Atlantic article about the underlying problem of the economy...

.Shane. · Mar 30, 2009

... well, maybe I could've said that better, I'll leave it to the likes of Whomp/JH to correct me here. The interesting thing is (well, interesting to me), they're making the case that Jeffersonians were right....

But, the theme of article is that

... the root of America's (and Europe's) economic woes is the cozy relationship between super-powerful bankers and government -- oligarchy. So, he says, we cannot fix the economy until we break up the banks, curb executive compensation in the finance sector, and turn it into "just another industry."

That quote is from Boing Boing.

The actual article is found here.

A couple quotes I found interesting:

Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.

....

at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government.

Note: I'm not going to speak to Russian history, but this is fairly in line with Hamiltonian thinking and very much in line with what he did as first Sec. of Treasury under Washington.

More...

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

...

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

At any rate, there's a lot here. One thing that does bother me who we're turning to the leaders of the same industries that put us here. Mind you I don't think we should hire the local kiln-master, Pro Bowl linebacker, or McDonald's manager to figure out the way out. BUT, I'm sick of seeing the same Wall Street hacks trotted in and out to solve this. Are there no economists or leaders of OTHER industries that might have a new model or approach that can lead us out of this mess?

This next part gets somewhat to my point...

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

I could go on, but then this post would be too large....its a bit unwieldy as is. I encourage you to read the whole thing.

All bolding in quotes mine.

Request: If you care to participate in this thread my only request is that you do so from that standpoint of pragmatism, rather than dogmatism... Meaning, leave any self-declarations that you are communist/capitalist/objectivist/whatever-cool-ist-I-read-about-online-this-week at the door and offer thoughts or criticism based on what the author has written...

Don't get hung up arguing semantics "OMG THIS IS SO NOT AN OLIGARCHY!" or flip to knee jerk, canned responses.

Well, I can hope for tender mercies...

GoodGame · Mar 30, 2009

First post!!! I just want to say that I can spell oligarchy.

No, but actually, I'd say even if there is a cliche (edit: clique) of corruption as the author states, why would it follow to break up the large organizations that presumably provide a better economy of scale? A better option to me is more oversight, and disjoining of political corruption from the system, by campaign financing reform. In other words, don't kill the patient just because they're suffering from a tumor.

.Shane. · Mar 30, 2009

GoodGame said:
In other words, don't kill the patient just because they're suffering from a tumor.

ITS NOT A TUMOR

/inevitable

I think where I'm agreeing w/ the author is I would like to see more barriers between the leaders of Wall Street and ready access to govt. at the highest levels. Then again, I'm in the early stages of having read this and am still mulling it over.

LucyDuke · Mar 30, 2009

.Shane. said:
At any rate, there's a lot here. One thing that does bother me who we're turning to the leaders of the same industries that put us here. Mind you I don't think we should hire the local kiln-master, Pro Bowl linebacker, or McDonald's manager to figure out the way out. BUT, I'm sick of seeing the same Wall Street hacks trotted in and out to solve this. Are there no economists or leaders of OTHER industries that might have a new model or approach that can lead us out of this mess?

Who?

And how?

Isn't it likely that everyone with the (allegedly) necessary expertise is already... I dunno how to say, part of the problem? Who can be tapped that would be both qualified and unlike the guys at the helm now? And how can we possibly have confidence in a completely new approach, confidence in any approach, really?

dutchfire · Mar 30, 2009

Over here, political parties get most of their money from members and the government (based on number of votes) instead of companies. Of course, that's hard to regulate, and probably "un-American". It at least removes some of the problems you seem to have on your side of the ocean.

mrt144 · Mar 30, 2009

The lack of will to either shoot down mergers or break up behemoths is part of the problem, but as the article points out: they lack the will because they are getting mad money to get elected from those interests they are supposed to be regulating.

GoodGame · Mar 30, 2009

.Shane. said:
I think where I'm agreeing w/ the author is I would like to see more barriers between the leaders of Wall Street and ready access to govt. at the highest levels.

