One Last Update On Bernie Sanders

The Wall Street Journal weighs in this morning with a front page article headlined "Price Tag of Sanders Proposals: $18 Trillion."  They've gone through the various proposals of the Sanders campaign and put a ten-year price tag on each.  The big number is a $15 trillion ten-year price tag that they attach to Sanders's proposal to extend the Medicare-style "single-payer" healthcare system to all.  (That number comes from a study by economist Gerald Friedman of UMass Amherst of a similar proposal by Congressman John Conyers of Michigan; but the article quotes a Sanders spokesperson as agreeing that the $15 trillion is a "fair estimate" of the cost of Sanders's universal single-payer plan.)

Other than the single-payer healthcare proposal, here are the sources of the other amounts:

• Social Security benefit increases -- $1.2 trillion
• Infrastructure program -- $1.0 trillion
• College affordability (free tuition for all!) -- $750 billion
• New paid leave fund -- $319 billion
• Bolster private pension funds -- $29 billion
• Youth jobs initiative -- $5.5 billion

Do you notice anything a little odd about the $18 trillion?  That's right, not a dime goes for the poor, or for doing anything about poverty.  Not that I'd be in favor of more government spending on the failed anti-poverty efforts.  But, after all, this is a guy who pretends to "care about the poor," and who advocates that we show how much we "care about the poor" by spending government money on them.  Oh, and none of this proposed new spending addresses income inequality either.  (Do you think that government spending on healthcare or education counts in anyone's income?  It doesn't.)

Actually, it's much worse than that.  $15 trillion for single-payer health care -- wait a minute, don't the poor and the elderly already have near-complete single-payer health-care through Medicaid and Medicare?  That means that essentially all of the $15 trillion is to be spent on the non-elderly middle class and affluent.  And this is someone's idea of how to use government coercive redistribution to improve social justice?

Keep going through that list and see if you can spot any of the spending that might arguably improve the poverty or income inequality statistics even a little.  How about "college affordability," you ask?  Highly unlikely.  Bernie's program calls for the free tuition to be at state colleges and universities.  Sure a few low-income kids go there, but far and away these are semi-elite schools that cater to the top half of the income distribution.  The post-secondary schools that cater to the bottom half of the income distribution are predominantly the trade schools and for-profit schools.  Nothing in Bernie's program for them!  OK, so how about the "youth jobs initiative" -- surely some of that would go to poor kids?  Well, at $5.5 billion it's all of 0.03% of Bernie's proposed incremental spending, and if I know anything about government jobs programs, the well-connected will somehow figure out how to claim most of that money.  And not many of the well-connected are poor.

Meanwhile, to support this additional spending, the federal government's share of GDP goes from about 20% to about 30% (WSJ estimate).  That means that everybody's ability to spend on anything other than healthcare goes down by much more than 10%.  Here's the calculation:  Federal, state and local governments already take about 40% of GDP.  Adding 10% to the federal share of GDP raises the total government share to 50%, and shrinks the private share of GDP from 60% to 50%, which is a drop of 16.7%.  So if the question is, how much of your current disposable income would the Sanders plan cost you, the answer is, about 16.7%.  And that's without proposing anything to address the issues of poverty or income inequality.  

Do you think that an incremental 10% of GDP can be extracted from just the top 1% by income?  The entire adjusted gross income (base for federal income tax) of the top 1% is less than 10% of GDP.  And by the way, they are already sending about 35% of that (and in some cases 50% and more) off the top to federal, state and local governments.  So taking 100 cents on the dollar of everything that the top 1% currently has left nets you at most 5% of GDP -- and that's assuming that everybody in the top 1% is so stupid that they will continue to declare all that income when it is completely confiscated by the government.

Yes, socialism is just so inspiring!  But at least this is not as bad as North Korea!

Time To Round Up The Hoarders And Speculators!

