Posted by Brad @ 12:08 pm on October 8th 2009

Corporate Communism

I’ve written about this a lot I suppose, but it’s a point I think needs to keep getting hammered home to conservatives or other right-leaning folks and, for that matter, their critics. Quite simply: belief in the free market does not necessarily mean a blanket defense of all corporate or business objectives. There is a big difference between capitalism and corporatism (or cronyism). As Doug puts it:

There’s a distinct difference between the free market and the state-aided corporate capitalism that we live with today. When businessmen use the state to protect themselves from competition, or from their own wrongdoing, that’s not free market capitalism. When they pay lobbyists to get the Federal Government to subsidize them, whether directly or indirectly, that’s not free-market captialism. When they help write the laws that they then use to hamper competition, that’s not free-market capitalism.

Many on the right make the mistake of thinking that believing in capitalism means that you’re obligated to defend the actions of the capitalists, but when those actions involve using the state to evade the discipline of the market, you’re no longer defending the market, you’re helping to destroy it.

You simply can’t look at the current health care system, or the current banking system, and conclude that what you’re looking at is a free market system. Nor can you conclude that deregulation is in all cases preferable to regulation, because, of course, deregulation is often done in such a way as to benefit some sectors/corporations/individuals above others, which makes it a de facto regulation, the state leaning on the market and putting their thumb on the scale to advance this interest or that, which is the very definition of regulation. That is, perhaps, one of the reasons I’ve been accused in the last ten years of moving to the left—I guess it’s just that the shallow dogmatism of free markets vs. socialism strikes me as pretty well irrelevant to the most important issues of the day. A deregulatory measure can do just as much harm, in terms of economic freedom, as a regulatory one, and a regulatory one seeking to redress artificial inequalities can do just as much good as a targeted deregulation to do the same. Which is one of the reasons I wound up finding so much respect for Ron Paul, because he truly understands that distinction.

That’s not to say I favor regulation. Far from it. And in a vacuum, the less regulation the better. But the point is our system does not operate in a vacuum. I am inclined to be more and more distrustful of market interventions sold under the deregulation rubric, or throwing up roadblocks against reform of any system by crying about market intervention as a harm simply for its own sake. On the flipside, I find liberal or leftist critiques of aspects of our current systems and generalizing those to mean that the free market system itself is a flawed model to be obnoxious, because I think what is not well understood by those critics is that the solutions are usually to get the government to stick their thumb on the scale as a way to redress problems created by the government sticking their thumb on the scales, and if corrupt, greedy, and ignorant politicians administering the system created whatever current predicament we’re talking about, how does further increasing the possibility of corrupt, greedy, and ignorant politicians in the future exerting further control of the process redress that? It always seems to me that the liberal call for reform is predicated on the notion that the government is going to stop doing corrupt, greedy, and ignorant things with the authority they’re given. Or, “the whole system would work great if only there weren’t so many fucking Republicans screwing it up.” Well that’s great. Now all we need is a system of government only run by progressive liberals holding the interests of the Great Society at heart and we’ll be all set. Good luck with that.

Anyway, what spurred that thought is the following clip:

posted in: Main

7 Comments »

  1. These are good points, particularly the last bit. If one is concerned with the ownership of the political establishment by corporations, the LAST thing one should advocate is an increase in political regulatory authority. And indeed, advocates of genuine deregulation need to be wary of misappropriations of the term–such as the electrical “deregulation” in California–that give the entire idea of deregulation a bad name.

    I would add, though, that the problem of corporate rent-seeking is unique to systems in which a great deal of economic authority is centered in government. Businesses may seek to control the system in order to preserve a monopoly, or simply to protect their own ability to compete; either way, though, it is the existence of strong regulatory authority which creates the incentive for businesses to buy politicians in the first place.

    The idea that the political system can be decontaminated by campaign finance reform is identical, in pragmatic terms, to the idea that drug use can be controlled by legal prohibition. Supply will follow demand, and suppliers will always be more clever and flexible than regulators. The ONLY way to produce a cleaner political system is to diminish the authority of the government generally; all other solutions are fantasies.

