Roubini and Taleb: Government's Socialization of Losses Is Destroying the Real Economy → Washingtons Blog
Roubini and Taleb: Government's Socialization of Losses Is Destroying the Real Economy - Washingtons Blog

Wednesday, September 16, 2009

Roubini and Taleb: Government's Socialization of Losses Is Destroying the Real Economy

In an essay last month, Nouriel Roubini wrote:

This is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest...

The releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending.

Roubini has previously written:

We're essentially continuing a system where profits are privatized and...losses socialized.

Now Nassim Nicholas Taleb is saying the same thing:

After finishing The Black Swan, I realized there was a cancer. The cancer was a huge buildup of risk-taking based on the lack of understanding of reality. The second problem is the hidden risk with new financial products. And the third is the interdependence among financial institutions.

[Interviewer]: But aren't those the very problems we're supposed to be fixing?

NT: They're all still here. Today we still have the same amount of debt, but it belongs to governments. Normally debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer. But the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren. What is the effect? The doctor has shown up and relieved the patient's symptoms – and transformed the tumour into a metastatic tumour. We still have the same disease. We still have too much debt, too many big banks, too much state sponsorship of risk-taking. And now we have six million more Americans who are unemployed – a lot more than that if you count hidden unemployment.

[Interviewer]: Are you saying the U.S. shouldn't have done all those bailouts? What was the alternative?

NT: Blood, sweat and tears. A lot of the growth of the past few years was fake growth from debt. So swallow the losses, be dignified and move on. Suck it up. I gather you're not too impressed with the folks in Washington who are handling this crisis.

Ben Bernanke saved nothing! He shouldn't be allowed in Washington. He's like a doctor who misses the metastatic tumour and says the patient is doing very well.
(PhD economist Steve Keen uses the same analogy of a patient with a tumor and the unwitting mainstream doctor).

Socialism, Capitalism or Fascism?

Some, however, argue that the economy is more like fascism than socialism. For example, leading journalist Robert Scheer writes:
What is proposed is not the nationalization of private corporations but rather a corporate takeover of government. The marriage of highly concentrated corporate power with an authoritarian state that services the politico-economic elite at the expense of the people is more accurately referred to as "financial fascism" [than socialism]. After all, even Hitler never nationalized the Mercedes-Benz company but rather entered into a very profitable partnership with the current car company's corporate ancestor, which made out quite well until Hitler's bubble burst.
Is Scheer right?

I don't know. But Italian historian Gaetano Salvemini argued in 1936 that fascism makes taxpayers responsible to private enterprise, because "the State pays for the blunders of private enterprise... Profit is private and individual. Loss is public and social" (page 416).

This perfectly mirrors Roubini's statement about the American government's bailout plan.

Remember that one of the best definitions of fascism - the one used by Mussolini - is the "merger of state and corporate power".

That could never happen in America, right?

Again, I don't know. But consider:
  • The head of the Federal Reserve Bank of Kansas City, the former Vice President of the Dallas Federal Reserve, and two top IMF officials have all said that we have - or are in danger of having - oligarchy in the U.S.
Ultimately, though, whether we have economic socialism or fascism is not really important. Whatever we have, it isn't free market capitalism.


  1. We've never had free market capitalism. There has always been creeping-cronyism in the make-up of our political economy.

    Only now, -this creeping cronyism has gone right over the top. The collective pragmatic wonder of our empirical creations -has toppled over -and fallen -lifeless to the ground -shattering itself into a million crumpled and scorched pieces.

    It will not stand back up. It cannot stand back up.

    The destruction of too many of the necessary components -that were built by decades upon decades of trial and error- is beyond any description -or- any clever repair.

    Everything the government has done -has merely exacerbated the destruction, and made it more impossible to mend.

    Even the corrupt ethic that once held our social structure together, and made it work somewhat cohesively- has been dissolved.

    No one knows this better than Ben Bernanke. The financial manipulations going on right not cannot be sustained. And Bernanke's statement that the recession is over, read like a surrender to defeat.

    By Bernanke's own estimates and now far less sure knowledge, he need scores of tens of trillions of dollars just to continue on the insidious path he charted.

    And these raving pundits quoted here -cannot possible find the words to describe the devastation that is upon us, and that is still coming.

    They cannot describe it, because it is beyond the possibility of any of their imaginations.

    They think the economy is broken.

    Are the charred remains of a forest -burnt to the ground- just broken trees?

    I think not. I no longer want to think at all. The very knowledge of what has happened is beyond any comfortable contemplation.

  2. As some have suggested of late, it's up to us we can walk away from the countries debt , it's not ours it's their's. We don't pay they don't play, Then we get to start over with a new currency and no FED. The only real problme is in getting enough people to play. Read "Web of Debt" then you will be willing to play

  3. Of course America get nuetered, and by plan. Of course the dollar dies, new currencies evolve.

    But the rub is who controls the new emergent currencies. Meet the new boss, same as the old boss, but this time around the entire monetary system world wide is controlled by a few private hands.

    You havnt seen anything yet. The sick sad truth is humanity is doomed with a small minority wasting the worlds resources at the overpopulated masses expense. This is a situation that must be rectified, and soon..

    What you are seeing is the culmination of a plan, one which concentrates all control of money into a very few hands, giving them the power to do what must be done, which in effect is massive triage.

    There will be a cull, so huge most can not and will not even consider it possible; yet it will happen irregardless..

    If you are not on board, then in reality you are actively promoting the destruction of our biosphere and dooming humanity as a species. Mull on this a bit..

    But, if you want to avoid this I will tell you the one simple truth that will thwart the plan.

    Stop using the product. Its that simple. Thats all you have to do, all that you can do.

    Stop using the product, or accept your fate, as you are ensuring it via the use of the product.

  4. Call it fascialism.

    You dont need to look to Hitler's national-socialism to find cronyism in Europe. We are full of it, all the time. Our system has allways been very very corrupt.

    @First Anonymous, the USA had quite a free market specially during the time from president Andew Jackson until the war. Banks were completely separated from state, and they were allowed to fail. It was also a time with great growth for the economy.

  5. I'm not an economist - but help me understand something.

    Why can't we force this loss back onto the financial system? Why can't we move this to the asset side of the ledgar (a debt owed) by requiring the financial system to take out a loan (to us) and pay us back with interest.

    Take the assets off the banks books. Sell them to the highest bidder. Subtract the Feds balance for this miss. Claw back the rest.

    I'm all for punishing the crimials but what will really reform Wall Street and banking is taking their money away (all their personal assets) and making the industry responsible for the rest.
    RICO statues and the like are already in the books. They've just never been used against this type of crime.

    We may not get it all back - but we can recover a large percentage.

    If something is not done by the government to install some confidence back into the system
    (home and abroad). The whole thing risks coming down on top of us. (and wipes everybody out)


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