Monthly Archives: January 2009

Too big to fail, the failure of “free markets” 4

Over the past year, we’ve seen a string of banks declared as “too big to fail.” As a result they got hundreds of billions of dollars in essentially no-strings attached bailouts. In return we’ve seen them payout $20 billion in bonuses to executives that helped lead these banks to the verge of collapse. Why has this happened? Precisely because the policies of deregulation happy Republicans allowed them to.

These same “conservatives” like to cite Adam Smith and the idea of laissez faire economics. That is the idea of taking a hands off approach and letting the market find its own way. The problem is that to have a free market as envisioned by Smith, there needs to be enough players on both the supply and demand sides of the market equation to prevent manipulation by individuals. This is where Smith’s ideas have fallen apart in the modern world. Over the course of the twentieth century, corporations have grown progressively larger while the numbers of companies in many business segments has shriveled.

As that has happened, those huge businesses have taken control of the market and made it exceedingly difficult to new players to come in. Without someone to call bullshit, huge financial companies have also created a bogus economy that was built on a web of lies. By largely abandoning anti-trust enforcement over the last several decades we have allowed unprecedented consolidation to occur. The result is that institutions with far too much influence on the overall economy have developed. The combination of these over sized players and excess unchecked greed leads to stupid developments. Ultimately this is unsustainable and we have the situation we see today.

If there is one lesson that we must learn from the events of the past year it is that these huge companies should be broken up and never allowed to consolidate to this degree again. There is no reason why companies should be too large to fail. Some anti-trust regulation is a good thing regardless of what Republicans say. Will we learn this lesson? Unfortunately, probably not.

It’s the Fuggly! 2

By now you may have seen the commercials for the Snuggie which looks like some old monk’s robe but is actually a blanket with sleeves. Yes it’s a dopey premise, but it makes prime fodder for the talented team that creates “This Hour has 22 Minutes”.

So Ireland should be our model? 4

During the debates in the waning days of the last presidential campaign John McCain repeatedly cited Ireland as the example that we should be following for our economic policies, particularly when it comes to business taxes. McCain described the low tax rates that stimulated the Irish economy to huge growth over the last 15-20 years. What he neglected to mention was the with all the tax breaks that businesses get here, they typically end up paying less in taxes than the nominally lower Irish rates.

The real issue though is the premise Republicans and anti-tax types like Grover Norquist rely on that cutting taxes for the business and the wealthy will help everyone. It’s old “a rising tide lifts all boats” argument. The problem lies in the fact only the well-off could afford to buy a boat in the first place. Most people here and in Ireland (and elsewhere) ended up treading water as long as they could while housing prices climbed.

An article on Ireland and the crash its economy experienced in 2008 in the International Herald Tribune looks at what happened over the last two decades as tax policies were changed and the economy boomed. Just as everywhere else it seems that whenever economic growth gets particularly aggressive, greed overwhelms common sense and sustainable growth levels evolve into unsustainable bubbles. At the same time that real estate developers were making fortunes in Ireland, there remained stubborn pockets of urban poverty in places like Limerick.

These chronically unemployed, poverty stricken people were “camped on the beach” as that tide came in and never managed to climb into a boat. Developers who were encouraged to help improve the lot of the people in these urban ghettos decided to go where the real money was. Given the option of almost certain, large short term profits or more moderate and vague, longer term returns, entrepeurs typically opt for the former. This was certainly the case in Ireland just as it has been here in the US where the poor typically end up getting isolated and marginalized.

What all this demonstrates yet again is that we cannot simply rely on private business to do the right thing. Certainly there are those who will do the right thing, but they are the exception rather than the rule. Government policies clearly need to make sure that everyone has a “boat” before the tide comes in. That means that everyone needs to get educated, fed and get basic health care. If we can make sure that everyone has some basic fundementals then those people can be in a position to start to take advantage of economic growth. At that point, the growth might in fact start to become sustainable.