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The year in review at Credit Writedowns – Crony Capitalism

Before the Christmas break, I wrote a post to tie together my thoughts on why I have found the Obama economic program so unsatisfying despite some obvious success in stabilizing the economy. This first part framed the status quo as an unequal division of spoils that has become more and more unequal due to kleptocracy aka looting.

In this post, I want to talk about Obama’s economic policies in the context of what I perceive as a crony capitalism which is now endemic in Washington. As I see it, Americans are angry because the economy is still quite fragile and the personal financial situation for many ordinary Americans is still quite dire. Yet, the so-called fat cats seem more pigs eating at the trough of government largesse. This juxtaposition is galling and undermines any success that the Obama Administration has achieved.

Sellout, bamboozler, or ingénue?

The question is this:

  • Did President Obama sell out (i.e. he was a good guy but has been corrupted in short order) or;
  • Did Obama find out he couldn’t change the status quo so easily (i.e. he was a good guy who was naive about the President’s real power) or;
  • Did the President simply bamboozle us (i.e. he was a bad guy who tricked the electorate with his silver tongue)?

I will assert that this question is irrelevant as it ascribes intent when we should be looking either at motive or outcome. If you do look at motive and outcome, you will see why I will focus more on government’s allowing a purge of malinvestment and less on government’s stimulating aggregate demand going forward.

The Obama Way

First, as to intent, Ross Douthat has an interesting piece in the New York Times.  He contends that Barack Obama is a knee-jerk liberal who believes in working within institutions for change. According to Douthat, that makes him Obama an odd bird who seems a Machiavellian willing to cut any deal juxtaposed with the soaring rhetoric of fairly ideological big government liberalism.

The part I found most interesting is this:

Between the stimulus package, the pending health care bill and a new raft of financial regulations, Obama will soon be able to claim more major legislative accomplishments than any Democrat since Lyndon Johnson.

I think Obama could make those claims as well.  I was going to write about this in January 2010 after Obama’s first year anniversary and after healthcare had passed. But now seems a good time to reflect on this: How many President’s can point to the record of accomplishments he can (prevented depression, stabilized finance, saved auto industry, overhauled healthcare). You may not like his methods. You may not like his results. You may not like him. But, President Obama has actually been quite productive – far more productive in his first year than Bush, Clinton or Bush II.

But, despite this productivity, the President’s poll numbers are falling.  He is not benefitting from any of his so-called successes. Clearly, he is doing something wrong. Is it messaging, process, outcomes – what gives?

This is where Douthat is right on the mark when he says in his article:

The assumption that a compromised victory is better than no victory at all can produce phony achievements — like last week’s “global agreement” on climate change — and bloated, ugly legislation. And using cynical means to progressive ends (think of the pork-laden stimulus bill or the frantic vote-buying that preceded this week’s Senate health care votes) tends to confirm independent voters’ worst fears about liberal government: that it’s a racket rigged to benefit privileged insiders and a corrupt marketplace floated by our tax dollars.

The gulf between Obama’s rhetoric and his actions is quite large and that leaves independents who voted for him quite dissatisfied.

Obama’s Intent

People do want to focus on the ‘why?’ They want to know why there is such a large gap between what the President says and what he does. After the November elections, I wrote the politics of economics, saying:

What experimenters here have shown is that there is a real human need to explain. Things happen for a reason, don’t they?  Why did the stock market rally? Why did Harry do that? Why didn’t we do something to stop this? Why did I vote for that guy back then, when I now don’t like him as much?

To the degree there is an explanation void, it will be filled. The question is: filled with what?

Confirmation bias and the psychology of politics

In politics, how the void gets filled has much to do with philosophical/political predisposition and one’s world view.

This is a mistake.  If you want to know why someone does something, it is better to use preponderance of evidence, the burden of proof used in civil trials, as a measure.

Preponderance of the evidence, also known as balance of probabilities is the standard required in most civil cases. The standard is met if the proposition is more likely to be true than not true. Effectively, the standard is satisfied if there is greater than 50 percent chance that the proposition is true. Lord Denning, in Miller v. Minister of Pensions, described it simply as "more probable than not." Until 1970, this was also the standard used in juvenile court in the United States.

