Kapital has transitioned to the state (ref. AMA) Political Economix & Rational Expectations
What we have to realize is that ‘capital has transitioned to the state’; through the bail-outs and bail-ins, QE’s & SLS’s, LTRO’s & EFSFs; TARPs & twists; capital has transitioned to the state; it has happened, it is ‘what it is’; de-facto (not de-jure); capital has crossed the great libertarian 'blood brain barrier' and it did it @ a ridiculously low price with the greatest irony of all, no central planning!
In the US today, you have infinitessimally low volumes in capital markets and practitioners complaining of state planning; as if the state planned to take over all of the liquidity in the capital markets!?!?!? [duh?] It was the practitioner’s screw-up which handed control to a bunch of politicians who didn’t plan to have it.
The Credit Crunch (CC) is perceived apocryphally as primarily characterized by the collapse in value of sub-prime mortgages in the US, although the US certainly has a residential mortgage problem, anyone who visits the US knows that, the Credit Crunch is not that, its not about that. Another perspective could view the Credit Crunch as a long series of write-downs in the capital value of assets held by banks and large institutions and to a certain extent from the news bulletins and national and regional newspaper commentary that is what the CC looked like but that is a naïve perspective.
The CC has had more sophisticated implications than that and more complex. A critical aspect (from a political perspective) is the liquidity injections provided by the Central Banks to the global interbank markets and the asset swap arrangements with individual banks to support those liquidity injections. It’s that third leg which has changed the monetary (and thus macroeconomic) game forever. The Liquidity interventions, Asset Swap arrangements and widening of the client type able to facilitate of the “discount window” provided by the US, UK, European and Swiss Central Banks has been a step change in both banking and monetary and thus macroeconomic arrangements, comparable (as is becoming now often repeated) with nothing since the great depression or the second world war. Indeed the concerted action by the world Central Banks of the 12th December 2007 to provide a dollar swap liquidity facility to the European and UK banking systems in particular looks very similar to a student of economic history to the type of activities engaged in by the Federal Reserve around the time of Lend Lease or the Marshall Plan. This is not to be too melodramatic, it is important that we understand where we are and that we realize that there will inevitably be consequences.
When we see photographs of Bank CEOs walking along Downing Street to “Number 10”; one can be sure that “the game is up”! That meeting between the Bank CEOs and the UK Prime Minister occurred in March 2008 and followed a European Heads of Government meeting at Downing Street at Christmas 2007 simply to discuss the CC. We can be sure that similar meetings have occurred in Washington and New York for example, far less smaller financial centres such as Dublin, Sydney or Madrid. So, the key aspect of this step change is that the banking industry has accepted the support of the central banks and by default the central governments of the UK, Europe, Switzerland, Canada and the US in particular and in that acceptance the game has changed forever. An analysis piece in the Financial Times of April 18th 2008 depicted the true position of the Bank of England SLS (The Super Swap Shop as it was described).
“When the UK’s prime minister invited bank heads to an emergency meeting, they warned him of Armageddon if the government did not lend a hand. The Bank of England was apparently finalizing a plan to help revive bank wholesale funding by accepting mortgages written before December (2007) in exchange for lending banks gilts. Given that the Bank has virtually no gilts itself, nor can it issue them, this is, in effect, a government initiative.”
As has been argued by Martin Wolf in 2008 (Martin Wolf is associate editor and chief economics commentator at the Financial Times) the failure of the banking system flowing from the disappearance of liquidity as a consequence of uncertainty or downright mistrust of capital values has necessitated that the banks in Europe and the US support themselves at the Fed’s discount widow and the equivalent emergency liquidity provision facilities of the ECB, SNB, Bank of Canada and the SLS of the Bank of England. In doing so, the banks have politicized themselves. The politicians and arguably more importantly executive officers of government have no choice but to increase the burdens of regulation, supervision and reporting since it is in fact these public servants (as representatives of you and me) who are responsible for the continuing operations of the banking system on either side of the Atlantic, right now (August 208).
Martin Woolf argued
“Remember Friday March 14 2008: it was the day the dream of global free- market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Josef Ackermann, chief executive of Deutsche Bank that “I no longer believe in the market’s self-healing power”. Deregulation has reached its limits”.
In Europe; Capital had transitioned to the state by May 2010 when the ECB cajoled the EU into establishing the EFSF to electric shock capital out of the state domain and back into the private sector. The EU politicians were so (a) dumb they didn’t see that point and (2) you could say so “communist” that they thought capital (& the banking system) was far better under their control; smoking that Keynesian cool-aid generated by their huge steam engine models lead them to that conclusion! The EU politicians were also so dumb they didn’t see that the ECB was telling them they needed to setup their own bank if they wanted a state controlled banking system since the rest of the world would never trust a state controlled currency & thus the European Central Bank had at least to appear independent. No, No; Barroso and co, decided that the ECB would be the optimal channel of neo-Keynesian fiscal splurge! Look where that got them!
