Political Will for Reform and the Concept of Corporate Communism

Norma Cohen, writing at ft.com, has a lengthy discussion about the lack of political will for financial reform of financial systems. While that sounds like a no brainer, the article is quite good. Read it here.

From Business Week comes an article by Frank Partnoy, entitled "Financial Reform: Lessons from 1929". Prof. Partnoy describes the price paid 80 years ago when financial system reform was delayed until nearly full collapse occurred. Read this article here. (Hat tip to Barry Ritholtz at The Big Picture here).

Both of these articles can be connected by dots to a post by Dylan Ratigan at Zero Hedge, which can be read at Phil's Stock World here. Dylan compares the oligarchy capture of government power to the structure of communism. He writes:

The massive spike in unemployment, the utter destruction of retirement wealth, the collapse in the value of our homes, the worst recession since the Great Depression have all resulted directly from the abdication of proper government.

Even with all that — the only changes that have been made, have been made to prop up and hide the massive flaws on behalf of those who perpetuated them. Still utterly nothing has been done to disclose the flaws in this system, improve it or rebuild it. Only true rules-based capitalism ensures constant adaptation and implementation of the latest and best practices for a given business, as those businesses that don’t adapt fail and those who deploy the latest innovations to their customers benefit, prosper.

If you follow the imbedded link in the last paragraph, it takes you to a Huffington Post article which is a castigation of Timothy Geithner by William Black.

All this prompts me to repeat something I wrote in a comment to John Mauldin's great article on fingers of instability (here). In that article, John describes a scientific experiment which studied how piles of sand collapse when grains are poured in one spot to build a high conical pyramid to the point of instability. I mentally connected that pile of sand to a financial structure that becomes overly concentrated in too few hands. My comment asked and attempted to answer some questions, based on this mental construction.

Why do all the grains of sand have to be added to one point, piling up until a steep, unstable pyramid is formed, leading to collapse? Why can't the sand be added across a broad area, with the base ever expanding. This could lead to a structure that never achieves steep walls.

This is analogous to comparing the financial system structure we have achieved to a broad and diverse structure that never sees the fatal fingers of instability except in a very local way. Interconnectedness may be very productive, but interdependence can produce collapse (domino effects). Maybe we need to find a way to divorce the two.

The fatal flaw of primal capitalism is that it allows the concentration of economic power until it eventually becomes so concentrated that there is nothing left to support it.

The fatal flaw of communism is that it has the lethal concentration of economic power at conception. These thoughts are why Dylan Ratigan's article on corporate communism struck such a harmonious chord with me.

Unregulated capitalism matures into the fatal condition; communism is born with it.

The ideal economic system has yet to be devised. Perhaps it never will be. How can you prevent unsustainable concentration of economic power without removing incentives for the masses to strive for economic advantage?

Reading these three new articles brought a lot of things together in my mind that started with John Mauldin's fingers of instability.

Comments

[Gloppie:]

"How can you prevent unsustainable concentration of economic power without removing incentives for the masses to strive for economic advantage?"

one word: Education

As long as greed is idealized, selfishness will prevail.
>me first< needs to go away, because we know it won't work on global scales. It is bad for the environment and for the arts, and we are starting to see that it is bad for the economy too.

Oct 08 08:41 AM

[ctjaeger:]

"Unregulated capitalism matures into the fatal condition; communism is born with it."

But we haven't had anything like "unregulated capitalism" in the US. The financial sector is one of the most heavily regulated sectors in the economy. The issue is appropriate and enforced/enforcable regulations. Regulatory agencies need to have the ability (and talent) to identify and regulate new risk factors as they enter the economy.

The current debate over regulating OTC derivatives is a good example of politics potentially defeating a seemingly rational regulatory constraint - clearing all derivatives on exchanges. The political will to combat Wall Street and self-interested regulatory bodies simply isn't there (hey, if they do something the Street doesn't like, maybe their campaign donations will decline, gotta get re-elected afterall).

In part, regulations can destabilize the pile of sand, eroding the base, rather than firming the base. Appropriate regulations reducing systemic risk that are enforced can strengthen the base, however, at some point no matter how strong the foundation, the pile of sand will come tumbling down. Regardless of the strength of the foundation, it is a basic law of physics that the structure will degrade and ultimately collapse.

