Archive for the ‘capitalism’ Category
[NOTE: This post was originally made on March 23, 2009. But with the recent discussion of Paul Ryan's long-standing commitment to Rand's thought--which he now appears to be trying to deny in spite of evidence to the contrary--I thought this post worth a rebroadcast. On Ryan's commitment to Rand, see the article in The Atlantic Wire, “Audio Surfaces of Paul Ryan’s Effusive Love of Ayn Rand.”]
In times such as these, our times, when unregulated capitalism has once again proven that it can bring down the house, literally, it’s worth reminding ourselves about the voices that have spoken so eloquently in favor of selfishness over the years. (Not Adam Smith, by the way; he thought that sympathy was a basic feature of human nature.) Here is Colbert discussing one of the leading lights of selfishness, Ayn Rand.
The Word – Rand Illusion | March 11th | ColbertNation.com
On Capitalism Run Amok, readers might want to check out Sullivan’s site today, March 23rd, “Are The Jacobins At The Gates?” Let’s just say, a bit over the top, but worth a look. (Btw, Sullivan thinks of himself as a conservative.)
P.S. Interesting fact: Stephen Colbert was a philosophy major at Hampden-Sydney College. Training in philosophy has its uses.
Today the Republicans in the Senate blocked passage of a bill to prevent the doubling of the interest rate on Stafford Student Loans. Here is a brief excerpt from today’s NY Times on the topic:
Republicans said they wanted to extend Democratic legislation passed in 2007 that temporarily reduced interest rates for the low-or middle-income undergraduates who receive subsidized Stafford loans to 3.4 percent from 6.8 percent.
But they oppose the Senate Democrats’ proposal to pay for a one-year extension by changing tax law that currently allows some wealthy taxpayers to avoid paying Social Security and Medicare taxes by classifying their pay as dividends, not cash income.
And why do they oppose the proposal? Because closing these loopholes will raise taxes on people who allegedly create jobs. In other words, by closing these loopholes in Social Security and Medicare we will slow the recovery. I kid you not. This is actually the Republican position.
“They want to raise taxes on people who are creating jobs when we are still recovering from the greatest recession since the Great Depression,” said Senator Lamar Alexander, Republican of Tennessee, who instead wanted to pay for it by eliminating a preventive health care fund in President Obama’s health care law.
This is such palpable nonsense it is hard to believe that anyone can say it with a straight face. Right, closing loopholes for wealthy folks on Social Security and Medicare is going to slow down the engine of economic growth.
I realize that I am venting here but it seems to me that the Republicans on taxes have either become ideological fanatics, who simply can’t see that the evidence is not on their side. Or they are absolutely committed to protecting the wealth of their donor base at all costs to the country. Or perhaps undermining Obama’s health care initiative is such a priority they will give any excuse. Or all of the above.
In any case, this points to an even more serious problem. Extreme differences in income are seriously problematic on numerous levels for democratic societies. The indebtedness of students is one piece of the puzzle of the ever increasing inequality bubble in America. We can go on like this for several more years, I suppose. Perhaps decades. But this is no way to ensure the flourishing of this society over the long term. Our children, and our children’s children, will pay for this fanatical pursuit of a form of “free” market capitalism that is simply out of date in the twenty-first century.
One doesn’t need a Ph.D. in economics to know certain facts about the current state of America’s economy:
1) Unemployment continues to be a serious problem not only for the unemployed but for the economy as a whole.
2) Consumers are skittish about spending money, so they can’t help drive an economic recovery.
3) In response to fears about unemployment and the economy, consumers are paying off debt.
4) Reducing debt may be a a good thing for individuals and for the economy in the long-term, but when too many people do it all at once it leads to less goods and services being bought, which reinforces and helps sustain a recession or a weak recovery.
5) Many of the largest corporations in America are sitting on huge sums of cash. Among the reasons for not investing it and hiring new employees: aversion to risk, preoccupation with the current bottom line, and hefty profits through making current employees more productive, that is, making them work longer and harder.
