Money woes product of regulatory failure

I'm enjoying the song and dance routine the free market capitalists are now giving us as they try to justify bailouts and more deficit spending. I admit to feeling confused when I hear about socialism. Isn't that what bigger government means? We've clearly been practicing socialism even before we've been graced by the leadership of avid free market theorists who now control our government. Well, the wonderful eight-year deregulatory experiment has come to an end (almost) and the results are in: they failed. Miserably.

The socialism label is being slapped on bailouts some politicians don't happen to like. One person's socialism is another's vital national security interest. It's all relative--if you wield enough influence, your business could get a bailout, too. So if you have what it takes, why don't you give it a shot? Your lobbying dollar buys a lot these days.

Times are tough and everyone does what they can, from the top on down. Just look at Governor Blagojevich. Aren't those kinds of demands just part of the way business gets done? Blago's mistake was apparently getting caught. Rather use Blagojevich as a proxy for the system's problems, the American people need to understand their system of governance is badly broken. We're reluctant to admit it, but we find ourselves in an age of corruption.

The reluctance of the GOP to support an auto bailout--where over 3 millions jobs are at stake--contrasts with the easer and lack of transparency on what's a vastly larger bailout for banks. Comparing the two industries, we could get into a debate on social welfare, the worthiness of one sector versus the other. Skip all that--the key motivator for rejecting the auto bailout for Republicans was the union. Look no further than Larry Kudlow of Neil Cavuto to see the true, ugly, anti-union face that the investor class demands out of its representative media figures. Unions are despised and hated by the Right. Why? Because not only do unions represent workers' interest, which are generally family-oriented and progressive, unions are also a threat to expanded profitability.

In their defense, the Republicans' rejection of organized labor reflects a broader economic trend, that can only be averted by recurring interventions, kind of like Iraq. Look no farther than the exorbitant cost of American labor on the global labor market. These higher costs may only in part be the unions' doing--the lack of any free health care from our government adds $1500 to the price of every new American car: the US is the only country in the industrialized world that doesn't subsidize this. Competing with foreign-built cars reveals the scope of this de facto subsidy: our cars cost more and our auto industry is less profitable (although foreign auto companies producing here seem to stay profitable.)

Even with single payer health care, our costs of production will be higher than places like Mexico. In this regard two issues pop up: national security and free trade. We can't defend the country with foreign-built autos/tanks in the event of a major war. And if we want to protect our less efficient auto industry we'll need to abandon free trade, or at least those portions of it which present us with too severe risk to our overall economy.

I don't see how a bailout of the auto industry represents a turn towards socialism when over a trillion dollars has been lent out by the Federal Reserve in their effort to manage the massive financial crisis which I attribute almost exclusively to de-regulation. And what of the 40% or so of the Pentagon budget that now flows directly to the private sector?

From the people who brought you de-regulation, add another layer of interventions of unprecedented size on behalf of the financial services industry. Aware of the political consequences of an economic collapse while they're at the helm, the Democrats have signed on. It was only after Senate Republicans had rejected a bailout that Bush came through and delivered on the $15 billion or so that the auto industry wants.

Historical precedent

The GOP has long sought to derail the source of Democratic party's popularity--social welfare programs like Medicare and Social Security--with the voter. Cutting the ability to spend--in what people like Grover Norquist called "starving the beast"--theoretically hampers the ability of government to spend on social programs--institutions much pilloried by those on the right. By themselves, war spending and the bailout (TARP and non-TARP) might not be enough to destroy the creditworthiness of our government, but together the two could spell major restraints on future spending.

Since Reagan's time, the Friedman mantra of lower taxes and deregulation has been tried. The regulatory element crumbled, leading to catastrophic Savings and Loan failures, as well as Enron and the current credit crisis. Bailout money was spent largely as a consequence of inadequate regulation, which decreased margin requirements for financial services companies and thus permitted them to speculate on risky derivatives.

