Godzilla Market or Frankenstein Socialism ?

No surprises in the news today. The Paulson bailout plan is nowhere near ratification. Washington Mutual was gobbled up by JPMorgan Chase yesterday, the largest US bank ever to go under. Sadly, neither Obama nor McCain seem to have a grasp either on the magnitude of the problem or the root cause. Their objections to the bailout are political tripes, and a guarantee that the economy will get a lot worse before it gets better. Of the politicians (I am aware of) speaking on the bailout, only Ron Paul seems to have a handle on where the problem is and what must change for the American economy to recover. I do not agree even with him.

Actually, Ron Paul does not agree with himself. He relies on F.A. Hayek and the Austrian school, economists who warned of the perils of credit expansion by central banks’ pushing down the lending rate. Better than to continue to artificially stimulate the economy, they said, let the credit slide, and bad debt liquidate itself. Works fine in theory and perhaps in practice where the market really “controls” supply and demand of money. But Ron Paul himself doubts that we have a “free market” today. So, my first question to Ron Paul would be: if the market itself is no longer operating on some standard of undisputed objectivity, what is the guarantee that it can correct the huge discrepancy between the nominal and actual value of assets ?

It is my view that we have nothing like a free market, and especially not, if we consider the global nature of today’s economy. Indeed, we live in the “flat world” of Thomas Friedmann (though I am puzzled by the metaphor) where the markets are manipulated wholesale, one by multinational oligopolies, and two – surprise, surprise – by governments. The fastest growing economy in the world is China, ruled by the communists, who have absolutely no reserve about regulating economic activity to conform to their view of what markets actually should do. Are there dangerous fluctuations in the supply of energy ? Let us regulate. Strategic reserve of crude and processed oil will be legislated to remove the price bulges. This stabilizes manufacturing sector as it provides for more predictable cost structures. Russia, as an oil & gas producer goes one step further – they re-nationalize the industry. Not by decree, but by making the market “unfriendly” to smaller operators, and operators in general, if they are not pliant to the planners' directives. We then have in front of us a very flexible market which readily responds to corrections of economically and politically (!) undesirable events and trends. The failure to “control” the market, or do it in a fashion that threatens the global economic community and/or its big players, will unleash its destructive forces. Much like Godzilla, the market will wreak havoc on pitiful dwarfs who want to play with yesterday toys in today’s world economy.

The US will have to learn how to play the global market game.

I agree with Congressman Paul that the economic ills are much bigger than toxic mortgages or over-extended credit. Kevin Phillips’ ‘Bad Money’ I think describes the problem in all its terrible splendor. The productive U.S. economy has been shrinking for decades, losing steadily its capability to create tangible value. The manufacturing sector’s share in the GDP is a mere 12%. After oil, the consumer goods, are the largest contributor to the trade deficit which now exceeds $800 bln $ a year. Massive restructuring of the economy, one restoring trade balance and productive capacities of the US, one investing consistently in value-add economic activities is, probably the only sane way out of the mess. Only one I can see, at any rate. Milton Friedman has lost his argument with David Ricardo. The Chinese economy is the proof.

The intrinsic danger of a bailout without a “new deal” on the structure of the US economy, comes from the Frankenstein nature of a socialism based on a failed monetarist model. Privatizing profits while socializing losses, won’t do as a policy. Politically, it is abhorrent to the idea of democracy, economically, as Ron Paul points out, it only masks the problem and defers the solution. For all intents and purposes, one needs to start with the admission that the U.S. financial system is insolvent and will become bankrupt without an immediate and resolved push for a radical reform.