News & Analysis
What Is Naked Capitalism?
ECONNED shows how the financial crisis is ultimately rooted in dubious economic theory. Its wide-ranging historical treatment starts with changes in methodology in the economics profession in the decade after World War II, leading to the rise of neoclassical economics and financial economics, which over time came to dominate policy thinking. These ideas were seized upon by conservative and corporate interests to promote deregulation starting in the 1970s, which included deregulation of financial services. But as ECONNED explains, financial markets operate differently than goods markets. Most importantly, they lack a propensity to self-correct. The result of deregulation of financial services was a rise in predatory behavior and looting, which unwittingly aided by overly accommodative Federal Reserve interest rate policies, produced the financial crisis. – Interview with Naked Capitalism founder
Dominant Social Theme: The problem with capitalism is that it is not regulated enough.
Free-Market Analysis: Naked Capitalism just picked up an article attacking DB as a "parody" of Austrian finance, so we thought we'd do a bit of research to find out why it posted the story. You can see our initial response here: Attorney Responds to the Daily Bell.
The founder of Naked Capitalism is Yves Smith, a pen name of Susan Webber, and she has written a book called ECONned. She gave an interview about the book (see above) in which she said that it was based (at least in part) on the idea that financial markets lack the propensity to "self correct."
She also said that the financial crisis was caused by financial deregulation and aided by "unwitting" Federal Reserve interest-rate polices. We don't think so. What we tend to believe after a century or so (actually closer to 500 years, collectively) of running central banking, those who seem to be in charge know EXACTLY what it does to the larger economy. No, we don't think it is unwitting at all.
Here's a question: If after 100 years, central banking officials don't understand the results of their policies, should they (the institution, anyway) be given power to run economies? And if they DO know what central banking does to an economy, aren't they being malicious (to say the least) in continuing to foist this system on everyone else? Central bankers would seem to be either ignorant or malicious. Either way, what are they doing with the power to run and ruin economies?
In fact, what central bankers do over and over is "fix" the price of money. They do so by regulating its volume and worth. Most recently, the Fed is said to have issued US$16 TRILLION into the marketplace to support an economic system that is dying.
They should have let it die quickly. Instead, people throughout the Western world are being tortured by the money supply. One tallies the cost in human despair: People lose jobs and houses, even commit suicide. Old people eat cat-food because of horribly low interest rates.
Meanwhile, the powers-that-be launch war after war to protect this dysfunctional system by distracting people's attention and further militarizing what is left of Western economies. Depleted uranium has killed or sickened millions overseas; still bombs drop and the poison drifts down from the sky in a gentle, endless, agonizing rain.
The modern money system is apparently the flip side of the modern economic system. It doesn't have to be this way, though. The only arbiter of money, in truth, is the marketplace, which regulates the creation of money naturally through supply and demand – usually through the circulation of gold and silver. Too much and the price goes down and less supply becomes available. Too little and the price goes up and more supply becomes available.
It is a simple fact that price-fixing doesn't work. Doesn't. Can't. Ever. So ... here is another question for pro-central banking advocates (or even those who merely think the system is unwitting): How much is too much? Alan Greenspan himself admitted early in his tenure that he couldn't find a way of accurately measuring how much money an economy needed – except in hindsight (when it's too late).
As Austrian economics points out correctly, the overprinting of money, which central banks (and especially the Fed) do constantly, swells the economy with overconfidence and currency. This is inevitably dangerous.
Eventually, when the markets reveal the mass of promotions to be unworkable, there is a crash and people's investments lose value. If the crash is deep enough, people lose much of what they worked for. Usually, central bankers do not. Meanwhile, remaining industry is further consolidated by the powers-that-be with additional central bank-printed capital!
One more thing. As a side effect, the powers-that-be use major downturns to pass more government regulation. Since the elites control governments behind the scenes via mercantilism, the central banking cycle is inordinately profitable. It consolidates both industry and government control in their hands.
