Crony Capitalism Caused the Crisis

Our power-grubbing politicians never shy away from blaming the shortcomings of capitalism for the “Great Recession” of the 21^st Century.  The old mantra goes, “capitalism is a flawed system that requires government intervention to alleviate the suffering caused by its shortfalls”.  Supported by their tax dollar dependent cronies in academia and their big government loving mouthpieces in the mainstream media, our ruling elite has been effective in socializing the masses that they know what they are talking about.  It is of course all an attempt to justify expanding the size of government even more so there is more for the politicians to give away to their faithful supporters.

Capitalism did not cause the financial crisis that we are still mired in some 29 months after it began; crony capitalism did.  Crony capitalism is loathed by every proper capitalist because it is more akin to the corrupt socialist systems of the past than to true capitalism.  In true capitalism, the primary responsibility of the government is to protect private property rights and prevent and punish fraud.  How can a system that confiscates private property through taxes (income and property) and transfers that property to others (domestic and foreign welfare) be called capitalist?    How can a system that takes from one to prop up the failure of another be called capitalist?  In terms of fraud, how many bank loan officers and borrowers who provided false information on the mortgage applications that contributed to the crisis have been prosecuted and jailed?  Uncle Sam has a weak record at best when it comes to exhibiting the qualities of a government operating in a capitalist system.

Instead, Washington has built a system based on favoritism and patronage.  Look at “Too big to fail”.  This should be translated into “Our Friends are the best”.  Hundreds of billions, if not trillions of taxpayer dollars, have gone into bailing out companies that in return can be counted on to contribute billions of dollars to Republican and Democratic campaign coffers.  The rationale we were told is that if any one company went under our economy would fall off the cliff.  Really, I don’t remember being airborne when Lehman Brothers was allowed to go belly up.  “Too big to fail” was a hoax perpetrated on the American public so the politicians could repay their campaign benefactors.  And they are at it again with their attempt to institutionalize “too big to fail” in financial reform legislation before the Senate.

In a true capitalist system GM and Chrysler would have been allowed to go bankrupt.  Their assets would have been purchased by other entities and workers would have been hired for hopefully a more profitable endeavor.  The economy would have been rid of a drag on it and therefore would be more able to operate at an efficient level.  Instead, what we got from our crony capitalist system was a huge taxpayer bailout that primarily benefitted the United Auto Workers Union (UAW).  In fact, it’s telling that the entity which for years demanded higher wages and benefits and was most responsible for the demise of GM and Chrysler was able to claim a huge stake in both companies ownership as a result of the government’s bailout deal.  At the end of the day, the UAW is richer, the politicians get their campaign contributions from Motown and the American taxpayer will ultimately have to bail out the car companies again sometime in the future.  

Now, it is true that if the bailed out financial companies were left to go under a lot of honest folks would have lost a lot of money.  But, that is only because of the system the crony capitalists have built.  The Federal Deposit Insurance Corporation (FDIC) allows depositors to place their money in banks without any worry that regardless of how irresponsible their bank may be they will always get their money.  Would you eat at a restaurant that was known for food poisoning?  I didn’t think so, but it doesn’t matter to you that you probably still have your money in a bank that acted irresponsibly and lost it in the early 2000s.  Even though they have brought the economy to its knees you will still get your money through government insurance.  Then, there is Fannie and Freddie Mac who really work on behalf of mortgage lenders and the real estate industry.  These two entities guaranteed (with taxpayer money) all the irresponsible behavior of the failed banks.  When the crisis unfolded what did Uncle Sam do to them?  He bailed them out and allowed them to add even more mortgages to their portfolio.   

In a true capitalist system much of the behavior that brought on the financial crisis would not have happened.  Bankers would have known that they faced the possibility of losing everything, their wealth, career, and even their freedom through reckless and/or fraudulent acts.  Government would not have been there to cushion their fall.  Of course, the biggest thing that would not have been there for them in a capitalist system would have been the existence of a central bank.

Indeed, the Federal Reserve Bank is certainly the most anti-capitalist feature of our economy.  In essence, it is a secretive small cabal of monetary central planners that determine the value of our money and stands ready to act as lender of last resort for over-leveraged banks.  It has been responsible for all of the big economic crises since its inception in 1914.  It caused the Great Depression with its easy credit policies towards banks and Wall Street.  It was responsible for the hyper-inflation of the 1970s and the savings and loan crisis of the 1980s because it monetized the Vietnam War and the social programs of Johnson’s “Great Society” of the 1960s.  In just the last fifteen years, it inflated the dot com and housing bubbles causing the biggest economic downturn since the Great Depression.  The Fed’s answer to the crisis, lower interest rates and bailout the banks.  There is no question where the Fed’s loyalty lies.  And this loyalty has paid off handsomely for its constituency – Goldman Sachs (GS), JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), Morgan Stanley (MS), and Citigroup (C) — together have posted $62 billion in after-tax profits in just the last 18 months!  Meanwhile, the true unemployment rate continues to hover around 17 percent, foreclosures are up, and the cost of health care is through the roof.

