They Own the Place

The banks and financial industry have a lock on our political and economic systems, directly contributing to the growing economic inequality and bifurcated rule of law. Since Senator Dick Durbin blurted out to a radio host the power that the banking and financial industries have over the US Senate–“they frankly own the place”–the too big to fail, too big to jail banks have only become more brazen.

Rigging markets, hoarding commodities, hiding massive amounts of plundered loot, evading taxes, laundering drug money from some of the most heinous drug cartels, the list goes on and on. Yet, not one banker has been charged with a crime or done any jail time.

Well, maybe Bernie Madoff. He was sent to jail, but he fleeced rich people, and we can’t have that can we?

That the banks feel so immune to the laws that govern us points to the much larger problem of power asymmetry in this country, contributing to what I like to call: neo-feudalism.

Wikipedia has this helpful explanation of neo-feudalism:

“… a theorized contemporary rebirth of policies of governance, economy and public life reminiscent of those present in many feudal societies, such as unequal rights and legal protections for common people and for nobility.”

Does anyone else notice this two tiered justice system? I’m pretty sure I can’t go around laundering drug money and not wind up in the stir with a new and menacing roommate. The bankers, however, can pretty much do what they want.

Matt Taibbi, at Rolling Stone, is the best current financial muckraker, and his stories of banksters gone wild and Vampire Squid, are so humorous you almost forget your outrage. Almost. Here’s one of his most colorful descriptions of the bailout of the banks in the aftermath of the 2008 stock market crash:

“It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in – only temporarily, mind you – to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyperconcentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it. The result is one of those deals where one wrong decision early on blossoms into a lush nightmare of unintended consequences. We thought we were just letting a friend crash at the house for a few days; we ended up with a family of hillbillies who moved in forever, sleeping nine to a bed and building a meth lab on the front lawn.”

How have banks and the financial sector become so powerful?

Examining the money the banking and financial industry have contributed, it’s clear that given the enormous amounts spent the banks and financial industry have received a pretty sweet return on their investment: the deregulation of financial derivatives and credit default swaps, the elimination of the line between investment banks and commercial banks, the increased hardship for those filing for bankruptcy, just for starters.

The Sunlight Foundation tracks corruption in the US. Here’s what they had to say about the banks and financial spending.

“Since 1997, the financial sector has spent a combined total of $3.6 billion on lobbying the federal government. The total lobbying expenses have increased by 260% since 1997. Over that same time financial sector corporate profits have gone through the roof, with the financial sector reporting up to 40% of corporate profits in recent years.”

And, there are the 3000 financial and banking lobbyists calling, e-mailing and meeting with Congress and the White House, promoting their interests, 24/7.

Taibbi, describes this lobbyist power imbalance.

“Members of Congress, when they talk about having to vote on issues like derivative reform, express frustration about the political dynamics of this debate. When they go back to their districts, nobody is standing up at town halls and shaking fists about relaxing rules at Swap Execution Facilities. On the other hand, when they return to Washington, they’re inundated with bank lobbyists who offer extensive financial backing if they play ball on these votes, while simultaneously threatening to run primary candidates if they don’t.”

It’s not just money and lobbyists. There’s a mutual ideology that says–whatever is good for the bankers is good for the country–that permeates recent Republican and Democratic administrations. This mutual ideology is cemented into place by a veritable revolving door between finance and government.

Taibbi complains how the revolving door is spinning at 78 rpm.

“…couldn’t they have found someone who isn’t a perfect symbol of the revolving-door culture under which regulators go soft on suspected Wall Street criminals, knowing they have million-dollar jobs waiting for them at hotshot defense firms as long as they play nice with the banks while still in office?”

While banks have become too big to fail, too big to jail, the evidence continues to mount that they are a drag on the productive economy.

In a properly functioning economy, a financial sector efficiently allocates capital to the productive sector of the economy that makes things and employs workers. Unfortunately, that’s not the scenario we have. Presently, the US economy is dominated by a extractive financial sector. As a new study by the Bank of International Settlements shows, this is terrible for the real economy.

The BIS has released an important paper, embedded at the end of this post, which has created quite a stir, even leading the orthodoxy-touting Economist to take note. Titled, Why does financial sector growth crowd out real economic growth?, its analysis of why too much finance is a bad thing is robust and compelling. This article is a follow up to a 2012 paper by the same authors, Stephen Cecchetti and Enisse Kharroubi, which found that when finance sectors exceeded a certain size, specifically when private sector debt topped 100% of GDP or when financial services industry professions were more than 3.9% of the work force, it became a drag on growth. Notice that this finding alone is damning as far as policy in the US is concerned, where cheaper debt, deregulation, more access to financial markets, and “financial deepening” are all seen as virtuous.

The paper starts by looking empirically at the fact that larger financial sectors are correlated with lower growth rates:

Again, to reiterate, the purpose of finance is to efficiently allocate capital for the productive economy that makes things and employees workers. An economy that works for the majority of Americans is not one of speculation in stocks and bonds, or the manipulation of exotic financial instruments such as derivatives. An economy that works for Americans is one that produces goods and services which have value for human beings.

We should be aghast at the control of our government by banks and finance and the way that there’s a different justice system for them than there is for us. This not healthy development for a democratic republic, if that term still applies. A plutocracy is probably more like it.

The infuriating thing about this state of affairs, is that we’ve been here before, back in the Gilded Age of the 1890’s, where inequality was the norm and both political parties bought and paid for by the bankers. Just like then, we desperately need a progressive movement to challenge our present banking and financial cabal.

Update: Bill Black asks the obvious question.

“So I have to ask our class of criminal bankers: “Have you no sense of decency sir, at long last?” Is there any crime so depraved that you would refuse to commit it or aid and abet its commission if it would increase your bonus?”


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