Is the Obama Administration’s Financial System Overhaul Pushing Us Toward State Capitalism?
By Shah Gilani
Contributing Writer
Money Morning
With its regulatory overhaul of the U.S. financial system, the Obama administration has granted the federal government new powers to take over systemically important businesses, but has done so in a way that may well mask a potentially dangerous drift toward American state capitalism.
The administration’s 88-page “white paper,” released last Wednesday (June 17), goes a long way in identifying most of the weak links in the regulatory chain that was supposed to protect America from a financial freefall. But, as always, the devil is in the details.
In 85 of those 88 pages, extensive fixes are put forth in an attempt to create additional financial institution transparency, to bolster consumer protections and to enhance supervisory oversight. But, in fewer than four of those pages, without any detail, the white paper calls for a “regime” to “provide for the ability to stabilize a failing institution by providing loans, purchasing assets from the firm, guaranteeing the liabilities of the firm, or making equity investments in the firm.”
The blind spot in the need to create such a “regime” if it isn’t intentional – is the missed assumption that all of the reforms supposed to constitute “A New Foundation” will still not be enough to arrest the failure of systemically important firms. The black spot on the administration and legislators’ records may ultimately be their complicity in not breaking up so-called “too-big-to-fail” institutions, Instead, the current and past administrations and elected officials coddled these firms and allowed them to continue to grow in both size and influence, to the point that they became large enough and important enough – as well as frail enough – to end up as assets in an American-style, taxpayer-funded sovereign wealth fund.
A Threat to the Economy’s Free-Market Foundation
Democratic capitalism – the foundation of our economic system – has two inherent characteristics that, if left unimpeded by government interference, result in almost-certain economic success. The first is the ideal of free markets and the other is the notion, popularized by Austrian economist Joseph Schumpeter, of creative destruction. Building from the foundation is a straightforward process: Free markets will themselves engender creative destruction, maximizing the ability of innovative entrepreneurs to destroy the hegemony of existing companies by creating and delivering new and better products and services to a free-to-choose public. Government coddling or the takeover of failing institutions destroys both of these foundational principles.
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Keeping our eyes on the prize necessitates not impeding free markets or the process of creative destruction. And while prudent regulation is absolutely necessary to check and arrest the ever-present bad seeds from choking our field of dreams, allowing the pendulum to swing too far in the direction of government control subjects the democratic capitalist model to attack by socialist influences. And that assault is already underway.
In the face of financial devastation in America and throughout the world, government intervention has been a welcome intrusion meant to lessen the pain of lost savings, foreclosed homes, violated security, broken dreams and the horrendous fear that many of us will never rise out of the hole created by the implosion of trusted systems we rely upon for our way of life.
The danger now is that welcoming the seeming suave of government intervention may embolden some misguided politicians and the vested-interest big-government/big-money crowd to permanently corrupt our once free markets. Government intervention has the potential of destroying the creative processes by undermining entrepreneurs and small businesses to protect an emerging and quickly growing portfolio of government-controlled assets.
If it’s not intentional, why does the administration’s regulatory reform package lead us directly down this path? By leaving in place discredited supervisory bodies and the failed regime of ineffective regulatory officers and soldiers, does the assured future failure of protected and coddled firms signal a policy paradigm shift towards more government intervention, control and ownership of giant, systemically important firms? Are we headed towards a more socialist economic model?
I brought these concerns to Bill Singer of BrokeAnd Broker.com, a partner at powerhouse law firm Stark & Stark, a veteran regulatory lawyer, staunch advocate for the rights of smaller broker-dealer firms, registered persons and defrauded investors, and a regular commentator on television and Forbes.com panelist.
“Look, I’d love to rail against creeping socialism and state capitalism, and you may well be right – that may be the sad legacy,” Singer said. “While it would be expedient to say that I don’t like it (and, frankly, I truly don’t), I like the concept that someone, somewhere has a cord to pull in the event of an emergency – the problem is whether there is anything at the end of that line when it’s pulled, or whether it merely sets off a series of contingency steps that will only reach some final stage long after the harm is done.”
