With the financial meltdown accelerating in the wake of the US bailout, and the recognition that many more failing banks will have to be nationalized, the British government is moving to get ahead of the game by offering equity injections across the board. But already this seems inadequate. Now that the taboo on nationalization has been broken, wouldn’t it make better sense to nationalize the whole sector? With full control, governments could then ensure the resumption of interbank lending at least among their own banks. This would provide a feasible basis for co-operative moves to re-establish international markets.
For this week at least, such an idea is beyond the range of political acceptability. But it’s striking to look back a month and realise that in that period the US government has become the main mortgage lender, the guarantor of the short term money market, the effective owner of the world’s largest insurance company, the potential future owner of much of the banking sector and now the purchaser of last resort for commercial paper. Since the reluctance of banks to buy commercial paper must reflect a significant probability of default, it seems inevitable that some of this commercial paper will end up being converted into claims on the assets of defaulting issuers, extending the scope of nationalisation beyond the finance sector and into business in general.
This kind of instalment-plan nationalisation seems to offer the worst of all worlds. At some point, a more systematic approach will have to be adopted, and given the rate at which markets are plummeting, the sooner that point comes the better. This isn’t the return of socialism, but it certainly looks like the end of the kind of financial capitalism that has prevailed for the last few decades.
{ 55 comments }
Walt 10.08.08 at 8:10 am
I’m sure that the British government has the legal authority to nationalize the banks, but I don’t know that the US government does. The US is stuck taking over each bank as it fails. (I suppose in dire enough straits the courts would tolerate a “national security” argument.)
Leeds9 10.08.08 at 10:54 am
This isn’t the return of socialism, but it certainly looks like the end of the kind of financial capitalism that has prevailed for the last few decades.
Part of the unfolding horror of the situation for me, is that precisely the opposite of the above will happen. Namely, that every effort and all our current and future money, wealth and assets will be used to ensure that this ‘current kind of capitalism’ will be renewed at the earliest possible convenience. It’s just a fear and there is no evidence, but in all the commentaries, reports, essays, learned opinions and interviews I haven’t heard such things as contrition, humility, recognition of wrongness, doubt, uncertainty or apology from potential sources of this malaise – Government or private.
Maybe I haven’t looked deep enough and definitely I am too glum but I just doubt we won’t move on and things will stay the same in the future, only we will be poorer, desperately poorer, sadder and more disenfranchised than ever.
HH 10.08.08 at 12:47 pm
Unfortunately, we are rewiring the faulty machinery with the same bad wire. Note that Paulson has “privatized” the management of the $700 billion government purchase of the toxic securities. The same easily corruptible Wall Streeters who got us into this mess will be paid to buy their own garbage with taxpayer money.
What the commentariat refuses to grasp is that our financial buildings are crumbling because the bricks are bad, not the mortar. An entire generation of financial careerists has been trained in the alchemical transformation of base falsehood into golden “spin.” There are no quick fixes for removing a generation of corrupt “professionals.” There is only a long, slow climb back to honest dealing. As professor Roubini put it, “We don’t have a sub-prime mortgage problem; we have a sub-prime financial industry problem.”
Ginger Yellow 10.08.08 at 1:04 pm
To be fair, the UK plan is systematic, just not in the direction of outright nationalisation. Everyone’s focusing on the recapitalisation, but the government is also guaranteeing £250bn of wholesale debt of up to three years in maturity, and providing £200bn of liquidity through the SLS.
So it aims to address three of the biggest challenges facing UK banks at the moment – capital shortfalls (real and perceived), frozen money markets and short to medium term refinancing burdens. Then you have the already announced increase in deposits and a coordinated rate cut today. This plan seems a lot better thought out than the US TARP, although that’s not saying much. That said, it doesn’t directly address the fundamental problem of falling house prices, but then maybe it shouldn’t. Prices are still unsustainably high.
Donald A. Coffin 10.08.08 at 2:37 pm
I’m sure I would not want an administration run by George Bush–or John McCain–and probably even Barack Obama–to be in control of the administrative apparatus that’s in control of the banks. Frankly, that way lies crony capitalism. (Not serfdom; I’m no Hayekian, but recall your Indonesia.)