They go by different names in different places.  The most generic description is the "hoarders and speculators," a term currently in favor as the preferred scapegoats of the disastrous Venezuelan regime.  For Stalin, it was the "kulaks."  For Hitler, it was the "Jews."  For Bernie Sanders, Elizabeth Warren, and others on the current Democratic left, it's the "greedy Wall Street bankers."  In economies hobbled by brain-dead socialist policies or by overzealous regulation, they are the people making lots of money doing things that many people don't understand.  Most commonly they have found a way to bet on the failure of government coercion to keep people from acting in their own self-interest.

Latest to join the theater is the government of China.  China had made it official policy to encourage margin borrowing to drive stock market valuations to unsustainable heights.  When that all started to come apart over the summer, this now wasn't just a normal market correction, it was a dissing of the all-knowing and perfect leaders.  The New York Times reports on the government's reaction in last Thursday's lead article in the upper right on page A-1, headlined "China's Response To Stock Plunge Rattles Traders."  Catching up with the Manhattan Contrarian from two weeks ago, the Times now reports that the Chinese government is responding to the plunging of its stock markets and the onset of an obvious recession (not reflected in official statistics, which are thereby revealed to be fraudulent -- but you already knew that) by rounding up the usual suspects.  In this case the usual suspects are stock traders, including those who had the nerve to do no more than to sell securities when the market was declining.

Police officers under the Chinese Ministry of Public Security specializing in economic crimes have joined agents from the nation’s securities regulator on inspections of investment funds and brokerage firms. The authorities are combing records and questioning transactions that appear to profit from or contribute to a falling market, according to employees of investment firms who, like others who spoke anonymously, said they feared reprisals.  Police officers have downloaded extensive trading data and asked fund managers why they sold shares when the market was going down, prompting discussions about basic investment strategy. Officers have bluntly told some fund managers to just stop selling.

The all-knowing and perfect leaders seem to have no idea that they will need to have a lot of non-spooked investors and traders around if they ever want their stock market to recover and resume providing capital to businesses.  Well, all I can say is, thank God that here in the United States our enlightened authorities actually understand and believe in capitalism and resist the unjustified criminalization of normal market transactions!

Oh, wait a minute.  There on the same front page of the same September 9 New York Times, immediately adjacent to the article about China linked above, we have another one headlined "Justice Dept. Sets Its Sights On Executives."    This article reports on a memo and subsequent interview with one Sally Yates, Deputy Attorney General in the U.S. Justice Department.  Seems that Ms. Yates has just announced a renewed Justice Department initiative to focus its efforts and energies on jailing top executives of Wall Street firms for allegedly "criminal" behavior.

The [Yates] memo is a tacit acknowledgment of criticism that despite securing record fines from major corporations, the Justice Department under President Obama has punished few executives involved in the housing crisis, the financial meltdown and corporate scandals.  “Corporations can only commit crimes through flesh-and-blood people,” Sally Q. Yates, the deputy attorney general and the author of the memo, said in an interview on Wednesday. “It’s only fair that the people who are responsible for committing those crimes be held accountable."

The "criticism" referred to would be from the likes of Senator Elizabeth Warren, known for her repeated demands that the government put Wall Street bankers in jail.   Of course a small problem here is that they need to come up with some crime that has been committed to justify the jailing.  I call that a "small" problem, because the lack of any clearly defined statutory crime to charge has not deterred many prosecutions against large banks for things like participation in the mortgage-backed securities markets, or against individuals for the non-crime of non-insider insider trading.  Nor has the lack of a crime to charge prevented dozens of convictions for non-crimes.  But then there is the pesky appeal process.  And thus the government, for example, continues to press its cert petition in the case of Messrs. Newman and Chiasson for non-insider insider trading, even as many people convicted of that non-crime continue to languish in limbo.

But even as the Justice Department descends further into lawlessness, there is a small piece of good news from the SEC.  Just this afternoon, an SEC Administrative Law Judge has dismissed after trial a non-insider insider trading case against a Well Fargo trader named Joseph Ruggieri.   (You'll have to wait until tomorrow to find a non-paywalled link.)  Ruggieri's alleged "insider trading" consisted of trading on Wells Fargo analyst reports before they were released to the public.  How is that even "insider trading" at all?  The government argued in the case that the Second Circuit's Newman/Chiasson decision should be ignored (!), or alternatively that Ruggieri's "friendship" with a stock analyst at WF was sufficient to constitute "compensation" to make Ruggieri into an insider.

