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December 1, 2014 | Democracy Journal ( also reprinted in Evonomics )
The Price of Everything, the Value of Nothing
The most basic measure we have of economic growth is gross domestic product. GDP was developed from the work in the 1930s of the American economist Simon Kuznets and it became the standard way to measure economic output following the 1944 Bretton Woods conference. But from the beginning, Kuznets and other economists highlighted that GDP was not a measure of prosperity. In 1959, noted American economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth of output."
In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known issues such as the fact that GDP does not capture changes in the quality of the products (think of mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent in the home). The commission also cited evidence that GDP growth does not always correlate with increases in measures of well-being such as health or self-reported happiness, and concluded that growing GDP can have deleterious effects on the environment. Some countries have experimented with other metrics to augment GDP, such as Bhutan's "gross national happiness index."
Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures economic activity or output. Rather, our issue is with the nature of that activity itself. Our question is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity of our society.
Since the field's beginnings, economists have been concerned with why one thing has more value than another, and what conditions lead to greater prosperity-or social welfare, as economists call it. Adam Smith's famous diamond-water paradox showed that quite often the market price of a thing does not always reflect intuitive notions of its intrinsic value-diamonds, with little intrinsic value, are typically far more expensive than water, which is essential for life. This is of course where markets come into play-in most places, water is more abundant than diamonds, and so the law of supply and demand determines that water is cheaper.
After lots of debate about the nature of economic value in the nineteenth and early twentieth centuries, economists considered the issue largely settled by the mid-twentieth century. The great French economist Gerard Debreu argued in his 1959 Theory of Value that if markets are competitive and people are rational and have good information, then markets will automatically sort everything out, ensuring that prices reflect supply and demand and allocate everything in such a way that everyone's welfare is maximized, and that no one can be made better off without making someone else worse off. In essence, the market price of something reflects a collective judgment of the value of that thing. The idea of intrinsic value was always problematic because it was inherently relative and hard to observe or measure. But market prices are cold hard facts. If market prices provide a collective societal judgment of value and allocate goods to their most efficient and welfare-maximizing uses, then we no longer have to worry about squishy ideas like intrinsic value; we just need to look at the price of something to know its value.
Debreu was apolitical about his theory-in fact, he saw it as an exercise in abstract mathematics and repeatedly warned about over-interpreting its applicability to real-world economies. However, his work, as well as related work in that era by figures such as Kenneth Arrow and Paul Samuelson, laid the foundations for economists such as Milton Friedman and Robert Lucas, who provided a devastating critique of Keynesianism in the 1960s and '70s, and recent Nobel laureate Eugene Fama, who pioneered the theory of efficient markets in finance in the 1970s and '80s. According to the neoclassical theory that emerged from this era, if markets are efficient and thus "welfare-maximizing," then it follows that we should minimize any distortions that move society away from this optimal state, whether it is companies engaging in monopolistic behavior, unions interfering with labor markets, or governments creating distortions through taxes and regulation.
These ideas became the intellectual touchstone of a resurgent conservative movement in the 1980s and led to a wave of financial market deregulation that continued through the 1990s up until the crash of 2008. Under this logic, if financial markets are the most competitive and efficient markets in the world, then they should be minimally regulated. And innovations like complex derivatives must be valuable, not just to the bankers earning big fees from creating them, but to those buying them and to society as a whole. Any interference will reduce the efficiency of the market and reduce the welfare of society. Likewise the enormous pay packets of the hedge-fund managers trading those derivatives must reflect the value they are adding to society - they are making the market more efficient. In efficient markets, if someone is willing to pay for something, it must be valuable. Price and value are effectively the same thing.
Even before the crash, some economists were beginning to question these ideas. Robert Shiller of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s that stock market prices did not always reflect fundamental value, and sometimes big gaps could open up between the two. Likewise, behavioral economists like Daniel Kahneman began showing that real people didn't behave in the hyper-rational way that Debreu's theory assumed. Other researchers in the 1980s and '90s, even Debreu's famous co-author Arrow, began to question the whole notion of the economy naturally moving to a resting point or "equilibrium" where everyone's welfare is optimized.
An emerging twenty-first century view of the economy is that it is a dynamic, constantly evolving, highly complex system-more like an ecosystem than a machine. In such a system, markets may be highly innovative and effective, but they can sometimes be far from efficient. And likewise, people may be clever, but they can sometimes be far from rational. So if markets are not always efficient and people are not always rational, then the twentieth century mantra that price equals value may not be right either. If this is the case, then what do terms like value, wealth, growth, and prosperity mean?
Prosperity Isn't Money, It's Solutions
In every society, some people are better off than others. Discerning the differences is simple. When someone has more money than most other people, we call him wealthy. But an important distinction must be drawn between this kind of relative wealth and the societal wealth that we term "prosperity." What it takes to make a society prosperous is far more complex than what it takes to make one individual better off than another.
Most of us intuitively believe that the more money people have in a society, the more prosperous that society must be. America's average household disposable income in 2010 was $38,001 versus $28,194 for Canada; therefore America is more prosperous than Canada.
But the idea that prosperity is simply "having money" can be easily disproved with a simple thought experiment. (This thought experiment and other elements of this section are adapted from Eric Beinhocker's The Origin of Wealth, Harvard Business School Press, 2006.) Imagine you had the $38,001 income of a typical American but lived in a village among the Yanomami people, an isolated hunter-gatherer tribe deep in the Brazilian rainforest. You'd easily be the richest Yanomamian (they don't use money but anthropologists estimate their standard of living at the equivalent of about $90 per year). But you'd still feel a lot poorer than the average American. Even after you'd fixed up your mud hut, bought the best clay pots in the village, and eaten the finest Yanomami cuisine, all of your riches still wouldn't get you antibiotics, air conditioning, or a comfy bed. And yet, even the poorest American typically has access to these crucial elements of well-being.
And therein lies the difference between a poor society and a prosperous one. It isn't the amount of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it is the availability of the things that create well-being-like antibiotics, air conditioning, safe food, the ability to travel, and even frivolous things like video games. It is the availability of these "solutions" to human problems-things that make life better on a relative basis-that makes us prosperous.
This is why prosperity in human societies can't be properly understood by just looking at monetary measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems.
These solutions run from the prosaic, like a crunchier potato chip, to the profound, like cures for deadly diseases. Ultimately, the measure of a society's wealth is the range of human problems that it has found a way to solve and how available it has made those solutions to its citizens. Every item in the huge retail stores that Americans shop in can be thought of as a solution to a different kind of problem-how to eat, clothe ourselves, make our homes more comfortable, get around, entertain ourselves, and so on. The more and better solutions available to us, the more prosperity we have.
The long arc of human progress can be thought of as an accumulation of such solutions, embodied in the products and services of the economy. The Yanomami economy, typical of our hunter-gatherer ancestors 15,000 years ago, has a variety of products and services measured in the hundreds or thousands at most. The variety of modern America's economy can be measured in the tens or even hundreds of billions. Measured in dollars, Americans are more than 500 times richer than the Yanomami. Measured in access to products and services that provide solutions to human problems, we are hundreds of millions of times more prosperous.
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This is from Edmund Phelps. It was kind of hard to highlight the main points in brief extracts, so you may want to take a look at the full article:
What Is Wrong with the West's Economies?: What is wrong with the economies of the West-and with economics? ...Many of us in Western Europe and America feel that our economies are far from just...
With little or no effective policy initiative giving a lift to the less advantaged, the jarring market forces of the past four decades-mainly the slowdowns in productivity that have spread over the West and, of course, globalization, which has moved much low-wage manufacturing to Asia-have proceeded, unopposed, to drag down both employment and wage rates at the low end. The setback has cost the less advantaged not only a loss of income but also a loss of what economists call inclusion-access to jobs offering work and pay that provide self-respect. And inclusion was already lacking to begin with. ...
How might Western nations gain-or regain-widespread prospering and flourishing? Taking concrete actions will not help much without fresh thinking: people must first grasp that standard economics is not a guide to flourishing-it is a tool only for efficiency. Widespread flourishing in a nation requires an economy energized by its own homegrown innovation from the grassroots on up. For such innovation a nation must possess the dynamism to imagine and create the new-economic freedoms are not sufficient. And dynamism needs to be nourished with strong human values.
Of the concrete steps that would help to widen flourishing, a reform of education stands out. The problem here is not a perceived mismatch between skills taught and skills in demand. ... The problem is that young people are not taught to see the economy as a place where participants may imagine new things, where entrepreneurs may want to build them and investors may venture to back some of them. It is essential to educate young people to this image of the economy.
It will also be essential that high schools and colleges expose students to the human values expressed in the masterpieces of Western literature, so that young people will want to seek economies offering imaginative and creative careers. Education systems must put students in touch with the humanities in order to fuel the human desire to conceive the new and perchance to achieve innovations. This reorientation of general education will have to be supported by a similar reorientation of economic education.
We will all have to turn from the classical fixation on wealth accumulation and efficiency to a modern economics that places imagination and creativity at the center of economic life.
I'm skeptical that this is the answer to our inequality/job satisfaction problems.
Posted by Mark Thoma on Friday, July 24, 2015 at 10:38 AM in Economics, Income Distribution, Productivity | Permalink Comments (14)
Peter K. said...
JohnH said in reply to Peter K...."With little or no effective policy initiative giving a lift to the less advantaged, the jarring market forces of the past four decades-mainly the slowdowns in productivity that have spread over the West and, of course, globalization, which has moved much low-wage manufacturing to Asia-have proceeded, unopposed, to drag down both employment and wage rates at the low end."
The jarring market forces? It was a political project with the desired results.
Indeed! And there is currently no meaningful effort to fix the problem, only to worsen it through TPP and TAFTA.
Rune Lagman said...
"We will all have to turn from the classical fixation on wealth accumulation and efficiency to a modern economics that places imagination and creativity at the center of economic life."
Well, ain't gonna happen by "reforming" the education system.
Everybody (more or less) knows what it takes to "fix" the western economies; lots of infrastructure investment (preferable green) and higher wages. I'm getting fed up with all these "economists" that keep justifying the status quo (probably because their paycheck depends on it).
dan berg said...
Could it possibly be that your skepticism arises from the fact that -precisely because you are an academic economist - you haven't got an imaginative or creative bone in your body?
RC AKA Darryl, Ron said in reply to dan berg...
Dear AH,
Doc Thoma wrote "I'm skeptical that this is the answer to our inequality/job satisfaction problems."
Everybody has imagination and creative potential. Most people just lack the mean to express it in a way that will enter the economy. Even Edmund realized that people got to eat. The obstacles run from there. It was Edmund's answer that Doc Thoma was skeptical of. This was Phelps answer to the question:
"... Of the concrete steps that would help to widen flourishing, a reform of education stands out. The problem here is not a perceived mismatch between skills taught and skills in demand. (Experts have urged greater education in STEM subjects-science, technology, engineering, and mathematics-but when Europe created specialized universities in these subjects, no innovation was observed.) The problem is that young people are not taught to see the economy as a place where participants may imagine new things, where entrepreneurs may want to build them and investors may venture to back some of them. It is essential to educate young people to this image of the economy.
It will also be essential that high schools and colleges expose students to the human values expressed in the masterpieces of Western literature, so that young people will want to seek economies offering imaginative and creative careers. Education systems must put students in touch with the humanities in order to fuel the human desire to conceive the new and perchance to achieve innovations. This reorientation of general education will have to be supported by a similar reorientation of economic education..."
If you agree with Edmund Phelps on his answer then at least we must all admit that you have an astronomical imagination.
djb said...
Our financial leaders don't want a thriving economy
The want to crush the opposition and keep people under their thumb
Give people real hope and the economy will thrive
anne said...
By way of Branko Milanovic, referring to randomized trials in economics:
http://www.sccs.swarthmore.edu/users/08/bblonder/phys120/docs/borges.pdf
1658
On Exactitude in Science
Suarez Miranda…In that Empire, the Art of Cartography attained such Perfection that the map of a single Province occupied the entirety of a City, and the map of the Empire, the entirety of a Province. In time, those Unconscionable Maps no longer satisfied, and the Cartographers Guilds struck a Map of the Empire whose size was that of the Empire, and which coincided point for point with it. The following Generations, who were not so fond of the Study of Cartography as their Forebears had been, saw that that vast Map was Useless, and not without some Pitilessness was it, that they delivered it up to the Inclemencies of Sun and Winters. In the Deserts of the West, still today, there are Tattered Ruins of that Map, inhabited by Animals and Beggars; in all the Land there is no other Relic of the Disciplines of Geography.
