John Kay says that the term “capitalism” is misleading in modern economies:
..So the business leaders of today are not capitalists in the sense in which Arkwright and Rockefeller were capitalists. Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital. They have obtained these positions through their skills in organizational politics, in the traditional ways bishops and generals acquired positions in an ecclesiastical or military hierarchy. …
And Mark comments on the article:
This is an important point, and it relates directly to the claim by many that inequality is needed in capitalist economies as an engine of growth. I think small businesses still operate in something resembling old fashioned capitalism — owners putting their own resources at risk to open a new business — but big business is another story (and in some cases, such as the finncial industry, too big too fail considerations reduce risk considerably for high level executives making arguments that this type of risks motivates innovation, etc. hard to swallow).
Via Reuters comes David Cay Johnston’s musing on Closing Wall Street’s casino:
A superb example of a sound rule in law and economics that needs reviving, because it can halt the rampant speculation in derivatives, is the ancient legal principle that gambling debts are not enforceable through court action.
Not so long ago — before casinos, currency and commodities speculation, and credit default swaps became big business — U.S. courts would not enforce gambling debts.
Restoring this principle offers a simple way to shrink the rampant speculation in derivatives that was central to the 2008 meltdown on Wall Street.
Professor Lynn Stout, a deeply principled Republican capitalist who teaches corporate law at the University of California, Los Angeles, raised this issue at a conference where we both spoke about the 2008 Wall Street meltdown.
“Derivatives are gambling,” she said, referring to credit default swaps, at the University of Missouri-Kansas City law school conference on the financial crisis. “They are a zero-sum game in which one side loses the bet and one side wins,” Stout said.
Actually they are worse than that, since the hefty fees Wall Street pockets for arranging the bets result in a less-than-zero-sum game.
As Wall Street fights meaningful financial regulations, and draft regulations remind us how complex and unfathomable regulations can be, this is a good time to remember the basic principles that served society so well until Chicago School theorists, and casino corporations, together with commodities and currency traders convinced us we were too modern to need them.
Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.
The fund manager says he was shocked that Paulson would furnish such specific information — to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information.
There’s no evidence that they did so after the meeting; tracking firm-specific short stock sales isn’t possible using public documents.
And law professors say that Paulson himself broke no law by disclosing what amounted to inside information.
The article goes on:
At the time Paulson privately addressed the fund managers at Eton Park, he had given the market some positive signals — and the GSEs’ shares were rallying, with Fannie Mae’s nearly doubling in four days.
William Black, associate professor of economics and law at the University of Missouri-Kansas City, can’t understand why Paulson felt impelled to share the Treasury Department’s plan with the fund managers.
“You just never ever do that as a government regulator — transmit nonpublic market information to market participants,” says Black, who’s a former general counsel at the Federal Home Loan Bank of San Francisco. “There were no legitimate reasons for those disclosures.”
Janet Tavakoli, founder of Chicago-based financial consulting firm Tavakoli Structured Finance Inc., says the meeting fits a pattern.
“What is this but crony capitalism?” she asks. “Most people have had their fill of it.”
The Bloomberg article is worth reading in its entirety.
(Elizabeth Warren has hired a campaign manager and has thousands of volunteers signing up for her campaign for the Senate seat in MA that Senator Scott Brown currently occupies. He has a lot of work to do for this election.)
Guess who wrote this op-ed??
The moment you threaten to strip politicians of their legal graft, they’ll moan that they can’t govern effectively without it. Perhaps they’ll gravitate toward reform, but often their idea of reform is to limit the right of “We the people” to exercise our freedom of speech in the political process.
I’ve learned from local, state and national political experience that the only solution to entrenched corruption is sudden and relentless reform. Sudden because our permanent political class is adept at changing the subject to divert the public’s attention—and we can no longer afford to be indifferent to this system of graft when our country is going bankrupt. Reform must be relentless because fighting corruption is like a game of whack-a-mole. You knock it down in one area only to see it pop up in another.
What are the solutions? We need reform that provides real transparency. Congress should be subject to the Freedom of Information Act like everyone else. We need more detailed financial disclosure reports, and members should submit reports much more often than once a year. All stock transactions above $5,000 should be disclosed within five days.
