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February 15, 2008


Friedrich von Blowhard writes:

Dear Blowhards:

I just came across a very funny short posting by Michael “Mish” Shedlock. The portions that caught my eye were as follows:

The list of those wanting a government bailout and/or bigger bailout than they have received so far keeps growing...Ambac (ABK) and MBIA (MBI) are both pleading for bailouts...MBIA wants cash, Ambac is blaming the rating agencies and wants guarantees of an AAA rating it does not deserve...The banking community is also looking for handouts, straight from taxpayers...Let's call it for what it is: A request for taxpayer funds to bail out lenders making stupid loan decisions...The national Association of Homebuilders recently announced that they have stopped all Congressional bribes…Obviously the NAHB was expecting a bigger bailout than it has seen so far for the bribes it has paid out.

That first sentence made me laugh out loud. (Okay, so I'm easily amused.)

This got me thinking that the term "bailout" (and all it signifies, including earlier ill-advised risk taking) is pretty much the meat of the problem of our contemporary political and economic life. This whole syndrome has been described by Martin Wolf, chief economic columnist of the Financial Times, and others as “privatizing the gains [of the economy] and socializing the losses.” If this seems unfair, just remind yourself how much money the credit insurers like Ambac and MBIA, the bankers, and the homebuilders have been making over the past decade or so, and notice how they respond to adversity caused chiefly by their own piggish greed and stupidity.

(The little economic crisis we're going through has one major upside: it's a golden opportunity to see how things really work in contemporary America. The situation has gotten so screwed up right now that the government, a relatively slow moving and stupid beast, can’t keep up with all the requests to socialize losses in real time. A year or two ago when everything seemed right with the world all this was much less visible.)

Why are we in this situation? Well, it’s more or less inevitable as a result of our political-economic system, which I would describe as "democratic Fascism." Sorry to use the F-word right out in the open like that, but it’s the correct one, at least according to the rubric they taught me in junior high school: "Fascism is public control and private ownership." (You know, in the sense that "Capitalism is private control and private ownership" and "Socialism is public control and public ownership.")

The widely repeated notion that the U.S. is a capitalist country is hard to understand, when you consider the extent to which government controls all the commanding heights of the economy, certainly including Wall Street. (Note how much of the business press actually covers the activities of one level or another of government.)

But that just pushes the issue up a level. The obvious follow-up question, although oddly obscured most of the time by people on both the left and the right, is "So who controls the government?" In the United States, being a democracy in good standing, the answer is of course "the people who pay to control the government." As a practical matter this answer means the people and businesses who make campaign contributions and who lobby Congress and administrative agencies (I provided some detail of this in my previous posting, Auctionocracy.)

So what we have is a circular process by which regulated (i.e., controlled) individuals, industries and businesses make campaign contributions to "capture their regulators" and to ultimately set government policy. In other words, the regulatory state in which the government is supposed to act as policeman of the private sector mostly works to the benefit of those market players smart enough to bribe the policeman. The referee gets paid to ensure an uneven playing field. The lunatics definitely run the asylum.

This mechanism, or at least major parts of it, seems oddly invisible to people of both common political persuasions. People on the right complain about intrusive government regulation and praise, say, financial innovation until the brilliant new innovations blow up in everyone's face. At which point they kind of shut up publicly and, eyeing their tumbling stock portfolios, privately mumble, "Thank goodness for the Fed and the Plunge Protection Team." People of the left smugly if accurately point out how lax financial regulation of things like boiler room mortgage brokers and boiler room Wall Street securitization factories contributed to the subprime mortgage 'contagion,' but seem unable to come to grips with why such heavily regulated and government-dependent industries as real estate and finance end up being both so profitable -- at least in bursts -- and so regularly unstable.

(Note, our current problems do not appear to originate in sectors of the economy that are relatively lightly regulated, but in precisely those which are very heavily regulated. Question for people of the left: why is it that regulation fails so regularly? Is it possible that what we tend to describe as regulatory failure might very well be described as regulatory success, at least by the people who probably designed it?)

Well, it’s a conundrum all right. We’ve apparently opted for Fascism over both Socialism and Capitalism, but we seem to have a hard time coming to grips with our choice intellectually. Obviously there are specific failure modes to a Fascist economy, yet they don’t seem to receive the kind of attention that they really deserve.

Let me suggest some examples at random. How should information flows work in a Fascist economy -- especially information relative to political and regulatory decision-making? Should industries that are the recipient of much governmental support (i.e., finance, broadcasting) or outright subsidies (i.e., healthcare, defense) pay much higher taxes than, say, the corner bakery? How can the issue of moral hazard – that is, where people are not exposed to the full negative impacts of their own behavior because of a friendly government policy -- a problem that is extraordinarily commonplace in Fascist systems – be meaningfully addressed?

I say it’s high time we start being a little smarter about all this. As Robert Heinlein remarked, "Live and learn, or you won’t live long."



posted by Friedrich at February 15, 2008


Does this post not make the basic error that capitalism and "free markets" are the same thing? The historians who taught me what little I know of economic theory and history always insisted that the two are quite distinct: "capitalism" merely refers to the accumulation and reinvestment of capital in one's business; a "free market" is one with minimal regulation.

