Digging Deeper and Deeper : Investment Banker Turns to Karl Marx For Solution

George Magnus is senior economic adviser at UBS, came up with the following op-ed in Bloomberg, showing just how much ignorance and greed is hidden in one of the least productive segment of the society: the investment bankers.

Policy makers struggling to understand the barrage of financial panics, protests and other ills afflicting the world would do well to study the works of a long-dead economist: Karl Marx. The sooner they recognize we’re facing a once-in-a-lifetime crisis of capitalism, the better equipped they will be to manage a way out of it. 

We are not facing a crisis of capitalism, we are facing the results of 70 years of socialism, with central planning dictating interest rates and investment opportunities, and central planners implementing amazingly counter productive policies (propping up bubbles after bubble). The same socialists gave also to the bank the legal permission to counterfeit money — paper money, is not a result of the free market but the result of government fiat — and to lend money they do not have — called fractional reserve banking. This is the opposite of crisis of capitalism, it's the crisis of socialism. It's hard to imagine that someone could hence be further from the truth.

The spirit of Marx, who is buried in a cemetery close to where I live in north London, has risen from the grave amid the financial crisis and subsequent economic slump. The wily philosopher’s analysis of capitalism had a lot of flaws, but today’s global economy bears some uncanny resemblances to the conditions he foresaw. 

Consider, for example, Marx’s prediction of how the inherent conflict between capital and labor would manifest itself. As he wrote in “Das Kapital,” companies’ pursuit of profits and productivity would naturally lead them to need fewer and fewer workers, creating an “industrial reserve army” of the poor and unemployed: “Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery.”

This is yet another completely silly statement that has been proven wrong many times by the like of Rothbard and Von Mises — but some statements won't die.

The process he describes is visible throughout the developed world, particularly in the U.S. Companies’ efforts to cut costs and avoid hiring have boosted U.S. corporate profits as a share of total economic output to the highest level in more than six decades, while the unemployment rate stands at 9.1 percent and real wages are stagnant. U.S. income inequality, meanwhile, is by some measures close to its highest level since the 1920s. Before 2008, the income disparity was obscured by factors such as easy credit, which allowed poor households to enjoy a more affluent lifestyle. 

Now the problem is coming home to roost. Over-Production Paradox Marx also pointed out the paradox of over-production and under-consumption: The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce. When one company cuts costs to boost earnings, it’s smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits. This problem, too, is evident in today’s developed world. We have a substantial capacity to produce, but in the middle- and lower-income cohorts, we find widespread financial insecurity and low consumption rates. The result is visible in the U.S., where new housing construction and automobile sales remain about 75% and 30% below their 2006 peaks, respectively. 

OK, so now imagine people are poor to the point were they cannot consume. Can companies lay off to boost "profits"? How can companies make profits when people can't consume? Prevent companies from doing what they want to do and you'll end up with no companies at all, no production, and stores with empty shelves. Didn't we experience that already, at a shockingly large scale? Has George Magnus ever traveled to eastern Europe to see from his own eyes the disasters created by communism?

Moreover, companies bring productivity gains, they lower the cost of products. States and their Central Banks do the opposite, they bring waste in order to buy votes, and their inflationary policies, and taxes bring poverty.

As Marx put it in Kapital: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.” Addressing the Crisis So how do we address this crisis? To put Marx’s spirit back in the box, policy makers have to place jobs at the top of the economic agenda, and consider other unorthodox measures. The crisis isn’t temporary, and it certainly won’t be cured by the ideological passion for government austerity. Here are five major planks of a strategy whose time, sadly, has not yet come. 

Poverty is a relative thing: would you prefer to be poor in Switzerland? Or poor in Bengladesh? Poor doesn't mean anything.

First, we have to sustain aggregate demand and income growth, or else we could fall into a debt trap along with serious social consequences. Governments that don’t face an imminent debt crisis -- including the U.S., Germany and the U.K. -- must make employment creation the litmus test of policy. In the U.S., the employment-to-population ratio is now as low as in the 1980s. Measures of underemployment almost everywhere are at record highs. Cutting employer payroll taxes and creating fiscal incentives to encourage companies to hire people and invest would do for a start. 

OK, this has nothing to do Marxism at all. Employment can be fostered by cutting taxes on corporations and all the other silly socialist measures such as minimum wage and healthcare.

Second, to lighten the household debt burden, new steps should allow eligible households to restructure mortgage debt, or swap some debt forgiveness for future payments to lenders out of any home price appreciation.

This would have already happened provided the government didn't prevent it!

Third, to improve the functionality of the credit system, well-capitalized and well-structured banks should be allowed some temporary capital adequacy relief to try to get new credit flowing to small companies, especially. 

Credit is not what is lacking. Small companies do not want to borrow. It's time to leave your shiny ivory and gold plated office and go see the real world, Mr Magnus.

Governments and central banks could engage in direct spending on or indirect financing of national investment or infrastructure programs.

Yes, let's build bridges, it will make us rich. The Spanish government is actually in the hole because they did massive, uncontrolled and needless infrastructure spending. Is there any logic to wasting valuable resources and capital into non-productive assets? Mr Magnus should return to Economics 101, at the Mises University.

Fourth, to ease the sovereign debt burden in the euro zone, European creditors have to extend the lower interest rates and longer payment terms recently proposed for Greece. If jointly guaranteed euro bonds are a bridge too far, Germany has to champion an urgent recapitalization of banks to help absorb inevitable losses through a vastly enlarged European Financial Stability Facility -- a sine qua non to solve the bond market crisis at least. 

The crisis will only end when haircuts are taken on debt that cannot be paid back. Lowering interest rates do not make an insolvent and overburdened debtor a solvent one. It just prolongs its agony.

Fifth, to build defenses against the risk of falling into deflation and stagnation, central banks should look beyond bond- buying programs, and instead target a growth rate of nominal economic output. This would allow a temporary period of moderately higher inflation that could push inflation-adjusted interest rates well below zero and facilitate a lowering of debt burdens. 

Oh, yes. Let's also build defenses against falling equity prices and also against gravity. Because gravity hurts when you fall down. Right? Let's ignore the reality of the world, and pretend we can, by decree, erase poverty and gravity.

We can’t know how these proposals might work out, or what their unintended consequences might be. But the policy status quo isn’t acceptable, either. It could turn the U.S. into a more unstable version of Japan, and fracture the euro zone with unknowable political consequences. By 2013, the crisis of Western capitalism could easily spill over to China, but that’s another subject.

We don't know the consequences of our reckless actions, because we are clueless about our suggestions. Let's bury our heads in the sand, and do crazy things! Maybe it will work!