I think that won't happen, especially if the Executive and Legistlative branches can act on the economy in the name of stimulation/jobs, without a set in stone didactic of how government can interfere in the free market. And on some level, an oligarchical feed-back loop is needed, because lets face it, American society works on money and trade, not just values.

What would help the most is sunshine laws and reasonable cut-offs regarding campaign contributions, including a government published disclosure of such, since the media would then help publicize that for free (and government-published disclosures would at least get free air on the internet). What would probably help also would be term limits on the legislative branch, since those positions probably benefit the most from long term relationships with business.

I think it might help if there was a national economic advisor position that minimized partisan influence in the same way the SCOTUS does, and maybe even a long-term board as such.

JerichoHill · Mar 30, 2009

IMHO, the lax oversight on the part of the lawful regulators contributed more than most folks will ever realize.

It will be very tough to find a system where the governing authorities are not connected to large companies and their executives. Those social groups intermix a lot.

From my perspective, we can change our modeling. Either incorporate chaos-theory or think about "2nd-best maximization". But those are tough to mathematize and program, difficult to explain, and still fringe.

Perhaps another change would be to pull out some regulating authority and push it under the judicial branch, just as the legal system keeps checks on lawmakers, pushing a regulating authority under a quasi-government independent framework could work. These are already out there and DO exist and DO good work, but you won't hear of them, they're not big, or at least, big enough to tackle every problem that pops up.

Oh, and go to a strict public financed election system for Congress, Senate, and President. I can't really stomach saying that as a libertarian and all, but the sheer fiscal waste that we by candidates and PACs is really highlighting the need to go to public financing (This would also ban public advertising by PACs)

.Shane. · Mar 30, 2009

JH, what about the repeal of Glass-Steagall? Was it a bad idea to break down those barriers? Someone had recently posted that (also on Boing Boing, I think) and there were a few people predicting something very similiar to what happened.

JerichoHill · Mar 30, 2009

Shane,

In many ways, the repeal of Glass-Steagall led to and/or exacerbated the problem surrounding oversight. However, keeping Glass-Steagall wouldn't have solved the entire problem either. Basically there were two worlds prior to the repeal of Glass Steagall. (Securities and Traditional Bank). The idea was that one world had an advantage over the other (S > T) However, S had greater risk that T.

I think in hindsight, the repeal harmed more than it helped. The act was in many ways a double-edged sword to begin with. I think that rather than a repeal, we could've changed it a bit, loosened up the T side but also introduced some Reg to the S side. But that would have be a politically impossible compromise

.Shane. · Mar 30, 2009

JerichoHill said:
I think in hindsight, the repeal harmed more than it helped. The act was in many ways a double-edged sword to begin with.

Why? What's the harm? Rather than looking at it as 1 group having advantage over the other group in the same industry, why not look at it as two industries that should be kept separate?

El Koeno · Mar 30, 2009

I think campaign finance isn't really the issue here. As Mise said, they're different at our side of the ocean, and still our banks and our financial system weren't safe from the crisis.

I think the main issue is that regulators have allowed finance to become so complex they were unable to properly regulate in anymore. Now, they had a point in that financial innovation is a good thing, and it has contributed to the increase in wealth we've seen the past decade. However, nobody is denying that there's a risk to this kind of innovation. It's kind of like an innovation like DDT perhaps. Once regulators understood the risks of pesticides they put laws in place. This hasn't stopped the positve effect pesticides have on farm output, and therefore mankind, but has helped to reduce the risks.

JerichoHill · Mar 30, 2009

.Shane. said:
Why? What's the harm? Rather than looking at it as 1 group having advantage over the other group in the same industry, why not look at it as two industries that should be kept separate?

They weren't separate industries in the sense that they did compete against each other. Further, these industries may have been separate in scope in the US, but not so in other locations in the world. That wasn't a problem for GS initially, we hadn't had globalization yet. But it became one.

crabapple · Mar 30, 2009

Totally agree with the article. Until some serious house cleaning is done, the crisis will repeat itself, time and time again, until someone does house cleaning or TOTAL collapse

Frank327 · Mar 30, 2009

There's another article with the same point of reference here.

http://www.rollingstone.com/politics/story/26793903/the_big_takeover/8

One thing I think should change is the power position banks have now. To be able to create money, and to be able to make money out of having money together create a very effective mix.