Enter the Bank of America. You know, the corporation that American taxpayers shelled out 45 billion dollars to rescue. Its past and current behavior exemplifies the failings of many giant corporations to do the right thing in national crises. Make no mistake about it, the way that the Bank of America mistreats its customers is bound to reinforce exactly the types of behavior that will maintain the economy in its present anemic state.
Let’s take the story back a few years. It seems that for several years the Bank of America has been arbitrarily raising interest rates on its credit card customers. Here is an excerpt from an article on MSN from BusinessWeek, February 2008.
Credit card issuers have drawn fire for jacking up interest rates on cardholders who aren’t behind on payments but whose credit scores have fallen for other reasons. Now, some consumers complain, Bank of America is increasing rates based on no apparent deterioration in their credit scores at all. The major credit card lender in mid-January sent letters notifying some responsible cardholders that it would more than double their rates to as high as 28%, without giving explanations for the increases, according to copies of five letters obtained by BusinessWeek. Fine print at the end of the letter — headed “Important Amendment to Your Credit Card Agreement” –- advised calling an 800-number for the reason, but consumers who called say they were unable to get a clear answer. “No one could give me an explanation,” says Eric Fresch, a Huron, Ohio, engineer who is on time with his Bank of America card payments and knows of no decline in the status of his overall credit….But Bank of America appears to be taking an even more aggressive stance because, beyond credit scores, it is using internal criteria that aren’t available to consumers. That makes the reasons for the rate increases even more opaque….Analysts also say they are surprised by the magnitude of the rate increases Bank of America is imposing on affected cardholders.
You can find stories all over the web about Bank of America’s bad behavior regarding its credit card customers. Recently it appears that BofA has accelerated the use of one of its strategies: arbitrarily reducing the credit limit of customers who have very good credit histories, pay on time, and pay more than the minimum. The deal goes like this: You borrow an amount from BofA at a good interest rate. After a few months you get a call. You are told that your credit limit is being reduced to almost exactly what you owe. When you ask for an explanation, you are given transparently bogus reasons. And there is no appealing the reduction. This action is unfair to credit card customers because it can adversely affect credit scores. Consumers now appear to be maxed out on their cards when 24 hours earlier they had a nice cushion. A lawyer in California became so incensed about this practice and arbitrary increases in interest rates that he threatened to sue the BofA. The story can be found in the Huffington Post, January 2010. An excerpt:
“Banks have done really well figuring out ways to screw people without making themselves legally liable,” said Ira Rheingold, director of the National Association of Consumer Advocates. “I think [the limit reduction] is another example of Bank of America’s venality. Whether or not it’s a successful lawsuit, I don’t know. Whether I think it ought to be challenged — absolutely.”
But maybe Bank of America is just trying to do what is best for its shareholders. That’s often what you hear when companies are challenged about their executives’ pay or other practices. Yet BofA doesn’t seem too keen on giving its shareholders a say in the pay of its executives. For example, a Los Angeles Times headline on February 23, 2010 announced:
Bank of America resisting shareholders on executive pay. . . The bank is working to keep investor proposals on executive compensation off the ballot.
The machinations of BofA are sad stuff. The resulting likely behavior from customers with reduced credit lines: pay off debt more quickly and spend less money in the marketplace. Of course this will only help to extend the anemic recovery. The fact is that the actions of leading banks and corporations have often not been good for the economy. They rant and rave about taxes and the federal government, but it’s a shell game. (Banks and their supporters will tell you that the reason they are not loaning is because of federal regulations. BofA is currently sitting on 172 billion in cash.) The intense preoccupation of corporations with the bottom line (and the well-being of their executives) has left millions of Americans un- or underemployed. The way that credit has been handled, for example, has increased the fear that we will never come out of this downturn, which will only help to prolong it.
