Bubbles a Feature Not Glitch of US Capitalism?

Opinion piece.
https://www.scmp.com/comment/article/3164451/bubbles-not-gli…

How did the bankrupt and corrupt Soviet system survive for so long? One popular explanation is that the Soviet governing edifice, though crumbling, served the interests of a bureaucratic elite.

investor Jeremy Grantham. Following on from his warning a year ago, he now predicts the impending bursting of the “US bubble extravaganza in housing, equities, bonds and commodities”.
I have no idea if he is right about the current state of the global capital markets. But what I find intriguing is his take on the instabilities and inequities created by contemporary American capitalism via the monetary system administered by the US Federal Reserve.

“The US has seen three great asset bubbles in 25 years, far more than normal,” he wrote. “Why on Earth would the Fed not only have allowed these events but should have actually encouraged and facilitated them[?]” he wrote.

A fourth one, which he describes as a super-bubble, is about to burst in the US. Whenever the economy tanks or a bubble bursts, everyone hurts. But then, the US Fed comes to the rescue with massive liquidity, inflating the assets of the 1 per cent while the rest are still hurting, especially the poor. Every liquidity bailout creates unimaginable wealth for a tiny minority at the expense of the rest.

The extreme inequality that results is not an accidental by-product, but a deliberate feature of the system. Grantham wrote: “We can measure the rapid increase in inequality since 1997, which has left the US as the least equal of all rich countries and … with the lowest level of economic mobility.

So the US capitalism system like the Soviet system of old benefits the elites. So will the US system collapse as did the Soviet system did in the Soviet Union?

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The extreme inequality that results is not an accidental by-product, but a deliberate feature of the system. Grantham wrote: “We can measure the rapid increase in inequality since 1997, which has left the US as the least equal of all rich countries and … with the lowest level of economic mobility.

Concentration of wealth has always been the goal of “supply side economics”. I have commented before that I saw Jack Kemp state the case clearly and plainly, decades ago, words to the effect “the rich do all the saving and investing, so the rich should have all the money”. Apparently, the rest of us waste money on things like food and housing, while the rich are the only ones that use money properly, to promote “capital formation”.

Steve

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So the US capitalism system like the Soviet system of old benefits the elites. So will the US system collapse as did the Soviet system did in the Soviet Union?

Originally they were not comparable but with the Fed and giverment meddling ever more, American Capitalism is becoming a planned economy that does not allow failure except by the hoi polloi. Bankruptcy acts like a safety valve. Close it down and expect as Krakatoa type explosion.

On the other hand I see a lot individual entrepreneurs taking advantage of the new technologies like youTube, Amazon, Shopify, eBay, MercadoLibre, and social media as well as energy distribution via home and business solar and storage which are healthy push backs against central planning. And don’t forget the stock market which plays an ever increasing role in the lives of individuals like most of us here. Work from home is another healthy decentralising movement.

The Captain

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The extreme inequality… a deliberate feature of the system. Grantham wrote: “We can measure the rapid increase in inequality since 1997, which has left the US as the least equal of all rich countries and … with the lowest level of economic mobility.

Tjscott0,

One might reasonably surmise that the critical inflection point* came after the 1997 Asian Financial Crisis via the singularly most corrupting catalyst in the history of modern capitalism, the bailout of insanely-leveraged Long Term Capital Management (LTCM) by actions of the US Federal Reserve.

https://en.wikipedia.org/wiki/1997_Asian_financial_crisis

The ordinary rules of bankruptcy were suspended from operating (and the universal laws of insolvency were prevented from application to the 1%) by the Fed’s actions protecting the elite bankers and clients swept up in the bad bets of LTCM. The nullification and repeal of principles of bankruptcy for the 1% occurred when LTCM was bailed out in 1998, protecting it and its participating banks from a well-earned collapse.

https://en.wikipedia.org/wiki/Long-Term_Capital_Management

This diabolical act of protecting the highly leveraged LTCM hedge fund from going bankrupt created a permanent divide between the elite of the 1% (a protected class) and everyone else on the planet. This creation of a “protected class” of individuals and institutions against the principles of insolvency was exacerbated by passage of the Gramm-Leach-Blyley Act of 1999 (so-called “Financial Modernization Act” or FMA), gutting Glass Steagall and allowing the unholy union of banks and insurance companies.

https://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bl…

The LTCM bailout and the official sanction of the creation of an entirely new class of entity under control of the 1% - namely, the “Too Big To Fail” (TBTF) institutions - the elite among who were the “Primary Dealer Banks,” and their management and largest clients, all of which were given license to “front run” the Federal Reserve’s Permanent Open Market Operations (POMO), continually enriching themselves at the expense of US Taxpayers.

Upon the subsequent passage of the Commodity Futures Modernization Act of 2000, the TBTF Primary Dealer Banks, their management, and largest clients, together with elite 1% traders and speculators in the mold of LTCM, all were gifted with the ability to create, package, trade, and speculate in derivative instruments with virtually unlimited leverage.

https://en.wikipedia.org/wiki/Commodity_Futures_Modernizatio…

This allowed the elite among the 1% to expand the class of TBTF (Too Big To Fail) entities, so as to permanently institutionalize and approve of “Moral Hazard” as the cardinal rule by which the 1% was and is allowed to play in the financial markets.

