… one victim will be entrepreneurship.
I monitor the financial blogs quite a bit and over the last two weeks an amazing transformation has occurred. Initially, many were calling the current wave of government takeovers “socialism.” Now, with the most recent Bush-Dodd-Frank plan to give enormous amounts of U.S. government money to global financial institutions, few believe this has nothing to do with “socialism.” What a canard. This is simply the final act in a long bout of “crony capitalism.”
Socialism is about government ownership of parts of the economy in an effort to transfer some of the gains to the less fortunate in society. For anyone to believe that the last two decades of financial deregulation and the current giveaways of government monies have anything to do with socialism is simply ridiculous. This is about some sort of booty capitalism where theft was legitimated. When the State abdicates its role as an enforcer of rules of the game, things quickly get out of control and outright fraud becomes the rule.
The New Deal was not socialism, though many accused it of being that. It had many components, but one of them was the enforcement of transparency and rules upon the stock market. It was this that made U.S. markets the envy of the world. These have now collapsed as few trust the financial results being reported by U.S. firms or even a day’s trading results, as investment banks are clearly investing in their own stocks for day trading profits. The SEC and the Fed have openly told firms they do not need to report their results truthfully. This is extremely dangerous throwing the major principles necessary for operating markets overboard at the first whiff of a crisis is extreme and dangerous short-termism. Regaining public trust will take a very long time.
How does all of this affect entrepreneurship and creativity? The U.S. entrepreneurial model was to start a firm, build it, and then use public stock markets to raise capital to build the firm further. In the last decade, many of the advocates for entrepreneurship came to think of public markets simply as exits from which the promoters got rich. This type of thinking is a fundamental misunderstanding of the role of stock markets. The initial public offering is meant to raise more capital so that a firm can grow. The EXIT is only a by-product of the raising of capital for further growth.
This mistaking of a private goal for the public good led to the offering of ridiculous firms in the dot.com bubble, which made billions for unscrupulous “entrepreneurs,” venture capitalists, and investment bankers. It also destroyed the public markets. Unfortunately, this most recent meltdown, which is only in its first stages, will be catastrophic for small firms wanting to raise capital.
For Schumpeter’s gales of creative destruction to work, one needs the transparency that can only come from stern and fair regulation. Otherwise, the creativity that creates new value cannot be expressed because of a generalized lack of trust.
I know I have combined two thoughts in this post. We need to sharpen up our vocabulary so that we can discuss the issues clearly and thoughtfully.
What do you think will be the effect of this collapse on entrepreneurship?
Tags: capitalism, entrepreneurship, New Deal, socialism, stock market
September 25th, 2008 at 11:04 pm
In many cases, deregulation is leading not to competition but to unregulated monopolies. With JP Morgan’s purchase of WaMU, there are a few mega-banks left (B of A, MorganChase, CitiBank) which may or may not be bad for consumers, but certainly reduces pressure on interest rates. And the ending of usury laws in the ’70’s led to today’s unconscionable 20% credit card rates.
In airlines, deregulation may have made Southwest possible, but it’s also led to bankruptcy of many carriers (Delta is buying Northwest) canceled flights, cattlecar conditions and no service to many small towns. In electricity the Enron debacle showed the consolidation some, but deregulation hasn’t lowered rates or led to a stronger grid. In telephones, home service repair disappeared — with cell phones and cable this has become less of an issue, but our cell service is still behind Japan’s and northern Europe.
September 26th, 2008 at 12:40 pm
I don’t like the title but the content is great. Without transparency, there can be no competition. It’s like playing football without a referee to throw a flag. Of course a lineman is going to hold when he’s been beat if there’s no one there to flag him. He wants to win. Sportsmanship is nice but it’s not what he’s there for and it certainly won’t reward him with a new contract. The more competitive things become, the greater need for the government to play a role as referee; and a competition committee to make rules that ensure fairness.