Nur al-Cubicle 10.08.08 at 3:15 pm
Gee, just 10 days ago it was the unmentionable N-word. So much for liberalism. Welcome The Return of the Modern Welfare State. Bow all ye doubters!
Will Davies 10.08.08 at 3:27 pm
The British plan was hatched due to cooperation between the government and the banks. The banks requested something of the sort, but the questions were – how much capital did they need and what was the state/public going to get in return? It wasn’t a question of legislation, but one of hatching a deal.
For what it’s worth, our government’s track record in this area is strengthened more by having invented various forms of Public Private Partnership over the 1990s (where the government shares risk and managerial responsibility with the private sector), rather than by the nationalisations of the 1940s and 50s. I wouldn’t say the PPPs have all been very successful and some have been disastrous, but it is at least a well-trodden path.
Russell Arben Fox 10.08.08 at 3:35 pm
This kind of instalment-plan nationalisation seems to offer the worst of all worlds.
Exactly! Our government is clumsily, without much foresight, with fervent denials, trying to do the obvious thing: introduce (or re-introduce, depending on how you look at the Great Depression and its immediate aftermath) some genuinely socialistic national regulations and controls over a broken system. But federal politicians can’t call what they’re doing by it’s proper name; and hence, the ability to understand the implications of what needs to be done, and accurately debate its ramifications and limitations, is severely hampered. We may get to where we need to go just by stumbling forward, but things would go much smoother if we weren’t so allergic to talking about class in this country.
Colin Danby 10.08.08 at 3:49 pm
I don’t think anyone’s suggesting, Donald, that banks would remain in public hands permanently — once you were back to some sort of financial-sector stability and growth and the banks had value, political pressure to reprivatize would be immense. Nor is there a lot of choice — given the pace of collapse I think nationalization is inevitable; the question is only what shape the banks and their borrowers are in at that moment.
Mexico’s 1982 bank nationalization, though there are obvious differences in scale and exchange rate context, is an interesting comparison. Essentially a rescue of a bankrupt sector, and also a case in which nationalization began as the most extreme option on the policy menu and became unavoidable as every other option dropped away. Reprivatization was 1991-2. Somebody should write up Mitterand’s bank nationalization for this blog. Not that we’re worried about this right now, but the long-term policy question is what regulatory system do you reprivatize into, because at the moment of sale there’s pressure to rake steps that will raise the value of the bank franchises you’re selling off.
ehj2 10.08.08 at 3:54 pm
Donald @4,
You can’t give it to the Executive. The only intellectually honest agency remaining in the Bush government is the non-partisan Congressional Budget Office. We need to remove more reporting from Executive Agencies and expand Congressional resources for reporting on the state of the nation; air quality, water, energy, etc.
And the Financial System needs to be run by Congress & The People or there will be limited transparency.
It’s time to acknowledge the Financial System is too important to be run by corporatists, who benefit from serial crises, and engineer insufficiency to bolster demand and profits. Energy is also too important to be run by people who profit from shortages and expend those profits on maintaining barriers to entry.
lemuel pitkin 10.08.08 at 4:01 pm
The commerical paper purchases are a big step in this direction, no? It moves the Fed from trying to shore up the private banking system, to simply replacing it.
A couple of details pointing in the other direction: Nonfinancial corproations account foor less than $200 billion of the $1.5 trillion in commercial paper outstanding, so direct lending by the Fed to ordinary businesses will be a relatively small part of this program. And only enough paper can be bought from a given issuer to bring them up to the average total amount outstanding that they ahd in August. Obviously that wouldn’t work if this arrangement continued for more than a few months.
Still, tho, I agree with John Q. And given that the private financial system has failed so spectacularly at its fundamental tasks of intermediation, acceptance, liquidity provision and risk assessment, one has to wonder what are the arguments against outright nationalization. After all, central bank functions were once performed by private institutions too, and no one (except a few cranks) thinks we should go back to that.
lemuel pitkin 10.08.08 at 4:03 pm
I don’t think anyone’s suggesting, Donald, that banks would remain in public hands permanently
But why not? has the current crisis not changed your views about the optimum mix of at public and private financial institutions at all?
