Patterson: Crony capitalism an impediment to the free market - East Valley Tribune: East Valley Voices

Patterson: Crony capitalism an impediment to the free market

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East Valley resident Tom Patterson (pattersontomc@cox.net) is a retired physician and former state senator.

Posted: Saturday, June 14, 2014 11:00 am

Crony capitalism occurs when government and the private sector scratch each other’s back. But that isn’t capitalism at all — rather its opposite.

Unfortunately, many often confuse the two and blame capitalism for the sins of crony capitalism. In a capitalist system, success depends upon your ability to efficiently anticipate and meet the needs of others so that they willingly pay you. In crony capitalism, success comes from comes from having the right connections in government.

So while retirees can no longer rely on CDs to produce a stable source of retirement income, Wall Street banks that have failed repeatedly still pay even junior executives multimillion dollar salaries and lavish bonuses. That’s all about crony capitalism.

Crony capitalism is popular with politicians of both parties and the faux capitalists who are the beneficiaries of these high-end welfare schemes. Take the Export-Import Bank, created in 1934 expressly to provide taxpayer-backed loans and other benefits to certain favored companies involved in international trade.

The bank’s reauthorization is up now before Congress, along with a $20 billion increase in their lending cap to $260 billion. The US Chamber of Commerce is all for it, along with Boeing, General Electric and Caterpillar among the favorite few. After all, they reason, the Ex-Im does deals that private lenders turn down.

But financing for international trade is readily available in private markets. If it’s more expensive there then through Ex-Im, that’s because private lenders have to accurately price for risk. Why should Ex-Im put taxpayer money in more risky deals than private lenders are willing to take on? Ex-Im’s own stress test showed they could be wiped out in a crisis. Kind of reminds you of Fannie Mae, doesn’t it?

But it’s hard to beat Goldman Sachs’ record of gorging on the fruits of crony capitalism. Ask yourself, how did Goldman become one of the worlds largest, most successful investment banks?

Superior customer service isn’t the answer. In fact, Goldman has a long history of client abuse. In 2010, the bank paid a $550 million fine in a case alleging they had sold securities to customers without informing them that Goldman would profit if the securities lost value.

In 2012, a retired executive admitted that Goldman’s view of clients was “purely how we can make the most money out of them”. The Financial Crisis Inquiry Commission noted that Goldman apparently “targeted less sophisticated customers” to buy their worthless subprime derivatives. Nice.

Nor has Goldman prospered by making consistently astute financial moves. They were among the geniuses who devised the plan to “bundle” subprime mortgages of dubious value and sell them as legitimate investments. True, the mountain of toxic debt in the system was the product of federal government demands that banks forsake traditional underwriting standards for home mortgages, but Goldman’s (and others) plan to profit from the mess was pure skullduggery.

When the scheme collapsed, the shockwaves threatened to bankrupt Goldman and destabilize the entire financial system. This was where friends in high places came in handy. Goldman happens to have a long list of present and former execs with sterling political connections like Robert Rubin, Larry Summers, Jon Corzine and others.

So the Fed decided that, of all the solutions available, the best was to throw hundreds of billions of dollars at some of the wealthiest people in our society — investment bankers. Goldman got a $10 billion direct bailout, $12 billion more in a pass-through from AIG, $28 billion in low interest loans from the Federal Deposit Insurance Corp. and billions more in low-cost Federal Reserve loans. And more.

Lloyd Blankfein, the fearless free marketer who is Goldman’s chairman, has been solid about the payback. He vigorously supported Obama’s 2008 and 2012 campaigns and plans to support Hillary in 2016. He pitches in on Obama initiatives outside the banking sphere, like gay marriage. He recently urged Congress to end the government “shutdown” and raise the debt ceiling. None of this crabby criticism from Mr. Blankfein.

Crony capitalism is a cancer on free markets. It makes the rest of us poorer and eats at our morale. We have to call out our leaders to stop it.

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