Prior to Bush II, we did see the greatest bull run in the stock market in American history, until it ultimately unwound due to bad investment decisions and a lack of oversight, two flaws which are precisely why a regulatory environment regime must be upheld. Otherwise the greed inherent in a free market capitalism ends up destabilizing society through severe economic corrections and an exacerbated gap between the wealthy and poor.

Whatever the end goal, trying to impact the entire economy through changing government policies is ultimately a command control, Soviet-style approach. We can't create a healthy economy by implementing it from above. Tax policy, even used to increase economic activity is still a methodology dependent on Washington and its bureaucracy--State power.

The trend in Washington is towards greater control, despite the promises of Bush and the Republicans to shrink government. Rather than eliminate central authority, Washington has built theirs up, by constantly spending more than they take in. Also, take a look at where the benefits of lower taxes have gone: increasingly to the top fifth income bracket; income disparities between rich and poor have grown.

A deregulatory environment can now clearly be seen for what it is: a vehicle for the investor class to maximize profits. The consequences of deregulation also pile up over the longer term, as this Friedmanian Period demonstrates. Over four or five years, pollution might not become that big an issue if a few emissions guidelines are trimmed. Six to ten, and the atmosphere becomes more toxic. Asthma rates climb and workforce productivity slows as parents stay home to care for kids on days of lower air quality. Hospital expenses soar, as do insurance premiums and cleanup costs.

Also, society pays a severe price for the actions of a the wealthy and their agents. Deregulations on coal have allowed mammoth mountaintop removal operations to occur. These projects destroy the natural heritage on which many areas in Appalachia depend. Once the coal is removed, the jobs die, in contrast to green jobs in wind power which are sustainable to infinity. The idea that we must flatten America's mountains to produce our energy is pathetic, anti-American, and singularly exploitative. It's like we've been recast back in Sinclair Lewis' Gilded Age all over again.

The deregulation of industry has also come at great benefit to the few and great expense to the many. The profits are privatized and expenses of polluting industries cast on to the public and government. So like deferred taxation, pollution simply defers cleanup expenses onto future generations of Americans. The toxins in the atmosphere may never be removed; still, as the nations' many Superfund sites attest, the process of detoxification will be hugely expensive and far exceed whatever benefit deregulation brought--benefits kept exclusively to those benefitting from cheaper production costs (in the short run) that pollution brought.

No people will put up with environmental degradation forever. Over time, the economic benefit of polluting ends up reducing the competitiveness of domestic industry as new regulations are brought into effect in order to meet the inevitable threat to public health that emerges, with Love Canal and thousands of other examples. Oriented largely around the exploitation of natural resources, polluting industries also tend to move on, to other countries, whether because the resources have dried up or the regulatory burden elsewhere is less severe. These fly-by-night operators will one day run out of raw resources to exploit--then what?

Another major impact of deregulation has been discovered in the capital markets. Quite simply, if people in control of huge sums of money can get away with cheating, they will. The Madoff Ponzi scheme shows just how much damage one dude in a small office can do. Investments are increasingly interrelated. Now we've had in the past plenty of schemes like Madoff's, but never on this kind of scale.

It takes a lot of heads looking the other way to allow a fraud of such epic proportions to emerge, or does it? Many the digital age has made it possible to defraud people without trying, without fear of apprehension. Judging from the ineptness of our SEC, and partisanship at the DoJ, maybe we've abandoned arbitrary enforcement of our laws in favor of more selective interpretations. Bush and Cheney's admission of torture does provide an example of self-serving, extralegal moral relativism for all Americans to follow. If you can get away with it, just do it.

Now unlike the larger financial services bailout, Madoff's comparatively smaller injury demonstrates no intentional plunder of government resources or any attempt at shock capitalism. Naomi Klein's theory holds that companies with ties to government will attempt to enrich themselves when free or low-cost services collapse in the event of a natural or man-made calamity. The damage Madoff did comes as a shock, but the list of victims includes far too many power players--Establishment insiders--to be intended as a method to spur privatization or greater government spending in the private sector.

