By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives
The Republican debate last night revealed one area of broad agreement among Americans – we now live in a system of crony capitalism that is systematically rigged to favor the ultra-wealthy. That is all the more remarkable as an admission because the Republican candidates are overwhelmingly (and increasingly) funded by the ultra-wealthy. It is also remarkable because the Republican policy prescription for crony capitalism is to make the ultra-wealthy wealthier at the expense of the American people. This last point is logical, but obscene.
This article focuses on the broad agreement among Republican candidates for the presidency that the system is rigged on behalf of the wealthy, particularly those in finance, and that this harms our economy, people, and democracy. Exhibit one, of course, is Donald Trump.
WALLACE: Mr. Trump, you talk a lot about how you are the person on this stage to grow the economy. I want to ask you about your business record. Trump corporations — Trump corporations, casinos and hotels, have declared bankruptcy four times over the last quarter-century.
In 2011, you told Forbes Magazine this: “I’ve used the laws of the country to my advantage.” But at the same time, financial experts involved in those bankruptcies say that lenders to your companies lost billions of dollars.
Question sir, with that record, why should we trust you to run the nation’s business?
Trump’s defense of his actions serves as an indictment of the tactics of wealthy investors. Indeed, Trump indicts “everybody,” particularly “the greatest” (wealthiest) investors.
TRUMP: Because I have used the laws of this country just like the greatest people that you read about every day in business have used the laws of this country, the chapter laws, to do a great job for my company, for myself, for my employees, for my family, et cetera.
His reference to “chapter laws” means “bankruptcy” filings to avoid repaying debts owed to lenders by Trump companies. By having his companies repeatedly file for bankruptcy, Trump was able to force their creditors to write down those debts by huge amounts. It is notable that Trump celebrates this as a tactic that “everybody,” particularly “the greatest” use to become exceptionally wealthy.
TRUMP: Excuse me, what am I saying? Out of hundreds of deals that I’ve done, hundreds, on four occasions I’ve taken advantage of the laws of this country, like other people. I’m not going to name their names because I’m not going to embarrass, but virtually every person that you read about on the front page of the business sections, they’ve used the law.
The difference is, when somebody else uses those laws, nobody writes about it. When I use it, they say, “Trump, Trump, Trump.” The fact is, I built a net worth of more than $10 billion. I have a great, great company. I employ thousands of people. And I’m very proud of the job I did.
Again Chris, hundreds and hundreds of deals. Four times, I’ve taken advantage of the laws. And frankly, so has everybody else in my position.
Trump claims that he has a net worth of “more than $10 billion,” and brags that he built up this net worth in part by stiffing his creditors repeatedly by defaulting and declaring bankruptcy even though he purportedly had ample wealth to repay his companies’ loans.
Why is it morally OK for someone as wealthy as Trump to avoid repaying corporate debts? Because “everyone” “in my position” (investors of enormous wealth) has “taken advantage of the laws.” That is the reasoning of an eight-year old – “everybody” does it. But Trump then added an even more revealing “moral” basis for repeatedly refusing to pay his companies’ debts. The entities he was stiffing were evil – they were giant banks. Trump’s moral outrage is directed at those that criticize his moral choices. Notice the enthusiastic response of the Republican crowd to Trump’s “moral reasoning.”
TRUMP: Let me just tell you about the lenders. First of all, these lenders aren’t babies. These are total killers. These are not the nice, sweet little people that you think, OK?
You know, I mean you’re living in a world of the make-believe, Chris, you want to know the truth.
Trump was not called out by Fox for the obvious logical flaw in his “moral reasoning.” If it is a great thing to be wealthy because it creates jobs, when a serial corporate dead beat like Trump repeatedly declares bankruptcy and refuses to pay corporate debts he is making other people (creditors – and those the creditors lend to) less wealthy and destroying jobs. That should harm the economy. The Republican audience also missed the logical flaw – it loved Trump’s response. Indeed, even when Trump blundered and unintentionally showed how destructive crony capitalism is the audience reaction was to praise him for profiting while the people suffered.