The UK has always been the analytical sandbox for new thinking in Economic policy in the world; its transatlantic position I think may have a lot to do with that (or is it that it just has ‘better’ economists?). The UK sits between Europe and America; not quite one or the other; sometimes more one than the other if you see what I mean. The UK was the test bed for Keynes’ policies (note not Keynesianism); which FDR then copied, same for the gold-standard bungee-jump (although Britain was rather chucked off that Indian wall) and then the state-labour partnerships of the 50s (which was the blueprint for Germany & then the EU); when that all blew up in 1974; the most radical (and honest) and most advanced Economic Policy approach in history was pursued to such great effect by Thatcher; monetarism, yes (originally Friedman) but more importantly Rational Expectation-ist Libertarianism (Hayek)! It worked, even Blair knew that. But Brown and Balls did not, they nationalized HBOS, RBS and Lloyds at a stroke because their Keynesian cool aid told them that they could stimulate the economy on a golden rule out of all possible constraints. They did the same thing as the EU; but (& this is the hilarious part); Balls and Brown left Osborne and Cameron holding the smelly screaming wean; going bankrupt tic by tic every day; 2 huge banks with nae money! No management and not a hope in hell of returning to the private sector. Worse than that Dave & George’s Con-Dem colleagues are rubbing their hands with glee; old foxy Vince wants a big green investment bank building wind turbines in South Uist; centrally planned by sandal wearers in Edinburgh (as long as fat-boy Alex doesn’t take Edinburgh away)! Gawd, we’re gonna have ‘Historic Scotland’ in charge of the economy!!???
Capital is the hands of politicians who neither want it nor know what to do with it; in Europe, the US and the UK! They didn’t actually ask for it & for a wee while in 2010 they thought they might be able to manipulate it but it got too big for them; it always was; it’s a dirty old grandmother that Kapital stuff; “the root of all evil tooooo-day”; bureaucrats & politicians cant hack capital; they cant do the math, never have, never will; what did that wind-farm cost? The olypmpix? The NHS? Ha!
Rational Expectations is a POLITICAL ECONOMIX which tells us that the people are smart; they aren’t very nice; they are very self interested & they are ruthless but they are smart & more than that; the REH (Rational Expectations Hypeothesis) tells us that you cant treat the people as dumb, dumb sheep in the aggregate like the Keynesian Models do, that is sheer stupidity, political stupidity! The Political Economics of now is game theoretic; its about survival of the fittest, the law of the jungle; An RE equation at a self interested individual level is a Consumption Function it is an explanation in a political context of self interested demand for cash, cash as a proxy for consumption, it’s a demand for money function. Friedman destroys Keynes' Consumption Function by disaggregating Savings across time & source, same thing Hayek does to Keynes' Investment. They both introduce people, smart people; in a game; self interested; out for all they can get; the way of the world; we are being screwed by Keynesian Models that view us as sheep in the aggregate and by politicians who think of us like that; this is particularly problematic in Brussels, where the Keynesian models still dominate; that world is upside down!
The REH is not political even the British Labour party in opposition right now led on the Treasury side by Ed Balls who was Gordon Brown’s technical number two in the UK Treasury when Labor were in power are using an expectational argument to explain why economic stimulus is not working to break the liquidity trap at the vortex of the current massive crisis. This is the idea of the self interested individual gaming the system.
Economic Policy is not about Left and Right anymore – Ed Balls, the Left Labour opposition “Shadow” Chancellor’ is running a rule based policy approach in opposition in the UK, his counterfactual economic policy is predicated on a monetary rule which accepts CROWDING OUT (& thus the limits of the effectiveness of Government economic ‘stabilization’ strategy). But more than that; his current policy rule takes account of expectations management by well informed citizens who might game away any expansionary policy strategies. There is a Reaction Function for the populace built into his economic model; he is a ‘Rational Expectation’-ist now. He has painted himself into a blind-spot, a little dunce’s corner from which all he can do now is shouting and point the finger at the coalition government; “yah boo – my forecast of the response lag of consumer demand is more accurate than yours because it is longer than yours”! Not only “we are all monetarists now”; they are all ‘Rational-Expectation’-ists now.
One thing does concern me, the politicians wont admit the obvious above; they wont come out and just tell us the truth; they are leading us on with a con trick that we still live in a democracy but the Political Economics tells us that economic democracy is finished; all we can do at the ballot box is vote for one or other form of state control. Rational Expectations wisdom tells us that is the current position. Y does = MX + C! That bunch of sham artists (the UK Labour party) who engineered this position in the UK in the 1st place have most to gain from this but they haven’t the balls (sic) for power; so rationally in the UK we are stuck with the Con-Dem compromise neither side of which wants what it has got. It’s all so dysfunctional; do ya think we need an intervention?
The UK is the micro model for the US on one side and the EU on the other. If we have massive unintended consequence of this credit blow up, lets face up to it in the political sphere; we need a technocracy a Platonic meritocracy to get us OUT of what has become a political hole. That’s what I think.
I wrote this as a reply to a debate I was having with an old friend – it grew slightly longer than the average email so I have presented it publicly here!
 I should trademark that phrase : http://www.asymptotix.eu/content/lunatix-are-grass-new-bretton-woods-proposition-europe-now
 Well that’s what ‘Social Democracy’ means “isn’ it” !!