The same can't be said for the bailout in general. I remembering hearing at one point that Paulson only intended to spend $350 billion of the total $700 billion, in order to leave the incoming administration with plenty of funds to oversee. Like so much of what I hear in the media, I was right to question this altruism for at no point ever has the Bush administration been willing to restrain itself from granting favors to industry. I've also repeatedly said that they would get away with as much as they could. Unless someone or something were actually capable of preventing the complete looting of TARP funds, such looting would take place.

What really amazes me--and dismays to a degree, though I rarely get surprised by this anymore--is the total inability and/or unwillingness of Congress to defend the public treasury. I'm guessing at some point in the recent history of the Congress, Democrats agreed that they would do nothing to oppose more spending. More spending is after all their raison d'etre, their justification for being elected--to create more government to benefit more people, which the free marketers and their representatives detest.

I guess the Democrats' plan is to stimulate the economy through additional spending; any dollar spent by government is a wise expenditure, or so they might think. Little do they know, but the rapid expansion of the deficit expedites the consequences of overspending--the money will almost certainly dry up, and soon. Already with borrowing for the Iraq and Afghanistan wars, combined with a Pentagon budget exceed what the rest of the world spends on their militaries combined, investment in the private capital markets are losing out to purchases of government Treasuries.
Why invest in the American economy and take higher risks, when the alternative is just to buy Treasuries, which are presumed to be safer in turbulent times? The less capital available for private sector lending, the less borrowing, and the less growth. The real unwritten story of the war(s) is the large-scale redirection of capital to government securities. Long bouts of large deficit financing eventually dry up available capital, similar to the Seventies, which came on the heels of Vietnam and massive social spending under LBJ.

Deficit financing

Lost in the partisan bickering is the fact that both parties have added massively to the deficit. The Bush adventures in the Middle East and Central Asia have added hugely to our financial weakness. Obama's penchant to escalate in Afghanistan will surely erode our financial position. Combined with a slowing economy, Obama is likely to further accelerate borrowing with his economic surge, which could well cost over $800 billion.

The lower taxes approach has bloated our deficit from under $1 trillion in pre-Reagan to over $11 trillion post-Bush. Whatever economic progress we've achieved in this time frame has to be offset by the claim on future income created by the deficit, which will take out large portions of future economic growth. The alternative to paying down the deficit is to create inflation. While the recent decades have been experienced exceptionally low inflation, the measure of decreased purchasing power is showing a gradual increase. How can we avoid reducing the purchasing power of a dollar when we increase the money supply? Assuming newly created dollars are spent, they make the dollars out there worth less in terms of what they buy.

The picture isn't pretty, folks. Future deficits have been worsened by the primacy of self: the desire of everyone not to pay for what they get. In other endeavors that's called stealing; in Washington, the passing on of debts has become a political necessity. Everyone wants to keep their money so pressure to lower taxes remains high. The Republicans, knowing this, chirp on about Friedmanian benefits of lower taxes, despite the unsustainability of lower taxes in an environment of free spending. Friedman is right about taxes, at least during a recession. Prevailing wisdom to which Washington and Obama subscribe largely view taxation increases during recession as a bad thing. Whatever the economic impact of lower taxes, over not a lot of time the deficit will grow and grow massively.

The people might be entitled to be opposed to taxation. Tax burdens at every level of government have unfortunately crept up in this country to the point that working folks can't really afford to give up any more of their income. look at history. The IRS was created at the same time of the Federal Reserve by no accident; checks made out to the US Treasury end up getting deposited there. Taxes prop up the fractional reserve lending system--otherwise it'd collapse for lack of input. Over time, we've ned up both feeding the money monster more of our income through higher taxes, but also had the value of that money decline, in excess of 96% from the creation of the Fed. (By contrast, during the 19th century, one dollar bought essentially the same amount of stuff in 1801 as it did in 1901. See now how both spouses have to work? Look no further than the effect of declining purchasing power--two incomes replaced one.)