Still another point: Much fraud in financial markets is CAUSED by the overprinting of money. Such euphorias make people over-confident and greedy. It makes them easily suggestible. They participate in investments they never would involve themselves in during a less euphoric time. This is why we disagree about Naked Capitalism's approach to the markets (if we understand it properly).
A free and fully deregulated market absent central banking and other distortions would likely be self-corrective; the Invisible Hand would work. But that's not what we have. Central bankers didn't "unwittingly" cause the current economic crisis. The system is SET UP to cause it.
Over the years, central banks consistently attempt a "soft landing," thus perpetuating one side of the larger business cycle. It is like a balloon that is puffed up until it bursts and a depression ensues.
During such times, nobody knows what to invest in anymore. It is not clear what companies are viable, given the incessant money stimulation and central banks' propensity to puff up their own distribution system of commercial banks and other huge industrial elements. Sound familiar?
Go to any city center and you'll see dozens of gleaming bank headquarters. The world is overbanked; Banking is the last big bubble, though no one ever writes about it.
The central bank itself is the fount and fundament of the problem. If one de-emphasizes its role (or even claims its manipulations are merely unwitting), one cannot correctly analyze larger issues, in our view.
And now we have our answer as to why the site posted the story referred to above. It is twofold. First, the Daily Bell is a proponent of the laissez faire (unregulated) marketplace; second, because one of its principals once had SEC troubles. Thus, the article fits within this larger meme – that "naked capitalism" on its own is dangerous and needs to be regulated. And those who are proponents of the Invisible Hand (versus big government regulation) are inevitably crooks.
In fact, we don't think a rational case can be made for regulation any more than a rational case can be made for the money-fixing of central banking. Is regulation ever REALLY effective? The 1930's convulsive change in the financial industry produced the SEC, the NASD, the NYSE (as a self-regulatory organization), Glass-Steagall and basically introduced the idea that Wall Street itself needed federal oversight.
But here we are, with worse problems than ever. Now we are being told we need still MORE regulation. Regulation and laws generally are a price fix just the way money printing by central banks are a price fix. One can argue that laws and regulations are NECESSARY but one cannot argue that they do not distort the larger marketplace.
Here is just one example of how counterproductive regulation can be. In researching a book on Wall Street (for about five years) one DB-associated writer discovered that the NYSE's former floor-based specialist system has a much different history than is ordinarily related. As even the Economist magazine pointed out a number of years ago, the specialist system was the result of one floor broker breaking his leg and standing in one place. Eventually, he began to specialize in a single stock. And thus the specialist system was born. Untrue.
In fact, from what we can tell, the real reason for the specialist system was because the NYSE was consolidating and buying up other exchanges in the 1800s. One exchange it couldn't buy was the one run by the "Uptown Boys" that were doing continuous trading when the NYSE brokers were still involved in auctions.
Eventually a deal was struck. The Uptown Boys agreed to come downtown if they could have stock franchises and the NYSE began continuous trading,which was more lucrative for brokers. And that's what happened. The specialist system was apparently born out of a business merger.
One cannot fully appreciate the ludicrousness of this unless one studies the subject. In the 20th century millions of words were written about the specialist system. Theses were written; degrees were handed out. The SEC debated the issue endless, especially after the 1987 Crash. And yet, the system was NEVER intended to protect investors from stock crashes, nor could it. A single specialist couldn't prop up his stock during a panic. He didn't have the capital to do so. No one did.
But nonetheless, the specialist system became an entrenched investor protection. The mainstream media reported on it solemnly and the NYSE honchos were very happy because their business compromise had been blessed by the regulatory authorities and turned into a market necessity. This is often how regulation seems to work. It facilitates regulatory capture. It blesses self-interest with the force of law.
Modern, centralized Wall Street is the RESULT of regulatory forces. The abuses in large part are the RESULT of regulatory price fixing and central bank money manipulation. It's fairly indisputable, in our view.
