Vinoth Ramachandra

Crony Capitalism

Posted on: December 18, 2010

Christmas is here once again. The season for forced jollity at office parties and, of course, the end-of-the-year bank bonuses. Ninety billion dollars has been stashed away by five American banking giants for their prize employees. The big PR problem the bankers face, whether in the US or UK,  is how to transfer this wealth to their tax havens without attracting the outrage of millions of people struggling with unemployment, foreclosures and shrinking social benefits.

The media, with few exceptions, looks the other way. The global frenzy over the Wikileaks affair has distracted us from the more important revelations slowly leaking out of the US Federal Reserve. While I find the official hysteria over Julian Assange quite ridiculous, I don’t think American citizens, let alone the rest of the world, have any automatic “right” of access to American diplomatic cables. In any case, unlike earlier leaks about war crimes in Afghanistan, the new “revelations” have been either low-level gossip or common knowledge. But what should be of concern to all of us is the way governments that proclaim “free markets” and call on citizens to accept “austerity for the good of the country” are hand-in-glove with powerful banking and corporate interests.

Three weeks ago, the US Federal Reserve posted on a public website details of 21,000 transactions from December 2007 through July 2010. The Fed provided roughly $3.3 trillion in liquidity and more than $9 trillion in short-term, low-interest loans not only to giant banks such as Bank of America, Citicorp, Wells Fargo and JPMorgan Chase, but also to companies such as General Electric, Caterpillar and Harley-Davidson. In addition, there were numerous transfers to foreign financial institutions such as Deutsche Bank and Credit Suisse which were implicated in the housing mortgage crisis of 2008.

The details show that the $700 billion Treasury Department bank bailout out signed into law under President George W. Bush in 2008 was only an initial down payment on a secretive “backdoor bailout” of big banks and corporations. This is the phrase used by Senator Bernard Sanders who wrote the measure that forced the disclosures under the financial services reform legislation passed this year by the U.S Congress.  Sanders and his allies forced the release of secret Fed files and persuaded the Government Accountability Office to conduct a top-to-bottom audit of the Fed. [The Fed information can be found at http://www.federalreserve.gov by clicking on “Usage of Federal Reserve Credit and Liquidity Facilities.”]

The Clinton and Bush administrations were well-stocked with former senior bankers from Goldman Sachs. Hank Paulson, the Treasury Secretary who engineered the 2008 bank bailout was himself a former chairman of the bank; so, unsurprisingly, Goldman Sachs was one of the first banks to benefit from the near-pandemonium and scaremongering that the US Treasury initiated to get the deal passed by both houses of Congress. Remember the talk at the time of “putting the military on the streets” and the imminent “collapse of the global economy”?

At the height of the “financial crisis” Philip Stevens, one of the Financial Times’s leading columnists, advocated shooting the bankers. Alongside the bankers he should have lined up a lot of other people – academic economists, politicians, journalists- who encouraged them and sanctioned their antics over the last two decades. And we must not forget thousands of stockholders who couldn’t care less what the banks were doing with their money, and who was bearing the costs of their reckless speculations, as long as their own dividends kept flowing in regularly. Moreover, many of the risks to which financial institutions became exposed bore little or no connection to their basic economic function of providing capital to either needy individuals or businesses.

I have often pointed out that the rich live on the backs of the poor. The net financial flows, within both local economies and the global system, are from the poor to the rich. In Sri Lanka, where I live, the backbone of the economy comprises small farmers, tea plantation workers, textile factory workers, and migrant workers who remit foreign exchange back to the country. A disproportionate number of these are women. The nouveau riche use this foreign exchange to send their children to international schools and foreign universities. In the recent budget, the ruling regime had nothing for the poor except the usual empty promises of “ development”. Taxes for the rich were cut, foreign capital restrictions eased, and members of parliament were given permits to import luxury vehicles. Education and healthcare are starved of funding, resulting in hundreds of rural schools being forced to shut down and state-run hospitals (the only medical services accessible to the poor) regularly run out of basic drugs.

In The Wealth of Nations, Adam Smith (yes, Adam Smith!) warned that any proposal for new laws or regulations in commerce which came from the business community should always be looked at sceptically: “It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”

Bernard Madoff, 72, is serving 150 years in prison because he defrauded rich people. Multiple murderers get far lighter sentences. Those who plunder the wealth of nations, let alone take the lives of the poor, are rarely brought to justice. The moral outrage of the rich is a wonder to behold.

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7 Responses to "Crony Capitalism"

Fantastic piece of writing. I appreciated reading it and sharing it alike.

Often I find that we tend to moralize the problem and point fingers at folks Medoff and others, but there is something systemically wrong that we are all implicated in. IN fact, sometimes moralizing and pointing fingers at one person can serve as a distraction to the systemic issues that is our economic playground. Unless the “powers that be” are challenged and called out for the manipulations that they are, we are heading toward a zero level catastrophe on multiple levels. It’s articles like this that help us put our fingers on the injustice and give us space to think about creative alternatives that are in alignment with the vision of the Kingdom.

Once again Vinoth you hit the nail on the head. By today’s standards here in the U.S.A. Adam Smith would be called a Communist. Bizarre doesn’t begin to describe what we’re experiencing.

Great post Vinoth. One of the factors that has no doubt contributed to the way that rich interests have managed to manipulate key political institutions is the way that they have used language and legislation in such a way that has “mystified” and deified the economy into some unmanageably complex, abstract and providential force. William Cavanaugh, the brilliant Catholic political theologian, has blamed much of the so called “crisis” on the increasingly abstract nature of the modern economy, which is increasingly disconnected from economic production itself and hence the world’s working poor. Those who don’t speak the language, or understand the system (which no one understands fully anyway!) are prevented from being able to challenge corporate power.

