A provocative piece by Bruce Judson: http://itcouldhappenhere.com/blog/the-kids-camping-on-wall-street-are-the-capitalists-not-the-people-in-the-buildings/
As we think about capitalism, it’s also useful to make an important distinction: It’s not what you say, it’s what you do. You may espouse capitalist ideals, but if you oppose responsibility, dishonor contracts, oppose competition, and embrace government subsidies, you are not a practicing capitalist.
For capitalism to work, there are several fundamental requirements: accountability, equal justice under the law, a clearly articulated purpose (and accompanying cost) for government subsidies of a specialized class of citizens, competition, and a relationship between the creation of profits and the creation of real wealth for the larger society.
Many of the protestors in New York City and around the country are jobless college graduates. The majority in all likelihood financed their education through federally subsidized student loans. A central characteristic of today’s generation of student loans is that, unlike most debts, they cannot automatically be discharged in bankruptcy…As a nation, we teach our most promising youth, from the age of 18 on, the importance of accountability. We use the federal government to subsidize an investment in human capital. In return, the beneficiaries enter into a lifetime of responsibility and accountability. It is a sacred contract. It is arguably one of the best, and potentially harshest, lessons of accountability associated with capitalism in our society today.
Judson misses or glosses over the important connections between the fiscal fetishes of the Clinton-Dole-Gingrich years, the extent of the federal government’s role in financing education, and the changes to bankruptcy laws that made student loans non-dischargeable.
In order to meet its widely lauded goal of a primary surplus, the federal government asked the private sector to take on more of the burden of human capital investment through expanding student loans for higher education. This helped the government “save” (remember, when the monopoly supplier of something saves, i.e. hoards, it means users have less of it; a fitting analogy is to imagine a utility “saving” electricity by generating less of it), but in return, banks asked for certain protections, including harsher bankruptcy laws for student borrowers, which they got. (The consumer credit industry received similar favors during the W years, as bankruptcy rules were tightened still further in the favor of creditors.)
By itself, those episodes would help Judson make his case, but they pale next to the impact and fallout of the financial crisis.
Now, let’s contrast this high accountability with the behavior that occurred in our financial sector. When our largest financial firms created havoc in the U.S. economy through undisputed greed, mismanagement, and extreme risk, some important things happened. First, the government bailed the companies out without demanding any substantial change in behavior…
Actually, as long as the USG was an equity holder and/or creditor, it kept the reins pretty tight on executives (shareholders have been left holding the bag since).
…and then the individuals responsible were not held accountable through civil or criminal law. As a result, the people who brought the nation close to the brink of economic collapse and caused untold pain and suffering — which continues to this day — returned after a brief hiatus to record levels of compensation. Individuals who earned tens of millions of dollars continue to earn these extraordinary sums. They have never been called to account for their deeds.
There’s at least one exception, though for the people and organizations most instrumental in the crisis, Judson’s right.
Can this be right? What about the many civil settlements negotiated by the federal government and the SEC? I would argue that, in light of the extraordinary profits these firms and individuals generate, such settlements are now viewed as a “cost of doing business.” They appear to have almost no impact on the behavior or attitude of the nation’s financiers.
Interestingly, the long-term returns on capital of the U.S. financial industry are pretty lousy overall. Book values in many cases are where they were 10 or 20 years ago, meaning that dividends have been the primary source of return for equity holders. Of course, the executives and certain other employees of the industry did astoundingly well over that period.
Now let’s contrast the kids on the street with the employees of The Street. The kids are accountable for their debts. They know it, and they simply want jobs so they can fulfill their civic responsibilities. In contrast, the occupants of the building on Wall Street act as if the rules of accountability — which are central to a viable system of capitalism — apply to everyone except them. Instead, many of the Wall Street elite have developed a dangerous sense of entitlement.
All while railing about the virtues of free enterprise and de-regulation.
I would argue that in a true, competitive capitalist society, the idea of entitlement is anathema to all participants. It suggests that rewards are disbursed because of who people are, as opposed to the tangible wealth they create for the nation.
There are plenty of damning emails and other evidence from the subprime crisis, but Enron remains the most potent example of the severe agency risk that’s taken hold of the financial industry. The recordings of Enron power traders conspiring to withhold electricity from the California market in order to turn a profit are nauseating and infuriating.
It’s worth noting that old timers on Wall Street may still remember that until 1970 the New York Stock exchange mandated that investment banks be organized as some of the most accountable businesses in existence. Prior to going public, in the late 20th century Wall Street firms were organized as old-fashioned partnerships. The central idea of these partnerships was that every partner was fully liable for all of the debts incurred by the firm. If the partnership could not meet its obligations, the partners were required to meet these obligations with their own funds until they were personally bankrupt as well. It was a self-policing system that provided high incentives for investment banks to manage the risks they undertook. When every partner is liable, each has the highest possible incentive to ensure that the firm is not exposed to potential default. If they fail in this responsibility, both the firm and the individual partners can be wiped out. This rule was meant to avoid precisely what happened in the financial crisis.
Judson’s echoing Michael Lewis’ Liar’s Poker here, and it ties in to my earlier point about the financial industry’s returns on capital. Once investment banks went public, partners who had to carefully balance risk and reward became executives who were incentivized and enabled (by directors, compensation consultants, and lackadaisical shareholders) to take large risks at others’ expense in the pursuit of personal reward.
Now these same publicly held financial institutions have been bailed out by the government and the high-paid executives are apparently immune — both with respect to their pay, their sources of employment, and their personal funds — from any day of reckoning…
[Pretend] you are a visitor from a foreign country or an alien world with no knowledge of Wall Street or capitalism. Then the principles of capitalism are explained to you and you are asked to identify the capitalists in this confrontation: the people in the buildings or the people congregating on the street. Which would you choose?
Good stuff. Contrast with CNBC’s characterization of crass opportunism among the Occupiers as capitalism.
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