Is capitalism over in America? The markets seem to think so. And one can make a pretty strong argument that it is. Personally, I was shocked by the headlines in today's Wall Street Journal following the U.S. government debt downgrade. Evidently nearly every market player wants the government and the Fed to again come to the rescue. There is no understanding among those who should understand that that is the problem, not the solution.
We no longer have an economy based on capitalism, where private investors invest in and participate in the profits of the organizations engaged in the production and distribution of products and services. The economy is now based on an entirely new concept - leveraged debt mania. For nearly a decade the debt markets and their derivative byproducts have been where the action is, and they have become testosterone filled high-risk crap games and juvenile games of chicken to see who bails first. And when the gamblers lose they expect the Fed to bail them out. Consequently, the debt markets have grown to dwarf the equity markets over that time.
The financial market is now a debt-drugged junkie, addicted to government debt. But trading debt and its derivatives is not capitalism. After all, what do collateralized debt obligations and credit default swaps, which insure against the default of debt that should never have been issued in the first place, have to do with capitalism? All that CDO's and derivatives do is encourage traders to take on too much risk in investment vehicles that have nothing to do with the private ownership of commercial and industrial enterprises.
The Wall Street institutions, meaning all the big banks, brokers and money managers, no longer serve their traditional functions. They used to be the financial intermediaries that provided for the efficient allocation of capital between investors and corporations in the marketplace. Now they are the marketplace. They have become too big to fail creators and traders of junk debt and ambiguous derivatives, demanding that the Federal Reserve keep interest rates near zero to facilitate their high-risk activities. Who does that help? How can private investors provide capital to business to create jobs and expand when they earn nothing on their savings?
Capitalism is the private ownership of the common stocks of corporate enterprises, small closely held businesses and partnership interests. It has nothing to do with collateralized debt obligations, credit default swaps or other debt derived contrivances created by Wall Street to generate fees and commissions. All of the innovative companies that grew over time to power American economic growth started by issuing stock to investors who took the risk in order to profit if the company became successful. Equity ownership is capitalism, and it is now only a small part of the financial markets in the U.S.A.
America today has a debt problem. That debt is downgraded and investors are dealing with the problem by selling stocks and buying more of the debt. Is that rational? After all, what makes more sense -
#1. Investing in the stock of a reasonably valued quality company with negligible debt, consistently strong profit margins, market leading products with a secure dividend yielding 3 to 4% and little chance of future insolvency, or
#2. A note or bond yielding less than 3% from an issuer with 536 polarized bosses that can do nothing to prevent it from becoming insolvent.
Apparently, either capitalism is dead or we are living in the twilight zone, a time warp or an alternate parallel universe. In today's market investors are choosing #2.