Socialism is no threat. Corporations only looking to the bottom line, which in times such as these is downright unpatriotic, are a threat. It’s time for companies that have done so well in America to stand up and sacrifice for America. We are not asking you to become charities, although you were willing to take our charity when you needed it. We are asking you to spend some money, damn it, and put people back to work, even if it’s not the absolutely best thing for your corporation’s current bottom line….and stop harassing responsible citizens while you do it.
Oh, and just in case you might be worried about the well-being of the former Chairman of BofAm, Ken Lewis, here is what ABC news reported regarding his retirement pay in 2009.
Outgoing Bank of America CEO Ken Lewis’ nearly $64 million retirement pay puts him ahead of most, though not all, fellow major bank CEOs who have left their institutions during the financial tumult of the last two years.
So, you think of yourself as an honest soul. You understand that stealing property or money is wrong. You wouldn’t do it. You wouldn’t want your kids or friends to do it. It’s unthinkable. But I have a proposition for you.
Here is a button. All you have to do is press it and $100,000 will be transferred from Goldman Sachs, BP–or any other giant corporation whose resources are larger than most countries–into your bank account. Nobody will ever know. It’s a magic button. Well, not really magic. Some geek has wired it in a fashion so that money can be transferred to your account without anyone being able to trace it–in the tradition of how derivatives were traded.
Just think of how much money Goldman Sachs and its executives made in the last few years as the Market tanked, while you probably lost money in your hard-earned retirement account. Not only did you recently lose money, but if you had invested $1,000 dollars eleven years ago in the Dow, that’s just about what it would be worth today, $1,000 (less if inflation is factored in). But you know, and I know, how much money these guys have made trading your money and my money. But that’s capitalism, you say. It’s the way the game is played.
But would you push the button? Would you be tempted to do it? Or perhaps a better question: how many of your fellow Americans do you think would be tempted? A lot, right? (Or an even better question, how many more would push it today than ten or twenty years ago?)
The recent Melt Down on Wall Street, and the ensuing profits made by big trading firms and banks, have been corrosive in ways that we may not fully understand for years. You’ve got Tea Baggers screaming about Washington, but the revelations about how Wall Street operates have buried themselves deep in our collective subconscious. Real damage has been done. Yes, we knew that there was big money out there and that big money corrupts. (Before the present Melt Down, there was Enron and assorted other travesties.) Yet “knowing” is one thing. Seeing it in front of your eyes day after day, year after year, undermines confidence that the system is anything close to fair. Yes, Obama has attempted to tame Wall Street with new regulations. They will do some good. Yet as long as we continue to see different rules of the game for a small strata of society, which is indeed what we have seen, our belief in the benefits of capitalism will be undermined by a gnawing sense that it is corrupting us, our children, our society. From a sanctified economic system, it will become what we have to put up with, sort of like the Roman emperors in Imperial Rome. It won’t go away anytime soon but we aren’t going to feel good about it.
There was a time in American business when many people believed that a handshake was as good as a contract, or so I am told. People kept their word. It now seems that handshakes still function in this manner for a small elite segment of corporate America that makes deals for unimaginable sums. The rest of us can’t depend on them when we deal with companies. (How about a handshake between you and your medical insurance company to guarantee your coverage? Any takers?) The middle class will need more and more contracts and lawyers to protect them in an economy in which money has gone wild. And they will have relatively less money to hire these lawyers.
No doubt there are problems with the way government functions. But anyone who thinks that this is the major source of the declining confidence in how our society works really needs to look at Wall Street with suitable eyewear. The business of America is no longer doing business but being given the business.
In the New York Times on Sunday, January 24, 2010, Thomas Friedman writes in his piece, “More (Steve) Jobs, Jobs, Jobs, Jobs,” about programs that can be helpful in getting the economy moving. For example,
Obama should make the centerpiece of his presidency mobilizing a million new start-up companies that won’t just give us temporary highway jobs, but lasting good jobs that keep America on the cutting edge. The best way to counter the Tea Party movement, which is all about stopping things, is with an Innovation Movement, which is all about starting things.
