With the recent stock market collapse and bear market, the critics of capitalism are out in force again; shouts that capitalism is dead or that capitalism is what caused this mess are growing louder.
But take a look around and think for a minute: is this a capitalist, or rather a communist society we live in?
Jim Rogers famously said in 2008, when the banks were bailed out en masse with taxpayer money: “This isn’t capitalism. This is communism for the rich.” I have yet to see a better definition of what is really going on.
Remarkably, the situation has remained so ever since, or has even advanced down the same path. And what we are seeing now in the markets is a direct consequence of that.
The selloff marks the breakdown of trust, a collapse of confidence of endemic proportions brought about by the fact that price discovery has been destroyed by repeated bailouts and endless interference from governments and central banks in the markets.
Free markets do not always advance in an orderly and linear fashion. In fact, they rarely do. Free markets punish failure and reward success – that is, in fact, their role.
Financial media in the West sneer at the Chinese authorities’ futile efforts to control the stock market and arrest its fall, and with good reason. But the same media are strangely silent when it comes to the efforts of authorities in their own countries to do the same.
Mario Draghi abolishes yield
Take for instance last week’s message to global financial markets from European Central Bank President Mario Draghi: the ECB will buy more assets in order to make up for the negative effects of market turbulence.
Just like the Shanghai Composite does when the “national team” of state-owned banks and brokers promises to buy stocks in China, European stocks, as well as Wall Street, rallied in response.
The way the ECB has interfered in markets is quite clear: investors, sensibly enough, had substituted government bond yields for exchange rates in order to make some sort of differentiation between weaker and stronger eurozone members.
Higher yields stood for weaker exchange rates in the periphery members of the single currency area, since the market could not price in those economies’ weaknesses via the currency channel. By embarking on bond purchases, the ECB made sure it killed this market mechanism of pricing risk. The free market is no longer free to price in the difference between Italy and Germany.
Another example is the Bank of England, which has mysteriously managed to maintain some influence over the markets, despite its inflation targeting regime becoming a mockery.
Governor Mark Carney repeated again recently that the bank’s interest rate rise is far into the future, blaming the fall in oil prices, among other things, for the delay in returning monetary policy to some sort of normality. Interest rates paid to savers by commercial banks fell again, while house prices jumped — at least, asking prices did.
The governor did not, however, feel the need to explain why the Bank of England did not take into account the rise in oil prices when inflation in the UK was running at around 5%. It should have raised rates then, but instead it said the effect of oil prices was not something it could control.
The fact that the unelected Bank of England feels entitled to take decisions that deepen inequality and favour one category of the public over another without being backed by solid economic arguments has nothing to do with a free market and everything to do with a controlled one.
The UK government meanwhile is throwing whatever subsidy it can at house prices, from Help to Buy equity loans covering up to 40% of the prices of properties to housing benefit covering the cost of rent for those who cannot afford to live in certain areas.
Market distortion sparks fear
The effect of these subsidies has been to distort the market to such an extent that it keeps over-leveraged and under-trained landlords in business, as well as developers whose work is often of shockingly low quality.
In the eurozone, the ECB’s asset purchases have increased moral hazard and have pushed much-needed structural revamping further. The eurozone seems more divided than ever, with politicians eager to blame “Europe” for their own inability to inspire reform.
There is talk now that the ECB’s next step or one of its next steps could be to buy equities direct from the markets.
But perversely, like in China, the more the authorities try to control the markets – be they stock, bonds or housing markets – the less they are able to bring back confidence.
After all, as Ronald Reagan famously said, the most terrifying words in the English language are: “I’m from the government, and I’m here to help.”
With all the state intervention in markets, no wonder investors are running to the hills. As RBS analysts said, “Sell everything.” Just make sure you do it before they outlaw selling.