Give Me Capitalism Without the Cronies

Many of the monetary actions taken by the Federal Reserve and other central banks last year were done under the auspices that they were “trying to save capitalism” or “the free market.”

Setting aside the fact that the US hasn’t been a free market in decades, IF EVER (we’ll address that point in a moment), this statement is so boldly stupid that it’s amazing no one laughed at the powers that be when they claimed it.

“Save capitalism?” what exactly does this statement mean? How does one save a system that by very its nature encompasses failure and collapse for those who mess up? For capitalism, in its purest form, is nothing if not a system through which bad business decisions result in failure and good business decisions result in success.

Indeed, if some financial firm makes a colossal mistake (say, betting trillions of dollars of mortgage backed securities the wrong way for example), and subsequently finds itself insolvent, capitalism dictates that said firm should GO UNDER. End of story. That IS Capitalism. And we have a bankruptcy system in place to hand off the assets to creditors and more capable business people.

However, that’s not the system we have in the US today. Indeed, it’s not clear to me that we ever had that sort of system. As far back as the 1850s the US business game was somewhat rigged as various entities attempted to form monopolies to increase their leverage over their respective industries (John D. Rockefeller’s Standard Oil being the most obvious example). To think that these monopolies were formed without some degree of government allowance or even approval is naive.

However, at least Rockefeller’s company was profitable and provided a basic good: oil.

In today’s Crony capitalist economy, the political system is bought outright by the large multinational corporations via various lobbying efforts/ corporate donations. These multinationals then receive kickbacks in the form of deregulatory policies and other tax loopholes, which permit them to further expand their power and influence.

However, unlike Rockefeller’s Standard Oil, most of these large-scale firms, especially the banks, are in fact insolvent or would be if they did not have unprecedented access to the US Federal Reserve and taxpayer dollars.

These groups aren’t strong pillars of profitability, they’re massively insolvent, unprofitable messes that wouldn’t exist if not for the fact that accounting standards have been suspended or disregarded as a national policy (unless you’re talking about ordinary Americans).

Moreover, these companies don’t “add value” to the US economy. If anything they are a net drag on US productivity as they simply move capital around, most often from their clients’ accounts into their own. How many Goldman Sachs clients made fortunes in 2008-2009? Not many. How many Goldman EMPLOYEES made fortunes or took in record bonuses during that time? Quite a few.

Goldman of course is only one example. But the whole US system operates based on the principles of moral hazard, double standards, and crony capitalism.

Which brings me to my final point.

The US is NOT a capitalist country. And is sure as heck ain’t a free market. No, the US is a CRONY capitalist state: a state where one’s position in the socio-economic complex dictates the rules by which one can play. END OF STORY.

Look at the individuals dictating our economic policy: Geithner, Summers, Rubin (to a lesser degree). All of them have either been responsible for massive blow-ups, which should have ended their careers OR have played by a different set of rules their entire lives

Instead, they’ve been promoted to the most powerful economic positions in the country. Why? Because they understand the part of Crony Capitalism that matters the most: it’s the Cronies… not the Capitalism.

Until we change this, and start leveling the playing field so that individuals with REAL ideas and solutions and STRONG track records can rise to positions of power in public policy, the US as a whole is screwed, or rather, those of us who don’t fall into the “Crony” category (the 300+ million).

Good Investing!

Graham Summers

Ps. I’m just putting the finishing touches on an expose of the US monetary system to be published Friday to subscribers of my socio-economic newsletter The Phoenix World Views Digest.

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