Why does this system persist and prosper? Well, as we have pointed out, it feeds on itself. Also because there are powerful interests that want it to. It's unfortunate, but after a combined half-century or so studying the way the modern financial industry works, we've concluded that there is a power elite interested in creating one-world government, one that needs to promote regulatory rule in order to create global dominance.
This is no joke. This elite that runs out of the City of London and elsewhere, doesn't just want to create world government; it actively wants to suppress the burgeoning human population – and the implication is that it wants to do so violently if necessary.
One simply needs to search the Internet for Georgia Guidestones to see what may be in store. Or read the writings of the Club of Rome and see who is associated with THAT.
It is unfortunately a basic dominant social theme, and an effective one: We need government to ensure that capitalism doesn't get out of hand. Government must be seen as the arbiter of fairness and a proponent of justice for the little guy. In fact, the calculation is much more basic: No government, no new world order.
Conclusion: We perceive an increasing number of websites that pretend to be laissez faire or pro-free market but are actually supporting the meme that free markets work best when they are under the supervision of an extensive (and growing) regulatory regime. Unfortunately, they never really attack the cause of the problem, which is money printing. This would seem to be an evolving dominant social theme of the elites as they ready their next attack on what's left of the free market, especially its financial entities.
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Posted by flying_pig on 11/19/11 09:18 PM
WTF? Wall St is the invisible hand now? Have you ever heard of the holy trinity of Goldman Sachs, the US Treasury and the US Federal Reserve? Nah, that's just the invisible hand. Bollocks.
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Posted by Bischoff on 11/18/11 08:13 PM
I am glad I was of help.
Yes, it is very important to have definitions and concepts firmly in place. Without them there is no possibility to construct a working paradigm.
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Posted by dave jr on 11/18/11 07:12 PM
Ingo,
So often arguments over principle would be non-starters if each had the same definition for key words. Thank you for laying it out in simple language. This helps my understanding.
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Posted by Bischoff on 11/18/11 06:12 PM
Dave,
If you understand that constant marginal utility (meaning completely liquid, MU = 1) is only found with Gold, then you understand that the liquidity of any other commodity must be less than that of gold (MU = [1).
The liquidity of any other commodity is a fraction of that of gold and it is this "fraction" which in common parlance is termed "price".
The big mistake people seem to make, is to set "liquidity" equal to "value" and "value" equal to "price".
"Liquidity" means the rate at which a commodity is accepted for payment. The closer the rate is to "1", the more liquid the commodity. The commodity which has the highest liquidity is Gold for which the rate is "1".
"Value" is determined by a measuring device. The measuring device in valuing of goods and services it is the amount of "work" (joules) required to produce them in relation to the amount of "work" (joules) required to mine and refine a specific amount of gold.
"Market Price" is the "utility" of a product plus the "value" of a product arrived at in a "free market" arbitrage transaction.
As I stated before, since only Gold has MU = 1, any other good or service must have a MU = [1. The "price" of any good and service is its "liquidity rate" divided by "1".
If you want to find the "price" of gold, you divide its "liquidity rate" by "1". The liquidity rate of gold is "1". 1/1 = 1 meaning there is no fraction and therefore no "price". Gold's liquidity, which relates to its value (work to produce it) makes gold the ONE commodity which has no "price", and which is also the measuring device for the "value" of any other good or service.
Real Bills started to evolve during the Middle Ages to solve the problem of gold to function as currency. Gold was always the "most liquid" commodity and therefore an ideal currency (means of exchange).
However, after the "Barter System" evolved into the "Money System" (Gold = Money), the demand for goods sky rocketed. Soon the amount of physical gold available to finance the production of goods, and to also facilitate the exchange of goods, proved insufficient.
Real Bills evolved to finance the production of goods which could be sold with relative certainty in a period of 90 days. Those who furnished supplies to an artisan or merchant didn't ask to be paid with gold on delivery of the supplies. Instead, they "drew" a Real Bill on the artisan or merchant who promised to pay in full within 90 days. With the signature by the artisan or merchant on the Real Bill, it became a non-recourse, negotiable instrument which could be immediately discounted for gold by the supplier. The Real Bill is not a "credit" instrument, because the party who decides the deal is not the supplier, it is the artisan or merchant. The supplier can discount the Real Bill immediately. On the other hand, the artisan or merchant has the unrestricted right to prepay it.
