Monday, March 4, 2013

“Cronyism”

Sydney M. Williams

Thought of the Day
“Cronyism”
March 4, 2013

“There are two things that are important in politics. The first is money and I can’t remember what the second one is,” so, allegedly, once remarked Mark Hanna of Ohio. And he was a man who would know. He had married the boss’s daughter and then took over what became the M.A. Hanna mining company. Once rich, he largely financed William McKinley’s successful bids for the Presidency in 1896 and 1900. While he turned down a cabinet position, he did use his influence to secure an appointment as U.S. Senator once John Sherman was named Secretary of State, showing that cronyism was alive and well a hundred years ago.

Cronyism is defined in my Random House unabridged dictionary as “the practice of favoring one’s close friends, especially in political appointments.” But it has assumed a more specific and darker connotation: today it is more associated with the combustible mixture of money and politics, bringing financial rewards to the business person in exchange for more power on the part of the politician. Money and politics are one of man’s earliest creations. In fact, the latter would not be possible without the former. The relationship is symbiotic. The former becomes more secure because of the latter. While cronyism has been around for millennium, the word is relatively new, dating back to the mid 19th Century. In my 1828 Webster dictionary there is no such word, and at that time the word “crony” connoted fellowship, as an intimate companion. It has obviously assumed a darker, more sinister meaning.

Patronage has been a part of every administration. Even in the earliest days of the Republic, it cost money to be elected President. Cushy jobs were offered to supporters from Washington’s administration forward. Ulysses Grant’s administration was noted for its scandals, perhaps most infamously the Whiskey Ring scandal, so called because a number of politicians siphoned off tax revenues levied against distillers. Teapot Dome, another infamous scandal, came to define Warren Harding’s Administration. It involved the leasing of U.S. Naval oil reserves in Wyoming and California to private oil companies at low prices and without competitive bids. Interior Secretary Albert Fall was later convicted of accepting bribes; he was fined and served a year in jail. In his farewell address on January 17, 1961, Dwight Eisenhower, one of our least corrupt Presidents, mused as to how the nation had become compelled to create a permanent armaments industry. In the address, he said “we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.”

We have seen close ties between the current administration and green energy, Hollywood and banks. Given the fact that it was the epicenter of the credit collapse of 2008, the financial sector has become of great internal risk to our nation. The problem is their size; they have continued to grow unchecked following the near collapse five years ago. While I have long felt that the Bush Administration’s immediate response following the bankruptcy of Lehman saved us from what could have been a devastating meltdown of financial and credit markets, I also feel that Dodd-Frank has done nothing to prevent a recurrence. In fact, banks too big to fail (TBTF) have become even bigger. In 2007, according to a report in Bloomberg Business Week, the five largest banks held assets that were equal to 43% of GDP. By 2011, the five biggest banks – JP Morgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs – held $8.3 trillion in assets, equal to 56% of the U.S. economy. In the same article, David Lynch wrote that the five largest banks are double what they had been a decade ago, relative to GDP. Despite the two thousand plus pages comprising Dodd-Frank, the taxpayers of America are at greater risk than we were five years ago. In a February 21 editorial, Bloomberg put the taxpayer annual subsidy of major banks at $83 billion – an amount almost exactly equal to the cuts mandated by sequester. Borrowing from the work of two economists, one of whom works for the International Monetary Fund (IMF), Bloomberg put the taxpayer subsidy to large banks at 80 basis points. They arrived at that number because of the implicit guaranty by the federal government that allows these banks to pay less for their liabilities – deposits and loans. To arrive at the $83 billion, the 80 basis points was multiplied by the banks’ liabilities.

The top five banks in the U.S. account for about $64 billion of that subsidy – a number roughly equal to their annual profits. In other words, it is the taxpayer who continues to help pay for the large bonuses to those working in large, publically traded firms. Since the banks continue to be large contributors to political campaigns, taxpayers can also be seen as unwittingly providing millions to the politicians who have allowed this travesty to persist. Anat Admati and Martin Hellwig have published a new book, The Bankers’ New Clothes. The review in Saturday’s Wall Street Journal spoke to the perverse incentives of government’s guaranteeing of bank debt, even implicitly. John Cochrane, the reviewer, wrote: the author’s “show us how politicians and regulators like the cozy cronyism of the current system” and “how governments around the world use regulation to direct funds to politically favored businesses, to preferred industries, to homeowners and to the government itself.”

