AIG's Effect on Regulation by James Jaeger
As we saw last night the Fed DID bail out AIG. Had AIG failed it probably would have taken down the world financial system. Close call, like the Cuban missile crises.
But this now puts into play a precedence we discussed here 2 or 3 years back (which went largely ignored). The groundwork for this was set when the Fed stopped reporting M3, Eurodollars and Repos. Remember? Why did they do this? Many believe they did it because they were expecting to have to inject large sums into the economy in order to be able to roll over the current debt and provide liquidity, i.e., such as for the events of last Monday and Tuesday. The Fed did something unprecedented yesterday, but something us "conspiracy theorists" anticipated. They broadened their collateral acceptance. Very ominous because this means we are now in an era a managed markets. Prior to yesterday, the Fed never did a repo or loan deal on equities, only bonds, which are much safer collateral. But yesterday we saw warrants come into the picture as security. And of course this is the main reason the last stockholders fled causing AIG's capital bailout requirements escalating by the minute throughout Mon and Tues, settling down at about $95 billion, with the Fed taking out some $85 billion of this. Thus the Fed will own as much as 80% of AIG.(1)
AIG, which is the world's largest insurance company, probably ate (underwrote) just a little too much toxic securitized debt. So now they're bringing in the quasi-gov Fed to further regulate all this. Count on more problems down the line because when the gov is in there a little, it HAS to be in there a lot. It's like having a car driven with two people putting their foot on the brake. Markets should be totally unregulated or totally regulated. A hybrid economic system doesn't work that well. In a hybrid economic system what you really have is NOT free market capitalism but some form of fascism, Marxism or authoritarian capitalism, as writers for FOREIGN AFFAIRS like to refer to China as.
The Stupidity of Regulated Economies:
Here's what many seem to not get: Regulation is good. Control is good. There is nothing wrong with control or regulation. Money, economies and machinery need to be controlled otherwise they can get OUT of control and do damage. The question is WHO or WHAT should do the controlling? There are basically three choices:
A. Free markets control;
B. Government regulates;
C Some combination of A and B regulates or controls.
What we have today is basically C. Here are the problems with C.
1. Accountability can't be exactly ascertained;
2. Door to moral hazard is opened;
3. Goals, purposes and management style of gov and private industry differ widely.
When you have hybrid control of private economic systems, meaning any government involved, you inevitably suffer the effects of 1 - 3 above.
Government regulators -- not being generally or instantaneously involved in the private sector -- aren't in a position to totally understand free enterprise capitalism therefore their regulation, although well-intentioned, will inevitably be unreal. They will put the breaks on the car when the gas needs to be applied or they will fail to break when the car needs to be slowed down. This is exactly what happened with the SEC. The SEC failed to put breaks on various practices as far back as several years, thus we wandered into the events of this week. IT'S SIMPLY IMPOSSIBLE FOR TWO PHILOSOPHICALLY DIFFERENT ENTITIES TO DRIVE AN ECONOMY AT THE SAME TIME, point 3.
When government is involved in the private sector the less-sophisticated members of society will always yap when things go south. These will always use government involvement to "justify" government bail outs. They will always say, the gov was supposed to be regulating that and since it crashed it's the gov that should now bail it out. Now the taxpayer is on the line. Now the screams for yet MORE regulation to "correct" the past failures of regulation grow louder. In this way regulation increases and the gov keeps growing larger, yet the catastrophes continue to happen. All this expansion consumes greater amounts of fiat money to fund its growth (since the currently popular fiscal philosophy of the day is "lower taxes promote economic growth." Sure lower taxes promote economic growth, but this growth is only real is the society isn't leveraged into oblivion. Is it any wonder the debt and long-term liabilities are now over $50 trillion?
So the idiots that have allowed us to wander from the Constitution and Founders' advice, have set up a game whereby the inevitable calculus is always the bailout and bigger government. Since the businesses in this kind of a system know "bailout is the name of the game" (that they will always get bailed out because Uncle Sam is in bed with them), they will ALWAYS be as reckless as their greed and pharmaceutical-damaged brains will permit them to be. THUS HYBRIDS OPEN THE DOOR TO MORAL HAZARD, point 2.
In a hybrid system, when the shit hits the fan, no one knows WHO or WHAT is actually to blame. Since no causality can be accurately established, it's impossible to fully correct the situation, there are too many variables. We now live in a system of endless blame game and improperly written hats (duties and responsibilities defined). This chaos and uncertainty is used by the DemGops to exasperate the public into placing unwise or desperate votes and inhibits them from seeing the wisdom of a third-party solution.
The Wisdom of Free Market Economies:
The above said, here's the beauty of a simple free market economy. A free market economy has ZERO government regulation or control. In such an economy there is no SEC, no FDIC, FDIC, no Federal Reserve System, no FIAT money. All entities in such an economy are reliant on the process of supply and demand, human intelligence and the universal doctrine of redundancy and distributed intelligence. This means a banker knowing that he can't sell his loans to a Fannie Mae or a Lehman Brothers, makes wiser loans because HE or his company will have to pay the price if they go south. This means the cost of money (interest rates) is exactly set by the supply and demand in the market, thus money remains VALUABLE and is not squandered into risky borrowers and imprudent business plans. When a business gets too greedy and indulges in excessive risk-taking, it knows that it will go bankrupt and no gov agency will bail it out nor will it be able to borrow artificially cheap fiat money. Businesses will thus be more cautious but they will grow exponentially stronger and eventually able to finance their expansion out of capital formation rather than the bogus fiat money injected into the economy by the unconstitutional Federal Reserve System. See http://www.FiatEmpire.com
An unregulated, free-market economy means investors will have to study economics and become more sophisticated before they invest. There will be no SEC to protect all the Econ 101 and math-challenged flunkies in society. Only a public full of math-challenged flunkies NEEDS government regulation. The investor public that can't read a business plan, prospectus, 10-K, P&L, cash flow statement or balance sheet will simply lose their money under the doctrine of "let the buyer beware." Such "investors" will thus stay out of the liquidity crap shoot known as Wall Street and put their attention on more productive activities.
