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WHERE ANGELS FEAR TO TREAD, BAILOUTS AND THE DAY AFTER

August 22, 2015

WHERE ANGELS FEAR TO TREAD, BAILOUTS AND THE DAY AFTER

Yesterday I blogged that the Dow was down 358 points from the day before, that Wall Street erroneously attributed such a sharp drop to a weakening Chinese economy, that both Chinese and American attempts to shore up their respective capital markets via intervention (with check books, cheap money etc. in hand) were futile, that the real cause of weakening world-wide economies (both emerging and mature) was the failure of adequate demand due to wage inequality and other such failures of the political class to provide the wherewithal to would be consumers which would stimulate world-wide aggregate demand, that intervention in capital markets treated the symptoms and not the causes, that we are in the throes of a transition from an industrial to a digital economy with all the economic dislocation that entails, that the immediate drop in the Dow and other equities markets is due to lack of funds in the pockets of would be consumers, that we are shooting at the wrong economic targets with the wrong ammunition etc.

That was yesterday. Today I find that yesterday the Dow again dropped precipitously, this time over 500 points in what appears to be a major correction in capital markets everywhere. Fortunately, a week end is upon us and we can hope things simmer down as our traders, investors and policy makers assess what is going wrong in our global economy and, I hope, come up with some new and different fixes than Chinese and American bailouts, which are Band-Aids and will fix nothing for most of us long term.

One can also hope that our political class (if not too busy exchanging insults and pocketing campaign contributions from the rich and corporate class) will conduct hearings with a view to passing substantive legislation that will enhance demand in our marketplace of goods and services which, along with systemic change to a new economy, comprise the immediate problems crying for solution. It is increasingly clear that both world-wide demand and production are headed south and that the global economy needs a tourniquet and not a Band-Aid to stem the blood-letting.

I wrote yesterday that we were shooting at the wrong target with the wrong ammunition but did not enlarge on that metaphor. I will now enlarge on that figure of speech. The Chinese are bailing out investors in their stock market in an (unconvincing) attempt to prove that their system works and that everything is or will be fine as this temporary glitch in the market is repaired. Query? If the system works why is it in a state of disrepair in the first place and why do they feel it is necessary to come up with billions of dollars in bailout money to prop up stock prices for investors? Why the (not so well concealed) pretense? Why don’t they wait and let the markets sort out winners and losers based on corporate performance without bailouts per “free market” economic theory and practice?

One could argue that their “state capitalism” in the final analysis doesn’t work or is at least not working in the present; otherwise, why is the government ponying up billions to prevent what must be perceived by them as a collapse of their capital markets? They are using the wrong gun and their bailout “ammunition” will draw a blank. Donated money is unearned money, a bailout by definition, and neither enhances demand nor increases production. As policy, it is an economic dud, and worse, it may be employed to divert attention from real solutions where, as here, the Chinese government has decided to favor the investment class over the working class in their country, a mistake they may in time regret.

So does that mean that money per se is meaningless in Chinese treatment of their problem? Not at all, but they have to shoot live ammunition at the real target – failure of demand both domestic and world-wide. The critical point to be made here is that their bailouts of a favored special interest and other such policies should instead be aimed at increasing wages and other forms of compensation generally to their hoi polloi so that such a stimulated demand among the masses will cause Chinese corporations to increase production and, in turn, return to profitability and recovery of their stock values.

We in this country have nothing to brag about in this connection since we are still involved in the bailout game, too. Americans all across the country of every political stripe have complained and are still complaining about the hundreds of billions of dollars we came up with to bail out the big Wall Street banks, their insurers and shareholders during the debacle provided us by the banks’ reckless investments which went south and brought on Bush’s Great Recession not so long ago – and from which the economy you and I live in has not yet recovered.

We did not allow “the market” to sift out winners and losers, as both classical capitalism and even Wall Street theorists insisted must be done without exception (until their ox was being gored). We instead favored bailing out the banks but not those unemployed as a result of the banks’ reckless and underregulated investment behavior in derivatives etc., a political decision which has proved to be a tragic mistake for ordinary Americans not members of the rich and corporate class.

The bank/insurer/shareholder bailout was (and still is under current law) a policy choice by politicians which favored corporate welfare over that of the rest of us and is still being played by the Fed with its near-free money policy for Wall Street investors under the ostensible grounds of fighting inflation and unemployment. Stripped of their formality and pretense, such giveaways are essentially trickle down economics in nature, and it hasn’t been trickling as corporate America has found better and more profitable investments elsewhere than in America. It certainly hasn’t worked out for those of us who live in the “other economy.” We can’t even get political consensus on an increase in the present coolie wage (aka the minimum wage) while the Dow (even with bad readings in the last few days) has achieved historic highs. It’s as though policymaking is in a time warp and we are back in the Industrial Revolution of Charles Dickens and Karl Marx – but with new gadgets.

I conclude from my take on the scene that (1) The Chinese need new guns, targets and ammunition, and (2) Our country needs changes in monetary Fed policy, an end to bailouts for commercial activities in allocation of market risk and an emphasis on policy ending wage inequality which would result in enhancement of aggregate demand which would in turn enhance corporate profits. Since the process in effecting such changes is political, it is clear that we need new and different politicians in charge of policymaking which consider the people as their only special interest to be served, so let’s get on with that process.  GERALD    E

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