Recently, I was invited to speak at a conference of Young Global Leaders of the World Economic Forum. The topic was Capitalism. At this stage in our nation's experience, it seemed useful to ask whether the Government believes in that idea. Given the rising tide of bailouts and untested medicines that the Government (through one branch or another) has been administering at taxpayer expense since the first rescue of Chrysler, it's a question worthy of careful study.
When, in the run-up to Jimmy Carter's campaign to be re-elected in 1980, he sought to avert a Chrysler bankruptcy, Senator William Proxmire, Chairman of the Senate Finance Committee, led comprehensive hearings on the subject, hearings with such substance and depth as to make any reader of them proud of the legislative process. The Chairman was initially opposed to the bailout, but when the hearings concluded, he led the Committee in approving a carefully designed bailout bill. It laid out a path for Chrysler that would lead to Government-enabled solvency. It was purposefully a path so onerous and difficult, so painful to Chrysler and all of its stakeholders, that in the future no private enterprise would seek Government assistance. At least, that was the Finance Committee's plan and its Chairman's hope. That was the lesson the Committee sought to teach private enterprise in the United States.
Alas, it was a lesson never learned, a plan and hope shown in the ensuing years to have been absurdly misplaced as a growing number of private enterprises successfully beat their own path to Government largesse, increasingly a path containing nothing close to the pain inflicted on the Chrysler community. The symbiosis of private enterprise and Government has grown so huge it demands inquiry: Does the Government Still Believe in Capitalism?
To be sure we're on the same page, let's rehearse the definition: Random House Dictionary defines 'capitalism' as 'an economic system in which investment in, and ownership of, the means of production, distribution and exchange of wealth is made and maintained chiefly by private individuals or corporations.'
Political leaders uniformly give lip service to 'capitalism' as being THE bed-rock principle on which our great nation rests. But careful examination of what our leaders have actually done, and are actually doing, when not boasting or fundraising, may lead one to different conclusions. In an effort to provoke discussion and encourage angular thought, I've assembled a few illustrative questions, facts and commentary. Illustrative because there are nearly endless examples to illustrate the point I'm going to make.
1. Is our Central Bank, as currently deployed, consistent with capitalism?
The Fed has been buying close to 75% of the Treasury's annual debt issuance. This incestuous behavior works to keep interest rates far below the true cost of money. It also creates unnatural upward pressure on all assets.
The Fed's mandate is dual: to achieve a stable dollar and a healthy level of employment. It has no mandate to manipulate the stock market to achieve these goals.
Yet here is Chairman Bernanke post QE 2: "stock prices rose and long term interest rates fell when investors began to anticipate the most recent action. ..... Higher stock prices will boost consumer wealth and help increase confidence..."
And, again post QE 3: "the tools we have involve affecting financial asset prices"; "to the extent that consumers feel wealthier, they'll feel more disposed to spend."
Isn't Bernanke deliberately asking the investing public to throw caution to the winds? And doing so despite the fact that, after more than four years of untested medicine, the patient has not recovered?
An obscure branch of the Faust legend furnishes an ancient example of unintended consequences flowing from a bargain with the Devil, in this case being tempted to print paper money notionally backed by gold that had not even been mined. At first happy results ensue across the lands. As more and more money is printed, however, rampant inflation follows, destroying the economy. Is it possible the Bernanke is bargaining with the Devil? What unintended consequences await us from the Fed's unprecedented interventionist policies?
Nassim Taleb, author of The Black Swan, in his new book, Antifragile, observes: "Stifling natural fluctuations masks real problems, causing the explosions to be both delayed and more intense when they do take place. ...And yet our economic policy makers have often aimed for maximum stability, even for eradicating the business cycle ....."
2. Is it consistent with capitalism to permit a handful of mega-banks that are too big to fail, jail or manage (Morgan, Citi, BofA, Well Fargo and Goldman Sachs) not just to survive, but to flourish with Government subsidies and moral hazard yoked in support?
Senator Carl Levin led a nine month probe by a Senate Subcommittee on the so-called JP Morgan Whale Trades. It found the bank's chief investment office used both bank capital and insured deposits in high risk derivatives trading, mismarked its books to hide losses, disregarded red flags of growing risks, manipulated models, dodged OCC oversight and lied about it all to investors, regulators and the public.