Really, is this the best that our government can come up with in the way of scapegoats that are supposedly harming our economy?  The case was so pitiful that they couldn't even win in front of their own rigged ALJ.  Somebody who's paying attention might even get the idea that the economy languishes because of the government's own incompetent policies, and not because of any mythical "hoarders and speculators."

Does Bernie Sanders "Care About The Poor"?

It seems that my last couple of posts have done what I would have said was impossible, namely scare up several people willing to attempt to argue in favor of Bernie Sanders and his policy proposals.  The latest is someone identifying him/herself as "Tehy."

For Tehy, the crux of the matter is that Bernie "cares about the poor":

But what this is about is that ultimately, bernie cares about the poor and wants to help them. That could and even probably will end up going south, but at least he's a guy willing to try.  

Oh yeah?  I don't believe it for a second.  In fact I find the statement that Bernie Sanders "cares about the poor" to be completely preposterous.  Here's why.

If Bernie Sanders actually cared about the poor, he would be loudly demanding every day and in every way HOW CAN IT POSSIBLY BE THAT WE SPEND A TRILLION DOLLARS A YEAR SUPPOSEDLY FIGHTING POVERTY AND YET THE NUMBER OF PEOPLE LIVING IN POVERTY NEVER GOES DOWN?????  If Bernie Sanders actually cared about the poor, he would be loudly and insistently demanding accountability and answers from the hundreds of thousands of bureaucrats who disburse the annual trillion without ever achieving the slightest measurable progress toward the goal.  If Bernie Sanders actually gave a hoot about the poor, he would be demanding a complete housecleaning of the failed programs that spend the trillion every year, only to maintain tens of millions of people in handout-dependent poverty from which it is almost impossible to escape.

Bernie Sanders has been in Washington now for about 25 years.  He can't pretend to be an outsider.  After twenty-five years in Washington, it is impossible for Sanders not to know that the entire point of Washington "anti-poverty" efforts is to make absolutely sure that the number of people in measured "poverty" never goes down.  The only real goal of every government program is to grow the program.  That goal is the exact opposite of the goal of curing the problem that the program is supposed to cure.  And so the bureaucracies actively scheme to keep the number of people in poverty up, so that the poverty figures can then be used to sell a gullible public on yet more spending and further growth of the programs.  I have written many previous articles on this subject, for example here.

Sanders is absolutely complicit in this scam.  For example, the section of his website on "Income Inequality" contains this chart of child poverty statistics:

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Well, Bernie, you've been in Congress for 25 years and you have had a big say in how all that government money is spent.  How can you have gone along with spending all those hundreds of billions every year in a way that would address this issue so ineffectively as to leave the U.S. child poverty rate still at 32%, well above the rate in every other advanced country?  (By the way, I am not saying that I accept the validity of the figures in this Unicef chart.  But Bernie does.)

The answer is that Bernie absolutely knows that the government spending never removes anyone from poverty and is explicitly designed to do the opposite and make sure that poverty never goes down.  But he also knows that there are millions of people like Tehy out there who will never figure this out, and who will always believe that the people who advocate to spend more and yet more money on such disastrous programs should be elected because they "care about the poor."   So Sanders advocates for precisely the kinds of programs that send the federal dollars straight to the core constituencies of the left wing of the Democratic party, like college professors (free college tuition for all!) and that he knows will have no measurable effect on poverty whatsoever.  Are the voters really this easy to fool?

At the end of his/her comment, Tehy asks, if I supposedly hate "crony capitalism," "besides campaign reform, what is your solution for it?"  There is only one solution:  shrink the government.  The smaller and less powerful the government, the less need and use for trying to buy favors.  As government control and regulation become more and more intrusive, then the government can crush the businesses it does not like, and success goes to those who make the political contributions and hire the batteries of lawyers.  And at the socialist extreme, when the government controls everything about the economy, you get the situation of Venezuela, where the richest person is the daughter of recently deceased dictator Hugo Chavez.