    Comment by Rojas — 10/8/2009 @ 2:02 pm

  2. Putting aside Rojas’s fantasies of “Libertarian capitalism has NEVER failed, it’s the people who have failed libertarian capitalism” and getting back to the topic, I would like to point out a great video here:
    http://www.pbs.org/moyers/journal/10092009/watch.html

    BILL MOYERS: What’s your explanation as an economist. And a student of this financial system as to why the banks are taking so long to help the homeowners when Congress has allocated funds for that purpose?

    SIMON JOHNSON: I’m afraid that it’s pretty obvious and it’s very tragic. That they have no interest in helping the homeowners. They make money with what they’re doing. Bill, they’ll expected a lot of these mortgages they made to default, okay? It was in their models. A high default rate. Now, they didn’t expect house prices to come down so much. That’s where they got their losses. But they absolutely made these loans expecting they would have to foreclose on people. And figuring they would make money on that. These are very smart, very profit-oriented people. I can assure you, if there was money in it for them. They would be negotiating you know, very various kinds of re-schedulings of these loans. They don’t want to do it. They it’s not in their interest. It’s not where the money is. Follow the money. The money is where Jamie Dimon says it is. Jamie Dimon says, ‘You ain’t seen nothing yet,’ in terms of his lobby in Washington. He’s on the record as saying, he’s this is his big initiative right now.

    BILL MOYERS: To?

    SIMON JOHNSON: To spend more time in Washington, more time cultivating all those relationships on Capital Hill and in the executive branch. And you know what else Jamie Dimon said to his shareholders? To his shareholders meeting this year, he said, with regard to 2008, the year of what we regard as the greatest financial crisis, an absolute human tragedy. He said, Jamie Dimon said to his shareholders, ‘This was perhaps our best year ever.’

    MARCY KAPTUR: Think about what these banks have done. They have taken very imprudent behavior, irresponsible. They have really gambled, all right? And in many cases, been involved in fraudulent activity. And then when they lost, they shifted their losses to the taxpayer. So, if you look at an instrumentality like the F.H.A., the Federal Housing Administration. They used to insure one of every 50 mortgages in the country. Now it’s one out of four. Because what they’re doing is they’re taking their mistakes and they’re dumping them on the taxpayer. So, you and I, and the long term debt of our country and our children and grandchildren. It’s all at risk because of their behavior. We aren’t reigning them in. The laws of Congress passed last year in terms of housing, were hollow. Were hollow.

    MARCY KAPTUR: Foreclosures in my area have gone up 94 percent. And we know the basic rules of economics. Housing leads us to recovery. Housing was the precipitating factor in this economic downturn. Unless you dealing with the housing sector, you aren’t going to have growth in this economy

    BILL MOYERS: You’re both saying the financial world, the banks in particular, are putting their interests above anybody else’s interest. And they’ve got the power in the executive branch, and the Congress to back up their demands, right?

    SIMON JOHNSON: This is capitalism, Bill. That’s what they’re supposed to do. They represent their shareholders, they’re appointed by the board of directors to make money for their shareholders. And the way they think that they can best make money is to shape the regulatory rules around housing around derivatives, around all everything we used to have that kept the financial sector under control. Has all been, you know, washed away, one way or another, by their efforts, right? They make money in the boom, that way. And when and when bad things happen, they shove all the downside onto the taxpayer. That’s what they’re doing their job.

    MARCY KAPTUR: It’s socialism for the big banks. Because they’ve basically taken their mistakes and they’ve put it on the taxpayer. That’s the government. That’s socialism. That isn’t capitalism.

    SIMON JOHNSON: Well people some people call that lemon socialism. So, when it turns out to be a lemon, it’s you it’s yours, the taxpayer. When it turns out to be good, it’s mine, I’m Wall Street.