When Too-Big-To-Fail Becomes Too-Big-To-Succeed
Whether it is an intentional shift towards a more socialist economic model, or the drift from the fallout of well-intended government assistance to save jobs, firms or industries, there’s an easier, more familiar and well-proven path that should be cleared and undertaken. Start by looking backwards. If too-big-to-fail firms constitute systemic threats, don’t allow firms to get too big. It really is that simple. There is no need and no place for socialist tendencies in this country if we already know that free markets create a level playing field for all willing participants and then take steps to make sure that they are not crowed out by vested interests that are backed and protected by the government.
Regulatory reforms must ensure that free markets remain free. Part of what’s necessary is to reform the tendencies of firms to overdo the concept of economies of scale. Bigger isn’t always better if it crowds out the processes of creative destruction, the drain in the tub that can overflow and undermine the floor and foundation of democratic capitalism.
It was big banks, big super-regional banks, big investment banks and big mortgage originators that deposited us into the economic sinkhole in which we’re presently mired. Community banks and small loan originators didn’t conceive of the weapons of mass destruction, but they were forced to compete with the big brothers of business by engaging in many of the same practices and investments as a way to remain competitive or be destroyed by the sprawl of bigger, bolder, and badder brethren. Why not disallow firms to get so big they swallow or destroy all competition?
To those that argue that larger and better-capitalized foreign firms will command the high ground, I say nonsense. If we want to compete with outsized international firms, we already have a mechanism to do that. For example, banks already syndicate large loans. By having even more banks participate in syndicated loans, it spreads the credit risk across a wider array of institutions. And maybe if our automotive industry hadn’t been allowed to get so large and cumbersome, we’d have more auto firms offering more innovative products and supporting a more robust industry of manufacturers, dealers and suppliers.
There’s a Way, But is There the Will?
Of course, without being overly protectionist, prudent legislation and regulation could easily control the sprawl of overly ambitious monster foreign interests. As politicians look at the power and potential of sovereign wealth funds, there may well be an inclination to compete with them by facilitating America’s own version of such a fund. Without enunciated exit plans from the asset control and ownership now enjoyed by the U.S. government, we’re going to move in that direction. A U.S. sovereign wealth fund can carry another name – state capitalism.
By keeping the old guard on duty and only giving them new binoculars, we may well see the next set of failures on the horizon – but will be powerless to stop them. Whether intended or unintended, the result will be the destruction of free markets and entrepreneurship.
We would do well to express our outrage at the prospects of such an outcome long before the debate goes behind closed doors and we end up with an oligopoly run by a cadre of self-serving officers.
Or, as best put by Singer, the veteran regulatory attorney: “Unless we are prepared to clean house – to purge ourselves of the majority of politicians now in power and to substantively overhaul the boards of directors of most public companies into meaningful, hands-on overseers, then we’re just deluding ourselves,” he said. “This isn’t merely a battle to re-start American capitalism; it is a battle for the heart and soul of our way of life. While it would be popular to suggest that we still have a fighting chance, I think we also need to wonder whether we have the political will to implement the wholesale changes that are necessary.”
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News and Related Story Links:
- Money Morning News Analysis:
Obama’s Financial System Overhaul Would Give the Fed Broad Powers Over Wall Street. - Money Morning News Analysis:
Wall Street vs. Main Street: The Regulatory Battle Begins Tomorrow. - Wikipedia:
U.S. Too Big to Fail Policy. - Money Morning Economic Forecasting Series (2008):
Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the “Next Wall Street”. - BusinessDictionary.com:
Free Markets. - Wikipedia:
Joseph Schumpeter. - UCSB.edu:
Joseph Schumpter/Creative Destruction. - Wikipedia:
Socialist Economic Model. - RRBDLAW.com:
Bill Singer Bio. - Economist.com:
Economies of Scale.
Comment by Mike Olivier on 26 June 2009:
The USA, with its myriad, often ineffective, regulations was already on its way there. This is just another step in that direction. Most of the rest of the world lives with one form of this or another. It can be good or bad – the USA needs to stop pretending to be such a free market.
Mike Olvier
South Africa
Comment by Don Rizzo on 26 June 2009:
I think your article is right on target. What can John Q Public do to affect this horrible trend toward socialism?
Comment by Hard Choices on 26 June 2009:
Socialism was been cooked a long time ago, probably since ancient times, but in contemporary times the pivotal point was the 1st and 2nd world wars, certainly the second world war when socialist democrats (FDR) and communist Russia (Stalin) start making deals below the table together with Churchill. When they won the war it meant that socialism communism won which lead to a world wide infestation of socialists trends around the world and thats where we stand right now and it wil probably last for many centuries untill new leadeship will guide the world away from those political driven and exploited nany state ideologies. And as usual it won’t be by choice because we are the good guys it will be by force like anything else in history.