(1946
Viajes de varones prudentes
Jorge Luis Borges)cm said...
"The problem is that young people are not taught to see the economy as a place where participants may imagine new things, where entrepreneurs may want to build them and investors may venture to back some of them. It is essential to educate young people to this image of the economy."
He left out the part who will pay for all these new things. Aggregate demand. I don't know where this idea comes from that young people don't imagine creating new things. They do it all the time, until the rubber hits the road and they have to get a corporate job because there is just not enough interest and funding for what they are interested in offering. No amount of education will help there.
Not to put words in his mouth, but its sounds like an impersonalized form victim blaming - schools suck and young people have no imagination.
RC AKA Darryl, Ron said in reply to cm...
cm said in reply to RC AKA Darryl, Ron...Schools suck and young people have too much imagination. But Edmund Phelps has more imagination that anyone that I have ever known :<)
Not sure how this relates to my point. How will "better education" fix the fact that when you have a good idea, more likely than not there is no market for it? A lot of tech innovation "rests" in actual or metaphorical drawers because of no ROI or no concrete customer/market to sell it. And this is not a recent phenomenon.
RC AKA Darryl, Ron said...
AN excellent paper up until Eddie tries to solve the problem. His description of the long term societal effects of consolidation of corporations into corporatist behemoths and wealth into obscene levels of power, isolation, and self-indulgence was unerring. Too bad he had no idea what he was depicting.
Lafayette said...
Lafayette said in reply to Lafayette...{... which has moved much low-wage manufacturing to Asia-have proceeded, unopposed, to drag down both employment and wage rates at the low end.}
Yes, unopposed. Just what should any nation do about it? Forbid it?
That's not the way economies work.
The Industrial Revolution took a lot of people off the farms, brought them into large cities, where accommodations were created for their families, and gave them jobs in factories with which to pay the rent.
Many then moved on to purchase those properties an become homeowners, which was a typical example of "economic progression".
Of course, the Industrial Revolution, which started in western developed nations, aided by a couple of wars, inevitably progressed from more developed to lesser developed societies.
We in the industrially developed West should not have permitted the Chinese, Vietnamese or Filipinos from bettering their lot by making exactly the same societal progression?
Where is the Social Justice in that, pray tell?
If there has been any failure in Social Justice, it is in the US. Piketty was very clear about that in this info-graphic: https://www.flickr.com/photos/68758107@N00/14266316974/
The income unfairness that has occurred since the US ratcheted down drastically upper-income taxation was not replicated in the EU. Is a third of all income going to only 10% of the population in Europe unfair? Perhaps.
But not quite as unfair as the nearly 50% in the United States. And as regards Wealth, the societal impact is even worse. As Domhoff's work shows, 80% of the American population obtain only 11% of America's wealth historically. See that tragic bit of unfairness here: http://www2.ucsc.edu/whorulesamerica/power/images/wealth/Net_worth_and_financial_wealth.gif
Perhaps well worth a rather long read, is Domhoff's piece titled, "The Class Domination Theory of Power, here: http://www2.ucsc.edu/whorulesamerica/power/class_domination.html
Excerpt: {The argument over the structure and distribution of power in the United States has been going on within academia since the 1950s. It has generated a large number of empirical studies, many of which have been drawn upon here.
In the final analysis, however, scholars' conclusions about the American power structure depend upon their beliefs concerning power indicators, which are a product of their "philosophy of science". That sounds strange, I realize, but if "who benefits?" and "who sits?" are seen as valid power indicators, on the assumption that "power" is an underlying social trait that can be indexed by a variety of imperfect indicators, then the kind of evidence briefly outlined here will be seen as a very strong case for the dominant role of the power elite in the federal government.}
Thanks to RR in the 1980s.
No wonder "they" make statues of Reckless Ronnie. Can't believe that? See this from WikiPedia: "List of things named after Ronald Reagan", here: https://en.wikipedia.org/wiki/List_of_things_named_after_Ronald_Reagan
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May 04, 2015 | Jesse's Café Américain
"Events have satisfied my mind, and I think the minds of the American people, that the mischiefs and dangers which flow from a national [central] bank far over-balance all its advantages. The bold effort the present bank has made to control the Government, the distresses it has wantonly produced, the violence of which it has been the occasion in one of our cities famed for its observance of law and order, are but premonitions of the fate which awaits the American people should they be deluded into a perpetuation of this institution or the establishment of another like it."
- Andrew Jackson, Sixth Annual Message, December 1, 1834
"Another cause of today's instability is that we now have a society in America, Europe and much of the world which is totally dominated by the two elements of sovereignty that are not included in the state structure: control of credit and banking, and the corporation.
These are free of political controls and social responsibility and have largely monopolized power in Western Civilization and in American society. They are ruthlessly going forward to eliminate land, labor, entrepreneurial-managerial skills, and everything else the economists once told us were the chief elements of production.
The only element of production they are concerned with is the one they can control: capital."
- Professor Carroll Quigley, Oscar Iden Lecture Series 3, 1976
Money is power. And those who control the money, if they have the will for it, can use it as a means to incredible power, to create debt, and to control it, thereby controlling the debtors, both as individuals, as communities, as regions, and whole nations.
This is the story of global trade deals, the Dollar, and the foul marriage between politics, money, and central banking. The more discretion and secrecy that is granted to those who create money and debt, the more vulnerable is the freedom of the people.
This is the story of Cyprus, of Greece, and of the Ukraine.
And there will be more.
This will to power is as old as Babylon, and as evil as hell.
"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations.
Each central bank, in the hands of men like Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve Bank, Charles Rist of the Bank of France, and Hjalmar Schacht of the Reichsbank, sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."
Professor Carroll Quigley, Tragedy and Hope, 1966
"He promises you illumination, he offers you knowledge, science, philosophy, enlargement of mind. He scoffs at times gone by; he scoffs at every institution which reveres them.He prompts you what to say, and then listens to you, and praises you, and encourages you. He bids you mount aloft. He shows you how to become as gods.
Then he laughs and jokes with you, and gets intimate with you; he takes your hand, and gets his fingers between yours, and grasps them, and then you are his."
John Henry Newman
Posted by Jesse at 8:03 PM
Category: audacious oligarchy, central banks, debt slavery, Federal Reserve, financial corruption, modern monetary theory, money corruption, political corruption
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So much for yet another "above consensus" recovery, and what's worse it is, well, about to get even worse, because while the Fed keeps baning some illusory drum that slack in the economy is almost non-existent, the reality is that in March the number of people who dropped out of the labor force rose by yet another 277K, up 2.1 million in the past year, and has reached a record 93.175 million. Indicatively, this means that the labor force participation rate dropped once more, from 62.8% to 62.7%, a level seen back in February 1978, even as the BLS reported that the entire labor force actually declined for the second consecutive month, down almost 100K in March to 156,906.
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August 28, 2012 | CNN iReport
Brilliant...absolutely brilliant piece by Giroux!
"The United States has entered a new historical era marked by a growing disinvestment in the social state, public goods, and civic morality. Matters of politics, power, ideology, governance, economics, and policy now translate unapologetically into a systemic disinvestment in institutions and policies that further the breakdown of those public spheres which traditionally provided the minimal conditions for social justice, dissent, and democratic expression.
Neoliberalism, or what might be called casino capitalism, has become the new normal.
Unabashed in its claim to financial power, self-regulation, and its survival of the fittest value system, neoliberalism not only undercuts the formative culture necessary for producing critical citizens and the public spheres that nourish them, it also facilitates the conditions for producing a bloated defense budget, the prison-industrial complex, environmental degradation, and the emergence of "finance as a criminalized, rogue industry."
It is clear that an emergent authoritarianism haunts a defanged democracy now shaped and structured largely by corporations.
Money dominates politics, the gap between the rich and poor is ballooning, urban spaces are becoming armed camps, militarism is creeping into every facet of public life, and civil liberties are being shredded.
Neoliberalism's policy of competition now dominates policies that define public spheres such as schools, allowing them to stripped of a civic and democratic project and handed over to the logic of the market. Regrettably, it is not democracy, but authoritarianism, that remains on the rise in the United States as we move further into the 21st century.
The 2012 U.S. Presidential Election exists at a pivotal moment in this transformation away from democracy, a moment in which formative cultural and political realms and forces – including the rhetoric used by election candidates – appear saturated with celebrations of war and Social Darwinism.
Accordingly, the possibility of an even more authoritarian and ethically dysfunctional leadership in the White House in 2013 has certainly caught the attention of a number of liberals and other progressives in the United States.American politics in general and the 2012 election in particular present a challenge to progressives, whose voices in recent years have been increasingly excluded from both the mainstream media and the corridors of political power. Instead, the media have played up the apocalyptic view of the Republican Party's fundamentalist warriors, who seem fixated on translating issues previously seen as non-religious-such as sexual orientation, education, identity, and participation in public life-into the language of a religious revival and militant crusade against evil.
How else to explain Republican Vice-Presidential nominee Paul Ryan's claim that the struggle for the future is a "fight of individualism versus collectivism," with its nod to the McCarthyism and cold war rhetoric of the 1950s.
Or Rick Santorum's assertion that "President Obama is getting America hooked on 'The narcotic of government dependency,'" promoting the view that government has no responsibility to provide safety nets for the poor, disabled, sick, and elderly.
There is more at work here than simply a ramped up version of social Darwinism with its savagely cruel ethic of "reward the rich, penalize the poor, and let everyone fend for themselves," there is also a full scale attack on the social contract, the welfare state, economic equality, and any viable vestige of moral and social responsibility.
The Romney-Ryan appropriation of Ayn Rand's ode to selfishness and self-interest is of particular importance because it offers a glimpse of a ruthless form of extreme capitalism in which the poor are considered "moochers," viewed with contempt, and singled out to be punished.
But this theocratic economic fundamentalist ideology does more. It destroys any viable notion of the and civic virtue in which the social contract and common good provide the basis for creating meaningful social bonds and instilling in citizens a sense of social and civic responsibility.
The idea of public service is viewed with disdain just as the work of individuals, social groups, and institutions that benefit the citizenry at large are held in contempt.
As George Lakoff and Glenn W. Smith point out, casino capitalism creates a culture of cruelty:
"its horrific effects on individuals-death, illness, suffering, greater poverty, and loss of opportunity, productive lives, and money."But it does more by crushing any viable notion of the common good and public life by destroying "the bonds that hold us together."
Under casino capitalism, the spaces, institutions, and values that constitute the public are now surrendered to powerful financial forces and viewed simply as another market to be commodified, privatized and surrendered to the demands of capital.
With religious and market-driven zealots in charge, politics becomes an extension of war; greed and self-interest trump any concern for the well-being of others; reason is trumped by emotions rooted in absolutist certainty and militaristic aggression; and skepticism and dissent are viewed as the work of Satan.
If the Republican candidacy race of 2012 is any indication, then political discourse in the United States has not only moved to the right-it has been introducing totalitarian values and ideals into the mainstream of public life.
Religious fanaticism, consumer culture, and the warfare state work in tandem with neoliberal economic forces to encourage privatization, corporate tax breaks, growing income and wealth inequality, and the further merging of the financial and military spheres in ways that diminish the authority and power of democratic governance.Neoliberal interests in freeing markets from social constraints, fueling competitiveness, destroying education systems, producing atomized subjects, and loosening individuals from any sense of social responsibility prepare the populace for a slow embrace of social Darwinism, state terrorism, and the mentality of war-not least of all by destroying communal bonds, dehumanizing the other, and pitting individuals against the communities they inhabit.
Totalitarian temptations now saturate the media and larger culture in the language of austerity as political and economic orthodoxy.
What we are witnessing in the United States is the normalization of a politics that exterminates not only the welfare state, and the truth, but all those others who bear the sins of the Enlightenment-that is, those who refuse a life free from doubt.
Reason and freedom have become enemies not merely to be mocked, but to be destroyed.
