Both Parties Corrupt; We Need New Laws, Not New Politicians

Let’s step aside from the partisan bickering over taxes, immigration, guns, and sex for a second. These are all hot-button issues, and tend to enflame people’s emotions. People have strong feelings about those issues, which are camera-ready, get plenty of talking points, and easily personal. But our obsessive national focus on these stories, particularly in the for-profit media, also ends up taking up large amounts of our brain space, not to mention our headlines, airtime, and social media.

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The fact that US politics is dominated by these issues tends to obscure other stories. The boring stories. The ones that don’t get front-page billing all that often. Those are the stories about the revolving door of elites that move between government and corporate bureaucracies. These stories are harder to follow, in part because they can put one to sleep. These are the stories that involve numbers – mostly numbers of dollars – and come from investigative committees and reporting. They involve the corrupt relationships between politicians, lobbyists, corporate executives, and special interest groups, including non-profits, that write the laws of the United States, pay the campaigns of ‘democratic’ representatives, and receive the largess of tax-payer government contracts.

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These special interests are the important players of our political game, and they aren’t elected and they don’t vote. They don’t control our system, of course; all complex systems are too thick with links for any few to over-determine the direction of a nation. But on the whole, the money that pours in from all these disparate players adds up like so many gold nuggets on the scale of democracy, and tips the balance from real people toward the fingers dropping the nuggets from on high. And so no matter what kinds of compromises the two parties reach, those compromises will inevitably reflect those gold-dusted fingers, and they will inevitably tip policy toward formulas that currently have the gold.

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At a certain point, this kind of influence ceases to be a righteous form of expression by the ‘successful.’ Instead, it changes the game itself – and we all know the game’s been changed. How do we know? When the players on the field are also the refs and umpires. And that’s where we are now. We got no sacred cows here, no party affiliations, and also no cynicism. We believe this is obvious corruption, and, as such, can be bleached.

No liberating changes to our democracy can appear until we address these different aspects of corruption, for any ordinary people of either political party.

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Government Banking Regulators Are Corrupt, Dude! Like, $2 Billion Secret Reports Corrupt!

Secret reports on how the banks foreclosed

In the game of politics, the players can sometimes become the refs or umpires. In the case of recent Senate Democrats barking at federal banking regulators last month, we saw how some Democrats temporarily blew the whistle on obvious corruption, though to no effect. That’s the game of politics in Washington, but the details are hee-lar-ee-us, yal. Especially for everyone who majored in the humanities, keep reading: those old book reports might have prepared you to make a million dollars per page when you grow up!

The news was a Senate hearing about why government regulators haven’t been, err, regulating very well. In the Wall Street Journal article “Regulators Face Heat on Foreclosure Reviews,” Alan Zibel writes that senators like Elizabeth Warren “faulted what they called a cozy relationship between regulators, banks and consulting firms, many of which have close ties to Washington officials.” Basically, it’s if LeBron James put on a ref jacket and called  games for the Heat. That’s Washington-style b-ball, folks.

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Part of the senators’ anger came because regulators hired consulting firms to study the mortgage foreclosure abuses committed by the big banks – and then kept their findings secret. Those consulting firms were hired by government regulators, who apparently didn’t conduct the reviews themselves. Maybe they were too busy updating their LinkedIn profiles to…get a job at a bank when they’re done playing regulator.

Senators like Warren wanted to see the reports, though. Hey guys! This is America! We live in a democracy here. She also wanted to know how much these consulting firms got paid. In response, regulators like the Office of the Comptroller (OCC) and the Federal Reserve refused to answer her questions or provide more information. They pointed to the $9.3 billion settlement they made with 13 of the 16 banks , and the $3.6 billion they paid to individuals last month. Uh, Lizzy, for real, we paid for all this already, remember? Please go away. 

If the banks paid billions, then what’s the problem? Why the secrecy over the reports?