We need equality under the law. From now on, laws that apply to the private sector must apply to Congress, including whistleblower, conflict-of-interest and insider-trading laws. Trading on nonpublic government information should be illegal both for those who pass on the information and those who trade on it. (This should close the loophole of the blind trusts that aren’t really blind because they’re managed by family members or friends.)
No more sweetheart land deals with campaign contributors. No gifts of IPO shares. No trading of stocks related to committee assignments. No earmarks where the congressman receives a direct benefit. No accepting campaign contributions while Congress is in session. No lobbyists as family members, and no transitioning into a lobbying career after leaving office. No more revolving door, ever.
by Linda Beale
crony capitalism and casino capitalism–bad flavors for right or left, per Kristof and Stiglitz
The Occupy Wall Street focus on “we are the 99 percent” juxtaposed with the CBO’s recent report on the growing inequality in America (see here) come at a time when the American right is pushing hard for policies, like Perry’s so-called “Flat Tax” and Cain’s so-called “FairTax”, that will exacerbate that inequality in a winner-take-all economic system that rewards the speculators and fat cats to the detriment of ordinary society. Hopefully those first two items will cause ordinary folk to think twice before supporting that exacerbating trend on the right. The right likes to disguise them as ‘folksy’ ‘down-home’ populism. They aren’t. They are wolves disguised in sheep’s clothing.
In Crony Capitalism Comes Home, New York Times (Oct. 26, 2011), Nicholas Kristof notes the “alarmist view” of Occupy Wall Street rampant among the media and the elitist critics of the movement–one that sees the protesters as “half-naked Communists aiming to bring down the American economic system” or “a ‘mob’ trying to overthow capitalism.” He rightly responds that it is instead a movement that “highlights the need to restore basic capitalist principles like accountability.”
[I]n recent years, some financiers have chosen to live in a government-backed featherbed. Their platform seems to be socialism for tycoons and capitalism for the rest of us.
The American critique of the Asian crisis was correct. The countries involved were nominally capitalist but needed major reforms to create accountability and competitive markets. Something similar is true today of the United States.
Capitalism is so successful an economic system partly because of an internal discipline that allows for loss and even bankruptcy. It’s the possibility of failure that creates the opportunity for triumph. Yet many of America’s major banks are too big to fail, so they can privatize profits while socializing risk.
[Mohamed El-Erian, chief executive of Pimco] told me that the economic system needs to move toward “inclusive capitalism” and embrace broad-based job creation while curbing excessive inequality. “You cannot be a good house in a rapidly deteriorating neighborhood,” he told me. “The credibility and the fair functioning of the neighborhood matter a great deal. Without that, the integrity of the capitalist system will weaken further.”
Kristof and El-Erian are correct.
The movement in the US over the last few decades has made crony capitalism possible by pretending that abstract economic theories about “free markets” developed by Milt Friedman and his Chicago boys and based on unreal assumptions about human behavior should not only be consulted for setting fiscal policy but are the “God’s Truth” bible from which such policies should be derived. This has led to the capture of the markets by big money. Swarms of lobbyists for Big Oil/ Insurance/ Banks/ Pharma draft the laws that apply to their industries then work with the agencies to draft favorable interpretations into the regulations and then use powerful firms funded by business coalitions like the U.S. Chamber of Commerce, National Association of Manufacturers or supported by “business-funded so-called ‘think tanks’ to exploit the courts (packed by the right in the four decades since Reagan) to push industry favorable policies no matter the ‘externalities’ for people’s lives, the environment, other priorities, and individual freedoms.
Crony capitalism doesn’t hold capitalists accountable for what they do. We put minimal if any restraints (tax law, anti-trust law, patent law) on business monopolization and business consolidation and business ability to use the power of money to influence the work of legislators, executives and courts. We allow private equity funds that buy, fire, and sell at great profits to themselves but at great cost to communities, not just in jobs lost, but also in abandoned buildings left to be handled at the taxpayers’ expense and polluted waterways, ground and air left to be cleaned (if at all) at taxpayers’ expense. Wal-Mart moves from one address to another across the street and a short hop down the road, because it gets a new tax rebate from the county over the line and leaves behind the community that gave it a tax rebate for the first store, without ever providing the financial benefits the rebate was intended to buy and leaving behind the pollution, waste and destruction of an empty shell megabuilding (real life anecdote from Champaign, Illinois).
