The War On Capitalism Continues

The bear rally continues…it is about to enter its 9th week. And the War on Capitalism continues!

The Dow rose again yesterday – up 101 points. Oil went up too – to $56. The dollar held steady. And gold was up again…to $911.

“Emerging market surge…Investors pile in on hopes of improved global economy,” says the Financial Times.

And this from the Telegraph: “Recession ‘over by Christmas,’ says Fed chief Bernanke.”

He did not say “Mission Accomplished.” That phrase was used too recently by another high official. In that event, the mission turned out to be not as accomplished as he thought.

Will the government’s War on Capitalism turn out better than their War on Terrorism? Or their War on Drugs? Or their War on Poverty?

“The last successful government program was WWII,” said Jimmy Breslin. Since then, almost all of them have been useless or counterproductive. But year in and year out, they’ve given federal hacks more money and power.

The current War on Capitalism didn’t begin a year ago, by the way. The feds have been conducting a dirty, undercover campaign against the free market for many years. Instead of permitting willing lenders and borrowers to set the price of credit, for example, the Federal Reserve imposed its own short-term rates many times over the last 50 years. Eleven times during that period, capitalism tried to correct the “borrow and spend” economy. Each time, the feds rushed in with more credit on even easier terms. By the recession of 2001-2002, the feds were intervening with such heavy hands that it set off the bubble in housing prices in the 2002-2007 period.

And when the bubble exploded, the fed’s dirty campaign turned into a major war with huge pitched battles…and millions of casualties.

Bloomberg reported yesterday, “nearly a quarter of US homeowners are underwater.” When the Fed flooded the market with so much easy credit, it pushed up housing prices way beyond what people could afford. Capitalism struck back – blowing up the dikes that held all that liquidity in place. But the explosion blew out the cushion of equity that kept homeowners afloat. House prices are still falling at a 14% annual rate. “Less than before,” say the bulls. But still going down.

This has left some communities – such as Salinas, California – with as much as one-third of the housing stock worth less than the money owed against it.

And in Victorville, California, the bank decided it had too many foreclosed houses. An entire new development of 16 houses – some completed, with granite countertops and all…some incomplete – had been foreclosed. Squatters and vandals were making a mess of the place. So the bank demolished the lot of them.

And overstretched homeowners who have an “Alt-A” or “Option ARM” mortgage are in trouble come 2011…when the majority of these loans will reset at a higher rate. You think it was bad when the first wave of defaults hit the United States? This could have even more catastrophic consequences.

Today, the results of the stress test on banks are out. They show some banks in good shape. Others need more capital. Bank of America, for example, is said to need another $34 billion. Wells Fargo needs $15 billion. GMAC and Citi both need more cash.

But investors decided to look at the part of the glass that was full rather than the part that was empty. They pushed up financial sector stocks generally.

If capitalism had its way, it would sort out the banks quickly. Banks that couldn’t raise the money they needed would go out of business. Their assets would be bought up by the solid banks. Life would go on.

But the feds’ war against capitalism prevents this kind of simple resolution. Instead, weak, mismanaged institutions are kept alive with taxpayers’ money.

“Trillions of dollars have been thrown at the system so that we can avoid the natural process of creative destruction,” write Matthew Richardson and Nouriel Roubini in today’s Financial Times.

Our next question: where is all this money going to come from?

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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1 Comment on "The War On Capitalism Continues"

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Jon Bain

Our next question: where is all this money going to come from?
Why, the illegal drugs trade of course. Reduce supply, increase demand and profit skyrockets. Confiscate the profits, and prop up your useless business with these profits. Works fine, until THAT bubble bursts. Then its back to square 1. Or perhaps square -10? Then they can make coffee and tea suger illegal. Profits multiply and everyone is the poorer.

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