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Bankers Versus Capitalism

When it comes to defending private enterprise, Wall Street is its own worst enemy.

Jan 16, 2012, Vol. 17, No. 17 • By IRWIN M. STELZER
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America’s more or less free-market capitalism is not under threat from Marxist-Leninism: That system’s demonstrated failures have consigned it to the ash-heap of history. Nor is it under threat from China’s system of managed economy plus political repression: We can’t even abide police breaking up a disease-infested occupy-something-or-other encampment. It is not even under threat from socialism, the hysterical charges of some anti-Obama extremists notwithstanding.

Photo of Occupy Wall Street protestors

Not the real threat to capitalism

AP / Ben Margot

No, it faces a far more subtle enemy—the gradual loss of acceptance of the idea that markets more efficiently allocate resources than governments, of the parallel idea that properly but not excessively regulated markets produce unparalleled levels of material wellbeing (something Marx conceded), and, finally, of the conviction that material prosperity is fairly shared among all who participate in its creation, with enough left over to care for those too ill, old, or otherwise impaired to participate in productive activity. When the broad consensus erodes that capitalism as practiced in America is better at creating and distributing wealth than any other system, the way is open for fundamental legislative and regulatory changes that strip the system of its flexibility and innovative drive.

Which is what makes the behavior of the leaders of our financial sector so inexplicable. Start with a few widely agreed facts. The financial sector does not have a recent history of which it can be proud. Investment banks bet their own money that the mortgage bubble would burst while at the same time advising their clients to buy mortgage-backed securities. Managers of our largest banks took on risks they did not understand, safe in the knowledge that they were too big to fail—that the government would have no choice but to bail them out in order to avoid a cataclysm, or at least a deep recession. Compensation was decoupled from performance, with failed executives tottering off onto their country clubs’ golf courses after pocketing multimillion-dollar bonuses and being awarded the use of company jets and office facilities. 

Some idea of the mindset of the leaders of the financial community can be gleaned from their response to criticism. Lloyd Blankfein, head of Goldman Sachs, claimed to be doing “God’s work,” a linking of God and Mammon that might have come as a surprise to the Lord. Charles “Chuck” Prince III, soon to be defrocked as CEO of Citigroup and sent packing with multimillions in payoffs, pensions, and perks after a reported $64 billion decline in the value of the bank over which he presided, explained the intellectually demanding risk analysis techniques he applied in his work: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” So were the passengers on the Titanic when it hit that iceberg.

Meanwhile, income inequality increased. We are not sure of all the reasons for this development, but we do know that it is in part because globalization brought millions of dollar-a-day workers into the international economy to compete with American workers; in part because the premium for skills and training was rising as the political class ceded control of the American education system to dirigiste teachers’ unions that prevented needed adaptations to the new world; and in part because money talks in the rooms in which the tax code is twisted to the advantage of special interests. Worse, mobility fell, creating an atmosphere ripe for an embattled president to declare class war rather than take on entrenched interests, i.e., unions fighting to prevent entry into trades and to preserve extortionate pensions; bankers willing to pour millions into Obama’s campaign coffers in return for prestigious photo-ops and appointments to meaningless committees; billionaires pressing him to increase taxes on families with relatively modest incomes while their capital gains and deal-generated profits receive gentler treatment at the hands of the tax collector.

None of these ills seems curable in the face of entrenched opposition by members of the financial and business communities, and other interest groups. The Democrats quite predictably defend the trade unions that fund them, and what they see as the disadvantaged, never mind that that group now includes wealthy older people who would be offended if their Social Security and medical benefits were reduced a trifle by means testing. The Republicans see no reason why the very, very wealthy should have their tax burden increased a bit, their corporate clients should lose their special tax benefits, or the lucky winners of the gene lottery should pay higher taxes on their inheritances. The result of this crony capitalism—each party with its own cronies—is a lack of radicalism, a you-don’t-gore-my-ox-and-I-won’t-touch-your-sacred-cow system. 

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