And I had the good sense to leave Atlantic City, which by the way, Caesars just went bankrupt. Every company, Chris can tell you, every company virtually in Atlantic City went bankrupt.
And let me just tell you. I had the good sense, and I’ve gotten a lot of credit in the financial pages, seven years ago I left Atlantic City before it totally cratered, and I made a lot of money in Atlantic City, and I’m very proud of it. I want to tell you that. Very, very proud of it
The wealthy get even wealthier even when local economies “totally cratered.” The wealthy simply had the companies they control declare bankruptcy and stiffed the lenders. The wealthy whose depredations cause the local economy to “crater” even expect praise for being the first to desert the collapsing city.
The use of bankruptcy has several major domestic policy applications – and the Republicans and conservative “blue dog” Democrats have been on the side of the wealthy and against the people in each case. First, for decades, bankruptcy has been used “strategically” by major corporations to escape contracts with unions and minimize tort liability for killing hundreds of thousands of workers and consumers. Second, the bankruptcy laws were “reformed” in 2005 to make it extraordinarily difficult for students to ever escape the burden of student loans and get the normal “fresh start” that is the premise of the bankruptcy laws. Third, the “reformed” bankruptcy law allows the owners of second (vacation) homes to take advantage of the “cram down” option to greatly reduce their mortgage debt – but bans the owners of a single home used a the principal residence from doing so. President Obama tried to change this provision of the bankruptcy laws in 2009, but was blocked by the Republicans and “blue dogs” in the Senate.
In the international sphere, the Republican candidates routinely denounce Greece for seeking debt write downs. Even the IMF admits that the debt is unsustainable and that the effort to collect the full debt will prevent any strong Greek economic recovery and continue enormous human suffering. No Republican candidate at the debate criticized Trump’s serial refusals to pay his corporations’ debts.
Mike Huckabee, the former Governor of Arkansas, unintentionally stressed the massive and growing income and wealth inequalities in America
HUCKABEE: Well, you ask about how we fund it. One of the reasons that Social Security is in so much trouble is that the only funding stream comes from people who get a wage. The people who get wages is declining dramatically. Most of the income in this country is made by people at the top who get dividends and — and capital gains.
The obvious problem is that Huckabee’s proposed solution – the oxymoronic “Fair Tax”– makes those inequalities worse. Huckabee proposes a federal sales tax with a “prebate” for those in poverty. The problem is that the tiny percentage of “people at the top,” who receive “most of the income” while wage income for the vast majority of Americans is (according to Huckabee) “declining dramatically,” spend vastly less of their income on consumption than do working and middle class Americans. As a result, they would pay, proportionally, a far smaller percentage of their income (and a vastly smaller percentage of their wealth) under the proposed sales tax. Federal taxes on the working and middle classes would go up substantially under a “revenue neutral” “Fair Tax.” Huckabee, and the debate audience that thundered its applause, ignored these facts. Arkansas is rated as having the eleventh most regressive tax system in America – and its legislature and Governor are working together to make it far more regressive.
HUCKABEE: The fair [tax] transforms the process by which we fund Social Security and Medicare because the money paid in consumption is paid by everybody, including illegals, prostitutes, pimps, drug dealers, all the people that are freeloading off the system now.
That’s why it ought to be a transformed system.
WALLACE: All right. Enough.
Huckabee is wrong about taxes on consumption. First, while they are more difficult to evade, they are often evaded through fraud – and the wealthy are the experts at such evasion. Second, only consumption in the United States would be subject to the tax, so “drug dealers” and other wealthy white-collar criminals who take their money abroad would avoid the tax. Indeed, Huckabee’s proposal would create an incentive to wealthy criminals to defraud in America and spend the proceeds abroad. The banksters have vastly greater criminal proceeds than the “prostitutes” and “pimps.”
Senator Marco Rubio continued the theme of decrying crony capitalism – and making proposals to make it worse.
Now, the big companies that have connections with Washington, they can affect policies to help them, but the small companies like the one Tania is talking about, they’re the ones that are struggling.
