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An End to a Capitalist Era – the Congress Bailout

Dow Jones September 2008

The first economic politics of the USA were founded on Adam Smith’s “Wealth of the Nations”. He argumented that the best economies worked based on the invisible hand of the market, who allocated the resources based on the individual’s needs and resources. This doctrine was so influential, that it is still present in the liberal ideologies of the most advanced countries govenrments. Or it was, untul yesterday evening.

When the Congress decided to pass the $700 billion bailout plan, it actually ruled something much more durable and important. It ruled the end of a ultra-liberal era, which started at the beginning of the 19th century and reigned the US free market economy until mrecently. It also shows that Harvard is no longer what it used to be.

The reason is simple – the bailout plan also allows an increased social protection for the US citizens (in the form of increased insurance of the banking deposits etc), as well as the possibility of the US government to buy troubled assets. It actually makes possible (and encourages) a much wider interventionof the state in the economy. In a market were anything beyond the most basic social protection is paid by the citizens, this new ideology turns the government into a more hands-on interventionist stance.

How will this fit with the ever laid-back attitude of the US institutions, noone can tell for the moment. And how will this fit with the widespread belief that the government is a poor administrator of market-regulated assets, again noone can tell yet. But the bailout measures show, beyond the huge bill paid by the US taxpayers, how desperate the Government is not to let the things slip out of any control.

Because in fact, what the investments banks did proved that a fully unregulated market economy can go too far. Enron and Worldcom accounting abuses now pale at the losses that the shareholders of the US companies have sustainedin the last months. Thousands of billions of dollars were (and still are) wiped per week from the stock market, where only the feeble rules of “stop-trading when the drop gets too low” are still enforced by SEC.

The bailoutshowsalso that when a shares market collapses, the investors are no loonger acting rational. Dow Jones was like a yo-yo in the last weeks.

But the clear tendency is downwards. In such a case, the calssical rules of the economic rational investors do not hold of course anymore. Now investing (or rather divesting) has become like a bloody battle – get rid of your enemy shares at maximum price and buy (if you still have money) what you can.

There remains also the question of whom the ultimate benficiaries of the $700 billion bailout will be. Of course, not the US taxpayer, who will see a higher inflation in the incoming months, as well as a depreciated dollar against other currencies. The beneficiaries will be those who get the money and who still can invest them – theose will get the money out the aid beneficiaries. And we will see probably who when some shares will start to rise…

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