Crony capitalism results in excessive inequality (witness the way the managers and owners have accrued all the productivity gains of the last decade) and excessive inequality furthers crony capitalism.
[Lawrence Katz, a Harvard economist, says that] excessive inequality can have two perverse consequences: first, the very wealthy lobby for favors, contracts and bailouts that distort markets; and, second, growing inequality undermines the ability of the poorest to invest in their own education. “These factors mean that high inequality can generate further high inequality and eventually poor economic growth.”
This is very similar to what Joseph Stiglitz has been telling us for some time. In his 2010 book, Freefall, Stiglitz recognized that America’s economic crisis stemmed in part from unfounded faith in Econ 101. :
Modern economics, with its faith in free markets and globalisation, had promised prosperity for all. The much-touted New Economy – the amazing innovations that marked the latter half of the 20th century, including deregulation and financial engineering – was supposed to enable better risk management, bringing with it the end of the business cycle. If the combination of the New Economy and modern economics had not eliminated economic fluctuations, at least it was taming them. Or so we were told.
The Great Recession – clearly the worst downturn since the Great Depression 75 years earlier – has shattered these illusions. (This and the following excerpts are from the extract of his book, Why we have to change capitalism, The Telegraph)
Saying that does not make anyone “against capitalism”. It just means that we must open our eyes to understand the potential that unfettered capitalism has for highly negative destruction. As Stiglitz says, “markets lie at the heart of every successful economy but … [they] do not work well on their own.” We have to let government work to correct the imbalances that otherwise result from unfettered capitalism–especially the kinds of imbalances that start to grow when casino capitalism is let loose by socializiation of losses and privatization of gains resulting in enormous inequality within the society.
Economies need a balance between the role of markets and the role of government – with important contributions by non-market and non-governmental institutions. In the last 25 years, America lost that balance, and it pushed its unbalanced perspective on countries around the world. The current crisis has uncovered fundamental flaws in the capitalist system, or at least the peculiar version of capitalism that emerged in the latter part of the 20th century in the US.
[A] closer look at the US economy suggests that there are some deeper problems [than just the ones resulting from our current financial crisis and recession]: a society where even those in the middle have seen incomes stagnate for a decade, a society marked by increasing inequality; a country where, though there are dramatic exceptions, the statistical chances of a poor American making it to the top are lower than in “Old Europe.”
Stiglitz concludes, as many of us have, that this crisis should be taken as an opportunity to ask what kind of society we would like to have and to make the changes necessary to ensure that we are on the right path.
We have gone far down an alternative path – creating a society in which materialism dominates moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together as a community to address our common needs, partly because rugged individualism and market fundamentalism have eroded any sense of community and have led to rampant exploitation of unwary and unprotected individuals and to an increasing social divide.
The model of rugged individualism combined with market fundamentalism has altered not just how individuals think of themselves and their preferences but how they relate to each other. In a world of rugged individualism, there is little need for community and no need for trust. Government is a hindrance; it is the problem, not the solution.
But if externalities and market failures are pervasive, there is a need for collective action, and voluntary arrangements will typically not suffice.
The government plays an important role in restraining the “dark angels” of capitalism and allowing the “good angels” to operate for the benefit of society. Without government as an enforcer of accountability and trust, some version of crony capitalism and its brute-force harm to those who lose out in the struggle for wealthy is inevitable.
This crisis has exposed fissures in our society, between Wall Street and Main Street, between America’s rich and the rest of our society. While the top has been doing very well over the last three decades, incomes of most Americans have stagnated or fallen.
We need to keep this in mind, as we deal with the myriad proposals coming from the right to continue the trend of unfettered markets, crony capitalism and winner-take-all policies. Deregulation for Big Banks/Oil/Pharma et al will not create jobs, tax cuts for the wealthy will not unleash broad-based growth, and larger inflows of lobbyists [see, e.g., Eggen & Farnam, Lobbyists playing key role in 2012 fundraising, Wash. Post (Oct. 27, 2011)] into even our political decisionmaking processes made possible by the Citizens United case will not provide ever more “free speech” for everyone. These are excesses of brute-force capitalism exercised in a plutarchy, not evidence of a sustainable democracy.
