The Worst System Of All - Privatized Gains, Socialized Losses

Recently Noah Chomsky made the point, as have many other commentators, that the financial meltdown illustrates the failure of the market. As he points externalities or side effects, such as pollution or changes to systemic risk due to the private transaction, are a key issue. However, after describing the failure of capitalism and the merits of government intervention he then goes on to point out that the US actually is not an example of a free market system at all but is in fact a system with strong government intervention. He dubs this system 'State Capitalism' and correctly reminds us that the presumed high priest of the markets, Reagan, was actually the "most protectionist president in postwar American history". So what is interesting is that Chomsky who calls for government to be the solution to the ills of the world has actually identified government intervention as the cause.

Despite his double think Chomsky eloquently leads us to the culprit in the current financial crisis; namely the forces of government interfering in the market place for the benefit of its lobbyist paymasters. The market system is where the gains are privatised and the losses are privatised. In other words, if you err in your investment judgement then you should lose. What we have, as has been clearly pointed out in most national papers of the world, is a situation where the gains are privatised and the losses are socialised. Regardless of whatever name we give to this system it is a formula for disaster as it clearly encourages everything from imprudent investment of scare capital to fraud.

The US state capitalist institutions, the Federal reserve and the Treasury, have been constantly bailing out the failed ventures of their anointed ones. The most egregious bailout, because of its size and timing, was the 1998 bail out of the highly leveraged hedge fund Long-Term Capital Management (LTCM) as it created huge moral hazard and set the stage for the impending disaster to come a decade later. LTCM had all the properties of the new world of finance which created the belief that certainty had now been brought to the world of investment. Genii at the helm (the best of all with two Nobel prize winners in economics) using cutting edge computer based mathematical models for valuation and speed of light trading, taking advantage of the latest financial technology, such as derivatives, in the no restrictions hedge fund environment. Despite some initial success LTCM lost $4.6 billion at almost the speed of light. If this hedge fund had been allowed to fail belief in this type of trading which has caused the current global crisis would have been checked and the moral hazard from being too big to fail removed. What is strange now is Alan Greenspan believes that the market failed a recent Congressional hearing saying "Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief" when in fact by bailing large failures out he actually removed the incentive of lending institutions to protect shareholders. If there's no safety net you make damn sure you do not take any risks.