Socialism Is Back

A long weekend. I think these are most of the major developments;

1. Kevin Rudd has guaranteed the deposits in all of Australia’s banks for the next three years. Initial talk of a $20,000 ceiling has been shelved. There is now no cap on the guarantee. He has also applied a government guarantee to the banks’ wholesale funding.

2. The G7 have decided that there are to be ‘no more Lehmans’ – i.e. all ‘strategically important’ financial institutions will be bailed out.

3. The EU goverments revealed the pompously-named ‘Declaration on a concerted European action plan of the Euro Area‘. This includes ; helping banks raise wholesale funding by guaranteeing senior (but not subordinated) debt, buying stakes in troubled banks via preferred equity, guaranteeing deposits, and bailing out troubled institutions.

4. Britain is due to implement this plan almost immediately when it will nationalise at least two of its largest banks – RBS and HBOS – via the issuance of new preferred shares.

5. ‘One cannot talk of nationalisation’ cried German Chancellor, Angela Merkel, as she announced a $500bn nationalisation, bail out, rescue package for German financial institutions.

Key thing to watch today – the fate of Morgan Stanley.

38 thoughts on “Socialism Is Back

  1. Its just a disgrace. And its all the fault of alleged pro-free-marketeers who ludicrously have supported the special priviledge of fractional reserve banking. Itself a socialist priviledge.

    Now we have fractional reserve EVERYTHING. Which is what all those derivatives are about in reality. Are the supporters of fractional reserve banking also supporting fractional reserve EVERYTHING?

    Its about time you justified your stupidity or gave it away.

  2. Socialism is back? Did it ever go away?
    What else is Democracy but socialised governments? Enforced political equality favours enforced equality in all other areas of life. Whilst democracy is better than other current systems, I don’t think it is the end-point of history.

  3. Pingback: When Will They Get It? The Denialism Of Jason Soon. « A Better World: Graeme Bird For High Office

  4. It’s not socialism, it a very heavy dose of interventionism.

    I don’t think Morgan Stanley will fail, Pom. In fact I put a little money where my big mouth is and bought some down here last Friday evening.

    Out of the rubble you could end up with something worthwhile.

    One socialist commenter in Australia is actually having an orgasm thinking this means a society change. Wonderful people real socialists.

  5. Of course its socialism JC you [wonderful person]. Its socialism for the rich. And obviously so. And its ongoing. The subsidies and protectioins to the banks are ongoing. Clearly this is socialist money. And money is one half of every transaction.

    Can somebody cut this welfare queen to pieces if you are refusing to let my posts through. The very least you could do is cut welfare queen cambria into little bits.

  6. Fleeced
    what extra taxes have you had to pay because of what’s happening in the US?

    Folks it’s actually rational for us in Australia to support the bailout. Without the bailout things would get much much worse before they get better and this may transmit itself to Australia. With a bailout matters may be ameliorated but we personally don’t have to pay a cent to benefit from this.

  7. jason – i agree that once other governments start to bail out their banks, Australia has no real alternative but to do the same. however, the consequences for all taxpayers are appalling (see Terje’s article on the fact that Freddie and Fannie are now being used as instruments of social policy).

  8. I don’t necessarily agree that because the US bails out its banks we must too. The US is in much deeper shit.

    My point is simply that insofar as there are any benefits from the US bailout we get those (e.g. less probability of a worldwide depression) without funding the costs.

  9. “It’s not socialism, it a very heavy dose of interventionism.”

    Nationalising companies isn’t socialism? Using taxes to bail out companies or to intervene in the markets isn’t redistribution of wealth? Perhaps it’s not along traditional lines, but it’s still socialism.

    It was intervention that caused this crisis in the first place, and now the same people are presenting regulation as the solution to “market failure”

  10. Fleeced:

    Socialism is a lot different to what these guys are doing. They won’t own these banks forever. In the US for example the idea is to buy non-voting equity etc.

  11. Alright Granate, you are right out the way,
    screw up your plans throw them in the recycler and move to a new country where you dont have to wear a demeaning racist insult as a name:

    Its not socialism, because in socialist countries there is no stockmarket and very limited personal savings in general.