The answer is what might be called “mitigated capitalism”–an economy that can benefit from the incentive power of capitalism, but that limits and restrains its excesses through reasonable social welfare programs and safety nets for those that are left behind in one way or another, strong emphasis on providing public education and other systems that allow individuals to take advantage of opportunities to advance themselves, and strong enforcement of laws that protect the public commons (natural resources, air, water, land, and the public square) for the public. The progressive income tax–a system that taxes every person on their income from whatever source (capital or labor)–and the estate tax–a system that redresses the inability of the tax system to capture the appreciation of capital resources during a person’s lifetime–are key ingredients of the tax answer to preventing crony/brute-force capitalism’s sway.
October 27, 2011 in Chicago School/Freshwater Economics, Debunking the Reagan “Free Marketarian” Myth, Democratic Egalitarianism, Estate Tax, Inequality of wealth or income, Occupy Wall Street, Sustainable Economy, Tax Policy | Permalink
by divorced one like Bush
The OCC is: Office of the Comptroller of the Currency
The OCC was established in 1863 as a bureau of the U.S. Department of the Treasury. The OCC is headed by the Comptroller , who is appointed by the President, with the advice and consent of the Senate, for a five-year term. The Comptroller also serves as a director of the Federal Deposit Insurance Corporation (FDIC) and a director of the Neighborhood Reinvestment Corporation.
The OCC’s activities are predicated on four objectives that support the OCC’s mission to ensure a stable and competitive national banking system. The four objectives are:
To ensure the safety and soundness of the national banking system.
To foster competition by allowing banks to offer new products and services.
To improve the efficiency and effectiveness of OCC supervision, including reducing regulatory burden.
To ensure fair and equal access to financial services for all Americans.
Out of the 4 statements and I count 9 items, I think they only have achieved two items:
…allowing banks to offer new products and services
…including reducing regulatory burden.
The OCC does not receive any appropriations from Congress. Instead, its operations are funded primarily by assessments on national banks. National banks pay for their examinations, and they pay for the OCC’s processing of their corporate applications. The OCC also receives revenue from its investment income, primarily from U.S. Treasury securities.
Ring a bell?
If yes, you are probably thinking about the one that got Elliot Spitzer and the other 48 AG’s pissed off. That one certainly needs to be reversed. Infact, the AG is going before the Supremes on the 25th. There is a push to get Obama et al to change this ruling.
WASHINGTON, D.C. –
For the past four years, the OCC has been championing deregulatory and minimal standards against states that have been trying to enact higher standards for banks and their operating subsidiaries. When states tried to monitor mortgage lending and protect consumers, the OCC invited national banks to contact the agency, which then wrote letters to banks and state banking agencies asserting that states had no authority to do so. The OCC also sided with national banks in the courts, writing amicus briefs arguing that state monitoring and enforcement in a variety of areas did not apply, and that only the OCC could investigate and enforce laws against nationally chartered banks.
After the Second Circuit Court sided with the OCC, the Attorneys General of all 50 states urged the Supreme Court to take up the case and reverse the appeals court decision. The Supreme Court agreed and, on March 25, the U.S. must file its brief in the case on behalf of the OCC, an agency under the Treasury Department.
With all the talk about re-regulating why have we not heard boo from Obama et al about changing this. I mean, he changed with a simple pen other bad positions from the last administration that are not related at all to the #1 issue of world wide economic collapse. What could be more simple and basic to steps to be taken to resolving this crisis than undoing the OCC ruling? Why is Obama leaving this OCC issue to chance when the Supremes already ruled in favor of Wachovia against Michigan?
This included the case decided by the U.S. Supreme Court last year against Michigan, in which the OCC sided with Wachovia Bank and argued that state mortgage lending laws and oversight could not apply to a national bank’s operating subsidiary.
Just read this article from 2005 about the issue to see what the pro-OCC crowd was thinking.
