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Author Topic:   Socialism bailing out capitalism? (The Federal Reserve and the Banking problems)
Minnemooseus
Member
Posts: 3941
From: Duluth, Minnesota, U.S. (West end of Lake Superior)
Joined: 11-11-2001
Member Rating: 10.0


Message 1 of 38 (461160)
03-23-2008 12:29 AM


Am I mistaken in interpreting the Federal Reserve Banks efforts such as the assisting of rescuing Bear Stearns as an example of socialism being used to save us from certain excesses and abuses of capitalism?
Moose

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Grizz
Member (Idle past 5472 days)
Posts: 318
Joined: 06-08-2007


Message 2 of 38 (461205)
03-23-2008 11:13 AM
Reply to: Message 1 by Minnemooseus
03-23-2008 12:29 AM


Am I mistaken in interpreting the Federal Reserve Banks efforts such as the assisting of rescuing Bear Stearns as an example of socialism being used to save us from certain excesses and abuses of capitalism?
Hi,
In the case of Bear Sterns, we will have to wait and see.
As with Enron, it is possible that the management was disclosing false information in their proxy and in the media. The week prior to the collapse, rumors were circulating that the problem with mortgage-backed securities and the credit crunch would soon cause Stearns to become insolvent. Stearns management issued a statement denying this.
Stock holders didn't buy it and Bear Sterns stock collapsed because there was a run on funds by the consumer. As investors dumped the stock, the price started to fall dramatically. Bear Sterns was not a retail bank but a capital management and investment firm. Anyone with eyes and ears could see the mortgage and credit crisis was going to be a major problem for the company. Investors are jittery right now and the slightest rumor will cause stocks to fall. Panic and fear caused the Stearns stock collapse. Outside of shutting down the market, you cannot stop investors from selling their shares.
Now, if it can be shown that Bear Sterns put out false financial information to the investors, they would certainly be guilty of securities fraud; however, before we label this as an example of excess and abuse, let's wait and see. Most financial's are all over the board. National City Corp has lost nearly 80% of its market value due to the mortgage and credit crisis. Washington Mutual is also tanking. Things like this are going to happen in this environment.
Stocks tank and corporations become insolvent for all sorts of reason. Stearns is a large corporation, so it's getting the headlines. Until we have all the facts, it's premature to start calling for a lynching. They only had two options--file for bankruptcy or sell at a fire-sale price.
The Feds jumped in because they had to--their job is not just to regulate but also to keep the economy healthy. There are lots of ways they can do this -- adjusting the interest rate that banks use to lend to each other is just one way. In this case, the Bear Stearns news was obviously going to cause massive panic and a run on funds at other institutions if they did not do something quickly. NCC stock went from $13.87 to $6.56 in 15 minutes after opening just because of the panic caused by the news. The rationale was, if this can happen to a securities firm as large as Stearns, it can happen to anyone. Everyone wanted their money out of struggling financial's.
This is an example of the Feds doing what they are supposed to. They HAD to do something to stop the panic sell-off in the financial's or you would have seen about 5 other corporations eating it. The only way to counter panic selling is by instilling confidence -- in this situation, letting the investors know the Feds would step in during the mortgage crisis was the only way. It worked - there was a large rally on financial's the next day and the sell-off stopped.
Regarding abuses, do they happen? Of course. Is the system perfect? No system is. As long as there are human beings, there will be greed and corruption somewhere. There will always be people who seek to take advantage of a system and there will always be those who turn a blind eye to corruption. If someone thinks these things happen only in a free-market economy, they are naive.
BTW, if you want to make some cash, nows a good time to buy BSC. If you purchased shares at $2.47 on Wednesday, your'e now sitting at $5.96.

