Thursday, January 28, 2010

Corporate Socialism vs Regulatory Reform

The failure of Congress to pass any meaningful financial regulatory reform, establish transparent derivatives markets, or even attempt to establish usury laws with respect to credit cards as well as the power of banking and financial industry lobbyist to gut, neuter, and transform proposed regulations into money cascades has illuminated that we no longer live in a free capitalist society in which there is access to opportunity and an even playing field on which talent and ability prevail as opposed to activity/results rewards of the closed, exclusive social structure of criminal enterprises.

Joseph Stiglitz has again re-emphasized that today's corporate world tramples shareholders as if they were serf's who have no need to own property or money and in which the managers (employees of the shareholders as owners of the corporation) get to keep excessive profits personally and, when the managers incur losses as the result of excessive risk taking, they dump the losses on the shareholders and society.  In doing so, the managers have privatized the gains and socialized the losses.  They have been allowed through deregulation and lax regulation to develop financial products that create risk rather than manage risks.

IN his new book, Freefall, Stiglitz specifically addresses this direct assault on capitalism by the reckless greed of financial product peddlers which has significantly aggravated income inequality and the diminishment of the middle class without which a republican democracy cannot survive much less flourish.  When the risk taking fails, society is left paying the tab while the corporate managers keep the profits.  In this recession the inadequate stimulus, which spent too little too slowly without properly targeting unemployment, amounted to only 5% of the money the banks and other financial companies got.  The trust has been broken.  Those who caused the problem should bear the brunt of paying for the problem, but we allow them, instead, to continue business as usual and tell the common man to suck it up.  Enough is enough.  "We have altered not only our institutions --- encouraging ever increasing concentration in finance --- but the very rules of capitalism.  We have created an ersatz capitalism with unclear rules -- but with a predictable outcome: future crisis, undue risk taking at the public expense, no matter what the promise of a new regulatory regime, and greater inefficiency."

Stiglitz, in the above excerpt from his book, also emphasized how the current financial crisis has exposed the division within our society: "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."  But the United States has chosen to go in a completely different direction by lessening competition and strengthening the grip of a corrupt financial oligarchy as it seeks to achieve objectives of a world market.

Even within the sheltered world of the Risky Rich, an awareness is showing its rebellious head within the very bastions of finance.  Albert Edwards, a chief strategist for Societe Generale, has written "Theft!  Were the US and UK central banks complicit in robbing the middle classes?"  He asserts that the central banks were actively complicit in an aggressive re-distribution policy benefiting the very rich by the creation of housing bubbles through increased leverage with derivatives and a mollifying increased leverage availability for the consumer, which in actuality extracted equity from the middle class.  He lays the problems not at the feet of the banks but with the monetary and regulatory authorities.  Edwards goes into detail on central bank policies in facilitating the process and how it has also aggravated income inequality which has contributed to an under-consumption problem, because the rich have a relatively low marginal propensity to consume.  Citing the work of Emmanuel Saez, the peaks of income skewness "... tell us there is something fundamentally unsustainable about excessively uneven income distribution."  He concludes the ordinary working people would not have gone along with these redistributive policies if they had not trusted the central banks.

Dan Geldon, a fellow at the Roosevelt Institute, has written "How Supposed Free-Market Theorists Destroyed Free-Market Theory" in which he cites the deregulatory push within American society since World War II and how the analysis of the current crisis, with its information asymmetry, moral hazard, and agency costs, reveals glaring holes in free-market theory as it has been distorted by the supposed heirs of Hayek and Friedman.  Geldon particularly concentrates on the proliferation and growth of fine print, complex products with hidden costs and dangers. Complexity was touted as innovation while government interference was pilloried.  Yet, consumer contracts became so complex not even lawyers could interpret or understand them.  This has amounted to a corporate assault on contract law which is the bedrock of capitalism.  These complex contracts not only harmed consumers but municipalities, who were lured into buying derivatives, and institutional investors.

Geldon continues his argument to deride the current success of financial lobbyists in preserving the implicit government guarantee created by the bailout which allows large banks to access capital more cheaply than smaller banks and to leverage power.  These market distortions have allowed the financial industry to reduce real competition with massive consolidation and excessive leverage in dictating terms and conditions within the economy under the well-worn guise of freedom to contract and freedom to choose while actually doing just the opposite with complex contracts purposefully designed to deceive and plunder.   In doing so, they have betrayed Hayek and Friedman, while asserting "industry interests" over "free-market interests", and turned free-market theory and capitalism upside down into nothing less than corporate socialism.

We need meaningful financial reform, transparent markets, and corporations who are responsible to and answerable to their shareholders.  The bailouts have exposed precisely what is wrong with corporate management, regulators who look the other way, central banks complicit ignorance of asset bubbles, governments which support the rich rather than exercise fiscal policy which benefits society as a whole, and the insidious corruption of lobbyists and Congress which excludes the people as worthless rabble without influence.



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