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Capitalism and Regulation Are Not Mutually Exclusive

May 12th, 2011 in News by
John Boehner NY Economic Club

House Speaker John Boehner speaking in New York

Osama bin Laden’s body has barely come to rest on the ocean floor and the Republicans are back in attack mode against the Obama administration. Speaker of the House John Boehner is taking his spending-cut crusade on parade again in the run-up to the vote to raise the nation’s debt ceiling. In doing so the Ohio Republican is not only acquiescing to the clamorous Tea Party faction of the GOP but to the special interests that define their politics.

The debt ceiling debate is the ultimate diversion from the more genuine debate that should be taking place in Congress. This is not to say it is without merit. But like so many political disputes, our politicians are intent on examining the symptoms of a crisis instead of deconstructing the root causes. The fact is our enormous national debt is a result of fighting two costly, protracted wars abroad and bailing out hooligans on Wall Street who engineered the greatest heist in American history. The problem is the GOP wants to fix everything else they deem to be wrong with the system without addressing these two key components of our indebtedness. 

Boehner and company are continuing the charade begun when Ronald Reagan was king and Alan Greenspan was God. Deregulation became the mantra of free market capitalists who view all government intervention into the markets as a complete affront to our democratic principles, as though the two are somehow connected. It sounded sexy and even seemed to be working for a while until our speculative chickens came home to roost and laid rotten eggs in all of our coops.

In a speech earlier this week to the Economic Club of New York, Boehner returned to the key conservative talking points, excoriating Washington for pandering to banks that are too big to fail without addressing the deregulatory fever in the Beltway that created this situation. He criticizes instead the government’s bailout response, saying that our “debt mostly borrowed from foreign investors caused a further erosion in the economic confidence of America and increased uncertainty for millions of private sector job creators.” If you asked these so-called job creators why they aren’t adding more people to the payroll or taking on more capital projects, I highly doubt the resounding answer would be America’s debt. Under President Reagan our debt skyrocketed but these same job creators doubled-down and invested in America, making the logical question: Why not now? Boehner went on to claim that the “massive borrowing and spending by the Treasury Department crowded out private investment by American business of all sizes.” That’s funny. I could have sworn that by keeping interest rates at practically zero, business owners would have been encouraged to borrow and invest in their companies with alacrity. 

This is where the GOP message gets into funky territory. You would be hard-pressed to find an economist who would deny that pumping bailout funds through the financial sector prevented a total collapse of our economic system. Everyone won in the short run. But because Congress was too cowardly to fix the structural regulatory issues in the banking industry, the big winner overall was Wall Street. The bailout allowed the banks to partake in riskless arbitrage (borrowing money at no cost and investing it in guaranteed government bonds for example) and bypass the private sector and individuals in desperate need of lending support. It’s one of the primary reasons the Dow Jones Industrial Average continues to rise despite a still-flagging economy; the dollars are flowing at the top with very little pulsing through the rest of the economy. But the concept of arbitrage is largely lost on Americans and our politicians are reluctant to talk about it in a meaningful way, instead choosing to focus on the national debt.

What’s worse is that the banks have presumably used a good portion of this money to invest in opaque investments that have artificially created crises in the agriculture and energy sectors. I say “presumably” because no one can really be sure where some of this money is being invested because the regulatory environment is still so broken and corrupt that the funds are impossible to track directly. It’s the pricing and behavior of these markets that gives them away. Energy supply is at an all-time high, demand is still perilously low yet the markets are soaring because unknown companies are pouring billions of dollars through small commodities exchanges and wildly impacting the prices of these investments. This phenomenon translates directly into high gasoline prices and rising food costs, thereby suppressing the recovery and obliterating household savings. Here again Boehner changes the subject, suggesting that the Obama administration is somehow keeping “energy resources under lock and key.” Further, he accuses Democrats in Congress of “creating more uncertainty for those who create American jobs” by raising “the specter of higher taxes.” Another direct attempt to divert the conversation from reality. After all, didn’t we just extend the Bush-era tax cuts? And weren’t these the same tax cuts that were in place prior to and during the economic meltdown?

This year Forbes added 214 new billionaires to its list of the world’s richest people. That’s up from 97 new billionaires last year. In perusing the list of the richest Americans, it’s interesting to note where the wealth of those whom Boehner touts as “job creators” is derived. Hedge funds, investing, oil, pipelines, retail, chemicals and pharmaceuticals are the industries that dominate the roster. Most of these companies employ relatively few people compared to the billionaire industrialists of old. No infrastructure companies, few manufacturing companies, and a handful of high-tech companies appear on this list. And of the ones that do appear, most of them manufacture overseas. I guess in Boehner’s world a job created in Bangalore is equal to one created in Scranton. What many of these industries do have in common is that they represent the vast majority of campaign contributors to people like John Boehner.

So it begs the question: Who is Boehner trying to protect? In his New York address he repeatedly refers to the “arrogance of Washington” even though that’s where he’s been working since 1990. Arrogance is not trying to pay for past transgressions by taxing those who devastated the economy. Arrogance is cutting the government’s primary funding source via an extension of the Bush-era tax cuts and attacking entitlement programs instead of the regulatory issues that brought down America’s entire economic system.

Where the White House fails is by indulging in debates over the debt ceiling and releasing oil reserves while bickering over entitlements. Our economy cannot, will not, improve until our elected officials have the courage to restore sanity to the marketplace by re-implementing the regulations that properly governed debt, equity and commodities trading for decades.