I notice that Wikipedia and other on-line sources don't share my definition of capitalism, but it seems to me that it is wise to make a distinction between the two concepts.

I know that there are many much more sophisticated economic thinkers, including professional economists, who read this blog, and if they want to tell me that I'm mistaken, I'm happy to accept their corrections.

Posted by: alias clio on February 15, 2008 10:37 AM

I like your idea that the industries that benefit most from government backing should pay higher taxes. Seems only fair.

Do you suppose that there *is* a way of ensuring that referees and umpires don't wind up being lackeys ensuring foreordained outcomes? I don't see that there can be a structural answer to that problem. It seems to wind up in the same territory as "who polices the police?" and "who judges the judges?" -- you keep putting new mechanisms in place but each one quickly gets captured by the corruption.

So finally maybe it's a social-gestalty thing. If qualities like honor and honesty and maybe even noblesse oblige count for a lot, maybe that'll give the institutions that are supposed to be serving the general welfare a little more spine.

On the other hand, that seems like an awfully flukey thing to rely on. So maybe it makes more sense to discard most of the institutions -- they're hopeless, they'll never work. Politically, though, that would certainly freak a lot of people out.


Posted by: Michael Blowhard on February 15, 2008 11:17 AM

It's tangential! But irresistable, in the light of the current political campaign: Speer's interrogator asked him how he knew the Reich was losing, and he said, well, the glorious victories of the Fatherland were happening ever closer to Berlin.

Posted by: dave.s. on February 15, 2008 11:21 AM

We're having a debate right now in the People's Republic of Massachusetts along these lines-the unemployment insurance fund. The legislature just voted to freeze rates for companies paying in; the fund is at $1.2 billion and they think it's OK. You just want to slap them and say hey guys, we're looking down the barrel of a loaded recession.

But who should be paying more? Companies like the one I work for that haven't laid anyone off in 15 years, or the construction industry that, up here in the Northeast, treat unemployment insurance like a yearly paid vacation?

Posted by: Brutus on February 15, 2008 2:55 PM

Note, our current problems do not appear to originate in sectors of the economy that are relatively lightly regulated, but in precisely those which are very heavily regulated.

It might be more accurate to say that bubbles appear in market sectors that are half regulated:

* S&Ls had government-insured deposits, but few regulations on how they invested those deposits. Regulation kept the money flowing in, and deregulation gave them the ability to take stupid risks with it.

* Power companies in California had provide electricity in regulated amounts at regulated rates. They had to buy it, wholesale, at market prices. This basically meant that Enron had a huge customer that had to say yes, to anything, and with a time limit.

* Hedge funds and investment banks can do all sorts of crazy hedging/trading strategies with mortgage-backed securities. But the mortgages themselves are a tax-advantaged way to make leveraged bets on real estate. Some of that tax advantage accrues to the homeowners, but surely a lot of it shows up as the kind of market distortion trading desks are designed to take advantage of.

I don't think you could see a bubble in an industry that was completely regulated: at some point, there has to be the freedom to borrow against the certainty of government intervention. It actually reminds me of the late Soviet economy, which had one currency for trading among factories, and another currency for buying things from stores -- they were nominally worth the same amount, but the wholesale currency actually traded at about a 90% discount. Eventually, some clever apparatchik maneuvered around some regulations and found a way to exchange them one-for-one, which was how he founded his particular oligarchic empire. (I'm not sure who it was, but the whole story is detailed in The Oligarchs.

Posted by: Byrne on February 15, 2008 3:36 PM

About 30 years ago, Douglas Casey pointed out in "The International Man" that the Scandinavian countries were practicing fascism rather than socialism. He also opined that regulation was more destructive than taxation, and that Scandinavia actually regulated less severely than most Western countries. So, by implication, those countries, including the U.S., are yet more fascist.

A few years later, Pres. Reagan stirred up the waters my saying that much of the New Deal, which he supported at the time, was fascist as well. Michael McMenemin defended him and elaborated on this in Reason magazine. That's when I came to the conclusion that all fascism was centrist.

More recently I've come to the conclusion that all centrism is fascist.

Posted by: Reg Cæsar on February 16, 2008 12:16 PM

When you're equating Roosevelt and Hitler, then you know the word "fascism" has lost all meaning. It's really a pointless smear word in this context.

There are plenty of forms of corporatist governance that are not "fascist".

Posted by: mq on February 19, 2008 2:49 PM


Say what?. What exactly am I supposed to be smearing here?

When did I equate Roosevelt with Hitler? When did I even mention Mr. Roosevelt?

And isn't using a term like "corporatist" just a tad, um, euphemistic?

You're making one of my points for me: if you balk at even acknowledging the appropriate, commonplace name for our system of government and economics, you won't be able to figure out how to make it work better, or avoid its systemic failure modes.

I think "calling a spade a spade" is a useful first step; it's time to overcome this intellectual squeamishness.

Posted by: Friedrich von Blowhard on February 20, 2008 10:51 PM

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