Stephen R. Ganns

Good article!

Seems we need a distinction to be able to differentiate the parts of capitalism–which have somehow become fused. Digressing for a second, the societal considerations seem to be inherent in the Westphalian system of which we are a participant. That system is dirigistic–setting up the rules or guidelines–which are needed to make sure the impact to the society operates toward the greater good. Once the rules are in place, the system can operate freely.

It seems that the problem is one of definition and non-differentiation between Free Enterprise and pure Finance, or as it has been coined, Financial Capitalism.

The reason the distinction between Free Enterprise and Finance is so important today, lies in the fact that free enterprise or free markets have always generally been able to achieve a natural equilibrium based on supply and demand. However, speculative “financial” practices tend to force real production economies to become unbalanced. This generally creates the “boom and bust” phenomenon. Unfortunately, the two concepts still remain fused today and synthesized in the public’s mind within the definition of capitalism-just as Karl Marx intended it in the mid 1800′s when he coined the term as a pejorative or strictly negative term.

Free enterprise is an economic system in which markets are created by private businesses to sell their goods and services to the general public.

The basic components of capitalism’s current properties would include:

1. Real assets, property, facilities and equipment are privately held.

2. The economy creates equilibrium through the concept of supply and demand– essentially driven primarily by demand, those who need goods and those who have supply.

3. The concept of best use of natural and human resources and the marketing of those resources successfully to consumers to gain maximum exchange.

4. Limited government regulation exists as a dirigisme to ensure fair play and to prevent market manipulation.

5. However, it is worthy of note that this does not imply in any way an anarchy. Government would lay out the ground rules to keep the markets from being undermined or manipulated. This is completely consistent with Adam Smith’s “invisible hand” as taught in “…The Wealth of Nations”. Why? Simply because in his earlier work (which was continually revised), “The Theory of Moral Sentiments” which speaks of social responsibility, could be referred to as a “visible hand”, thus creating a binary and balanced system going hand in hand.

By finance or financial capitalism, we mean the use of capital or wealth to create more wealth including the charging of interest and speculations in different types of financial products such as various types of investments, equities, options or other derivatives. In defining finance by these particular uses, functions and habits, it can be seen that the nature of finance is not centrally (directly) involved in the actual production process. It is generally a facilitator, aiding production, as in providing capital for daily operations or expansion or consumption. This is finance’s true value.

Viewing the current turmoil of 2007, it can be seen that the “capital markets” have frozen dramatically, seriously hindering production, consumption and free enterprise. Question becomes: what would cause this imbalance to occur between these two forces?

We can solve for that.

Stephen R. Ganns

http://yaleherald.com/opinion/remaking-capitalism-for-the-greater-good/

Invaluable program at Yale.
A few thoughts on Egypt which first appeared on      TheIndependentFiduciary.Org :

Let’s review the recent events in Egypt against some of the data and principles of Sun Tzu.

Intelligence, and the use of agents were central to Sun Tzu’s strategies and methods. Today, this would constitute having a good and reliable “intelligence estimate” or assessment of the situation leading to predictions of a high probability. Another attribute of intelligence is that it is covert or secret–the elements of surprise and “mis-direction” contribute majorly to probable victory.

SunTzu laid out and codified many principles which would be too numerous to mention in this blog–although it would make a great subject for a written piece to analyze current events: the wars in Iraq and Afghanistan: the Turmoil in the Middle East, etc.–against his strategies.

Simple fact: these are campaigns, well thought out and planned, utilizing the workable principles of war. Yes, social media acted as a light speed facilatator, and yes a students organized the various tactical maneuvers the public sees on television. But make no mistake–these events were well thought out in advance, coordinated, timed, planned using intelligence far superior to the “opponent’s” intelligence. Any other assertion is simply folly.

Who had the accurate intelligence assesment in Egypt? Who has the accurate intelligence assessment in the other countries currently undergoing social unrest in the Middle East? Who’s winning the coordinated campaign? Who ’s using the correct principles of warfare? Who stands to gain from these events?

I guess eventually, we will know.

The breakdown in underwriting standards was definitely a prime contributing factor, which allowed so much credit risk. This became compounded by various leverage factors (actual and derivative), rating’s systems and other elements. Below is an excerpt from a commentary of mine done in August 2008 on BIS Working Papers. It speaks to credit quality and transparency.

Super Anti-efficiency

“Markets can remain irrational longer than you can remain solvent.” J. M. Keynes.

“The current phenomenon occurring in the capital markets is aptly termed a “dislocation”, as the primary ultimate intermediary—as the process proceeds and as a matter of fact—will be the Central Banks, as proxies for the Sovereign Governments and institutions which they represent.

Efficient Market Hypothesis whether one subscribes or not, concludes that financial markets are “informationally efficient”. The current situation finds: these markets have gotten into their current state due to what might be termed a “super anti-efficiency”—in that data believed known or actionable was either not known or if known not acted upon. To be clear, the statement that the general markets in the main, were unaware and thus became stultified seems reasonable. But please note that in these premises, are included by reference the rules of fiduciary prudence as “should have known” or more importantly, “should have acted upon”.

What is manifest tends toward an abject systemic or asymmetric informational anomaly—coupled with lack of positive and clear-cut action. Was the notional value of “innovative” Credit Risk Transfer instruments and derivatives unknown? Were the off balance sheet operations of investment and commercial banks completely latent? Did Credit Rating Agencies have any semblance of true experiential and subjective understanding of the products being rated? Was the rapid vaporization of Enron not enough of a microcosmic event to warrant extrapolation?

From a subjective and visceral view, everyday actors for example, in Originate & Distribute model businesses and at all levels with the exception of certain investors, knew what was occurring at a daily functional level—however, sans any real understanding of the global-macro consequences. To say the least, the full picture was not widely known or if it was, not disseminated to the participants capable of realization and response.

Central Banks and Sovereign Treasuries, to be able to know and analyze macro consequences, must have access to accurate information and then the analyses are only as good as the data collected along with the concomitant ability to analyze, understand and predict distributive results and outcomes.In the final analysis, most did not perceive the true circumstance—save on an idiosyncratic micro level—and of those who did, either the full consequence was not appreciated or as inheritors, were confronted with an overwhelmingly daunting task. Thus, a condition of Super Anti Efficiency was born.”