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 Message 1 by Minnemooseus, posted 03-23-2008 12:29 AM Minnemooseus has not replied

Replies to this message:
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Chiroptera
Inactive Member


Message 3 of 38 (461212)
03-23-2008 1:05 PM
Reply to: Message 1 by Minnemooseus
03-23-2008 12:29 AM


Am I mistaken in interpreting the Federal Reserve Banks efforts such as the assisting of rescuing Bear Stearns as an example of socialism being used to save us from certain excesses and abuses of capitalism?
Not really. It is actually a common phenomenon of modern industrial (and, perhaps, "post-industrial") capitalism.
The idea that the economy should be "regulated" by the mythical "invisible hand" was formulated by the earliest capitalists (like Adam Smith) back in a time when the economy was considered to consist of many small individual buyers and sellers, each one too small to have a significant effect on the industry. This is still the view held by grade school children and libertarians.
In real life the era of small businesses passed long ago, if it ever existed to begin with. Most industries are now dominated by a very small number of corporations forming oligopolies and/or oligopsonies. In this case, one corporation can and does have a huge effect on the industry, which seems to be the case here.
So, the goverment becoming involved in the economy is no more a violation of classical capitalism than the fact that Bear Stearns has, individually, such a huge potential effect on the economy.
But capitalism vs. socialism has never been defined by laissez faire vs. active government response. It is true that the long out-dated classical capitalist theory (now only taught in grade schools and libertarian circle jerks) always advocated no government involvement in economic affairs (except in unusual and carefully delineated areas), but that has never been the defining characteristic of capitalism.
The defining characteristics of capitalism vs. socialism is who controls the means of production. That is what the "capital" in "capitalism" means, after all.

There is a tragic flaw in our precious Constitution, and I don't know what can be done to fix it. This is it: Only nut cases want to be president. -- Kurt Vonnegut

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 Message 1 by Minnemooseus, posted 03-23-2008 12:29 AM Minnemooseus has not replied

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Silent H
Member (Idle past 5820 days)
Posts: 7405
From: satellite of love
Joined: 12-11-2002


Message 4 of 38 (461215)
03-23-2008 3:01 PM
Reply to: Message 3 by Chiroptera
03-23-2008 1:05 PM


I sort of agree with both you and Minnemooseus. You are correct if we are going to go with strict nomenclature, however M is correct if we go by popular terminology regarding gov't activity in the market.
What you call long outdated classical capitalist theory really is the most popular public conception as far as I can tell.
And in this particular case it is not just gov't regulation, it was the gov't taking public money and redistributing it to save corporations, who are treated as individuals. Thus while Bush and Co had no interest in redistributing public money to help save individuals who were losing their homes, as that would be socialism, there was no issue with giving the money to corporations. Of course if we used money that same way to ensure healthcare, that would also be socialism (to them).
Thus, using pop terms, they are in favor of socialism, only when it benefits the high and mighty.
libertarian circle jerks
Hey, I used to enjoy those!

h
"Civilized men are more discourteous than savages because they know they can be impolite without having their skulls split, as a general thing." - Robert E. Howard

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Chiroptera
Inactive Member


Message 5 of 38 (461216)
03-23-2008 3:18 PM
Reply to: Message 4 by Silent H
03-23-2008 3:01 PM


Thus while Bush and Co had no interest in redistributing public money to help save individuals who were losing their homes, as that would be socialism, there was no issue with giving the money to corporations.
The saying among us dippy hippy left wing types concerning American capitalism is: "profit has been privatized, risk has been socialized."
-
Hey, I used to enjoy those!
Heh. I actually have fond memories of when libertarianism was the most popular form of "conservatism" where I grew up. (Although, in those days, I was more of the Christian fundamentalist type of "regulate every aspect of your private bahavior, and build an efficient police state to do it" conservatism. I was always something of a contrarian.)

