Capitalism's Achilles' Heel

>> Tuesday, April 27, 2010

Now, in the past I've gone back and forth with this person or another on government vs. business. If you've been reading here a while, you probably know I'm a little more pro-central government on many topics than some of my friends.

There are reasons for that. One of which is my own study of history. I know how often things only got worse and worse until the public, which couldn't get business to solve the problem, pushed the federal government to make important changes. Sometimes labor unions helped with this; sometimes they hindered. But, in the end, real changes in many important topics never really took off until the central government of this country forced the changes.

Things like food safety, workplace safety, environmental pollution and clean up, discrimination and child/adult labor used to mean horrific conditions for children, for people, for minorities, for health in general. Go back even a hundred years, and the world is a far different place as far as all these topics are concerned. I stress the federal government because, in many cases, local regulations were in place in pockets here and there to address these. Business just moved somewhere where they weren't in force and went on, business as usual, with no repercussions crossing state lines.

And this is what's wrong with trusting the market to do it. People talk about people getting bad service or a product and going elsewhere. That the market or competition will make it all better.

All well and good if that were entirely true. Truth is, people don't buy products just because of quality, per se, or just price or any reason. In fact, the reality of the product isn't what brings customers - it's the perception of the the quality, price, availability, convenience, etc. Reality doesn't change; perception is malleable. People who believe that a product is better made or hard to find or a really good price will often buy without checking it out. People who care about jobs in America might buy a GM vehicle made in Ottowa rather than a Toyota made in San Antonio. Really, "American" products could be made 'most anywhere.

It's the perception that counts.

That's true for other things, too. We convince ourselves that big business is competing against each other and we come out ahead as a result. Amazing, isn't it, that all the oil companies, for instance, have price hikes at holidays or are within a cent or two of each other's prices. In the finance industry, a few money men have so much influence, so much power, and are using tactics so obscure, we can only go on faith. When the market is driven by perception, that's a heady brew and will do Mainstreet America no good.

I thought about this while reading an editorial this morning in the NYT by an ex-Goldman employee explaining how the worst transgressor in the huge Goldman swindle/financial fiasco was the federal government and everyone else, including banks that lost their shirt, was "at best, a willing accomplice. " Goldman, though masterminding the deal and priming the pump for making out like a bandit, is considered to be on the same level with the victim banks who didn't do their homework. Actually, the editorial is a masterpiece of misdirection and bull$hit arguments on why people consciously out to swindle and steal billions weren't at fault.

She makes the argument that the government was the MOST at fault because they didn't stop 'em. In fact, I found this bit amazingly important and the key to my point here:

Yet, in the end, it comes down to this: Goldman Sachs, ACA Capital, IKB Deutsche Industriebank and even the rating agencies never had any duty to protect us from their greed. There was one entity that did — our government.
Now, I'm not excusing the massive deregulation that's been dismantling financial oversight for the past few decades. Or saying the government doesn't have plenty to answer for. They do, but, as we bitch and moan at the government "letting" unemployment get so high, etc., we might want to bear in mind that these are often the same folks bitching and moaning about the government having too much interference with business. Folks, you can't have it both ways.

Truth is, business will continue to ream the public backwards and forwards without any consideration for anything but their own bottom line, using every loophole, every geographical and legal advantage, every advertising distortion possible. We know, from experience, that expecting them to police themselves or to have market forces keep them honest is bust. It's been proven time and time again. And, when we catch them with their hands in the cookie jar, they'll say it's the government's fault that they were thieves and liars.

Meanwhile, they'll pump money into "grass-roots" keep-government-small movements and lobby/pay-off our elected officials so they can keep on doing what they have been doing in the name of the free market.

They're right. They're under no obligation to be ethical and honest unless we make them with laws - as we've done before. Laissez-faire is a proven loser. Regulation is not.


  • Jeff King

    I will defer to better minds for this debate; my limited concern for politics is revealed in my ignorance of the topic...

  • Project Savior

    From the stand point of a former securities broker I agree with you completely. An "honest" securities broker carefully studies the law and obeys the letter but not the spirit, always being sure to stay just inside the law. Then there is the other 90%.
    Working around people constantly breaking the laws makes you proud of being one of the few who only bends the law to its fullest.

  • The Mother

    I would argue that the government saved the banks with the bailout,rather than allowing the bad wood to fail. If capitalism had been allowed to do its thing, the bad ones would have been weeded out, and the entire industry would have learned a thing or two about misbehaving (no new regulation required).

    [This argument is strictly for the sake of taking the negative. I actually think a few new regulations are required, if the only thing Goldman Sachs did wrong was failure of "disclosure."]

  • Stephanie Barr

    Except Goldman Sach's, though contributing to the failure of many large banks, made out like a bandit, so, though partly responsible for the collapse (though hardly alone) they would have been left owning the market. Capitalism would have rewarded their dishonesty. Many of the banks failed by buying into money schemes, that in hindsight, seemed obviously too good to be true. Apparently, they'd bought their own hype too long.

    And, since anti-trust regulation went the way of the dodo, we had organizations deemed "too big to fail" without huge hardships on regular people (which happened anyway, but, at least according to many economists, is a pale shadow of what it could have been).

    I don't know. I think your counterpoint goes a long way to making my point for me.

  • Roy

    About that deregulation... Just remember that that started with the Reagan administration, who basically brought the foxes into the henhouse and let them have free reign. By the time Bill Clinton was elected, the place was lousy with Reagan and Bush Sr. appointees, and his 8 years just wasn't enough time to root them out (not that anyone tried during the Clinton years; Congress was still under a Republican majority and in financial matters ol' Bill wasn't much more than a Republican in Democrat drag himself).

