Tuesday, September 30, 2008
Reader Dismuke alerted me via email to an excellent piece at RealClear Markets regarding the current economic crisis, by investor Joseph Calhoun. What I like about it is that it busts two myths at once: that the current crisis represents a failure of capitalism and that there is a shortage of capital in the economy. Each has been used when convenient lately to sow panic and to justify massive new government interventions in the economy.
Last week Goldman Sachs raised $10 billion in new capital in one day. They sold $5 billion in preferred stock and warrants to Berkshire Hathaway and also completed a secondary offering of common stock that raised another $5 billion. Friday, JP Morgan raised $10 billion in a secondary offering to help pay for the Washington Mutual takeunder. Both of these offerings were oversubscribed, meaning that the companies could have raised more capital if they wanted. There is not a shortage of capital for well run financial companies.Oh, and scratch what I said about "justifying" government intervention in the economy. The proper verb in my last sentence is really "excuse". Capitalism depends on (and, to the extent that a nation is free, it is the triumph of) countless individuals exercising their own, independent judgement. This is impossible without freedom, which must be protected by the government. In fact, that is the only proper function of the government.
There is, however, a shortage of capital for companies that have acted irresponsibly with investor capital in the recent past. For some reason, our political leaders believe this is a failure of the market, but isn't this what should be expected from rational investors? Given a choice,why would a rational investor allocate limited capital to the losers rather than the winners? If capital is really as scarce as it seems, isn't it better for our economy if we make sure that it is allocated wisely? [This can be done only by making sure that people who know what they are doing are free to act on their rational effort. --ed]
The biggest bank failure in the history of the United States happened last Thursday night and by Friday morning, it was business as usual. The only difference was the name on the door and the losses suffered by those unfortunate enough to invest in Washington Mutual bonds or stock. The taxpayers didn't lose anything and depositors didn't lose anything, only investors. That is how capitalism works in case everyone has forgotten. [bold added]
Any time and for any reason (HT, C. August) the government interferes with individual rights, it curtails the ability of some individuals to act according to their best judgement, and threatens to do so for all. Think about what this means in the context of the current crisis.
Those who have made bad decisions in real estate (and related) investments have already suffered their losses, or can probably see them coming.
What good is it going to do for our economy or our freedom for the government to take money away from those who have not made similar mistakes and hand it over to those who have? And what good will "supervision" of the able (in the worst imaginable context, that of threats) by the very people who helped create this mess do? Most importantly, by what right?
In all the disgraceful spinning of campfire ghost stories, cries of "act now, think later", and groveling before Nancy Pelosi (of all people!), not once has any politician in favor of the bailout explained why robbing American citizens for the benefit of inept bankers is the right, American thing to do. That's because they can't, any more than Nancy Pelosi can wave a wand and relieve all of us from the necessity of thinking carefully in order to make a living. Or make socialism compatible with the actual requirements of human life.
Just for starters, a "bailout" will insulate those who deserve their losses from the consequences of their bad decisions, as well as (via the inevitable redistribution of wealth) visit those consequences upon those who don't deserve them and deprive the rewards of sound judgement from those who do deserve them. Isn't the last thing our economy needs right now to throw good money after bad, while removing incentives from those best able to make good economic decisions?
If we allow sympathy for the inept (or the foolish) or envy of the able to cloud our judgement enough to blind us to the fact that government intervention in the economy is ultimately achieved by violating someone's inalienable rights, we will rue that choice sooner or later. A mere bursting bubble will look like a walk in the park. (Calhoun hints at that, too, although he could have gone a lot farther.)
Read the whole article. (Among the things I haven't discussed here, Calhoun succinctly explains how some recent government interventions have already misfired.)
Today: Corrected typos.