There is a tragic flaw in our precious Constitution, and I don't know what can be done to fix it. This is it: Only nut cases want to be president. -- Kurt Vonnegut

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Grizz
Member (Idle past 5472 days)
Posts: 318
Joined: 06-08-2007


Message 6 of 38 (461217)
03-23-2008 3:59 PM


It is really disconcerting to see intelligent people lose their objectivity and make blanket statements. The market is currently undergoing a very serious financial crisis that started in the housing sector and now is touching virtually every other industry. If you think the deal with Bear Stearns was meant to only benefit the 'high and mighty', you might want to reconsider this position. If the erosion in consumer confidence continued, there would have been a further run on funds that would have brought down not only a handful of other financials, but would have leaked over into other sectors very rapidly. It just takes one large domino to fall to take the whole market down with it.
When this happens, a lot of consumers would be waiting months for their FDIC insured deposit checks to be processed. In the meantime, the consumer's bills would go unpaid, causing further defaults in the housing market and credit environment. In addition, the companies that went insolvent could not meet the payroll and would be forced to employ massive layoffs, just as with Bear Stearns. This makes the problem even worse, further eroding consumer confidence and spending. I guess the Feds should have done nothing because someone rich might benefit.
To state any intervention is simply meant to benefit the high and mighty is a grossly oversimplified generalization. It really is not that simplistic, although it is quite easy to paint it that way if one wants to read into the situation whatever is expedient. There will always be those who frame corporations and a free market in a negative light, decrying them as evil empires who's goal is nothing but holding down the poor while propping up the rich. Likewise, there are those who will state the system cannot be made any better and is always just and fair. Like most extremes positions, the Truth is usually never so black and white and lies somewhere in between.

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Chiroptera
Inactive Member


Message 7 of 38 (461218)
03-23-2008 4:06 PM
Reply to: Message 6 by Grizz
03-23-2008 3:59 PM


Politics (and economics) is pretty much the same thing as religion. It has nothing to do with facts or logic; people believe what they believe, and will force whatever facts to fit into their beliefs, and trot out the same old tired jingles and claim it's a logical argument.

There is a tragic flaw in our precious Constitution, and I don't know what can be done to fix it. This is it: Only nut cases want to be president. -- Kurt Vonnegut

This message is a reply to:
 Message 6 by Grizz, posted 03-23-2008 3:59 PM Grizz has not replied

  
Minnemooseus
Member
Posts: 3941
From: Duluth, Minnesota, U.S. (West end of Lake Superior)
Joined: 11-11-2001
Member Rating: 10.0


Message 8 of 38 (461219)
03-23-2008 4:11 PM
Reply to: Message 6 by Grizz
03-23-2008 3:59 PM


Capitalism good, socialism bad - NOT
The bottom line in my starting this topic was to make a statement against the widespread perception that capitalism is good and socialism is bad (even evil). Both economic systems can have their failings, for which the roots are probably greed.
The "conventional wisdom" is that socialism is inefficient and wasteful. But what does this "conventional wisdom" have to say when the big capitalistic screw-up happens? One that threatens the entirety of the economy.
Added by edit:
If you think the deal with Bear Stearns was meant to only benefit the 'high and mighty', ...
I certainly agree with that the bailout benefits go beyond the 'high and mighty'. Would you, however, also agree that the banking and related crisis was largely brought on by the greed of the 'high and mighty'?
End edit.
Moose
Edited by Minnemooseus, : See above.

Professor, geology, Whatsamatta U
Evolution - Changes in the environment, caused by the interactions of the components of the environment.
"Do not meddle in the affairs of cats, for they are subtle and will piss on your computer." - Bruce Graham
"The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness." - John Kenneth Galbraith
"As democracy is perfected, the office of president represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart's desire at last and the White House will be adorned by a downright moron." - H.L. Mencken (1880-1956)
"Nixon was a professional politician, and I despised everything he stood for ” but if he were running for president this year against the evil Bush-Cheney gang, I would happily vote for him." - Hunter S. Thompson
"I know a little about a lot of things, and a lot about a few things, but I'm highly ignorant about everything." - Moose

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Silent H
Member (Idle past 5820 days)
Posts: 7405
From: satellite of love
Joined: 12-11-2002


Message 9 of 38 (461223)
03-23-2008 5:35 PM
Reply to: Message 6 by Grizz
03-23-2008 3:59 PM


