Palibbinism: Or The Financial Servile State

Matt Taibi writes:

The Republicans, meanwhile, are in the difficult position of trying to sell Wall Street’s position on the Regulatory Reform bill to their base. That might not sound so very difficult, given that the Tea Partiers in particular continue to oppose further government regulation and have used the idea that Barack Obama’s government is “taking over the banking sector” as a rallying cry. But Wall Street isn’t exactly popular with the Tea Party, either, so selling their side of the debate on this bill is a bit of a sticky thing.

Taibbi says that Sarah Palin has come up with the solution to this political paradox and quotes this passage from her Facebook page:

The current debate over financial reform demonstrates what happens when political leaders react to a crisis with a raft of new regulations. First off, the people involved in writing government regulations are often lobbyists from the very industry that the new laws are supposed to regulate, and that’s been the case here. It should surprise no one that financial lobbyists areflocking to DC this week. Of course, the big players who can afford lobbyists work the regulations in their favor, while their smaller competitors are left out in the cold. The result here are regulations thatinstitutionalize the “too big to fail” mentality.

Moreover, the financial reform bill gives regulators the power to pick winners and losers, institutionalizing their ability to decide “which firms to rescue or close, and which creditors to reward and how.” Does anyone doubt that firms with the most lobbyists and the biggest campaign donations will be the ones who get seats in the lifeboat? The president is trying to convince us that he’s taking on the Wall Street “fat cats,” but firms like Goldman Sachs are happy with federal regulation because, as one of their lobbyists recently stated, “We partner with regulators.”

Taibbi adds:

Sometimes it’s hard not to admire Sarah Palin. You need to have a pair of iron church bells swinging between your knees to pull off a crazy line like this, and she does it almost effortlessly. If you’re scoring at home, the idea here is that banks like Goldman actually want this regulatory bill because it will allow them to “partner with regulators,” i.e. team up with the government, to dominate the economy. This is despite the fact that Washington is currently flooded with financial services industry lobbyists who, in an attempt to kill this bill, are practically lugging suitcases full of money around to throw at the likes of Ben Nelson and Mitch McConnell.

Now on one level Taibbi is of course perfectly correct.  But, (and this might be a first on this blog, it certainly is for me), doesn’t Sarah Palin actually have a point here?  [I just threw up in my mouth writing that, but there it is].

Or in other words, aren’t they both right?  The financial lobbying industry is certainly trying to get the best deal it can get, as determined from its short-term, limited point of view.  They may be morons, but they aren’t dumb.  They are going to play both sides on this one.  On the one hand, they seed money to the GOP and push them to water down the bill if not kill it entirely.  On the other hand, they give money to the Democrats so that they know if and when the time comes that the Democrats actually pass a bill, they will do so in a way that cements the monopolization of the large existing financial firms.

Does anybody really expect the Financial Regulation bill to separate financial casino betting from banking?  To turn banking back into a public utility and set those who want to go into the investing/speculation game entirely out on their own as ought to be the case?  i.e. They take the risk and they reap any losses or benefits.  Instead of the current privatization of gains and socialization of losses, favored by both political parties.

If the SEC’s charges end up sticking and being seriously enforced and/or the Democrats cut Goldman loose, they will be the scapegoat–not that they are innocent in this.  But Goldman may possibly get used as the public sacrifice in order for the politicians to cover themselves as they pass a bill that basically cements the status quo.

Episodes like this I think yet again show the central wisdom of Belloc’s The Servile State.  While it looks on one level (a la Taibbi) that there is some great gulf between Democrats and Republicans on this one, is there really?  There’s a difference to be sure, and if I only have a choice between the two parties, I’ll favor a more Democratic regulatory approach.  But that fact, in my  mind, shouldn’t blind us to the deeper one-party nature of the US system.

What has changed since Belloc’s prescient text is the globalization of capital and financial industries and the death of any alternative economic platforms to capitalism (i.e. communism and fascism in Belloc’s time).  The nation-state is not only servile in Belloc’s terms, it’s not subservient to the globalized financial industry.  Sub-servile I suppose.  The US state has all the fecklessness a Taibbi rightly points out it does  while also weirdly having far too much influence as a Palin will point out.

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22 thoughts on “Palibbinism: Or The Financial Servile State

    • @Will,

      So you believe that Blankfein’s really believes that or is just waving the white flag so the SEC will call off the dogs and the Dems can hold him up as a successful product of re-education? I’m sure that the financial industry can adapt to almost any new regs but that doesn’t mean the regs are really any good or will have the desired effect.

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      • @Scott, I have no idea what Blankfein thinks. I wouldn’t want to be in that crazy man’s head for even a second.

        The problem as I see it is that the speculation innovation outpaces any norms (legal and political) and any regulation is always ex post facto.

        At a deeper level, I think the financialization of our economy is the wrong way into a post-industrial economy (leaving everyone else in service sector). I don’t think protectionism will bring back heavy industrialization but I also don’t think this cheap credit economy creates real value.

        I’d like to see the financial sector totally disentangled from banking and essentially disentangled from the real economy rather than their pseudo-casino economy.