Comment by A Treutler on 26 June 2009:
I doubt it but if so, whose fault do you think it is? Could it be the reckless philosophy of the last eight years of borrow and spend? A philosophy of destroying surplusses and turning our world into a huge debt trap for the benefit of a few? That spells fascism; that spells Bush, not Obama. Let’s be real. As an aside, how “free market” is a system with a committee that meets in seccret to set interest rates?
Comment by KCB Gupta on 26 June 2009:
What is the way out for Obama or US Government when the Financial Giants took the country to such a disastrous state of affairs? Even the American public is to be blamed for not being prudent or money smart. In transition socialism is not bad and may make the American Institutions and public realise their follies. Let us pray US economy and ultimately the world economy will finally appreciate the benefits of Open Market economy and the ills of Socialistic governance of a nation’s economy or administration – KCB Gupta, Chennai, India.
Comment by Sam Port on 26 June 2009:
Regarding the politics of the DOE ATVM Loan awards:
Ford paid over $14M to elected officials and consultants in order to get the loan. Ford paid the third largest amount and Ford got the third largest loan. This is disclosed in public records searches and lobby filings just revealed. 21 elected officials had direct benefit from the deal.
Nissan paid over $10M to elected officials and consultants in order to get the loan. Nissan paid the third largest amount and Nissan got the third largest loan. This is disclosed in public records searches and lobby filings just revealed. The law and public statements by elected officials state that the money was to increase American competitiveness for America car companies yet the money was given to a Japanese company who will send all of the profits back to Japan. 7 elected officials had direct benefit from the deal.
Tesla paid over $100,000.00 to elected officials and consultants in order to get the loan. Tesla paid the third largest amount and Tesla got the third largest loan. This is disclosed in public records searches and lobby filings just revealed. Tesla’s filings show that their business model is unsustainable compared to competitors, that they were 200% off on the BOM of their car, that all of their first funding was wasted so they have to pay back twice as much to investors as competing companies and that their technology is so old, it all needs to be redone yet they still got money. 18 elected officials had direct benefit from the deal. Tesla did not even read the rules for the loan and planned to build a building when the NEPA rules make that option impossible so they had to restart the process, which is supposed to put one into a new cycle yet they were kept in the previous cycle and put ahead of Fisker, Bright and others who had applied earlier than Tesla.
The ATVM program was created by Ford, GM & Chrysler lobbyists to pad their company’s pockets and those three had pre-hardwired the entire $25B for their own pockets but something happened in the process when Senator Bingaman added a few key lines that opened the door for OTHERS to apply to build green technology and required that those who get the money were “financially sustainable” businesses. Back when the ATVM was authored to save Detroit, it was fully known that Detroit was going to go bankrupt. Ford had the same problems as GM and Chrysler but they went around the world getting bailout money instead of going first to US funds. As law required public exposure of the bankruptcy, Bingaman’s brilliant plan to finally create a green transportation industry was revealed. The very people that had stopped green cars for over 100 years suddenly became the first people to, accidently, cause them to happen but now others could do it too. Once Detroit realized this, they tried to hijack the whole ATVM program with a takeback at the end of 2008 but that effort was defeated by a close late night vote. Now that it was out there, Detroit lobbyists and influencers fought to get the review of applicants delayed for as long as possible because they realized that, in a recession, most of the smaller competing interests could be forced to go out of business if they could just be kept away from the money for long enough. Major American TARP banks have said that the standard commercial loan process that each of these 26 applicants (not hundreds of applicants- There were 26 applicants in the round) should take 4 weeks at the longest and 3 weeks nominally. It seems clear that the loans were delayed due to political agendas and not process issues.
Bright Automotive had applied on time, ahead of the others, turned in low overhead numbers and a great path too profit but they were virtually ignored while intensive meetings were conducted with Nissan, Ford and Tesla because those parties paid for it. The law says that this, and the purchasing of favors, gave those parties an unfair business advantage using taxpayer dollars, over Bright. A case Bright would easily win if they choose to run with it.
