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Thursday, April 21, 2011

Bought and Paid For

Americans who have at least a modicum of political sophistication know that special-interest groups have enormous power to influence the political system, getting favors from government they couldn’t obtain through voluntary means. Informed people know, for example, that many farmers receive subsidies, that labor unions have privileges to employ coercion that no other private organization has, and so on.

Few of us, however, think of Wall Street in a similar vein. Why, Wall Street consists of rich, Republican-leaning firms that make their money by financing business—right? Wall Street is interested in minimizing government because its business clients are harmed by the expansion of government—right?

Those notions could not be more mistaken, as veteran financial journalist Charles Gasparino demonstrates in his latest book, Bought and Paid For: The Unholy Alliance Between Barack Obama and Wall Street. Far from advocating a minimal, night-watchman State (or at least shrinking somewhat the bloated leviathan we now have), the big Wall Street firms earn such enormous profits from financing federal deficits that a shrinking State is the last thing they would ever want. On the contrary, expanding government that borrows heavily guarantees buckets of money in their coffers—far more than the big firms make from the difficult work of business finance.

If that isn’t enough of a shock to people who accept the conventional wisdom about politics, Gasparino has many others in store. Most people would assume that wealthy Wall Streeters would have been scared silly of a candidate like Barack Obama, what with his Progressive/radical/community-organizer past and redistributionist rhetoric. The truth is just the opposite. Obama was the candidate preferred by the top Wall Street CEOs, who regarded him as more amenable to their interests than Hillary Clinton and far more inclined to expand federal borrowing than any Republican in the 2008 field. It’s true that in 2009, as president, Obama gave Wall Street a tongue-lashing for its gigantic bonuses (bonuses made possible by Obama administration policies), but that was pure political theater, Gasparino argues. There was and still is a symbiotic relationship between Obama and Wall Street. Obama expects and will probably get the same high level of campaign support from it in 2012 that he received in 2008.

Among the many enlightening revelations in the book is that the Wall Streeters factored into their support for Obama his pledge to raise income taxes on the wealthy. They concluded that paying somewhat higher taxes would be greatly outweighed by their profit gains. Other Americans might feel the sting of higher taxes, but Wall Street knew that it would be way ahead even with higher rates.

Compared with the likes of Wall Street giants like Goldman Sachs, other American special-interest groups seem puny. The advantages of being a government pet deemed “too big to fail” are immense. “Goldman,” Gasparino writes, “more than any other firm, was able to use its status as a government-protected business to gain access to billions of dollars of borrowed money at rock-bottom rates and then use the funds to buy bonds—many of which were the same as those that had helped cause the financial crisis, but were now trading at just pennies on the dollar.” Gasparino acknowledges that the men who run the big Wall Street firms are brilliant, but unfortunately they employ their brilliance in manipulating Washington.

It’s not just Washington, though. Wall Street has also been earning great fees by helping states and localities borrow and spend beyond their means. Gasparino gives an illuminating history of the relationship between Merrill Lynch and supposedly prudent Orange County, California. Thanks to financial advice from a Wall Street consortium headed by Merrill, Orange County’s government went on a spending binge that seemed affordable. Unfortunately, the investments that initially performed so well and lulled people into a false sense of security later crashed, leaving the county facing huge deficits. But Merrill had made its money. The same is true regarding bankrupt Greece. Wall Street was happy to sell the Greek government advice on how to continue borrowing and hiding its looming fiscal crisis, as long as firms got their fees up front.

We often hear politicians and big-business leaders cooing about how they will work together to solve the nation’s problems. Gasparino says that idea is pure hokum. Teamwork between the federal government and Wall Street means “The big firms underwrite the massive amounts of debt being sold to keep the welfare state afloat, and the welfare state bails out the big firms from some of their most disastrous forays into risk.”

The huge cost of that partnership is paid for by the rest of America in higher taxes and a sluggish economy.

If this book doesn’t make you angry over our crony-capitalist economy, I can’t imagine what would.