Home > Miscellaneous Musings > The ‘private’ bank-coercive state nexus has become a parasitic, corrupt malignant growth on the real economy

The ‘private’ bank-coercive state nexus has become a parasitic, corrupt malignant growth on the real economy

Yves Smith hits it out of the park in this piece from her Naked Capitalism blog.  She laughs at Basel III and states the obvious: the banks are effectively socialist organisations that are part of the corrupting, corroding machine of the State. 

A juicy quote:

The usual narrative, “privatized gains and socialized losses” is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state supported.

Consider Fannie and Freddie pre-conservatorship. They were at least branded more accurately as “government sponsored enterprises” and “agencies” making their public/private role explicit. Yet they were over time allowed more and more latitude to act as private enterprises, particularly as far as employee pay was concerned. We know how that movie ended.

Consider now the banking industry. Admittedly, banks do not fund at the tight spreads over Treasuries that Freddie and Fannie enjoyed pre-crisis, and regulators are trying to convince investors and the broader public that they will allow big banks to be resolved and are prepared to impose losses on bondholders, but does anyone believe this will happen? Winding down even a medium sized broker-dealer is a market-disrupting activity, and the “living wills” requirement looks like window dressing. But aside from the saber rattling of Pimco about why bondholders needed to be spared any pain, we also heard troubling rationalizations, such as bank bonds are held by pension funds. Well, yes, it’s risk capital. Investors are supposed to diversify holdings and losses are part of the game. And perhaps most important reason during the crisis for not cramming down bondholders was fear of contagion: imposing losses on bondholders of one bank would lead bondholders of other at-risk firms to run for the exits, raising their funding costs and potentially putting them in a death spiral.

So, the reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries…

Ambrose Bierce, in The Devil’s Dictionary, described a partnership as “When two thieves have their hands so deeply plunged into each other’s pockets that they cannot separately plunder a third party.” Pointing out that banks are de facto partners of the state, enjoying substantial privileges (that unlimited checkwriting on official coffers when things go bad, the ongoing subsidies, the lavish private sector pay) without commensurate duties opens a huge can of worms. It goes beyond the usual, relatively anodyne “privatized gains and socialized losses” and opens up the terrain of “What do we mean by private enterprise?” Part of the American ideology is that there is a hard line between government and business. But entire industries suck off the state with far too few strings attached. The black/white distinction is illusory; what we instead have is a gradient.

But looking hard at the degree of looting and abuse of taxpayers, particularly in light of lavish CEO pay, not only raises uncomfortable questions, but calls for remedies that are politically unpalatable. Even though the state is deeply involved in enterprise, our ideology is that explicit industrial policy or other forms of involvement is a bad thing, the government will screw it up (when in fact some foreign governments do a decent job but we’d never deign to learn from them). So we’d rather limp along with a defective and increasingly costly model than challenge deeply held political beliefs.

Categories: Miscellaneous Musings
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