Gangster Capitalism: Same as it ever was?

If you are going to read one thing and just one thing on the financial crisis and how it is working itself out you need to read this blog post at naked capitalism:  the one stop shop for understanding contemporary finance.

After the September 2008 crash, Iceland’s government took over the old, collapsed, banks and created new ones in their place. Original bondholders of the old banks off-loaded the Icelandic bank bonds in the market for pennies on the dollar. The buyers were vulture funds. These bondholders became the owners of the old banks, as all shareholders were wiped out. In October, the government’s monetary authority appointed new boards to control the banks. Three new banks were set up, and all the deposits, mortgages and other bank loans were transferred to these new, healthier banks – at a steep discount. These new banks received 80 percent of the assets, the old banks 20 percent.

Then, owners of the old banks were given control over two of the new banks (87% and 95% respectively). The owners of these new banks were called vultures not only because of the steep discount at which the financial assets and claims of the old banks were transferred, but mainly because they already had bought control of the old banks at pennies on the dollar.

The result is that instead of the government keeping the banks and simply wiping them out in bankruptcy, the government kept aside and let vulture investors reap a giant windfall – that now threatens to plunge Iceland’s economy into chronic financial austerity. In retrospect, none of this was necessary. The question is, what can the government do to clean up the mess that it has created by so gullibly taking bad IMF advice?

In the United States, banks receiving TARP bailout money were supposed to negotiate with mortgage debtors to write down the debts to market prices and/or the ability to pay. This was not done. Likewise in Iceland, the vulture funds that bought the bad “old bank” loans were supposed to pass on the debt write-downs to the debtors. This was not done either. In fact, the loan principals continued to be revalued upward in keeping with Iceland’s unique indexing designed to save banks from taking a loss – that is, to make sure that the economy as a whole suffers, even suffering a fatal austerity attack, so that bankers will be “made whole.” This means making a windfall fortune for the vultures who buy bad loans on the cheap.

Go read the whole article.

Never count on economists to defend the public interest

This is something that should always be kept in mind in economic policy discussions: most economists are pro-Market, not pro-Public Interest.

It is especially important to keep this in mind when we read commentary such as this, in which an economist from one of Canada’s smaller economics departments conflates being pro-market with being in the public interest.

This point is sometimes hard to see, especially since many economists hold to the deeply ingrained syllogism that being pro-market is straightforwardly being in the public interest.

But they are a lobby group like any other, and cannot be relied upon to defend the general public interest.*

Economists, particularly academic economists (and like all academics), rely on, for their social status, research funding and a quiet concious, having the public view them as working in the public interest. And given the majority of economists are true believers in the “market” that inevitably gets conflated with being in the public interest

Cloaking oneself as being in the public interest is of course one of the oldest rhetorical stances to take since like wearing the national flag it clearly puts the speaker in the role of the hero and casts those being spoken against in the role of the villains. This is all the more easy to to do when the terms of conversation are being articulated in fuzzy, ill defined concepts such as the “public interest” and “pro-market”. When an economist uses those terms they have very exotic definitions in mind that most lay people would not readily grasp. Perhaps I am being too charitable: I can’t, in fact, find a definition of the public interest in any my economics text-books.

The public interest is a rather fuzzy notion. We can perhaps all agree that it has something to do with public goods but that just raises the thorny issue of what is and what is not a public good. In any case the argument at least has to be made that a specific policy is in the public good and why. Just standing around hands waiving in the air mindlessly chanting pro-market rhetoric like “free trade” or deregulation does not really cut the mustard.

Indeed after a generation of pro-market policies like financial liberalization and deregulation with cascading financial crises of increasingly damaging intensity culminating in the Great Financial Crisis that was 2007 and from which no advanced capitalist economy has yet to emerge; in which whole nations like Iceland, Greece and Ireland were raised; in which untold millions of workers were put and remain out of work; and as a consequence a massive hole was blown in public finances around the world, it should be clear that pro-market policies are not always or even in the majority of cases un-problematically in the public good to say the very least.

Notice that even if you are want to argue that it was bad government regulation in the US which caused the Great Financial Crisis the fact is that decades of financial liberalization and deregulation (pro-market policies) directly led to the formation of global investment and insurance markets which made sure that a “made in the USA” problem had serious global consequences. And it is not just that economists did not foresee these negative consequences they actually argued in favour of these policies on the grounds that such a crisis was less likely to occur and that the consequences would be less severe in the event that it did occur because these pro-market policies allowed risk to be more evenly spread. So much for theory.

That a pro-market economist is given a national soap-box on which to conflate being Pro-market with being in the Public Interest does not bode well for the Public Interest.

* The first four paragraphs are an inverted paraphrase of the linked commentary. I apologize to my readers for reproducing a very clichéd prose style.