And this is a war whose totalitarian tendencies are evident in the assault on science, immigrants, women, the elderly, the poor, people of color, and youth.
What too often goes unsaid, particularly with the media's focus on inflammatory rhetoric, is that those who dominate politics and policymaking, whether Democrats or Republicans, do so largely because of their disproportionate control of the nation's income and wealth.
Increasingly, it appears these political elite choose to act in ways that sustain their dominance through the systemic reproduction of an iniquitous social order. In other words, big money and corporate power rule while electoral politics are
rigged.
The secrecy of the voting booth becomes the ultimate expression of democracy, reducing politics to an individualized purchase-a crude form of economic action.
Any form of politics willing to invest in such ritualistic pageantry only adds to the current dysfunctional nature of our social order, while reinforcing a profound failure of political imagination."The issue should no longer be how to work within the current electoral system, but how to dismantle it and construct a new political landscape that is capable of making a claim on equity, justice, and democracy for all of its inhabitants.
Obama's once inspiring call for hope has degenerated into a flight from responsibility.
The Obama administration has worked to extend the policies of the George W. Bush administration by legitimating a range of foreign and domestic policies that have shredded civil liberties, expanded the permanent warfare state, and increased the domestic reach of the punitive surveillance state.
And if Romney and his ideological cohorts, now viewed as the most extremists faction of the Republican Party, come to power, surely the existing totalitarian and anti-democratic tendencies at work in the United States will be dangerously intensified.
A catalogue of indicting evidence reveals the depth and breadth of the war being waged against the social state, and particularly against young people. Beyond exposing the moral depravity of a nation that fails to protect its young, such a war speaks to nothing less than a perverse death-wish, a barely masked desire for self-annihilation-as the wilful destruction of an entire generation not only transforms U.S. politics into pathology, but is sure to signal the death-knell for America's future.
How much longer will the American public have to wait before the nightmare comes to an end?
An awareness of the material and cultural elements that have produced these deeply anti-democratic conditions is important; however it is simply not enough.
The collective response here must include a refusal to enter the current political discourse of compromise and accommodation-to think well beyond the discourse of facile concessions and to conduct struggles on the mutually informed terrains of civic literacy, education, and power.
A rejection of traditional forms of political mobilization must be accompanied by a new political discourse, one that uncovers the hidden practices of neoliberal domination while developing rigorous models for critical reflection and fresh forms of intellectual and social engagement.
Yet, the current historical moment seems at an utter loss to create a massive social movement capable of addressing the totalitarian nature and social costs of a religious and political fundamentalism that is merging with an extreme market-fundamentalism.
In this case, a fundamentalism whose idea of freedom extends no further than personal financial gain and endless consumption.
Under such circumstances, progressives should focus their energies on working with the Occupy movement and other social movements to develop a new language of radical reform and to create new public spheres that will make possible the modes of critical thought and engaged agency that are the very foundations of a truly participatory and radical democracy.
Such a project must work to develop vigorous educational programs, modes of public communication, and communities that promote a culture of deliberation, public debate, and critical exchange across a wide variety of cultural and institutional sites.
Ultimately, it must focus on the end goal of generating those formative cultures and public spheres that are the preconditions for political engagement and vital for energizing democratic movements for social change-movements willing to think beyond the limits of a savage global capitalism.
Pedagogy in this sense becomes central to any substantive notion of politics and must be viewed as a crucial element of organized resistance and collective struggles.
The deep regressive elements of neoliberalism constitute both a pedagogical practice and a legitimating function for a deeply oppressive social order. Pedagogical relations that make the power relations of casino capitalism disappear must be uncovered and challenged.
Under such circumstances, politics becomes transformative rather than accommodating and aims at abolishing a capitalist system marked by massive economic, social, and cultural inequalities.
A politics that uncovers the harsh realities imposed by casino capitalism should also work towards establishing a society in which matters of justice, equality, and freedom are understood as the crucial foundation of a substantive democracy.
Rather than invest in electoral politics, it would be more worthwhile for progressives to develop formative conditions that make a real democracy possible.
As Angela Davis has suggested, this means engaging "in difficult coalition-building processes, negotiating the recognition for which communities and issues inevitably strive [and coming] together in a unity that is not simplistic and oppressive, but complex and emancipatory, recognizing, in June Jordan's words that 'we are the ones we have been waiting for.'
Developing a broad-based social movement means finding a common ground upon which challenging diverse forms of oppression, exploitation, and exclusion can become part of a wider effort to create a radical democracy.
In part, this means reclaiming a discourse of ethics and morality, elaborating a new model of democratic politics, and developing fresh analytical concepts for understanding and engaging the concept of the social.
One avenue for developing a critical and transformative politics might take a cue from youth protesters the world over and develop new ways to challenge the corporate values that shape American, and increasingly global, politics. It is especially crucial to provide alternative values that challenge market-driven ideologies that equate freedom with radical individualism, self-interest, hyper-competitiveness, privatization, and deregulation, while undermining democratic social bonds, the public good, and the welfare state.
Such actions can be further addressed by recruiting young people, teachers, labor activists, religious leaders, and other engaged citizens to become public intellectuals who are willing to use their skills and knowledge to make visible how power works and to address important social and political issues.
Of course, the American public needs to do more than talk. It also needs to bring together educators, students, workers, and anyone else interested in real democracy in order to create a social movement–a well-organized movement capable of changing the power relations and vast economic inequalities that have created the conditions for symbolic and systemic violence in American society.
Addressing such challenges suggests that progressives will invariably need to take on the role of educational activists.
One option would be to create micro-spheres of public education that further modes of critical learning and civic agency, and thus enable young people and others to learn how to govern rather than be governed.
This could be accomplished through a network of free educational spaces developed among diverse faith communities and public schools, as well as in secular and religious organizations affiliated with higher educational institutions.
These new educational spaces focused on cultivating both dialogue and action in the public interest can look to past models in those institutions developed by socialists, labor unions, and civil rights activists in the early twentieth century and later in the 1950s and 60s.
Such schools represented oppositional public spheres and functioned a democratic public spheres in the best educational sense and ranged from the early networks of radical Sunday schools to the later Brookwood Labor College and Highlander Folk School in Tennessee.
Stanley Aronowitz rightly insists that the current "system survives on the eclipse of the radical imagination, the absence of a viable political opposition with roots in the general population, and the conformity of its intellectuals who, to a large extent, are subjugated by their secure berths in the academy; less secure private sector corporate jobs, and centrist and center-left media institutions."
At a time when critical thought has been flattened, it becomes imperative to develop a discourse of critique and possibility-one that recognizes that without an informed citizenry, collective struggle, and dynamic social movements, hope for a viable democratic future will slip out of reach.
By Henry A. Giroux
Complete story at:
http://www.counterpunch.org/2012/08/27/authoritarian-politics-in-the-age-of-casino-capitalism/For anyone that's read to the bottom and understood what Giroux has said, congratulations in now being where we need to start. Brilliant work and I agree completely.
All capitalism is not good for our country- especially Rentier Capitalism where nothing is produced and the rich live off the suffering of the poor. These types of capitalists create nothing, they do nothing to benefit society. They are parasitic in their relationship with our community.
Looking for a solution to the current economic crisis? Read up on your Minsky
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The United States has since the early 1990s undergone a piecemeal but profound social and economic transformation: casinos, nearly prohibited nationwide in 1910, are now legal in some form in 40 states, including 24 with legalized commercial operations. The companies involved make a tidy profit: Of the $34.6 billion in revenue (and again, this figure is in addition to the $26.7 billion generated at the nation's 448 tribal casinos), casinos paid just $7.59 billion in taxes and $13.3 billion in wages and benefits.
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Dave Eggers' gem of a book, "A Hologram for the King," is a parable about the decadence, fragility and heartlessness of late, decayed corporate capitalism. It is about the small, largely colorless men and women who serve as managers in our suicidal outsourcing of manufacturing jobs and the methodical breaking of labor unions. It is about the lie of globalization, a lie that impoverishes us all to increase corporate profits."A Hologram for the King" tells the story of Alan, a lackluster 54-year-old consultant who is desperately trying to snag one final big contract in Saudi Arabia for Reliant, a corporation that is "the largest I.T. supplier in the world," to save himself from financial ruin. Alan has come to realize that managers like him who made outsourcing possible will be discarded as human refuse now that the process is complete, left to wander like ghosts-or holograms-among the ruins. And Eggers' novel is a subtle, deft and poignant look at the horrendous toll this corporate process takes on self-esteem, on family, on health, on community and finally on the nation itself. It does so, like parables from Greek tragedy or George Orwell, by finding the perfect story to make a point that is universal.
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August 27, 2012 | Counterpunch
The United States has entered a new historical era marked by a growing disinvestment in the social state, public goods, and civic morality. Matters of politics, power, ideology, governance, economics, and policy now translate unapologetically into a systemic disinvestment in institutions and policies that further the breakdown of those public spheres which traditionally provided the minimal conditions for social justice, dissent, and democratic expression. Neoliberalism, or what might be called casino capitalism, has become the new normal. Unabashed in its claim to financial power, self-regulation, and its survival of the fittest value system, neoliberalism not only undercuts the formative culture necessary for producing critical citizens and the public spheres that nourish them, it also facilitates the conditions for producing a bloated defense budget, the prison-industrial complex, environmental degradation, and the emergence of "finance as a criminalized, rogue industry."[i]
It is clear that an emergent authoritarianism haunts a defanged democracy now shaped and structured largely by corporations. Money dominates politics, the gap between the rich and poor is ballooning, urban spaces are becoming armed camps, militarism is creeping into every facet of public life, and civil liberties are being shredded. Neoliberalism's policy of competition now dominates policies that define public spheres such as schools, allowing them to stripped of a civic and democratic project and handed over to the logic of the market. Regrettably, it is not democracy, but authoritarianism, that remains on the rise in the United States as we move further into the 21st century.
The 2012 U.S. Presidential Election exists at a pivotal moment in this transformation away from democracy, a moment in which formative cultural and political realms and forces – including the rhetoric used by election candidates – appear saturated with celebrations of war and Social Darwinism. Accordingly, the possibility of an even more authoritarian and ethically dysfunctional leadership in the White House in 2013 has certainly caught the attention of a number of liberals and other progressives in the United States. American politics in general and the 2012 election in particular present a challenge to progressives, whose voices in recent years have been increasingly excluded from both the mainstream media and the corridors of political power. Instead, the media have played up the apocalyptic view of the Republican Party's fundamentalist warriors, who seem fixated on translating issues previously seen as non-religious-such as sexual orientation, education, identity, and participation in public life-into the language of a religious revival and militant crusade against evil.
How else to explain Republican Vice-Presidential nominee Paul Ryan's claim that the struggle for the future is a "fight of individualism versus collectivism," with its nod to the McCarthyism and cold war rhetoric of the 1950s. Or Rick Santorum's assertion that "President Obama is getting America hooked on 'The narcotic of government dependency,'" promoting the view that government has no responsibility to provide safety nets for the poor, disabled, sick, and elderly. There is more at work here than simply a ramped up version of social Darwinism with its savagely cruel ethic of "reward the rich, penalize the poor, [and] let everyone fend for themselves," [ii] there is also a full scale attack on the social contract, the welfare state, economic equality, and any viable vestige of moral and social responsibility. The Romney-Ryan appropriation of Ayn Rand's ode to selfishness and self-interest is of particular importance because it offers a glimpse of a ruthless form of extreme capitalism in which the poor are considered "moochers," viewed with contempt, and singled out to be punished. But this theocratic economic fundamentalist ideology does more. It destroys any viable notion of the and civic virtue in which the social contract and common good provide the basis for creating meaningful social bonds and instilling in citizens a sense of social and civic responsibility. The idea of public service is viewed with disdain just as the work of individuals, social groups, and institutions that benefit the citizenry at large are held in contempt. As George Lakoff and Glenn W. Smith point out, casino capitalism creates a culture of cruelty: "its horrific effects on individuals-death, illness, suffering, greater poverty, and loss of opportunity, productive lives, and money."[iii] But it does more by crushing any viable notion of the common good and public life by destroying "the bonds that hold us together."[iv] Under casino capitalism, the spaces, institutions, and values that constitute the public are now surrendered to powerful financial forces and viewed simply as another market to be commodified, privatized and surrendered to the demands of capital. With religious and market-driven zealots in charge, politics becomes an extension of war; greed and self-interest trump any concern for the well-being of others; reason is trumped by emotions rooted in absolutist certainty and militaristic aggression; and skepticism and dissent are viewed as the work of Satan.
