hard scrutiny for one. Such instruments as CDO's, ARMS, & derivatives are pure market confections rather than the result of public policy. It would be difficult to argue that excessive leveraging among investment banks is the result of government housing policy or FED interest rates.

Just some thoughts. Sometimes, you really need to mull ideas and the feedback loop that tells you when something doesn't quite add up tells one to pull at the threads and look for inconsistencies.

At 1/03/2009 8:38 PM, Blogger OBloodyHell said...

> It would be difficult to argue that excessive leveraging among investment banks is the result of government housing policy or FED interest rates.

No it wouldn't.

The GSEs were inflating their numbers and claiming far better returns than were actually there, largely to provide Raines, Gorelick, et al, with their yearly bonuses(*).

This has the bad effect of saying to the market "hey, there's money to be made here!!" -- and the inevitable gold rush to get a piece of the pie.

If not for the Dems stomping on the OFHEO people doing their jobs, and ignoring what OFHEO was telling them, people might have been clued in a lot sooner that the GSEs were in trouble, and might have treated the various instruments with more circumspection.

The economy most likely would have had a downturn, but not almost tanked as it did.

(*) And the real question is, given that Raines and Gorelick pretty much did exactly what Ken Lay, et al, did, where is the call to string G&R up by their balls that followed the revelations about Lay, et al's almost identical machinations?

Oh, right. That would make the GSEs, and the Dems, look bad. So we need to be sure no one says anything about THAT notion.

"Never mind".

At 1/03/2009 11:44 PM, Blogger QT said...


Agree that there is plenty of blame to go around. I believe that this particular crisis has been the perfect storm of factors in both the private and public sectors.

The proposition of a market elevator that always goes up, however, remains an insuperable position. Markets periodically create bubbles/mismatches with value/excessive leveraging.

To suggest a "two legs, good; four legs, bad" rational that markets work and government intervention sucks (or the inverse) would seem to be an over simplification. Both it would appear are capable of misfiring.


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