Lowering taxes has the same effect as borrowing--both defer taxation onto future generations. Of course, most people want the benefits of subsidized services and social welfare. The worse things get economically, the closer to the bosom the Baby Boomers are to clutch the safety net. So we borrow and no reason exists to indicate we won't borrow more--inextricably. Until we can borrow no longer. Like we own an endless credit card. In this respect we are no different from an average consumer, except of course the balance is already at $11 trillion owed, with upwards of an estimated $35 trillion or more in future liabilities. So we pass the tax on, pay down none of the principal, and expect future taxpayers to pay. Some day they won't be able to pay. It's obvious. Unless they can issue ever greater amounts of currency, the costs of paying creditors will simply be too high. It's like any spiral of debt that incurs ever larger fiscal burdens on the borrower.

Republican hypocrisy

The GOP is fixated on their image as fiscal conservatives, which hasn't matched reality. I guess it's like Las Vegas, what happens in Las Vegas stays in Las Vegas. If the media exposes the hypocrisy of the Republican pledge to actually shrink government, their acting job would make a mockery of that principle. But in this media-centric, perception-management world, only in Washington, already infatuated with itself, can the rules of acceptable conduct not apply. This permissibility, this moral latitude, has made accepting corporate donations and PAC money simply the way Washington does business.

To regain fiscal conservatism, the GOP must contend with rampant military spending incurred by Bush and condones in the wars of aggression he launched. For those still in power, Republican leaders must face the consequences of massive borrowing to pay for T.A.R.P., which is actually only part of the total lending that the Federal Reserve has initiated through a broad array of what I call "Treasuries-for-trash" programs. These myriad credit facilities are unapproved by Congress and lack any apparent oversight. Apparently the Fed's actions are so nontransparent as to warrant a lawsuit by Bloomberg Media under the Freedom of Information Act (see last post). In response, the Fed has invoked trade secrets as a defense, admitting they are a private, for-profit entity.

I've explained how the Fed works in detail here. The US Treasury actually loses control of whatever the Fed lends out. The role of the Fed as middlemen encourages them to initiate their own lending. They can utilize the power of the U.S. Treasury--essentially the ability to tax--to solidify their credit, which they can extend in exchange for less valuable borrowings.

Particularly egregious is the fact that banks, charter members of the Fed, will actually receive the interest on the Fed's lending. All those Treasuries that go out will pay interest to no one other than the banks and the people who've exchanged in worthless derivatives. The recipients of all this interest who, in any free market environment should be end up getting punished, end up getting rewarded! Talk about naked socialism!

The American people need to wake up and educate themselves about how the bailouts work, as well as what people like Ron Paul are telling them about their money and the financial system. Until then, those in control will get away with everything they can. It's like the tragedy of the commons. With no one empowered to take control, the shared resource--our money--is available for plunder by those sufficiently well positioned to get what they want, like the highly successful commercial operations overgrazing the commons.

Still, the size of the bailouts does threaten the integrity of the financial system, although I guess that's not a problem if you've got a jet and wads of cash in the Caymans. The Fed plays a dangerous game not because the US government could directly issue money and debt, but rather because the Fed can put so many Treasuries out in the public auction that they start to become less attractive, and command higher interest rates. The Fed may be radically curtailed in what it can do in the future not because of government overspending but rather because the banks have cannibalized so much of the market for US debt securities by using their control over the Fed. In the end, the Fed may become quite irrelevant as no alternative to issuing money other than directly, through the Treasury, becomes available.

Deja vu

The failure of deregulation to work should provide plenty of ammunition against any future deregulatory effort, especially considering the size of the failures and near-failures. Anyone desirous of smaller government has to wonder if deregulation actually creates economic growth or simply maximizes profit for a few a the top while leading to a broader economic collapse that might only be prevented by massive bailout(s). Naomi Klein's theory holds that companies with ties to government will attempt to enrich themselves by allowing services to collapse in the event of a natural or man-made calamity.

Economists are fond of cycles in explaining all sort of phenomena. We've been told in the recent past of how the economy is cyclical, and that we go through up and down periods like the tops of the waves and the trough of some giant slow-moving, multiyear cycle.