I'm Not Making Any Progress In Trying To Understand The Bernie Sanders Phenomenon

A few days ago I asked if someone could explain the Bernie Sanders phenomenon to me, and commenter Justin Ferraro actually took me up on my request.  After giving a series of reasons, his conclusion is that Sanders supporters are just "normal people with brains."

Unfortunately, having read Justin's comment, I'm still scratching my head at the Sanders phenomenon, particularly the explicit willingness to embrace socialism by name even after the series of unmitigated disasters that it has inflicted on humanity in the last century and now the current one.  So, a few thoughts are in order.

I think Justin's main point is his first one, which is that somehow the Soviet Union was not real socialism and if we just execute correctly it will work this time.

Just as the USSR was a sham of a communist country it is also a failure of socialism, which is doomed, like any other economic system, if it exists within an authoritarian framework. American socialism, rooted in democracy, protection of workers, and representation of the people, is a vastly different (if equally maligned idea).

Well, we do have numerous examples of socialist systems implemented by democratically-elected governments.  The current prime example is Venezuela, with Bolivia and Ecuador not far behind.  Then there's Nazi Germany, although I'm not sure that Justin would embrace it as "socialist" despite the Nazis' own use of the term and their adoption of the economic model of extensive government ownership and/or control of industry.  Of course, despite the initial rise to power through democratic elections, each of these examples then more or less took forcible control of the election process to prevent political competitors from ever regaining power.

More importantly, what exactly is socialism without an "authoritarian framework"?  Isn't the very essence of socialism the forcible prevention of consensual economic transactions?  This asset cannot be owned, bought or sold (or only under restrictive conditions specified by the government) because if that is allowed some people will become wealthy and others will not.  The whole idea is to prevent people from enhancing their wealth by trading privately owned property.  That can only be accomplished by government force.

Justin does hold up current day Western Europe as the example of successful execution of socialism:

[T]he fact that [the Manhattan Contrarian] ignores the incredible, demonstrable success of socialist ideas in Western Europe is completely inexcusable.

I guess we'll just have to disagree about that one.  As far as I observe, Western Europe has hugely backed off the main principles of socialism during my lifetime.  When I was younger, governments in places like the UK, France, Italy and Spain owned huge swaths of the economy, mostly (but far from entirely) sold off since.  And of course, the waves of privatization led to substantial economic revivals.  Today these countries don't so much have public ownership of the economy as large welfare states, many consuming 50% and more of GDP in government spending.  Is that the current official definition of "socialism"?  Look at a chart of government spending as a percent of GDP by country and it's easy to see that those that spend the most have languishing economies with all or nearly all growth stamped out: France (56%), Greece (52%),  Italy (50%), Portugal (49%).  All these countries have lower per capita GDP than the U.S., and with no growth, no ability to catch up.  How does that help the middle class?  The UK has cut government spending by several points of GDP in the last few years and has seen economic growth revive.  The strongest economies in the world have dramatically lower government spending (e.g., Switzerland - 34%; Singapore - 17%!).  And then there's the issue that the coddling welfare states have brought plummeting birth rates and incipient population declines.  Are the Western European welfare states sustainable?  This issue will play out over a long time horizon, likely the next 20 to 40 years, but my prediction is that the current situation is not sustainable.  It's what I've called the "socialist death spiral."    An incentive structure has been created where it's in everybody's interest to maximize receipt of state benefits, work less, retire early, and have fewer children.  But we have less income inequality! (at far lower levels of income).  Is that how we define "demonstrable success"?  It's not how I would define it.

And let me mention a couple more of Justin's points.  One is the issue of "big money in politics":

[Sanders] wishes to combat a system that allows unlimited money from corporate interests to directly fund political campaigns, thus decisively wresting any vestiges of government control from the feeble hands of the individual citizen.