On the basis of this excellent, exhaustive hard hitting report, the Subcommittee makes only seven recommendations, all directed to regulators, inviting more regulation aimed at curbing the risks and abuses uncovered. Nothing about breaking down Morgan and the other mega-banks to a size that could not cause systemic risk if failure occurred; nothing about referring findings to Justice for prosecution or the SEC for enforcement; nothing about replacing the miscreants -among them officers and directors; nothing about suspension of its banking license. In short, nothing that matches the 'hard to imagine or believe' behavior by the leaders of what was the most respected bank within this 'too big to fail' oligopoly.
Senator Levin's press release of 3/14/13 captures in stirring metaphor the "father-son" nature of the Government's relationship to the mega-banks:
"When Wall Street plays with fire, American families get burned. It's time to put away the matches."
Could the good Senator be unconsciously speaking of capitalism? Doesn't capitalism need matches to light the fires of creativity in order to succeed greatly? But always with the risk of going down in smoke and ashes.
The "too big to jail" phrase is not only journalistic humor applied to a bank, but designed to highlight Attorney General Eric Holder's statement to the Senate Judiciary Committee that, in essence, some financial institutions are too big to prosecute, because of the damage to the US and world economy that might ensue.
3. Is it consistent with capitalism for the OCC to become the 'silent partner' of JP Morgan's major violations of law?
The Subcommittee report shows that when JP Morgan's chief financial officer told investors on a quarterly earnings conference call that the OCC was fully aware of what Morgan's derivatives traders were doing, he was lying and the OCC knew it. Yet, for almost a year, the OCC neither alerted the public nor demanded that Morgan issue a correction. Does this behavior make the OCC a silent partner of Morgan, participating in a conspiracy of silence? Does it suggest that, perhaps, the big five are wards of the state, or worse, visa versa? After all, doesn't 'moral hazard' mean heads the private stakeholders win, tails the taxpayers lose?
4. Is the Government's role in the Mortgage Market consistent with capitalism?
Despite the devastating failures of Fannie and Freddie in their well understood supporting roles during the mortgage fiasco that caused the country's financial crisis, now, over four years later, the U.S. Government still supports 95% of the country's mortgage market. Why should this be? What's public about private home mortgages?
5. How is Government's intervention in markets to bail out private enterprises and control the economy like the use of antibiotics to rid the body of life-threatening infections?
Penicillin was discovered in time to save many soldiers' lives in WWII. Since then the use of antibiotics to treat infections in humans and animals has escalated to the point of vast over-use having serious adverse consequences. As the use of antibiotics has grown, bacteria have developed immunities to them, reducing their effectiveness, in some cases to the vanishing point. The parallel to Government intervention to save private enterprises and control the economy is strong and may become stronger as the unintended adverse consequences of national economic policy slowly emerge.
6. Finally, do the following statements, drawn from the ancient to the modern, have any relevance to our current situation?
By Edward Gibbon, British historian and MP (1737-1794) in reference to Athens: "In the end, more than freedom, they wanted security. They wanted a comfortable life, and they lost it all -- security, comfort and freedom. When the Athenians finally wanted not to give to society but for society to give to them, when the freedom they wished for most was freedom from responsibility, then Athens ceased to be free and was never free again."
Attributed to Alexander F. Tytler (1747-1813) in reference to democracy: "A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years."
By Thomas Jefferson (in 1821) in reference to farm policy: "When we are told from Washington when to plant and when to reap, we shall soon want for bread."
By Fareed Zakaria, now, in the January/February 2013 issue of Foreign Affairs: "On its current path, the U.S. federal government is turning into, in the journalist Ezra Klein's memorable image, an insurance company with an army."
By David Stockman, in the New York Times of March 31, 2013: "Instead of moderation [proclaimed by Bernanke in 2004], what's at hand is a Great Deformation, arising from a rogue central bank that has abetted the Wall Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity bubble that erodes Main Street living standards through rising food and energy prices -- a form of inflation that the Fed fecklessly disregards in calculating inflation."