Guest Saturday with The Free Market Project _ # 1

The following article was originally published by P at Slattery at The Free Market Project on October 13, 2011.


We Need Our Free Market Capitalism Back!

I’ve been reading a lot lately on the crash of 2008, as well as about the current conversation about the state of our economy. From the left I hear about eeeevile! corporations. From the right I hear about capitalism and the wonders that can be provided by it. Frankly, this blog is dedicated to the latter argument.

HOWEVER, I think there is a distinction to be made. When I am talking about capitalism, the free market system, what is in my mind is entrepreneurs creating good and services and selling them to others and creating wealth for themselves and the economy in general by doing so. That is most definitely NOT what Wall Street has been doing over the course of the last few decades. They have been generating a kind of wealth based on nothing. Actually, it’s based on less than nothing. It’s been based on debt and ways to package that debt that they can sell to others.

I understand the arguments of what good the packaging of that debt could do. However, it is increasingly clear that those arguments are academic. They aren’t arguments for doing something good, they are in the category of justification. Wall Street was, in fact, simply greedy. The packaging and reselling and insuring these papers is not creating conditions for prosperity for the rest of the economy. What they were doing was coming up with ever more clever ways to sell paper as if it had value and enrich themselves. And it worked. They were enriched more and more the higher their house of cards got stacked. And I am talking about personal enrichment. This is not wealth that flowed into the general economy. Why not? Nothing tangible was produced, except a bubble in credit (used mostly in the housing industry), which enabled them to sell ever more debt instruments. These debt instruments were not transparent, with everyone from seller to buyer knowing exactly what they were buying. They were not only opaque (with nobody knowing what was in the CDOs and CDSs), there were teams of nearly equally enriched lawyers making certain that these newly minted nothings could be sold without repercussions. Wall Street knew they were getting rich selling God-only-knows-what, and repackaged God-only-knows-what, and insurance on God-only-knows-what, but it didn’t matter because they were becoming extraordinarily wealthy personally and they knew that the taxpayer was going to pick up the tab if their house of cards came tumbling down.

These were not extraordinarily smart people manipulating the world economy for takeover. These were extraordinarily greedy people manipulating the system to enrich themselves. The more you learn about the players at the top of these banks, the more you realize that these guys are greedy idiots driven by ego and feeling entitled to millions and billions not for their ability to generate prosperity for the nation, but for their ability to manipulate the system to literally “make” money.

We are not talking about doing the things that benefit a free market capitalist society, like bringing a new company public so that it has capital to build its business. We’re talking about figuring out clever ways to create paper to sell from which they garner great personal reward. At the level where the instruments are created the people are ingenious, utilizing computer models and legal wizardry in formulating their God-only-knows-what paper creations. At the tops of these banks are greedy egotistical bastards that don’t understand what’s being created any more than anyone else does, but they love the the return on non-investment and what it does to the size of their bonus checks.

This is NOT the capitalism that we who love capitalism love. We love Steve Jobs. We love the people who make things– real things. We love the people who create real services. Real wealth is generated by real goods and services changing hands in a marketplace where the seller knows exactly what he’s selling and the buyer knows exactly what she’s buying and they’ve agreed upon a price for the transaction.

The great wealth that Wall Street has created for itself is NOT that.

Two things are infuriating to me. The first is that people collapse the distinction between what Wall Street has been all about for the last several decades and particularly the last decade, and “corporations” or “business” in general. People are hating businesses, as though they are not providing something real, including jobs, because they’ve collapsed the distinction between the God-only-knows-what paper that Wall Street uses to enrich itself (with a taxpayer backstop when their house of cards collapses) and the backbone of America which is corporations that create something tangible and useful.

The other thing that infuriates me is that government is right in the middle of it, bought and paid for by these Wall Street bankers. This is a bi-partisan failure because both parties love that Wall Street moola. Democrats are completely full of crap when they blame Reagan’s deregulation or the Bush administration because it was a change in regulation under Clinton that paved the way for the mess we’re in now. It’s simple really. What is needed is very simple regulation that creates transparency and responsibility. Instead, what Washington does is enable opacity and irresponsibility (the responsibility is born by the taxpayer, who has no connection to the problem) so that their donors on Wall Street don’t see their bank accounts diminish. The Obama administration had the perfect opportunity to hold Wall Street to account, and they passed. Read Confidence Men by Ron Suskind. Obama was cozying up to Wall Street people from the time he began his campaign. He had a choice when his administration started to select an economic team that wanted to hold Wall Street accountable or another team that wanted to “do no harm”. He chose the “do no harm” team and the “no harm” they did was basically no harm to the status quo of the way the big money on Wall Street was made. This is why you see Wall Street still engaging in the very things that got them in trouble in the first place–rebuilding the same damned house of cards–and paying back TARP funds so that they are no longer restricted in executive pay.

Democrats bitch about the diminishing middle class while wealth is collecting more and more not to top executives in companies that actually produce something, but in non-productive activities engaged in on Wall Street. No new business is created by selling a CDO. There’s no new Apple Computer or Microsoft or Google generated as the commissions on sales of someone else’s debt, and re-sales of that debt, are collected and distributed to clever paper creators on Wall Street.

Republicans turn a blind eye to the scam and act like what is happening actually IS the creation of the new Apple Computer or Microsoft of Google. But that is not what’s generating the money on Wall Street now. We would not have gotten into trouble if what Wall Street was engaged in was selling stock in new IPOs (tech bubble aside, but you notice that the tech bubble bursting created a short-lived recession, not a prolonged world-wide near-catastrophe). Wall Street is no longer doing the things capitalism needs in order to be vibrant. They are doing things that contribute nothing to the overall economy (other than place risk at the feet of taxpayers who have nothing to do with it), but that line their own pockets. That is why wealth is gathering at the top of our economy while we manufacture less and less, and while new businesses that employ people–people who do not know how to create some paper asset and sell it over and over for commissions–are in trouble.

We need to get back to the capitalism we love. We need to have Wall Street reigned in. We also need to understand that politicians of both parties are loathe to do it because they are getting contributions from those who make money the newfangled way: they scam it. It is up to us to make the distinction between the free market capitalism that we love and what is happening on Wall Street and in the seats of power. Obama is no worse than Bush and Bush was no better than Clinton. They all need a wake-up call. All of us, Democrat and Republican, Leftist and Libertarian, need to let Washington know that we are unwilling to allow this Wall Street scam to continue. We can argue over robust capitalism and socialism later (capitalism will win, when done correctly, because social programs can’t exist without it). Right now there is something going on that is neither and it’s extremely damaging. It has to be stopped.

5 thoughts on “Guest Saturday with The Free Market Project _ # 1

  1. I won’t pretend to be knowledgeable about Wall Street. I t does seam, however, that over the last decades it has become more of a casino than a place to make investments. I read recently that 70% of transactions on Wall Street are held for less than a year. I’m not smart enough to know what should or can be done about it.

  2. Much of the trading now is done by computer. Pre-program trading that leads to wild swings such that the average investor no longer has a fair shot.

  3. “We love the people who make things– real things. We love the people who create real services. Real wealth is generated by real goods and services changing hands in a marketplace where the seller knows exactly what he’s selling and the buyer knows exactly what she’s buying and they’ve agreed upon a price for the transaction.”

    And that is what the American economic system should always be about. A great description and a great post.

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