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Crisis of capitalism and the broccoli mandate

Published:Thursday | April 5, 2012 | 12:00 AM

by Wilberne Persaud, Financial Gleaner Columnist

In a New York Times March 14, Op-Ed piece Greg Smith wrote: "Today is my last day at Goldman Sachs. After almost 12 years at the firm - first as a summer intern while at Stanford, then in New York for 10 years, and now in London - I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity.

And I can honestly say that the environment now is as toxic and destructive as I have ever seen it."

He tells of three quick ways to advance one's career at Goldman: "Execute on the firm's 'axes', which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit; 'hunt elephants' - In English: get your clients, some of whom are sophisticated, and some of whom aren't, to trade whatever will bring the biggest profit to Goldman ...; find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym."

Did Smith have an abrupt shedding of naivety?

If so, how do we explain a Stanford grad and Rhodes Scholar neither knowing nor informing himself of Wall Street history? Setting these questions aside, let's agree he had his decade of innocence abruptly blown away leading to an acute attack of conscience.

This is not whistle-blowing as we know it. His revelations occur after the fact. Did Mr Smith take home bonuses associated with the behaviours he now condemns? If he did, should he return them to clients, give them to charity?

Grave issues

This is one way to consider the grave issues Mr Smith's parting of the ways raises. Another, perhaps, more disquieting way to view this, is to reflect on the economic and political power Wall Street commands and the fact that it no longer works in the way expanding capitalism requires. Link this to the powerful forces of globalisation, ubiquitous and planetary reach of information and communication technologies unevenly uniting the world's productive forces and we begin to contemplate a system badly in need of a fix.

Capitalism is prone to crises of demand. Whereas Marx would have wished to exploit these, Keynes set about showing governments how they might mitigate such periodic crises.

On another tack altogether, Schumpeter identified and praised what he termed capitalism's inherent capacity for 'creative destruction' which guaranteed its continued expansion, enhancement and efficiency. Productivity and real wages would generally increase, the common labouring man and woman would benefit. Silks, stockings and finer foods could become commonplace.

Keynes, Schumpeter and Irving Fisher attended a dinner at New York's New School for Social Research where Keynes elaborated his ideas on deficit financing.

He had the day before, in May of 1934 finally got his chance to talk with President Frank Delano Roosevelt on the same issues. FDR reportedly said he had a "grand talk with Keynes and liked him immensely [but he talked] like a mathematician." Keynes on his part praised FDR and the New Deal.

The next day, May 29, 1934, The New York Times ran an open letter from Keynes to FDR recommending expenditure of 8 per cent of GDP which "might directly or indirectly, increase the national income by at least three or four times this amount. Most people greatly underestimate the effect of a given emergency expenditure, because they overlook the multiplier - the cumulative effect of increased individual incomes, because the expenditure of these incomes improves the incomes of a further set of recipients and so on". All three of these economists were observing capitalism at its epicentre - experiencing among other things, falling prices and interest rates that could not counterbalance gloomy business expectations.

Effects of the recession

Compare this to today's apparently receding great recession. Millions of homeowners stifled in underwater mortgages, a bailed-out Wall Street and bankers who, having been made whole by taxpayer funding, refuse to pass on even a modicum of that largesse to unemployed mortgagors while spending countless millions on lobbying efforts to defeat tried and time-tested regulatory mechanisms that would avoid the casino gambling and cheating Mr Smith now admits is at core of Wall Street's operations.

Capitalism, believe it or not, requires trust. The joint stock company exists to pool funds, to maintain business beyond the lifetime of one innovator or entrepreneur; it is given recognition in law to act as a person. But the tendency for corporate and financial overgrowth can develop malignancy.

The self-interest Adam Smith's 'invisible hand' renders societally beneficial, morphs into outright short-sightedness.

At its extremities, belief in that 'invisible hand' with which the state should never interfere, translates into the Citizens United v. Federal Election Commission landmark decision by the United States Supreme Court which held that the First Amendment of the US Constitution prohibited the government from restricting political expenditures by corporations and unions. In other words, corporations could speak with money. This was a 5-to-4 decision.

Corporations' influence - direct and indirect - could likely also result in the US Supreme Court overturning President Obama's and Congress' Health Care reform measures. It is difficult, perhaps foolhardy to predict the Court's decision.

Yet questioning by Justice Scalia referencing 'broccoli' is ominous.

Insurance is rendered affordable because of the size of the pool. If young healthy people refuse to buy health insurance, the price to those in need goes up. If people refuse to buy broccoli the exact opposite happens - broccoli sellers have excess supply and must cut prices!

Overturning this reform would cause the extreme inequality evident in US income distribution over three decades to attain unimaginable proportions.

Demand insufficiency and political polarisation, already at high intensity, partly as a result of a 'black' president in the White House, are likely to increase. With an unreformed Wall Street exercising muscle globally, the prospect of the 'mother of all recessions' looms. Not even China, India, Brazil and other countries poised on exceptional economic growth paths render this scenario anything but alarming.

Wilberne Persaud is author of 'Jamaica Meltdown: Indigenous Financial Sector Crash 1996'.