Pure Capitalism would lead to Armageddon: Startups/Funding

Banks, Funds and Starting Business

This is a series of objections, starting with the common misconception that capitalism and freedom would hurt everyone, especially the poor, creating unheardof poverty for all. See the initial post here and the entire category here.

One recent objection I had regarding AnCap societies were that banks would never lend to you, unless you have substantial amounts of capital or income already - which then would never occur, because only the rich would have access to these. That is, nobody could ever start a business, unless you were already rich or had a company.

This last part, I already showed in Pure Capitalism would lead to Armageddon: Salaries above, is false.

Neither is the conclusion ("You could never start a business") because of that, accurate:

Simple because bank lending is not the prime source of fund for start-ups or SMEs. 

The top three sources of funds for Business are given below (Martin Zwilling provides an extended list of more opportunities). Crowdfunding is an amazing tool, probably moving up the ranks of importance in the future as it becomes more viral and used. 

1. Current revenue (indeed, assuming a business or income already)
2. Equity, (either your own or acquired through venture capitals, family, investors, Business Angels, networks etc)
3. Obligation & credit (either from banks and financial institutions or straight through the financial credit markets).  

The argument is simply flawed in all of its parts. 

That's some initial responses to why an Anarcho-Capitalist society (or even a Minarchist society) would not lead to the destruction of large chunks of the population, not even the poor, as I showed in the case of Kenya some weeks back. And we havn't even gone into the exciting parts of Private Law and Private Defense. Murphy has a great piece on that, if you're interested

A leftie analyses the Financial Crisis of 2008

This is the 3rd part of the "Leftie Serie" which I created after attending the People & Planet Conference on the 8th of March 2014. 
Here's a link to the other posts: Feminist Economics, Inequality

Here's a passage from page 14 in The Austerity Machine, a pamphlet I got at the Leftie conference, that is just so entertaining! On page 14 it tries to explain the origin of the 2008 financial crisis which is such a great example for how the left likes to look at the world: superficiously, of course, and with very little insights.

"Banks continued to give new loans even when it was clear the borrowers would not be able to repay. The sub-prime mortage crisis in the US, which sparked the financial crisis, was a clear case of banks targetting poor borrowers, selling them expensive mortgages that they could not repay. Although this doesn't sound sensible, the banks had a strategy: they sold on the mortgages to other banks and investors in 'bundles', 'packaged up' with good mortgages so they looked less risky. This is just one example of the way finance started developing new ways of trading, to hide high levels of risk." - Economic Justice Project

Now, this is just like the famous Keynesian economist Paul Krugman goes on about everything; He's not technically lying or stating incorrect statements, but he twists them and hides certain facts that change the meaning of what he's saying.

Same thing here. Yes, the crisis originated in the US, it occurred after a housing boom, banks did sell 'Sub-prime mortgages' and they did mix them into packages with high-credit mortgages, obtaining AAA-credit rating on those products. Yes, they targeted the poor (thus: 'sub-prime', = below prime: that is costumers that actually can't afford/support a loan because they, for instance, had no income). That is, banks were injecting risk all over the financial system and these risks were hidden through the rating given to them.

The left makes this look like how the banks are awful, how their greed deliberatly caused the world economy to crash - and especially that bankers are so obsessed with their trading that not even risk matters to them.

Let's think about bankers and evil capitalists that only wants to make money for a moment. Let's assume these traits are true. What, in a free market, stops these capitalists from going crazy, lending money to everyone in order to make as much profits as possible? The risk of loosing the initial money, obviously. If they loose their own money after going mental, that's their lose - no problem for the rest of us.

Now, let's wonder for a moment why bankers did sell loans to poor people that clearly couldn't sustain them, or why they even would do that to begin with. Sub-prime costumers represented a HUGE risk for bankers, why would they risk their capital to low/no-income borrowers who would never be able to pay that money back? The left story is simple; because they're evil, greedy and want to exploit the poor as much as possible. The more truthful story is a bit more technical. Since the Clinton era in the US, there had been a political goal of making all Americans own their homes - not too different from UK politics. For this reasons, the administration used something called Government-Sponsored Enterprise (Fannie Mae & Freddie Mac), designed to purchase mortgage loans from other banks, making sure normal banks always had a second market for their loans. Essentially, the risk associated with lending money to someone was transferred to these companies. Banks lended to everyone because Fannie and Freddie would buy that mortgage straight away - leaving the banks with initial profits, but Fannie and Freddie with all the risks.

