Capitalism: The Relationship Between Politics and Economics
By: Adrian Nardella and Luke Rebecchi.
Edited by: Jonathan Burns and Benjamin Virkus
By now, after decades of incessant repetition, free markets and capitalism are inextricable. Taken together or standing alone, these words sanctify a tradition of economic thought and political action. We consider capitalism a synonym for free markets and freedom. But might there be unspoken benefits of capital and its owners? As noted by Karl Marx, capitalism implies an imbalance that favors business owners to the dismay of laborers. The revolving door between big business and politics may explain why this balance emerged. More appropriate are its effects as seen throughout the modern world today.
Recent policy reflects the imbalance mentioned above. In the same year Bill Clinton signed the North American Free Trade Agreement (NAFTA), which promoted trade across the southern U.S. border, construction of a border across Mexico commenced. The message is clear, and continues to resonate: we do not grant labor the same rights as the owners of capital. Last week, The New York Times ran a three-part series on state/local government-issued tax expenditures for businesses. In order to attract ‘job-creators’ to their district, local governments have annually forgone over $80 billion (a conservative estimate) in taxes. When governments grant big business money to turn the lights on, it is done under the guise of protecting ‘job-creators’; conversely, when governments grant poor laborers money to work, it is condemned as buying votes and sustaining lazy welfare mothers. Through the use of political rhetoric, politicians justify the promotion of job creation as an acceptable tradeoff to forgo revenues (taxes). These are the same revenues used to fund social and economic programs which provide assistance to the under-privileged “laboring-class” of society. In essence, our current political system is designed to contribute to the underlying imbalance embedded within a capitalistic system. The fact that corporate America might be receiving favorable treatment, dare I say welfare, is anathema.
As Milton Friedman noted in the first sentence of Capitalism and Freedom, “It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem”. At some point, the curious must question why capitalism deserves to be the predetermined derivative of free markets. Unfortunately, (as Friedman further elaborates) politics and economics are an interconnected and powerful vehicle. Although our current political system favors big business above all, it is an interesting concept to conceptualize a declaration of allegiance to free market labor amongst America’s elite policymakers. Rectifying this thought against the classical theory that equates the power of capital with labor within the same function, might provide more power to the lower classes of society. Only then, will local governments be forced to provide ‘job-creators’ with incentives other than those that solely impact the same laborers politicians claim to protect.
Discussion (0) | December 9th, 2012 Categories: Government Policy, Money
The Law and Disorder of the Financial Market
Image credit: Satoshi Kambayashi, published Oct 13th 2012 "Law and disorder: Financial institutions are vulnerable to investigation, prosecution and litigation from every direction." The Economist.
By: Wenqing Zhang and Janaki Patel.
There are many entities in the US coined to be consumer protection bureaus, many of which specialize in prosecuting financial firms. These entities are, for example, the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation, but there are also other departments which create settlements with big banks. Other entities that are often unrecognized as prosecuting entities, are the Department of Housing and Development, which assisted in a $25 billion mortgage settlement with banks. The persistent problem is that the settlements that are being made are not necessarily protecting the consumer directly, and on top of that, financial firms are being exploited repeatedly.
Furthermore, since the settlement will be used to fund the government budget, the reward for being the one who take the settlement will be great. Though there are some “underground” rules among those investigation departments, for instance, DoJ always takes the case that SEC are limited to take, the coordination among the investigation departments is not secured. According to the Standard Chartered case, in which the Department of Financial Service (DFS) rapidly collected $340 million settlement from the bank unilateral. Since the rewards for being the first to fine the financial institutions is so great, the investigation departments will have a higher incentive to be the first to prosecute. This behavior will absolutely destroy the coordination between the investigation institutions and in addition, it can disorder the market.
In fact, the settlement can now be regarded as a trade between the financial firms and their investigators. Since the result of an indictment of a financial institution can be really bad, for example, the indictment may suspend its license, so firms always choose to pay the settlement when the investigation starts. Therefore, if the firms did something bad, since they paid the settlement and the investigation ends, their bad behavior will not be found. If they did not have any bad behavior, the investigation department will also leave them alone because of the settlement. According to the article, “this cosy alignment of incentives worries some.” This “alignment” cannot be regarded as justice regulation any longer, it is just a different form of trade. The law of the financial market does not stabilize the market but disorders it.