Another thing is of course having one budget for all campaigns, which assigns the same money to each candidate to make sure there's an even playing field. Also a public funded news station could be a good idea.

"but wouldn't that give government power over the news?"

No, as long as government is forced to fund the news station, and the news station is a public non profit organization not under direct government control, it can be very unbiased. Also, the main thing that should change of course is the mindset of americans. Somehow they need to want to hear what is true, not what corresponds with their opinions.

m4gill4 · Mar 30, 2009

BUT, I'm sick of seeing the same Wall Street hacks trotted in and out to solve this. Are there no economists or leaders of OTHER industries that might have a new model or approach that can lead us out of this mess?

Shane has discovered liberalism!

GoodGame · Mar 30, 2009

Frank327 said:
Another thing is of course having one budget for all campaigns, which assigns the same money to each candidate to make sure there's an even playing field. Also a public funded news station could be a good idea.

I don't think that would work simply because people wouldn't want their tax money going to fund the opposition; Tax write-offs would be used in full to try to avoid this, and people would still complain (there's just too much partisanship). Seed-money for all major parties would be a good idea, and I believe it already is done.

Republicans, for one, are strongly against forced 'bi-partisan representation' on the news. It would be good for a public television outfit to run during election year, to give equal time to the candidates, and even air free commercials. Certifying that as non-partisan would be a bear, such that I doubt it'd get passed.

I think the largest, quickest short term improvement would be had by Legislative branch term limits and campaign sunshine laws.

MagisterCultuum · Mar 30, 2009

I don't like the idea of public financing of campaigns, especially those that rely on giving out money based on how powerful a political party already is. I don't believe any official recognition even of the existence of political parties is a good thing.

I think we should really move to either Ranged Voting or Fractional Ballots for the election of all Federal officials, and that one of these systems should be used by members of congress (still with a secret ballot) to decide who will be on what committee, who will chair said committees, who will be speaker of the house, etc. These should all have 1 year terms, and no incumbents should be able to run (simply being on a committee doesn't count as an incumbent for this purpose).

National Initiatives (which would be called only if enough citizens sign petitions, never called by the legislature as a means of passing off responsibility) with a large enough supermajority should be able to repeal laws/executive orders/judicial doctrines and to remove anyone from an appointed office/call for a reelection for appointed offices.

I would support the expansion of C-SPAN-like media to cover the day to day activities of the government (at all levels), to sponsor debates between candidates, and possibly to free air informational commercials from candidates. This should all be available for free on regular broadcast TV, radio, and the internet. Perhaps it could also be expanded to the print media. The government could mandate that contributing funding towards the non profit that runs these is required for a private media organization to be licensed.

I would require all campaign contributions be anonymous.

luiz · Mar 30, 2009

What caused the crisis, if we really want to talk about root causes, was an option that american consumers made to get massively indebted by buying a bunch of stuff they could not afford, including but not limited to homes. Now that the thing has crashed and burned, instead of taking responsability, many people are crying "oh my daddy government should have stopped me from borrowing and the bank from lending! I am not big enough to make my own decisions! We need more regulation! Huuummmph!"

Of course the crisis was made worse by the interest rates kept artificially low, which encouraged this exagerated borrowing. The government pushing for loans for low income people to buy their own homes didn't help, either.

But hey, nobody has balls to say the truth, which is that americans at large have large degrees of blame. So let's blame the "oligarchy", and derivatives (which are just an instrument that can both be very useful and very destructive, but is absolutely innocent on itself), "deregulation", or "lack of oversight by our daddy".

Bill3000 · Mar 30, 2009

What caused the crisis, if we really want to talk about root causes, was an option that american consumers made to get massively indebted by buying a bunch of stuff they could not afford, including but not limited to homes. Now that the thing has crashed and burned, instead of taking responsability, many people are crying "oh my daddy government should have stopped me from borrowing and the bank from lending! I am not big enough to make my own decisions! We need more regulation! Huuummmph!"

Who were the ones offering the loans again?

Atlantic article about the underlying problem of the economy...

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