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Is the System on the Verge of Collapse?

by: Nicholas Ventimiglia September 26, 2008    

Nicholas Ventimiglia

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It’s easy to hate the system and the powerful. But capitalism is the best system we've ever had. Before people reminisce about the good old days when bankers jumped out of windows maybe they should contemplate a system to replace capitalism. Communism? Feudalism? Maybe anarchy!

Personally, I'm a computer nerd – I need a functioning society to thrive. However others might prefer a more naturalist style of shooting and hunting as a means of survival. That’s ok, but I am not sure that system will suffice for the majority.

Why I bring this up is because the system as we know it is on the verge of collapse. Capitalism is not flawless, but it is the best system we have known. The US Treasury Notes are currently yielding about .4% (one tenth of one percent). At zero, you will effectively begin paying the US government for the right to hold their bonds. Last time Treasury yields were this low was 1931. The billionaires already pulled out into EEMs. China has 2 trillion in our notes. They could change their recent 'wait and see' attitude into a 'cut loss' if nothing is done. They pledged Chinese dominance, and maybe they beat us at our own money changing games. Again, the people who will be hurt most from inaction are the average Americans who will shortly cannibalize themselves based off of culture warrior ideals.

Maybe buying the CDO’s from the bank at extreme discount (22 cents) and holding them until maturity (60 cents) isn’t such a bad idea. The gains from this ‘Bailout’ could pay for a FDR style new deal , return jobs to the US (The Root Problem). We will become a nation of Tax Earners, doing well by doing good.

P.S. To all you non-anarchist protesters, If you really must do some lynching go ahead and find Phil Gramm (R-TX) and James Leach (R-IA) who lead the house in repealing the Glass-Steagall Act of 1934. This act prohibits banks whose chief business is investment from playing with homes or the deposit banking business.

Stock position: None.

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This article has 16 comments:

  •  
    Sep 26 09:29 AM
    The Reserve and Putnam money market funds are frozen because of a run of redemption requests. This includes the Reserve treasury fund. With no agreement on the bailout today (Friday), the odds are good for a run on money market funds. That would be awful.

    Thank you John McCain for another great decision. The trouble with stupid people is that they think they are smart, and smarter than truly smart people like Bernanke and Paulson.
    Reply
  •  
    Sep 26 09:41 AM
    Why can't our politicians behave more like the smart money?

    When this crisis started, plenty of financial institutios needed cash. So, they went to the smart money. Of course they would have loved to sell the snart money their distressed assets at a reasonable price. But, the smart money being smart money said no and instead traded their cash for a slice of equity.

    You see, the smart money knows nothing about esoteric mortgage backed derivatives and other assets. Even a great price, they figured, it's going to cost a fortune to manage these things. Whatever upside in price there is, will be evaporated by the management cost of these equities from now until it's a good yime to sell. "Thanks, but no thanks" they told the financial institutions. We;ll buy a piece of your equity and let you manage these assets. You have the know-how, people and structure to do it cheaper than us.

    Why can't our government behave more like the smart money? Yes, the financial institutions need a $700B financial infusion lest the entire system collapse. Yes, it is in the best interest of the taxpayers to give them this infusion. So, let's do it. But, wait a minute, why do we have to take these assets that not even the financial institutions understand in return for our money? Let's change the accounting rules so they don't have to price them in their books at distressed prices and let's take instead some interest or equity for our $700B.

    X years from now, these mortgage backed assets will be worth more than today. Who will be able to cutody them in the meantime at a lower cost? The financial institutions, or the federal government? Who eill be able to sell them at a better time and at a higher price? The financial institutions, or the federal government?

    Dear fed: Please give the banks the money, just don't trade it for a complex financial instrument you don't understand and will spend a fortune managing. Buy stock or a CD, sit down and wait. After all, that is what politicians do best and at a lesser expense. No?
    Reply
  •  
    Sep 26 10:17 AM
    You might want to add Bill Clinton to the list of "lynch today" as he signed into law the bill repealing the Glass-Steagall Act of 1934.
    Reply
  •  
    Sep 26 10:57 AM
    Capitalism is not the best system ever devised, it's just the system you're accustomed to, and can't imagine anything else. Capitalism is also not the free-market mechanism you imagine it to be--Capitalism as we know it today is a partnership of corporations and their servants in government designed for manipulating market conditions which once went by the name "fascism" in its European setting.