Colin Danby 10.08.08 at 4:23 pm
Martin Wolf:
http://www.ft.com/cms/s/0/3dc401f8-949a-11dd-953e-000077b07658.html
lemuel pitkin 10.08.08 at 4:27 pm
I’d be very curious if John Q. (and Dsquared, but I’m not holding my breath) agree with Dean Baker that the decision to buy commercial paper means that passing the bailout was wrong — the Fed can, and should, and anyway will have to, provide credit to the real economy directly rather than via the banks.
MarkUp 10.08.08 at 4:46 pm
One has to wonder with all this talk of nationalization, will Hugo Chavez be apologized to?
Walt 10.08.08 at 5:04 pm
I think it means that the bailout wasn’t wrong, it was besides the point.
I think we’re past the point where we need to worry about the banking system collapsing. The banking system has collapsed. The fact that CP for financial companies has dried completely is not surprising — they’re all borrowing from the Fed, who’s the only one who can survive not being repaid. It’s the fact that they’re not willing (or more realistically, able) to lend to anybody at all that shows that the system has broken down completely. So it’s only with the disruption of the non-financial CP sector that we know that the whole system has broken (though that was the way to bet for some time).
Walt 10.08.08 at 5:06 pm
I think the idea of permanent nationalization of the banking industry is a terrible one. Everyone in America is going to go to the government every time they need a mortgage? A car loan? Every business that needs a short-term loan to tide them over before the Christmas rush is going to go to the government? Every business that needs to fund a new plant has to get the money from the government? It would be slightly different from a command economy, but only slightly.
Righteous Bubba 10.08.08 at 5:14 pm
But why not? has the current crisis not changed your views about the optimum mix of at public and private financial institutions at all?
The cure for the disease after onset may be different from the regime used to protect yourself from the onset of the disease.
lemuel pitkin 10.08.08 at 5:26 pm
I think the idea of permanent nationalization of the banking industry is a terrible one. Everyone in America is going to go to the government every time they need a mortgage?
Doesn’t have to be all or nothing. There is a wide range of possibilities that involve substantially more public wonership/control than the status quo ante, but fall short of full nationalization.
We could, for instance, nationalize the big money-cetner banks but keep a bunch of small, heavily regualted, deposit-taking isntitutions to provide mortgages, consumer credit, loans to small businesses, etc., something like the pre-Reagan S&Ls (which prior to deregulation worked quite well.)
lemuel pitkin 10.08.08 at 5:33 pm
… I mean, you’ve got Brad DeLong talking about turning the price of risk into an administered price, like the short-term interest rate. And here’s Michael Lind in the New York Times talking about having the government take over a big chunk of the deposit-taking function through a revived postal savings system.
Wall Street has been taking a big chunk of our income in return for services that, it turns out, they ahve failed to deliver. I understand why they want to get paid anyway, but for the rest of us, there’s no reason to assume that the goal of intervention should be to get us back to the system we had before.
Walt 10.08.08 at 5:40 pm
They took over a big chunk of the income of the super-rich, and failed to deliver.
I don’t think there’s much chance of a return to the status quo ante. What I would like to see is either a) breaking up money center banks or any other financial institution that’ll be deemed too big to fail or b) a special form of bankruptcy so that any financial institution that is too big to fail can be taken over by the government as soon as it gets in trouble. Plus additional regulation, but I think it will take a little time for the dust to settle to figure out what the regulation should be.
lemuel pitkin 10.08.08 at 5:48 pm
They took over a big chunk of the income of the super-rich,
Plenty of yours, too, Walt. In the mid-2000s, a third of all the economy’s profits were in the financial sector. Every paycheck you get and every purchase you make has a “Wall Street tax” included.
Russell Arben Fox 10.08.08 at 6:20 pm
For some reason my comment above is still being held in moderation, so let me try again…
breaking up money center banks or any other financial institution that’ll be deemed too big to fail
Assuming the goal is to avoid outright nationalization–and, as Lemuel Pitkin points out, there is a sliding scale here, not an all-or-nothing decision; Sweden’s socialism is not the same as Britain’s, neither of which would properly be anything like America’s, etc.–then this could perhaps be an important reform; in fact, it would probably be important regardless of whatever kind of nationalization or quasi-nationalizing reforms and regulations might emerge. But the idea of making things smaller so they’re more likely to survive the rigors of financial capitalism doesn’t say anything about how those banks might be contributors to the very process which threatens them, no matter what their size. “Breaking up” the big institutions sounds like a nive populist argument, but if it’s not followed up with a general re-evaluation of credit practices, discouraging the sort of expansion and lending which takes economic sovereignty away, then you not only haven’t really done anything truly populist, but you haven’t addresses the fundamental dilemma either.
