A Crisis of Capitalism?

Ever since the 2008 financial crisis we have frequently remarked in these pages how ludicrous the assertions are – which keep being repeated ad nauseam in the mainstream media – that the financial and economic crisis was a result of 'laissez faire' allegedly gone too far. Not a week has passed since then without someone coming out and blaming the non-existent free market for the calamity.

First of all, it should be perfectly clear that the Western regulatory democracies do not represent free unhampered market economies. They have a socialistic, centrally planned monetary system and free enterprise and production are restricted by a mountain of licensing laws and administrative legislation that is unsurpassed in the history of mankind. At the center of the financial crisis we  found in fact  one of the most regulated sectors of the economy.

There is no free banking –  the banking system is a cartel at the center of which there is a central economic planning agency no different in principle from the former Soviet GOSPLAN agency.

Consider in this context the recent refusal of Blackstone chief Stephen Schwartzman to hand over details of his personal finances to the Federal Reserve. Apparently the regulations state that anyone who owns more than a 10% stake in a bank must give the Fed all his personal financial information. In this case, Blackstone along with a few other investors rescued a bank that was about to go belly-up, Bank United. Rather then hand over this information to the Fed, Schwartzman decided to lower his firm's stake in the bank to below 10%. However, for the purpose of this post we only want you to consider a brief snippet from the WSJ article reporting on the situation:


The matter of Mr. Schwarzman's personal financial information is tied to BankUnited's plans to convert from a savings-and-loan institution to a national bank. The bank proposed the switch last year when it agreed to buy Herald National Bank, a two-branch bank in New York, for roughly $70 million.

As part of the conversion, the Fed requires detailed financial information from "principals" of entities that own more than 10% of the bank's stock. The Fed first requested the information in the fall, according to the people familiar with the situation.

The request stretches to the upper ranks of those firms, according to people familiar with the process. That means top executives of those firms are required to provide comprehensive details about private real-estate holdings, investments and anything else that contributes to their net worth.

"The Fed has always been very careful about who they let into the banking tent," says Harold Reichawald, co-chair of the banking practice at law firm Manatt, Phelps & Phillips, LLP in Los Angeles.”


The are careful who they 'let into the banking tent'? Well, they have to be careful, since banks are a privileged business that is exempted from the traditional legal principles governing property rights. They can expand credit and money from thin air, ultimately the functional equivalent of a mafia boss printing counterfeit bank notes in his cellar, only in their case it's perfectly legal.

However, what this example once again shows us is how little the current financial system has to do with a free market. Whatever it is, it is about as far removed from 'laissez-faire' as one can possibly get short of instituting full-blown socialism.

Recently we received several e-mails from the Financial Times regarding a new series of articles. The paper is well known for its etatiste editorial slant. Its chief writer on economics, Martin Wolf, continually makes the case for more money printing (he does so verbatim, so at least he's not hiding his hoary inflationist theories behind euphemisms) and more deficit spending to rescue the economy from crisis.

The above mentioned series of articles that is currently being published by the paper comes under the heading 'Capitalism in Crisis'. Now, if they had entitled it 'Crony Capitalism in Crisis', or 'State Capitalism in Crisis', then we could perhaps say that the topic is likely to hit the mark. Alas, it is only capitalism as such that is deemed to be in crisis – a term formerly synonymous with the free market economy, but perhaps this is no longer true.

There can be no doubt that the encroachment of statism on the economy has produced a crisis – if one imagines the hampered market economy as a car, then it is a car that has three of its wheels spinning in the air, not getting any traction. The wheels are certainly turning, but to no effect.

Looking at the articles in the FT, we were pleasantly surprised to find a handful that seemed to actually come out in defense of free market principles – ironically one of them was written by Bill Clinton, who argued that 'charity needs capitalism to solve the world's problems'. However, the vast majority seemed far more concerned with 'monitoring' and 'controlling' capitalism, condemning 'consumerism' and so forth. The 'high point' is probably represented by Jeffrey Sachs' article entitled 'Self-interest puts capitalism under threat'. That sounds a bit like the arguments put forward by the methodological collectivists of the Prussian Historicist school in the early 20th century. What shall we do about this 'dangerous self interest'? There is no 'solution' short of outlawing it.