Ok, it wasn’t that ruling you were thinking of. Maybe you were thinking about the OCC ruling letting banks be realtors and real estate developers? I would understand, it was a 2006 ruling making it a little more fresh in the mind. Needless to say, the National Association of Realtors was not happy.
The OCC decisions permit U.S. national banks to engage in the business of real estate development by developing and operating a luxury hotel; financing, developing, operating and leasing space in a mixed use building (including developing residential condominiums for sale). They need only argue that a small portion of the project is needed for bank premises or that a part of the project is needed to make the rest economically feasible. They may also hold a 70 percent equity stake in a windmill business, qualifying for special tax credits. Three national banks were given the green light to engage in these business activities.
Well there goes the green powered economy Obama wants.
But there was another ruling from the OCC that I’m thinking of. A ruling that requires Obama to undo a Clinton era position from 1996. And, funny thing it had an entire industry all bent out of shape that today would not be recognized as completely and entirely distinct from the banks; the insurance industry.
Office of the Comptroller of the Currency; bank subsidiaries may sell insurance
WASHINGTON — Insurance groups are vowing to do everything possible to block a new ruling by the Office of the Comptroller of the Currency that could allow national banks to form operating subsidiaries that sell and underwrite insurance.
Gary Hughes, vice president and chief counsel with the Washington-based American Council of Life Insurance, said his preliminary analysis suggests two possible levels of attack.
First, Mr. Hughes said, insurers could charge that Comptroller Eugene Ludwig does not have the power to adopt the ruling. Second, he said, insurers could say that even if the ruling is lawful, insurance underwriting is not incidental to banking and thus …
Are you seeing a pattern here? No? How about this 2002 ruling:
A recent ruling by the Office of the Comptroller of the Currency eased fears of marketers in the credit card industry about any possible new rules that could have hampered telemarketing of debt suspension and cancellation agreements.
In addition, the OCC declined to consider the agreements a type of insurance product. Doing so would have taken the agreements out of the hands of federal regulators and into the jurisdiction of the states, opening the possibility that they would be subject to 50 different state laws.
The OCC also ruled that marketers could provide consumers with short-form disclosures at the time of closing an agreement provided that they mail a long-form disclosure brochure afterward. The new rules take effect in June 2003.
How did the OCC get to do this? Guess!
Congress granted the OCC the authority to regulate credit card marketers when it passed the Gramm-Leach-Bliley Act in 1999. In 2000, the office published a notice of proposed rulemaking stating that it was considering changes regarding debt suspension and cancellation agreements.
I know we are all thinking the bad guys have been the prior Treasury, Fed and AG. But I gotta tell you, looking at these OCC actions, the OCC seems to be the real Ace under the table and NO ONE IS TALKING ABOUT THEM! Hell, they get their money from fees charged to the industry they regulate. And recently we heard that a part of their directorship duties, the FDIC, hasn’t been collecting the insurance premiums. Though that was do to congress I guess. I mean, no influence from the industry here (cough, cough, choking, choking).
I just can’t resist closing with this statement about why the fees were not collected. They (as in congress, bankers, financiers) really believed in the free lunch money from money theories.
But James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because “the fund became so large that interest income on the fund was covering the premiums for almost a decade.”
Yeah, just like your 401K huh?
Forty years ago, in 1968, an American major after the battle of Ben Tre in Viet Nam was quoted by Peter Arnett as having declared, “It became necessary to destroy the town to save it.”
Now, we have the contemporary version, from U.S. President George Walker Bush: “I’ve abandoned free-market principles to save the free-market system.”
This, apparently, is why banks are being paid not to make loans.
We already gave them $900 Billion. (Or, as I would prefer to write it, just so everyone understands: $900,000,000,000. About 3,000 a person, or 26.7% of the annual median household income, assuming a family of four.)
What would makes anyone think another $700,000,000,000 will solve the problem? Just because “sooner or later, you’re talking about real money”?
It is, or should be, no longer possible to pretend that this is still just a liquidity crisis. Certainly, the Fed isn’t doing so. It is well beyond that.
Adding liquidity will not solve the problem. And if the plan is to buy assets above their value—then why are we expected to buy Beanie Babies? Shouldn’t we be selling them to Treasury Secretary
Gramm Fiorina Paulson?