I believe I was the only person to say anything about benefits going to the high and mighty, and so I take it you are replying to me?
You are correct that saying any intervention is meant to benefit the H&M would be oversimplified generalization. However it is not generalization to point to specific acts of specific individuals and groups and describe what their choices entail, nor what it would mean in pop terms.
I personally have no problem with corporations or free markets. I am a reformed libertarian, who only wants socialism (although chiro would disagree with my usage) to deal with common public needs (much as we have a socialized military and fire department).
That said, while one can certainly point to the bailout of BS as having effects beyond the H&M alone, that is really where the attempt at stopping the damage is being directed. A similar measure was not employed at the beginning of the crisis when the people that would have received aid were not H&M.
You are correct that some frame corporations in a negative light. There are also those who frame individuals in a negative light... as leeches on the free market... while positing corporations as saviors of the free market. In any bailout such as we just had, what will happen is that the H&M will be stabilized and be able to make a profit, while those who are not H&M will see just about nothing. They will have to just be thankful nothing worse happened... while some go fully down the tubes.
If we are looking at and accepting interventionist strategies, then we have to look beyond just using bailout measures at the corporate level. The last immense bailout did not end the recession we slid into. I doubt this one will either. But I know who has been helped live through it, and those who have not.
Edited by Silent H, : specific

h
"Civilized men are more discourteous than savages because they know they can be impolite without having their skulls split, as a general thing." - Robert E. Howard

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Silent H
Member (Idle past 5820 days)
Posts: 7405
From: satellite of love
Joined: 12-11-2002


Message 10 of 38 (461224)
03-23-2008 5:43 PM
Reply to: Message 5 by Chiroptera
03-23-2008 3:18 PM


"profit has been privatized, risk has been socialized."
I guess I'm hippy dippy, as that sounded about right to me.
"regulate every aspect of your private bahavior, and build an efficient police state to do it"
Oh my. While I may have left behind some of my libertarian ideas on economic policy, I have always been and always will be for deregulated human behavior. I guess I've felt that the only way to actually effect human behavior is to build a police state, which to my mind does more damage than the original problem (whatever that might be).

h
"Civilized men are more discourteous than savages because they know they can be impolite without having their skulls split, as a general thing." - Robert E. Howard

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Grizz
Member (Idle past 5472 days)
Posts: 318
Joined: 06-08-2007


Message 11 of 38 (461228)
03-23-2008 6:25 PM
Reply to: Message 8 by Minnemooseus
03-23-2008 4:11 PM


Re: Capitalism good, socialism bad - NOT
I certainly agree with that the bailout benefits go beyond the 'high and mighty'. Would you, however, also agree that the banking and related crisis was largely brought on by the greed of the 'high and mighty'?
Without a dobut, the current crisis was definitely brought on in part by predatory lending practices in the housing sector. These practices are not only unethical but also unwise -- lenders like Countrywide knew ahead of time that the market was over-valued, so did everyone else. Nobody cared -- lenders continued to hand out variable rate mortgages like candy to anyone who could sign their name. When the rates changed, people could no longer pay the premiums. Nobody was planning ahead and the classical risk models failed badly. It was blatantly obvious that the housing bubble would eventually burst at the seems(as it has now).
If anything, this is a case of the chickens coming home to roost. The fact is, the high and mighty who started it all are falling like dominos and going into the poor house - their greed and lack of foresight has caused these lenders to go insolvent. Amidst their frenzy for a quick buck, they failed to ask one thing - what happens if the market value falls and they cannot recoup the cost of the mortgage in foreclosure since the property was initially over-valued? Well, it happened, and they are now left holding securities worth 70% of their book value and many lenders have become insolvent and nobody will invest a dime in these securities.
It is definitely time for change. Congress must pass strict regulations to eliminate this type of lending practice to insure this scenario never happens again; for ethical reasons, but also practical reasons as well - without intervention, this type of scenario could easily bring down the entire economy. Yes, the current crisis was precipitated in a large part by greed. This doesn't make the system broke, it makes the system in dire need of change. EVERYONE stands to lose in this scenario and it is good for nobody.
If it's any consolation, the lenders that started it all are going broke as everyone cuts and runs. Also, the financials like Bear Stearns that used mortgage backed securities to invest can't by a pot to pee in. When your stock goes from $190 to $2.10 in under a year, you are not getting rich, you are getting busted. Trust me, they are not making out on this. Nobody saw this coming -- if they did, the greedy would have covertly bailed and taken their money out and kept silent(ala Enron).
One more note -- If this was an Enron-style affair, you would have seen the Execs selling their stocks well ahead of the collapse. This did not happen. Obviously, they did not this coming as the stock slowly dipped, remained stagnnant, then fell suddenly to $20.
Edited by Grizz, : No reason given.