Walt 10.08.08 at 6:31 pm
I don’t think that’s true. I think that Wall Street’s profits were so fat because our economy disproportionately rewards the wealthy, who don’t know what to do with their money other than to turn it over to speculators. Wall Street is the closest thing to redistribution we saw in the 2000s.
Walt 10.08.08 at 6:42 pm
Naked Capitalism quotes Wolfgang Munchau advocating something close to what you’re advocating in the pages of the Financial Times, Lemuel, so apparently you were just ahead of your time.
lemuel pitkin 10.08.08 at 7:02 pm
Walt,
Thanks for the Naked Capitalism/Munchau tip. Very interesting:
“Government is our one and only safety net. It could, if it wanted to, provide basic financial services, that could easily fulfil three economic functions that are attributed to finance: to provide liquidity, to share risk, and to allow agents in the economy to make inter-temporal choices. You don’t need CDOs and CDSs for that. A network of central bank branch offices, in combinations with a relatively small number of national, or nationalised banks, could temporarily offer the vast bulk of all financial service of wider economic relevance. The way to go is to shrink the financial system and nationalise the systemically important financial institutions.”
This is the conversation that needs to be happening.
lemuel pitkin 10.08.08 at 7:14 pm
I think that Wall Street’s profits were so fat because our economy disproportionately rewards the wealthy, who don’t know what to do with their money other than to turn it over to speculators.
Actually, I agree with this too. Seems to me a central but largely undiscussed aspect of the crisis is its roots in the redistribution of income from wages to profits, which both increases the pool of capital available for investment and decreases the number of profitable investments to be made. In Econ 101, a fall in the interest rate would bring S and I back into balance, but in the real world investors are resistant to accepting lower returns so are increasingly susceptible to taking part in speculative bubbles instead.
Felwith 10.08.08 at 8:05 pm
Must it? Why can’t it reflect uncertainty over whether the banks’ remaining cash reserves will be called upon at short notice to cover their own debts?
a 10.08.08 at 8:14 pm
I think it would be pretty expensive to nationalize the entire British banking sector, even at current market prices. HSBC would by itself probably break the British budget. That is, if the government compensates shareholders the current market value.
Walt 10.08.08 at 8:16 pm
Felwith, that’s a good question. I wonder if there’s a Fed publication that contains the answer.
J Thomas 10.08.08 at 8:19 pm
Why can’t it reflect uncertainty over whether the banks’ remaining cash reserves will be called upon at short notice to cover their own debts?
If the Fed thinks a member bank is solvent, it will loan them money to cover extraordinary reserve needs, right? That’s part of the Fed being a “banker’s bank”.
Why doesn’t that work?
lemuel pitkin 10.08.08 at 8:39 pm
The official theory is that banks don’t want to hold commercial paper because of the fear that *other* banks’ problems will prevent the borrowers’ from rolling the paper over, leading to default. Since the paper is mostly very short duration — as little as one day — any interruptiion in the ability to refinance it can creates big problems.
Let’s say ABC, Inc. (probably a bank itself) has $100 millionof commercial paper outstanding. Normally it simply rolls the bulk of this paper over, increasing or decreasing the amount outstanding only at the margin. But the crisis means that suddenly lenders are unable or unwilling to purchase it. So it must pay the whole $100 million immediately, which it may be unable to do. of course, this can be a self-fulfilling prophecy, since the expectation that ABC could end up in this situation will mean that no one wants to buy its paper.
In the Fed’s statement, this is how they justify the policy: “By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market.” IOW, it’s intended to encourage private investors to resume buying commercial paper by reassuring them that borrowers will be able to refinance with the Fed if necessary.
Walt 10.08.08 at 8:50 pm
Thanks, Lemuel. That was informative.