The "drawer" and "drawee" on a Real Bills which can be discounted, is totally different from a "borrower" and a "lender" in a loan transaction which is done to earn interest.
Now, I come to your specific question, "Could you explain why real bills can not constitute "money"... ???"
Real Bills could be compared to slips for payment. Instead of these slips, consider payment takes place in kind. The items such as bread, butter, milk and any other good which can be sold within 90 days are used as payment in kind to pay suppliers and workers. The suppliers and the workers then end up with all kind of goods in excess of their consumption needs. So, they start to trade amongst each other. After they have traded and consumed everything, the whole system is said to have "cleared".
However, people are conscious that they need to save for old age or when they get sick. So they can't consume everything, they have to set something aside. The goods to set aside however are not long lasting, and they tend to spoil. Therefore, if they can find a gold miner and trade with him some of their consumption goods for gold nuggets, they can then save the gold nuggets for old age and not lose value.
People spend 90% plus of their income on consumption. Trading back and forth by using Real Bills (or currency created against them) is perfectly fine. It is for 10% of income used as savings for which gold needs to be available.
Therefore, if the currency created against Real Bills is redeemable for gold, then the system can work, because it allows production and consumption to take place without requiring gold to finance it. Therefore, enough gold is left for people who want to save by turning redeemable currency into gold. Redeemable currency conforms to the requirement of Section 10, Article I of the U.S. Constitution and qualifies as legal tender in payment of debt.
Real Bills are clearing instruments. Real Bills clear all the trading back and forth. Real Bills are NOT money, they are ONLY a "currency", a means of exchange.
ONLY Gold is Money by virtue of having constant marginal utility.
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Posted by rossbcan on 11/18/11 12:31 PM
"you have to know how to regulate"
regulation by third parties is FUTILE (their self-interest, in their forceful opinion, trumps YOURS):
Click to view link
... and, if you read Joel Wade's companion article today, it is clear: self-regulation is crucial. Or, per my link above, smite aggressors "after the fact" should they start running amok, as in NOW.
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Posted by christof on 11/18/11 09:49 AM
I don't advocate irresponsibility, au contraire and I certainly do not advocate moral hazard of privatizing profits and socializing losses. And that was not my argument. And 2 wrongs don't make a right either. And I repeat : the "freedom" of financial players over the past century - i won't dare to use the deregul... word - has caused a lot of trouble. Regulation is not in se a bad word, you have to know how to regulate. In JS Mill world, freedom means "executing one's freedom without hindering the freedom execution of others". And when that occurs, a police officer or regulator or whatever steps in. I am afraid that a lot of people are hindered right now in executing their freedom by action of financial markets. And I am in it 24 hours a day and survived 2008 and 2011.
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Posted by christof on 11/18/11 09:37 AM
It seems that your imagination lifts this game to a higher level : we all are God ? Be your own God ? may be overoptimistic and naive ? I remember reading some of Gilders' books in the 70ies where enterpreneurs where "givers" and altruists. He even gave religious characteristics to the market place. I had a good laugh. Problem these days is that too many people take this too seriously.
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Posted by dave jr on 11/18/11 06:00 AM
"Guess what... ??? The two graphs for oil and gold are indeed synchronous. Check it out."
That is what I meant.
My other point was, when you say the price of gold is zero; it is confusing because you are quantifying that which you say is unquantifiable.
Could you explain why real bills can not constitute "money".
Thanks
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Posted by rossbcan on 11/18/11 05:44 AM
"Does that mean all the goods you can exchange for it are also universally recognized as stores of value... ??? "
No, just the necessities of life, such as food, energy, time-savers. Other "values" are subjective, perhaps frivolous to all others.