Oct 08 09:34 AM

[David Van K...:]

Interesting article and ideas. I usually turn away from attempts to compare the physical world to markets, because the latter are man-made and depend on psychology. People have agendas, sand particles do not. That's why the study of traffic patterns is hard even for skilled physicists. Drivers make decisions constantly, atomic particles do not.

That said, this particular analogy seems to work. I have nothing to add except this: The risks that accompany over-concentration of economic power at the highest macro levels also exist at each level down the chain, all the way to individual portfolios. Just about every financial "disaster" of the recent past (LTCM, the dot-com bubble, the housing price collapse, the dangers of MBS and similar derivatives) all involved too much concentration of something. Too much leverage shows up a lot in these episodes. Each individual investor should keep these lessons in mind when constructing his or her own portfolio.

Oct 08 09:42 AM

[Leftfield:]

One problem, Gloppie, with education, is that the educated are highly prone to considering themselves elite and construct ridiculous structures which are useful tools for statists and dictatorships. Academics tend towards fashions and unworkable, high-sounding ideas. And, "education" hasn't reduced teen pregnancy.
Principle is needed. The Constitution has been nearly abandoned, yet people looked at the resultant massive growth of government and figured we had a safety net in case of a new Depression. But, that's not how power works; all that ill-gotten power and unprincipled debt and taxpayer-built structure is supporting the leadership, government and crony, who have hijacked it. The high, unstable part of the sandpile.
While there is doubt, as there always is about the best course, there needs to be principle. Big government has also given us lousy, expensive education. We had the best principles of all time underlying our system. The hour is late, the memories of even the nearly debt-free prosperity we once had from it, grow dim.

Oct 08 09:49 AM

[Zmartmoney:]

The people sleep while our leaders are consumed by greed and the lust for power, relegating those few who are awake to watch a macabre dance of lies, collusion, and perfidy. The flight away from the Constitution and towards Socialism is due to the Big Lie that the government is the only one that can take care of you in this big, scary world. That government depends on your dependence. The moment you don't need them, the curtain drops and the hands that pull the strings can be revealed and amputated. The only thing that can stop the descent is for the American people to awaken and step to the polls to replace most of the Congress and the Presidency - every election until the halls are full of fresh faces who haven't learned yet how to jury-rig the system. Term limits are mandatory, and will be the true test of the electorate. While the people are at it, they can eliminate the incredibly magnanimous retirement system that Congress has bestowed upon itself as congratulatory plunder. The circular pathway that is trod through DC is a cesspool of influence peddling and notoriously bad behavior. There are few statesmen, and almost no reward for being one.

Oct 08 11:05 AM

[Tony Petroski:]

John Lounsbury's lament, and perhaps Partnoy's complaint:

"Why do all the grains of sand have to be added to one point, piling up until a steep, unstable pyramid is formed, leading to collapse? Why can't the sand be added across a broad area, with the base ever expanding. This could lead to a structure that never achieves steep walls."

The grains of sand don't have to be added to one point, nor is it necessary to remove "incentives for the masses to strive for economic advantage." Cutting down too-big-to-fail organizations to a size in which they can fail won't interfere with the pursuit of happiness by the "masses," once known as "free people."

The structure you write about exists. It's called the American Way. At the founding of this experiment, or so Lincoln called it, it was understood that concentrations of wealth and power were to be avoided lest they lead to tyranny. Thus a federal system was set up with a government constrained by a written constitution. That constitution specified what the federal government could do and not do. Owning banks, car companies and mortgage lenders wasn't one of the things the government was allowed to do.

It would be a great tragedy if our current difficulties were to be seen as failures of "unbridled" or "primal" capitalism. In fact or troubles stem from incestuous relationships among those who run our government, some who sit even now as chairs of congressional committees, and a cabal of financial manipulators on Wall Street.

Mr. Lounsbury: "The ideal economic system has yet to be devised. Perhaps it never will be."

True, so true. Since experience shows men are corrupted by power and money, the American founders put together a structure that worked well for a long time and one we need to rediscover. But never forget that the biggest monopoly in America is the federal government. And it is in these hands, and through our new Tsars that we are placing our future and giving the power to regulate everything.

