Crony Capitalism Strikes Again

The explosion of the BP oil rig on April 20 and the subsequent saturation of the Gulf of Mexico with oil will go down as the biggest environmental catastrophe of all time.  We still don’t know what caused the initial blast that took the lives of eleven workers, but there is one important lesson we have learned from the incident.  Crony capitalism is the culprit once again.

Our old friend, crony capitalism, unlike free market capitalism, is that mutation of the latter caused by unconstitutional reaches of government.  As discussed in previous editions of this column, the most egregious example of cronyism in our economic system is the financial cartel run by the Federal Reserve Bank.  We are all familiar with the way banks are permitted to inflate our money supply through fractional reserve banking ensuring huge profits for them and higher prices for the rest of us.  Of course, when the banks overstretch their lending and run into trouble the Fed is there to bail them out with more of our money.

Besides an endless stream of money to bail out fraudulent banking practices, crony capitalism has attempted to remedy union induced bankruptcies in the auto industry and has also provided cash subsidies to wheat farmers and price supports to dairy farmers to keep their products’ prices artificially high and our purchasing power artificially low.  Then there are the hidden cronyisms in our system.  One of them has been exposed with the current crisis in the Gulf.

Under current law, it turns out that BP is responsible to pay for 100 percent of the cost of the clean-up of oil.  Beyond that, the company’s liability for economic damages is limited to $75 million.  This means that BP must pay to clean up their mess but all the fisherman, crabbers, restaurateurs, hotel owners, and others that rely on the gulf for their livelihood will have to split the $75 million pot.  Clearly, the losses suffered by the locals on the coasts of Louisiana, Alabama, Mississippi, and Florida will far exceed $75 million.  Given that BP earns multibillions every year, a $75 million cap on damages is a pittance of what they should be paying to make lives whole.  Perhaps BP wouldn’t have taken such risks by drilling in deep water, if faced with catastrophic losses or they would have at the very least put in place more precautionary measures.

But it’s the same old story – crony capitalism.  BP and other oil companies grease the palms (no pun intended) of members of Congress and in return receive special protections in the law.  At the end of the day, the taxpayers will foot the bill for this malfeasance.

Of course, it is all about perception, not reality in Washington.  On a recent trip to the Gulf, President Obama spoke of BP’s responsibility, “I don’t want them to nickel and diming people down here.  I don’t want somebody else bearing the costs of those risks that they took.  I want to make sure that they’re paying for it.”  This is nothing more than tough talk to make the president seem righteous to the voters since he has no legal authority to make it happen.  Naturally, there is talk now in Congress to either raise or eliminate altogether the liability cap.  There is even talk of changing the law and making it apply to BP’s current disaster.  But, as readers of the U.S. Constitutional know this is what is known as an ex post facto law or after the fact law which is unconstitutional.  Washington is not allowed to hold a party to a law that didn’t exist when the action took place.  In the long run, I suppose it will take another violation of the Constitution to right the first wrong.

If we had a true free market capitalist system, the accident may not have happened in the first place.  If it did BP would be responsible for every penny of damage it caused.  There would be no protectionist laws that put others (other businesses, taxpayers) at risk.  If it bankrupted the corporation then so be it.  The market would be rid of a major polluter; its assets would be sold to pay off the damaged parties and utilized by another provider alleviating the possibility of an oil shortage.  If criminal activity was found, the perpetrators would be punished further.  The Minerals Management Service would not exist to bilk taxpayers while its bureaucrats participated in conflicts of interest, illegal drug use, and elicit sex with the very people they were supposed to be regulating.  Lastly, and this is currently happening, BP’s stock would take a dive opening the company up to takeover bids.

Yes, crony capitalism has its fingerprints all over the Gulf oil catastrophe.  It may not have happened without it and the taxpayers will be on the hook because of it.  Members of Congress and the president can squirm and rant and rave about how they are going to go after BP all they want.  As usual they are a day late and billions of dollars short.  The best thing they can do is immediately eliminate all laws that protect corporate America at the expense of the rest of us.  Naturally, that won’t happen since corporate America finances their reelection campaigns.

Article first published as Crony Capitalism Strikes Again on Blogcritics.

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.

In Defense of Capitalism

September 20, 2008

The economy of the United States is not a pure capitalist system.  We operate economically under what economists like to call a “mixed system”.   This is a system that combines elements of a market economy with elements of a planned economy.  It is because of this mixed economic approach that Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke determined that it was within their authority to nationalize Freddie, Fannie, and AIG in the name of stabilizing the financial markets.  In a purely capitalist system, these bailouts would have been impossible.  Quite frankly, the crisis that caused those bailouts to happen in the first place would not have happened if we were a pure capitalist country.