Fine. Let’s support programs that can provide education and opportunity. But Friedman also gives the president some advice.
Well, here’s my free advice to Obama, post-Massachusetts. If you think that the right response is to unleash a populist backlash against bankers, you’re wrong. Please, please re-regulate the banks in a smart way. But remember: in the long run, Americans don’t rally to angry politicians. They do not bring out the best in us. We rally to inspirational, hopeful ones. They bring out the best in us. And right now we need to be at our best.
This is a bad piece of political advice. It pretends that one can decontextualize a politician’s responses and hides behind the phrase “in the long run” in order to do so. President Franklin Roosevelt sounded pretty angry when he spoke to the nation about the Japanese attack on Pearl Harbor—you remember, “a date which will live in infamy.” And then there was his cousin, Theodore. He got pretty angry at those old monopolies in order to help pass some progressive anti-trust laws. In general, can you imagine how the American people would react if an American president did not get angry at a perceived threat, domestic or foreign, to the well-being of the nation?
To say that Americans don’t rally in the long run to angry politicians is one of those innocuous truisms that mean little in the real political world, for everything depends on what one means by “the long run.” (As Keynes said, “in the long run we’ll all be dead.”) In the short run, and medium runs, the American people surely do rally to an angry president, as long as they can connect with the anger. They also rally to presidents who know when to get angry and when to be inspirational. (Presumably this would mean getting angry on and off, so it would sort of be in the long run.) Oh, yes, and then there are those presidential moments that combine anger and inspiration.
Since the statement about anger is so obviously off the mark and hackneyed, one might be inclined to look for some other motivation for Friedman tossing it out. Here’s my guess. Friedman is scared that if Obama goes too far in attacking the bankers a rift may develop between his administration and the wonderful world of capital. And then America may find itself falling behind foreign nations in the new flat world of economic competition that we face. According to Friedman, entrepreneurs, who at some point will require capital, are the movers and shakers in this world, and it will be a pretty scary place for those places and persons who aren’t on board in terms of the new world order.
But back home, in the meantime, Obama only gets to use the bully pulpit with one hand tied behind his back while he is trying to back Wall Street down. (Note Machiavelli here: it is better that the prince be loved and feared.) Friedman wants Obama to re-regulate the banks. In the real world of American politics just how is he supposed to accomplish this without some heavy duty support in Congress? And given the special interests standing in the way of reforms, you can kiss them good-bye if the American people don’t get sufficiently excited about the issue to get their representatives worried about reelection.
I have a piece of advice for Mr. Friedman and I hope that he won’t mind. It is in the spirit of his advice to the president: Don’t worry! Obama won’t forget about being loved over the long run.
UPDATE, January 27, 2010
For readers who may have felt that I was being a bit unfair to Friedman by claiming that he may have been motivated by fear, I suggest that you check out his column today, “Adult’s Only, Please.” Here is an excerpt. Catch the last line. (He does acknowledge that Obama might be justified in being a bit peeved by the way some on Wall Street have behaved, but hey, just let’s not make them too angry. And if you do, well, you are not being an adult, which of course Friedman is.)
Lately, we’ve seen an explosion of situational thinking. I support the broad proposals President Obama put forth last week to prevent banks from becoming too big to fail and to protect taxpayers from banks that get in trouble by speculating and then expect us to bail them out. But the way the president unveiled his proposals — “if those folks want a fight, it’s a fight I’m ready to have” — left me feeling as though he was looking for a way to bash the banks right after the Democrats’ loss in Massachusetts, in order to score a few cheap political points more than to initiate a serious national discussion about an incredibly complex issue.
President Obama is so much better when he takes a heated, knotty issue, like civil rights or banking reform, and talks to the country like adults. He is so much better at making us smarter than angrier. Going to war with the banks for a quick political sugar high after an electoral loss will just work against him and us. It will spook the banks into lending even less and slow the recovery even more.