    Have you lived in a socialist country?
    Have any of you lived in socialist country?

    No, well I have (and Pepsi socialism like Laos does not count).

  12. Nationalising companies is NOT Socialism- it’s FASCISM! Socialism is where you nationalise the workers.
    It CAN’T be socialism- after all, socialism is GOOD, right?

  13. jason – i meant that if Rudd hadn’t offered to guarantee deposits when all the Europeans had guaranteed their bank depositors, then the Aussie banks would have faced a huge run on their deposits this morning

    nice purchase, jc 😉

  14. What else is Democracy but socialised governments? Enforced political equality favours enforced equality in all other areas of life. Whilst democracy is better than other current systems, I don’t think it is the end-point of history.
    .
    The end point in history comes when we blow ourselves up. I think that might arrive sometime around 2019. 🙂 .
    .
    How do you have a government that isn’t socialized? Democracy and capitalism have certain conflicts but they go together a lot more then they don’t. If one has democracy for example how do you stop people trading?
    .
    What we have is part democracy. What we really have is a corporatist technocracy: a collusion between higher levels of private and public bureaucracy involving concerted manipulations that are too complex for ordinary people to understand – or so they think.
    .
    This illustrates how things work: publically funded infrastructure gifted to a dodgy bank that then possesses a monopoly on necessary transit. The worst of both worlds. And you can’t recourse to elections because both sides of the house collude in perpetrating it.
    .
    But there’s only one thing wrong. The Scots invented modern law and economics and they knew how to kill it. And they did. So should we.

  15. Jason, I was never tempted into the Chinese opium dens of the Victorian goldfields in previous lifetimes or this one.
    I will support your community’s business in this regard by saying if alcohol is legal, opiates should be too.

  16. Given that governments helped break it, now they gotta help pay for it. Usual grocer’s principle should apply.

  17. Parkos – I will support your community’s business in this regard by saying if alcohol is legal, opiates should be too.
    .
    Jason doesn’t have a community Parkos. For him there is no society. 🙂 .
    .
    Reading your stuff I can well appreciate why the legal status of opium’s of personal concern to you. 🙂 .
    .
    Shem – Who’s up for moving to Asia with me?
    .
    Don’t bother. Its moving here.

  18. Jase does have a catallaxy instead of a community.
    And that consists of a wonderful old Italian stallion named JC who will rub very expensive ointment on him, when he comes home from a very hard day on the interblog with a very sore but not Hugh Jass 😉

  19. I don’t think liberty should be about having no role for government. Liberty should be about maintaining and expanding choice. A massive credit contraction, which could easily slam GDP down by 10% and unemployment up by 10%, is definitely a reduction in choice for most people.

    The world was skirting on the brink of a depression. If a bank lacks capital and seeks to restore its capital adequacy ratio to 10%, it has to reduce lending by 10 times the amount of capital it lost. If a bank knows that other banks are likely trading insolvent it will refuse to lend to other banks. When banks have leverage ratios of 50 times, which was common place for European banks, the MBS disaster if left unchecked was going to drive the modern economy off the cliff.

    Fortunately, policy makers woke up in time. The government will buy a temporary stake in the banks thereby boosting capital. Financial intermediation will continue. US households will still likely contract their balance sheets over time, but it will be over more like 2 year rather than 2 weeks that we were faced with.

    People who are interested in this sort of thing should read up on a economist called Minsky.

  20. The world is much the same before the bailout was made law.

    The US credit market didn’t allow choice. it forced lenders to give loans to uncreditworthy borrowers. This is the main institutional cause of this crisis.

    If you’re interested in Minsky, you should also read Mises and Hayek.

    Here is a Misean/Hayekian perspective on the sub prime crisis, take your time to read the articles and get informed:

    http://mises.org/story/3128

    The Bailout Reader
    Daily Article by Mises.org | Posted on 9/26/2008

    *The events taking place in the financial market offer an illustration of the soundness of the Austrian theory of money, banking, and credit cycles, and Mises.org, which has long warned of precisely the scenario playing itself out today, is your source not only for analysis of these events but also the economic theory that helps explain what is happening and what to do about it. There are many thousands of articles available, and also the full text of thousands of books as well as journal articles.