True capitalism is not perfect, but then again no system is.  To blame capitalism for the financial crisis is absurd.  We have a crony capitalist system in the United States where politicians pander to corporatists and unions and in return get huge amounts of money to monopolize the political system.  It’s a vicious cycle that benefits Washington.  No wonder it spends all of its time blaming capitalism for crises.

Article first published as Crony Capitalism Caused the Crisis on Blogcritics.

As Usual, Government Regulation as Political Payoff

I heard the president’s speech at Cooper Union College today and thought it was quite bizarre that he would criticize Wall Street for bad behavior when Washington is currently running our national debt through the roof and the policies that emanated from there in the last ten years caused our current financial crisis.  The old adage about those that live in glass houses and stone throwing immediately came to mind.  But, the president really believes that the financial crisis we still find ourselves in despite trillions of dollars in Keynesian spending is somebody else’s fault.  In fact, he indicated that, “…the system as it stands is what led to a series of massive, costly, taxpayer bailouts.”  And I thought it was Mr. Obama and his big government colleagues in the Congress who voted unconstitutionally to give away our money to the greedy, misbehaving banks.

Now, the president’s bizarre remarks are one thing, but the financial regulation bill before the Senate is even more bizarre.  Crafted by Connecticut Senator Chris Dodd, the bill will do nothing to fix the real causes of the financial crisis. In actuality, the bill amounts to nothing more than a political payoff for Dodd’s benefactors on Wall Street.  And this should come as no surprise since Dodd’s donor list reads like a who’s who of the financial services sector.        

First of all, Dodd’s bill does nothing to address the primary culprit of the financial crisis – the Federal Reserve.  Yes, consumers took out mortgages they could not afford and loan officers falsified applications knowing that they would collect their commissions long before the bad loans defaulted on a bigger institution up the line.  But the Fed supplied the poison for it all to happen – easy money.  After 911, Alan Greenspan’s Fed kept interest rates artificially low at 1 percent for three years.  This encouraged a mortgage craze as trillions of dollars were borrowed.  It was a government sponsored get rich quick scheme as many housing investors bought homes with low teaser rates and no money down.  You know the rest of the story – homeowners leveraged their homes to the max, rates adjusted up and the bubble burst when many folks could no longer afford their payments.  To add insult to injury, the Fed came to the rescue of financial institutions, even foreign ones, at the expense of taxpayers.  Make no mistake about it, the Federal Reserve exists for the profit making of banks alone.  It was established by bankers; it is run by bankers; it allows banks to inflate dollars through fractional reserve banking; and it is there for them when they need a few dollars to keep the charade going.  No other industry has a full government agency to support its shady dealings like the banking industry.  Dodd’s bill, by ignoring the Fed’s culpability in the crisis, has no chance of preventing financial calamities in the future.  Additionally, it only benefits the big banks since their benefactor, the Fed, will continue to operate unencumbered by any new regulations or oversight.

If ignoring the Fed’s role in the financial crisis is not bad enough, Dodd’s bill also institutionalizes “too big to fail” bailouts.  It should be pointed out that a major rationale of financial reform is to ensure that taxpayers never again get stuck with bailing out firms that are too crucial to our economy to fail.  Well, Section 113 of the bill provides for a “Financial Stability Oversight Council” which would identify distressed firms whose failure would “pose a threat to the financial security of the United States…”  Section 210(n)(1) establishes an “Orderly Resolution Fund” within the U.S. Treasury that would provide $50 billion in bailout money funded by taxes on financial firms.  Of course, ultimately those taxes would come from consumers in the form of higher bank fees.  These two sections of the bill essentially provide implicit guarantees from the government against failure for big banks.  They extend the life of the moral hazards that we have become too familiar with.  In the end, they will encourage big banks to continue to take undue risks which will once again put taxpayers in harm’s way.  These sections of Dodd’s bill will not prevent future financial crises.  On the contrary, they only benefit big banks by allowing them to risk everything with the knowledge that taxpayers will be there to pony up bailout funds for them.

Since 1989, Chris Dodd has received over $12 million in campaign contributions from the financial services industry.  They own him and this bill proves it.  On the other hand, the president is yet to embrace Dodd’s bill.  In his speech at Cooper Union he said to financial firms, “I want to urge you to join us, instead of fighting us in this effort.”  If he chooses Dodd’s bill to reform the financial industry he probably won’t get much of a fight from Wall Street.

You Should be Furious!

There are certainly a lot of things that Washington does that should make the average American citizen furious.  I would like to point out just four: the hypocrisy of the illegality of purchasing foreign prescription drugs, federal employee salaries, the job busting cap and trade legislation, and the wanton destruction of the dollar.

The price of prescription drugs in the United States has increased by 9 percent in the last year.  Certainly the ever increasing cost of drugs is a major reason for the pressure on Congress to reform our healthcare system.  However, currently it is illegal for Americans to import cheaper prescription drugs from outside the United States.  Drugs produced by American companies, but sold in foreign markets are usually between 35 to 55 percent lower in price due to price controls of other countries.  It is an outrage to me that we are not able to take advantage of the stupidity of other governments and import and buy their cheaper American made drugs.  The same bleeding hearts in D.C. that whine about how people are dying because they can’t afford prescription drugs are standing in the way of those folks getting cheaper drugs.