The first thing we need to do is we need to even out the tax code for small businesses so that we lower their tax rate to 25 percent, just as we need to lower it for all businesses.
We need to have a regulatory budget in America that limits the amount of regulations on our economy. We need to repeal and replace Obamacare and we need to improve higher education so that people can have access to the skills they need for 21st century jobs.
And last but not least, we need to repeal Dodd-Frank. It is eviscerating small businesses and small banks.
20 — over 40 percent of small and mid-size banks that loan money to small businesses have been wiped out over the — since Dodd-Frank has passed. We need to repeal and replace Dodd-Frank. We need to make America fair again for all businesses, but especially those being run by small business owners.
Track Rubio’s “logic.” (His numbers are wrong.) The “big companies” control “Washington.” (That includes the House and the Senate, which are both controlled by Republicans.) Rubio, however, makes no proposal to break that dominance. Indeed, he does the opposite. He promises to “repeal Dodd-Frank” – and offers no alternative beyond the ultra-vague term “replace.” I too am deeply critical of Dodd-Frank, but it does at least seek to restrict the power and risks posed by the “big companies” – the systemically dangerous institutions (SDIs) made up of our largest and most criminal banks. But Rubio suggests nothing to limit the control of “big companies” and the SDIs over “Washington.” Instead, he tries to blame Dodd-Frank for the fact that the SDIs increasingly dominate banking. That is bizarre, unless he is arguing that it is so weak because it fails to eliminate SDIs that it needs to be replaced by far tougher regulation that would eliminate the SDIs.
Rubio’s statement implies that there was a startling drop in the number of banks after the passage of Dodd-Frank in 2010. The reality is more complex and refutes Rubio’s claims. The number of independent banks has been falling since the late 1960s – a half century. The rate at which independent banks have disappeared for any has been greater in several periods in the past (see Figure 1 of the Fed article). The single most important direct cause is deregulation, specifically, the removal of restrictions on interstate banking and branches. The most important indirect cause of the sharp fall in the number of banks since the late 1960s is deregulation. Deregulation indirectly led to the rise of the SDIs. Indeed, by Clinton’s administration deregulation was designed to aid the dominance of the SDIs. The five largest U.S. banks conduct over 90% of all derivatives trades in the U.S. Only a subset of the largest U.S. banks engaged in any huge investment banking after the effective repeal of Glass-Steagall. The result is that even conservative finance scholars now admit that there is no “free market” in finance and can never be as long as the SDIs exist. The independent banks cannot compete with the SDIs except in very local, niche markets. Before and after the passage of Dodd-Frank they are gobbled up by mergers.
The Fed article shows that regulatory costs are not driving the continuing consolidation of banking.
According to data from the Reports on Condition and Income (or “Call Reports”), the ratio of non-interest expenses to assets for banks with less than $1 billion in assets did not change significantly from 2007 through 2013.
Note that the Fed study, improperly and implicitly, assumed that if compliance costs increased that fact proved that bank efficiency was reduced by regulation. That cannot be assumed. Improved compliance with regulatory requirements for sound underwriting, for example, would have added immensely to bank profitability.
The SDIs have not only the explicit government subsidy of deposit insurance, but also the even larger implicit federal subsidy of “too big to fail.” But those subsidies only begin to capture the SDIs’ true power. As Rubio stressed, the “big companies” dominate “Washington” and no one serious doubts that the SDIs are the most dominant of the “big companies” in “Washington.” More recently, we have also seen the rise of “too big to prosecute.” That doctrine has destroyed all accountability.
The Dog that Didn’t Bark – No Demand for Accountability for Banksters
It is remarkable that a Republican debate run by Fox had the perfect issue with which to bash the Democrats, including Presidents Obama and Clinton, and refused to even mention it. There was not a word criticizing Clinton’s deregulation or Obama’s refusal to prosecute the elite banksters that led the fraud epidemics that caused the Great Recession. Instead, the candidates are committed to creating more criminogenic environments through the three “de’s” – deregulation, desupervision, and de facto decriminalization.