Fannie and Freddie (and further down the line, Goldman Sachs or Leeman Brothers etc also) packaged these "risky" loans with proper, "good" loans into a financial product, which, by the incentives of rating agencies and Fannie & Freddies government-sponsorship, recieved AAA ratings and were deemed to be very safe. Effect: banks, investors and individuals around the world bought them, because they yielded good returns, while on paper exposing them to very low risk.

Now, when the debtors of the initial bad loans eventually defaulted, a domino fell through the system, causing loses to be made all over - and the rest is, as they say, history.

Yes, if you want to make the superficial analysis that "look, a product bankers made spread risk throughout the system - IT'S THE BANKER'S FAULT!", you can make that. It just simply doesn't deal with the fundamental mistakes made that eventually caused a financial crisis to occur.
Misguided incentives, however, does. Politically-governed idea that "all should own their home", an interest rate held substantially below its market rate and the hydra of moral hazard that GSEs, Sub-Prime purchases and Bank Bailouts represent are more accurate explanations. 

Stop messing around with absurd accusations of "bankers and SPECULATION causing the financial system to crash". Politicians and messed-up incentives did. Like governments, state and politicians do most of the time.

This is a perfect example to when Lefties take one glance at something, find an explanation - regardless of how inaccurate it might be - that fit their worldview and start accusing one of the following 1) capitalism, 2) bankers, 3) rich people, for x, y and z.

Sorry guys, it doesn't work that way.


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For an extensive story on the Financial Crisis see here, or a more technical, economic debate, see Austrian Theory of the Business Cycle.

UK 'Help to Buy', or just a regular party at Uni?

After a first turbulent decade of the new century, with artificially-low interest rates, Subprime crisis and housing booms you'd figure Governments around the world learned a thing or two about what just happened.

As perhaps a few students have experienced over the years of University life, curing an awful hangover with more booze might work for a day or two (or weeks, as Fresher's Week taught us), but the nasty, horrible hangover will return - worse than before.

"The Hangover is not the problem. The Party was." - Johan Norberg

What a bum, saying yesterday's epic party was the problem! How dare he? Luckily, he's referring to the economy and its crisis witnessed over the last few years rather than your fabulous party.

The US government created the largest financial crisis for generations by lowering interest rates, the economic equivalent of free shots to everyone. The political purpose of 'every american a home owner', made sure the government buddies Fanny & Freddie bought every mortage loan available, no matter how risky or insecure that mortage was (that is, book U2 and Green Day for your livingroom party - someone else's dad will pay for it). On top of that, we had the issues of foreign currencies streaming into the US, that is; invite everyone you know. All set for an epic party, right?

When we all woke up from that heavy hangover of ours, we found ourselves in a weird situations; our economies didn't work properly. We had debts all over the place - and nobody to pay for them. Clearly, that bum's dad didn't pay U2 enough, now we're all screwed!

Today, in 2013, we're still deep down in debts. Most Western governments run major budget deficits (Pay for the booze with your credit card), and the UK Government figured they'd do something about the expensive Housing Market. Clearly, those venues for your crazy party ideas are a bit too expensive, are they not? Earlier this year, Help To Buy was introduced, as a way of "helping young people onto the property ladder" - by providing them with free loans for the first 5 years, and taking on responsibility for 20% of the mortage value.

Absolute rubbish! How do you think we got into this mess to begin with?

A Crisis caused by too low interest rates, perverse government intervention and mortgage loan for everyone, CANNOT be solved by LOWER interest rates, MORE government stimulus and MORE mortgage loans. 

Ask any student if more drinks will solve that horrible hangover. I guess even governments like to keep partying.


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Financial Times has a nice run-through of the Help to Buy Scheme.

I absolutely recommend Johan Norberg's book. It will blow your mind