During the last 15 or so years on Wall Street, the inmates have run the asylum. There have been no referees to throw flags and call back the touchdowns earned on plays where the rules have been blatantly broken. At some point, the scoreboard shows a scam, much like the home run totals piled-up during baseball during the steroid years. That’s where we are today. Again, sportsmanship is encouraged but it’s not what motivates athletes. Nor does it motivate capitalist strivers. Government needs to learn to be an effective referee without becoming so interventionist that the players no longer want to play. In the current case, the pendulum needs to begin swinging-bak. This is not a matter of things right or wrong, it’s a matter of recognizing inherent interest positions and learning to keep them in check. Some players should be banned. But most of them just need to be flagged for a penalty every now and then.
September 28th, 2008 at 4:21 pm
Maybe we need to separate economic socialism from political Socialism? As in “Socialism is about government ownership of parts of the economy…” is economic socialism, while “…in an effort to transfer some of the gains to the less fortunate in society” is political socialism. The political part has been the stated goal of the Socialist parties in Western Europe, the US and elsewhere. But Hitler’s Germany (National Socialist) and Stalin’s USSR both called themselves socialist, while not making things much better for the less fortunate.
No less a personage than Nobel-winning economist Joe Stiglitz, certainly not a conservative, is quoted in the Times saying “If this isn’t socialism, then I don’t know what is.” Maybe what we’re seeing is booty socialism?
September 28th, 2008 at 4:51 pm
Hi Michael and Hayden,
Not sure what to call this mess that we have created in the US. We certainly have been creative in fleecing the Asians who sooner or later are going to be left holding a very big bag of extremely nasty “assets.” Hayden, you are spot on regarding “rules.” This is what is most amazing of what the US government is doing now. Firing blindly and without logic in every direction. Cronyism and insider trading absolutely destroy markets.
In the next six months we will see that many people’s pension funds, particularly in the public sector, have been totally drained. The creativity and financial innovations on Wall Street and in the real estate and mortgage markets are marvels of human ingenuity.
Michael,
These are times when “nationalism” and odd brands of “socialism” can come together in very ugly ways. The recent Austrian elections may be harbinger of the future. One thing I am noticing is that people in the US are very, very angry. This is why the Democrats appear to be doing everything possible to get the Republicans onboard with the Bush-Pelosi-Frank plan to provide succor to the Wall Street banks.
In a previous post, I used the metaphor of the ocean ecosystem. This new life support for Wall Street plan MUST ultimately fail. The ecosystem is collapsing because the plankton, the societal producers, are dying a painful death. If we don’t move to save them, then the peak predators will also inevitably die. Already we are seeing them turn on each other. Unfortunately, we are only in the opening throes of this tragedy.
Eventually, as this current arrangement exposes its inability to address the disaster, new ideas will appear. If Rich is right that there is a “creative class” and that it has a leadership role for all social groups, then it will begin to express itself.
Will Obama express this or is he a part of the past. So far, I am pessimistic, but some human beings are able to rise to the occasion and grow.
Rather than booty socialism, I think it is better to think of this as crony capitalism (I believe the term came from the Marcos regime in the Philippines where you only got ahead if you were a friend of the dictator). The two decades by any standard have been neither economic or political socialism.
Thanks for the comments.
Martin
September 29th, 2008 at 1:21 pm
During all this debate I have yet to see any figures or
specific breakdown of the sub prime mortgages. I am talking about the demographic profiles of borrowers and the areas
of the country where this is occurring along with the home prices. None of this is being discussed with any degree of specificity. How can I possibly know what is happening in
this situation without accurate data?
If banks had to hold the paper they would be less likely
to act like used car salesmen and hand off bad loans.
They would not make the loan if it were going into their
accounts receivable. None of this is political except in
the sense that the banks and the investment bankers need to
be protected from themselves. As the great philosopher
Homer Simpson once noted “It takes two people to lie; one
to talk and another one to listen.” There are no innocents
here. The motto of American business in the first part of
the Twenty First century is taken from an old W. C. Fields
film “Never Give a Sucker an Even Break”.
There is some part of me that is an anarchist that says let
it all go, let it all collapse and we will rebuild. The problem with that is that the same bozos will have sway.
No answers here my friend.
Wris