    The best system to be found in the world today is the light form of socialism we find in Europe called "social democracy". It allows corporations and private interests to pursue their aims with reasonable levels of regulation and attends to public needs in an effective way, unlike America, which is hamstrung by the "culture wars" at our highest levels of society...
    Reply
  •  
    Sep 26 11:26 AM
    And the point of this article is?
    Reply
  •  
    Sep 26 11:31 AM
    Glass-Steagall repeal is a red herring being floated by some on the left. Yet this repeal has nothing to do with the systemic problem we have. That one can be traced to two causes: 1) the swaps market, which has never been regulated and has been growing for 20 years, and 2) the exemption granted to 5 investment banks by the SEC in 2004 that allowed them to lever up to 40:1 (which Gramm pushed through).
    Reply
  •  
    Sep 26 11:57 AM
    In response to the headline: Yes.

    The system we have today, however, is not Capitalism. (True capitalism doesn't need to have the government negotiate 'free trade treaties'. True free trade requires no international treaty, only a willing buyer and a willing seller.)

    Any system which bases its growth and expansion on ever-increasing amounts of borrowed money is doomed from the beginning.

    Pre-Federal Reserve the US economy was grown via the use of savings as investment, not 'created-out-of-thin-a... debt-based legal tender.

    At that time, the US was far and away the wealthiest nation on the planet. Now our economy is about to implode and destroy trillions of dollars in net worth. Our country's debt has more than doubled in the last 8 years and is about to begin growing even faster in an attempt to forestall the inevitable for as long as possible.

    The current system will eventually fail. The only remaining unknown is whose ox will be gored. The way to fix the problem is to eliminate debt-based money and the central bank which creates it.

    Borrowings for business expansion should come from consumer savings, not from government IOUs.
    Reply
  •  
    Sep 26 01:50 PM
    I love the people that try to blame Clinton for this mess? That's a laugh. Ever since Saint Reagan, Republicans have been carping about deregulation and making fun of anyone who thought some prudent regulatory oversight was necessary. Get out of the way of the free markets, we were told. Nice going, are you happy now?
    Reply
  •  
    Sep 27 01:44 AM
    There is nothing wrong with capitalism perse. What is terribly wrong is the ethical bankruptcy that encourages moral hazard. Ethical capitalism is not necessarily an oxymoron. There is plenty of good old fashioned money to be made in an ethical capitalism environment. However, that's not what we've had have we? What we've had is a totally immoral set of individuals, completely captivated by greed, who pressed the very limits of legality (let's give them a suspect benefit of the doubt for argument's sake), knowing that Uncle Sam (i.e. the taxpayer) would ultimately be there to bail them out. Does anyone, even for a second, believe this problem would have gotten so bad if there was an EXPLICIT threat of failure without bailout issued by the Fed and Treasury? It didn't exactly help to send the CEO of Goldman Sachs into the most prominent government position (our treasury!). This latest power grab will be analyzed for years by historians. One can only hope that it's lessons in abject immorality will be documented and taught in the schoolrooms as what went wrong in America between 2003 and 2008. If we love true democracy and free markets, we've got to kick out the current set of robbers (both parties) and start thinking better. It's hard to devote one's life to American Idol, and at the same time be intelligently informed and involved. Wake up folks; the Fox is in the henhouse, and he's stealing all the golden eggs! If you don't keep calling and writing congress, we'll end up fully socialist, fascist, or worse. The best way out of this mess is not a shortcut, it's a haircut. Let the market solve this. Will it hurt? Of course. Will we survive? Of course. Afterwards, our dollar will be stronger, our house prices will be cheaper, and all this moral hazard will be put back into the bottle where it belongs. Tough love is coming, whether or not we go into debt...so let's stop digging as they say and start acting responsible both at the personal level, and within government. The less these politicians muck with the system, the sooner market confidence will be restored. Right now, all of these games being played only go to destroy the confidence in fair and open markets, with the result that we're getting more and more unstable. We can't say we believe in capitalism and yet put our money on socialism when losses need to be taken. Time to route out the rot and reward the folks who've played it smart, worked hard, and played by the rules without using excessive debt. That's the capitalism we can all be proud of, and the sooner we get there, the sooner this mess will end. Until then, trying to bailout the badguys just makes us look stupid.
    Reply
  •  
    Sep 27 10:03 AM
    Yes the system appears to be rotten to the core ... especially the people involved. So many examples ... but following is the most interesting example.

