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  1. 06 May '10 20:22 / 2 edits
    Yahoo News:

    American Oligarchy
    The Weekly Standard

    Christopher Caldwell Christopher Caldwell – Wed May 5, 5:07 pm ET

    Washington (The Weekly Standard) Vol. 015, Issue 32 - 05/10/2010 – "Now, the Senate Republican leader, he paid a visit to Wall Street a week or two ago," said President Obama at a California fundraiser for Barbara Boxer in mid-April, putting on a mocking, homespun voice. "He took along the chairman of their campaign committee. He met with some of the movers and shakers up there. I don't know exactly what was discussed. All I can tell you is when he came back, he promptly announced he would oppose the financial regulatory reform."

    To judge from the guffawing that followed, few in attendance realized that Obama is more dependent on "movers and shakers" in the financial sector than any president of our time, although the files of the Federal Election Commission make this clear as day. The movers at Goldman Sachs, whose top employees were grilled before the Senate Banking Committe last week, gave Obama's party three times as much money in the last cycle ($4.5 million) as they gave to Mitch McConnell's ($1.5 million). The shakers at Citicorp gave Democrats almost twice as much ($3.1 million) as they gave Republicans ($1.8 million).

    So every time the president accuses Republicans of trying to "block progress" or of defying "common sense," as he did that night, he is executing a dangerous tightrope walk. His party's electoral fortunes depend on his making forceful calls for reform of our banking laws. His party's fundraising fortunes depend on his ensuring that no serious reform—of the kind that endangers the big banks' size and power—ever happens. That may be why the Democrats' strategy of painting the Republicans as obstructionists on finance reform has gained little traction. By the same token, if Republicans ever did get serious about reforming the banks—and even about breaking up an industry that has turned into a Democratic war chest—they would put Democrats in mortal peril. There seems no chance of this. Obama's taunts show a confidence, verging on certitude, that Republicans' hypocrisy is as deep as his own.

    What does it mean, the inability or unwillingness of either party to change or discipline the big banks in any way, even after all the havoc they have lately caused? In the year and a half since the implosion of Lehman Brothers, Simon Johnson, who was the chief economist of the International Monetary Fund in 2007 and 2008, is the only person to have come up with a plausible explanation. He has done so by examining the United States as an IMF analyst would examine some bankrupt basket-case of a country in what used to be called the Third World. Johnson believes that the leaders of the American finance industry have turned into the sort of oligarchy more typical of the developing world, and that they have "captured" the government and its regulatory functions. Johnson laid out this bombshell thesis in the Atlantic a year ago.
  2. 06 May '10 20:23

    Most countries rescued by the IMF are marked by tight links between the business elite and the political elite. They are oligarchies. Johnson defines oligarchy as a system whereby economic power can be translated into political power (and vice versa). When you try to fix a country dominated by an oligarchy, you immediately hit a frustrating paradox: Rescue plans make the oligarchy more powerful. An IMF loan is a lifeline. Somebody has to decide which banks and industries get to use it, and which ones are set adrift. In this process, the cement company owned by the finance minister's cousin does better than the cement company run by some schmuck in the hinterland. And it is not just that politically favored companies get the original infusion of IMF cash. Private investors can see what is going on and realize that it is "best to invest in the firms with the most political power (and hence the most assurance of being bailed out in a crisis)." So if the politically connected rich don't pay, who does? "Most emerging-market governments," according to Johnson, "look first to ordinary working folk—at least until the riots grow too large."

    This is a terrifying truth, if you think about it. It means that you cannot take for granted that "once burned, twice shy" will describe the aftermath of an oligarchy-driven financial crisis. Serious reform is not inevitable. On the contrary: The "reforms" that follow a bubble-binge-bailout cycle tend to consolidate the privileges of the oligarchs who caused it. That is why the IMF tends to judge the good faith of a country seeking debt relief by whether it is willing to "squeeze at least some of its oligarchs," in Johnson's words. Back in the day when the United States was on its moral high horse, our bankers and government officials derided the fledgling market economies of Southeast Asia and Eastern Europe as havens of "crony capitalism." We demanded not just the squeezing of oligarchs but the squeezing of government. Freewheeling monetary policy and write-downs were anathema. Discipline was the order of the day.

    When our own day of reckoning came, though, we behaved less responsibly than the governments we used to lecture. There are two ways that a government can fix industries that have gone bankrupt: It can take them over or it can bail them out. We are bailing them out. Treasury Secretary Hank Paulson sat his capital-starved former colleagues down at a table in October 2008 and told them to accept $25 billion apiece from the government, with few strings attached, or else. Cash infusions of that order were necessary to stop a contagion of bank failures. But reforms were necessary, too, to ensure that the crash did not repeat itself. And no reforms came.