Clearly, it isn’t over yet. Stay tuned for the Senate, Congressional, Ethics Committee and media reviews of this one. Watch for the charts connecting who-to-who. (It is OK to re-post this)
Comment by Al on 26 June 2009:
Being of an older generation, I can look back and remember when as a younger business owner I was forced to accept the creep of “Big Brother” policies bought forth by an infant socialist minded government. It was wrong even then to simply accept the mandatory “new rules”.
We have been progressively and systematically and wrongly led to this very moment in time. We have been led to believe that we are a “nation of laws” and accordingly we are unwilling to violate the rules which govern us.
Unfortunately for us, while we worked and paid our taxes and lived a “wonderful and free life”, we placed too much trust in the “lawmakers” as they progressively “messed up” the Republic and its Constitution.
As Mr. Galani states it would seem as though we need to do battle in order to preserve the very heart and soul of our way
of life. Try that one after we have lost the protection of the Second Amendment.
I certainly hope that enough good and talented people immediately come forward and legally stop this Hitler type Blitzkreig party that is now very successfully dismantling the government ot these seemingly inattentive [as I once was] United States of America.
Comment by L. Taylor on 26 June 2009:
It may be too late to do anything about the current state of affairs in the US. Most people don’t even realize what’s really happening under their noses! Americans need to follow the money and realize where the head of the dragon truly is. Tax-cuts, etc, aren’t going to do squat if the central bank keeps us in perpetual debt. Its a scam that has been going on since 1913 and it’s the very heart of our economic problems. Until we get away from central banking (Fed. Res.) there is nothing we can do to really affect change. Since Obama and the majority of powerful people all belong to the same club (the CFR) we won’t see daylight for a long, long time. If ever. I really miss America. And I really dislike the bastards that are killing it.
Comment by Joachim Mueller on 26 June 2009:
Excellent article!
Though I want governments to watch over business activities I do not want government to run businesses. That would only constitute a conflict of interest and worsen already rampant cronyism.
Mr. Schumpeter is a theorist. That may be a good thing but theories do not always apply. The main problem is that there is no free market. Even if the government does not interfere – the competition will create a dirty side effect: Companies want to secure there business and therefor try to monopolise their markets. The dumbest thing in recent history is digital TV. Europe promoted digital TV fairly early when the US companies wanted to still cash in on their old stuff. Then the US government woke up and instead allowing regular competition a new US system was cooked up to give companies a moat. Is that a free market economy that is touted all the time by brain-damaged senators?
The problem in this country is that everything is seen as an opportunity to “make” money. There is little thought about creating a better society. As far as that goes we still live in the stone age.
Comment by Milan on 26 June 2009:
State capitalism – how is it even possible that seemingly inteligent people even would use such a term. This could be used only by what one would call INTELIGENT MORONS, just like Karl Marx. The history of last century already proved beyond reasonable doubt that if goverment get in any shape or form involved in the supposedly free markets/ business in real terms it is nothing less than raving socialism or its next stage fascism (that is a present reality of USA/Canada), and of course the final stage the communism (that is where we are heading under the dear leader chairman Obama). In that moment of gov. intervention the free market seize to be free. Gov. does not create, gov. very rarely can maintain for a short period of time. Inevitably gov. leads to destruction (California? Anybody?) if left unchecked by uneducated, brain lazy or ignorant voters. The irony for me is, I lived this ones already (Communist Czechoslovakia). Here we go again.
Comment by Scott S Powell on 26 June 2009:
Mr. Gilani,
Your analysis is correct, but your choice of descriptive terms is weak. State capitalism? Really? If your purpose is wake people up, come right out with it man. Why not express this insane government overreach with terms that will get people off their derriers. A concerted push towards socialism or fascism might be more effective (and probably more accurate). Does the emperor really have any clothes on? We have a chief executive/commander in chief who came out the activist trenches of a corrupt political machine in Chicago, whose longest held professional position was community organizer for ACORN. He never ran a business with bottom line discipline or met a payroll. Ditto for Treasury Secretary Geithner.