... because personal (subjective) life is the highest, universally acknowledged "value", consisting of the time and energy available, from beginning to end. Anything that allows it to continue (food, peace... ) or enhances it has "value", to you. Some others covet this "value" (your property) and weigh the "value" to them as being "worth it" to aggress as opposed to trade to acquire it.
Anything that is common in this area to all human life is a store of value. Some stores of "value" such as food are perishable, but still universally recognized as having universal necessity and therefore "value".
Gold is just a medium of exchange, facilitating trades of "value" for "value". It's "value" is determined by what it is traded for.
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Posted by Bischoff on 11/17/11 07:54 PM
"It's "value" AKA "price" is what people are willing to trade for it."
Oh, ya... ... based on what... ???
You say it is nothing more than a universally acknowledged store of value. Does that mean all the goods you can exchange for it are also universally recognized as stores of value... ???
On the other hand, if gold is the only universally acknowledged store of value, I wonder what causes it to be such... ??? Do you have an answer to that question... ???
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Posted by Steve L. on 11/17/11 07:06 PM
Ms. Webber might have benefited from reading Cleon Skousen's "The Naked Capitalist" to help her understand the reality of naked capitalism, if her mind is sufficiently open to ideas other than leftist dogma. I predict that Skousen's use of the term will have much better staying power in the face of attempts to co-opt/confuse yet another important idea.
The Daily Bell has, in the past, tried to push for a distinction between two widely divergent economic philosophies that are bedfellows only because of the Marxist intoduction of the term "Capitalism": the first being Adam Smith's concept of decentralized free enterprise and the unseen hand that guides free market actions; the second being the philosophy of capital that is constantly moving to centralization via monopolism or cabalism and goes under names such as merchantilism, monopolistic corporatism, and crony capitalism among others. The latter is the evil twin of the former only because they are framed under the unfortunate terminology of capitalism. OWS (the legitimate aspect of that movement, that is) is in opposition to the latter, which I prefer to call Monopolistic Corporatism. If that distinction can ever be made in the minds of the public there just might be and erosion of the veneer of support for that illegitimate expression from conservatives and liberals alike, freeing true free market principles to be exercised without being besmirched by the albatross of a market philosopy that enslaves nations. Please continue to press the distiction.
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Posted by rossbcan on 11/17/11 06:42 PM
"price" of "money" is what leads you up a blind alley."
In my reality, if gold is money "priceless", it costs whatever the lowest bidder seller of gold is willing to accept in MATERIAL GOODS / SERVICES, from me, per unit of gold.
I, as a gold "seller" will, assuming I am willing to "sell" will only accept the highest "price" I can achieve, in terms of MATERIAL GOODS / SERVICES from buyers.
Gold is nothing more than a universal acknowledgement of stored "value", by historical consensus, resolvable as a medium of exchange for something else.
It's "value" AKA "price" is what people are willing to trade for it.
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Posted by Bischoff on 11/17/11 06:23 PM
Hello Dave,
"How so? About the only thing gold has remained equilvalent to is oil."
When you say this, you are using the USD as the measuring stick, a measuring stick which amounts to a rubber band. Why... ???
The USD as the choice of currency for the denomination of the Oil Bill was agreed to between the Saudis and the U.S.'s William Miller of the Treasury and Paul Volker of the Fed during a meeting in Jamaica in 1980. I won't go into the actual arrangement, except to say that it benefitted both parties.
What does it mean to quote Saudi oil only in USD... ??? It means that the USD is backed by the value of Saudi crude oil. The Saudis are the marginal cost oil producers, and they and the U.S. Majors collude on the "price" of world crude.
To your question, do you know what it means for a commodity to have a marginal utility which is constant... ??? It means that it is the one commodity you would still accept for nothing, after you have turned down every other commodity which was offered to you for nothing. You are not saying that you would turn down gold in favor of crude oil, do you?
To maintain that "the only thing gold has remained equilvalent to is oil", is a statement that points out the obvious.
