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Friday, March 15, 2013

Transcript: The institution of corporate control

Institutionalism.  The way we use it at Demand Side, this is the "political" in political economy.  For our purposes today, it is the skewing of the economy toward the interests of the corporate elite, the corporate oligarchy.  This has been done in three significant ways: capturing the bureaucracy of government, capturing the political parties, and controlling the media.
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Control of the courts was accomplished by the Reagan and Bush administrations' appointments of justices with little to recommend them except ideology and willingness to actively dismantle government, epitomized by Clarence Thomas.  The court has recently elected presidents, subverted elections and pushed corporate power to the top.

Control of the regulatory bureaucracy is a natural consequence of the revolving door, with management desks and lobbyist desks revolving as the pro-corporate stuffed suit simply sits and collects.  Bureaucracy is further corrupted by armies of lobbyists controlling the process simply by their sophisticated participation as others are locked out.

As to Congress.  We have the best Congress money can  buy.  It turns out money can't buy a very good Congress.  The Republicans have two factions: business interests that are anti-government market fundamentalists and a quasi-libertarian zealot wing that is just anti-government, but is funded by anti-government corporate interests, possibly just in a cynical move to screw up government.  The past thirty years have been a series of experiments in testing the philosophy of less government and lower taxes.  Results are in.  The approach is a failure.  But they are not deterred, and they are well-funded and in power, so we have to continue the experiments until the patient dies.

The Democrats have two factions:  The progressives and the pro-business centrists, who have been neutered by big money and the necessity of campaign finance.

The functional government of pragmatists is gone.  The progressives are the pragmatists, of course. Not exclusively for their understanding of climate change, but because policies that are equitable are economically efficient, public goods as the province of the government, as in health care, is economically efficient, and it is economically efficient to regulate when no regulation means markets are structured to the specifications of the strong, not to the ideals of the invisible hand.

An essential aid to the direct control of government by the corporate institutions is the control of the media.  The concept of "liberal media" is laughable today, though you still here it.  While there may be pockets, the media has an unmistakable corporate bias.  Why not  corporate advertisers are paying the bills.  You have also the phenomenon of FoxNews and FoxNews facts.  My car is going to have a bumper sticker one day that says, "Global warming is real, FoxNews is a hoax." You can borrow that.

But more insidious is Bubblegum news.  This is not news, but accounts of violence and sex and celebrity.  Bubblegum news dovetails nicely with the sports culture and the celebrity culture.  Everything gets turned into a contest between two teams, the Republicans and Democrats, the Americans and the fill in the blanks, this side and that side.  Who will win?  Who are the big players?  Did the last zinger hit home?  Choose your side and it comes complete with ideology and convenient facts, no critical thinking necessary.

The Internet may have the potential of leveling the playing field, or it may be just another distraction, reducing attention spans to bubblegum card length, or balkanizing information and opinion and exacerbating the conflict.

I mentioned I was reading Shiela Bair's book, "Bull by the Horns."  Bair was the Republican head of the FDIC through the Great Financial Crisis. But she was close enough to see what was going on.

page 358
"The thing I hate hearing most when people talk about the crisis is the bailouts "saved the system" or ended up "making money." Participating in bailout measures was the most distasteful thing I have ever had to do, and those ex post facto rationalizations make my skin crawl.  Why system were we trying to save, anyway?  A system in which well-connected big financial institutions get government handouts while smaller institutions and homeowners are left to fend for themselves?  A system that allows government agencies unfettered discretion to pick winners and losers with taxpayer money?  A system that has created cynicism and despair among honest, average working people who take responsibility for their own actions and would never in a million years ask for a government bailout?  A system that has spawned two angry political movements on the left side and the right side that are united in their desire to end the crony capitalism characterized by too-big-to-fail policies?  That is not a system I want to save.

"With the millions of lost jobs and lost homes and the trillions of dollars of lost tax revenue, how can anyone try to rationalize what happened by saying that the bailouts "made money?" In point of fact, they did not make money.

"When the Treasury Department states that the bailouts "made money," they are referring to the dollar amounts that were invested in the financial sector offset by the amounts that were paid back.  Thus, the department does not count as a "cost" the very generous subsidies taxpayers provided financial institutions.  As one distinguished group of academic experts has pointed out, this cash flow method of measuring bailout costs is inconsistent with government accounting rules. ....If those funds and guarantees had been priced at or near their true market value, taxpayers would have been entitled to substantially higher rates of return."

Or as Joseph Stiglitz is fond of saying, "We got cheated."

but down here.
"The bailouts, while stabilizing the financial system in the short term, have created a long-term drag on our economy.  Because we propped up the mismanaged institutions, our financial sector remains bloated. The well-managed institutions have to compete with the boneheads. We did not force financial institutions to shed their bad assets and recognize their losses.  Lingering uncertainty about the true extent of those losses made previously profligate management more risk averse when prudent risk taking and lending were most needed, particularly by small businesses.  Only in 2012 are we finally seeing some meaningful pickup in lending by the big financial institutions. Economic growth is sluggish, unemployment remains high. The housing market still struggles.  I hope that our economy continues to improve.  But it will do so despite the bailouts, not because of them."

"In my farewell remarks to the FDIC, I expressed amazement at the conduct we tolerated in the years leading up to the crisis.  I said:
Looking back, How could we rationalize letting big firms take on leverage at 30 or 40 to 1, giving millions of people mortgages they couldn't afford, a mortgage refinance system which divorced the decision to make the mortgage from the responsibility if the loan went sour, the trading of hundreds of trillions of dollars' worth of derivatives without any ability of the government to police it."...
And on here, to end the chapter with,
It would be hard to find anyone on Main Street who was not in one way or another hurt by the horrible debacle. Government fundamentally failed in its role of protecting us."

Shiela Bair,

And I have to include some mention of the forecast.  The consensus is now complete, or nearly so, that we are in the great spring of recovery.  The zero interest rates and massive purchases of securities by the Fed have done their work.  Ooops.  We're actually not supposed to notice that part.  It is some kind of natural rebound.  As you know, Demand Side and Laksman Achuthan of ECRI are in the same small boat , with maybe a few others.

From the Demand Side there can be no recovery without an increase in incomes, and there is no increase in incomes, so any recovery is really a debt-fueled bubble.

This past week, we had noted regional forecaster Dick Conway in to the Seattle Economics Council.  Dick talked most about tax reform, but he did present us with a provocative chart under the title "The Great Depression and the Great Recession, Two Peas in a Pod."  We thought at first he was going to point to the debt bubble or the massive disparities in incomes and wealth that marked the decade prior to the great recession.  But the chart was in fact, GDP between 1929 and 1940 and a similar eleven-year period between 2000 and 2011.  Turns out the level of GDP in index terms was the same.  In fact, in 1940, the level was actually further above 1929, very slightly, than 2011 was above 2000.  How is that possible.  Because of the stagnation of the 2000's.  Yes, the enormous collapse of the economy between 1929 and 1933 was followed by a very strong recovery, excepting 1938.  The dot com crash was followed by seven years of a jobless recovery and then the Great Financial Crisis and Great Recession, followed by the non-recovery to date.

Dick's chart is online.


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