A new book is coming out called The Great Deformation: The Corruption of Capitalism in America, by David Stockman. The author was a cabinet member under Reagan, and “veteran financier”, who claims that the capital bubbles created by the federal reserve, and the bailouts which resulted after the bursts, undermined the free market system by keeping in tact banks that made bad decisions. Had these banks been forced to answer for their ineptitude, they would have been broken down into smaller banks, or disappeared altogether, leaving a vacuum for properly run banks to step up and fill the void in a responsible way. Instead, taxpayer money was used to protect Wall Street from their own bad decisions and investments, rescuing them from their failures, and prompting the same situation to repeat itself, because after all, the taxpayers can just bail them out again. Business Insider has the full interview with the author about his book.
Stockman lays out how we have devolved from a free market economy into a managed one that operates for the benefit of a privileged few. And when trouble arises, these few are bailed out at the expense of the public good.
By manipulating the price of money through sustained and historically low interest rates, Greenspan and Bernanke created an era of asset mis-pricing that inevitably would need to correct. And when market forces attempted to do so in 2008, Paulson et al hoodwinked the world into believing the repercussions would be so calamitous for all that the institutions responsible for the bad actions that instigated the problem needed to be rescued — in full — at all costs.
Of course, history shows that our markets and economy would have been better off had the system been allowed to correct. Most of the “too big to fail” institutions would have survived or been broken into smaller, more resilient, entities. For those that would have failed, smaller, more responsible banks would have stepped up to replace them – as happens as part of the natural course of a free market system.
Because the banks were rescued, within weeks they were back to the same game, this time betting $10 billion of taxpayer money. Investors recovered their stock value at the expense of the taxpayers, who would see no benefit from the survival of Morgan Stanley and Goldman Sachs. In fact those firms survival is a huge problem for taxpayers, because it means they continued the same failing policies, while the precedent was set that they are “too big to fail”, and therefore the taxpayer will be expected to bail out these financial institutions again, the next time a bubble bursts. These investment banks were assisted in this con by the Federal Reserve who keeps interest rates at levels not consistent with the actual amount of capital available.
The interest rates set by the Federal Reserve are too low, too much money is available for too little return, which means bubbles are created by increased capital into a market, the growth of which will not match what the low interest rates says: that plenty of capital is available for expansion.
The banks quickly worked out their solvency issues because the Fed basically took it out of the hides of Main Street savers and depositors throughout America. When the Fed panicked, it basically destroyed the free-market interest rate – you cannot have capitalism, you cannot have healthy financial markets without an interest rate, which is the price of money, the price of capital that can freely measure and reflect risk and true economic prospects.
The author says that what the Wall Street Federal Reserve dynamic basically does, is produce “random thievery day in and day out”. Essentially free market interest rates would have kept the possibility of bubbles very low, while recessions would be fewer and less intense, only affecting one sector of the economy, instead of the entire system. A free market system of letting failures fail would have ended the companies which created much of the mess in finances, because they would not have been bailed out to continue their dangerous practices. In the end the people who won were the very people running the financial institutions who made the bad decisions which lead to bank failures, and the people who lost are the taxpayers, who lost money, but also got placed at more risk in terms of personal investments, and the prospects of the instability in the future economy.