2011, a year of me-first politics and taxpayers getting swindled

2011 was a year in which the wretched and hideous state of American politics became crystal clear.  

Banks love being too big to fail and have aggressively lobbied the government to stay that way.

Fannie and Freddie continue to suck money from taxpayers like giant leeches: since 2008, about $73 million in taxpayer money has been used to pay the legal bills of former executives who are fighting fraud suits.

MF Global, a derivatives firm run by former NJ senator Jon Corzine, allowed hundreds of millions of consumer dollars to simply vanish.

Minorities and low-income borrowers (those who were supposed to benefit from the federal "housing strategy") became the biggest victims of the foreclosure crisis. In a suit filed in December, the Justice Department alleged that Countrywide--once the country's largest mortgage lender--steered more than 10,000 low-income minorities into risky subprime mortgages.

The cowardly postponement of the Keystone XL pipeline prevented tens of thousands of working-class Americans from getting new jobs.

The deficit problem and the payroll-tax holiday were simply kicked down the road.

Hopefully 2012 will be better. But it might not.

As America gets poorer, Congress gets richer

In a previous post, I commented on how the president and Congress seem to primarily be working for the big guys. Big government has seen its power grow dramatically; Wall Street has been raking in dough; wealthy individuals and corporations can take advantage of numerous tax loopholes. Meanwhile, middle class jobs are being scuttled by powerful special interests such as the NLRB (in the case of Boeing) and the green lobby (in the case of Keystone XL).


One probable reason for this? Congress is populated overwhelmingly by the rich--and is getting richer while the country gets poorer. As you can see from the chart to the right, between 2004 and 2010 the median net worth of Congress grew by 15 percent while the median net worth of all Americans fell by 8 percent. Even more blatantly, the richest 10% of Congress saw their net worth increase by 33%, while the net worth of the richest 10% of Americans was essentially flat. In other words, if the Occupiers think that Congress currently favors the 1 percent, it is probably because Congress is the 1 percent.

Why is Congress getting so much richer? One obvious reason is that they can basically vote themselves a raise every two years regardless of their performance or that of the economy. But the huge windfall for the richest members of Congress is more a result of crony capitalism and insider trading. For example, during the Obamacare debates, John Kerry invested $200,000 in the healthcare company ResMed--and when Obamacare cut Medicare reimbursements, Kerry dumped his holdings in an insurance company that was heavily dependent on Medicare. Similarly, Dick Durbin liquidated a large chunk of his investments in September 2008 after Ben Bernanke warned him of a possible financial crisis. Rep. Darrell Issa (R-CA) once obtained $800,000 in federal earmarks for a road-widening project next to his land holdings.

Clearly, the rising cost of a political campaign (the average successful Senate run cost $10 million in 2010) is a major factor keeping the non-rich out of Congress, as well as giving significantly more power to special-interest donors. But sometimes I feel like we need a third elected branch of government, whose job is to investigate members of the executive and legislative branches and mete out penalties. In sports, athletes who take steroids are suspended for large portions of a season, and colleges that accept illegal donations are forbidden from competing in postseason games. If lawmakers who engage in business or land deals involving a conflict of interest, they need to be fined--or, for repeat offenders, banned from the next election.

"Occupy Wall Street" protesters call for more use of force by government

At first glance, I liked the idea of the "Occupy Wall Street" protests. I agree that Wall Street currently has way too much power (in a previous post, I compared Wall Street to Orren Boyle, the conniving crony capitalist villain from Atlas Shrugged). However, it seems that the protesters are completely misinformed about the source of Wall Street's power, and some of the "solutions" they proposed were fairly frightening.

Journalist and anti-war activist Adam Kokesh interviewed several of the protesters in DC. Many of them called for additional government regulations and the re-election of Obama. This seems a bit odd, considering the number of Wall Street operatives in Obama's cabinet, and the fact that one-third of the money he has raised so far for his 2012 campaign has come directly from Wall Street. These protesters seem to think that somehow a candidate that is bankrolled by Wall Street can effectively check Wall Street's power. They fail to understand that Wall Street has so much power largely because they have bought off so many people in government--and have received lots of sweetheart deals, loopholes, and bailouts in return.

While that is puzzling, this sign that was being carried at the protest is disturbing. It reads: "A government is an entity which holds the monopolistic right to initiate force." One of the protesters that Kokesh interviews also says that he supports the use of force by government if it will "maximize social justice...maximize freedom...and improve the lot of everyone." I believe that is very similar to the argument used by Hitler to pass the Enabling Act. And besides, how can people rail against Wall Street having excessive power...and then call for an even more powerful institution, the government, to use force? Do they actually want a totalitarian government?