In an information age, the doctrine of "let the buyer beware" makes sense. This doctrine was perhaps cruel a generation ago as there was no way regular people or investors could get instantaneous and unbiased information on sellers of products. Today, companies like eBay bring millions of strange buyers and sellers together and the vast majority of their transactions go perfectly well because the buyers and sellers can post reports on each others performance, thus frauds and rip-off artists are quickly exposed and henceforth ignored. No need for even a cop, law or court. The financial system should be set up the same way. Investors buying financial products would thus not need extra layers of government regulation like the SEC and congressional oversight committees. This places power back into the hands of the People because it forces the People to take charge of their own lives. To study, improve their abilities and make their own decisions -- or pay the price of ignorance. This is a distributed system of bailout, one that's infinitely more fair to the taxpayer because under this system no one has to bail out their neighbor because they were a stupid, drunk who flunked Investment 101.
In an unfettered free market economy, fast-flow information, supply & demand and rapidity of electronic transaction all make for a different type of REGULATED MARKET: a market regulated by the forces of nature, not the artificial forces of government, special interests and fiat currency. No SEC or Federal Reserve System is thus needed to "rescue" failing companies in this system because all such companies will never NEED TO BE rescued. For one shaky companies will never be able to develop because their business plans will be less likely to get funded. Today, bogus cheap fiat money makes it possible for 10 companies to start-up when 8 of them will fail. This gives business to the lawyers that handle the bankruptcies, business to the lawyers that draft the private placement memoranda, business to the bankers that lent the "capital" and temporary business to all the employees and suppliers in the community -- a temporary "stimulus" to the community around the start-up with unreal cash flow that gives the illusion of prosperity. This is boom part of the bogus, so-called Business Cycle. But when the initial capitalization based on bogus "easy" fiat or fractional-reserve loans is spent, the start up files bankruptcy and many more people suffer that would have otherwise. Many of the employees of these star-up businesses will go out and apply for loans. They will get the loans and then when 8 of the 10 start ups fail, those employed by the start-ups will soon find themselves laid off by the failing start-up and thus unable to make their mortgage payments. They will thus lose their homes adding to the chaos in society while the bank that made them the loan has long since sold that loan to a Freddie Mac, Fannie Mae, Bear Sterns or a Lehman Brothers and an AIG has insured the transaction.
A system based on sound money and real capitalization would never allow 10 start ups for every 2 successes with all the downstream negative repercussions to society. In such a system, probably only 5 start-ups would get financed, however 4 of these start ups would survive and ultimately prosper and provide real security to the employees, stockholders and community. Thus in a system funded by capital formation rather than fiat money loans made possible by a quasi-government agency (the Fed), the money that's WASTED on unviable or failing business would be available to build stronger, more viable businesses, businesses that produce products that are actually needed and wanted by society. Today, the over-diversity and redundancy of poorly-made products is rampant. Go into any Wal-Mart, Staples or Circuit City and you will see hundreds of redundant products all masquerading under the mantra of "consumer diversity." Much of this is consumer waste. With all this wasted capital, is it any wonder American corporations find themselves in a position of making up for it by seeking cheaper labor in foreign markets?
In an unregulated free market economy companies would never be ABLE to get so big that their failure would effect the larger economy. The current system we now live under ENABLES too many companies to merge and get too big. The mass media, as an example, is now controlled by just six (6) ridiculously large corporations whereas it was based on over 50 companies in 1970. The banking industry is now consolidating just as bad. Here again, government regulation, put in place by corporate lobbyists, has enabled merger laws that are imprudent. This regulation has permitted the growth of corporations that are WAY larger than they would have grown under NORMAL circumstances. By "normal" circumstances I mean: an unfettered free market economy. The only reason we can possibly have an AIG or a VIACOM or a BofA or a FED is because gov is in effect partnering with business when it regulates or subsidizes that business. Thus businesses grow artificially large on the wings of big bro gov and bogus fiat money. The entire financial and global economic system we thus have is artificially large. It is thus destined to crumble sooner or later, or as President Bush might say: "adjust." A speeding automobile is destined to crash sooner or later when there are several people attempting to "control" it at once. Such an integrated system may provide economies of scale, but economies of scale only result in consumer discounts until systems of businesses consolidate into oligopolies and monopolies, as is now happening. The end result is a fascist or totalitarian system where monopoly capitalism dominates the once-free market.
These are some of the lessons we will be learning in MELTDOWN 101.
(1) Now would be a good time to watch or re-screen FIAT EMPIRE such found at http://www.FiatEmpire.com. In this movie we warn about the owners of the Federal Reserve System, such being the elite New York banks, and how they are in the process of scoffing up the assets of the world using fiat money and frctional reserve lending practices. Where do think the Fed will get the $85 billion to "buy" AIG? It will simply print it up. In the long-term, you and I will pay for this "bailout" with increased inflation. In order to offset this, the Fed chose to NOT raise the Fed Funds Rate yesterday. The monetization of more debt will WEAKEN the dollar and keeping the Fed Funds interest rate the same will help STRENGTHEN the dollar. Top the degree the Fed provides fiat money to bailout "indispensible" entities, it has a built-in conflict of interest because what's good for the entity might not be good for the general welfare. Jefferson and Adams warned us about fiat-issuing central banks and the corporations that will grow up around them.
17 September 2008
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