I am a professor by trade. I like the idea of making people smarter (or perhaps I should say, better educated), especially over the long run. But I think we all know the danger of coming off like a professor discussing fire codes while the house is burning down.
(Print, Southern Labor Archives. Caption: History Repeats Itself–The Robber Barons of the Middle Ages, And The Robber Barons of To-Day)
Guess what? The fat cats on Wall Street not only think that they will be doing as well or better this year than last, they think that any attempt to limit their outrageous salaries and bonuses will stifle innovation. The following is from a Bloomberg.com story, “Bankers Expect Rising Bonus Pay to Break Records in Global Poll,” (Oct. 30, 2009).
Having shaken off the biggest economic decline since the 1930s, almost three in five traders, analysts and fund managers believe their 2009 bonuses will either increase or won’t change, according to a quarterly poll of Bloomberg customers. Only one in four see a decline. Asians are the most optimistic about pay and Americans and Europeans somewhat less so.
“The large banks are knocking the cover off the ball,” said Daniel Alpert, managing director of New York-based investment bank Westwood Capital LLC. The industry is “making money, though with government help.”
Worldwide, a majority of market professionals in the survey also turn thumbs down on government attempts to limit compensation, with 51 percent saying restrictions will stifle useful innovation. Only about 38 percent think pay limits will control excessive risk-taking.
In the U.S., where President Barack Obama has chided Wall Street for being “motivated only by the appetite for quick kills and bloated bonuses,” 65 percent say the restrictions will damp innovation.
So, we are supposed to believe that if “market professionals” lose some of their bonuses, it will decrease their capacity and motivation to think about new ways to make money. This claim is as lame as it is self-serving. You would think that some loss would only drive them to new heights of creativity, given their alleged professionalism. Yet they keep managing to get away with offering ever weaker rationalizations for why they need ever increasing salaries and bonuses. Laughing all the way to the bank(s). It seems that we have our own version of the Robber Barons. They may oppose tariffs, but they have the equivalent of monopolies in many areas. They work for institutions that are, after all, too big to fail. Yet these “professionals” should remember that Americans have a limited tolerance for aristocrats, and they are beginning to skate on the thin ice of class: they are becoming an entrenched moneyed aristocracy.
If you question my assumption about Americans’ limited tolerance for self-inflated moneyed folks, I ask you to take the Gilligan’s Island test. Which character or characters on Gilligan’s Island do you least trust: Gilligan, the skipper, the millionaire and his wife, the movie star, the professor or Mary Ann? (Hint: notice that there is only one character not looking at you.)
We have all wondered how the financial wizards down on Wall Street managed to help tank the economy. No doubt creative accounting played a substantial role. This clip will explain to you, in a straightforward and easily accessible fashion, just how simple creative accounting can be.
RockefellerJ.P. Morgan in action
Obama’s budget is smart and far-sighted. I wish I could say the same about the bank bailout. We are certainly not out of the woods on this one.
On April 1st, the New York Times ran an Op-Ed piece by the noble winning economist, Joseph Stiglitz. (There is an excerpt and link below.) It’s about as clear a presentation of the issues involved as I have seen (in a short piece). And it lays out why we should be concerned about the plan, which is no doubt the work of Geithner and Summers. I worry, as many do, that the red-herring rhetoric of “nationalizing” the banks will prevent us from properly addressing the situation. I worry that Geithner and co., for all of their good intentions, are too close to Wall Street not to be sucked into the myth that “nationalizing” must mean socialism or the appearance of socialism. (The irony here is that this is precisely the rhetoric that the right has used so successfully in the past to prevent such needed programs as universal medical insurance.) I worry that this plan is viewed as a shrewd move to get the Wall Street/banking crowd on board by Geithner and co., but will end up providing the banks only a temporary boost in liquidity, yielding “profits” that will once again allow them to laugh all the way to their own banks.
