China’s Big Finger to All the ‘Capitalists’

The essence of Capitalism is that you take risk and ‘invest’ via ownership or debt in a venture. If the venture goes bust, then:

1. If you are a shareholder, you could lose all you invested;
2. If you are a bondholder, you get some back (say your fair share of whatever is remaining, after liquidation); and
3. If you speculated in derivatives on this venture: you could lose more than you gambled

For the past twenty years, here is what is happening in the ‘American Style Capitalism:’

1. If you a not big enough to screw the country, you face the same fate as the Capitalism meant to be;
2. If you are a non-bank (a la auto industry) but very big, the government comes and screws you in a way that is TBD by their whims; and
3. If you are a moderately big bank or a big-bank, or even a big casino and smart enough to call yourself a Hedge Fund and bet a multiple f GDP on speculative trades (CitiBank 2004, LTCM 2008, Bank of America 2008):
   1. you get to keep your shareholders value (Goldman Sachs, 2008);
   2. you get to get majority or all of your debt paid back by tax payers (eg. Goldman vs. AIG); and
   3. your bank or the hedge fund keeps getting a recurring chance to screw you, the consumer and all of us, the tax payers!

Here is an interesting question. What if a local/municipal government (Harrisburg, PA is rumored to be almost there) defaults on its debt obligation? Will the state government rescue them? If it were a true capitalist society, the state shouldn’t rescue the locals. Period.

What if the state government defaults (California is headed there)? Will the Federal Government rescue the state? It shouldn’t, but regardless of which party is in power, the Feds will probably bail out the states.

This is the current state of American system of Capitalism.

For decades Americans wanted China to be capitalist nation. Guess what? Today, to me it appears that Communist China is the only country practicing true capitalism. Here are some excerpts from Bloomberg article: China to Nullify Financing Guarantees by Local Governments

March 8 (Bloomberg) — China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.

The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as soon as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.

China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on local- government borrowing, estimated at about 24 trillion yuan ($3.5 trillion) by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad loans as projects are left without funding, Shih said this month.

“Beijing’s fiscal situation probably isn’t as good as it looks at first glance,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong. “Perhaps at some stage the central government is going to have to bail out the banks or the regional governments and take it on its own balance sheet.”

What I am hearing is that Goldman Sachs stands to lose a s’ load of money if this happens. My friends, to me that is poetic justice!

I know it has been two years since Beijing Olympics was over. Let the games begin.