The attempt to radically restructure the US economy by the Obama administration in the midst of the worst depression since the 1930s reflects only two possibilities: 1) extremely bad judgment because it risks the economic welfare of an already weakened people of an entire nation; or 2) an opportunistic decision to take advantage of and exacerbate the current crisis to engineer a power grab whose end game is a socialist outcome. The most corrupt governments in the world are all socialist. Why would we want to take one step in that direction, when we have a constitution that has served us so well? The American people neet to wake up to the wolf in sheep’s clothing. The current health care bill, the restructuring of the automobile and financial services industry are all a trojan horse for more government control (and ultimately more corruption).
Scott S Powell
Comment by Morris Hancock on 27 June 2009:
I find your articles interesting and informative. Thank you
for explanations, insight and news beyond the daily gush of
sawdust porridge we get from the mainstream media.
Today I am startled and a little amused to find an error like
the following:
“The danger now is that welcoming the seeming
suave of government intervention may embolden
some misguided politicians and the vested-interest
big-government/big-money crowd to permanently
corrupt our once free markets.”
I suspect Shah Gilani intended to say “salve,” though I must
admit the definition of suave does play a part in selling the
programs which would not be so easily accepted if not sold by “smoothly gracious or polite; polished; blandly ingratiating;
urbane” explanations of the latest dire need.
Reminds me, someone said, “If you think our problems are
bad, wait till you see our solutions.”
The unintended wry humor does to some extent salve the grammatical bruise.
Respectfully,
Morris Hancock
Arizona
Comment by R Kuch on 27 June 2009:
John Q Public first needs the will to do something besides rant, rail, wring his hands in distress, and ask, “But what can I doooo about it?” and expect the government to do something.
That will require some brain strain, attention span, and persistence to comprehend the problem and become knowledgeably informed, stay informed, find and get actively involved with others who are willing to do the same … and vote.
The first wave of politicians to be voted out of office for irrational adherence to party agenda will be a strong message to those remaining, that John Q Public is back.
Comment by leo maduro on 29 June 2009:
I really do not understand why it would be such a big deal to have a socialist threat hidden in what government is aiming at.
It was a pseudo-socialist concept that was implemented under the very noses of the biggest capitalist money scrapers – giving mortgages to people who do not have the financial solvency to back it up – and because of well understood capitalist greed nobody ever asked what kind of socialist madness this was! And rightfully so, because everybody was only thinking of the money they were to make on those crazy financial products – securities, what a nice name for such a stupid thing – and now that this madness came down everybody seems worried about that government that had to come out and save their playground. I could live with straight forward capitalism, but not with this kind of madness of those that want all the freedom of the world, but no accountability. Meanwhile, can’t you guys see that Europe and China are doing a far better job finding a balance in between the swings left and right of economic systems?
It pays off to have a look across the border once in a while…
Leo Maduro
Aruba
Comment by Peter K. Theodorakakos PE on 14 July 2009:
The US has been a Socialist country for the longest time.
Welfare, Food Stamps, Medicare, Medicaid, Social Security, Farm subsidies (including tobacco), apportioning mineral rights to companies rather the land owners, grants, loans for veterans, protections for minorities, subsidizing the defense of NATO countries and Korea’s Japans’ etc.
Any talk about losing capitalism is absolute nonsence.
We never had capitalism. Just a goverment willing to partake in the fleecing of the land, people, one’s savings etc.
Now that the *** has hit the fan, the illusion of separating the goverment from its partners-in-crime is beginning. Who is afraid of State Capitalism? Not I.
I wish Communist China was running our economy. You would have had the Wall Street Barons and some goverment officials on death row, not negotiating bonuses for showing up at work.
Imagine having budget surpluses and jobs.
Socialism mixed with high end corruption does not work.
That we have proved. For anyone who thinks too loudly that a goverment run business cannot succeed, look to Toyota. Some of you are driving the very thing you pretend to be afraid of. A state owned automaker’s product. If you do not like it, you should have bought American products while they were privately held. Now you are paying for it and still have no car on the driveway. The propaganda about Obama and state capitalism is empty and tired. Obama is not the cause of this disaster. Nor is he the savior of America to be sure. Print more money, destroy the dollar and start again with no deficits and a new tax code, powerful regulations and no lobby influence. Then we can succeed whether we are capitalists or any other form.
Comment by Hong Nhung on 25 July 2009:
Obama said that he liked Lincoln, but eventually his administration is supporting Wall Street. Obama must have known the outcome that super-regional banks will benefit in $700 billion package, but he let it happen. Is he a product of state capitalism? Did he lie? I used to admire Mr. Obama.