In recent testimony to the Congressional Oversight Panel on the impact of the TARP, Columbia University professor and former Clinton advisor and chief economist of the World Bank Joseph Stiglitz argued that “we have not repaired our banking system, and indeed, with the enhanced moral hazard and concentration in the financial sector, the economy remains very much at risk.”

Joseph Stiglitz

These arguments are nothing new to the Nobel Prize-winning economist, who in 2008 warned of the enduring negative consequences of deregulation. At a hearing held back then by the House Committee on Financial Services, Stiglitz invoked Adam Smith, saying that “even he recognized that unregulated markets will try to restrict competition, and without strong competition markets will not be efficient.” One of Stiglitz’s solutions to this is to restore transparency to investments and the markets themselves by restricting “banks’ dealing with criminals, unregulated and non-transparent hedge funds, and off-shore banks that do not conform to regulatory and accounting standard of our highly regulation financial entities.” For emphasis, he notes that “we have shown that we can do this when we want, when terrorism is the issue.”

He’s right in every aspect. This is economic terrorism that Americans are unwittingly enabling by allowing politicians in Washington to skirt the issue of financial reform and to skip tighter regulations in favor of continuing tax breaks, cutting spending on infrastructure and demonizing programs that provide security for the sick, the aged and the unemployed.

Yet no matter how often people of Stiglitz’s ilk provide testimony, no one on these committees either understands or cares what is being offered. I suppose that just because we call them “hearings” doesn’t mean anyone is necessarily listening.

Author: Jed Morey

Jed Morey is the publisher of the Long Island Press, LI's Cultural Arts and Investigative News Journal. The Press has a monthly circulation of 100,000, and www.longislandpress.com, welcomes more than 500,000 unique visitors every month. He serves on the board of the Holocaust Memorial and Tolerance Center in Nassau County, as well as the President's Council of Big Brothers and Big Sisters of Long Island. In addition to the contributions on this blog, Morey authors a column for the Long Island Press titled "Off The Reservation" and is a staunch advocate for Indian rights. The column was voted Best Column in New York by the NY Press Association in 2010 and third overall in the nation among alternative publications by the Association of Alternative Weeklies in 2012. Morey lives in Glen Cove with his wife, Eden White, and their two daughters.

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5 Comments

[...] more on this subject, I highly recommend Jed Morey’s latest piece on jedmorey.com (“Capitalism and Regulation Are Not Mutually Exclusive“). Morey writes [...]

Dorian Dale

May 12th, 2011

“I can’t manage to find any reason to doubt that the House Republicans’ plan would destroy the U.S. financial system,” economist Robert Waldmann wrote on the Angry Bear blog.

No, it wasn’t written this week. It was 9/26/08 and Boehner had just emerged from a conference with Bush’s T-Sec from Goldman – Hank Paulson – and the Wheeper of the House looked like he’d just come face-to-face with the Grim Reaper staring back at him from imminent Depression.

George Maccarone

May 13th, 2011

I read your column in the print edition of this week’s “Press.” Ironically, I am also reading Matt Taibbi’s latest book, “Griftopia,” which deals with the same subject matter. You are both to be commended for your honest examination of what is wrong with the economic and political systems, and for your call to arms to ordinary Americans to wake up.

Mystapitt

May 14th, 2011

You really lost me on this one. Laden with inaccuracy and one sided finger point. Our debt is not due to the wars and TARP. As a matter of fact, tarp (not that I was in favor of it) $$ have all but been repaid. The debt is due to exploding spending (can you say stimulus?) entitlement programs that are not keeping up) amongst other things. Where the Democrats not in charge of the check book since 2006? How many times did Barney Frank dig us into a deeper hole. I can on and on, but try spreading the wealth, errrr blame a little bit.

Jed Morey

May 15th, 2011

I absolutely think blame should be spread around. For my money, the auto bailout was a textbook bailout that paid incredible dividends to the nation. The stimulus package may be unpopular but it, more than the TARP, prevented the economy from driving into the ground completely. And with TARP being paid back almost entirely, you’re assuming that it’s because it somehow stabilized the banking system and was effective in the same way the auto bailout was. Not true. The big investment banks took government money at no cost, then reinvested it into treasuries or risky off-shore investments that there was no downside on. They did not invest it in American business, which is party why our economy is still stuck in the mud. And for this, I blame the Obama Administration for not regulating the markets or the methodology of the loan administration. All they did was send regulators into the small and mid-sized banks and create more paperwork for them. Having said all of that, you can’t really be serious in dismissing the cost of the wars? These trillion dollar combined efforts in conjunction with tax cuts (which came on the heels of Bush distributing the surplus earned during the Clinton years – remember that?) started us on the path of indebtedness that came to a head when the economy burst into flames. So my criticism is spread evenly and can be encapsulated as the following:
Bush fucked everything up because he was too stupid to realize what he was doing by cutting revenue (taxes) and expanded costs (war) and preventing future growth (regulation of markets) thereby setting the table for catastrophe.
Obama should have known better than to surround himself with Wall Street sycophants who allowed the banks to steal money from American businesses and citizens. Instead of blowing all of his political capital on massive health care reform, he could have reduced the eligibility age of Medicare recipients by a couple of years, allowed kids to stay on their parents policies after college for a few more years and spent his time creating real financial reform that would have benefitted every American and not just the wealthiest. Instead he focuses on complete overhaul and loses everyone’s support for anything else in the process.

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