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The capital was hijacked by the bankters and others. This mis-allocation is what has caused the mess.
Efficient use of capital is what market based Capitalism relies on. This basic failure of efficient allocation of capital is what lies at the core of the debate.

“Everyone wants to be Chinese. Because the Chinese have money. And because they don’t have free markets. It is widely believed that the Middle Kingdom can more effectively fight a downturn without democratic, consensus-driven institutions staying its hand.

But here is where we gasp for air. What theory holds that central planning – whether by Chinese communists or American Democrats – can do a better job of allocating capital than the people who own it?

There is none. That is why the world’s leaders – and most of its economists too – permit themselves a luscious fib; they say they don’t need theory at all. “Pragmatism” was the word on every pair of lips in London this week. Free from chains to dead economists, they say they will try “whatever works.” Oh, the loveable lunkheads! Naïve enough to believe anything; receptive as a trashcan. “Pragmatism” in economics is as phony as the men who preach it. Every one of them has a dog-eared copy of Keynes’ General Theory of Employment, Interest and Money in his briefcase and an ace up his sleeve. And every supposedly new, pragmatic idea they come up with is merely a version of the same quack cures that kept the economy in the hospital last time.

Perhaps you can paint a bridge pragmatically. If you don’t like the color, you can change it quickly. But if you’re building a bridge, an airplane or an economic system, you can’t make it up as you go along. You have to have an idea of how it works before you start. Besides, results from fiscal, monetary and regulatory policies don’t happen overnight. The feedback loop takes years. It took the Bolsheviks seven decades before they realized they’d been had. Friedman’s critique of America’s Great Depression policies didn’t appear until 30 years after the event. In Japan, they still don’t know what they did wrong. And by the time the feds catch on this time, they will have turned an ordinary depression into a great one.”

100% untrue…….

Treasury’s proposals specifically included a proposed resolution authority for systematically significant finanancial companies like AIG, modelled on the FDIC’s resolution authority. And like the FDIC’s resolution authority for insured banks and thrifts, the Treasury’s proposal gives the FDIC the power to impose pain on creditors—which is exactly what Cowen criticizes the Obama administration for failing to propose! Specifically, the FDIC would have its traditional powers of avoidance, as well as the power to repudiate “burdensome” contracts.

This undercuts Cowen’s entire column. I honestly don’t know how he could have missed this—the proposed resolution authority was the most talked about aspect of Treasury’s proposed financial regulations. What’s even more amazing is that the NYT’s editors let Cowen’s column go to press. I guess they don’t read their own paper.

April 5th, 2009 at 6:09 pm
Curmudgeon,

I agree, and honestly, I wish the big D happens tomorrow so we can start mucking2 ASAP.
French correction: n’est-ce pas ?

(Thanks for the correction. French was a long time ago. I use it nowadays at my own peril.)

also calls for UK Pound to go the way Icelandic Krona

and, see: Ritholtz on evidence of fraud at AIG
he’s a fan of TBP.
http://maxkeiser.com/

Max is a sharp dude, willing to speak it as he sees it.

The problem as I see it is that we do not know who actually has a legitimate credit claim on these financial institutions. Is a CDS a legitimate claim when not used as a legitimate hedge? How would one quantify the fallout from making all creditors suffer?

I imagine that GM’s bankruptcy will be an experiment, in a more limited and controlled way, in this very exercise. The question with that will be if GMAC is included.