In a rare epiphany (likely to go unrepeated), I found myself last week in total agreement with Massachusetts’ newly elected Senator, Elizabeth Warren. She took Fed Chairman Ben Bernanke to task for failing to implement the Volcker Rule – for allowing TBTF banks to become even bigger. It was a delight to see her attack a squirming Mr. Bernanke.

Another other aspect of this cozy relationship is the revolving door that remains open between Wall Street and Washington. Goldman Sachs has provided two of the country’s last six Treasury Secretaries. Newly appointed Treasury Secretary, Jack Lew, came to the White House from Citigroup. His last bonus at the bank was funded by taxpayers, via TARP. But I don’t worry too much about this swinging gate. There have always been people moving between the two places. Infamously, President Franklin Roosevelt appointed Joseph Kennedy as the first director of the Security and Exchange Commission (SEC) on the premise that the fox is the best guardian of the henhouse. Every Treasury Secretary has had previous experience, and Wall Street is not a bad training ground.

What is of concern is the amount of money involved. According to OpenSecrets.org, the total cost of a Presidential election more than doubled between 2000 and 2012 to $6.266 billion. Growth in spending, thus, compounded at 6.1% – more than double the growth in GDP. The rate is unsustainable (I hope) and, of course, causes the candidates to become even more dependent on moneyed interests. Those who provide financing expect something in return. Mr. Obama came to office promising to remove the taint of big money. It hasn’t happened. Following the Supreme Court decision on Citizen’s United, George Soros’s PAC MoveOn.org passed out a petition to get signatures for a Constitutional Amendment to “get big money out of politics permanently.” The irony is that George Soros is one of the single largest contributors to the political process, almost always to leftwing causes. The motion, unsurprisingly, did not succeed.

Every attempt to limit the amount of money in elections has failed. It is an impossible dream, akin to the ideal of eliminating all nuclear weapons, halting global warming, sending home all illegal immigrants, or banning all handguns. The Tillman Act of 1907 was an attempt to remove contributions from corporations in elections. The language of the Act provided for penalties, but had no means of enforcement. The McCain-Feingold Act of 2002 was an attempt to limit the amount of money in campaigns – preventing political parties from raising and spending money not limited to federal limits. The Citizens United case overturned the part of McCain- Feingold that prevented (or limited) corporations from contributing to campaigns. Money, unfortunately, will never be removed from politics. The only answer is to provide the disinfectant of sunshine, and remove all attempts to regulate or control spending. The only requirement should be that anyone who contributes to a campaign, including a PAC, discloses their name and the nature and size of their gift, for all to see. That would allow the public to judge subsequent appointments and to consider all government contracts.

Selling access persists. The White House has recently elevated the game of trolling for cash to a new (but lower) level. Organizing for Action has been reincarnated from the ashes of the successful, but defunct, Obama for America committee. The new organization is led by the same strategists, Jim Messina and on Jon Carson, and has the same data base, but with none of the limits on who can donate or on how much each person or corporation can give. They also do not have to disclose names. Additionally, such campaign stalwarts as David Axelrod and David Plouffe will be involved. It is organized as a 501 (c) (4), which means those of us with differing opinions will in fact be helping to support it. Its purpose is to influence legislation favored by Mr. Obama and to inflict damage on those who oppose him. Donors who give $500,000 or more are being assured of quarterly meetings with the President. Buying access so blatantly has caused the New York Times to find it unseemly.

Cronyism will always be with us. Like dirty laundry, it is an unpleasant consequence of the political process. Since it is also the mother (father) of contributions, the only response that works is sunshine – disclosure and openness. Nevertheless, the assumption has to be that the parties involved will not always be forthcoming, after all these are politicians. It falls upon the press to not take sides, to be truly the watchdog that was their historic role. Unfortunately, in today’s world that may be asking the impossible.

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