I would like to make clear that I don’t agree with completely defending big financial institutions, because often times, bankers will often bend the rules for their own personal financial gain, as we have seen in the case of trader, Kweku Adoboli, who had his bank, UBS, be fined 29.7m pounds for fraud. In this case, UBS had made some serious mistakes in not effectively utilizing controls within the bank, but in other financial settlement investigations, the crime may not have been committed by one person or one firm and just one firm may be charged. Take, for example, the LIBOR scandal which costed Barclays $450m in settlement charges; this scandal, which some evidence claims that other banks have colluded on has not yet fined other firms ( though, it may soon enough) and manipulated LIBOR rates could have affected over $800B in trades, including almost half of the derivative market and homeowner interest rates. While the practices are not justified, it seems that every banker in the industry receives a bad name for the scandal and yet, the culture does not change in the upper-level management. The real problem is that these suits are costing financial firms millions of dollars, which are not necessarily improving the system and are not creating a more fair system . In addition to that, firms can be sued repeatedly for the same crime by federal and state authorities, and the banks may pay out settlement fines, simply to get political authorities off their back, even if they are not guilty of any crime, creating an endless and vicious cycle of continuous lawsuits. It seems that the only way financial firms can cope is to hire a larger legal team - though that seems unreasonable, considering that the point of the legal system is to decrease crime and bad practices, rather than increased the population of lawyers.
Discussion (0) | December 2nd, 2012 Categories: Government Policy
Gold vs. Fiat
By: Michael Kopelman and Luay Kanaan.
“I just want to make it clear to everybody that our policy has been and will always be...that a strong dollar is in our interest as a country, and we will never embrace a strategy of trying to weaken our currency to gain economic advantage at the expense of our trading partners” (U.S. Treasury Secretary Timothy F. Geithneron) On august 15th 1971 Richard Nixon cut the ties between gold and the US dollar. It has been 41 years since the United States has moved from the gold standard, to fiat money. In essence this means that the banking standard moved from something far more tangible(the price of gold) to something far less tangible (trust in a countries currency among investors). As is everything in economics, there remains debate today whether or not the switch to fiat money was truly the best idea for the United States economy in the short run as well as the long run.
One of the advantages to using the gold standard is evaluation. A constant universal commodity such as gold allows a country to look at current and past numbers and evaluate them. With gold being a common denominator throughout you can get a far greater understanding of how your economic standing of today compares to that of previous years. This comparison is not nearly as easy under a fiat money system.
Another advantage for the gold standard is that it is more stable than fiat money, this is because fiat money is based on trust in a government and not a set standard(ie gold). In its most basic element, a lack of confidence caused Greece’s financial crisis. Investors feared Greece’s ability to pay back its debt leading to a full out crisis where greece now stands.
Due to the instability of the financial system in recent years, embedded risk has been increased through currency wars, the debasement of the dollar, and leverage in the too-big-to-fail banks. The failure of banks such as Lehman Brothers in 2008 and other corporations has been due to fiat money. If an underlying security is priced in dollars and the dollar is collapsing, then the value of that security is collapsing too, forcing traders to sell everything! Markets in the dollar and dollar-based securities collapse while markets in commodities and non-U.S. stocks begin to spike. A solution to these problems however can be realized through the adoption of a gold standard.
One of the disadvantages of the gold system is the creation of larger amounts of money. While the gold standard would allow for the creation of credit through the exchange of money for a receipt which indicates a fixed quantity of gold, it would not allow for the creation of money beyond the amount of gold on deposit. Since gold is a scarce resource it could seriously limit the growth of an economy.
Another disadvantage of the gold standard can be thought of in light of the Great Depression. The gold standard limited the flexibility of the central bank’s monetary policy by limiting their ability to expand the money supply, and thus, the U.S. was unable to lower interest rates. Higher interest rates intensified the deflationary pressure on the dollar and reduced overall investment in banks. Therefore, a limited supply of gold reserves in central bank vaults would lead to a deliberate tightening of monetary policy, higher labor costs, and weaker securities.
A flexible gold standard should be adopted to reduce uncertainty about inflation, interest rates and exchange rates. Once investors have greater certainty and price stability, they can then take greater risk on new investments. Inflation, interest rates and exchange rates act as barriers standing in the way of innovation. The U.S. economy has seen asset bubbles, booms and busts, and crashes in the forty one years since it left gold. Gold produces the greatest price stability in asset values and therefore reduces the volatility for entrepreneurs, who are the real source of wealth creation.
Discussion (2) | September 30th, 2012 Categories: Money
