Speculation: Private Profit, Public Losses?
(November 27, 2007)
Astute reader Ken K. sent in this wonderful insight into investors and speculators:
My grandfather always said an investor was a speculator who made a
mistake and wouldn't admit it!
Which brings us to the looming question: just who is going to absorb all the losses
coming to light as banks and other institutions admit their speculations have soured?
In pure capitalism, the answer is obvious: those who took the risk in hopes of earning
the return must suffer the loss.
But in statist capitalism (i.e. the U.S.), huge private losses have been absorbed
by the public--most directly, in the late 80s when the savings and loan debacle
was "cleaned up" with $150 billion in taxpayer money.
So perhaps the real credo of our "statist capitalism" is: the profits are private,
but the losses are public.
Knowledgeable reader Zeus Y. made the following thoughtful comments on this issue:
"Do I think the U.S. economy is healthy? Heck no, but again, in my own idiosyncratic
view, markets are not connected to reality. They are only connected to the emotions and
views of the investors/speculators." (CHS, November 26)
Put another way--the profits are mine but the losses are "ours" (i.e. yours).
Thank you, Zeus, for this cogent analysis.
I agree, and I think it might be helpful to add the dimension of personal power over the
market, especially in how personal power disproportionately exercised in the market can
augment and magnify emotions and views. Just as our elections are much closer to "one
dollar, one vote" than "one person, one vote," so are the prejudices, interests, and
emotions of some market players much more consequential and powerful in the market
This has a way of intensifying the warping of market "reality" (how
things should work in theory if there is basic equality between investors in a market
and/or voters in a democracy). Basic theories assume all investors or voters can access
the same information, equally execute choices given that information, and experience
Both in our markets and in our democracy these basic assumptions have become unglued,
and this tends to destroy the ability of democracy or the market system to buffer
irrational excesses. People do not have access to the same information. From the Bush
administrationís ability to use "national security" to lock out scrutiny to market
insider trading, there is no equality or transparency of information.
Not all "voters"
in a democracy or investors in a market have the same power execute choices. Witness
the disproportionate power claimed by the executive branch in the US government
(especially under a state of perpetual war) to trump the legislative branch, and
the power of mutual and hedge fund managers to trump the vast majority of stock holders
when it comes to decisions over how companies should be run.
Finally we are seeing that the economically privileged are allowed to have their way in
the markets, harvest profits on questionable ventures, and when they screw it up, slide
the consequences on to the taxpayer in terms of bailouts. The motto seems to be: "Use
manipulative tricks to rally the market (buying oneís own stock to create false demand,
etc.) to eke out yet another multi-hundred million dollar year-end bonus before everything
blows. Get a 100-200 million dollar golden parachute after everything blows."
Nothing succeeds like fake success and failure.
You look at how George Bush simply decided to issue "signing statements" saying he wasnít
going to execute the law if he didnít like what it says. You look at how the Bush
administration has used the veto and a craven minority to prevent the will of the people
from going forward with regard to the Iraq War. You look at the extreme manipulation of
the election system in 2000, 2002, and 2004 and of the political patronage system to
reward incompetent yes-men and fire wise counsel.
And then when the awful consequences
of these policies and actions come due, and our reputation as a country is shattered,
our middle class is demolished, national debt has tripled, and the US dollar is in the
toilet, the self-same individuals who started this mess indicate that this is a reason
to give them "emergency" power to do more of the same.
Something similar is happening in the market. Weíve already seen how banks, hedge fund
managers, mortgage agencies, and ratings agencies like Moodyís colluded to pass off junk
as AAA rated securities. This has led to a collapse in real value of purportedly solid
investments, based on outright fraud. Yet no criminal or civil penalties are in the
You have the collapse of government and corporation into one another. You have
the complete privatization of markets (look at private equities buying up public
companies with funny money), just as you have a nearly complete privatization of government,
not only in terms of eliminating public jobs but in eliminating public benefit.
And this is seen as "good" by those who have benefited immensely from their own
vastly outsized personal power to sway supposedly impersonal governmental and market
mechanisms, including Mr. Dick Cheney, who has taken advantage of both arenas to package
together governmental war policy with Halliburtonís private war profiteering.
It is not surprising in a system that has devolved so badly to see the Federal Reserve,
itself a private corporation, essentially dictating that the US taxpayer absorb the losses
from this shell game and even reward multinational banks and equity/fund traders for their
Of course, it is also crushing to witness the end of innocence of your country, but also
heartening to realize, the game is really afoot now. Are we going to answer the call and
take back our democracy, run for office ourselves, elect progressives, refuse to buy into
these scams, and demand accountability and integrity, or are we going to roll over? We
are not staring at a possible oligarchy, but we are undeniably witnessing, what has been
since the election of Reagan, the evolution and culmination of almost 30 years of
oligarchic rule (not coincidentally linked directly with debt-driven "growth") aimed at
the privatization of all public benefit and the public absorption of all private risk.
Now it is time to act. Iíve never been a pessimist or even a cranky realist. I believe
in the entrepreneurial and innovative democratic spirit this country has exhibited in its
best times can rise yet again, if we act critically and creatively to reassert the power
of the people in the market and in democracy.
In the spirit of civic democracy and in the conviction that markets will once again be
free and public,
Thank you, Jerry and Rosanne A.., ($21), for your thoughtful contribution to this humble site.
I am greatly honored by your readership and support.
All contributors are listed below in acknowledgement of my gratitude.
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