That is not to say that capitalism is perfect.  But, in the current environment we must brace ourselves against the endless onslaught against the system which has made our country number one economically for some time now.  You see the politicians are really just poor sports that have never grown up and never like to admit fault for anything.  McCain, Obama, members of Congress, and the Administration will babble on about how the greed and unbridled actions of others are the culprits for the subprime crisis.  They will talk tough about how they are going to go after the bad guys and bring them to justice.  They will propose new regulations to prevent this from ever happening again.  In short, they will attempt to socialize us to believe that only a capitalist system with the ruling elite (themselves) in charge is good for the country.  They are all liars and are hereby permanently banned from the shrine of Free Market Economics.

Throwing out accusations and speaking in vague generalities is easy.  That is what the politicians do all the time.  So instead, let’s look at some examples of where capitalism has been blamed for a crisis that the politicians actually started.  We have all heard about the greed and lack of regulations that caused the savings and loan crisis of the 1980s.  But, it is never mentioned by the politicians how the crisis came to be in the first place.  For that we go back to the year of my birth, 1964.  Lyndon Johnson, the patron saint of the welfare/ warfare state, had just begun to rebuild that institution on our shores.  With the passage of his so called “Great Society” and increased funding for a military conflict in Southeast Asia, the United States government, through the Federal Reserve Bank, printed money over and above the limit mandated by the gold reserves held by the government at the time.  By the late 1960s, foreign holders of U.S. dollars realizing that their asset would soon be worth much less, demanded, as they were entitled to, an exchange of their devalued dollars for American gold.  The hemorrhaging of U.S. gold reserves that ensued was so great that Richard Nixon closed the gold window in 1971 to prevent a default.  He effectively opened the door to future wild spending by Uncle Sam. 

These actions by our leaders: increased spending and lifting the last vestige of the gold standard would set the stage for the savings and loan crisis.  Little did policy makers know at the time, that printing money to monetize debt was addictive and would eventually lead to inflation.  This was probably because most of them had never heard of the Austrian School of Economics and because some years later Richard Nixon declared that “we are all Keynesians now”.  Nonetheless, savings and loan banks through the 1970s played by the rules paying interest on savings accounts and providing mortgages to borrowers.  The problem came in the late 1970s when faced with high inflation from the spending binge the Fed had to increase interest rates to 21 percent in an attempt to control rising prices.  This hurt the savings and loan banks in two ways.  First, a government regulation that placed a ceiling on the interest rates savings and loans could offer to their depositors caused a transfer of funds from low rate savings and loan savings accounts to new higher rate money market accounts in other banks.   Second, savings and loan banks had much of their money tied up in low, fixed rate, long term mortgages.  As the Fed increased interest rates it made these mortgage backed assets virtually worth nothing.  Thus, government spending which forced the Fed to raise interest rates ultimately caused the savings and loan crisis.  By 1980, before deregulation, many savings and loans were already insolvent.  Politicians are disingenuous when they say the savings and loan crisis was caused by the greed of the bankers; it was caused by the misguided policies of the politicians of the time.

Now, flip the calendar forward a decade to the 1990s.  Through the decade, the “Maestro” Fed chairman Alan Greenspan, had kept interest rates artificially low while continuing to pump more dollars into the economy to keep the good times rolling.  By the end of the decade, we had the dot.com bubble.  Of course, we were told by Washington that this was the fault of greedy techies who were corrupt and had unbridled behavior.  At the end of the day, I didn’t expect Washington to come clean and admit culpability, but I did expect them to learn from their mistake so it wouldn’t happen again.

Then, it did happen again.  The “Maestro” lowered interest rates to one percent to stimulate the economy after 911.   In the meantime, Congress revised the Community Reinvestment Act, which cajoled community banks to make loans to bad risk borrowers.  With an implicit guarantee from Uncle Sam, Fannie and Freddie took on more and more mortgage loans.  With more money in the pipeline, laws forcing banks to make at least some bad loans, and moral hazard, the federal government had tied and given the noose to the financial community to hang itself. 

Again, like in the 80s and the 90s, the cause of the crisis according to the ruling elite is with those greedy bankers.  Again they are being disingenuous.  In the 1980s, Congress instituted the Resolution Trust Corporation to liquidate the bad assets of the insolvent savings and loans.  In the end it cost the taxpayers $150 billion.  Today, Congress is considering a similar approach to liquidate the bad assets of the insolvent financial institutions.  This time the costs will be in the trillions. 

The capitalist system is not perfect, but it is eons better than the bastardized economic system Washington has given us.  History has proven that the price of money is better determined by the market than a central bank.  History has also proven that a commodity backed currency not the political whims of politicians and financial bureaucrats is the best way to rein in the size of government, protect purchasing power and asset value, and in the end avoid catastrophes like the one we are about to encounter.