    We have eight years of deregulation and blind regulators working in the finance markets on the record. We had a system where the government abdicated its authority and little stood between consumers and the people who would abuse them. Just because you remove power from the government doesn’t mean the power disappears, it just cedes from a democratic institution to one which is motivated towards profit enhancement.
    What we have to do is change the way people think about public service, because candidacy in this political system is capital intensive and people have been brainwashed into this idea of profit making as our highest calling.

    When a politician gives that ‘highest calling’ precedent over her democratic duty, her service is detrimental to democracy because her representation is reserved for the dollars she requires to campaign.

    She represents her money, not you, and should be unfit to serve as a result. Politicians need to learn that the consequence of serving god and mana, serving their money before their constituents, is primaries against people who aren’t so divided.

    Comment by thimbles — 10/12/2009 @ 12:32 pm

  3. I think that’s right, but I would point out that you’re stretching the Moyers interview (and Greenwald’s post about it) into representing a point Kaptur is not making. It is not an indictment of capitalism, nor is the problem here deregulation in a vacuum, nor for that matter is that in any way a refutation of what you call Rojas’ libertarian capitalism fantasy. Banks, as with any businesses, SHOULD be running with a motivation geared solely for profit enhancement—that is, in fact, the most democratic system you can get, and if the results of that aren’t to your liking your problem is not with the economic system but with the people who it represents, who vote with their dollars (and those are the same people, by the way—us—who would be running the government, so I’m not sure if you can’t trust them collectively in commerce you’d trust them collectively in governance, which would operate according to the same whims, desires, blind spots, et al. they have in their buying and selling but translate to an arena where they are less accountable and suddenly have a monopoly on force behind their whims, desires, blind spots, et al.) You are right, perhaps, that politicians should not be, although they too will always have to be accountable to a different kind of profit, one that comes in votes rather than dollars, but the motives behind the two aren’t substantially different. But the point Kaptur and Greenwald are making is that the harm here is not banks looking for profit or politicians looking for votes, but rather in the vehicle of leveraging government to meet those two aims for both parties. That can be either in the form or deregulation or regulation, depending on how either are leveraged and executed. That’s worth reiterating by the way, and part of the point of my post above. Regulation or deregulation are neither good nor bad in themselves, and either have an exactly equal capacity for abuse or manipulation. What is different between the two is that regulation coalesces power around the government, deregulation around the market, so in that sense the difference is fundamental, not specific. Either can be leveraged by business to gain an unfair advantage in profit-seeking.

    But I think Rojas’ point in the first comment here is spot on. In a system where the government is the ultimate arbiter of the market, no bank or other business can afford NOT to try to influence government to their advantage. Because all it takes is one institution leveraging government to use their powers to lean on the market in their favor, and suddenly the playing field is not level so every other institution has to try to compete according to the new rules (which, in this case, is taking the game to the new field of play, leveraging government) as a matter no less fundamental than their very survival. That’s what I don’t get about people who try to say regulation is the answer or deregulation is the problem. Because businesses will always compete on the market, but when that intersection of business and governance becomes live, it shifts the battleground to government. And for a utopian Michael Moorish vision of collectivised social “higher calling” to fail, all it requires is ONE institution or bad law to get through, and then boom, the entire system fails as other companies have to follow suit, and x amount of years later you have market problems of precisely the sort we have now, that you’re quoting and talking about above. The equilibrium that has to be maintained for a “higher calling” sort of system to work is so fragile and has such nonexistent surface tension that, in practice, it’ll always be untenable. To put that another way, businesses can (and do) fail by the thousands every day, and it doesn’t shock the system in a purer market system. But the government, if it seeks to create an artificial edifice over the realities of human behavior (profit-seeking), can’t fail once without fatally compromising the integrity of the entire system. All it takes is one bad (or even poorly written) law, one campaign contribution, one tit-for-tat, and the entire system fails.

    It sort of reminds me of steroids in baseball. Taking steroids, if you’re a ballplayer, is undeniably a bad idea—right up until the point when somebody else gets away with it, at which point it’s a necessity.