Felwith 10.08.08 at 9:12 pm
OK, so it’s not that the issuers are expected to go broke, exactly, just that they won’t be able to keep their loans going long enough to catch up to the revenue that’s supposed to cover them. I think I have it now. It just seemed odd that a result of the mortgage meltdown would be that McDonald’s would start looking like a bad credit risk.
Ginger Yellow 10.09.08 at 12:31 am
Everyone starts looking like a bad credit risk when all of the international credit markets (SSAs aside) are frozen.
J Thomas 10.09.08 at 2:13 am
“One of Nasrudin’s neighbors came to him to borrow his rope.
‘I can’t lend you my rope just now, I’d drying flour on it.’
‘How can you dry flour on a rope?’
‘It’s easy, when it’s a rope you don’t want to lend.'”
If you can’t get aloan, is it that they’re afraid you won’t pay it back or is it that they think they need it themselves?
If you can’t get a loan when you obviously have no need for the money, probably it’s the latter.
Walt 10.09.08 at 2:57 am
I just got a new credit card offer from my bank, so apparently I am now the only good credit risk in the United States. I promise to consume as much as I can; not for my sake, but for America’s.
Colin Danby 10.09.08 at 6:02 am
Evidently Secretary Paulson reads CT.
john b 10.09.08 at 9:45 am
“I think it would be pretty expensive to nationalize the entire British banking sector, even at current market prices. HSBC would by itself probably break the British budget. That is, if the government compensates shareholders the current market value.”
British-owned banking sector != British banking sector.
Under any half-sane nationalisation plan, you’d be nationalising HSBC Bank plc, which is the 3rd-largest bank in England and Wales and suffers (to a lesser degree than HBOS or RBS, sure) from the same problems as the rest of the UK banking sector, rather than HSBC Group plc, which is the world’s largest bank and makes enormous amounts of money from its operations in the developing world.
Deliasmith 10.09.08 at 12:38 pm
For years I’ve thought that the only items in today’s newspapers that will be widely read in the 22nd century are the cartoons of Steve Bell. They’ll be on book covers and TV documentaries, illustrations in schoolbooks and stuck to students’ walls, as familiar as Gilray and Rowlandson.
He’s not as good as he was: ‘If … ‘ is very poor indeed nine days out of ten, and his recent big political cartoons often miss the bull’s eye (narrowly, but still, a miss is a miss) because of his failure to ‘get’ George W Bush. Drawing him as an ape might be accurate as a physical observation but it’s too easy to dismiss as mindless abuse. Maybe it’s just that he knows more about or cares more about British politics.
But, today’s contribution is brilliant. This will be on the dustjacket of volume XXIV of the Oxford History of the Twenty-first Century.
dsquared 10.09.08 at 1:44 pm
#14: It does not count as a comment on the crisis (and this is why I have written the same thing as a comment on Paul Krugman’s site which is currently held up in moderation) to point out that central bank intervention in the commercial paper market is a completely orthodox practice. It’s not typically been used by the Fed, but it was the major means by which the Bank of England carried out its open market operations (it was called “bill discounting”) up until about 1994. As a result of its operations, the BoE built up a very large portfolio of bills of exchange (the same thing as CP), referred to as “the bill mountain” (a humourous analogy to the then-existing EEC wine, butter and grain mountains), which was the subject of many chin-stroking articles of the time, most of them written by Charles Goodhart.
Walt 10.09.08 at 1:49 pm
Did they buy any-and-all kinds of CP, or just that from banks?
Ginger Yellow 10.09.08 at 3:24 pm
John B:”Under any half-sane nationalisation plan, you’d be nationalising HSBC Bank plc, which is the 3rd-largest bank in England and Wales and suffers (to a lesser degree than HBOS or RBS, sure) from the same problems as the rest of the UK banking sector, rather than HSBC Group plc…”
The UK isn’t nationalising either, it seems. HSBC says it will be using internal funds to recapitalise HSBC Bank plc.
Delia: I still fondly remember a Steve Bell series from the 1998 financial crisis (Russia default, LTCM collapse etc) about lean times at the “Eurobond factories”.
robertdfeinman 10.09.08 at 3:33 pm
State capitalism is the right term. What is happening in the US is that the preferred firms (Goldman Sachs, etc) are being helped to survive and those without the same political connections are being driven out of business or into the arms of others.