A second Gilded Age?

For those unfamiliar with the Gilded Age, it was an era of government dysfunction that lasted from about 1877 to 1900. The gap between rich and poor was enormous. Partisan gridlock in Congress was the norm. Powerful political organizations got out the vote for their candidate and were rewarded with generous favors once the candidate was elected. Large monopolies or near-monopolies wielded enormous power over the government and were said to have bought certain senators. And corruption and crony capitalism were rampant and bipartisan. In fact, as Pittsburgh Tribune-Review columnist Salena Zito argues, it was very much like the political situation today.

In this 1890's political cartoon, a number of bloated figures--representing the "Iron Trust," "Standard Oil Trust," "Copper Trust," "Steel Trust," and various other monopolies--have taken over the Senate. Today the cartoon is just as true; all that needs to change are the names on the figures' bellies. Instead of the Oil Trust and the Steel Trust, we have Giant Banks, Fannie Mae/Freddie Mac, the Military-Industrial Complex, Public Employee Unions, Giant Hedge Funds, Trial Lawyers, et cetera.

In response to the corrupt excesses of the Gilded Age, a populist movement--the Progressive movement--formed in the 1900's. This movement was the driving force behind several important changes: antitrust legislation, direct election of senators, state-level referendums, and (somewhat unfortunately) the income tax. The people largely blamed local and state-based political machines for the corruption, and thus enacted reforms that strengthened the federal government and made all levels of government more responsive to the people.

Similarly, the Tea Party is a populist response to the partisan bitterness and special-interest power that characterize today's politics. In contrast to the Progressives of the 1900's, the Tea Party blames most political problems on the federal government, and thus their goal is to weaken the federal government and give more power to the states and the people. Even outside of the Tea Party, independents in general are fed up with government (as shown by the record-low approval rating for Congress). In 2006 and 2008, independents angrily threw Republicans out of office. Since 2010, the voters have turned their anger towards the Democrats. One has to wonder how long this political ping-pong will continue before someone finally enacts meaningful reform.

Putting a leash on Wall Street

Traditionally, the function of the financial sector has been to provide capital for business. Over the last few decades, however, it seems that Wall Street has become much more than that. As William D. Cohan argues in this Bloomberg article, Wall Street has now become a huge casino--with speculation, hedging, and arbitrage instead of craps, blackjack, and roulette--where the players get to make bets that have consequences for the US economy but not for themselves.

In the past, Wall Street transactions mostly consisted of actually buying and selling shares of companies. Recently, however, we have seen an explosion in derivatives, which allow investors to speculate on the price of shares or commodities without actually buying the shares or commodities themselves. Credit default swaps, a type of derivative, played a huge role in the credit crisis of 2008. Even Warren Buffett has called derivatives "financial weapons of mass destruction."

Even worse is the concept of "too big to fail." Currently, Wall Street bankers have no consequences for making risky investments--they are rewarded with huge bonuses if the bets pay off, and with bailouts if they don't. Some people think that the banks should simply be allowed to fail. The problem is, if letting the banks fail could lead to economic disaster, that's still an awful situation. People on Wall Street should not be able to take risks that could submarine the whole economy if they fail. Banks that are too big to fail are too big, period, and need to be broken up. Reinstating Glass-Steagall would be a good start.

What is the government doing to prevent another financial crisis like what happened in 2008? Predictably, nothing. Wall Street simply donates too much money to candidates of both parties. Oh, and most of Obama's economic team has ties to Goldman Sachs. The Dodd-Frank bill claims to be "finance reform," but it specified almost nothing and left the reforms up to a team of bureaucrats. The best way to guarantee that nothing good will be accomplished anytime soon is to leave something up to a team of bureaucrats.

Some libertarians have compared the current American economic situation to the events of Ayn Rand's Atlas Shrugged. In that comparison, Wall Street--along with Fannie Mae and Freddie Mac--would be the obvious choice for the role of Orren Boyle, the incompetent businessman who keeps himself afloat by using his connections to get constant favors from the government. Although Wall Street is not incompetent, they have been taking way too many risks that endanger the whole economy. Government has only been encouraging those risks, and in some cases (e.g. housing) mandating them. It's a classic case of crony capitalism.