If the Republican candidacy race of 2012 is any indication, then political discourse in the United States has not only moved to the right-it has been introducing totalitarian values and ideals into the mainstream of public life. Religious fanaticism, consumer culture, and the warfare state work in tandem with neoliberal economic forces to encourage privatization, corporate tax breaks, growing income and wealth inequality, and the further merging of the financial and military spheres in ways that diminish the authority and power of democratic governance.[v] Neoliberal interests in freeing markets from social constraints, fueling competitiveness, destroying education systems, producing atomized subjects, and loosening individuals from any sense of social responsibility prepare the populace for a slow embrace of social Darwinism, state terrorism, and the mentality of war-not least of all by destroying communal bonds, dehumanizing the other, and pitting individuals against the communities they inhabit.
Totalitarian temptations now saturate the media and larger culture in the language of austerity as political and economic orthodoxy. What we are witnessing in the United States is the normalization of a politics that exterminates not only the welfare state, and the truth, but all those others who bear the sins of the Enlightenment-that is, those who refuse a life free from doubt. Reason and freedom have become enemies not merely to be mocked, but to be destroyed. And this is a war whose totalitarian tendencies are evident in the assault on science, immigrants, women, the elderly, the poor, people of color, and youth. What too often goes unsaid, particularly with the media's focus on inflammatory rhetoric, is that those who dominate politics and policymaking, whether Democrats or Republicans, do so largely because of their disproportionate control of the nation's income and wealth. Increasingly, it appears these political elite choose to act in ways that sustain their dominance through the systemic reproduction of an iniquitous social order. In other words, big money and corporate power rule while electoral politics are rigged. The secrecy of the voting booth becomes the ultimate expression of democracy, reducing politics to an individualized purchase-a crude form of economic action. Any form of politics willing to invest in such ritualistic pageantry only adds to the current dysfunctional nature of our social order, while reinforcing a profound failure of political imagination. The issue should no longer be how to work within the current electoral system, but how to dismantle it and construct a new political landscape that is capable of making a claim on equity, justice, and democracy for all of its inhabitants. Obama's once inspiring call for hope has degenerated into a flight from responsibility. The Obama administration has worked to extend the policies of the George W. Bush administration by legitimating a range of foreign and domestic policies that have shredded civil liberties, expanded the permanent warfare state, and increased the domestic reach of the punitive surveillance state. And if Romney and his ideological cohorts, now viewed as the most extremists faction of the Republican Party, come to power, surely the existing totalitarian and anti-democratic tendencies at work in the United States will be dangerously intensified.
A catalogue of indicting evidence reveals the depth and breadth of the war being waged against the social state, and particularly against young people. Beyond exposing the moral depravity of a nation that fails to protect its young, such a war speaks to nothing less than a perverse death-wish, a barely masked desire for self-annihilation-as the wilful destruction of an entire generation not only transforms U.S. politics into pathology, but is sure to signal the death-knell for America's future. How much longer will the American public have to wait before the nightmare comes to an end?
An awareness of the material and cultural elements that have produced these deeply anti-democratic conditions is important; however it is simply not enough. The collective response here must include a refusal to enter the current political discourse of compromise and accommodation-to think well beyond the discourse of facile concessions and to conduct struggles on the mutually informed terrains of civic literacy, education, and power. A rejection of traditional forms of political mobilization must be accompanied by a new political discourse, one that uncovers the hidden practices of neoliberal domination while developing rigorous models for critical reflection and fresh forms of intellectual and social engagement.
Yet, the current historical moment seems at an utter loss to create a massive social movement capable of addressing the totalitarian nature and social costs of a religious and political fundamentalism that is merging with an extreme market-fundamentalism. In this case, a fundamentalism whose idea of freedom extends no further than personal financial gain and endless consumption. Under such circumstances, progressives should focus their energies on working with the Occupy movement and other social movements to develop a new language of radical reform and to create new public spheres that will make possible the modes of critical thought and engaged agency that are the very foundations of a truly participatory and radical democracy. Such a project must work to develop vigorous educational programs, modes of public communication, and communities that promote a culture of deliberation, public debate, and critical exchange across a wide variety of cultural and institutional sites. Ultimately, it must focus on the end goal of generating those formative cultures and public spheres that are the preconditions for political engagement and vital for energizing democratic movements for social change-movements willing to think beyond the limits of a savage global capitalism. Pedagogy in this sense becomes central to any substantive notion of politics and must be viewed as a crucial element of organized resistance and collective struggles. The deep regressive elements of neoliberalism constitute both a pedagogical practice and a legitimating function for a deeply oppressive social order. Pedagogical relations that make the power relations of casino capitalism disappear must be uncovered and challenged. Under such circumstances, politics becomes transformative rather than accommodating and aims at abolishing a capitalist system marked by massive economic, social, and cultural inequalities. A politics that uncovers the harsh realities imposed by casino capitalism should also work towards establishing a society in which matters of justice, equality, and freedom are understood as the crucial foundation of a substantive democracy.
Rather than invest in electoral politics, it would be more worthwhile for progressives to develop formative conditions that make a real democracy possible. As Angela Davis has suggested, this means engaging "in difficult coalition-building processes, negotiating the recognition for which communities and issues inevitably strive [and coming] together in a unity that is not simplistic and oppressive, but complex and emancipatory, recognising, in June Jordan's words that 'we are the ones we have been waiting for.'"[vi] Developing a broad-based social movement means finding a common ground upon which challenging diverse forms of oppression, exploitation, and exclusion can become part of a wider effort to create a radical democracy.
In part, this means reclaiming a discourse of ethics and morality, elaborating a new model of democratic politics, and developing fresh analytical concepts for understanding and engaging the concept of the social. One avenue for developing a critical and transformative politics might take a cue from youth protesters the world over and develop new ways to challenge the corporate values that shape American, and increasingly global, politics. It is especially crucial to provide alternative values that challenge market-driven ideologies that equate freedom with radical individualism, self-interest, hyper-competitiveness, privatization, and deregulation, while undermining democratic social bonds, the public good, and the welfare state. Such actions can be further addressed by recruiting young people, teachers, labor activists, religious leaders, and other engaged citizens to become public intellectuals who are willing to use their skills and knowledge to make visible how power works and to address important social and political issues. Of course, the American public needs to do more than talk. It also needs to bring together educators, students, workers, and anyone else interested in real democracy in order to create a social movement–a well-organized movement capable of changing the power relations and vast economic inequalities that have created the conditions for symbolic and systemic violence in American society.
Addressing such challenges suggests that progressives will invariably need to take on the role of educational activists. One option would be to create micro-spheres of public education that further modes of critical learning and civic agency, and thus enable young people and others to learn how to govern rather than be governed. This could be accomplished through a network of free educational spaces developed among diverse faith communities and public schools, as well as in secular and religious organizations affiliated with higher educational institutions. These new educational spaces focused on cultivating both dialogue and action in the public interest can look to past models in those institutions developed by socialists, labor unions, and civil rights activists in the early twentieth century and later in the 1950s and 60s. Such schools represented oppositional public spheres and functioned a democratic public spheres in the best educational sense and ranged from the early networks of radical Sunday schools to the later Brookwood Labor College and Highlander Folk School in Tennessee. Stanley Aronowitz rightly insists that the current "system survives on the eclipse of the radical imagination, the absence of a viable political opposition with roots in the general population, and the conformity of its intellectuals who, to a large extent, are subjugated by their secure berths in the academy; less secure private sector corporate jobs, and centrist and center-left media institutions."[vii] At a time when critical thought has been flattened, it becomes imperative to develop a discourse of critique and possibility-one that recognizes that without an informed citizenry, collective struggle, and dynamic social movements, hope for a viable democratic future will slip out of reach.
Henry A. Giroux holds the Global TV Network chair in English and Cultural Studies at McMaster University in Canada. His most recent books include: "Take Back Higher Education" (co-authored with Susan Searls Giroux, 2006), "The University in Chains: Confronting the Military-Industrial-Academic Complex" (2007) and "Against the Terror of Neoliberalism: Politics Beyond the Age of Greed" (2008). His latest book is Twilight of the Social: Resurgent Publics in the Age of Disposability," (Paradigm.)
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August 16, 2012 | The Nation
Mitt Romney, above all else, epitomizes the deep inequality in our society. In this episode of Nation Conversations, former Secretary of Labor Robert Reich explains to Managing Editor Roane Carey how Romney's casino capitalism used tax benefits to not only enrich himself and his fellow CEOs, but bankrupted the country while they were at it. Read Mitt Romney and the New Gilded Age, in which Reich describes why Romney reflects the deep structural crisis we currently face, in this week's double issue.
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Bloomberg
Mitt Romney touts his business acumen and job-creation record as a key qualification for being the next U.S. president.What's clear from a review of the public record during his management of the private-equity firm Bain Capital from 1985 to 1999 is that Romney was fabulously successful in generating high returns for its investors. He did so, in large part, through heavy use of tax-deductible debt, usually to finance outsized dividends for the firm's partners and investors. When some of the investments went bad, workers and creditors felt most of the pain. Romney privatized the gains and socialized the losses.
What's less clear is how his skills are relevant to the job of overseeing the U.S. economy, strengthening competitiveness and looking out for the welfare of the general public, especially the middle class.
Thanks to leverage, 10 of roughly 67 major deals by Bain Capital during Romney's watch produced about 70 percent of the firm's profits. Four of those 10 deals, as well as others, later wound up in bankruptcy. It's worth examining some of them to understand Romney's investment style at Bain Capital.
In 1986, in one of its earliest deals, Bain Capital acquired Accuride Corp., a manufacturer of aluminum truck wheels. The purchase was 97.5 percent financed by debt, a high level of leverage under any circumstances. It was especially burdensome for a company that was exposed to aluminum-price volatility and cyclical automotive production.
Casino CapitalismForty-to-one leverage is casino capitalism that hugely magnifies gains and losses. Bain Capital wisely chose to flip the company fast: After 18 months, it sold Accuride, converting its $2.6 million sliver of equity into a $61 million capital gain. That deal, which yielded a 1,123 percent annualized return, was critical to Bain Capital's early success and led the firm to keep maximizing the use of leverage.
In 1992, Bain Capital bought American Pad & Paper by financing 87 percent of the purchase price. In the next three years, Ampad borrowed to make acquisitions, repay existing debt and pay Bain Capital and its investors $60 million in dividends.
As a result, the company's debt swelled from $11 million in 1993 to $444 million by 1995. The $14 million in annual interest expense on this debt dwarfed the company's $4.7 million operating cash flow. The proceeds of an initial public offering in July 1996 were used to pay Bain Capital $48 million for part of its stake and to reduce the company's debt to $270 million.
From 1993 to 1999, Bain Capital charged Ampad about $18 million in various fees. By 1999, the company's debt was back up to $400 million. Unable to pay the interest costs and drained of cash paid to Bain Capital in fees and dividends, Ampad filed for bankruptcy the following year. Senior secured lenders got less than 50 cents on the dollar, unsecured lenders received two- tenths of a cent on the dollar, and several hundred jobs were lost. Bain Capital had reaped capital gains of $107 million on its $5.1 million investment.
Bain Capital's acquisition in 1994 of Dade International, a supplier of in-vitro diagnostic products, was 81 percent financed by debt. Of the $85 million in equity, about $27 million came from Bain with the rest coming from a group of investors that included Goldman Sachs Group Inc.
From 1995 to 1999, Bain Capital tripled Dade's debt from about $300 million to $902 million. Some of the debt was used to pay for acquisitions of DuPont Co.'s in-vitro diagnostics division in May 1996 and Behring Diagnostics, a German medical- testing company, in 1997. But some was used to finance a repurchase of half of Bain Capital's equity for $242 million -- more than eight times its investment -- and to pay its investors almost $100 million in fees.