The 'Reasonable Profits Board'

Seemingly eager to confirm our contention that they are really socialists (misnamed 'liberals' in the US), six house Democrats recently proposed the setting up of a new bureaucracy, the so-called 'Reasonable Profits Board'. This entity's purpose would be to regulate the amount of profit energy companies will be graciously 'allowed' by the State to make in the future. Upon seeing the headline, we at first we thought it was a satire.

Unfortunately it wasn't: they actually mean it.

According to 'the Hill':


Six House Democrats, led by Rep. Dennis Kucinich (D-Ohio), want to set up a "Reasonable Profits Board" to control gas profits.

The Democrats, worried about higher gas prices, want to set up a board that would apply a "windfall profit tax" as high as 100 percent on the sale of oil and gas, according to their legislation. The bill provides no specific guidance for how the board would determine what constitutes a reasonable profit.

The Gas Price Spike Act, H.R. 3784, would apply a windfall tax on the sale of oil and gas that ranges from 50 percent to 100 percent on all surplus earnings exceeding "a reasonable profit."

It would set up a Reasonable Profits Board made up of three presidential nominees that will serve three-year terms. Unlike other bills setting up advisory boards, the Reasonable Profits Board would not be made up of any nominees from Congress.

The bill would also seem to exclude industry representatives from the board, as it says members "shall have no financial interests in any of the businesses for which reasonable profits are determined by the Board."

According to the bill, a windfall tax of 50 percent would be applied when the sale of oil or gas leads to a profit of between 100 percent and 102 percent of a reasonable profit. The windfall tax would jump to 75 percent when the profit is between 102 and 105 percent of a reasonable profit, and above that, the windfall tax would be 100 percent.

The bill also specifies that the oil-and-gas companies, as the seller, would have to pay this tax.

Kucinich said these tax revenues would be used to fund alternative transportation programs when oil-and-gas prices spike "Gas prices continue to rise, creating a hardship for the American people," he said.

"At the same time, oil companies are making record profits gouging their customers. This bill would tax only the excess profits and create forward-thinking transportation alternatives.”

Specifically, he said the money would be used to fund a tax credit on the purchase of fuel-efficient cars and set up a grant program for mass transit programs when oil-and-gas prices are high.

The bill does not estimate the size of these grants or the amount of money that might be collected through the tax. Co-sponsoring the bill are five other Democrats: Reps. John Conyers Jr. (Mich.), Bob Filner (Calif.), Marcia Fudge (Ohio), Jim Langevin (R.I.), and Lynn Woolsey (Calif.).”


(emphasis added)

We've probably seen it all now. Just to make a few things clear: if such a tax were introduced, investment in energy production would likely stop in the US. Energy prices would consequently soar even further.

The populist fable of 'price gouging' by oil companies that is underlying this proposed bill is just that: a fable. In reality, oil companies have no control whatsoever over oil prices, the height of which is determined in global markets. There was no-one arguing for helping oil producers to cope with the losses they made when crude oil was trading below $10 a barrel in 1998.

Moreover, it should be clear that if such a tax were introduced, the revenue would never be spent on what the sponsors of the bill say it will be spent on. It would anyway not even make sense to spend it that way, as  investments in 'alternative transportation' that are profitable will be made by entrepreneurs of their own volition. Any such investments that are not profitable and can only exist on the base of subsidies will perforce waste scarce capital and make society as a whole poorer.

What constitutes a 'reasonable profit' will of course be based on an entirely arbitrary judgment. Instituting a board that determines what companies are 'allowed' to earn essentially amounts to a variation of the 'Zwangswirtschaft' of the Italian fascists and the German national socialists in the 1930's. The means of production remain nominally in private hands, but they can no longer be freely disposed of.

Dan Ferris of the 'Extreme Value' newsletter had this comment (via Casey Research):


Selling gasoline is a crap, low (if any) margin business. If you don't attach a convenience store to it, you make nothing. Refining gasoline has a margin between something like 1% and negative infinity, except every now and then when it almost looks like it's not another crappy business.

And Congress says they make too much money. If they could guarantee a reasonable profit, they'd be subsidizing it, not taxing it. People who lend out your deposits (ten times over) and forbid Walmart from entering their business because Walmart's model would only benefit customers, not cronies, aren't making too much money.

People who get money from the government to keep the price of sugar double the global price aren't making too much money.