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  1. I’ll draft a post in response to this. After spending some time reading Rortybomb as well as a paper he references there by Raj Date, I don’t think Palin has a clue and her “piece” on financial reform is more obnoxious than I had originally thought.

    There are differences between both parties and the Republicans are so far behind the 8-ball on this one. I didn’t follow the ins and outs of healthcare reform but I think I understand why liberals of various stripes wanted little to do with Republicans and their obstructionism. They have added nothing to this debate, and the financially illiterate right-leaning blogosphere is painful to read.

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    • @Dave, the obstructionism and stupidity part of the GOP is true fo’ sure. But like with health care, I imagine we are going to see a deal that however much on one level it regulates the industry and hurts some of their more gambling sides, it’s not going to really hurt them. Like in this analogy the health insurance industry which bitched and moaned about the guv’ment coming down on them, but at the end of the day, the bill was a major boon for their business no?

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      • @Chris Dierkes,
        Chris I think the main point is more that industry will always lobby for both sides, especially when the status quo is so much to their interest.

        When they start signalling that they’re willing to back legislation it’s a tactical gesture to try to get concessions from pieces they find onerous (“we support it but…”) rather than some nefarious plot for them to actually want legislation passed.

        As for health care reform: given the extent to which insurers spent money trying to kill the legislation, they probably know that down the line it’ll lead to them being regulated more tightly akin to public utilities a state of affairs they wanted to avoid. It may be a short-term “boon” in terms of total revenue (since more people will buy insurance) but it comes with shackles that will make them less flexible as a business (and thus less profitable).

        Industry will usually try to cut a deal at some point when it becomes clear they can’t stop legislation. That’s what Wall Street is doing now.

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  2. “I just threw up in my mouth writing that, but there it is”

    I’m sure this is meant as some sort of signal of sophistication, but in reality it’s more a marker of ignorance.

    We know, from more or less the entirely of economic history since the beginning of the Industrial Revolution forward that strong and stable property rights are the foundation for creating wealth.

    The flip side of this is one kind or another of folk Marxism, that economics is a zero sum game and the object of it is to grab economically valuable things from other parties on grounds of equity, need or political disfavor. Politically speaking this mentality is represented by various parties of the Left and most of their political maneuvers are intended to build this grievance-mongering mentality among the people in general.

    This is a really big problem but thankfully the mainstream Right carries
    with it the possibility of putting this particular genie back in the bottle. Therefore, in a very important way Sarah Palin actually has credibility and you, well, not so much.

    On this particular issue, people have argued on this site over the last week or whatever that the Democrats’ financial reform bill is not a bailout because it only applies to firms going bankrupt. I’m not entirely convinced by this but let’s stipulate that for the sake of argument.

    What’s this supposed to mean? What problem is this supposed to solve and why do we think this bill will solve it?

    The reason we had TARP in the first place was not because the public wanted to take taxpayer money and give it to financial institutions but 1. because we wanted to avoid the immediate paralysis of cascading failures of financial institutions and 2. we also wanted creditor institutions, mostly commercial banks to continue to serve its function as intermediary.

    As I see it, this bill does nothing to change these motivations in the event of another Sep 2008. The hope is that with this bill we’ll supposedly have another means of resolving a similar crisis. I’ve seen very little credible argument that such a thing will actually work. And in fact, it’s not really meant to work in the first place. The real goal is for the folk Marxist Democratic majorities in Congress to be able to reassure the American people that some of them are actually paying attention to our economic problems and intend to do something constructive about it.

    A far more viable strategy, a far more solid foundation fundamentally, is to get rid of the folk Marxist Demo’s and give people the opportunity to go out and earn a real living.

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    • @Koz,

      Just about everything Sarah Palin wrote in her piece on financial reform is a marker of ignorance. I explain why in my latest post.

      I also explain why your dearly beloved Republicans don’t get it.

      On this particular issue, people have argued on this site over the last week or whatever that the Democrats’ financial reform bill is not a bailout because it only applies to firms going bankrupt. I’m not entirely convinced by this but let’s stipulate that for the sake of argument.

      It’s not a bailout because a) no blank checks are being written to recapitalize firms; b) resolution authority will be punitive to management and, most likely, will wipe out shareholders and c) senior creditors will be left no better off than they would have been had they entered into bankruptcy.

      The issue that resolution authority addresses is the orderly liquidation of a systemically significant firm before its financial condition becomes so grave that it threatens to destabilize the markets (a la Lehman Brothers). A fund (hopefully) will be put in place to handle the costs of a liquidation. Assuming any taxpayer monies are used, those funds are to be paid back before senior creditors get one red cent.

      Will it work? Well, my fear is that, given the incentives for management to not go into resolution (and be fired and have the value of their stock holdings basically wiped out), politically connected firms will have the incentive to pressure regulators to not act in a timely enough fashion to stave off any turbulence in the markets. It’s not unreasonable to see this scenario happen.

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      • @Dave,

        Well all I saw from Sarah Palin in this particular context is what I saw quoted here, and on the face of it seems reasonable to me.

