Monday, November 29, 2010

Is That Really How Capitalism is Supposed to Work?

Charles Hugh Smith has an interesting piece up today entitled "Ireland, Please Do the World a Favor and Default.
I have only skimmed the post, but I'd say on balance that it seems pretty thoughtful, and when CHS thinks things through, he usually nails it.

A couple of things caught my eye. 

First, there is this statement:

It's rather straightforward: as asset bubbles rise, they enable vast leveraging of credit and debt. Once mal-invested assets collapse in value, then the debt remains, unsupported by equity or capital.
I've highlighted the word "mal-invested" because, to me, it highlights CHS's Austrian leanings.  My problem with that term is speculation is not investment, mal- or otherwise.  The fact that the Austrians purposefully pretend that speculation is a form of investment tells me that the Austrians accept financial speculation as normal and acceptable.  I'd rather criminalize it, at least the debt-financed part of it.

Second, there is this statement:

The money is lost, and Capitalism requires those who took on the risk to earn outsized returns must take the loss, come what may.
Really?  Capitalism requires that kind of outcome?  I know that we've all been told something along these lines, but where's the empirical evidence that this has ever truly been the case?  I defiinitely have emprical evidence to the contrary.  For example, while rummaging around in the history of finance and banking, I discovered that in the 1870s the Bank of England bailed out a large number of English banks who were exposed to the fallout of the U.S. railroad bubble bursting. 

Admittedly, in the past we certainly did see financial speculators get their comeuppance, but over the arc of history, it is clear that the system has been continually adjusted to prevent that kind of outcome.  The rise of corporate banks is an example.  When individual bankers or banking partnerships were threatened with ruin, it was kind of hard to bail them out because the owners were the managers.  But when corporate banks are threatened with ruin because of management's missteps/fraud, well, my goodness, we can't allow the innocent shareholders and bondholders take the hit, can we?  It's kind of the flipside of the argument that led to the social safety net as a result of the Great Depression.

It seems to me that what CHS views as a feature of capitalism is actually viewed by capitalism's masters as a bug.

UPDATE: Clarifying:
My problem is that the term "malinvestment" is a euphemism that derealizes the primary economic evil facing capitalist economies and thus normalizes it. To even use the term is to engage in "normalizing evil" as CHS described recently in his "Banality of (Financial) Evil" post. Debt-financed speculation is in no way an "investment." It is always a gamble made with other people's money, and it is the other people that always pay when the bet goes the wrong way.

As CHS said "Not naming evil is the key to normalizing evil. Evil must first and foremost be derealized, detached from our realization and awareness by naming it something innocuous."  Malinvestment is a pretty innocuous term, isn't it?