Go to Sanders' site, and sure enough he has a section on "Getting Big Money Out Of Politics."  That section talks about the evil Koch brothers and about a "constitutional amendment to overturn the Supreme Court’s Citizens United decision" -- I guess that means doing away with the First Amendment.  But here's my question.  Suppose you give government complete control over all money-raising to support political speech.  Then consider the phenomenon of the Clinton $500,000 speeches and the hundreds of millions raised by the Clinton Foundation, largely from the biggest corporations and wealthy foreign governments -- all completely outside the campaign regulatory process.  Can't everybody else then just copy that model?  So now we've done away with the First Amendment, only to find a completely cynical end run.  And how then do you do away with this end run?  Perhaps by making it illegal to pay anybody a large amount of money or to give any money to "charity"?  Well, that would be socialism all right.

And finally, here's something else that Justin thinks Sanders would do away with:

A system of unregulated, speculative finance that contributes nothing to society and in fact threatens to upturn it completely by triggering economic disaster.

I won't try to stand up for every aspect of our system of finance, but still, I'm fascinated by the fact that some people think it is "unregulated," and also that it "contributes nothing to society."   On the "unregulated" front, I do happen to have a copy of the Dodd-Frank legislation here on my desk, and it's almost too heavy to pick up, about 2000 pages in this printing.  That's just the statute, not the regulations, which are a multiple of the size, and still coming out today five years after the law was enacted.  I can say with great assurance that Justin has not read the Dodd-Frank law and regulations, because nobody has.  It's not physically possible to read it all in a lifetime, and if you could, you could not remember enough of it when you're done to be able even to give a comprehensible summary.  That's why we need hundreds of expensive lawyers, each to become expert in one little sub-part of the law.  And of course, Dodd-Frank itself is just a small part of the many statutes and regulations that cover the financial industry in this country.  Wasn't Dodd-Frank supposed to be the ultimate be-all-end-all answer to the supposed problem of "under-regulation" of the financial businesses in the U.S.?   What it actually demonstrates is the limits of the regulatory model.  The human brain is not capable of learning and complying with this much dense verbiage.  And Justin calls this "unregulated"!  By the way, all this "regulation" has little or nothing to do with market bubbles or their prevention, and even in the world of Dodd-Frank and twenty more such laws there will be more of them as surely as night follows day.

And finally we have the contention that our system of finance "contributes nothing to society."  Really?  I'll definitely have to have subsequent posts on this, but come on.  Our system of finance provides intermediation between millions of investors all over the world and tens of millions of homeowners to enable a housing stock far beyond anything previously known in the world.  Our system of finance enables vast saving for retirement independent of the government and use of those savings to finance factories, farms, offices and shopping centers around the world.  Our system of finance has created the venture and start-up culture that brought us the computer and the smart phone and the internet.  Our system of finance makes it so that a farmer can sell his crop before he plants it (to a speculator!) and be free of the wild price swings that regularly wiped farmers out in past generations.  Our system of finance makes it possible to go to just about any country and charge purchases on a card or withdraw local currency from an ATM with remarkably small losses in the exchange (a fraction of what the exchange losses were when I was younger).  Are there market bubbles that burst from time to time?  Sure.  They are a very small price to pay for the tremendous benefits of our modern financial system.  Really, I just can't get over that some people think the system "contributes nothing." 

UPDATE, September 11:  Word comes from Venezuela via Bloomberg News that opposition leader Leopoldo Lopez has been sentenced to 14 years in military jail for "inciting violence" in connection with his campaign in the 2014 "elections."  The sentence follows a year-long trial held in secret.  Question:  Is this the "authoritarian" or "non-authoritarian" version of socialism?

Can Somebody Explain The Bernie Sanders Phenomenon To Me?

About 25 years ago the Soviet Union collapsed.  For my whole lifetime up until then they had been loudly proclaiming the successful creation of the great workers' paradise, while not letting anyone in to see it.  When it fell apart, it was revealed that the experiment had been a disastrous failure.  The economy was about 10 - 20% the size they had been claiming, with a huge percentage of that (some said close to 50%) devoted to the military.  Factories were inefficient, worn out, and making the same stuff they had made thirty and fifty years previously.  The country produced literally nothing competitive  in the world marketplace other than extracted minerals like oil and gas -- in other words, their socialism had been a one hundred percent failure in keeping up with the change and innovation going on in the world, let alone providing for the material needs of the people.  Oh, and they had killed 25 million or so people as part of imposing totalitarian control.  Hey, if you want to make an omelet you have to break a few eggs!