People who get money from government to grow corn so they can do the most expensive possible thing with it – turn it into ethanol – aren't making too much money.

Al Gore's carbon credit trading operation isn't making too much money.

College professors who don't teach, who drink fine wine, live in Tudor McMansions and drive Volvos while writing papers on the oppression of women in the workforce aren't making too much money.

But people who sell gasoline… one of the skinniest margins on Earth… a product without which life as we know it comes to a grinding halt… they're making too much money.

This is what you get when you vote, people trying to make good sound bites for ignoramuses who vote, as if the political process had all the depth and meaning of a Disney movie trailer. "Coming soon: Hope, Change and Reasonable Profits!"




Francois Hollande Identifies His Enemy

As everybody knows by now, although French still-president Sarkozy's in a stroke of luck got rid of his most dangerous opponent Dominique Strauss-Kahn, this hasn't really helped his chances of being elected (as it were, it appears that DSK was trapped in what is colloquially known as a 'honey trap', and the 'cui bono' question points squarely in Sarko's direction. Of course none of this is provable).

His new socialist opponent Francois Hollande seems likely to win the upcoming presidential election in France merely on account of  the fact that he is not Sarkozy,  if the polls are to be believed.  At this point it seems likely that even a sock puppet would be able to unseat Sarkozy, so Hollande could afford to keep a low profile up until now.  However, that is now changing. In his first major campaign speech, Hollande let us in on what he stands for. As one might expect, a useful populist slogan was found. He is not fighting Sarkozy, he is fighting the men behind the curtain.

According to 'Opinion France 24', he said:


“My adversary has no name, no party, no face. And yet he is in charge. My adversary is the world of finance."


Now, if we didn't know who was saying this, we would perhaps await a clarification. Is he against the cartelized fractionally reserved banking system and wants to replace it with a free market alternative? It is a good bet that this is not his intention –  on a previous occasion, he noted that he wanted to achieve what Sarkozy couldn't: namely get the ECB to print even more money and engage in 'QE' against German resistance.

In reality, the above slogan should probably be rephrased as : 'my enemy is capitalism'. This is not exactly a hard sell in France, where even nominally conservatives like Sarkozy constantly surprise us with their deep-seated economic ignorance and disdain for free markets. 

As 'Opinion France 24' continues:


“If François Hollande wanted a phrase to define his first major rally in this election campaign, he's found it.

Killing two birds with one stone, he brushed aside Nicolas Sarkozy, omitting to mention the President's name, and singled out what he reckons is the source of many ills in France.

All in all, Sunday's rally at Le Bourget, just north of Paris, is likely to be considered a success by the Socialist Party. There was lots of noise, cheering, flag-waving, queues outside as more people than expected turned up – a vital rule of politics: make it look like you're popular. Singer Yannick Noah gave it some welly as a warm-up act and there were smiles all round from the party barons, the « éléphants ».”


He made a clear step leftwards with the promise to 'Get The Financial Sector'. That's important, both to reassure the party, and to ensure he stands out from his rivals that are closest in the polls (that means François Bayrou). "I offer a clear choice, between Right and Left". There's little room for dithering there.”


Pretty much the last thing Europe needs is 'another step leftward'. There is undoubtedly much to criticize about the financial sector, but it doesn't need to become more socialistic, it needs to become less so.

Further below, the article notes that Hollande's chances may not be as clear-cut as the polls currently indicate:


“[…] what about the masses of disenchanted voters? They're unlikely to give two hoots about this rally, as Nathalie, an activist from Sèvres, pointed out. When she goes canvassing, door-to-door, the election and the candidates are far from people's minds. "It's not a campaign like the others in the past. In these hard times, people don't know who to vote for. Their real concern is to find out which one of the candidates will get them out of the crisis".

With promises to dismantle the wealthy financial elite, François Hollande is playing it safe with his own party. Vowing to make France a better place to grow up may not be new, but it does strike a chord. Both allow him to point the finger at – but not name – the man he judges responsible, the man he hopes to replace, Nicolas Sarkozy.”