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Chinese Economy Shaky as Epic Problems Persist

We’ve been thinking about China for years, and writing about China for months. This blog is almost a year old and we’ve studied China fairly closely in that time. There’s only so much you can get from news sources, of course, and from our favorite blog, China Daily Mail. That said, our China stories are all about epic problems: epic corruption, epic social engineering projects, epic riots, and epic trillons leaving the country. And yet to call any one the crisis risks wasting a breathless tone on an enigma. Just another western pundit grabbing readers with fake newspaper headlines…but the riots continue (see below, from today).

China riot may 2013

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It’s damn humbling. How is China holding itself together? Is “authoritarian capitalism” really so resilient? Is the last Communist Party of the 20th century (right?) really so strong? It’s tested our senses, folks.

And so we’re going to start using a different voice to write about China, and maybe everything else, because we’re starting to laugh at all this. But will The Daily Crowd join the snarky writers who take clever but all-too-whimsical stands on issues, with personal or ironic twists? That might give us some more readers, for sure: people like light tones. But we’ll probably have to do something in between our ‘newsman’ voice and the snarky what I find I interesting common to all young bloggers. So more irony. Less breathless. More here’s the guy writing this. Why? Because we’re mixing it up. And we promised to keep it shorter. Speaking of which, enough of this intro. Can we even do this? Probably not.

So thanks for joining us again, dear reader. Now read on for our update on the volatile Chinese political economy: remind yourself how many of those trillions left the country last year…

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Serious Risks Still Define Chinese Politics and Economy

It’s been several months since we’ve turned our attention to China. We’ve been following a cascade of blogs from China Daily Mail, our favorite Chinese blog, as well as the usual two-track narrative in the mainstream financial media.

Track one says that China has survived its soft-landing after the 2008 collapse and its subsequent stimulus, which led to a successfully popped property bubble. As the new Chinese leadership begins a slow and methodical rollout of economic reforms, a manageable transition to a domestic consumer society will fulfill the ultimate promise of China’s two-decade strong urbanization project.

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Track two says that the incoming leadership team will need to address political reforms, and that the economic data used to measure China’s relative stability doesn’t include the opaque flows into China’s shadow banking sectors, or account for the significant concern that the Chinese Communist Party routinely fudges its data. Without meaningful expansion of the Chinese Communist Party to new demographics, new environmental regulations, and more experiments in localized democracy, the incredible inequalities created by China’s corrupt, state-owned corporate economy will produce political instability, fragmenting social cohesion and sparking militant clashes.

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Over the new few blogs, we will address these two tracks, and build the pessimistic case that the track-two narrative needs more sustained attention for those hell-bent on promoting their faith in exponential global economic growth.

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A Common Crisis: Slow Growth and Political Legitimacy in the United States and China

For the past few blogs we’ve been drawing attention to several contradictions essential to understanding the future of US politics and global crowd formation. The overall conflict involves continuing high employment and low GDP growth in the real economy, which is occurring simultaneously with rapid growth in the finance economy, and shadow banking especially. As we see with partisan fights over the federal budget, the slow-growth real economy stands in opposition to record-breaking stock markets and vast profit expansion in the realm of private equity and hedge funds. In part, this conflict has led to increased inequality and investor-driven policies of austerity for the public commons.

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Furthermore, this widening gap between the highly profitable financial economy and the punishments of austerity continues to create political tension. This tension has grown in the wake of widely perceived unfairness regarding the “two-tiered American justice system,” in which financial criminals with political connections pay fines to avoid criminal prosecutions. As a result, various levels of US government are widely perceived to be corrupt. This corruption is testing the “legitimacy” of the US as a whole, whose “democratic” elections aren’t able to provide voters with any real mechanisms for radically changing the embedded criminal networks reaching from corporate firms, via lobbyists and donations, to the political class in Washington.

