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'Occupy' must understand there is nothing fundamentally wrong with banking

By Mikayla Novak - posted Thursday, 27 October 2011


As Germany's post-war Finance Minister, Ludwig Erhard, once said it is imperative for functioning markets to have strong-willed governments that are impervious to rent-seeking pressures from all vested interests who seek to transform the state into nothing more than booty to be ransacked at the expense of the general public.

To put simply the private sector banks and investment houses would not have received assistance, through the US government's Troubled Asset Relief Program (TARP) or other GFC bailout packages introduced throughout the OECD, if politicians credibly maintained a position not to negotiate with rent seekers and lobbyists.

In the United States, the epicentre of the GFC, there was precious little evidence of this stance being held by the Bush administration in any event. In September 2008 then Treasury Secretary Henry Paulson hastily cobbled together a plan for legislative approval, including obligating the US Treasury to purchase up to US$700 billion of risky mortgage-backed financial securities.

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Despite the confidence of President Bush that the bailout package would pass Congress, the House of Representatives initially rejected the plan on 29 September 2008. With two-thirds of Democrats voting in favour of the plan the outcome hinged on the refusal by Tea Party Republicans to support the move.

Although the 2008 Tea Party position on this specific issue was virtually indistinguishable from the position of the 2011 occupiers, the Tea Party were nonetheless severely criticised for not bending to a strategy that rewarded financial market failures and extended the interference of the state in economic affairs.

Unsurprisingly the most trenchant critics of the Tea Party Republicans at the time were the political and business establishment that stood to gain from the deal.

The hysterical commentary in response to the initial fall in the Dow Jones share market index (which incidentally occurred just before the actual 29 September vote took place) only emboldened the rent seekers and weakened the resolve of politicians to reject, as a matter of principle, the socialisation of private sector financial losses.

There is certainly merit in the arguments that the responses by governments to the GFC not only consigned ordinary citizens to confront the overhang of unsustainable levels of public sector indebtedness, but it corrupted the integrity of the market process which is essential for the promotion of improved living standards and not to mention the amelioration of poverty.

But because of their prior disposition against markets, elements of the protest movement are not only arguing against bank bailouts but, on some accounts, for the abolition of private sector financial institutions and money itself.

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If there is any example of throwing the baby out with the bathwater, this would be it. For example if money as the medium of exchange were abolished then how could the coincidence of wants between individuals be reconciled? Would the protestors successfully be able to barter their hand-woven baskets and hemp shirts for food, iPods, mobile phones or computers?

For some reason, that's perhaps little more than a hunch, I don't like their chances.

That the Sydney arm of Occupy Wall Street recently asked for state and local taxpayers to fund coal-fired electricity, wi-fi internet connectivity, motor vehicle parking spaces, tents, umbrellas and other paraphernalia would suggest even they realise they'd have a hard time in a world without money or capitalism.

While the denigration of the role of the financier in economic life represents something of a sport for the protest arm of the political left, a policy acceptance of the Occupy Wall Street positions on many aspects of capitalism would do nothing but cause irreparable damage to the lives of millions.

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About the Author

Mikayla Novak is a Research Fellow with the Institute of Public Affairs. She has previously worked for Commonwealth and State public sector agencies, including the Commonwealth Treasury and Productivity Commission. Mikayla was also previously advisor to the Queensland Chamber of Commerce and Industry. Her opinion pieces have been published in The Australian, Australian Financial Review, The Age, and The Courier-Mail, on issues ranging from state public finances to social services reform.

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