        The narrow point on this particular matter is that whatever it does for shareholders, management and traditional creditors, the Senate bill clearly protects counterparties. Kevin Williamson wrote a Corner post here:

        corner.nationalreview.com/post/?q=MDVkNzdkOTA2MDJhMjlhZDgwNTVkMjAyY2RkYTNjZWY=

        On the one hand, we are institutionalizing TBTF for the counterparties, on the other we are supposedly punishing the deadbeats. It’s not impossible that such a thing could work, but it’s also reasonable to think such a regulatory regime could create a bubble that wouldn’t occur otherwise.

        My beef with Williamson is that the TBTF problem really is a problem and is not merely a creation of Chris Dodd, so we ought to cut the D’s some slack for that. But the underlying folk Marxism problem is much bigger and the Demo’s can’t fix it because it’s the foundation of their self-image as liberals, as we found out in the health care bill. If we can repudiate the desire to collectivize the capital base toward socially or politically approved ends, we might find that the financial problems are easier to deal with.

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        • @Koz,

          It’s my understanding that Section 210(d)(2)(B) limits the liability to creditors to the amounts that they would have received under a Chapter 7 bankruptcy. The language appears to cover counterparties since counterparties are claimants as well. I fail to see how this can be construed as a bailout.

          Williamson does make a point challenging people like myself to discuss in more detail the emergency liquidity provisions and how those are not bailouts as well.

          The only firm to really benefit from that was GE Capital largely because of its position as a major issuer of commercial paper.

          I may address those sections at some point but per the Raj Date paper, its purpose appears to be more systemic in cause and not meant to prop up failing firms.

          Out of curiosity, how would our financial problems be easier to deal with?

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          • @Dave,

            The part about the counterparties is just not credible. As Williamson points out, just what are the emergency liquidity provisions supposed to do if they don’t bail out counterparties?

            More importantly, the big picture problem has to do with too much government spending. Our problems would be a lot easier if we could repudiate the liberal folk Marxist inclination to think that we can collectivize the capital base for politically favored ends.

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            • @Koz,

              How is my argument regarding counterparties not credible? I interpret the text one way and disagree with Williamson’s claim and then you dispute that by saying Williamson is right because he infers that the liquidity provisions are in effect a backdoor bailout. The text of the provision (1152) calls that into question. I need more to go on.

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              • @Dave,

                For two sort-of related, sort-of separate reasons that I should have differentiated better in my last comment.

                1. Because the liquidity provisions are in the bill and there is no plausible purpose for them except to bail out counterparties. (Williamson’s point) One thing Williamson doesn’t mention that he should have is that to compare the amount of counterparty bailout to bankruptcy is a red herring because the point of the resolution authority is to prevent bankruptcies.

                2. If we have another crisis like Sep 2008, the political and economic pressures to bail out various parties will likely be the same as they were then, and our Establishment will probably respond by bailing them out. In any case, this law does nothing to change that (and if it did it wouldn’t make any difference, we’d change the law to adapt to the crisis like we changed the law to create TARP).

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  3. Koz,

    Regarding (1), I would start at section 4.3 of this paper:

    http://www.cambridgewinter.org/Cambridge_Winter/Welcome_files/killer%20g's%20042310.pdf

    as it describes what the liquidity provisions are aimed to do. The intention is as a lender of last resort and is not intended to prop up failing firms. Its intent is to be used when extremely volatile conditions in the capital markets choke off access to capital for otherwise healthy yet systemically important firms. I fail to see how loan guarantees are counterparty bailouts since counterparties are not lenders.

    Point (2) is not a criticism of the current bill but an admission that financial reform does not preclude the federal government from stepping in and bailing out companies in a future crisis.

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    • @Dave,

      1. I read some of that, I don’t see how it changes things. Why do we suppose AIG, for example, will be treated differently under this bill?

      2. Sure it is, at least relative to the big picture. It is very difficult in practice for the government to allow GSEs or GS or GE to stiff their creditors and counterparties, or credibly convince the markets of that. But, what we can do is get Fannie and Freddie out of business altogether. That way there are no GSE defaults.

      Compare this to the S&L crisis from 20 years ago. The major difference between that and 2008 is that we could afford to just write a check and go on. But, there is a limit to the extent we can try to control private capital toward politically/socially approved ends without putting stability of the whole system at risk and we have plainly hit that limit.

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    • @Dave,

      I’m bringing this back from the dead to look at it from the context of what we know from the recent Greek bailout.

      The IMF and other EU parties have pledged a pile of money to keep Greek sovereign debt from defaulting and to minimize the risk of contagion to other PIGS countries.

      At the risk of stating the obvious, this propensity of this bailout (and other alternatives) are determined by the policy goals of the various relevant political and financial actors. It doesn’t matter if it is mandate by some law or banned by others. In crises of this magnitude, the legislators are going to be just as panicked as everybody else.

      Given that, the Senate bill may or may not be better than the status quo. But we should not harbor any illusions that this bill solves the most important American macroeconomic problems now or will mitigate any crisis in the future.

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