Ordinary companies, shareholders, bondholders, savers, and retirees all are subject to the laws of bankruptcy, by which they will be stripped of their assets and reduced to meager living in the event of insolvency or operation of mark-to-market asset rules.

However, the 1%, especially the Primary Dealer Banks, their affiliates, senior and retired management, as well as their largest clients - are deemed TOO BIG TO FAIL - shielded from failure by an implicit and explicit backstop from the Federal Reserve and the US Congress (granting Goldman Sachs an overnight National Bank charter so as to protect Treasury Secretary Hank Paulson’s retirement nest egg), via the Bank Bailout of 2008.

https://en.wikipedia.org/wiki/Emergency_Economic_Stabilizati…
https://en.wikipedia.org/wiki/Henry_Paulson

This series of events, changes in the laws, schemes, and practices of the Federal Reserve, designed to provide a permanent bankruptcy-protected “preferred class” or “preference” in favor of the elite among the 1% (no matter how many bad bets they make), while relegating the rest of the world’s economic participants to a permanent underclass, always at risk of insolvency and bankruptcy for making a bad bet.

Shortly thereafter, in 2005, Congress even changed the rules of bankruptcy to further prejudice the poorest among us by the Bankruptcy Abuse Prevention and Consumer Protection Act, protecting the 1% and the Too Big to Fail Banks from losses at the expense of the poor insolvent borrowers.

https://en.wikipedia.org/wiki/Bankruptcy_Abuse_Prevention_an…

The global financial system is a rigged game of poker where the 1% is guaranteed to win.

“If you’re playing a poker game and you look around the table and can’t tell who the sucker is, it’s you.”

  • Paul Newman

https://www.brainyquote.com/quotes/paul_newman_128243#:~:tex….

*An earlier inflection point was when the Fed allowed Citibank and other elite banks to ignore mark-to-market principles in valuing their exposure to losses in Latin American debt during the Latin American Debt Crisis of the 1980s.

The Fed itself acknowledges this instigation of moral hazard in its recorded history:

In the United States, the chief concern was the soundness and solvency of the financial system. To that end, regulators weakened regulatory standards for large banks exposed to LDC debt to prevent them from becoming insolvent… But allowing those institutions to delay the recognition of losses set a precedent that may have weakened market discipline and encouraged excess risk-taking in subsequent decades.

https://www.federalreservehistory.org/essays/latin-american-…

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Notehound, I wish there was a super-rec because your post is worth 10 of most ordinary rec’d posts.

Wendy

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LTCM was purchased by the banks/brokers, not by the Federal Reserve.

Anyone who says otherwise is a tinfoil-hatted conspiracy theorist, completely at odds with the facts and memories of the bank employees who worked on the deal.

It was GS’ co-chair Corzine who called the NY Fed to let them know they, JPM and Merrill, among others, were looking to rescue LTCM. Peter Fisher then went to Greenwich to look at their books. The 3 firms mentioned agreed to be the lead investors in any purchase of LTCM. Chase, Lehman, MS, SSB and Citi were then asked if they wished to participate by GS, et al.

Then, Buffett along with AIG and GS offered to buy LTCM for $250m, and then stabilize it with cash injections. No Fed necessary. But Meriwether turned that deal down.

There was no bailout [which would require public money]. 14 banks purchased them for $3.6bn. The Fed was mostly responsible for putting everyone in a neutral boardroom where they could talk about what would happen in a failure vs a bank and broker buyout of LTCM, and for CEOs to communicate directly, in-person with each other about the risks they individually faced and ability to be part of the purchase deal.

The original plan was for banks and brokers to liquidate LTCM rapidly, Greenspan did suggest a slower liquidation, which ended up being the right move because most of the positions showed large-gains post-bailout. It was LTCM’s leverage of 50-1 that killed them, not their assets.

The Fed did not determine who participated and who didn’t in the bailout. 3 of the 17 banks, including Lehman, chose not to do so.

Sources: Richmond Fed publication, Alan Greenspan, Jon Corzine, Roger Lowenstein.

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LTCM was purchased by the banks/brokers, not by the Federal Reserve.

Right but the buyout was organized by The Fed. Bear Stearns refused to join in and was punished in 2008 with bankruptcy.

The debate was a messy process, with negotiations falling through left and right. Bear Stearns completely refused to take part in any of it. Eventually, eleven of the banks agreed to put in $300 million, Lehman $100 million, and two French banks at $125 million each, for a total $3.65 million bailout. The executives hoped that this would help lower risk, return capital to the fund’s investors, and potentially reverse losses.

https://www.businessinsider.com/the-fall-of-long-term-capita…

The Captain

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Right but the buyout was organized by The Fed. Bear Stearns refused to join in and was punished in 2008 with bankruptcy.

So they waited 10 years for their chance, when much of the board of the Fed had been replaced and when another unpredicted financial crisis happened to exact their retribution.

Sale on Reynolds’s Wrap on Aisle 3!

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Sale on Reynolds’s Wrap on Aisle 3!

You know I am stealing that…