As with many issues we discuss, I have started to view this through the lens of intent and motive. In a court of law, intent is the primary difference between manslaughter and murder. In the court of public opinion, a politician who intentionally violates public trust for a hidden agenda is ‘evil,’ but one who does so unintentionally is ‘misguided.’ In general, we like to ascribe intent because it makes it easier to denigrate or glorify the person in question.

Crony Capitalism

This is where cronyism enters the picture. There is a rather large body of evidence demonstrating that the Bush and Obama Administrations have favored large banks in an unseemly way. The same is true for the Congress and other big business insiders like Big Pharma, the Defense Industry and Health Insurance companies.

Witness these posts from the last month alone:

I could provide you with a far longer list of posts from the January to April period when the Citi and BofA bailouts were conducted and the alphabet soup of liquidity programs began which Bank of America and Citi were prepared to game.

I said in March it’s the writedowns, stupid. When accounting rules were formally changed to reflect the de-facto accounting policies favoring banks, I knew the big banks were on easy street and The Fake Recovery had begun. So, by April, I said Wells profit forecast is a clear bullish sign.

Don’t even get me started on the stress tests. They were a sham from the start and were merely a means of recapitalizing the banks via inflated equity valuations. They were neither tests nor stressful, as Bill Black has demonstrated.

More recently, posts by Yves Smith and Bruce Krasting confirmed my long-held suspicions that Fannie Mae and Freddie Mac would be used as a nationalization of America’s mortgage problems via a back door bailout of banks.

The evidence, therefore, tends to demonstrate that we have witnessed an orchestrated campaign by the Bush and Obama Administrations to recapitalize too big to fail institutions by hook or by crook, bypassing Congressional approval if necessary. And when it comes to healthcare, both Congress and the White House have bent over backwards to keep the lobbyists onside. As I see it, our government has favored special interests in the past year of Obama’s tenure to our detriment.

Political legacy

Personally, I don’t buy the line that Obama is a liberal. I consider him more a corporatist (i.e someone who coddles big business). But, from a political perspective, it’s not really relevant, is it? What difference does it make whether President Obama is a liberal sellout as Matt Taibbi claims or a pragmatic corporatist, if the outcome for the electorate is largely the same? Forget about intent. Focus on actions.

As an aside, I should point out the logic likely employed by Geithner et al in bailing out the banks. I gave voice to this last month in the wildly optimistic view of Treasury’s handling of the crisis. Noam Schreiber takes this one better in the New Republic. If you still want a why – this is as good as any:

There’s an interesting back-and-forth between Dan Gross and Tim Geithner in Newsweek‘s year-end interview issue:

GROSS: There have been, and continue to be, calls for you to go. How do you deal with those?

GEITHNER: I spent most of my professional life in this building. Watching the politics of the things we did in the past financial crises in Mexico and Asia had a powerful effect on me. The surveys were 9-to-1 against almost everything that helped contain the damage. And I watched exceptionally capable people just get killed in the court of public opinion as they defended those policies on the Hill. This is a necessary part of the office, certainly in financial crises. I think this really says something important about the president, not about me. The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives. …

This is a theme I wrote about in my profile of Larry Summers earlier this year. I don’t think you can underestimate the extent to which the financial crises in Mexico and Asia were a formative experience for the Obama economic team–especially in shaping their thinking on the intersection of politics and economic policy.

In his memoir, then-Treasury Secretary Robert Rubin, who both men worked for at the time, summed up his views on the Mexican crisis by citing "the difficulties our political processes have in dealing effectively with issues that involve technical complexities, shorter-term cost to achieve longer-term gain, incomplete information and uncertain outcomes, opportunities for political advantage, and inadequate understanding." Obviously, these same difficulties made a big impression on Geithner and Summers, too. So they were more prepared than most for the political backlash this time around, even if the intensity may have surprised even them on occasion.

The recent Fannie-Freddie end run around Congress demonstrates Schreiber is right about the Asian and Tequila Crisis legacy -  as do the TARP money stimulus slush fund and the earlier liquidity packages.

