The Collapse Of The Capitalist Consensus

by John Tamny - February 19th, 2009 - Real Clear Markets

In a November 21 speech for the Cato Institute, Harvard professor Jeffrey Miron eagerly stated that the idea of counterparty risk is overdone. Miron noted that the only scholarly work on the subject was written by none other than our present Fed Chairman, Ben Bernanke, back in the early ’80s. Bernanke’s fears of a domino effect with regard to banks were then, and remain pure conjecture. And assuming the domino effect is real, when we consider how whole countries have bounced back from total economic and human destruction as a result of war, it seems a reach to assume that ours would fail to bounce back from the demise of one or many banks.

More broadly, it should be pointed out that every transaction irrespective of its business purpose involves counterparty risk. When businesses go under, counterparties are left short, but one or many failures rarely have any kind of lasting economic impact.

That is so because when businesses fail, they in no way disappear. Instead, an opportunity arises for competitors to quickly snap up market share, not to mention that capital previously misused by the failed business in question is quickly redirected to those with a stated objective to deploy it more wisely.

Free enterprise works. It has as a basic element the "creative destruction" that Joseph Schumpeter postulated. What has happened in America during the last 15 years is a total abandonment of acceptance of risk. Wall Streeters love their profits and have worked diligently to undermine the idea of risk. As a result they have created this new "crony capitalism" that embraces capitalism when markets are rising but seeks socialism to stop the down side of market corrections. Robert Rubin, Clinton's Treasury Secretary has been one of its major supporters and leaders. Through people like Rubin, Wall Street has embraced the idea that their primary role is facilitating mergers and acquisitions that create monopolies to maximize profits. Combine that with derivatives and credit default swaps and collateralized mortgage obligations and sub-prime mortgages for people with no jobs and no down payments and Wall Street has tried to find a world where risk can be eliminated. Market corrections can also be avoided. At least that is the theory. It doesn't work though.

In actuality, Wall Street has become the enemy of free enterprise. America has had the unfortunate mistake of having George W. Bush, a rich, pampered and arrogant buffoon as President at one of the most critical periods in our nation's history. With absolutely no understanding of business, he allowed Bernanke and other followers of Wall Street "crony capitalism" to panic him when the recession started last year.

All of the advise he received was anti competition and anti free enterprise. All of this advise was based on the premise that government power could fix something that could only be fixed by allowing the correction they feverishly tried to avoid. Bush was completely susceptible to this gibberish because he was so ignorant of how capitalism really worked. Just as FDR made a recession a depression early in the last century by embracing socialism, Bush and Obama are turning what would have been a typical recession into a depression by their incompetent invocation of socialism today.

This is an excellent article that reminds people of what used to be the underlying premise of American prosperity, capitalism works. All of these modern geniuses are simply proving that their illusions lead to the tyranny of socialism. That system doesn't have market corrections that cause temporary periods of hard times for a small part of society. Socialism is a system which rapidly degenerates into permanent economic misery for the majority ... such as Russia has experienced for nearly 100 years. Why is it that every generation creates a new group of people who think that if they are in charge the horrors of socialism can be overcome?