Saturday, January 3, 2015


Political economist Robert Gilpin (and others) has long asserted that those on the left see a world where individual capitalists are rational, but the capitalist system as a whole is irrational. The reasons why are varied and, at times, complex. 

At the risk of over generalizing, the primary argument is that as market players become bigger and more entrenched their investment decisions (or "incentives") become distorted while business downturns in the economy (recessions & depressions) become increasingly severe. The energy and creativity of entrepreneurs who built economic empires are eventually superseded by entrenched market players who are rigid and manipulative. 

As economist Joseph Schumpeter might have put it, the people who built monopolies are replaced by people more interested in playing monopoly. 

These market players are driven by the search for easy profits and power, at any cost. If this means finding ways to guarantee their profits while the entire system is put at risk, well then, that's a problem someone else will have to deal with. 

As a point of reference, if you're thinking of 2008 Wall Street/Big Banks vs. Silicon Valley (and the rest of us), you're spot on. Here individual market players in the financial sector were acting "rational" regardless of how it impacted everyone else. The entire system was almost brought down in the process. 

Unfortunately, we're getting ready to do it again.

If you understand how someones selfishness can put others around them in harms way then you probably have an intuitive sense why the cromnibus spending bill that was passed into law by Congress this past December (2014) is so dangerous. The logic surrounding the bill sets us up to repeat the "I got mine, you're on your own" mentality that brought us the 2008 market crash.  

The biggest problem with the cromnibus bill can be found in the part written primarily by Citigroup. It allows our nation's largest banks to use depositors' money to gamble in the same derivative markets that brought us the 2008 market collapse.

Yeah, you read that correctly. The banks get to do it all over, as if 2008 never happened.

The part of the bill that gives the banks the green light to go nuts again was actually written last year. It's been brewing for over a year. The goal was to gut the post-2008 Dodd-Frank legislation that protected you and me from banks when they make reckless or stupid "investment" decisions.

The cromnibus bill achieved that goal by eliminating the provision in Dodd-Frank that kept our nation's biggest banks from gambling recklessly with our money. If you're thinking that everything will be OK because the banks learned their lesson from 2008, think again. Their derivative bets, which brought down the house in 2008, are larger today than before the crash. Thanks to a U.S. Congress full of Wall Street sycophants, the banks are set to make record profits all over again.

The financial pirates are now back in the saddle (as it were).

Making matters worse is that after shoving at least $4 trillion in bailout dollars into our financial sector - through the Federal Reserves Quantitative Easing (QE) programs - the financial sector was still able to get trillions more in the form of financial guarantees for the market bets they are currently making. Jefferey Lacker, the Federal Reserve Chair of Richmond, was so worried about this that he publicly expressed his concern over the $14 trillion that automatically becomes available to America's biggest financial institutions when the next market collapse happens.

Yeah, that's right, there will be no discussion in Congress the next time we have a market melt down. While you were asleep the bankers worked the next bailout, worth multiple trillions of dollars, into the system. This was good for the bankers, but it's clearly bad for you and me.

This, my friends, is how someone can argue that individual capitalists doing the rational thing (for themselves) can make the system as a whole irrational (for the rest of us).

Comic: Stephanie McMillan / Minimum Security
For those of you keeping score at home, this is what we have.

1. TAKE OUR MONEY, PLEASE: Because of the cromnibus bill, our nation's largest banks get to gamble with FDIC-insured money that you and I deposit in our commercial banks. Nice.  
2. GUARANTEE MY BETS TOO: In spite of already forking over more than $4 trillion as part of our on-going bailout of Wall Street and the Too Big to Fail Banks (in schemes like this), we're all on the hook for another $14 trillion when the next market collapse happens

Whatever we decide to call the next bailout - my suggestion is QE Eternity - it all adds up to more than $18 trillion in bets that you and I get to backstop (as a point of comparison, if we're fortunate the entire U.S. economy might have produced about $18 trillion in goods in services in 2014).

With wages stagnating, wealth concentrating in the hands of the 1%, increased debt loads, and job insecurity one thing is clear: People are working harder and harder but getting less in return.

Yet, thanks to favorable legislation and generous tax breaks, Wall Street and our TBTF banks are doing just great.

Today, Wall Street and our TBTF banks are writing their legislative tickets, getting trillion dollar market guarantees, and putting the rest of us on the financial hook for their market mistakes. In the process we are now allowing a small group of people who have little regard for anyone except themselves - which is rational in a market setting, right? - to put our larger economic and political institutions in jeopardy.

According to Forbes, by enabling banks to use the insured deposits of ordinary depositors to once again gamble in derivative markets "the big,bad banks are back." Money Morning's Shah Gilani took a look at the latest gift for our largest banks and sees a "no-lose" trading scenario for the biggest market players. Heads they win, tails we lose.

Representative Alan Grayson (R-Fl) goes a step further, and sees a nation taking a big step towards fulfilling "capitalism's death wish." Think about it. Who's going to argue that the system needs to be saved after the next bank induced market collapse?

While the individual capitalist might disagree with Rep. Grayson's assertion, the market busting legislative gifts we are handing our nation's largest banks are poison pills that the rest of us will one day have to swallow.

In this light, Rep. Grayson is only stating the obvious.

- Mark 

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