Monday, 23 June 2008

Gekko drives by

Aston Martin DB9 Convertible At the end of last week an Aston Martin DB9, a Bentley Continental and a late model Mercedes owned by former Blue Chip magnate Mark Byers were put up for auction. Bryers himself didn't show up to see his cars auctioned off; he was out playing golf. In Scotland.

Corporate trustees joke that "the acquisition of a status symbol like a jet, a Rolls-Royce or Ferrari by a company's top executive is one of the early warning signs of impending insolvency." Big swinging dicks who've built empires based on borrowed money consume other people's capital on toys, hookers and fine living, and then, once the credit on which they've splurged has disappeared, they head off to pastures (and creditors) anew -- leaving behind them a trail of creditors to pick up the pieces that still have to be paid for. Paid for with real money.

Not just the money of hurting creditors -- your money, as we'll see.

Blue Chip's modus operandi was simple, as former Blue Chip flunkie Stewart Goldstone explained in The Herald: "Bryers' answer to keep ahead [of the game] was "to go faster and faster", to sell more while "borrowing from Peter to pay Paul"."

It sounds just like a pyramid scheme, doesn't it -- and it was: A whole pyramid based on lies and phony credit that destroyed the real capital of real people.

200px-1Gordon-gekko Bryers appears to subscribe to the child's view of economics personified by Gordon Gekko in Oliver Stone's ignorant snorefest, Wall Street. Says Gekko in a speech written by an economic illiterate:

"It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another... We make the rules, pal. The news, war, peace, famine, upheaval, the price of a paper clip. We pick that rabbit out of a hat while everybody sits around wondering how the hell we did it. Now you’re not naïve enough to think that we’re living in a democracy, are you, Buddy? It’s the free market, and you’re part of it."

Actually, that's not the free market at all that Stone is describing, and this isn't the way the free market works. Stone has an excuse for peddling this crap -- he's an ignorant Marxist -- but those who worship Gekko as the personification of capitalism need a lesson:

Gekko is not your God.

Capitalism is not a zero sum game.

At least learn that much. Economics is the science of wealth creation -- do you hear me, of the creation of genuine wealth -- which in its most basic free market form is the production of actual goods that stand in a direct causal relationship to the satisfaction of our needs and wants.

In short, it's wealth creation, not the destruction of other people's capital. It's production, not passing around money from "one perception" -- or one con man -- to another.

And deals aren't a matter or one person stealing from another -- somebody winning and somebody losing. In every deal done without fraud (something the likes of Mark Bryers knows little about), we both receive something we want more in exchange for something we want less. For example, when I buy a bottle of milk for four dollars from my local dairy, it's because I want the bottle of milk more than I want the three dollars, and the shop owner wants the four dollars more than she wants the bottle of milk. We both win, just as we do in every honest deal, which is why rational economists call trades like this the "double thank you moment." The principle is the same whether it's a bottle of milk we're talking about, or a whole shipload of refrigerated dairy products, and it's deals such as this one on which world trade is based.

It's deals such as this that Gekko is not talking about.

Oliver Stone is not talking about a free market -- he's talking about the mixed economy created by the politicians in which there are crevices for cockroaches like Gekko to flourish. As far as Stone is concerned, it's these crevices that define capitalism, but there's no reason to make Stone's vapid view your own. If you're angry at vermin like Mark Byers and Rod Petricevic and their ilk, then get angry where it matters. Get angry that cockroaches like this are only able to exist because we don't have a free market where it really matters: in money. In the words of George Reisman, "Get angry

not at the existence of a market economy and the way the market economy works but at the presence in the market of a vast gang of dishonest bidders and dishonest buyers, a gang that bids and spends dollars created out of thin air in competition with their earned dollars." [Emphasis in the original.]

Despite all the securities law and regulations on financial markets, there's a fraud right at the centre of it all that makes a mockery of all the regulators. These dishonest bidders aren't using earned dollars to blow up their bubbles -- they're overwhelmingly using this credit created out of thin air.

What allows this destruction of your capital and the presence of these dishonest bidders is very simple: there is not a free market in money. In the present setup, governments and their central banks create counterfeit capital that eventually destroys real capital. Various explanations are given for this creation, the most idiotic being the preservation of price stability -- but it's an idiotic claim, since it's the creation of all this bogus credit that creates all the inflation that central banks are supposed to be fighting.

It's important to understand that inflation is not rising prices. It's so important that I'll say it again: inflation is not rising prices. In the normal course of events, prices rise and fall according to supply and demand, and it is important for the smooth functioning of the economy that these price signals are left unmolested.
Rising prices right across the board however are more accurately the symptom of inflation. Inflation itself is the injection of currency or credit into an economy by government, ahead of productivity and production. It is the inflation of the money supply. On the back of this injection of paper into the purchase of production, producers charge higher prices for their products in response to the extra “demand,” other producers raise their prices to compensate, the labour force seeks to do likewise, and the spiral has begun. Those who raise their prices at the beginning of the spiral come out ahead (as do those who get first use of each new tranche of paper), but when the spiral is really underway one raises prices simply to keep up, and those on fixed incomes are left behind.

The direct relevance of that quote to the likes of Mr Petricevic and Mr Byers (and Mr Gekko) is that each new tranche of paper pumped out by the central banks is injected into the economy by the likes of Mr Petricevic and Mr Byers (and Mr Gekko). It's them who gets first use of each tranche of paper, before prices have risen -- going "faster and faster", to sell more and more while "borrowing from Peter to pay Paul".