    Comment by Brad — 10/12/2009 @ 1:03 pm

  4. First off, Simon Johnson’s point is not that the banks were not geared towards profit enhancement for the institution, the society, the shareholder, or the consumer. Johnson’s point is that their profit incentive is geared towards their own personal profits at the expense of all the institutions above. They made these loans with the knowledge that many of them would default because they were making money off of it in the short term.
    They gave bad loans to consumers, brokered by crooks and frauds, and sold them as securities to pensions and investors, while they knew they would fail.

    And because we are letting these guys get away with it, because we are not getting the law enforcement required to attack this fraud, because we are not punishing the managers for tanking their businesses, because we are not letting these businesses suffer for their risk taking and have insulated them from significant losses through recapitalization without representation schemes like the non-voting share purchase garbage, we have given them the message they can do it again. There’s profit, without consequence, in being a conscienceless crook.

    And Rojas’s answer to that is we should defang the government. Lolwut? Let me present a couple of scenarios to illustrate why this doesn’t make sense.

    Pension managers and the like can’t buy risky securities. There are rating agencies which rate securities AAA or not. These rating agencies were private institutions which received money based on who brought them securities to rate. They were captured by the banks who were bringing them securities that they wanted stamped AAA and so stuck their prized label on securities they KNEW were going to fail.

    So is your answer to get rid of rating agencies, because the crooks will inevitably try and capture them? Or should the rating agencies change their profit incentive so that they’re not getting money from the people they are supposed to negatively rate? Is the idea of rating inevitably corrupt or is it the compensation system which is corruptive?

    Let’s take a bank. This bank has money. Money is valuable. Because this bank has something valuable, crooks try and rob it. Crooks are always trying to take valuable things because that is human nature. There is nothing that can be done to avoid human nature.

    So your answer is to have banks store something less valuable like manure? Thus depriving the crooks of their incentive to rob?

    The problem isn’t that government has something of worth and provides services of value, and therefore the problem can be solved by making the government worthless and provide nothing of value. It’s that government oversees the people who compensate it and therefore is corrupted by their money and values, when they should be responsive to our values – the values of their voters. That should not be allowed without electoral consequences.

    You say that because the government regulates the economy, the battle ground for economic success becomes the government not the marketplace. What is the alternative, a marketplace without law? A marketplace without standards? China?

    There are such things as good regulation and bad regulation. There are such things as good deregulation and bad deregulation. When you have no regulation, the bad actors have the advantage because they can extinguish the good actors in the short term and dominate the market in the long term. When the housing market was being inflated, bad actors made money off of the false perception of wealth while the good actors didn’t make as much money. Those people either lost customers and shareholders or they got fired and replaced with people who would follow the tide.
    As William Black says:

    http://www.pbs.org/moyers/journal/04032009/watch.html
    BILL MOYERS: Yeah, and this week in New York, at this conference, you described this as more than a financial crisis. You called it a moral crisis.

    WILLIAM K. BLACK: Yes.

    BILL MOYERS: Why?

    WILLIAM K. BLACK: Because it is a fundamental lack of integrity. But also because, if you look back at crises, an economist who is also a presidential appointee, as a regulator in the Savings and Loan industry, right here in New York, Larry White, wrote a book about the Savings and Loan crisis. And he said, you know, one of the most interesting questions is why so few people engaged in fraud? Because objectively, you could have gotten away with it. But only about ten percent of the CEOs, engaged in fraud. So, 90 percent of them were restrained by ethics and integrity. So, far more than law or by F.B.I. agents, it’s our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud.

    BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker’s income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?

    WILLIAM K. BLACK: Right.

    BILL MOYERS: It was relatively a handful of people.

    WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don’t prosper. So, instead of being bad for capitalism, it’s what saves capitalism. “Honest purveyors prosper” is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn’t need to happen at all.