The chief benefit of cycle theory is predictability, not only whether or not the economy is improving or declining but also a rough idea of when it might improve. With the rise of the digital age, the speed of economic changes staggers the mind. Essentially we can't predict what will happen just a few months down the road. At least during more industrialized periods, we could anticipate downturn and the inevitable uptick. With this most recent crisis, we can't be sure if there is any daylight at the end of the tunnel, at least for some traditional industries like auto-making or mortgage brokering.

I worry that we won't learn from our fiscal mistakes and make them all over again. Prone to repeating our mistakes, the American people are vulnerable to future manipulations of the stock market. As long as well financed interests steer public policy, the threat posed by deregulation will continue. Absent a countervailing force like unions or a multiparty system, the corporations are likely to remain the strongest single political force. Whatever companies lack in zeal, they make up for in lobbying and donations which can be channeled for very specific tasks. And unlike people, corporations can pursue their goal indefinitely.

The country's greatest strength is its people, as is its greatest weakness. People are prone to do as they always have. If they've been demotivated to act on political affairs, momentum clearly favors remaining uninformed and/or apathetic. It takes unions and other groups of organized people to overcome defeatism and challenge the special interests gnawing at the system from within.

I can only surmise that the people with the shortest attention span in the world--us--will forgot this travesty, this explosion in government spending, and let it happen all over again. And why not? If politicians in the future are as tightly wedded to their corporate donors as they have been in the past, why wouldn't they let them deregulate once again? How can the Little People ever compete with corporations, with their legions of K Street suits pandering every want of the Washington establishment?

Perhaps the pain of a severe economic contraction is the only means of waking the American people from their political lethargy. Record voting in the recent election indicate Americans have woken up. The record participation repudiated the neoconservative Republican candidate, who lost by some 8 million votes or so. Contrary to Bush's cry for a universal mandate based on his narrowest of wins in 2004, Obama's policies appear to have been fully approved and ratified by virtue of his margin of victory.

An economic collapse might provide a good degree of "I told you so" as well as a package of reforms, not just a band-aid, which is I'm afraid all that pouring out huge sums on troubled companies will achieve. Whatever the severity and duration of the economic pain, we will eventually recover. At that point, we need fiscal conservatives (not just in name) to stand up before Congress to defend the cost-savings inherent in good old-fashioned regulation, less the market collapse once again.

Corporate donations need to be contained. Yet protecting campaign supporters is priority #1 for Congress so why would they limit their take and diminish their chances for reelection. Continued giving reassures reelection, the quid pro quo dictates that those special interests get preferential treatment in exchange for their financial help.
Obama's victory was built on a $750 million war chest, a fact not lost on any politician. Without the money, victory is impossible. Therefore soliciting donation is part of the way Washington does business, and Obama's approach reflects this orientation. And after winning, can we assume that the donors won't expect anything in return, or get anything back for all their help?

True change isn't a matter of replacing the political affiliation of those at the top but requires removal of the methodologies and habits that have led to business as usual--and all the corruption and failure that appears to have wrought. As much as we'd like to believe that exercising our right to vote represents change, little of the system will really be changed.

As long as the perception of impending change is maintained, the American people go on hoping that things will improve. In this respect, electing Obama could create a dangerous complacency. Not only is Bush not over, but people who voted for Obama might feel that his election demonstrates that our political system can manage crisis better, that it essentially operates on a top-down model. Yet the problems are systemic, and originate from the way things have been done.

The status quo has a momentum all its own. Unless Obama can change the system, whatever policies he plans on implementing will be undermined by Establishment realities. Obama's choice of insiders to serve as advisers shows he values the notion of changing from within the system. With the momentum of going on so strong, even in the face of clear political and financial risks, it's easier to use Washington insiders or else nothing might be achieved, much less any bold vision for change. Obama's choices reflect a measure of careful deliberation and compromise, which are invaluable tools in achieving any form of change in the existing order. Still, the closeness of Obama's advisers to the Washington establishment may mean that his agenda for change gets corrupted. Let's give him a chance anyway.

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