Capitalism and free markets.

What a great idea. It’s a shame no one has actually tried it out or bothered to let homo rationalus economicus that it’s an urban myth. We operate mainly in a state sponsored system of capital markets underpinned by arcane and often opaque trading rules and regulations.

The provision of capital is key to any functioning economy and has been since the beginning of time. Each empire had its own approach to coinage to support trade and the governing class or head of state. The first pillar of modern capitalism was established in 1694 with the formation of the Bank of England. Thus began the first stirrings of the fractional reserve banking system and the modern financial system.

I’ve previously covered the many bailouts experienced by the banking system and the Bank of England itself and in some ways our current malaise is no different. The central precept of free markets is that they should operate on their own merits - caveat emptor.

I’m not going to discuss that fallacy here but focus on the problems of bail outs. Why should a failing business be rescued by the state? The simple answer to that is when it has implications for the national economy or issues of national security (often regarded as twos sides of the same coin). We have seen the fiasco in the US, the UK and Europe. We have seen the banking system bailed out, private companies bailed out and yet we still hear the mantra of free markets, trade and market liberalisation and privatisation repeated.

Here in NZ we have seen South Canterbury Finance bailed out and most recently AMI. On both occasions the government intervened to provide capital from taxpayers for businesses which had clearly failed. In the case of SCF depositors were guaranteed under a standard deposit guarantee framework but bondholders also benefitted to the tune of $350m. Those bonds should never have been covered under a deposit guarantee scheme. Investors enjoyed a big free lunch here at the expense of the taxpayer. In the case of AMI, the government intervened to support an insurance company who didn’t have enough reserves on hand post the February 22nd quake. The government could easily make a good case for supporting AMI, in terms of providing it with backstop liquidity but in doing so it needed to be very clear that it was suspending any belief in free markets.

The moral hazard is clear but the implications have not been explored. On one hand the government wants to bail out private companies who are clearly responsible for their own position. At the same time they want to promote policies like privatisation because, wait for it, private companies are more efficient than public ones.

It’s very clear that the neo-liberal dream is in tatters but no one seems to want to wake up and smell the reality. Market morality is indeed quite hazardous.

Today John Key revealed the policy what we have all been waiting for: privatisation or, in his words, partial asset sales. Let me be clear that I am not against privatisation as a whole but certainly I am very concerned about the sale of key and core infrastructure assets. I also noticed how John trotted out the “TINA” message: there is no alternative otherwise S+P will downgrade us. Expect to hear this being repeated as some kind of mantra…..otherwise saying we are dependent on the opinion of the same guys who rated dodgy Collateralized Debt Obligations (CDOs) as AAA.

There are some key human requirements for any society. We are lucky to be blessed by all of them: plentiful water, energy generation and food production. Any decent society with these assets should be able to provide them to all people at the lowest possible cost. Why? Because it can.

We are already well into a fight over NZ’s water assets and consumers are paying through the nose for basic food items especially dairy in which we are global leaders. Energy is also costing us more and more each year as the dysfunctional electricity market continues to fail.

Contact Energy has already been sold off to foreign investors with Australian energy company Origin owning 51%. Expect more pain in the pricing policy we have witnessed since this company was first floated. I have never understood the need for energy generation (water is even more inexplicable) to be a competitive process between private companies. Deregulation has not delivered cheaper prices and yet more privatisation is on the cards.

The deregulation of the 80s made was driven by a desire for greater efficiency and more dynamic management as well as the demand from financiers for new investment prospects. But change could have been brought about in different ways such as simply instituting new management, guidelines etc. It would be very possible to run a state owned company focused on providing electricity, in all forms, with the sole focus of the customer.

So instead of selling off more energy assets we should be thinking about changing the model. I favour looking at some form of  quota based allocation which comes at the cheapest possible price (a break-even number) with market pricing on top of that. These quotas could be traded (as in DTQs 0r Domestic Tradable Quotas) as part of a generalised carbon trading scheme. But the important issue is that energy is a basic human need and in New Zealand this can and should be provided at the cheapest possible cost. I do not believe, and have seen no evidence, that the current system delivers this.

We should also address the silly argument about “mum and dad” investors. Please no more of this patronising label. Lots of people are investors, not just these mythical and no doubt unsophisticated “mums and dads”. But let’s point out the very obvious hole in this argument. We already own these companies, yes us taxpayers, mums, dads and bubs…we own it already so why do we need to re-buy into it? plenty of money for the investment banks involved in the float (they have been pushing this for ages). More importantly there will be losers: low income people who simply could not afford to buy into the share bonanza….it’s just another process for transferring wealth from low to high income earners. This will look great for some but ultimately we all lose in the end and inequality is further increased.

Privatisation is only going to make things worse. It’s time to put people before profit.

Sorry John, there is an alternative.