    It’s easy to do bad things when there’s no demand to do them in the open and there’s no consequences attached to them. It becomes a condition for survival in the market until someone shines a bright enough light and attaches significant enough cost to bad behavior to discourage it.

    Crooks don’t rob banks with guns because the banks have nothing of value, they don’t because they know there’s a variety of systems that will likely catch them and that they will go to jail for a long time if they get caught. The risk isn’t worth the reward. We need the kind of regulation that increases risk of getting caught and suffering harsh penalties for bad actions. Across the board deregulation isn’t going to bring that.

    But that’s the thing that people like Robert Rubin, Larry Summers, and Geithner choose not to understand. They supported the system we have with all of it’s perverse incentives in place. They’ve created the moral hazard that banks can take excessive risks because they’ll be recapitalized with public money without consequence. The government isn’t going to let the world fall apart after all, so the banks can use the world as their hostage. The government is being coerced into corporate communism and there should be a better solution to the problem than withdrawing the government and letting the world fall apart in a second Great Depression.

    You need regulation to save capitalism, because people radicalized by the effects of a busted unregulated economy will demand a lot more regulation, maybe even demand a new economic system, than people who live in a stable, regulated economy.

    Comment by thimbles — 10/13/2009 @ 12:04 am

  5. From the Moyers interview:

    MARCY KAPTUR: So why should any American citizen be kicked out of their homes in this cold weather? In Ohio it is going to be 10 or 20 below zero. Don’t leave your home. Because you know what? When those companies say they have your mortgage, unless you have a lawyer that can put his or her finger on that mortgage, you don’t have that mortgage, and you are going to find they can’t find the paper up there on Wall Street. So I say to the American people, you be squatters in your own homes. Don’t you leave. In Ohio and Michigan and Indiana and Illinois and all these other places our people are being treated like chattel, and this Congress is stymied.

    BILL MOYERS: Wow. You are urging them to resist the law when the Sheriff shows up to throw them out of their home.

    MARCY KAPTUR: I’m saying that they deserve justice, too. And that the scales of justice in front of the Supreme Court are supposed to be balanced, and they’re not. And that possession is 90 percent of the law. And that you have legal rights, as a home owner. You have a right to legal representation. You have a right before the judge to have the mortgage note produced by whomever in the system has it. Judge Boyko of Cleveland threw out six cases, because when the foreclosures came up, the financial institutions couldn’t produce the note. Our people deserve their day in court.

    from the Nytimes:
    http://www.nytimes.com/2009/10/25/business/economy/25gret.html?_r=1

    But if our current financial crisis has taught us anything, it is that many borrowers entered into mortgage agreements without a clear understanding of the debt they were incurring. And banks often lacked a clear understanding of whether all those borrowers could really repay their loans.

    Even so, banks and borrowers still do battle over foreclosures on an unlevel playing field that exists in far too many courtrooms. But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.

    One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

    So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able tostay in their homes mortgage-free.

    LOL. H/t to Ritholtz.
    http://www.ritholtz.com/blog/.

    Comment by thimbles — 10/26/2009 @ 12:54 am

  6. I’ve heard Michael Moore make the same argument. And you know what? Even a blind pig finds an acorn now and then. This behavior is quite appropriate, and provides an important incentive for mortgage holders to behave responsibly with regard to their side of the equation.

    Bravo to the “squatters”.

    I could have done without the emotionalist “cold weather” babble, though.

    Comment by Rojas — 10/26/2009 @ 1:00 pm

  7. Another example:
    http://videos.mcclatchydc.com/vmix_hosted_apps/p/media?id=7031974
    pulled from a story that will mke you mad:

    http://www.mcclatchydc.com/homepage/story/77791.html

    “The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion,” said Laurence Kotlikoff, a Boston University economics professor who’s proposed a massive overhaul of the nation’s banks. “This is fraud and should be prosecuted.”

    These guys are bastards, plain and simple.

    Comment by thimbles — 11/1/2009 @ 12:35 pm

RSS feed for comments on this post.

Leave a comment

You must be logged in to post a comment.