OK that was a long time ago, before the birth of today's college students.  But we do keep Cuba and North Korea around today to remind us of how bad it was.  Plus we have Venezuela to show us what happens when you try to impose socialism on what had been a somewhat successful (if flawed) market economy.  Sure these guys try to avoid publicizing how bad their economies are.  But there's plenty of information about them out there for anyone who's curious, and they are a little big just to completely ignore.

And then we have the Bernie Sanders phenomenon.  The guy actually proudly calls himself a "socialist."  Could it really be that after the experience of the Soviet Union, and with Cuba, North Korea, Venezuela and others still out there, the concept of "socialism" is other than completely toxic?  Of course, it's the opposite.  It's not just that Bernie is drawing big crowds to make Hillary envious.  It's also that his self-proclaimed "socialism" is trendy among seemingly well-educated young recent college graduates otherwise known as "hipsters."

For example, we have Adam Gabbatt reporting in the Guardian on August 20 on "Millennials 'heart' Bernie Sanders: why the young and hip are #FeelingtheBern."   Gabbatt goes to a Bernie Sanders event in the Bushwick section of Brooklyn ("known for -- or lamented as -- being the hippest part of Brooklyn"), where some twenty-somethings have gathered to listen to a Sanders speech and make tee-shirts supporting their favorite candidate.  Gabbatt notes that the neighborhood remains "mostly Hispanic," but somehow everyone who makes it into his photograph is a white twenty-something.  Gabbatt interviews hipsters including one Nick Kowalczyk, a 29-year-old actor:

“Bernie Sanders uses socialism in the way it makes sense, which is just good, common, moral, ethical policy,” Kowalczyk says. “And I appreciate the guy’s honesty and his steadfastness to his beliefs. His consistency.”  

Well, that's certainly warm and fuzzy.  There are two possibilities here:  one is that none of these people have ever studied one word of the history of the twentieth century;  the other is that at every university in this country today the disasters of socialism are whitewashed and suppressed.

So what is this "just good, common, moral, ethical policy" that Kowalczyk is referring to?  You do have to give Sanders a little credit for at least having a web site where he lays out what he stands for.  (You'll never get that, for example, out of Hillary.)  Of course, he may be leaving a few things out.  For example, there's nothing here about nationalizing business.  Does he favor that, or is that not part of "socialism" any more?  No answer to that question here.  

A fair summary of the Sanders program is de Blasio-ism on a national scale.  There's endless railing against the injustices of the world (income inequality! racism! poverty! violence!) combined with limitless faith in government to fix these problems with programs, programs and yet more programs.  There's the usual socialist diversion of placing all the blame for the problems of the world on the speculators and hoarders, here known as "Wall Street" ("for the past 40 years, Wall Street and the billionaire class has rigged the rules to redistribute wealth and income to the wealthiest and most powerful people of this country").  There's no recognition whatsoever that we already have a trillion dollars a year of government anti-poverty programs that by his own assertion have not made the slightest dent so far in the problems he identifies.  And finally, of course, there are the proposed "solutions" that for a few more gazillions of dollars into the pockets of government bureaucrats either won't address the problems at all or are highly likely to make them worse.

Number one in Sanders's list of issues is of course income inequality.  A big chart shows the increasing share of the top 1% in pre-tax income.  And the number one proposed solution?  "Demanding that the wealthy and large corporations pay their fair share in taxes."  Should somebody tell the poor guy that doubling or even tripling the taxes won't change his chart in the slightest?  Other proposed solutions to income inequality include free college tuition for all (Do you believe that will have any measurable effect on the distribution of income?  I don't.) and a vast expansion of social security (Has anybody told him that it's already an unsustainable Ponzi scheme?). 