Bankruptcy FilingDade was left in a weakened financial condition and couldn't withstand the shocks of increased debt payments when interest rates rose and revenue from Europe fell because of a decline in the value of the euro. The company filed for bankruptcy in August 2002, because of its inability to service a $1.5 billion debt load. About 1,700 people lost their jobs while Bain Capital claimed capital gains (net of its losses in the bankruptcy) of roughly $216 million, an eightfold return.
There are many other examples of this debt-fueled strategy. In the two years following the acquisition in 1993 of GS Industries, a steel mill, for $8 million, Bain Capital increased the company's debt to $378 million on operating income of less than a 10th of that amount. Some of this was used to pay Bain Capital a $36 million dividend in 1994. That degree of leverage was excessive in light of the cyclicality and capital-intensive nature of the steel industry.
By the time the company went bankrupt in 2001, it owed $554 million in debt against assets valued at $395 million. Many creditors lost money, and 750 workers lost their jobs. The U.S. Pension Benefit Guaranty Corp., which insures company retirement plans, determined in 2002 that GS had underfunded its pension by $44 million and had to step in to cover the shortfall.
Bain Capital's acquisition of Stage Stores, a department- store chain, in 1988 was 96 percent financed by debt (mostly in junk bonds) -- an extreme level for a cyclical and very competitive low-margin business. Bain sold a large part of its stake in 1997 for a $184 million gain, three years before the company filed for bankruptcy because of its inability to service its $600 million debt.
Success, entrepreneurship, risk taking and wealth creation deserve to be celebrated when they are the result of fair play and hard work. President Barack Obama is correct in distinguishing the patient creation of value for the benefit of investors through genuine operational improvements and growth -- the true mission of private equity -- from the form of rigged capitalism that was practiced by some in the industry in the past when debt was cheap and plentiful.
While Bain Capital wasn't alone in using financial engineering to turbo-charge its returns, it was among the most aggressive under Romney's leadership. Enriching investors by taking leveraged bets isn't a qualification for a job requiring long-term vision and concern for public welfare. It is appropriate to point that out to voters.
(Anthony Luzzatto Gardner works at Palamon Capital Partners, a private equity fund based in London, and was director of European affairs in the U.S. National Security Council in 1994-95. The opinions expressed are his own.)
Read more opinion online from Bloomberg View. Subscribe to receive a daily e-mail highlighting new View editorials, columns and op-ed articles.
Today's highlights: the editors on good news from Guantanamo, why Jamie Dimon's bonus should be clawed back and how to put more electric cars on the road; William D. Cohan on Romney's magical IRA; Albert R. Hunt on the candidates' need to spell out debt-cutting plans; Stephen Marche explains why Canadians are now richer than Americans.
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Robert Reich is pleased to see the Justice Department crackdown on "Big Pharma," but doesn't think think the government is doing anywhere near enough to solve the problem:
How Not to Get Big Pharma to Change Its Ways, by Robert Reich: Earlier this week the Justice Department announced a $3 billion settlement of criminal and civil charges against pharma giant GlaxoSmithKline - the largest pharmaceutical settlement in history - for improper marketing prescription drugs in the late 1990s to the mid-2000s.The charges are deadly serious. Among other things, Glaxo was charged with promoting to kids under 18 an antidepressant approved only for adults; pushing two other antidepressants for unapproved purposes,... and, to further boost sales of prescription drugs, showering doctors with gifts, consulting contracts, speaking fees, even tickets to sporting events.$3 billion may sound like a lot of money, but during these years Glaxo made $27.5 billion on these three antidepressants alone,... so the penalty could almost be considered a cost of doing business.Besides, to the extent the penalty affects Glaxo's profits and its share price, the wrong people will be feeling the financial pain. ... Not a single executive has been charged - even though some charges against the company are criminal. ...The Glaxo case is the latest and biggest in a series of Justice Department prosecutions of Big Pharma for illegal marketing prescription drugs. ... The Department says the prosecutions are well worth the effort. By one estimate it's recovered more than $15 for every $1 it's spent.But what's the point if the fines are small relative to the profits, if the wrong people are feeling the financial pinch, and if no executive is held accountable?The only way to get big companies like these to change their behavior is to make the individuals responsible feel the heat.An even more basic issue is why the advertising and marketing of prescription drugs is allowed at all, when consumers can't buy them and shouldn't be influencing doctor's decisions anyway. Before 1997, the Food and Drug Administration banned such advertising on TV and radio. That ban should be resurrected.Finally, there's no good reason why doctors should be allowed to accept any perks at all from [drug] companies... It's an inherent conflict of interest. Codes of ethics that are supposed to limit such gifts obviously don't work. All perks should be banned, and doctors that accept them should be subject to potential loss of their license to practice.Simon Johnson, summarizing Dennis Kelleher of the blog Better Markets, says banks have the same problem:
... Global megabanks have an incentive to deceive customers, including both individuals and nonfinancial corporations. Their size confers both market power and the political power needed to conceal the extent to which they engage in economic fraud. The lack of transparency in derivatives markets provides them with an opportunity to cheat, but the abuses are much wider – as the Libor scandal demonstrates. The ripoff is not just of retail investors. ...This has motivated Samuel Brittan of the Financial Times to rethink his view of competitive markets. Sort of:
As one of the few commentators to have always favored competitive market capitalism I have had to ask myself a few questions. Apart from scandals such as the Libor rate fixing, we have had the behavior of banks before the great recession; a trend to much greater concentration of income and wealth, squeezing the living standards of ordinary citizens; and one could go on.So, after asking himself these questions, what does he propose?:
Yet if anyone expects me to issue a clarion call for more state ownership and control, they will be disappointed. ... What then has gone wrong? ... Few of us like competition; and the tendency to form closely knit groups to keep outsiders at bay is probably as old as the human race. For pre-capitalist examples one has only to think of the medieval guilds, whether of craftsmen or Master Singers. More subtle are the practices of bankers, as they come disguised as services for customers. In summary, success has depended more on whom you know than what you know. Hence the catchphrase "crony capitalism". ...The biggest obstacle to reform is that insiders can devote time and energy to maintaining their position. For ordinary citizens, political reform is a sideshow that hardly repays such efforts. The protests in financial canters are a well-meant but ill-focused attempt to offset this bias.Yet nil desperandum. The UK corn laws were repealed and the US antitrust acts were passed; and in time both the financiers and the Eurocrats will be brought down.So, no cause for despair? Not so sure about that (the changes he describes did not come easily). It feels a bit like the Libor scandal has produced a turning point, but the power hold on politicians is still as strong as ever. We've seen how some Democrats react if Obama so much as points a finger in the direction of the financial industry, and if Romney is elected does anyone think the government will get tougher with big banks, big pharma, or big anything else?
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March 24, 2010 | Counterpunch
There was a time when the pen was mightier than the sword. That was a time when people believed in truth and regarded truth as an independent power and not as an auxiliary for government, class, race, ideological, personal, or financial interest.
Today Americans are ruled by propaganda. Americans have little regard for truth, little access to it, and little ability to recognize it.
Truth is an unwelcome entity. It is disturbing. It is off limits. Those who speak it run the risk of being branded "anti-American," "anti-semite" or "conspiracy theorist."
Truth is an inconvenience for government and for the interest groups whose campaign contributions control government.
Truth is an inconvenience for prosecutors who want convictions, not the discovery of innocence or guilt.
Truth is inconvenient for ideologues.
Today many whose goal once was the discovery of truth are now paid handsomely to hide it. "Free market economists" are paid to sell offshoring to the American people. High-productivity, high value-added American jobs are denigrated as dirty, old industrial jobs. Relicts from long ago, we are best shed of them. Their place has been taken by "the New Economy," a mythical economy that allegedly consists of high-tech white collar jobs in which Americans innovate and finance activities that occur offshore. All Americans need in order to participate in this "new economy" are finance degrees from Ivy League universities, and then they will work on Wall Street at million dollar jobs.
Economists who were once respectable took money to contribute to this myth of "the New Economy."
And not only economists sell their souls for filthy lucre. Recently we have had reports of medical doctors who, for money, have published in peer-reviewed journals concocted "studies" that hype this or that new medicine produced by pharmaceutical companies that paid for the "studies."
The Council of Europe is investigating the drug companies' role in hyping a false swine flu pandemic in order to gain billions of dollars in sales of the vaccine.
The media helped the US military hype its recent Marja offensive in Afghanistan, describing Marja as a city of 80,000 under Taliban control. It turns out that Marja is not urban but a collection of village farms.
And there is the global warming scandal, in which NGOs. the UN, and the nuclear industry colluded in concocting a doomsday scenario in order to create profit in pollution.
Wherever one looks, truth has fallen to money.
Wherever money is insufficient to bury the truth, ignorance, propaganda, and short memories finish the job.
I remember when, following CIA director William Colby's testimony before the Church Committee in the mid-1970s, presidents Gerald Ford and Ronald Reagan issued executive orders preventing the CIA and U.S. black-op groups from assassinating foreign leaders. In 2010 the US Congress was told by Dennis Blair, head of national intelligence, that the US now assassinates its own citizens in addition to foreign leaders.
When Blair told the House Intelligence Committee that US citizens no longer needed to be arrested, charged, tried, and convicted of a capital crime, just murdered on suspicion alone of being a "threat," he wasn't impeached. No investigation pursued. Nothing happened. There was no Church Committee. In the mid-1970s the CIA got into trouble for plots to kill Castro. Today it is American citizens who are on the hit list. Whatever objections there might be don't carry any weight. No one in government is in any trouble over the assassination of U.S. citizens by the U.S. government.
As an economist, I am astonished that the American economics profession has no awareness whatsoever that the U.S. economy has been destroyed by the offshoring of U.S. GDP to overseas countries. U.S. corporations, in pursuit of absolute advantage or lowest labor costs and maximum CEO "performance bonuses," have moved the production of goods and services marketed to Americans to China, India, and elsewhere abroad. When I read economists describe offshoring as free trade based on comparative advantage, I realize that there is no intelligence or integrity in the American economics profession.
Intelligence and integrity have been purchased by money. The transnational or global U.S. corporations pay multi-million dollar compensation packages to top managers, who achieve these "performance awards" by replacing U.S. labor with foreign labor. While Washington worries about "the Muslim threat," Wall Street, U.S. corporations and "free market" shills destroy the U.S. economy and the prospects of tens of millions of Americans.
Americans, or most of them, have proved to be putty in the hands of the police state.
Americans have bought into the government's claim that security requires the suspension of civil liberties and accountable government. Astonishingly, Americans, or most of them, believe that civil liberties, such as habeas corpus and due process, protect "terrorists," and not themselves. Many also believe that the Constitution is a tired old document that prevents government from exercising the kind of police state powers necessary to keep Americans safe and free.
Most Americans are unlikely to hear from anyone who would tell them any different.
I was associate editor and columnist for the Wall Street Journal. I was Business Week's first outside columnist, a position I held for 15 years. I was columnist for a decade for Scripps Howard News Service, carried in 300 newspapers. I was a columnist for the Washington Times and for newspapers in France and Italy and for a magazine in Germany. I was a contributor to the New York Times and a regular feature in the Los Angeles Times. Today I cannot publish in, or appear on, the American "mainstream media."
For the last six years I have been banned from the "mainstream media." My last column in the New York Times appeared in January, 2004, coauthored with Democratic U.S. Senator Charles Schumer representing New York. We addressed the offshoring of U.S. jobs. Our op-ed article produced a conference at the Brookings Institution in Washington, D.C. and live coverage by C-Span. A debate was launched. No such thing could happen today.
For years I was a mainstay at the Washington Times, producing credibility for the Moony newspaper as a Business Week columnist, former Wall Street Journal editor, and former Assistant Secretary of the U.S. Treasury. But when I began criticizing Bush's wars of aggression, the order came down to Mary Lou Forbes to cancel my column.
The American corporate media does not serve the truth. It serves the government and the interest groups that empower the government.
America's fate was sealed when the public and the anti-war movement bought the government's 9/11 conspiracy theory. The government's account of 9/11 is contradicted by much evidence. Nevertheless, this defining event of our time, which has launched the US on interminable wars of aggression and a domestic police state, is a taboo topic for investigation in the media. It is pointless to complain of war and a police state when one accepts the premise upon which they are based.