In fact, it's overwhelmingly their spending of credit created out of thin air that is the direct driver of inflation -- -- and in the case of Mr Byers where it inflates first is in the markets for fast cars and faster women -- and of the destruction of real capital that is the result.

Now I hasten to point out that not everyone who borrows money is a parasite - far from it. And not every corporate raider using borrowed money is dishonest -- most of them take honest advantage of companies that are under-using their assets, and they use these resources in new ways to create new wealth. That's a good thing. No, what I'm talking about is the scum who use the opportunity of all the counterfeit capital washing around to consume the real capital of others in frauds and malinvestments like those of Mr Byers, Mr Petricevic and (in an earlier decade) Mr Hawkins. Scum like these exist in every culture, but in the present mixed economy in which the use of credit created out of thin air is encouraged, the scum rise to the top on a wave of phoney money -- their smoke and mirrors concealed by the fraud at the heart of central banks and their monetary inflation. Their bad money drives out the good, and is eventually paid for out of the genuine savings created by hard work.

If you want to get angry at these dishonest scum, get angry at those who are responsible for the scam: the politicians and the central bankers who've made fraud a central feature of the banking system.


Eric Crampton said...

Gordon Gecko, in the first half of the movie, wasn't bad at all. His "greed is good" speech was fantastic: his defence of the corporate raider who tosses out incompetent management to the benefit of the shareholder owners...stirring. Of course, then Stone had to turn him evil. Sigh.

Anonymous said...

Well said.

B.S. said...

Thanks for an interesting look at the Blue Chip debacle. We might have another candidate for dissection shortly in Merlot Property Investments.

Peter Cresswell said...

No surprise, is it. It was the chap I quoted explaining the modus operandi of Blue Chip who went on to set up Merlot.

Like all pyramid schemes, they fail when the money runs out.

B.S. said...

So we won't be running out of bad news to report on anytime soon then ? :-)

Anonymous said...

A real big one coming- household names and all that. This'll be a goody too- bound to get the regulators well involved passing new rules to "prevent it happenning again", especially as some of the "important" chatterati get wiped done in. Stay tuned.


Matt Burgess said...

I like this post PC, but I wonder if you're playing the man not the ball here. Any legal system properly designed to encourage wealth creation should take as given the presence of people like Mr Bryers operating in it and be careful to set incentives so that bad behaviour is punished, while genuine effort which turns out to lead to bad outcomes is not. Probably not an easy task for any regulator or lawmaker - but if it wasn't Bryers it would have been somebody else.

Much as I love Wall St the movie, and especially the endlessly watchable 'greed is good' slaying of those underperforming executives, I was always disappointed that Gecko's character was written to believe in a zero sum capitalist economy. It never rang true. Gecko would surely see a world wealthier than it was 20 or 50 or 1000 years ago and see value created not shifted from elsewhere.

Wall St's writers have a jarring pairing of ideas in their heads: on the one hand they plainly understand a lot about the mechanisms of capitalism; yet on the other they completely misunderstand what capitalism ultimately does, which is to create value and not steal it.

Peter Cresswell said...

Hi Matt, you said, "...I wonder if you're playing the man not the ball here. Any legal system properly designed to encourage wealth creation should take as given the presence of people like Mr Bryers operating in it and be careful to set incentives so that bad behaviour is punished, while genuine effort which turns out to lead to bad outcomes is not."

I wonder if I was unclear. I'm playing both the man AND the ball. If I only played the ball and didn't attack the man, no one would read the post. :-)

What I'm saying however is precisely that the system is improperly designed -- it's designed to put large gobs of counterfeit credit in the hands of the Mark Bryers of this world, who then piss it up against their creditors.

Bad man, bad system, bad central bankers.

And you're right in your second point. Anyone who sees a world wealthier than it was 20 or 50 or 1000 years ago and doesn't see value created rather than shifted from elsewhere is just dumb. Flat-out ignorant. Must have been keeping their brains in PJ O'Rourke's pizza box.

It's hard to know whether Wall St's writers were satirising the character of Gekko as being pig ignorant, or satirising the numb nut pseudo-capitalists who they figured would take Gekko as their hero (remembering that Americans generally don't get irony), or were themselves just flat-out ignorant on this point.

Opinions are divided on that.

But it's still a crap film.

PS: Here's a list of Oliver Stone's ten best films:

Elijah Lineberry said...

As I said to Peter privately I am still angry about Stone's absurd film "Nixon"...a pack of lies from start to finish.

With regards to Blue Chip and Bridgecorp, I have an open mind and I think some matters should be left up to a Jury to decide (in the case of Bridgecorp Directors) and a potential Jury (in the case of Blue Chip).

Delighted Crampton and I share similar inspiration from the 'Greed is Good' speech!

Anonymous said...

Anyone who steals a sum greater than $1 million should be treated as a murderer - that sum represents more than a lifetime of work for many people. Byers and similar white collar parasites are far worse than the average thug roaming the streets.

Anonymous said...

Yeah and murder can be downgraded to simple assault, so long as the victim had less net worth than the criminal.

You're approach is imbecilic.

Get a brain!


Anonymous said...

You're approach is imbecilic.

Was that irony you were going for?