If the USD reflects the value of world crude, and the value of world crude is the result of Saudi collusion with U.S. majors, then my assertion that gold has marginal utility which is constant, must show up in the comparison charts of the value of world crude and gold measured in USD.
Guess what... ??? The two graphs for oil and gold are indeed synchronous. Check it out.
It isn't crude oil which has constant marginal utility, it is gold. It isn't crude oil which is Money. It is only Gold which is Money.
You are being fooled by gold being quoted with a "price". There is no such thing as Gold having a price. Gold is Money, and Money has no Price.
To talk about the "price" of "money" is what leads you up a blind alley. That's exactly where the ME and PE wants you.
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Posted by rossbcan on 11/17/11 02:24 PM
oops... christof I'm sure you know that "crap happens" is just a lame excuse of predators.
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Posted by dave jr on 11/17/11 02:16 PM
I'll assume that was not addressed to me.:)
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Posted by dave jr on 11/17/11 02:13 PM
"so freedom implies the ability to screw to screw your customer, client or whoever, is that what you're saying ;"
Yes, and also the freedom to not be held down by regulation, to be screwed. The freedom to avoid being screwed. And to hold individuals, not their constructs, responsible for their actions.
It takes a 100 demonstrations of trustworthiness to gain one customer, and only one act of untrustworthiness to lose them all.
Unless there is a magical power enforcing morality in the market, there will always be risk. There is no savior of the material world. To assign that role to an external entity, is to irresponsibaly deny the magical power of self preservation placed within each of us.
If you want a savoir, look within.
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Posted by rossbcan on 11/17/11 01:55 PM
"every accident, from Wall Street 1907 to Wall Street 2008"
You believe "crap happens"?. THEY claim they are "accidents", but, THEIR modus oparandi is:
"sell" a regulatory "structure" under warm and fuzzy pretexts of "this WLLL happen" knowing full well that "that will happen", claim THEIR profit and OUR loss as "unintended consequences", next "grand, fraud, civilization".
The reason that the get away with this is they have arranged matters such that "those who profit" by their actions are not those "who pay the costs (loss)". Private profit (by coercers / slavers), socialized loss, with OUR guns of state preventing us from defending ourselves. Contrary to Justice:
Justice Defined: We are all free to profit or suffer and learn (adapt to excellence) by facing the consequences of our OWN choices. Injustice is to be forced to suffer the consequences of choices of unaccountable (irresponsible) others..
"The danger is not that a particular class is unfit to govern. Every class is unfit to govern. The law of liberty tends to abolish the reign of race over race, of faith over faith, of class over class." ~ Lord Acton
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Posted by dave jr on 11/17/11 12:36 PM
"Take a look at your history books : every accident, from Wall Street 1907 tot Wall Street 2008 has 2 main ingredients : bad monetary policy by central banking (and austrain boom-bust credit cycles) coupled to deregulation/selfregulation accelerating the process."
Does bad monetary policy of individuals carry any responsibility? If I trust you with with my cherished possession and you defile it, was my trust misplaced? Do I need a third party to correct my error? Why do you advocate irresponsibility and helplessness?
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Posted by rossbcan on 11/17/11 12:32 PM
Noted, Okey Dokey. Your wife Lucid not coming? May be dicey:)
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Posted by christof on 11/17/11 12:05 PM
so freedom implies the ability to screw to screw your customer, client or whoever, is that what you're saying ; great society, and when thing blow up, you can always say "hey, it was the market" or blame regulation (yeah, right). I call that cowardness my dear friends. I am not advocating absolute government control.
But I think a minimum minimorum should be in place. Take a look at your history books : every accident, from Wall Street 1907 tot Wall Street 2008 has 2 main ingredients : bad monetary policy by central banking (and austrain boom-bust credit cycles) coupled to deregulation/selfregulation accelerating the process. Denial is more than just a river in Egypt
Reply from The Daily Bell
The 20th century built a huge regulatory state in the West. You think things are better?
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