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Ignoring The Root Cause

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June 17, 2010

The predominant criticism of the so-called “financial reform” bill is its failure to address the problems caused by the existence of financial institutions considered “too big to fail”.  In an essay entitled, “Creating the Next Crisis” economist Simon Johnson discussed the consequences of this legislative let-down:

On the critical dimension of excessive bank size and what it implies for systemic risk, there was a concerted effort by Senators Ted Kaufman and Sherrod Brown to impose a size cap on the largest banks – very much in accordance with the spirit of the original “Volcker Rule” proposed in January 2010 by Obama himself.  In an almost unbelievable volte face, for reasons that remain somewhat mysterious, Obama’s administration itself shot down this approach.  “If enacted, Brown-Kaufman would have broken up the six biggest banks in America,” a senior Treasury official said.  “If we’d been for it, it probably would have happened.  But we weren’t, so it didn’t.”

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The US financial sector received an unconditional bailout – and is not now facing any kind of meaningful re-regulation.  We are setting ourselves up, without question, for another boom based on excessive and reckless risk-taking at the heart of the world’s financial system.  This can end only one way:  badly.

One would assume that an important lesson learned from the 2008 financial crisis was the idea that a corporation shouldn’t be permitted to blackmail the country with threats that its own financial collapse would have such a dire impact on society-at-large that the corporation should be bailed out by the taxpayers.  The resulting problem is called “moral hazard” because such businesses are encouraged to act irresponsibly by virtue of the certainty that they will be bailed out if their activities prove self-destructive.

Gonzalo Lira wrote a piece for the Naked Capitalism blog, explaining how the moral hazard resulting from the “too big to fail” doctrine is facilitating a state of corporate anarchy:

In a nutshell, in this era of corporate anarchy, corporations do not have to abide by any rules — none at all.  Legal, moral, ethical, even financial rules are irrelevant.  They have all been rescinded in the pursuit of profit — literally nothing else matters.

As a result, corporations currently exist in a state of almost pure anarchy — but an anarchy directly related to their size:  The larger the corporation, the greater its absolute freedom to do and act as it pleases.  That’s why so many medium-sized corporations are hell-bent on growth over profits:  The biggest of them all, like BP and Goldman Sachs, live in a positively Hobbesian State of Nature, free to do as they please, with nary a consequence.

Good-old British Petroleum – the latest beneficiary of the “too big to fail doctrine”  — can rely on its size to avoid any sanctions it considers unacceptable because too many “small people” might lose their jobs if BP can’t stay fat and happy.  Gonzalo Lira’s analysis went a step further:

Worst of all, BP realizes that, if it finally cannot get a handle on the oil spill disaster, they can simply fob it off on the U.S. Government — in other words, the people of the United States will wind up cleaning BP’s mess.  BP knows that no one will hold it accountable — BP knows that it will get away with it.

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This era of corporate anarchy is reaching a crisis point — we can all sense it.  Yet the leadership in the United States and Europe is making no effort to solve the root problem.  Perhaps they don’t see the problem.  Perhaps they are beholden to corporate masters.  Whatever the case, in his speech, President Obama made ridiculous references to “clean energy” while ignoring the cause of the BP oil spill disaster, the cause of the financial crisis, the cause of the spiralling health-care costs — the corporate anarchy that underlines them all.

This era of corporate anarchy is wrecking the world — literally, if you’ve been tuning in to images of the oil billowing out a mile down in the Gulf of Mexico.

Mr. Lira discussed how a leadership void has been helping corporate anarchy overtake democratic capitalism:

Obama is a corporatist — he’s one of Them.  So there’ll be more bullshit talk about “clean energy” and “energy independence”, while the root cause — corporate anarchy — is left undisturbed.

The failure of President Obama to take advantage of the opportunity to address this “root cause” in his Oval Office address concerning the Deepwater Horizon disaster, inspired Robert Reich to make this comment:

Whether it’s Wall Street or health insurers or oil companies, we are approaching a turning point.  The top executives of powerful corporations are pursuing profits in ways that menace the nation.  We have not seen the likes not since the late nineteenth century when the “robber barons” of finance, oil, and the giant trusts ran roughshod over America.  Now, as then, they are using their wealth and influence to buy off legislators and intimidate the regions that depend on them for jobs.  Now, as then, they are threatening the safety and security of our people.

One of my favorite commentators, Paul Farrell of MarketWatch, recently warned us about the consequences of allowing corporate anarchy to destroy democratic capitalism:

The rise of uncontrolled corporate greed killed the “Invisible Hand,” the “soul” of capitalism that Adam Smith saw in 1776 as a divine force serving “the common good.”  Today the system has no moral compass.  Wall Street’s insatiable greed has destroyed capitalism from within, turning America’s economy into a soulless zombie.