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In his editorial for the Financial Times last year called “The west’s legitimacy rests on restoring opportunity,” Raghuram Rajan addresses another aspect of this problem between slow growth and political legitimacy (10.18.2012). A professor at the University of Chicago School of Business, Rajan’s editorial opens by questioning whether “democracy and free enterprise should be mutually supportive.” Though perhaps oversimplifying the matter, he’s broadly correct when he defines a major split in the ways that democracy and capitalism treat ‘the individual.’ In democracies, individuals are equally powerful in that one person has one vote. In capitalism, however, individuals are valuable only based on “how much economic value they create and how much property they own.” Built into this tension, Rajan claims, is the threat of voters dispossessing the rich and powerful, as well as the threat of the wealthy eroding the political equality of voters.

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Rajan argues that voters protect the wealthy because they see that the rich are more “efficient managers” of wealth. They assume that the rich are “self-made” and have “won” their wealth in a competitive society, where everyone plays fair according to transparent rules. Things get murky only when voters begin seeing the wealthy elite as “crooked” – that is, the wealthy elite received their wealth from inheritance or accumulated it unethically. This is where he sees the origins of “regulations” and “punitive taxes.” As an example, he offers Russia, where property rights aren’t popular because the oligarchs acquired their wealth through primitive accumulation, or various forms of institutional and predatory pillaging from others. Those oligarchs rely on the Russian government to protect their wealth. In turn, the Russian government grows more authoritarian, autocratic, tyrannical, and corrupt.

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Corporate Fraud in the Age of Austerity

To celebrate the recent sequester cuts in federal discretionary spending, we thought our readers would enjoy a recent column in the Wall Street Journal. The theme of Justin Lahart’s article “Investors Should Trust But Verify” is recent research into the transparency of corporate finances. The thesis of economists Alexander Dyck, Adair Morse, and Luigi Zingales is eye-opening: “for every company hit by allegations of dodgy behavior, three more go undetected.”

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Austerity, Humiliation, and Riots

Our recent blogs have addressed the social and legal ramifications of austerity. When considering the Geithner Doctrine, we reflected with Neil Barofsky on the “two-tiered system of justice” in the United States: one that prosecutes individuals for crimes that include prison punishment, and one that fines financial institutions for enormous, networked conspiracies and yet refuses prison punishment. In the context of Federal Reserve Chairman Ben Bernanke’s unprecedented monetary policy, we discussed the Fed’s increasing anxiety over the failure of its policies to lead to growth in the ‘real economy.’ And next to these figures we imagined a novel idea from Reverend Jesse Jackson and the Rainbow Push Coalition, who want to open a national Development Bank funded from the “repatriation” of $1.7 trillion in outstanding overseas cash hoarded by US corporations.

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So today, we’d like to briefly address some of the ways that people express their emotions over conflicts like these, and in the process take justice into their own hands. Justice, in a moral and emotional sense, is distinct from justice in the context of political institutions. When people believe that institutions of political and economic power serve to entrench elites in their positions and deny opportunities to those that lack the benefit of institutional power, then those institutions lose legitimacy, and people start to seek justice outside institutions in larger numbers. So as the United States begins to go further down the unnecessary road of austerity, as with the sequester this week, we might consider the implementation of austerity in Europe, and see how austerity has spurred social fragmentation and the breakdown of respect for the rule of law. In short, people sometimes turn to “law-breaking” when they feel that law is applied selectively, dishonestly, and for the benefit of an elite few.

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Fed Anxiety Over QE3 Reveals Structural Crisis In Real Economy

The Fed has propped up the US economy since the 2008 collapse. Meanwhile, ‘real’ economic growth – with sustainable jobs, alternative energy, and scalable innovation – has simply not followed the Fed-funded ‘financial’ economy of stocks, derivatives, bonds, and debt. In their article in the Financial Times “Fed doubts grow over open-ended QE3 policy,” Robin Harding and Claire Jones write that the Fed’s open-ended asset purchases have split the Fed board led by chairman Benjamin Bernanke (2.21.2013). This open-ended program is what’s known as QE3, because it’s the third round of so-called “Quantitative Easing” since 2008. Orwellian moniker-makers, take note.