Oct 08 11:12 AM

[Howard_T:]

In one of the Civil Engineering courses that we Electrical Engineers were forced to take in college, we were introduced to a table of various materials and the steepest angles at which they could be piled in order to make walls, fills, or the like. Naturally, thin, sandy soil was at the bottom of the list, and clay was near the top. I liken the financial industry to the clay. There is regulation (the compact nature of the clay itself or the planting of vegetation to help stabilize the pile) that allows things to be concentrated more than if there were no regulation at all (sand). The problem comes when the few try get more from the pile than it can support. You can't put more on top (regulation), so you try to spread it out a little further. This is like digging some of the dirt out of the bottom of a mound of clay. It will eventually collapse. Consider those who exploit loopholes in the regulations or take advantage of "sleeping watchdogs" to be those doing the digging at the bottom.

Oct 08 12:56 PM

[nym:]

Willem Buiter blogs.ft.com/maverecon.../ echoes Ratigan's theme with "...turn our financial sector back into something that belongs in and sustains a market economy instead of a form of communism for the rich and well-connected."

Oct 08 01:42 PM

[BRUCE E. W.:]

If this keeps up, John, there going to have to give college credits for following your articles (opps..blogs). The questions you raise are fundamentally profound since they raise "subprimal" doubts about the categorical rationality of rudimentary competition and natural order in cultural terms. Even further, you dare to imply that historical context must be read critically and not simply as associative comparisons. There are certain features about competitive capitalism that we are forbidden to test or question. It is treated by some like a religion and by others as the keys to the backdoor of the bank; and some say its the same guy from different sides of the institution. Let's just suppose that the so-called "rules" of competitive refinement were tested in real time and than followed up with games theory. Competition can not only be powerfully destructive, but it is in fact used for that purpose for those who simply seek power.
Your statement: " The fatal flaw of primal capitalism is that it allows the concentration of economic power until it eventually becomes so concentrated that there is nothing left to support it." This is what I half jokingly refer to the fatal flaw of "subprimal" capitalism. In truth, the fatal flaw of PRIMAL CAPITALISM is that it lends itself to PURE TYRANNY, not concentrated quality as the myth books portray.
I won't go any further since the college credit here is still open enrollment and somewhere along the line someone has to pay.
Das Capital!

Oct 08 03:34 PM

[derryl:]

Re: nym's link

Buiter understands the mechanics of banking and offers some good critiques of current initiatives that are intended to reduce future rusk (i.e. the requirement that banks hold more currency in reserve, as opposed to just holidng as much as they require for normal customer withdrawals of cash). He argues that it is the proper role of central banks to be the liquidity provider of last resort and it is counterproductive to compel banks to "self-insure" in this way.

But I think the main obstacle to rational financial reform is that the oligarchs/corporate communists want to maintain the illusion that banking is a "free enterprise" and should be lightly regulated. This is a false argument. Banks create a nation's money. Bank loan underwriting, and capitalist punishment (bankruptcy) of profligate bankers, is supposed to ensure that only creditworthy borrowers and projects receive loans. This is a socially necessary and economically critical function in a modern credit based economy.

It is governments, not private enterprise, who are constitutionally required to provide their nation with money. It is illegal for governments to 'subcontract' this power to private enterprise then wash their hands of the whole realm of finance. Regulation of money, banking and finance is a core constitutional obligation of government, despite what corporate communists would have us believe to the contrary, and despite what their defacto capture of the political system has enabled them to get away with.

Oct 08 03:35 PM

[BRUCE E. W.:]

One further comment about its (capitalism) comparison to communism as we know it in modern times. Is it possible that two half truths together would ever make one whole truth?

Only in the confidence games.

Perhaps the real question is as to how many half truths are interlinked on these circle graphs we perceive as a single systemic economy; and then boldly label as a single autonomous system? And why we must defend with our first and last breath absolutely unconditionally and without question when that national defense identity starves and strangles our own people tole to never break rank.

Oct 08 03:56 PM

[tjfxh:]

Economic neoliberalism aka free market capitalism tends toward monopoly capitalism because it advantages capitalists who garner profit from ownership of the means of production and financial rents over those who labor for wages. The problem with free market philosophy, which is based on equilibrium models, is that these models assume that pure forces like supply and demand operate freely, assuming that all other things are equal (coterie paribus). But the economy is highly complex, the data are extremely numerous and difficult to collect and process into information without error, and there are forces external to the market, like government (which can be manipulated by buying influence).

The tendency to monopoly capital is countered by strong labor organization. Knowing this, capital does everything in its power to undercut the bargaining power of labor. The result is an imperfect market, favoring capital.