    It is impossible to draw attention to the full range of literature one can use to understand the crisis. However, below we offer a brief look into the topics most discussed in these times, with extended treatments of each in the sidebar. Mises.org also offers both a blog and a community forum for reading and discussing them all.

    It’s never been more important to spread a sound view of money and banking, not only as a protection against the fallacies of “stabilization” and “reflation” but also as way to see what kind of reforms are essential now.*

  21. The world is not the same following the bailout. The world is materially different.

    There is a massive difference between a undercapitalised banking sector and a well capitalised banking sector. It is like night and day to credit markets and confidence in the financial system.

    It will take a few weeks for the effects to permeate, but interbank lending will return as is guaranteed by the governments. In turn corporates will be able to get short-term financing from banks. Confidence will then return to the commercial paper market (which is paralysed by bankruptcy fears), allowing liquidity to return. In turn companies that are solvent but are dependent on the commercial paper market for short-term financing will be able to exist. A lot of this interwoven and interdependent, but make no mistake, bank capitalisation lies at the very core of current problems.

    We are stepping back from the brink. There is no doubt about it.

    I will read your links later this weekend. Thanks.

  22. BTW, just reading some of those links. At a quick glance, most of them are about how we got into this mess. I would agree that distortionary government policies did contribute. No argument there…

    Reading the comments by Frank Shostak… He concludes:

    “Only a few weeks ago, we saw that the liquidation of a large bank such as Lehman Brothers and the sale of Merrill Lynch did not cause massive disruptions. ”

    Holy crap Batman. This guy couldn’t have been more wrong… The failure of Lehmans marks the escalation in the crisis. Three month Libor widened from 86bp to 344 bp. That is the cost of short-term financing more than quadrupled. The reason for this is that bank counterparty risk went up as there was nothing separating Lehmans from the rest of the banks. They had all invested in heavily in what they thought were AAA rates MBS, and all had watched the value of these securities drop 80 to 90%. A Lehman failure meant anyone could fail, which means that all lending other than intraday lending was suspect.

  23. Mark,

    I have a question for you, if you don’t mind?

    As I understand the Austrian Business Cycle Theory, the central banks are responsible for the boom/bust cycle.

    But aren’t central banks a modern institution? Surely booms and busts also existed prior to their invention, so what caused business cycles back then?

  24. WARNING: Just for an experiment… and to see if he’s reformed and now capable of polite discussion… I’ve removed the restrictions on Graeme Bird.

    Graeme (and people who debate with Graeme), please keep to the issues, don’t dominate the conversation at other people’s expense, and stay polite. It’s possible to disagree with an idea while still behaving like friendly adults.

    And specifically, we do NOT want to see a “thread of doom” about fractional reserve banking. The occasional comment or link is fine, but Graeme should put his FR-banking mongraphs (and AGW booklets) on his own blog.

    Let’s see how this goes… 🙂

  25. E.D.,

    It is not “central banking” so much as i) inability to smoothly adjust money supply and ii) intentional lowering of the cost of funds that creates the credit mispricings and the malinvestments.

    There are of course more causes to business cycles than just the credit cycle.

    One example might be natural factors, like a very bad drought, political factors, like Israel and Iran facing each other off, cutting off trade routes and increasing energy costs.

    These phenomena (sudden events, basically) are generally classed as shocks.

    There may be other policy variables, like crowding out for example – too much Government debt can slow down private investment to the point where Government spending simply takes too much out of the economy.

    There too can be institutional factors like wage regulation or the sub prime loan system in America which means the system cannot adjust normally in reaction to economic downturn. Instead of lower wages, we have unemployment. Instead of dissaving and paying down debt, we had foreclosures.

    The Great Depression saw a combination of a credit cycle, which was only subtle, then impacted by a sudden and dramatic change in global trade policies, which shut down global trade by 20%. So we had a policy factor, essentially creating a microeconomic level mispricing and malinvestments, made vulnerable to a policy factor which created another shock.

    There are other explanations such as hysteresis (which touches on a whole host of monetary and labour economics problems) and product innovation cycles for example. I believe a realistic explanation includes all or most of these smaller sub-explanations.

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