    There was no bailout announcement during the failures of Lehman, Freddie, Fannie, AIG etc. But when Goldman started to drop toward $100 per share there was the bailout idea / announcement by Hank Paulson / George Bush. Why did the bailout come at this time? It is because Paulson owns $500 million of Goldman stock. If you were going to lose that kind of cash you would bow down / get on one knee to whomever you thought could save your ass!!! In fact, some of you may have done a lot more for Nancy! It stinks that a fox is in charge of the hen house and telling the President (an absolute idiot) what to do. Your doing a heck of a job Brownie .... ooops .... Hank.

    Watch out below!!!
    Reply
  •  
    Sep 27 10:12 AM
    Right Dougn--, though it took you time to get there.
    As long as there is reward in plundering the public and no cause and effect-penalty for misdeeds, we have spawned the seeds of our own demise----In ANY system.
    Reply
  •  
    Sep 27 11:24 AM
    There are bodies burrried on both sides of the aisle on this. We as a nation were addicted to fast and easy credit at any cost. Democrats pushed for people to get into homes and Republicans complied by signing off on standards. The ponzy game has come to an end, or the largest pyramid in history has failed. For me I am sick of all the politicians involved.
    Reply
  •  
    Sep 27 01:56 PM
    'Capitalism has within itself the seeds of its own destruction.'

    I forget which one of the Marx Brothers it was who said that. Think it might have been Karl.
    Reply
  •  
    Sep 27 06:43 PM
    It isn't as simple as communism/socialism vs capitalism.

    If you are a computer nerd, it's about as intelligent as characterizing computer science as a war between 0's and 1's.

    Economics is a very complicated subject, just as human beings and their wants and desires are a very complicated subject.
    Reply
  •  
    Sep 27 11:06 PM
    I see no need to hate any kind of economic system; the nitwits and otherwise stupid greedy people may be another matter. ...

    Unless we go entirely bonkers and give N00 billions of USD, I'd guesstimate that the markets are close to being half-way toward the bottom. Any worse and the globe--mostly the U.S.--can look forward to many years of a deep recession.

    We in the State will survive; meanwhile, the Chinese have learned exceptionally well from the U.S. and Hong Kong about laissez faire capitalism. [ That's another term for "throat cutting." ]
    Reply
  •  
    Sep 28 08:15 AM
    It is becoming apparant that for close on a hundred years the West has been following the teachings of a false economic phrophet.

    Without the academic authority of John Maynard Keynes behind him, President Nixon would have been unable in 1971 to renage on America's committment to redeem its currency for gold at the rate of $35 per oz, thereby setting afloat the worlds currencies without a fixed anchor point. Of course the term 'demonetise gold' is used rather than 'renage on its commitments' to sugar the pill and hide the crime.

    The removal of the discipline of gold from the world's financial system enabled politicions the world over to deliver prosperity,via the printing press, for a lengthy period - but the party is now over and we have to get back to basics.

    Wealth can only be created by production and savings,
    bankers financial manipulations are simply con tricks, designed to divert, not create, wealth. Concentrate on production and building up savings, but who in their right mind can be persuaded to save a constantly depreciating currency.

    There might be an alternative to gold but I don't know what it could be so back to the gold standard, with all its faults, looks the only solution.
    Reply
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