As long as the Free World labors under the illusion that economic neoliberalism is the optimal solution for setting policy, policy will favor the accumulation of capital, with the result that the government (policy-makers, regulators, and overseers) will be captured by capital.

Reagan and Thatcher successfully worked to establish the predominance of economic neoliberalism in policy due to the influence of Hayek. Hayek was reacting to totalitarian socialism, which he equated with Communism on the left and Fascism on the right. Ironically, the totalitarianism he was seeking to avoid through his presuming economic neoliberalism to be a necessary condition for liberal democracy has resulted in the capture of the state by a plutocratic oligarchy. The consequences of this capture portend to be a deep crisis that may threaten the existence of capitalism as we know it unless reforms are adopted to prevent this.

Oct 08 07:13 PM

[tjfxh:]

It is incorrect to call the plutocratic oligarchy that has captured the state "corporate communism." This is the condition of humanity before Marx even thought of communism. The wealthy have always ruled the state. When land was predominant, it was feudalism. In the industrial age it was the owners of capital. This was the condition against which Marx objected, and then his notion of an alternative was hijacked by those who rose up to implement it and subverted their power to enrich themselves.

The problem is that wealth and power always convey influence, and if there are not laws to prevent this from subverting the state — and strong enforcement of those laws — the result will always be the same.

The US is now being seduced by the argument that economic neoliberalism is optimal for setting political policy. This is a false argument that plays into the hands of oligarchs and enables them to capture the state by buying influence.

Unless the people protect themselves from the powerful few, liberal democracy will exist in name only. The US will continue to be a plutocratic oligarchy, run for the advantage of the privileged few.

Oct 08 07:25 PM

[TinyTim:]

John-
A very enjoyable read, and the four articles were excellent. Thank you for bringing up John Mauldin's article, I don't know how I missed it.
The philosophical bent of the discussion demonstrates a larger and longer perspective than most SA articles.

To paraphrase Churchill: capitalism is a terrible system, but it's much better than anything else around.

Oct 08 09:36 PM

[Zmartmoney:]

The "fatal flaw" is that man is inherently evil and will revert to tyrrany at unannounced moments, triggered by events that are particular to that man, or association of men. The rule of law is to subvert and curb that inherent evil so that the group we call society is protected from one individual or sub-group running amok over the rest of us. The challenge is to maintain the quality of law and the even-handedness of enforcement. We hire people to do that. The Congress and the Presidency has been perverted to the point where they ARE running amok over us, as they now presume to be our superiors, and whatever they decide for us is superior to whatever we might even conceive. Thus, we get Nancy Pelosi and Charles Rangel, and other assorted hoodlums masquerading as those loyal agents to whom the quality of law is charged. Turn the Congress. Turn the Presidency. Abolish the notion that they are our rightful rulers, having ascended the mountain to take their rightful place at the right hand of Moses.


On Oct 08 03:34 PM BRUCE E. W. wrote:

> If this keeps up, John, there going to have to give college credits
> for following your articles (opps..blogs). The questions you raise
> are fundamentally profound since they raise "subprimal" doubts about
> the categorical rationality of rudimentary competition and natural
> order in cultural terms. Even further, you dare to imply that historical
> context must be read critically and not simply as associative comparisons.
> There are certain features about competitive capitalism that we are
> forbidden to test or question. It is treated by some like a religion
> and by others as the keys to the backdoor of the bank; and some say
> its the same guy from different sides of the institution. Let's just
> suppose that the so-called "rules" of competitive refinement were
> tested in real time and than followed up with games theory. Competition
> can not only be powerfully destructive, but it is in fact used for
> that purpose for those who simply seek power.
> Your statement: " The fatal flaw of primal capitalism is that it
> allows the concentration of economic power until it eventually becomes
> so concentrated that there is nothing left to support it." This is
> what I half jokingly refer to the fatal flaw of "subprimal" capitalism.
> In truth, the fatal flaw of PRIMAL CAPITALISM is that it lends itself
> to PURE TYRANNY, not concentrated quality as the myth books portray.
>
> I won't go any further since the college credit here is still open
> enrollment and somewhere along the line someone has to pay.
> Das Capital!

Oct 08 09:41 PM

[John Lounsbury:]

To all commenters - - -

I would like to think that there is heaven somewhere for economists. (Yeah, I know most think it can't be the real heaven because economists would be disqualified.) But if there is such a place, I think imagine that Adam Smith, Engel, Marx, Keynes, Hayek, Von Mises, Samuelson and Friedman (you can add as many more names as you like), are all sitting together, watching what is going on and giving each other sympathetic pats on the shoulder.