The “Invisible Hand” Adam Smith saw as essential to capitalism in “The Theory of Moral Sentiments” died in endless battles fought by 261,000 lobbyists each wanting a bigger piece of the $1.7 trillion federal budget pie plus favorable laws protecting, vesting and increasing the power and wealth of their special interest clients.  Future historians will call this ideological battle replacing democracy the new “American Capitalists Anarchy.”

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As a New York Times reviewer put it:  Nations like “China and Russia are using what he calls ‘state capitalism’ to advance the interests of their companies at the expense of their American rivals.”  Global pandemic?

Unfortunately while America wastes trillions to bail out inefficient too-stupid-to-fail banks, our competition is bankrolling healthy state-controlled corporations to destroy us  . . .

If we ever reach the point when the watered-down “financial reform” bill finally becomes law, the taxpayers should insist that their government move on to address the “root cause” of corporate anarchy by taking up campaign finance reform.  That should be one hell of a fight!



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This Flip Is Bound To Flop

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August 4, 2008

Most of the criticism directed against Barack Obama this past week concerned what has been described as his “Celebrity” status.   The McCain camp actually believes that this theme hurts Obama.  Greg Sargent reported in TalkingPointsMemo.com that McCain is spending over $140,000 per day to run the ad featuring Paris Hilton and Britney Spears.  This, according to Sargent, amounts to roughly one third of McCain’s TV ad spending.  Meanwhile, many of us in the audience are wondering whether this ad campaign may actually be helping Obama.  Given America’s fascination with celebrities, might some people be motivated to vote for Obama simply to put a celebrity in the White House?

For his part, Obama disappointed many of us last week with his “flip” on the issue of offshore oil drilling.  There is unanimous consensus among experts on the point that planning new offshore oil rigs will do nothing to effect the availability of gasoline for approximately ten years.  By then, we will likely have the infrastructure and technology available for cost-effective electric cars.  Nevertheless, Obama appeared to be reacting to mounting pressure from the Republicans to allow for more offshore drilling.  Worse yet, new poll results reveal that a majority of Americans actually believe that enacting legislation to permit more offshore drilling would reduce the price of gasoline now.  A CNN/Opinion Research Corporation poll released on July 30 revealed that 69% of the respondents favored offshore drilling, with 51% actually believing that legislation approving increased offshore drilling would lower oil prices within the next year.  The people participating in these polls were probably the same poll participants who expressed belief (and who probably still do believe) that Saddam Hussein was responsible for the September 11 attacks.  Rather than attempting to educate those “low information voters” on the futility of planning more oil platforms to solve today’s problems, Obama has chosen to drink the Kool Aid favored by McCain and announce that he supports expanded offshore drilling.  One would have expected this issue to die when McCain had to cancel a speech he was going to give on an oil rig, because of Hurricane Dolly on July 24.  If he wanted to, Obama could have chosen to ridicule McCain for this failed stunt and criticize McCain’s claim that Hurricanes Rita and Katrina did not damage any oil rigs located in the Gulf of Mexico.  As reported by Michael Shear of The Washington Post on July 23, those hurricanes actually destroyed 113 oil rigs, contrary to McCain’s claim.

The article by Adam Smith and Wes Allison of The St. Petersburg Times on August 1, contrasted Obama’s earlier campaign promise with his current position.  Quoting a speech given by the candidate early this summer, they included this passage:

“And when I am president,” Obama said in June in Chicago, “I will keep the moratorium in place and prevent oil companies from drilling off Florida’s coasts.  That’s how we can protect our coasts and still make the investments that will reduce our dependence on foreign oil and bring down gas prices for good.”

Obama’s new position on this subject goes back to that same type of compromise we saw him demonstrate by voting in favor of the FISA “wiretap” bill.  The voting public is not likely to see this type of weak compromise as the sort of “change” promised by the sign on the podium.

Looking back to Jonathan Darman’s July 11 article for Newsweek, he discussed the results of their poll taken on July 9 – 10.  Senator Obama voted in favor of the controversial FISA bill on July 9 (after having discussed his intention to do so a week earlier).  This poll revealed that the Democrat lost his 12-point lead among independent voters and fell behind McCain among independents by 7 points.  The people “sitting on the fence”, the independents, are the voters tracking Obama’s campaign moves with the most scrutiny.  They are also the voters he needs most.  This latest “flip” in favor of offshore oil drilling could have the same effect on the independent voters as his vote in favor of FISA.  Given Obama’s concern about the poll results concerning the popularity of offshore drilling, the next poll results to show the impact of his position change on this subject, particularly from the perspective of independent voters, might give him a good scare.