These trillion dollar wars have created financing problems for Washington's deficits and threaten the U.S. dollar's role as world reserve currency. The wars and the pressure that the budget deficits put on the dollar's value have put Social Security and Medicare on the chopping block. Former Goldman Sachs chairman and U.S. Treasury Secretary Hank Paulson is after these protections for the elderly. Fed chairman Bernanke is also after them. The Republicans are after them as well. These protections are called "entitlements" as if they are some sort of welfare that people have not paid for in payroll taxes all their working lives.
With over 21 per cent unemployment as measured by the methodology of 1980, with American jobs, GDP, and technology having been given to China and India, with war being Washington's greatest commitment, with the dollar over-burdened with debt, with civil liberty sacrificed to the "war on terror," the liberty and prosperity of the American people have been thrown into the trash bin of history.
The militarism of the U.S. and Israeli states, and Wall Street and corporate greed, will now run their course. As the pen is censored and its might extinguished, I am signing off.
PAUL CRAIG ROBERTS was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury. His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached at: [email protected]
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The Nation
The White House has criticized Mitt Romney for his years at the helm of Bain Capital, pointing to a deal that led to the bankruptcy of GS Technologies, a Bain investment in Kansas City that went belly up in 2001 at the cost of 750 jobs. But the White House hasn't connected Romney's Bain to the larger scourge of casino capitalism. Not surprisingly, its criticism has quickly degenerated into a "he said, she said" feud over what proportion of the companies that Bain bought and loaded up with debt subsequently went broke (it's about 20 percent), and how many people lost their jobs relative to how many jobs were added because of Bain's financial maneuvers (that depends on when you start and stop the clock). And it has invited a Republican countercharge that the administration gambled away taxpayer money on its own bad bet, the Solyndra solar panel company.
But the real issue here isn't Bain's betting record. It's that Romney's Bain is part of the same system as Jamie Dimon's JPMorgan Chase, Jon Corzine's MF Global and Lloyd Blankfein's Goldman Sachs-a system that has turned much of the economy into a betting parlor that nearly imploded in 2008, destroying millions of jobs and devastating household incomes. The winners in this system are top Wall Street executives and traders, private-equity managers and hedge-fund moguls, and the losers are most of the rest of us. The system is largely responsible for the greatest concentration of the nation's income and wealth at the very top since the Gilded Age of the nineteenth century, with the richest 400 Americans owning as much as the bottom 150 million put together. And these multimillionaires and billionaires are now actively buying the 2012 election-and with it, American democracy.
The biggest players in this system have, like Romney, made their profits placing big bets with other people's money. If the bets go well, the players make out like bandits. If they go badly, the burden lands on average workers and taxpayers. The 750 peo- ple at GS Technologies who lost their jobs thanks to a bad deal engineered by Romney's Bain were a small foreshadowing of the 15 million who lost jobs after the cumulative dealmaking of the entire financial sector pushed the whole economy off a cliff. And relative to the cost to taxpayers of bailing out Wall Street, Solyndra is a rounding error.
Connect the dots of casino capitalism, and you get Mitt Romney. The fortunes raked in by financial dealmakers depend on special goodies baked into the tax code such as "carried interest," which allows Romney and other partners in private-equity firms (as well as in many venture-capital and hedge funds) to treat their incomes as capital gains taxed at a maximum of 15 percent. This is how Romney managed to pay an average of 14 percent on more than $42 million of combined income in 2010 and 2011. But the carried-interest loophole makes no economic sense. Conservatives try to justify the tax code's generous preference for capital gains as a reward to risk-takers-but Romney and other private-equity partners risk little, if any, of their personal wealth. They mostly bet with other investors' money, including the pension savings of average working people.Another goodie allows private-equity partners to sock away almost any amount of their earnings into a tax-deferred IRA, while the rest of us are limited to a few thousand dollars a year. The partners can merely low-ball the value of whatever portion of their investment partnership they put away-even valuing it at zero-because the tax code considers a partnership interest to have value only in the future. This explains how Romney's IRA is worth as much as $101 million. The tax code further subsidizes private equity and much of the rest of the financial sector by making interest on debt tax-deductible, while taxing profits and dividends. This creates huge incentives for financiers to find ways of substituting debt for equity and is a major reason America's biggest banks have leveraged America to the hilt. It's also why Romney's Bain and other private-equity partnerships have done the same to the companies they buy.
These maneuvers shift all the economic risk to debtors, who sometimes can't repay what they owe. That's rarely a problem for the financiers who engineer the deals; they're sufficiently diversified to withstand some losses, or they've already taken their profits and moved on. But piles of debt play havoc with the lives of real people in the real economy when the companies they work for can't meet their payments, or the banks they rely on stop lending money, or the contractors they depend on go broke-often with the result that they can't meet their own debt payments and lose their homes, cars and savings.
It took more than a decade for America to recover from the Great Crash of 1929 after the financial sector had gorged itself on debt, and it's taking years to recover from the more limited but still terrible crash of 2008. The same kinds of convulsions have occurred on a smaller scale at a host of companies since the go-go years of the 1980s, when private-equity firms like Bain began doing leveraged buyouts-taking over a target company, loading it up with debt, using the tax deduction that comes with the debt to boost the target company's profits, cutting payrolls and then reselling the company at a higher price.
Sometimes these maneuvers work, sometimes they end in disaster; but they always generate giant rewards for the dealmakers while shifting the risk to workers and taxpayers. In 1988 drugstore chain Revco went under when it couldn't meet its debt payments on a $1.6 billion leveraged buyout engineered by Salomon Brothers. In 1989 the private-equity firm of Kohlberg, Kravis, Roberts completed the notorious and ultimately disastrous buyout of RJR Nabisco for $31 billion, much of it in high-yield ("junk") bonds. In 1993 Bain Capital became a majority shareholder in GS Technologies and loaded it with debt. In 2001 it went down when it couldn't meet payments on that debt load. But even as these firms sank, Bain and the other dealmakers continued to collect lucrative fees-transaction fees, advisory fees, management fees-sucking the companies dry until the bitter end. According to a review by the New York Times of firms that went bankrupt on Romney's watch, Bain structured the deals so that its executives would always win, even if employees, creditors and Bain's own investors lost out. That's been Big Finance's MO.
... ... ...
We've entered a new Gilded Age, of which Mitt Romney is the perfect reflection. The original Gilded Age was a time of buoyant rich men with flashy white teeth, raging wealth and a measured disdain for anyone lacking those attributes, which was just about everyone else.
... ... ...
We've had wealthy presidents before, but they have been traitors to their class-Teddy Roosevelt storming against the "malefactors of great wealth" and busting up the trusts, Franklin Roosevelt railing against the "economic royalists" and raising their taxes, John F. Kennedy appealing to the conscience of the nation to conquer poverty. Romney is the opposite: he wants to do everything he can to make the superwealthy even wealthier and the poor even poorer, and he justifies it all with a thinly veiled social Darwinism.
Not incidentally, social Darwinism was also the reigning philosophy of the original Gilded Age, propounded in America more than a century ago by William Graham Sumner, a professor of political and social science at Yale, who twisted Charles Darwin's insights into a theory to justify the brazen inequality of that era: survival of the fittest. Romney uses the same logic when he accuses President Obama of creating an "entitlement society" simply because millions of desperate Americans have been forced to accept food stamps and unemployment insurance, or when he opines that government should not help distressed homeowners but instead let the market "hit the bottom," or enthuses over a House Republican budget that would cut $3.3 trillion from low-income programs over the next decade. It's survival of the fittest all over again. Sumner, too, warned against handouts to people he termed "negligent, shiftless, inefficient, silly, and imprudent."
When Romney simultaneously proposes to cut the taxes of households earning over $1 million by an average of $295,874 a year (according to an analysis of his proposals by the nonpartisan Tax Policy Center) because the rich are, allegedly, "job creators," he mimics Sumner's view that "millionaires are a product of natural selection, acting on the whole body of men to pick out those who can meet the requirement of certain work to be done." In truth, the whole of Republican trickle-down economics is nothing but repotted social Darwinism.
The Gilded Age was also the last time America came close to becoming a plutocracy-a system of government of, by and for the wealthy. It was an era when the lackeys of the very rich literally put sacks of money on the desks of pliant legislators, senators bore the nicknames of the giant companies whose interests they served ("the senator from Standard Oil"), and the kings of finance decided how the American economy would function.
The potential of great wealth in the hands of a relative few to undermine democratic institutions was a continuing concern in the nineteenth century as railroad, oil and financial magnates accumulated power. "Wealth, like suffrage, must be considerably distributed, to support a democratick republic," wrote Virginia Congressman John Taylor as early as 1814, "and hence, whatever draws a considerable proportion of either into a few hands, will destroy it. As power follows wealth, the majority must have wealth or lose power." Decades later, progressives like Louis Brandeis saw the choice starkly: "We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both."
The reforms of the Progressive Era at the turn of the twentieth century saved American democracy from the robber barons, but the political power of great wealth has now resurfaced with a vengeance. And here again, Romney is the poster boy. Congress has so far failed to close the absurd carried-interest tax loophole, for example, because of generous donations by Bain Capital and other private-equity partners to both parties.
... ... ...
To be sure, Romney is no worse than any other casino capitalist of this new Gilded Age. All have been making big bets-collecting large sums when they pay off and imposing the risks and costs on the rest of us when they don't. Many have justified their growing wealth, along with the growing impoverishment of much of the rest of the nation, with beliefs strikingly similar to social Darwinism. And a significant number have transformed their winnings into the clout needed to protect the unrestrained betting and tax preferences that have fueled their fortunes, and to lower their tax rates even further. Wall Street has already all but eviscerated the Dodd-Frank Act, and it has even turned the so-called Volcker Rule-a watered-down version of the old Glass-Steagall Act, which established a firewall between commercial and investment banking-into a Swiss cheese of loopholes and exemptions.
... ... ...
So why don't Democrats connect these dots? It's not as if Americans harbor great admiration for financial dealmakers. According to the newly released twenty-fifth annual Pew Research Center poll on core values, nearly three-quarters of Americans believe "Wall Street only cares about making money for itself." That's not surprising, given that many are still bearing the scars of 2008. Nor are they pleased with the concentration of income and wealth at the top. Polls show a majority of Americans want taxes raised on the very rich, and a majority are opposed to the bailouts, subsidies and special tax breaks with which the wealthy have padded their nests.
Part of the answer, surely, is that elected Democrats are still almost as beholden to the wealthy for campaign funds as the Republicans, and don't want to bite the hand that feeds them. Wall Street can give most of its largesse to Romney this year and still have enough left over to tame many influential Democrats (look at the outcry from some of them when the White House took on Bain Capital). But I suspect a deeper reason for their reticence is that if they connect the dots and reveal Romney for what he is-the epitome of what's fundamentally wrong with our economy-they'll be admitting how serious our economic problems really are. They would have to acknowledge that the economic catastrophe that continues to cause us so much suffering is, at its root, a product of the gross inequality of income, wealth and political power in America's new Gilded Age, as well as the perverse incentives of casino capitalism.
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May 24, 2012
By Simon Johnson
There are two diametrically opposed views of how the largest financial companies in our economy operate. On the one hand, there are those like Charles Ferguson, director of the Academy Award-winning documentary "Inside Job" and author of the new book, "Predator Nation." Mr. Ferguson takes the view that greed and immorality now prevail to an excessive degree at the heart of Wall Street.
Academics and other experts have become corrupted, the responsible regulators have been intellectually captured, and law enforcement officials refuse to act – despite the accumulation of evidence before their eyes.
"Inside Job" was gripping and emotional; "Predator Nation" contains many more specific details and evidence, as this excerpt dealing with academics (one Republican and one Democrat) makes clear.
The second view is that the people in charge of large banks and bank holding companies have done nothing wrong. To see this view in action, look no further than this week's debate about whether Jamie Dimon, chief executive of JPMorgan Chase, should resign from the board of the Federal Reserve Bank of New York. The New York Fed oversees his organization, including assessing whether it is taking dangerous risks, so there are reasonable questions about whether this creates a potential conflict of interest.
