February 17, 2008

Crumbling Rock at the End of the Rope

Wow. Britain has socialized the bank Northern Rock PLC. Northern Rock is one of the top five mortgage lenders in the United Kingdom in terms of gross lending.

Maybe Venezuelan President Hugo Chavez is being persuasive. More likely, corporate capitalism is demonstrating that, yes, it is self-correcting. But, "self-correcting" is not the same as "self-regulating." With unregulated markets, those self-corrections can come in the form of large institutions going down the tubes after bacchanalian speculation.

The deregulation craze, starting with Ronald Reagan and Margaret Thatcher, went too far. Regulation, like a heavy flywheel on a car, helps smooth out the booms and busts, the later known as "corrections".

Take regulation away and capital accumulation goes wild, a few people get rich, stocks zoom up, speculation, a natural part of it, creates disconnections between the real value of assets and the get-rich-quick aspirations of speculators. Add cheap credit, inflationary federal monetary policies and fractional reserve banking and, as we're seeing, the disconnect between real value and speculative prices can become so large that the "correction" of the market can be terminal.

The message? Laissez-faire capitalism was given enough deregulatory rope to hang itself. It is now twisting at the end of that rope, feet kicking, eyes bulging looking to governments, that means We the Tax Payers, to "do something."

There is a solution floating around here in the US, but some think it's too "radical." Take Joe, snookered into an adjustable rate mortgage on a home that was overpriced because of the deregulatory speculative boom described above. Because Joe's mortgage is now part of a bundle of mortgages, known as a mortgaged backed security (bond), which is now part of someone's investment portfolio, it isn't possible to say, "Joe, we're going to renegotiate your mortgage." So, the "solution" is for the US Government to buy these crappy bonds, unbundle them, and do the renegotiations with the Joe's of the Nation.

Everyone pays for bailing out this capitalist debacle. But, another part of the solution must be that we get a public admission that well regulated markets are a good thing. No more of this know-nothing punditocracy lauding the Laissez-faire deregulated free market system as some kind of deity. That notion is, once again, discredited by the facts unraveling before us.

History shows, time and again, that, yes, economics principles exist. What goes up, must come down. Humans are supposed to be different from other members of the animal kingdom in their ability to self-reflect, to document their history in writing, to learn from their history. So far, it appears the free market fundamentalists have yet to join the human side of the animal kingdom, 'cuz they continue to make the same mistake over and over.


Associated Press, Britain Nationalizes Northern Rock, February 17, 2008.


libhom said...

I'm so sick of pundits treating the phrase "government regulation" as obscene.

GDAEman said...

They don't even understand the term. HOWEVER, there is a different, more complex and subtle view on "regulations." That is, that complex regulations are often crafted by the corporate elite to tie 'we the people' in knots, so that we don't go after the more fundamental questions like, why are you allowed to pollute in the first place (they keep us busy fighting over 25 mg/l or 50 mg/l when the REAL issue is more profound.)