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Grizz
Member (Idle past 5472 days)
Posts: 318
Joined: 06-08-2007


Message 12 of 38 (461230)
03-23-2008 6:52 PM


If we are looking at and accepting interventionist strategies, then we have to look beyond just using bailout measures at the corporate level. The last immense bailout did not end the recession we slid into. I doubt this one will either. But I know who has been helped live through it, and those who have not.
I guess it depends on the goal of the intervention. The way out of a recession is to get the consumer spending again. Capitalism requires growth. Intervention should be focused on quelling fear and instilling confidence. It doesn't always happen that way, and yes there is often favoritism and catering to the high and mighty. The Stearns bail-out was a case of the former. The Feds clearly had to stop the sell-off and let the consumer know they will jump in if needed.
Ultimately, the question that hounds us is how do you stop corruption and greed? There is noting wrong with wanting to make a profit. How do you fulfill that goal while keeping things honest. How do you temper man's desire to sometimes choose the wrong avenue or abuse others? Man has been asking these questions for eons and it goes beyond any economic system. One could argue that in a capitalist system, it is easier for people to manipulate the system.
Does this mean the system is bad and should be tanked or does it mean we need to address problems as they arise, learn from our mistakes, and strive for ethics and integrity? Easier said than done, yes, but what else can we ask for, while at the same time being realistic about prospects for change? These are complex issues that are not easily solved.

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obvious Child
Member (Idle past 4116 days)
Posts: 661
Joined: 08-17-2006


Message 13 of 38 (461243)
03-23-2008 7:54 PM
Reply to: Message 12 by Grizz
03-23-2008 6:52 PM


I think Grizz, that you're missing something more fundamental. This isn't the first time America has crashed. We had a railroad crash, then telegraph, then telecom, savings and loans, internet bubble and many others.
We essentially haven't learned our lessons. We keep going after the next big thing only to get massively burned. True, there are benefits to such booms, but there are also huge losses. If the past 100 years have shown us, regulation hasn't stopped this cycle. It is our culture that keeps setting us up for huge gains and huge losses.

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Taz
Member (Idle past 3292 days)
Posts: 5069
From: Zerus
Joined: 07-18-2006


Message 14 of 38 (461250)
03-23-2008 8:51 PM
Reply to: Message 11 by Grizz
03-23-2008 6:25 PM


Re: Capitalism good, socialism bad - NOT
First of all, I need to make it clear that I am an econ dummy. About the only thing I know about economics is that I can exchange a twenty dollar bill for 2 ten dollar bills.
Grizz writes:
The fact is, the high and mighty who started it all are falling like dominos and going into the poor house - their greed and lack of foresight has caused these lenders to go insolvent.
By poor, do you mean they are literally poor poor or do you mean they have to use a smaller private jet and settle for a smaller private island?

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randman 
Suspended Member (Idle past 4899 days)
Posts: 6367
Joined: 05-26-2005


Message 15 of 38 (461259)
03-23-2008 10:58 PM
Reply to: Message 1 by Minnemooseus
03-23-2008 12:29 AM


One can argue it was the FED that created the problem in the first place.

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