    Without reforms, Johnson shows, bailouts exacerbate many of the problems they were meant to fix. U.S. banks were rescued in such a way that, as he and Kwak put it, "taxpayer money could pass straight through to bankers' Ferraris and vacation homes in the Hamptons." Bailouts create a moral hazard—a country that rescues banks once is more likely to have to do so again. And this likelihood gets priced into the operating expenses of the surviving banks. The financial behemoths pay 0.78 percentage points less for money than small banks. To tolerate banks deemed too big to fail is to subsidize them.

  3. 06 May '10 20:23
    is it time to throw ALL the bums out?
  4. 06 May '10 20:25

    The sympathies of Johnson and Kwak are with the left of the Democratic party, specifically with the SAFE Banking Act sponsored by Senators Sherrod Brown of Ohio and Ted Kaufman of Delaware. It would break up the big banks along a sensible formula similar to the one the authors suggest in their book. They have little hope that it will pass, however, even though there are potentially Republican votes for it. (Kentucky's Jim Bunning backed it in committee.) Illinois senator Dick Durbin, a champion of modest banking reform, calls it "a bridge too far." The SAFE Banking Act is a bridge too far because the fundraising needs of the Democratic caucus and the White House make it a bridge too far. Since the financial crisis began, the system of too-big-to-fail banks that caused it appears to have grown more entrenched.

  5. 06 May '10 20:37 / 2 edits
    Originally posted by zeeblebot
    is it time to throw ALL the bums out?
    Suppose we do that. Wouldn't the replacements be getting their campaigns financed by the same array of folks that have been financing the old ones?

    What's your plan to ensure that we don't just replace the old bums with a whole new crop of bums?
  6. Standard member Scriabin
    Done Asking
    06 May '10 20:51
    Kaufman is dead right.

    Theodore Roosevelt in 1910 said that the people of the United States suffered needlessly from periodical financial panics. He thought it vital to investigate and revise the US financial system to prevent such panics.

    TR advocated fair play under the contemporary rules of the game, but wanted those rules changed so as to work for a more substantial equality of opportunity and of reward for equally good service. He did not mean that we should collectively support the man who remains poor because he has not got the energy to work for himself.

    TR was the first to argue that government, National and State, must be freed from what he termed “the sinister influence or control of special interests.”

    He said that while every special interest was entitled to justice, not one was entitled to a vote in Congress, to a voice on the bench, or to representation in any public office. The Constitution guarantees protection to property, and we must make that promise good, TR said; “but it does not give the right of suffrage to any corporation.”

    “The true friend of property, the true conservative,” TR said, “is he who insists that property shall be the servant and not the master of the commonwealth.” So he insisted that the public was entitled to know whether corporations obey the law and whether their management entitles them to the confidence of the public. He thought it necessary to pass law to prohibit the use of corporate funds directly or indirectly for political purposes, and even more necessary to enforce such laws thoroughly. TR blamed corporate expenditures for political purposes, and especially such expenditures by public-service corporations, as one of the principal sources of corruption in US political affairs.

    TR wanted government supervision of the capitalization of all corporations doing an interstate business. He insisted on thoroughgoing and effective regulation of corporations, especially of combinations that control necessities, such as food, and fuel. He said officers, and, especially, the directors, of corporations should be held personally responsible when any corporation breaks the law. He said we should be as sure of the proper conduct of corporations in interstate commerce as we should be sure of the conduct and management of the national banks..

    TR pointed at what he saw as the absence of “effective State, and, especially, national, restraint upon unfair money-getting” which he said created “a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power.” TR’s priority was to change the conditions which enabled these men to accumulate power “which it is not for the general welfare that they should hold or exercise.”

    TR had no objection to a man accumulating a fortune representing his own power and sagacity, with the proviso that it be exercised with “entire regard to the welfare of his fellows.”

    He said we should grudge no man a fortune in civil life “if it is honorably obtained and well used.” But he thought it is “not even enough that it should have been gained without doing damage to the community. We should permit it to be gained only so long as the gaining represents benefit to the community.” He knew this would lead to far more active governmental interference with social and economic conditions that the country had yet had, but he thought such an increase in governmental control is necessary.

    TR identified where to draw the line and what the standard regarding “greed was.” He said that the “really big fortune, the swollen fortune, by the mere fact of its size acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means.” This was the source of his belief in a graduated income tax on big fortunes, and in a graduated inheritance tax on big fortunes.