At the end of the day, whether these firms go through a “nationalized” phase or not, we will have even more concentration in key industries. The surviver firms will not only be “too big to fail” but will be guaranteed not to fail.
This is in contrast to the days when we had regulated monopolies like AT&T, where their profits were regulated and more like the 1870’s when the railroads set their own rates and owned their own politicians and were granted eminent domain.
The problem is that favored monopolies are inefficient, not innovative and suppress innovation by preventing new firms from entering the market. Other countries which will not be making the same mistakes can be expected to out innovate and out compete us. Welcome to the end of the American branch of the British Empire..
john b 10.09.08 at 3:34 pm
“The UK isn’t nationalising either, it seems. HSBC says it will be using internal funds to recapitalise HSBC Bank plc.”
Indeed. It has the option of doing that because HSBC Group plc has plenty of cash globally (and it presumably believes that in the long run, the UK business has strong enough recovery prospects that retaining 100% of the risks and rewards is a good idea. Which I guess is fairly promising news for UK taxpayers on the value of their investment, given that HSBC is generally rated as quite competent at understanding Things And Stuff).
Walt 10.09.08 at 3:34 pm
One thing you can’t say about Wall Street, robert, is that they’re not innovative.
lemuel pitkin 10.09.08 at 3:56 pm
This is in contrast to the days when we had regulated monopolies like AT&T, where their profits were regulated and more like the 1870’s when the railroads set their own rates and owned their own politicians and were granted eminent domain.
There’s something to this analogy. But you know, historically, the latter did somehow lead to the former. It’s at least possible that, with enough presure from below, the expanded economic role of the state could be redeployed to help build a more humane and sustainable society.
MarkUp 10.09.08 at 4:58 pm
”The problem is that favored monopolies are inefficient, not innovative and suppress innovation by preventing new firms from entering the market.”
How does one go about deselecting monopoly? There is much inefficiency in having broad choice as well, which one could ascribe to consumer society in general. This too can stifle innovation and market entry. Is Apple a monopoly? Do we need more than 47 kinds of 6-8 mega pixel point and shoot cameras on the market at a given moment [plus of course phone cams…]? Is that efficient? Is it efficient for a homeowner to not go with the added initial cost of building an energy efficient home if/when the odds are against them recovering that investment?
robertdfeinman 10.09.08 at 5:35 pm
MarkUp:
We humans haven’t yet devised a system to guarantee innovation. The best we have done is to allow 47 kinds of digital cameras to enter the market and then let the various forces weed the features down to what is most desired. When there are 47 choices it is because the field is undergoing rapid technological change and each firm thinks that its combination of ideas will prevail. This is “inefficient” only in the sense that many of these firms will fail and that their products may be dumped if they overproduce.
What’s the alternative? Do you want some arbitrary judges to decide what gets produced? Where would the choices come from? Without the possibility of making a (large) profit firms won’t invest in the R&D and won’t attract the bright minds needed to do the innovation.
The kind of inefficiency I’m talking about is that where firms don’t spend on R&D because they control markets and raise prices because they have no effective competition. The first stifles innovation and the second shifts money from consumers and into the hands of the least innovative parts of society.
As for the financial “innovation” that has been much touted over the past two decades. There was only one real innovation: this was permitting banks to resell their mortgages and thus gain fresh capital to offer new ones. Before this banks held the mortgages and were constrained by the amount of deposits they could attract. The resold mortgages could be offered to groups with money that would never deposit it in US banks. This includes foreigners, other corporations and mutual and other financial investment firms.
When this started Fannie Mae was just a conduit for this repackaging and offered a new type of service – collecting, marketing and pricing these derivative securities. That was the “innovation”. All the other things that have been going on are simple variations on the same financial trickery that has always existed. Jay Gould (died 1892) would feel right at home these days – watered stock, subsidiaries with no assets, overinflated asset values (underwater real estate in Florida, anyone), and the promises of profits in excess of the cash flow from the investment.
The only innovation came from the government. It’s innovation was the ability to trash existing regulations and laws that had been put into place as a result of previous Ponzi schemes. Figuring out how to bamboozle congress, the press and the public was a real “innovation”
MarkUp 10.09.08 at 6:51 pm
”The kind of inefficiency I’m talking about is that where firms don’t …”
Right, but the other end of that is gross market dilution where there is often not enough money to spend on meaningful R&D – the double edged sword. It’s not either or, but both.