Then there's "creating decent paying jobs."  Who could be against that?  Turns out that every idea he has for "creating decent paying jobs" consists of government handout jobs programs.  ("Introduced the Employ Young Americans Now Act with Rep. John Conyers. It would provide $5.5 billion in immediate funding to employ one million young Americans between the ages of 16 and 24, and would provide job training to hundreds of thousands of others.")  If he has any recognition that real "decent paying jobs" have to be created by the private sector, you won't find that here.  Then of course he touts his opposition to all free trade agreements.  Does he acknowledge that the alternative to free trade is tariffs and trade preferences for the government's cronies?  Of course not.

There's a big section on "racial justice."  ("Communities of color also face the violence of economic deprivation. Let’s be frank: neighborhoods like those in west Baltimore, where Freddie Gray resided, suffer the most.")  Well, Baltimore and essentially every other city with the same types of problems in this country has been governed by left-wing Democrats peddling programs just like those touted by Sanders since beyond human memory.  When does it ever become time to take ownership of the failure of these programs?

There's more detail, but you get the gist.  Let's add another, and yet another, and then yet another government program until the world becomes perfect, without any critical examination of the vast expenditure already underway that has accomplished nothing.  And of course there is no limiting principle, no guiding star of any sort to tell us when the collection of programs has done all that it is capable of accomplishing.  We just keep going until the last bit of success has been stomped out of the economy.  But don't worry, there's a special exemption under socialism for families and cronies of the jefe to become billionaires. 

Yes, young hipsters, it's all so very inspiring. 

In Case You Thought The Chinese Know What They're Doing -- Part III

Spending hundreds of billions of dollars of state funds to support the stock market.  Spending more hundreds of billions of state funds to make new loans to failed businesses so that "zombie" factories won't close and keep operating with few to no customers.  Using state banks to allocate credit to businesses selected by the political leaders.  All these have been the economic policies adopted by the leaders of China in the face of the recent stock market downturn and revelations of significant overcapacity in major business sectors.  Could the economic policies followed by China possibly get any worse?

Yes!   For about the past two weeks there have been rumblings of the beginnings of criminal investigations against market participants for allegedly being the cause of the downturn.  This morning, the Financial Times has the latest in an article titled "China blame game spooks investors."  Seems like the economic genius powers that be in China, having never heard of the phenomenon of market bubbles, have decided that the downturn must have been caused by some combination of "malpractice, manipulation, and 'rumour mongering'."  They are in the process of rounding up the usual suspects:

The authorities have arrested, or investigated, several employees of brokerages, listed companies, and even the market regulator itself as they seek to tackle malpractice, manipulation, and "rumour-mongering". . . .  [O]fficial focus has shifted towards probing and punishing individuals and institutions the authorities believe took advantage of the state bailout to make profits, or who obstructed the government's attempts to shore up the market.

The FT reports that a prominent hedge fund head, Li Yifei (a woman) was "summoned" several days ago for meetings with the authorities, and hasn't been heard from since.  Then there was the reporter from Caijing magazine who reported (correctly) that the government was planning to scale back its massive stock market purchases.  He found himself forced to make a public confession on national television that his report had caused "panic and disorder" in the market.  Do they really believe that these kinds of witch hunts are somehow going to restore confidence in the markets?

Of course, it's exactly the opposite.  What they really should be trying to do is set up the conditions to encourage major outside investors to come in and start buying as soon as the market gets to appropriate valuations.  Instead, what they are doing is virtually certain to scare people off.  Investors have of course been spooked, and rightly so:

China has spent years courting foreign investors, in the hope that more institutional money would help anchor a retail-driven market long prone to bubbles and busts.  But many global funds -- even those long accustomed to China's erratic, opaque stock markets -- have begun pulling back.

It's all in the great tradition of economic ignoramuses who blame all economic problems on some kind of malign financial players, the "hoarders and speculators," the "greedy bankers," the Jews, whatever.  Like Chavez and Maduro in Venezuela, constantly announcing yet another crackdown against the hoarders and speculators, as if their own wild overspending, exchange controls, crony capitalism and currency printing had nothing at all to do with the economic problems.  Or Elizabeth Warren, who thinks that the U.S. economic downturn of 2008/9 was all the fault of "greedy bankers."