    Even now, the foxes are still ruling; Tim Geithner is a shill for the Wall Street status quo, and the only reason he's publicly changed his tune lately is because the evidence of chicanery is so outrageous and so public that he has no choice, especially since I suspect his boss has told him to straighten up or start looking for a new job.

    You're right - the historical record shows that when left to run things by its own rules, the market is self-centered and inhuman. Now if only we could get Congress and some of the people in the Obama administration to read that record!

  • Stephanie Barr

    Sad to say that change for the better has almost always been the last thing the federal government wanted. The government, on its own, has almost never actively improved regulation on financial matters or environment or labor laws. They have always reacted (reluctantly) to overwhelming pressure from the citizens when the transgressions revealed were so heinous as to be unanswerable or the damage done by neglect horrific.

    Scandals with corruption, financial collapse, etc., outrage over media revelations of food and environmental and labor activities that shocked the public, as it should be. The nonviolent and intelligent leadership involved with civil rights. Only when confronted with evidence that can't be condoned without looking like complete villains do our elected leaders step up and take up reform.

    Surely, we should be smarter than that by now.

  • flit

    The incident that I always think of when it comes to de-regulation is Walkerton. It is the prime Ontario example of what happens when de-regulation goes too far: people die.

    Walkerton is a small town in Ontario - thanks to the Mike Harris government's move to deregulate and privatize everything they possibly could, the entire system that once upon a time ensured the safety of our drinking water crashed. And in Walkerton it was fatal.... and as usual, cleaning it up cost a hell of a lot more than it would have required to oversee the process.

    That's what really makes me crazy - governments decide to save pennies....and it ends up costing a heck of a lot more both in terms of money, but also in human suffering.

  • Stephanie Barr

    Ah, if I had fifty cents for every time I saw the government doing the penny wise pound foolish thing (such as saving money on ground testing only to have it fail on orbit costing 50X more to fix than the original test) I'd be a rich woman. And our government would have had a lot more money to play with.

  • Relax Max

    I find myself agreeing with you about deregulation. Reagan's famous regulation cutting has brought us to where we are today where banks can charge any fees they feel like and fix prices at will. As for Wall Street, I still say there were rules in place, but unenforced by Obama, Bush, Clinton, Bush, Reagan, Carter....

    Congress doesn't enforce the law. The Executive Branch does.

    It is little good to have laws on the books which are unenforced. No need for new ones to also be unenforced.

  • Stephanie Barr

    See, we agree again.Enforcing rules is just as important and been neglected by several administrations.

    However, the lack of "criminal" charges to lay against Goldman Sachs for clearly criminal behavior that has contributed to bringing several economies to their knees demonstrates to me that the laws are also inadequate.

  • Stephanie Barr

    When people excuse away their dishonesty and destructive practices with the argument that they are under no obligation to be honest, clearly self-policing isn't going to cut it.

    Which is my point.

  • Relax Max

    I don't really believe in self-policing" on that large a scale; I believe in law enforcement.

    I have also heard, as you mention, that what they did is not criminal behavior. I am not sure how the government comes to that conclusion. Aren't fraud and racketeering actual criminal acts?

    Make the GS execs walk the perp walk like Bernie Madoff and Ken Lay had to do. Take their assets and give them to their victims. What am I missing? If the justice dept. will do this, slowly, these people will learn.

  • Stephanie Barr

    Once more, Max, we agree.

  • Anonymous

    While the unethical, and perhaps illegal, practices of Goldman may come to light, I think the real problem is in assuming that gov't regulation can work at all when the regulators are so incestuously involved with the industries that they're paid to watch over. We expect companies to ride (or jump over) the lines. We expect gov't to keep an eye for it.

    In 2004, the SEC (after lobbying from major banks like Goldman) created an exemption to the 30-year-old 'Net Capital Rule' (see wikipedia) allowing only the major banks to increase greatly their leverage and risk. Paulson was chairman, and a major stockholder, of Goldman when he was appointed by Bush to be Treasury Sec'y in 2006. He allows his old rivals Lehman, Bear, and Merrill to die on the vine (or be swallowed by other banks) "to send a clear message that the gov't won't save badly-run companies" but then jumps in majestically to save AIG and his old stomping grounds Goldman. Friedman, as NY Fed chief (and prior Goldman chairman as well) saves AIG, then "secretly" negotiates a deal that pays Goldman $12.9B using AIG's bailout money for credit-swaps. I could go on but it's much too depressing.

    No conflicts of interest here?? (Think FDA and BigPharma or Cheney-Haliburton-Iraq) It's the same problem... too many insiders with old loyalties guarding the hen house. What's the point of even more regulation if we don't have true outsider watchdogs in place?

    Mike Hawthorne

  • Stephanie Barr

    Mike, you're going to get me all spun up. You're absolutely right. I work for an FFRDC. I have to prove that I have no conflicts of interest and I'm precluded from so much as buying lunch for a NASA or DOD employee.

    NASA safety USED to be independently funded but someone got the bright idea in 1998 to have those being overseen pay directly for safety (based on what they thought it was worth). Do I have to tell you how successful that tactic was (and, no, it's not been corrected, even after Columbia, even after being cited in the report). Your imagination, I assure you, does not do it justice.

    We've come to accept this inherent dishonesty as people with vested interests in an industry are tapped as overseers (without even having to sever their ties) and elected officials are bought and paid for by special interests.

    That doesn't have to be part and parcel of democracy, though many people seem to think it's a necessary evil.


    If Martha Stewart can be sent to jail by acting on a stock tip she heard from her stockbroker, I think it's safe to say that manipulating the market you're supposed to be regulating in a way that puts money in your own pocket is definitely not fulfilling your role.

    Throw the book at them.

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