[omegaman]

http://business.blogs.cnn.com/2012/0...ury/?hpt=hp_c1

[Captain Tom Coughlin]

No, but we don't allow it to work.

[omegaman]

Originally Posted by Captain Tom Coughlin

No, but we don't allow it to work.

Clarify?

[Captain Tom Coughlin]

The bailouts were a pretty good example. We take the risk of failing out of the equation because we are afraid of the consequences. The market said those banks should die, if this was pure Capitalisim they would have been allowed to die.

[horatio]

There are basically six forms of society.
The premodern one, modernity implying democracy and capitalism. We don't really gotta think about this.
Then there is anarcho-capitalism which reigned until it was challenged by communism, fascism and social democracy.
Anarcho-capitalism denies social antagonism respectively naturalizes it (social darwinism).
Communism on the other hand promises the merits of a classless society and intends to fight the class struggle out.
Like communism fascism perceives inequality, exploitation and so on as real problem but projects it upon jews. Its promise is that society is whole again once these outsiders are crushed. Contemporary European fascism (Breivik) projects inherent social antagonism upon Muslims.
Social democracy does not deny, fight out or distort class struggle, it moderates it via the welfare state and aggregate demand management. Or as Stiglitz put it, Keynes "save[d] capitalism from the capitalists", the alternatives being as outlined above communism or fascism.

We have had social democracy aka moderatedd capitalism since the thirties respectively fourties in the west yet the Thatcher-Reagan revolution paved the way back to anarcho-capitalism.
That's a bit of background on Roubini's (one of the few guys who predicated the financial crisis) statement and it helps us to answer the question. I clearly say no to anarcho-capitalism and clearly say yes to moderated capitalism.

To put history in a picture:

[horatio]

Originally Posted by Captain Tom Coughlin

The bailouts were a pretty good example. We take the risk of failing out of the equation because we are afraid of the consequences. The market said those banks should die, if this was pure Capitalisim they would have been allowed to die.

The bankruptcy contagion would have been enormous. The often repeated phrase "too big too fail" means in econonspeak that there is a negative externality. Unlike an ordinary company which merely has a financial impact upon its lender and, in case there is outstanding trade credit, its suppliers when it goes bankrupt a big bank has an impact upon many other banks and lots of companies. We already had a severe credit crunch after Lehmann died. Anything that implies unemployment rates of 20% or 30% is not really an option.

Once shadowbanks are regulated like ordinary banks, once Glass–Steagall is reintroduced, once the few big banks are split up into smaller banks (which can all only happen once Wallstreet doesn't basically "rent" both major parties anymore), once the negative externality of bank bankruptcies is negligible I am all for your "let them die" suggestion.

[Captain Tom Coughlin]

The credit markets remained frozen anyway, and in many way still are. You can't get small business loans. They bailed these companies out with no strings attached and allowed them to essentially just sit on the money. Pure, utter insanity. It's madness. This is why OJ Simpson has a higher approval rating than Congress (true fact, I kid you not)

[Captain Tom Coughlin]

And sometimes upheavel is good. A fire fertilizes the ground. This is a society in need of fertilizer if you ask me.

[horatio]

About "money for nothing and chicks for free", you guys basically bought the crappy derivative products whereas the UK basically bought shares of their banks. The latter is obviously the better solution as it implies smaller losses for the public.
About the ongoing credit crunch, opinions differ on how to deal with recessions. We basically did what Friedman would have wanted, a pure monetary solution. I am basically also a monetarist but the Japanese experience has shown that Friedman was wrong, you cannot get out of a liquidity trap purely with monetary policy. Fiscal policy is an additional tool which you have to use in such a situation. And yes, the big problem after WWII has been that we have not created public finance rules that force politicians to cut public spending during booms. I totally acknowledge that there are implementation problems about this tool but this does not imply that it is the wrong tool.
On a sidenote, of course monetary policy can still be helpful, especially in a balance sheet recession like right now. Helping to deleverage the public sector via putting private debt into the balance sheet of the central bank is good yet it doesn't directly create aggregate demand like fiscal policy does.

[horatio]

There are two key lessons which you learn when you study macroeconomics.
First, the whole is more than the sum of its parts. Of course it is a sound business decision to fire people when you face low demand but if all firms face low demand this implies unemployment. We don't really want to endure years with two-digit unemployment rates so we counteract.
Second, macroeconomics isn't a morality tale. When you have partied too hard you remain sober on the next day, when you have are indebted you reduce your spendings. Not so on the macro level, here the party has to go on.

Recently one of the three rating agencies, I think it was S&P, downgraded sovereign debt of several European countries. They said correctly that the course of the current problems in Europe is the imbalance of trade relations. Being stuck in the equivalent of the gold standard periphery countries with trade deficits cannot devaluate their currency and internal devaluation takes a lot of time as wages and prices are sticky.
Yet the austerity freaks over here (we Germans are the worst, Brüning seems to have reincarnated in Merkel) did not care why S&P downgraded them, they misused it as rationalization for their austerity policy.

It's like with a medieval doctor who bleeds the patient and then wonders why he doesn't get better. Actually it is worse than that, it is as if a modern doctor who has access to modern science bleeds a patient. Obviously he belongs behind bars ...

There is another angle to it which sounds slightly Marxist although it isn't. Workers, i.e. the large majority of the population, worry about unemployment whereas capitalists, i.e. people who gain a significant part of their income from capital and not from labour, worry about inflation, default and so on if they receive a large part of their income from bonds.
We have a conflict of interest between workers and bondholders. Now take a look at how current policies represent these two interests and you will partly understand why the employment situation is so dire.