So here are the choices the French people will have to ponder when election day comes around: they can either vote for a 'conservative' with a well-established disdain for free markets (Sarkozy), they can vote for a bland socialist intent on 'making a clear step leftward',  or they can vote for the charismatic and xenophobic leader of the far right Front Nationale, Marine Le Pen. She is on record for wanting to make France autarkic – her economic ideas are essentially mercantilistic. The question is whether voters will see her as too great a risk on account of her radicalism. Perhaps the time is not yet ripe for political radicals to win. A deepening economic downturn could eventually change that.

Alas, there is a choice the French people will definitely not have: there's no-one on their roster of candidates who is standing up for economic liberty and free markets.

Americans at least do have that choice, as they have Ron Paul – they will only have themselves to blame if they once again vote for 'hope, change and reasonable profits' or another faceless representative of the so-called mainstream who will simply continue on the path the country has been on for several decades now. To be sure, Paul is considered a 'radical' as well today, mainly because he is clearly the only truly non-socialist candidate. His disdain of the vast government bureaucracy, the fraudulent financial system and the military-industrial complex and the endless wars that are fought to keep it in clover  all make him allegedly 'unelectable'. The mainstream media continue to blithely ignore him. As the Casey report notes in this context:


“The lead story [on CBS, ed.] was all about Newt Gingrich's apparent surge in South Carolina, but also about Rick Perry and Rick Santorum and their continued battle for the nomination. At one point, the newscaster went so far as to show the four candidates on the screen as he discussed their positioning for votes in South Carolina. Yet, even though he is running third, the news program didn't even mention Ron Paul!

In the perfect hindsight afforded by the passage of the last couple of days, we now know that the grips of Santorum and Perry were so weak – single-digit territory – that they both subsequently dropped out of the running. So now that leaves just Mitt Romney and Newt Gingrich. Oh, and that other guy, you know Ron whatever-his-name-is.

Anyone who thinks that the game in this degraded democracy isn't rigged, isn't paying attention.”


However, the fact remains that he is on offer: American voters are free to choose Paul and with him, vote for liberty and free markets. No such choice exists for the great bulk of European voters, least of all the voters in France.



The choice faced by the tax cows

(Image source: unknowm – The Web)


It has become very difficult to stand up for the free market economy. It is under siege, as the true culprits of the crisis have in time-honored fashion blamed the crisis on the market. It has become difficult to defend capitalism as the meaning of the term has been conflated with a societal organization that is not truly capitalistic in the original sense of the term, but rather resembles a form of 'state capitalism' or 'soft fascism'. Most people due to their ignorance of economics believe that more government intervention is required to fix the crisis, in spite of the fact that it is government intervention that has brought it about. This is highly unfortunate, but it is not an obstacle that is impossible to overcome.

As Ludwig von Mises said:


“Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action  and concerns everybody and everything. It is the pith of civilization and of man's human existence.”




Sarkozy challenger Francois Hollande: a step leftward

(Photo credit: Reuters)



Below are a few interesting charts we have come across recently and that we wanted to share with our readers:



Personal income ex government transfer payments, via 'financialarmageddon.com'



The number of S&P 500 companies with a dividend yield exceeding the current t-note yield (note that this indicator of 'cheapness' could well turn into a trap in a secular bear market, as such log term bear markets usually end with p/e ratios in single digits regardless of the yield on government bonds)



The bias of gold price movements between the London am and pm 'fix' vs the periods outside the London trading hours – gold seems to have consistently fallen in London trade throughout the bull market – via sharelynx.



And lastly, a pdf file for download that shows US migration patterns. It appears that the main attractions for migrants in the US are states with low taxes and market-friendly regulatory regimes, as well as Washington DC, where the federal government's hiring sprees and generous perks for bureaucrats attract a great many people as well. Of course lobbyists and 'think tanks' are also proliferating in Washington.




Emigrate While You Can... Learn More




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5 Responses to “The Market Economy Under Siege”

  • Jonas:

    In Belgium we have something called “The price observatorium”, always on the look out for ‘suspicious’ price changes. The reason we got another downgrade by Fitch today is that we throw away money employing f*tards like this.

  • Kim Hackl:

    Most American politicians don’t even have a clue what Ron Paul is talking about. Over the last couple of decades the US has been on a similar path as Europe. I wonder how long it will take us to catch up to them?

  • Jim:

    “Reasonable Profits Board”? Gas Price Spike Act”? Shades of Ayn Rand. These are names right out of Atlas Shrugged. Scary stuff.

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