A balanced account of this debate appeared in American Banker, which kindly agreed to bring the entire article out from behind its paywall. The strongest statement from the pro-Dimon corner comes from Ernest Patrikis, a partner with White & Case L.L.P. and former general counsel of the New York Federal Reserve:
"I don't see Jamie Dimon's conflict of interest. What's the conflict? He's expected to represent the banks' view, the lenders' view."
Yet even people who are generally sympathetic to banks feel that there is a perception problem with Mr. Dimon's position. Treasury Secretary Timothy Geithner said exactly that to the "PBS NewsHour" last week.
Kenneth Guenther, the former head of the Independent Community Bankers of America, told American Banker:
"I do think there is a public perception problem when the head of the largest bank gets into a massive highly publicized trading loss, which he articulately condemns, when he's tied to the Federal Reserve Bank of New York, and the president of the Federal Reserve Bank is vice chair of the Federal Open Market Committee. There is a perception problem. I don't think there's any way around it."
What exactly is a conflict of interest? Narrowly defined, an actual conflict of interest would involve using public office for personal financial gain – and would be a matter for criminal prosecution.
There is only one case that I am aware of in which a director of the New York Fed went to prison for such a violation – Robert A. Rough was indicted in December 1988, on charges that he leaked sensitive interest-rate information to a brokerage firm. He was sentenced to six months in prison.
More broadly, however, in modern America we use the term "conflict of interest" when we believe someone may be promoting private interests while acting in a public role.
Allowing big bankers to become too influential is an important part of what Mr. Ferguson writes about. If you don't understand the channels through which influence actually works in the United States today, you need to see "Inside Job," which touched a nerve and won an Oscar precisely because it is profoundly undemocratic when powerful people are able behave in this way.
Elizabeth Warren, a Democratic candidate for the Senate in Massachusetts, said Mr. Dimon should resign from the board of the New York Fed. The recent spectacular trading losses at his company require a full investigation, which should include an examination of how the supervision process broke down. How can this be anything other than awkward for the New York Fed while Mr. Dimon – hardly known as a shrinking violet – sits on its board?
Senator Bernie Sanders, independent of Vermont, would go further, proposing legislation that would remove any bankers from the boards of Federal Reserve banks. For more background, you may want to consult Page 65 and other parts of this report from the Government Accountability Office, which deal with potential conflicts of interest in the Federal Reserve System, or at least read Senator Sanders's summary of the report.
To be clear, directors of the New York Fed are in principle kept away from bank-supervision matters – a point that was codified in December 2010, following the passage of the Dodd-Frank financial reform legislation.
Under the current bylaws, directors are not involved in appointing, monitoring or compensating the head of supervision, although they have input into the selection and remuneration of the head of research (an important position, as this person helps to shape the Fed's view on bank capital and all technical matters relative to risk management), and they oversee other management issues. Bill Dudley, the president of the New York Fed, interacts with the board at least several times a month, as you can see from his schedule.
Mr. Dudley, a former Goldman Sachs executive, was originally appointed president of the New York Fed by a board that included Mr. Dimon as a voting member. The Dodd-Frank legislation stripped so-called "Class A" directors, of which Mr. Dimon is one, from voting on such appointments. Mr. Dudley was subsequently reappointed by the Class B and Class C directors of the board. (For more on the different classes of directors, see this page)
Mr. Dimon has also been an outspoken opponent of financial reform of late – including the Volcker Rule (on proprietary trading) and attempts to strengthen capital requirements. He is an intensely political figure, despite the fact that an important footnote in the Board of Governors' policy on political activity by Reserve Bank Directors says,
In all instances, directors should avoid any political activity that would publicly identify the director as being associated with the Federal Reserve System or would embarrass the System or raise questions about the independence of the director or the ability to perform Federal Reserve duties.
Directors are allowed to lobby and engage in other specific activities. The issue is whether these actions undermine the effectiveness of the New York Fed.
There is recent precedent for New York Fed board members resigning when there is a perceived conflict of interest – and when the legitimacy of the Federal Reserve System would undoubtedly have been undermined if they had refused to resign.
Dick Fuld, the chief executive of Lehman Brothers, resigned (on Thursday, September 11, 2008) shortly before his firm collapsed (on September 15, but its last day of business was Friday, September 12) – and presumably because the New York Fed was at the center of intense discussions about who should suffer what kind of losses or get rescued. Did he resign of his own volition or was he encouraged to resign?
Stephen Friedman, then the former chief executive of Goldman Sachs, resigned in early 2009 when it became clear that he had bought Goldman stock after Goldman became a bank and therefore fell under the supervision of the New York Fed.
Mr. Friedman was chairman of the New York Fed at that time. (To be clear, Mr. Friedman was not involved in any of the decisions that saved Goldman in fall 2008, and I am not accusing him of using his public position for personal financial gain.)
For those of you keeping score at home, Mr. Fuld was a Class B director and Mr. Friedman was a Class C director.
If you think Mr. Dimon should resign from the New York Fed, you can express your opinion by signing this on-line petition, which I drafted. (For more background on why he should resign, see this blog post.)
If Mr. Dimon refuses to resign – as seems likely – he can removed by the Board of Governors of the Federal Reserve System (not by his fellow directors at the New York Fed). The petition is therefore addressed to the Board of Governors.
There is an undeniable perception problem. It is damaging the legitimacy of the Federal Reserve. As Treasury Secretary Geithner implied, this must be "addressed" – a great Washington euphemism – by Mr. Dimon leaving the board of the New York Fed.
An edited version of this blog post appeared this morning on the NYT.com's Economix; it is used here with permission. If you would like to reproduce the entire column, please contact the New York Times.
mattmossman
Not impressed by that American Banker article. If the Fed needs to get the view of the banks, is having them on the board of a regulatory agency the only way to do so? The reporter should have asked Ernest Patrikis that. If the Fed would benefit from getting perspective from outside Washington, is having Jamie Dimon on the board of the NY Fed the only way to get that? Should have asked Chip MacDonald that. If its perception and not reality, shouldn't Karen Shaw Petrou be asked why, after what's happened, she feels that way?Vern McKinleyWe all know what the common sense position is about having a bank president on the board of a banking regulator. There should be more burden of proof placed upon the people insisting that this is fine. Not enough to just cite a perception/reality gap.
This gets back to the creation of the Federal Reserve in 1913/1914. It was a creation of bankers for bankers. A much more substantial change would be to make the FRBNY subject to the Freedom of Information Act. The Board in Washington is, the FRBNY is not. Makes no sense.The Bond ManWhere was the "well documented propensity for listening to his risk management team (where the problem was caught)", relating to these particular criminal or MASSIVELY FRAUDULENT activities??:Anonymoushttp://www.nytimes.com/2009/11/05/business/05derivatives.html?_r=1
Incidentally, this IS NOT a "B" movie plot, it's a conspiracy to defraud hard-working Americans of the fruits of HONEST LABOR~~
http://www.huffingtonpost.com/2012/05/24/bain-capital-tony-soprano_n_1542249.htmlJames TaylorI am absolutely convinced that after runaway health care costs, TBTF is the next financial disaster facing the country. But here is what scares the crap of out me. Jamie Dimon is a pretty good guy. Maybe the only one on Wall Street. So if you don't like him, think about the rest. Then remember that Goldman Sachs runs the U.S. Treasury (Timmy is just marking time until he gets his Million Dollar job on the Street.)Think about that for a minute and you'll get scared too.The Bond ManBeing a pretty good guy isn't really the issue, imo. He may be a nice guy, he looks like a nice guy to me, but some things his bank have done, as linked above, smack of rank criminality.The Bond ManIf we had an independent and functioning justice system, I think people like Mr. Dimon would have been indicted and convicted long ago.
He's lucky we don't.
"It is a blatant conflict of interest for Jamie Dimon, the CEO and chairman of JPMorgan Chase, to serve on the New York Fed's board of directors," Senator Bernie Sanders (I-VT) said in introducing the bill. "If this is not a clear example of the fox guarding the henhouse, I don't know what is."William Barclayhttp://www.huffingtonpost.com/2012/05/24/esther-george-jamie-dimon-new-york-fed_n_1543757.html
The chorus of boos intensifies! Simon, of course, is right the hell on!
Dimon and JPMorgan Chase have done a better job of explaining why too big to fail is too big, period than any policy wonk could possibly do.JPMorgan Chase, Cit, B of A and others with assets over X% of US GDP should be broken up.
BTW, it is possible to have large – even very large – banks without all the incompetence and leveraged risk taking that threaten the economy as a whole: just look next door (Canada – no banks failed in the 1930s, none failed in the 2007s. Of course, they couldn't do all the exciting stuff that makes banking soooooo important and financially rewarding.
I know Americans HATE to think that some other country got it right and we didn't, but let's look around.
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June 04, 2012 | Economist's View
Why don't those in power listen to Joseph Stiglitz and Paul Krugman?:Our Most Widely Ignored Public Intellectuals, by Robert Kuttner: ...As the most prestigious economic dissenters of this era, Joseph Stiglitz and Paul Krugman form a category of two: astonishingly prescient, widely read, and largely ignored by those in power. ...If these eminent thinkers are at the edge of economic orthodoxy, why are they marginalized within the corridors of power? One reason is that politics, not surprisingly, tends to get personal. Both Stiglitz and Krugman have decided to air their views in public rather than operating as discreet outside members of a kitchen cabinet... Stiglitz, even more than Krugman, has not been shy about criticizing Summers and Treasury Secretary Timothy Geithner by name, and the disfavor has been richly returned. Though Krugman's column praises the Obama administration when the president gives Krugman half a reason to do so, the White House accurately perceives him and Stiglitz as off-message and part of the opposition.
More fundamental to their marginalization is the relative radicalism of what Krugman and Stiglitz are advocating in our conservative era, one in which even Democratic presidents have done little to reverse unconstrained finance, shrunken government, and deepening inequality. To embrace their wisdom would require something close to a political revolution. So two of our most lauded economists remain prophets with little power to change events. America would be a far healthier country if they broke through.
Jeffrey Stewart:
This is a relatively easy puzzle to solve. It absolutely doesn't matter to politicians and those funding their campaigns that Krugman and Stiglitz are 100% correct. If Krugman and Stiglitz were advocating policies that benefited the wealthy rather than the majority of the population, they would be listened to and have influential positions in any administration. There is a near complete capture of the state by capital. This means that only policies that directly benefit financial, industrial and commercial capitalist and only indirectly the working class, e.g., trickle down economics of tax cuts and deregulation get a hearing and are considered "serious," "responsible" and in the "mainstream" i.e., not "radical" or "extreme.""In the domain of Political Economy, free scientific inquiry meets not merely the same enemies as in all other domains. The peculiar nature of the materials it deals with, summons as foes into the field of battle the most violent, mean and malignant passions of the human breast, the Furies of private interest."
MRJ said in reply to Darryl FKA Ron...
I like your comment about them being like each other.
One example: The right wing today includes a large contingent who actively desire and promote the failure of the US, both economically and politically, so that their side can win the up-coming election, which is strikingly reminiscent of Lenin's tactics prior to the Russian Revolution.
Seth said in reply to Jeffrey Stewart...
Correct. Krugman and Stiglitz are not being ignored by accident or simple misunderstanding. They are being studiously ignored. They are met with deep sighs and 'polite' eyes are averted in the hope that K & S will tire themselves out and simply shut up.
Here was my reaction to Krugman's recent "I'm Not Clubbable" post:
Clubbable is a synonym for Very Serious: it means taking social cues from higher status peers as the basis for evaluating information. Rather than evaluating claims by reference to facts and their logical connections, a VSP understands that demonstrating loyalty to the status hierarchy will better serve their personal interests. Demonstrated failure to conform to social expectations by stubbornly sticking with conclusions drawn from reasoned argument will make clubbable people acutely uncomfortable. They need to disassociate themselves lest they gain a reputation as a 'fellow-traveller' with disloyal types.
This is why economics went seriously wrong -- indeed the discipline quite simply 'sold out' -- when it abandoned attempts to take account of power. Power *constrains* economic outcomes, markets merely optimize within the constraints set by power.
The irony is that this sell-out is what gives economics professors the cache required to have an audience among the powerful in the first place. But when you try to speak the truth, you begin to sound uncomfortably like those scary Marxists the VSP's thought they had managed to purge many years ago.
