Monday, May 11, 2009

Wells Fargo and Morgan Stanley Capital Raises are Failure

Last week, Wells Fargo sold $8.6 billion in common stock; Morgan Stanley sold $8 billion in stock and senior notes.

I don't mean that those two banks failed in this case. Far from it. But this is a failure for our society. A failure to do something that a free market can do effectively without even trying.

The point here is that these investors are not turning their money over to the banks because they believe in their business model; they are doing it because they believe the taxpayer will bear some, most, or all of the risk.

By propping up these broken institutions, the government is directing scarce resources away from productive endeavors.

With Bush and Obama leading the charge, the Wall St./government cabal has somehow convinced us that we need these banks for capitalism to work.

Obama and others say the banking system is "the lifeblood of our economy."

It just aint so, and we should all be thanking our maker for that fact.

The truth is that the banking system lies pretty low on the list of essential components of free-market capitalism. Certainly creativity, human productivity, entrepreneurship, and good-old trial-and-error rank high above it.

A banking system is necessary. Its function is simple: take excess resources from savers* and distribute it to competent investors*. Our system has failed to do that effectively and its natural fate is to collapse and die. Once that happens a new banking system will rise up to replace it. Until then, we stifle the attributes of our economy that make it work.

The bailout, prop-up path is doomed to fail. There is no other possible conclusion.

Furthermore, all those bankers who have been fired or are about to be may well be fantastic architects, musicians, store managers, and vacuum cleaner repairmen; they are not good bankers.

*Savers are people who do not consume all of their production. Investment is addition to the stock of real capital.

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