The Death of Capitalism: A grifter’s delight

The always-entertaining Matt Taibbi lays into Wall Street again in his latest missive for Rolling Stone magazine.

Taibbi has been relentless in his criticism of the banking community and his comparisons to the grifters, schemers and con artists are, largely, valid ones.

I’d also like to take the opportunity to respond to reader TS, and TS’s comment on the first TDOC post last week. Thanks for taking the time to read and comment. I’m sure it will come as no surprise that I don’t exactly agree with you, but I’d love to explore this a bit further. A portion of TS’s criticism:

“In the mean time, it’s a gross over generalization to say capitalism failed. I would argue in fact, we have really just realize its faults.”

TS goes on to say that if better regulation were possible, capitalism would do a better job of accounting for external costs, and therefore capitalism would work, since the true value of a tree left standing, for example, would be known.

It’s true that there have been some halting moves towards this – most notably WalMart’s sustainability index, for example.

But where TS and I differ, I expect, is in our varying levels of confidence that such transformative changes in the way we do business are possible. I suspect that any meaningful reform will be blocked before it truly has a chance to affect the needed changes, and that therefore we are in fact seeing the early stages of the death of capitalism.

To understand how that works, we need to understand a bit about the process of sausage-making in a democracy. These days that’s almost entirely left up to well-connected and well-funded lobbyists, even more so directly south of us. These folks are well paid, each and every day, to monitor political activity, lobby the ‘right’ people and generally have their way with the democratic process.

And this is where the issue of better and ‘smarter’ regulation goes off the rails each and every time. Let’s return again to the issue of Wall Street bankers, since it’s the most instructive example in recent years.

These guys screwed up royally. All the major US investment banks should be broke. They only survive because they were able to engineer a bailout of AIG who was a ‘counterparty’ in a bunch of credit default swaps, and that organization was then able to pay off the policies it wrote – policies covering the most egregious excesses of the US housing bubble.

But rather than face their medicine, these folks then turned around and began actively lobbying against regulations of these sorts of black arts financial instruments and instead tried to pin the blame on the US’s CMHC-like bodies like Fannie Mae and Freddie Mac. Now there’s no arguing these quasi-public institutions caused their own problems – but in this case they were following Wall Street’s lead and were responsible for less than one per cent of the bad mortgages.

But of course the real villans will never be held accountable because of the great sway they hold in the corridors of power.

Without this accountability they’re about to suffer from a powerful case of moral hazard — they now know with absolute certainty that if they make these outrageous bets again and win, they pocket a huge bonus. But if they lose? Well, then the taxpayer is on the hook.

2 thoughts on “The Death of Capitalism: A grifter’s delight”

  1. Well I was thinking I would get a comment back on your last post, not an entirely new post. So thanks!

    I agree that getting any tough regulation into usage is difficult in a democratic system due to lobbyists (especially in the case of US). Even with that statement it is not impossible. Also you sometimes end up with external pressures driving results that people don’t expect. For example, in the entire push to put a price on carbon in the US/Canada. For years the reason Canada hasn’t done anything is the US hasn’t moved (we didn’t want a trade imbalance). Now with the EPA ruling pushing the US to some sort of regulation (or perhaps a miracle will happen and the Senate will pass a bill) you might end up with border adjustments on Canadian exports to the US. You can bet suddenly there is a deep interest in Ottawa in having a draft system in place to price carbon. This is from the very reason they didn’t want a system: trade. Ironic, eh?

    I didn’t say regulation was easy, but it would make capitalism work. I agree moral hazard does become a problem in the current system. Don’t get me started on CMHC, mortgages and the banks in Canada or you will have an essay here.

    So a question for you then is if capitalism fails where do you see things going? You haven’t really gone into much detail as of yet.

    Thanks,
    TS

  2. Hi TS,

    Thanks for that reply. Just a quick note this time — I’m busy trying to hold down the day job just now!

    I like your example for greenhouse gases, but if anything I think it makes my point more than yours.

    There’s ample evidence that “Climategate” and other attempts just like them, including one in Victoria where two spurious technicians showed up and then disappeared into thin air when there were challenged, shows just how far big business is willing to go to win these debates — and why they’ll likely succeed.

    The problem, as I see it, is that there’s a lot of unpleasant heavy lifting ahead of us, and it’s only human nature to want to avoid that — so as a species we’re more than willing to listen to anything that tells us we don’t have to make any hard choices. We’re willing to fiddle around the margins — like that WalMart sustainability index — but real change becomes incredibly hard. Let me pose a question to you: Do you think Teddy Roosevelt would be able to do his trust-busting today?

    As for where things are going, how I wish I had that crystal ball. I consider myself more an observer and documenter than a prognosticator… making predictions is hard, especially about the future. But in a nutshell, I think humanity needs to get serious about these big issues — what remains to be seen is if we can do so.

    If we can’t, I suspect we’ll have one financial crisis after another, until we finally have one too large for any cash-strapped government to bail out. Then the offending nations become Iceland. But the problem is that it won’t be on the fringes anymore — it will be at the heart of modern finance in places like Wall Street and the City in London. That’s when things get truly interesting.

    Again, thanks for the response, much appreciated. Have a great day.

    Gord

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