Thanks for making some very thoughful inputs to this discussion.

Oct 09 12:51 AM

[Steven Hansen:]

John, you are correct about the comment stream being so thoughtful - it was as good of a read as your excellent article.

for me there are few simple truths. any concept taken to its full implementation fails. there cannot be pure capitalism. you cannot obtain full freedom.

our anti-trust laws are a joke now as government's tentacles are interwoven with business. we need a clean slate. a new beginning. a change in direction.....

oh, i forgot - we elected a new president who was going to change things. but just like animal farm, very quickly the oppressed became the oppressor.

Oct 09 02:06 AM

[Charles McK...:]

John, great article and comments. Thanks.

Last night I saw Moore's new movie, Capitalism: A Love Story, and found that many of the points in his film match ideas in your article and comments by others. He clearly depicts the corporate take-over of our government and it's regulators through the revolving door of favors, contributions and employment.

Perhaps one of Moore's best suggestions was his reference to FDR's proposed new bill of rights. Is it possible that for our recovery and future health, our nation needs a new, updated, bill of rights?

Oct 09 12:38 PM

[John Lounsbury:]

Charlie - - -

The most important right that has been usurped in the socialization of financial oligarchy and its successful capture of government is the right of individual opportunity. When a few control most of the capital, the many are reduced to serfdom. I am reminded of Marie Antoinette and the "let them eat cake" quotation. Modifying that to the current situation, it might be said the remark might now be "let them eat crumbs, I'm keeping the cake".

And then, let's extend the thought just one step further to "who cares if the crumbs are green with mold".

The concentration of wealth has reached historic distortion. See seekingalpha.com/insta...
We have only reached this extreme once before in our history. That was 1929, and we all know how that turned out.

Another right that I believe every American has is the right of access to health care. I also think that every American has an individual obligation to pay for his own health care. The disadvantaged may receive public assistance (they do now, in a very inefficient way), but that does not abrogate their obligation for self responsibility.

The health care system we have today is comprised of insiders and outsiders. Those on the inside have health insurance that pays a fraction of the "list price" for drugs and treatments. Those on the outside have no insurance and, if they do obtain any health services or prescriptions, they are usually billed the "sticker price". The outsiders are having their rights trampled by the agents of the insiders.

These types of inequalities arise when our laws and our systems are developed under the guiding hand of lobbies that work to maximize the profits of their special interests. The only way this will be changed is if citizen action takes place to counter these special interests. I hope to support such citizen action. It will not be easy, because too many citizens have had their intellect captured by ideological slogans, much in a way similar to the oligarchy capture of government.

Liberals will never solve this problem; conservatives will never solve this problem. Forget about Democrats and Republicans. Only when citizens move beyond the confining constraints of ideology will progress be made.

I apologize for replying to your excellent comment with such a long rant. I'm sure I will enjoy Michael Moore's efforts, too. But I will not attend expecting him to offer many solutions.

On Oct 09 12:38 PM Charles McKenna wrote:

> John, great article and comments. Thanks.
>
> Last night I saw Moore's new movie, Capitalism: A Love Story, and
> found that many of the points in his film match ideas in your article
> and comments by others. He clearly depicts the corporate take-over
> of our government and it's regulators through the revolving door
> of favors, contributions and employment.
>
> Perhaps one of Moore's best suggestions was his reference to FDR's
> proposed new bill of rights. Is it possible that for our recovery
> and future health, our nation needs a new, updated, bill of rights?

Oct 09 03:52 PM

[Charles McK...:]

John,

Just a couple of additions to your excellent response. You said, "Another right that I believe every American has is the right of access to health care. I also think that every American has an individual obligation to pay for his own health care." I would agree if you add ... access to individually affordable health care, and ... an individual obligation to pay for his insurance, given a system of broadly shared insurance based on ability to pay. Currently, the distribution of wealth and income is, as you pointed our, so out of balance, that a large proportion of our population could be considered 'disadvantaged'. I believe the distribution of income needs to be flattened considerably and the cost of health care reduced and shared in order to create a just and sustainable system.

It seems to me that one of the reasons health care reform is so difficult is that it strikes at the corruption of our economic and political system, thereby threatening the advantage of those individuals and corporations in our society currently enjoying special power and wealth.

Oct 11 12:42 PM