Be careful when investment bankers start advancing ideas for solving the financial crisis which is upon us – especially when the solution is more government regulation and spending. Two prominent members of the investment community have been promoting solutions for "solving" our current crisis. Felix Rohatyn, long a partner and managing director of Lazard Frères and now an advisor to Lehman Brothers, has been advocating a massive government "investment" program. George Soros, the hedge fund operator, currency speculator and investor, has been promoting government regulation of the credit markets in addition to government regulation of the money supply by the Federal Reserve. This is just more of the same self-interest government interventionism and corporate welfarism that we have seen promoted over the past 100 years in the United States and around the world which has led us to one financial crisis after another.
Rohatyn, who is frequently credited with the federal government (American taxpayer) bailing out New York City from its financial crisis in the 1970s, wants passage of the bill sponsored by United States Senators Dodd and Hagel for the creation of a national infrastructure bank to assist state and local governments increase "investment" in infrastructure. But this is just more of what we use to call public works (known as public jobs and waste of taxpayer money) now repackaged as "investment," a term coined during the Clinton administration. This national infrastructure bank would have a capital base of $60 billion. It would provide subsidies for certain projects, issue its own long-term bonds and insure the bonds of local and state governments resulting in an estimated $250 billion of funding and employment of a million or more (jobs is always a key political word used by promoters of such projects). In addition Rohatyn wants an additional $250 billion of revenue sharing by the federal government for state and local governments' infrastructure projects particularly local schools (education is another key political word used in promoting government projects). Does anyone really think this will stop at $500 billion once the floodgates are opened?
It should be obvious where all this is heading – right into the pocketbook of Rohatyn's client Lehman Brothers who will sell the bonds which are backed by the full faith and credit of the American taxpayers. These are not investments which provide any increase in wealth from the invested capital but rather transfer payments from taxpayers to the beneficiaries of these public make-work projects resulting in more waste of capital and taxpayers' money. The beneficiaries will be the investment bankers such as Lehman Brothers who will have another financial product to sell (the long-term government bonds backed by the taxpayer), the holders of the bonds (who receive interest on the bonds which is paid by the American taxpayer) the contractors and businesses (and their workers) who are awarded the bids for construction of the infrastructure projects and the politicians and bureaucrats who will be working hard to funnel this new money into the pet projects of their constituents and clients. The losers will be the American taxpayers who will have more of their money taken by force to be transferred to the beneficiaries of these projects through taxation and inflation and who will now have less money for real investment and consumption.
Soros, who is also noted for his advocacy of eclectic charitable and political causes, the promotion of reflexivity and the open society, wants the government to regulate credit as well as the money supply. “It’s time to recognize that markets do need to be regulated, and that regulators have failed to fulfill their obligations over the past 25 years," Soros told National Public Radio in the United States during an earlier interview.
“I think it ought to be part of (regulators) duties to prevent asset bubbles from growing too big. For that, they would have to acknowledge that markets tend to produce bubbles.” For example Soros would have regulators determine whether or not too much money is being directed toward funding mortgages (the current asset bubble).
"We've had a series of small financial crises since 1980. Each time, when the real economy was threatened, the Fed stepped in, lowered interest rates, provided monetary fiscal stimulus, so we got out of it.” According to Soros this action has reinforced both the credit expansion and the misconception that markets are self-correcting. “For more than the past 25 years, we’ve been in a period of credit expansion and wealth creation. Now, we’re in a period of credit contraction and wealth destruction,” said Soros in the NPR interview.
In other words Soros wants the government, presumably the Federal Reserve, to step in and determine the type of financing for which its fiat currency is being loaned or invested. What a political free-for-all this would be as various financial institutions, including presumably Soros' own Soros Fund Management, lobby for credit to be allocated toward various sectors of the economy in the United States and internationally. It is precisely this type of central planning and central bank legacy of crisis and conflicts that has led us to the current financial crisis. It is obvious what Soros's problem is – he does not like the current contraction in credit and the meltdown of asset values (the correction of the Fed's inflationary policies) from what he sees as being malinvestments in the real estate sector caused by the Fed's inflationary policies. While Soros' concerns are understandable his solution shows a lack of understanding of the cause of the problem.
It is the Fed that created the crisis through its inflationary policies and has prolonged the crisis through its inflationary policies. It is the market which has corrected the problem when consumers re-adjusted their consumption-savings preferences borrowers could not and would not pay the increase cost of the sub-prime loans, the increase price of energy, the increased price of food and the increase prices of other goods and services. The real economy re-appeared and the false economy created by the Fed's inflation was exposed and hence began the inevitable and necessary correction.
The solution is not more regulation of the credit market but deregulation of the credit and financial markets (as well as other markets), elimination and liquidation of the Fed and return to free banking and sound currency that will help to stop spending on wasteful public works and reduce the appearance of speculative bubbles as capital is allocated to investments required by the market not malinvestments promoted by the politicians, the bureaucrats and their special interest clientele.