”When there are 47 choices it is because the field is undergoing rapid technological change and each firm thinks that its combination of ideas will prevail.”
That holds some truth for some markets/items; bought laundry detergent or cereal lately? Obviously competition and choice can be good but almost equally it can be harmful. Most ‘innovation’ comes in the form of a differential marketing of the same thing rather than meaningful product improvement. The ‘market’ will eventually recongeal the mortg industry thus proving that they ‘work’ having had weeded out the now rebranded CountryWide’s and all the mom and pop shops that really were not needed and in light of current problems, were less than beneficial. But choice is good.
”Do you want some arbitrary judges to decide what gets produced?”
Yes, the gatekeepers at local landfills might be a good starting point. Perhaps even the ones at airports. It took an [almost] arbitrary judge to make refrigerators and toilets more efficient. This in a market[s] that had lots of money and competition, but was not making any real steps forward. The ‘market’ is not real good at [though it is improving] factoring in the long term social costs, but it is real good at supplyying monies to mitigate action/regulation that attempts to control for that. Again a double edge sword.
robertdfeinman 10.09.08 at 7:16 pm
I have no objections to an “arbitrary” judge as long as this mechanism is a function of truly democratic processes. Improvements in refrigerators and toilets came about because of a chain:
1. The public demanded (indirectly and diffusely) improvements in efficiency
2. They elected public officials who were tasked with carrying out these aims
3. The officials passed appropriate legislation
4. Agencies and other gov’t powers created standards and enforcement mechanisms
5. Companies complied, but still kept the flexibility to innovate in other ways (or exceed the standards if they wished).
What we have now is that there is a failure between 1 and 2. The public speaks, but the politicians who get elected don’t follow the mandates. They follow the money instead. What we have is a broken democracy. The cure, for which, is more democracy.
Capitalism, is not democratic. All firms are run as top-down fiefdoms. Neither are most public institutions which are typically run by self-perpetuating boards of directors. Since such institutions are not democratic it is all the more important that the public be able to control their actions through a responsive government.
The unexamined issue is still the corrupt campaign process. They cycle it will cost $1 billion to get elected.
lemuel pitkin 10.09.08 at 7:55 pm
What’s the alternative? Do you want some arbitrary judges to decide what gets produced? Where would the choices come from? Without the possibility of making a (large) profit firms won’t invest in the R&D and won’t attract the bright minds needed to do the innovation.
Evidently there has been no innovation in public transit — subway systems are all run the exact way they were when they came into public ownership 60 or 70 or 80 years ago. Evidently there has been no innovation in the French nuclear power industry. Police forces, fire protection, the military — all unchanged down the centuries. And of course no innovation coming from researchers in universities. Because no profits = no innovation. Yup.
MarkUp 10.09.08 at 8:24 pm
Your chain is off kilter a wee bit in regards to 1 & 2, but that could just be the difference in how we define certain terms and interactions.
As to #5, what were the advances we got? More per capita refrig space? More hotel rooms with mini fridges, built-in tv’s and $60 water filters. Hooray!
robertdfeinman 10.09.08 at 8:33 pm
You two need to read some of the essays on my web site and you will discover that I’m not a fan of capitalist excess. In fact most of my writings are some variation of the need to develop a steady-state economic system. Here’s a sample:
Planning For a Steady State (No Growth) Society
Not all innovation comes from capitalist motives. I, myself, worked in the non-profit sector for my entire career doing R&D. But these days there is little basic research being done outside of universities, and much of that is now based abroad. The big industrial labs no longer exist or are devoted to product development, not research. All of this is a consequence of decisions being based upon financial factors, especially short-term returns to boost stock prices.
I don’t think capitalism is the answer, in fact I don’t even think it is the best system, but we do need a way to foster innovation and entrepreneurship. The results from centrally planned systems have never been good. If you think you have some ideas let’s hear them.
MarkUp 10.09.08 at 8:59 pm
“The big industrial labs no longer exist or are devoted to product development, not research.
But they did at one time right? I remember eating some good tomatoes and eggplants courtesy of a friend & Bell Labs. They had a small monopoly back then IIRC.
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