Now, an argument given for keeping importation illegal is that the safety of the drugs cannot be guaranteed.  Nonsense!  We are talking about countries like Japan, the United Kingdom, and Canada which have product protection mechanisms in place.  Personally, I’ve lived in the developing world for 8 years and my family has never had an issue with unsafe drugs in those countries.  The bottom line is that there is an easy way to cut drug costs and provide much needed medication to the financially strapped sick, but Congress refuses to do the right thing.

Then there is the story reported by USA Today that the number of federal employees who make $100,000 or more jumped from 14 percent to 19 percent of all bureaucrats during the first 18 months of the recession.  The average federal worker’s salary is now $71,206 compared to $40,331 for private sector employees.  To put it in even greater perspective, in December 2007 the Transportation Department had one employee earning $170,000.  By June of 2009 the department had 1,690 workers with salaries above $170,000.  Substantial pay raises and new salary rules were the reason for the jump in salaries.  So while 7.2 million Americans were losing their jobs, not only were financial institutions and car manufacturers bailed out, your tax dollars also went toward ensuring the comfort and security of our ruling bureaucrats.  Not only did Uncle Sam not cut back on labor costs like the rest of America, he handsomely rewarded those that produce very little if anything that benefits society.  All Americans should be furious.

Turning to the environment, if Congress was intent on destroying jobs in these tough times it would have immediately passed the 1500 page cap and trade legislation.  The painful new taxes the legislation would have imposed on all of us would have increased business costs and reduced aggregate demand thereby making an awful job market that much worse.  Additionally, Environmental Protection Agency administrator Lisa Jackson admitted during a Senate committee hearing that the bill would not significantly reduce global carbon concentrations in the atmosphere.

Fortunately, Democrats have sat on the legislation given the political risks to their careers of passing it.  But, just one minute, because to the rescue comes the EPA.  This past week the agency issued an “endangerment finding” that global warming is hazardous to human health.  In addition, the enviro-nazis at the EPA threatened Congress that if it didn’t pass cap and trade then it, the EPA, “would act on its own—and in a far more blunt fashion than Congress preferred.”   According to one anonymous administration official, ,” the EPA is going to have to “regulate in a command-and-control way, which will probably generate even more uncertainty.”

Why is the EPA going to impose regulations that it admits will not significantly reduce global carbon concentrations in the atmosphere?  Why does Congress put up with this extortion?  Wasn’t the EPA created by Congress and thus answerable to it and not the other way around?  Why would Congress allow a bunch of unelected bureaucrats to decide policy?  The answer is easy: to deflect blame for stupid policy.  The EPA is doing Congress a favor – it is going to further drain our economy with expensive regulations and when your congressperson runs for reelection he/she can blame the EPA.  Of course, the question that should be asked at town hall meetings is, can’t Congress take away the EPA’s power?  Yes it can, and as Americans get wiser about what charlatans their elected leaders are they will press them more and more for upright answers.

Lastly, and most importantly, the American people should be outraged at the wanton destruction of their currency by the Fed, Congress, and two presidents.  In the last 3 years alone the dollar has lost 30 percent of its value!  What do you expect the way money has been thrown at financial firms, car manufacturers, and so forth.  For their part, the banks seem to have done well investing their bailout funds since they seem to be turning profits without loaning money.

The federal philanthropy continues – on Saturday, the Senate cleared the way for the passage of a $1.1 trillion spending bill.  The vote was held up for an hour to allow Senator Lieberman an Orthodox Jew to walk more than 3 miles to the Hill on the Sabbath to cast the 60^th vote to end debate.  Now, I am not an authority on Orthodox law, but didn’t the Senator consider voting in the Senate chamber work?  I suppose, like the Constitution that body continues to violate, when it serves their purpose members of Congress fell free to violate whatever parameters will get the job done.

All the bailouts and all this additional spending with money we do not have on aid for car dealers, loan guarantees for steel companies, and 5000 pork barrel projects for individual members continues to devalue our money making it that much harder for those already struggling to make ends meet in this horrendous economy Washington has given us.  Members of Congress are either charlatans or economic imbeciles because their inflationary policies hurt the same people they purport to help.  The whole thing is a stupendous outrage.

So, what is there to do?  I already think it is too late?  We owe 12 trillion dollars with none of our problems resolved.  Congress and the President seem hell-bent on making sure America is further bankrupted by every giveaway scheme imaginable – everyone knows the litany by now, too big to fail, too important to fail, so called environmental protection, cash for clunkers, homebuyer credits, etc, etc, etc….  I suppose we have the mid-term elections to look forward to next year, but given past experience if Republicans take Congress it will be akin to going on a diet and drinking Bud Light instead of Regular Bud.  Bottom line:  both are bad brands. 

If this article has irritated you even just a little bit, understand that there is a lot more that Washington spews that is awful.  From prescription drugs to federal salaries it seems like Washington only cares about it special constituencies and not the rest of us who are hurting.  And these examples are just the tip of the iceberg.