The problem for Obama politically is this:

At the same time, Obama doesn’t enjoy the kind of deep credibility with his base that both Reagan and Kennedy spent decades building. When Kennedy told liberals that a given compromise was the best they could get, they believed him. Whether the issue is health care or Afghanistan, Obama’s word doesn’t carry the same weight.

This leaves him walking a fine line. If Obama’s presidency succeeds, it will be a testament to what ideology tempered by institutionalism can accomplish. But his political approach leaves him in constant danger of losing center and left alike — of being dismissed by independents as another tax-and-spender, and disdained by liberals as a sellout.

Come 2011, I expect the perverse math of GDP reporting to spell a double dip recession. As the associated economic slowing will begin much earlier, expect to see the disdain for Obama that Douthat writes about exhibited at the polls in 2010.

See also "We’ll Be Judged on How We Dealt With the Things That Were Broken" from Slate to see how Tim Geithner feels things are going.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

11 Comments

  1. LavrentiBeria says:

    I’ll raise this question a second time. Is it that you oppose additional stimuli because you fear the funds will be abused, is that what these two pieces come together to say? A simple yes and no answer will suffice. As to intent and motive, Ralph Nader offered some illumination respecting Obama at Counterpunch last week:

    http://www.counterpunch.org/nader12222009.html

    • Lavrenti,

      This was part of my reply on a different thread:

      Let’s distinguish between fiscal and monetary stimulus, anarchist. Monetary stimulus in the form of quantitative easing doesn’t work in a debt deflationary environment. The Fed is pushing on a string. You correctly state that zero rates do not promote saving or deleveraging. So, monetary stimulus is an attempt to re-create the status quo ante.

      On the other hand, fiscal stimulus causes the public sector to deficit spend and, through the financial sector balance, it causes the private sector to net save. See here:

      http://www.creditwritedowns.com/2009/11/barack-obama-if-we-keep-on-adding-to-the-debt-that-could-actually-lead-to-a-double-dip.html

      The question is whether, over the longer-term, the specific stimulus policies lead to desirable outcomes, optimal allocation of scarce resources, a fair distribution of income, longer-term economic growth.

      So my opposition to non-jobs targeted stimulus is “fear the funds will be abused” i.e. misallocated in a way that does not meet longer-term economic goals and thus re-creates the status quo ante. If stimulus is used to misallocate resources and perpetuate a false economy by propping up overcapacity (what I call in the link above the Herbert Hoover solution), I would prefer a liquidation approach.

      In my view, cronyism is so entrenched that only a downturn of this sort will yield any correction of the current path, which few of us want.

      • LavrentiBeria says:

        “So my opposition to non-jobs targeted stimulus is ‘fear the funds will be abused’”

        Lesson: Never ask Ed Harrison for a one word reply. :-)

        OK, the quote above resolves my confusion. You would not be opposed in principle, then, to WPA or CCC types of direct government jobs initiatives. That feels better. I had the impression that you and Auerbach were going in two very different directions from what you’d written the other day. By the way, enjoyed your interview with Max Keyser last week.

  2. Anonymous says:

    Crony Capitalism always existed. Nothing new. Corruption is what government is all about.

    • LavrentiBeria says:

      “Corruption is what government is all about.”

      It doesn’t have to be, anarchist. The problem is sin, anarchist, not government. Structures are not moral agents, only human beings. But if you’re talking about corruption, here’s a rather drunken public example of what you’re getting at:

      http://www.youtube.com/watch?v=M5Y9X5ggxzA

      And nobody in government is more corrupt than this pig, Baucus. Now they’re so shameless that the depravity is showcased right on the Senate floor. The peoples’ time may not be all that far away.

  3. John says:

    Read Barrons “The Bear Truth” I am one of the independents who has lost all confidence in Obama. He has done more damage to the US than Bush, Clinton and Bush ll combined. He has wasted so much taxpayer money with all of his socialist policies thta we will need a devaluation of the dollar to pay all of these debts back. No worries the devaluation is comming just wait for year 2.