J.P Morgan headquarters
My hope is that if the plan doesn’t work, the Administration will quickly turn around and say, we tried, and move on to a solution more appropriate to the problem. I am confident that Obama the pragmatist would make such a move. The question at hand: how hard will his own soft ideologues fight to avoid the appearance of “nationalizing” the banks?
Obama’s Ersatz Capitalism (excerpt)
by JOSEPH E. STIGLITZ
THE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.
Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency. . . .
What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.
So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.
At today’s Congressional Hearing:
“We are meeting today at a high point of public anger,” said Mr. Liddy, a former chief executive of Allstate who was installed as A.I.G.’s chief when the Federal Reserve announced its rescue package. “I share that anger. As a businessman of some 37 years, I have seen the good side of capitalism. Over the last few months, in reviewing how A.I.G. had been run in prior years, I have also seen evidence of its bad side.” NY Times, March 18, 2009.
I watched a good portion of Edward M. Liddy’s testimony before Congress today. I hadn’t planned to. I got caught up. Liddy took on the job of CEO at A.I.G. for 1 dollar a year. He appears to be a man sincerely dedicated to the service of his country. However, while by no means clueless about the possible reaction of the American people to the AIG bonuses, he did not realize that his arguments amounted to telling the American people that we had been blackmailed. If he hadn’t agreed to pay the executives of the compromised division their bonuses, they would have walked, AIG would have tanked, and our economy would have headed into a death spiral. Or so he claimed. Liddy needed to retain these folks. And he could only do so by paying out millions. (Yes, he made it clear time and again that there were contracts that had to be honored, but as congressmen pointed out, the company could have chosen not to pay and accepted the possibility of being sued.)
“Of the 418 employees who received bonuses, 298 got more than $100,000, according to the New York attorney general, Andrew M. Cuomo. The highest bonus was $6.4 million, and 6 other employees received more than $4 million. Fifteen other people received bonuses of more than $2 million and 51 received $1 million to $2 million.” NY Times, March 18, 2009
The danger to the nation due to a complete financial collapse is far greater than the danger of terrorism. And this is just what Liddy was claiming might happen if these executives walked and AIG tanked. So we have people dying in the fight against terrorism, but we have others insisting on the entire amounts of their bonuses in order to cooperate and prevent financial ruin. As patriotic Americans (that is, those who are Americans), they should have offered to work for a small portion of what they were being paid, especially the top earning executives.
Each contract with each employee had its own unique structure, reported Liddy. They simply couldn’t hold back the funds. However, today he reported that he has asked the executives to return 50% of the money. They don’t have to, but as good Americans they might. (Why didn’t he ask this of them last week? or a month ago? or ask for more?) Think about this, as you think about all those who are on the street without jobs, including Wall Street people. Think about the sense of entitlement that these AIG executives have. Think about why so many of us didn’t see this sense of entitlement as dangerous to the well-being of our nation until very recently.
The American people have been sold a bill of goods for almost two generations now, and it goes something like this: if we take advantage of the magic of the market, if we just look out for number 1, the free market will reward us as a nation. Yes, there are folks in the military who sacrifice, and there are those who volunteer for civilian service, but at the end of the day we serve our country and communities best by seeking our own fortunes.
I am putting this too starkly you say? Perhaps. But it became the mantra of Wall Street. And as they once said about GM, what’s good for Wall Street is good for America. Just watch those 401k’s grow, and never take any money out of them. The market always makes a profit in the long run. (Of course what they forget to tell you is that the long run can be very long indeed.)
The party’s almost over, as so many have declared. The party, however, is not just about living the high life in good financial times. The party is about having a set of beliefs that comfort and aid us in getting on in the world. And one set of these beliefs has involved the goodness of capitalism and the free market. We have spoken about them as if they are gods. They are not. Capitalism can be an exceedingly productive economic system, but only when operating under proper guidance and regulation. There are no free lunches and there are no entirely free markets. Believing so is exceedingly dangerous, especially when this ideology replaces our common sense about the sacrifices and labors required to build and maintain communities and a nation.