From the head of the Finance Department at Texas A&M, Dr. Sorin Sorescu, on crony capitalism
"Perhaps the most timely and important case of crony
capitalism today is the de facto alliance between Wall
Street and Federal Government resulting from implicit
“Too Big to Fail” policies.
The financial sector plays both a private role and a
public role. The public role is the clearing of checks and
the payment system in general. What would happen if
the payment system froze? Imagine a world where
nobody can access their funds. No credit cards, no
functioning ATMs, and all banks closed. Nobody gets
paid, nobody can spend. There would be massive bank
runs and the economy would most likely collapse within
48 hours.
It is precisely because of this critical public role that the
financial system needs to be regulated. Glass Steagall
was a smart way to regulate banks. Government offered
deposit insurance to minimize the risk for bank runs. In
exchange, government imposed restrictions on
investment activities. Abstracting from ideological
left/right biases, these restrictions made sense on
economic grounds.
To prevent moral hazard,
government needed to make sure that banks would not
gamble with their depositor funds. Why? Because
these funds were insured by the taxpayers. And while
gambling wins would go to the shareholders and bank
executives in the form of large bonuses, the losses
would be passed on to the taxpayers.
The system worked reasonably well until Glass Steagall
was repealed in 1999. At that time, the government
lifted restrictions on investment activities. However, it
continued to insure banks and stood ready to bail them
out if they failed. This was a huge mistake. It makes no
economic sense to deregulate the investment side but
continue to insure the bank and stand ready to bail it
out. You either regulate and insure, or do neither.
The repeal of Glass Steagall set the stage for the
biggest moral hazard catastrophe in modern history. To
make matters worse, Congress enacted the Commodity
Futures Modernization Act in 2000, which placed
additional gambling tools in the hands of banking
executives in the form of unregulated “derivative”
securities.
It was just a matter of time before the system would
collapse as it did in 2008. Government had to borrow
and print in excess of $6 trillion dollars to save the
system. About $1 trillion has been repaid. The rest is
being absorbed by the rest of us in the form of inflation,
unemployment, higher taxes and further government
spending cuts. Meanwhile, Wall Street executives
walked away with multi-million dollar bonuses. All legal,
of course, but so highly immoral.
So what does this boil down to? A financial system that
provides a public service will always be bailed out to
avoid a collapse of the economy. In its current state the
US financial system acts as a mechanism that
expropriates wealth from over 95% of Americans to
concentrate it in the hands of the system’s insiders.
Critical to the survival of this system are two elements:
the lack of regulation and the fact that the government
stands ready to bail it out in case of disaster.
In order to survive, the system markets itself differently
to the left and to the right, and attempts to create discord
among us. So far, this has been quite successful. To
the right, the system markets itself through the “lack of
regulation” arm. Given our natural affinity for free
markets, this is a narrative many of us on the right quite
find appealing. Except that there is nothing “free” about
markets any more.
To the left, the system markets itself through the
“bailout” arm. Given that our friends on the left have a
natural affinity to protect the destitute, many will find
appealing the idea that government will not allow the
least fortunate to lose their savings because of the “evil
capitalists."
The system survives because the traditional right and
the traditional left have bought into its respective
narratives. Without a critical mass to challenge the
system, it will go on continuing to expropriate wealth
from ordinary Americans in order to take on gambles of
higher and higher magnitude. The gamble calculus is
actually quite simple: Heads, the system wins. Tails,
the rest of us lose.
Freedom loving people from the left and the right need to
come together and reform the system before it is too
late. A good place to start is to break the big banks and
to bring back Glass Steagall. Otherwise, when the next
crisis hits, and it is only a matter of time before it does,
the bailout could be beyond the government’s capacity
to borrow and print. And if that happens, that could be
the end of America as we know it. The left-right dialogue
would become irrelevant because we will have all lost.
(Source credit to come)