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Right now, those open-ended asset purchases equal $85 billion dollars a month in mortgage-backed securities, purchased from mortgage brokers by the Fed. So as the Fed becomes the world’s largest home owner, so to speak, many Fed executives worry that their huge balance sheet will permanently distort the way the US economy works, the way the financial system works, and the way the Fed works. The Fed’s balance sheet of people’s homes – or mortgage backed securities, depending on your point of emphasis – now totals $3.078 trillion dollars. That’s a significant portion of the United States’ annual GDP; it’s around 20% of the entire value of all the goods and services produced in the country in one year (assuming a $15 trillion dollar annual economy). Or higher: see chart below.

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If they keep buying until the end of 2013, the value of the Fed’s total securities will hit $4 trillion. (In an age when people regularly call for debt jubilee, these numbers provide the punch that stirs the drink. Why? Because the Fed buys these securities with money it creates from nothing. Why not put that money to use for the common good? Ah, we’re getting ahead of ourselves.) All this news comes as a shock because the Fed told us back in September 2012 that they’d buy these securities…forever! Or at least until the unemployment rate went down or until inflation went too high. Yet now executives on the Fed want them to curtail the program early.

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Proposed Small-Business Bank Seeks Sliver of $1.7 trillion US Corporate Overseas-Cash Pile

In Gillian Tett’s article “Big corporate cash piles can help fund small business,” Tett continues with her running commentary over the past year on the enormous cash reserves built by global firms, many of them American (Financial Times, 2.08.13). American companies alone hold $1.7 trillion dollars in “spare funds” overseas, which they refuse to “repatriate” because they don’t want to pay taxes. Furthermore, the Joint Committee on Taxation has found that American multinationals typically hide two-thirds of their funds offshore, in part due to their refusals to pay tax. Facts like these rarely entire mainstream conversations between the two dominant political parties, which  mire themselves in proposals like those below.

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Tett points to Reverend Jesse Jackson’s Rainbow Push Coalition as one group trying to apply new pressure on corporations to release their funds into the United States, for the benefit of Americans. The Push Coalition has begun to urge state pensions to divest from corporations storing large cash piles overseas, such as General Electric, Google, and Pfizer. And now Rev. Jackson has another good idea to get Americans this cash: the companies can have tax breaks if they agree to provide some money to “deprived areas” through a US development bank – a national, potentially non-profit bank.

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The Geithner Doctrine and the New Criminal Justice $ystem

There are so many bank scandals finding settlements in the past several years it’s hard to keep them all straight. But one need only watch the tape of new Massachusetts Senator Elizabeth Warren asking regulators from the Securities and Exchange Commission (SEC) a simple question to conceive the lies, fraud, and criminality of Wall Street firms. She asked, merely, when the SEC last brought a bank to trial.

The SEC fumbled through their response, caught off guard, mumbling about their leverage and choices. Stunningly, they could not remember the last time they brought a bank to trial. Senator Warren made at least one good point on the subject, too; what’s the point of deterrence if banks understand in advance they will be able to pay fines out of their fraud-based profits? Comptroller of the Currency Thomas J. Curry, below, just didn’t think it was necessary to prosecute.

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Warren isn’t alone. Former special inspector-general of the troubled asset relief programme (TARP), Neil Barofsky, wrote an editorial in The Financial Times last week on the very subject (“The Geithner Doctrine lives on in the Libor scandal,” 2.08.13). Currently a senior fellow at NYU School of Law and author of Bailout, Barofsky levels some strong criticism at exiting Treasury Secretary Timothy Geithner, Obama’s top finance man during his first term. His editorial centers on what the blogger Yves Smith calls the “Geithner Doctrine,” which made “the preservation of the banks, no matter the consequences, a top priority of the US Government.”

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