Policy is made by [the most senior] members of the club. Your role in their world is to justify the policies they derive from their need to reinforce the status quo power structure. I'm glad you refuse to play that sycophantic part in their little morality play, but it isn't at all mysterious why you are treated the way Cassandra was.
Jeffrey Stewart
An excellent example of this pro-capitalist bias is the capitalist, corporate media and VSP fawning over the Ryan budget while the Progressive Caucus' Budget For All received...crickets.
denim:
"It's been really frustrating to watch policymakers listen to the people who got it wrong again and again, not just before the crisis but during it as well, while ignoring the people who largely got things right, and then wonder why the policies weren't more effective. If they'd listened, and it's not too late to start, things could be better today." The policymakers wanted it wrong. The goal is to establish Ayn Rand's vision for America where the sociopath is the most venerated leader of all in business or politics. A well managed pseudo-crisis works wonders for scaring the masses into the slaughterhouses.
Charlie Baker:
Paul Krugman: Things I Didn't Say
http://krugman.blogs.nytimes.com/2010/05/23/things-i-didnt-say/
From John Heilemann's article about the falling out between Obama and Wall Street:
After countless rehearsals of the options, Obama wanted to hear a broader range of voices. So in April, a dinner was set up at the White House with the president and a clutch of big-name economists: Paul Krugman, Joseph Stiglitz, Jeffrey Sachs, Alan Blinder, Kenneth Rogoff. "That turned out to be a defining moment in the debate," Geithner told me. "Partly because they were all disagreeing with each other, and partly because they knew what they were against but not exactly what they were for and what it entailed-except Krugman. He was the only one willing to say, 'Look, there's a good case for nationalizing, but if you do, you have to understand two things: One, it's incredibly expensive, it'll cost trillions; and two, you have to guarantee everything.' " Once again, Obama cast his lot with Geithner. Uh, no. I never said that it would cost trillions of dollars. On the contrary, I didn't think taking over Citi or B of A, which had near-zero market caps at the time, would cost much at all. I did say that we'd have to guarantee the debts of the seized banks, much as the Swedes did; but I think I said then, and certainly believed, that we were de facto guaranteeing those debts anyway - that we had already socialized the possible losses, and that the point was to give taxpayers a share of the potential gains.
I'm glad to get credit for being more realistic than the other guys - but Geithner seems to be putting a spin on what I actually said.
John Heilmann's article here:
Mark A. Sadowski:
"Given his support for Hillary Clinton, it is hard to take Krugman seriously when he lambaste the Obama administration for centrism and compromising progressive values."
As Krugman has pointed out again and again Obama didn't pose as a Nation-type progressive, then suddenly turn to the right after he won the Democratic nomination. He was always slightly less progressive than Hillary Clinton on domestic issues, and more than slightly on health care.
Mundus vult decipi, ergo decipiatur
Paine:
Oh please the Hill and Barry different in practice
Hill would use the same people and get the same results or less Given her cave factor under pressure
Mark A. Sadowski:
"Given her cave factor under pressure"
Give me a break.
Obama routinely stakes out a postion just to the left of the opposition, not because he's planning any grand Bill Clintonesque triangulation strategies, but because he *really is* the Republican-lite he's always said that he was.
But then he *always* gives into the Republicans and throws a pony into the deal for good measure.
Barry should write a book on "The Art of the Cave-In" when this thing is all over.
Mike said in reply to Sarah...
It is not just Obama. In general, modern day Democrats are to the right of Nixon. They are not liberal or progressive.
I have debated with many on the so-called left about how poor Obama's economic policies have been, and they either typically defend his policies or outright champion them.
It is flat out bizarre, but this is the land of confusion where Democrats are anything but liberal and Republicans are anything but conservative. Neither party takes kindly to criticism since they are too busy looking to blame the other party for their poor performance since it is their best chance to retain power.
Darryl FKA Ron:
Ignoring intellectuals is nothing new or singular in the US. Frederick Perls was out-voted by big pharma in the AMA/APA. Ian Mitroff has met much the same resistance as Peter Drucker. Drucker received much acclaim, but almost no one ever applied his practices. They were managing for different results. Ignored intellectuals are a dime a dozen. I prefer the Stig myself, but neither one should feel like the lone ranger. Now Joe Schumpeter was an intellectual that did not get ignored. So, it just depends upon what you are selling.
John Hulls:
The real irony of this is that the purpose of government should actually be to protect the one percent from themselves and preserve the economy for all. As a retired history professor friend recently told me, the way to understand the current Greek econodrama is to read Arisophanes 'The Acharnians', which I wrote about in a piece entitled 'Hedging the Apocalypse' at http://somewhatlogically.com/?p=598 which is mostly raises the question as to why the financial community fails to learn from others about management of high risk situations, such as nuclear weapons and aircraft safety.
What is so disturbing is that what is going to happen is pretty apparent if you take a look from a perspective outside the current economic debate, and alternate methods of modeling the economy. (I'm interested in analog simulations to illuminate environmental and resource utilization) I can't resist posting a link to a piece that I wrote in 2008, from 'Too Big to Fail to Too Large to Care' at http://somewhatlogically.com/?p=51
Krugman and Stiglitz are sadly right, but tend to put their answers in mostly economic terms, which don't really seem to resonate with the public, as did Roosevelt's specific programs, such as the REA and federal power projects. As Brad Delong's wife said in a recent post on his blog, referring to the REA "Thankee Mr. Roosevelt"
ilsm said in reply to John Hulls...
The foundation of the democratic party goes back to Andrew Jackson or before, Jefferson.
Jackson fought the bank because the US bank threatened to bribe the lower chanber from being the peoples' house.
There was always the feeling that the elites were filled with vice and would corrupt the virtues that the masses would fit to the republic.
TR and FDR were fans of Jackson as was Truman.
A respect for Old Hickory is in order.
Darryl FKA Ron said in reply to John Hulls...
John,
Pretty kool dude. Cross disciplinary science is a must in a modern world, but the econ world has not all got on board with that yet. I just had time to skim the first article, but was smiling the whole time.
Are you familiar with Ian Mitroff?
Here is a list of his books copied from Wiki - just to give you some idea of his range:
- 1974. The Subjective Side of Science: A Philosophical Inquiry into the Psychology of the Apollo Moon Scientists. Elsevier, Amsterdam (reissued in 1984 by Intersystems Publishers, Seaside, California).
- 1978. Methodological Approaches to Social Science: Integrating Divergent Concepts and Theories. With Ralph Kilmann. Jossey-Bass, San Francisco.
- 1981. Challenging Strategic Planning Assumptions, Theory, Cases, and Techniques. With Richard O. Mason. John Wiley, New York.
- 1982. Creating A Dialectical Social Science: Concepts, Methods, and Models. With Richard O. Mason and D. Reidel. John Wiley, New York.
- 1983 The 1980 Census: Policymaking Amid Turbulence. With Richard O. Mason and V.P. Barabba. Lexington Books, Massachusetts.
- 1983. Stakeholders of the Organizational Mind: Toward A New View of Policy Making. Jossey-Bass, San Francisco.
- 1984. Corporate Tragedies, Product Tampering, Sabotage, and Other Catastrophes. With Ralph Kilmann. Praeger, New York.
- 1987. Business Not As Usual, Rethinking Our Individual, Corporate, and Industrial Strategies for Global Competition. Jossey-Bass, San Francisco.
- 1988. Break-Away Thinking, How To Challenge Your Business Assumptions. John Wiley, New York.
- 1989. The Unreality Industry, The Deliberate Manufacturing of Falsehood and What It Is Doing to Our Lives. With Bennis, Warren. Birch Lane Press, New York.
- 1990. We're So Big And Powerful Nothing Bad Can Happen To Us: An Investigation of America's Crisis-Prone Corporations. With Thierry Pauchant. Birch Lane Press, New York.
- 1992. The Unbounded Mind: Breaking the Chains of Traditional Business Thinking. With Harold A. Linstone. Oxford University Press.
- 1992. Transforming the Crisis-Prone Organization. With Thierry Pauchant. Jossey-Bass, San Francisco.
- 1993. Crisis Management: A Diagnostic Guide for Improving Your Organization's Crisis-Preparedness. With Christine M. Pearson. Jossey-Bass, San Francisco.
- 1994. The Challenge of the 21st Century: Managing Technology and Ourselves in a Shrinking World. With Harold A Linstone. State University of New York Press, Albany, New York.
- 1994. Framebreak: The Radical Redesign of American Business. With Richard O. Mason, and Christine M. Pearson. Jossey-Bass, San Francisco.
- 1996. The Essential Guide to Managing Corporate Crises.
- 1998. Smart Thinking for Crazy Times: The Art of Solving the Right Problems. With Christine M. Pearson, and Katharine L. Harrington. Oxford University Press, New York. The Management of Crises and Paradoxes: Preventing the Destructive Effects of Organizations (in French). H.E.C., Montreal, Canada.
- 1999. A Spiritual Audit of Corporate America: A Hard Look at Spirituality, Religion, and Values in the Workplace. With Elizabeth A. Denton. Jossey-Bass Publishers Inc., San Francisco.
- 2000. Managing Crises Before They Happen: What Every Executive Needs to Know About Crisis Management. With Gus Anagnos. AMACOM, New York.
- 2003. Crisis Leadership: Planning for the Unthinkable. John Wiley, New York.
- 2005. Why Some Companies Emerge Stronger And Better From a Crisis: Seven Essential Lessons For Surviving Disaster. AMACOM, New York. Ian I. Mitroff and Abraham Silvers, Dirty Rotten Strategies: How We Trick Ourselves and Others into Solving the Wrong Problems Precisely, Stanford Business Press (2009), hardcover, 210 pages, ISBN 978-0-8047-5996-0
- 2011. "Swans, Swine, and Swindlers: Coping With The Growing Threat of Mega Crises and Mega Messes". With Can M. Alpaslan. Stanford Business Press.
*****************
Dirty Rotten Strategies is pretty good. I am going to have to get We're So Big And Powerful Nothing Bad Can Happen To Us.
Edward Lambert:
Stiglitz is more of an economic hero than Krugman, because Stiglitz talks more about sustainable economics and living wages...
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The Huffington Post
I wish President Obama would draw the obvious connection between Bain Capital and JPMorgan Chase.
That way his so-called "attack" on private equity is neither a personal attack on Mitt Romney nor a generalized attack on American business.
It's an attack on a particular kind of capitalism that Romney and JPMorgan both practice: Using other peoples' money to make big bets which, if they go wrong, can wreak havoc on the economy.
It's the substitution of casino capitalism for real capitalism, the dominance of the betting parlor over the real business of America, financial innovation rather than product innovation.
It's been terrible for the American economy and for our democracy.
It's also why Obama has to come out swinging about JPMorgan. The JPMorgan Chase debacle would have been prevented if the Volcker Rule were sufficiently strict, prohibiting banks from using commercial deposits to make bets except very specific offsetting bets (hedges) on narrow classes of trades.
But Jamie Dimon and JPMorgan have been lobbying like mad to loosen the Volcker Rule and widen that exception to include the very kind of reckless bets JPMorgan made. And they're still at it, as evidenced by Dimon's current claim that the rule that eventually emerges would allow those bets.
As a practical matter, the Volcker Rule is hopeless. It was intended to be Glass-Steagall lite -- a more nuanced version of the original Depression-era law that separated commercial from investment banking. But JPMorgan has proven that any nuance -- any exception -- will be stretched beyond recognition by the big banks.
So much money can be made when these bets turn out well that the big banks will stop at nothing to keep the spigot open.
There's no alternative but to resurrect Glass-Steagall as a whole. Even then, the biggest banks are still too big to fail or to regulate. We also need to heed the recent advice of the Dallas branch of the Federal Reserve, and break them up.
At the same time, there's no point to the "carried interest" loophole that allows private-equity managers like Mitt Romney to treat their incomes as capital gains, taxed at only 15 percent, when they've risked no money of their own.
If private equity were good for America it wouldn't need this or the other tax preference it depends on, elevating debt over equity. But the private equity industry has huge political clout, which is why these tax preferences remain.
Get it? Bain Capital and JPMorgan are parts of the same problem. The president should be leading the charge against both.
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