Page 2 of 2 BOOK REVIEW
Too late to learn? The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our Economic
Future, by Robert Barbera
Reviewed by Julian Delasantellis
It is in the final stage of a Minsky expansion where all the greed and glory,
the delight and the destruction of unregulated finance capitalism, can be
found. All rational and practical limits against the assumption of risk and
leverage are abandoned; nobody has two quarters they can rub together in their
bank accounts or any other readily accessible sources of emergency cash. With
debt obligations far in excess of investment cash flows, more and more
borrowing is being used to fund almost all the daily needs of life. This
creates a boom in asset prices, which spurs more lending; indeed, the only way
people can pay back their old loans is with
new, even bigger, very short-term loans .
But what if the collateral to finance the new loans falls in value? At that
point, just like in the condominium markets in South Florida and San Diego in
mid-2006, the borrowing stops; so does the price appreciation that was addicted
to the ever-continually rising borrowing. The entire wealth-creation machine
goes into reverse, and assets and wealth are destroyed at a maddening pace. In
the current lingo, this asset price turnaround that opens the gates of economic
hell is now being called a "Minsky moment".
At Harvard, Minsky had studied under the king of the Austrian School of
economics, Joseph Schumpeter, and many see echoes of Schumpeter's famed
"creative destruction" in Minsky's theory of financial cycles. Minsky would not
have been one of these. Whereas Schumpeter believed that each successive boom
and bust cycle led to a more advanced and productive economy, Minsky believed
just the opposite, seeing in the successive financial crises that ended with
the Great Depression ever greater and greater danger, through the growing
amounts involved, to the financial markets and the economy in general.
As I noted here many times, Barbera observes that one common factor driving the
blowoff stages of bubbles is "TTID" - this time it's different - the belief
that what is on display amongst the irrational exuberance of rapidly rising
prices is not the fundamental human characteristic of greed in unholy union
with the dynamics of mob psychology, but an existential change in the human
dynamic forcing a basic re-allocation of capital from the old paradigm to the
new. As Barbera noted about his experiences at a 2000 White House Conference on
the New Economy, just a few weeks after the actual dot-com top:
I had
the misfortune to experience this sentiment firsthand, at the White House
Conference on the New Economy, in April 2000. As I noted earlier, Alan
Greenspan was the rock star at the conference, peopled almost entirely by true
believers. Somewhat inexplicably, I was also in attendance. After the main
session was held, all participants were assigned to breakout groups. I joined
about a dozen others. Our collective task was to answer the question: "What
could go wrong?" Not being the shy type, I volunteered within the first five
minutes of our round table that the obvious issue we had to grapple with was
the potential for a bursting of the large technology share price bubble.
Our moderator, a White House insider whose name, thankfully, I do not remember,
pounced. "This is not a bubble!" ... In the end, the group decided that the big
risk going forward, in this brave new world, was the technology gap that was
sure to worsen between the United States and poor African and Latin American
nations. Bubble? The word was never uttered again.
The year
2000 saw US president Bill Clinton's head, swollen huge from the victories over
the baying hounds of impeachment and the vengeful furies of Hillary, grow so
massive as to threaten the asphyxiation of the planet. So it's not all that
surprising that out of the fertile ground of national hubris and delusion the
dot-com tech bubble grew - 2004-06 proved that it was just as easy or easier to
grow an even bigger bubble with a dolt as president.
As this is a book targeted not for academics but for finance professionals, I
did not expect to see many encouraging words for Minsky's core policy
prescription for smoothing out the boom/bust cycles of finance capitalism - a
much bigger government role in the economy, up to and including some measure of
government control over the private market's investment decisions.
For Minsky, putting investment control in the hands of enlightened bureaucrats
whose pay packets were mostly unrelated to the gyrations of the boom/bust cycle
prevented lots of unnecessary investment during the boom, and supported it from
withering into non-existence during the bust. Barbera, echoing much of current
American political discourse, can't see much further than government's
inevitable waste:
Government projects, once they begin to spend, face
no such [spending] discipline. Benefits, as it turns out, are in the eyes of
the bureaucrat, they can be refined again and again so as to perpetually
justify investment projects. Indeed, at the worse, we may find ourselves
authorizing bridges to nowhere!
Bridges that, when reversed,
lead directly from Sarah Palin's house to the White House.
During the long, beneficent salad days of Greenspan's reign, the populace
regarded him almost as a sort of Olympian god of money, greeting him on his
trips to be among the mortals in the provinces with extended hand, Roman-type
salutes of adoration. These days, the salutes are the same, but they are
missing four of the previously present five fingers.
In his defense, the old fox has two refuges. One, that there was no evidence of
a real-estate bubble in the period up to 2006; two, that even if there was, the
pain of pricking it would have been worse than letting it burst from natural
over-inflation.
Minsky proves both these points wrong. First, it was his contention that
bubbles were not rare, unpredictable events, but natural, to-be-expected
features of modern finance capitalism. The rampant new borrowing required to
make the payments on the old borrowing, Minsky's key cenotaph of an economy in
bubble, blowoff phase, was self-evidently rampant in that long-passed period of
just three years ago.
As to Greenspan's defense that the bursting of the bubble would have been worse
than letting it explode naturally, well, currently, the US Department of
Labor's broadest measure of unemployment, its so called "U-6" index, is now
showing more than one in six American workers now either unemployed,
underemployed/working part time, or having given up looking for work
altogether. Doing things naturally is good, I suppose, unless its like natural
childbirth or speculative bubble bursting, where you can die from it.
To me, the most important insight gained from Barbera's valuable introduction
to Minsky is just how much it validates what all Americans witnessed with their
own eyes just a few years ago.
Then, the bubble madness was all around, symbolized by such cultural phenomena
as the mad rush to have the forests plowed under for another new cookie-cutter
housing development, the monomaniacal obsession with rising real-estate prices
at all social occasions, the children dropping out of college, or even high
school, to try to make their first million before their first shave, and my
favorite, a strange new agricultural sprout that seemingly burst overnight from
the ground like a tempting but ultimately poisonous kudzu on a small piece of
wood nailed to a stake, a hand scribbled magic marker written entreaty to "quit
your job to make $100,000 in real estate by next month".
In The Graduate, Ben eschews the advice regarding plastics, to first bed
his father's partner's wife, then to romance her daughter. The mother, the
inimitable Mrs Robinson, is none too pleased with this situation; she beats her
daughter in protest, crying "It's too late!"
"Not for me!" the daughter responds.
But, if as the cultural zeitgeist seems to demand, and in contrast to all we've
learned from Minsky, another bubble is so soon spun in another ill-considered
attempt to bring back the prosperity of the previous burst bubbles, it will be
too late to maintain the world capitalist economy in any now recognizable form.
The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our Economic
Future, by Robert Barbera, McGraw-Hill. ISBN-10: 0071628444. Price
US$27.95, 240 pages.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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