Most of us have been blindsided by by rhetoric of economists, politicians and corporate interests. It is telling that in a country like New Zealand, most of our economic advice comes from people in the pay of major banks (generally owned offshore) who completely ignore the way that the so-called “free market” has been engineered through an alliance of corporate and state power.

The free market itself does not exist. In reality, what exists is a market in which the rules of the game have been engineered by an alliance between wealthy political and corporate interests in what often seems more like a globalised form of facism.

“Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power”-Mussolini

Richard above has hit on something for me. I don’t understand what is going on. Vinoth can write what he written above and i instantly am mad. But then i read what is actually on the fed website and i see this

“The emergency liquidity programs that the Federal Reserve set up provided secured and mostly short-term loans. Over time, these programs helped to alleviate the strains and to restore normal functioning in a number of key financial markets, supporting the flow of credit to businesses and households. As financial markets stabilized, the Federal Reserve closed most of these programs. Indeed, many of the programs were intentionally priced to be unattractive to borrowers when markets are functioning normally and, as a result, wound down as market conditions improved. The programmes achieved their intended purposes with no loss to the taxpayer

The Federal Reserve also provided credit to several systemically important financial institutions. These actions were taken to avoid the disorderly failure of these institutions and the potential catastrophic consequences for the U.S. financial system and economy. All extensions of credit were fully secured and are in the process of being fully repaid.”

In my own country, Ireland; we were recently bailed out. In fact we have it seems been bailed out a number of times in the last two years. The true cost i’m not sure we even know yet. At times during this bailout people often echoed one of the journalists Vinoth mentions sentiments that the bankers and politicians who let them do what they did- should be shot. AND YET only this week a new poll suggests that the majority of people here support the bailout and feel relieved.

Vinoth is ( i think ) calling us to be aware of the hypocrisy of the government’s who are in league with big business- on one hand calling for austerity whilst at the same time bailing out business with colossal sums of money and on the other hand hailing the free market whilst at the same time fundamentally altering the rules to allow business to get away with both 1 not paying for their failings and 2 playing to their own greed.

To get back to my point, Richard above says people don’t understand and i agree with him. For all the talk above, the most important sentence people will read in the fed’s words are the ones that says
“These actions were taken to avoid the disorderly failure of these institutions and the potential catastrophic consequences for the U.S. financial system and economy.”

People are willing to let these things happen because they are afraid of the consequences. I don’t really see an alternative. Whilst they are corrupt would anyone want all the banks and companies that Vinoth mentions to disappear? Would that even happen? I was told by a friend who has a friend in AIB ( the biggest Irish Bank) that Ireland was 48 hours away from having no paper money in the bank machines.
I feel that the bailouts where wrong but what would have happened if we hadnt done them???????????????

Thanks for all your comments- everybody!

If it is true that global financial stability hinges on a few giant banking corporations, as the powers-that-be claim, and therefore they need to be “bailed out” in the interests of us all, it reveals something fundamentally wrong with the global financial system. This, however, is not addressed by the IMF or the G-8 governments. It is back to “business-as-usual” where the big players are concerned; and the banking reforms in Wall Street have been minimal.

If corporations cannot compete in the global arena, they should- according to the economic orthodoxy that has been foisted on the rest of the world- be left to die. Giant banks are, effectively, holding the world to ransom: “Either bail us out or you will lose your jobs, saving and pensions.” I agree that governments do have a responsibility to protect peoples’ deposits and pensions. I am not sure it has any other responsibility vis a vis helping the banks.

I don’t know enough about the IMF bail-out of Ireland and what conditions were imposed on those responsible for the crisis in the first place. Bail-outs are justified if they are backed up by conditions such as breaking up giant corporations into smaller units; reducing wage differentials and bonuses; insisting that they stimulate more employment by reducing the interest charged on loans to small businesses, students and so on. When banks receive low-interest loans from the government and recoup them by charging higher interests on the loans they make to their customers, they are enacting the parable of the unjust servant (Matt 18.23ff).

In any case, my post was not against “bail-outs” per se, but about the bias and hypocrisy in the system.

Thank Vinoth. It is incredibly frustrating to read this in light of my weekly interaction with families who need that kind of “liquidity” to overcome unexpected medical bills and other “normal” expenses that are yet overwhelming when on a tight budget. I mean less than $2 per day…the majority of the people on the planet.

Aid given to these folk is called charity, or entitlement, by those who grow rich on or at least believe the lie of the bankers. ( a friend said that the biggest chump in America is a middle class Republican) Yet, if $700,000,000 was spread out to any one section of poor people, the money would soon be distributed throughout that economy. The poor cannot afford to horde. The most right minded bailout would be to give it to the lowest…who will very soon be giving it to the highest.

George Bush Called Trickle down economy Voodoo…at least before being offered the Vice Presidency. Its actually the opposite. Wealth is a steady flow from the have nots to the haves. By war, conquest, slavery or capitalism.

[...] Christmas is here once again. The season for forced jollity at office parties and, of course, the end-of-the-year bank bonuses. Ninety billion dollars has been stashed away by five American banking giants for their prize employees. The big PR problem the bankers face, whether in the US or UK,  is how to transfer this wealth to their tax havens without attracting the outrage of millions of people struggling with unemployment, foreclosures and shri … Read More [...]

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