There’s a reason that corporate states, ones in which corporations participate heavily in the role of government, litter dystopian fiction.
First, it’s because we’re all too aware of the gross imbalance of power between corporations and individuals in any capitalist society. Corporations may have been created to provide a protective envelope for investment risk, but they easily accrue privileges and abilities that position them well outside that original intent.
Second, it's because we've already had experience with what happens at the end of the corporatism road. Somewhere, not too far out of sight, is that land where the trains run on time, but in which government acts primarily as a pooled resource to protect the interests of corporate power against that of individuals.
In very few scenarios does corporate statism seem like an inviting vacation spot for anyone not enjoying the scene from a corner office.
These days corporations are largely unchecked by organized labor and—not at all coincidental to their status as electoral super-citizens—are increasingly unburdened by regulation. Between the wide-open political power opened through the gates of Citizens United, and the dead-hand-at-the-tiller intentional neglect provided by Congress, the soil for rising corporatism has rarely been richer.
And what’s taken root in that soil is something that we used to call a “bank.”
Come inside for a closer look.
In 1913, when the Federal Reserve Act created the basics of the modern banking system, a lack of adequate regulations allowed banks to exploit the new system. Banks could draw from the plentiful funds available through the reserve, and then use this low-cost river of cash to both promote high-risk ventures and pad their own profits with less than reputable instruments. It created a huge weakness in the banking system, a weakness that was masked for many years by an expanding bubble of speculation. The banks drew from the Reserve well so frequently to fund their own growth, that by 1929 the then-current regulations meant that the Federal Reserve was essentially tapped out. Not surprisingly, soon after that limit was reached, the whole strained edifice came tumbling down.
In 1933, after the bubble had popped and thousands of financial institutions had collapsed, Congress passed the Glass-Steagall Act. Glass-Steagall was intended to restrict the activities of banks, specifically to prevent banks from becoming entangled in the kind of investment vehicles that had led to widespread failures. It was also intended to prevent banks from generating inherent conflicts between their own profits and those of clients.
The theory behind these regulations was that banks should be centered around providing loans to finance the production and sale of goods. Because banks that made their profits through loans were directly dependent on the success of their customers, they were forced to be prudent in their lending, yet they couldn't make money without lending money. The result was intended to be institutions that were cautious, but not too cautious, and institutions with little incentive to work against the needs of those paying back the loans.
But gradually, decade by decade, the strictures against banks drawing revenues from other sources were weakened. In the name of "competitiveness," banks were given more and more leeway in their dealings with other fiscal institutions. Finally, in 1999, Congress passed the Gramm-Leach-Bliley Act, which stripped the last of the old protections away. And then some.
Glass-Steagall had held the US fiscal sector in a stable configuration for more than sixty years. With the limits removed, it didn't take twenty years for the banks to bring down the economy a second time. This time, they had practice. They managed it in seven.
Some of those associated with Gramm-Leach-Bliley, including many of the Congressmen who voted for it and President Clinton who signed it, have since claimed ignorance of the effects of the bill. The same can't be said of Phil Gramm. Gramm's actions and motives in passing this bill, which I detailed in 2008, were just another not at all subtle step in a career built on destroying regulatory institutions for fun and profit. Mostly profit. He cut a tornado-like swath through the economy that left an unmatched level of damage, and made him the most admired financial figure on the right. Oh, and he moved directly from the Senate to a comfy position at UBS AG where be became very, very wealthy.
The most obvious effect of Gramm's legislation was to enable the emergence of the modern investment bank, a hybrid institution that still carried the word “bank” in its name, but whose purpose had little to do with pre-Gramm institutions. These new creations spewed out an ascending series of imaginative fiscal instruments that within a few short years created theoretical wealth more than twenty times that present in the entire real-world economy. Nearly all that wealth came from allowing banks to act directly against the best interests of their traditional clients under the old rules. In fact, Gramm's final act on the congressional stage left banks in a position where they could actively profit more from the downfall of their clients than they ever had in promoting growth. It opened the door for a devastating array of counter-intuitive derivative instruments that rewarded failure, and created the pseudo-wealth of the credit default swap economy (an instrument made possible by changes to the Commodity Futures Modernization Act of 2000, authored by... Phil Gramm).
By allowing banks, investment firms, and insurance companies to merge into fiscal mega-entities, the new law created opportunities for creating wealth through knowingly murdering the economy. The new banks eagerly took up the knives.
We didn't stumble into a fiscal meltdown. We weren't even pushed. We were driven there gleefully, by investment banks that knew full well they could profit at every stage of the collapse. That's the state we're still in today.
But the perverse incentives created under Gramm-Leach-Bliley don’t end with simply breaking down the barriers between banks and investment institutions. They didn't even end at turning a fiscal apocalypse into a profitable affair. In the land of post-Gramm, every form of destruction is both a source of profit and a buying opportunity.
That’s because the new law didn't simply allow banks to merge with other fiscal institutions. It also allowed them to merge, marry, and swallow whole other assets. What kind of assets? Well anything that “is complementary for a financial activity.” What does that mean? Once again, most of those around at the time can only shrug. Even Leach and Bliley don't have a definition to match that phrase. Gramm did, and does. He's the one who inserted those words into the earliest drafts of the bill and made sure they stayed in place to the end.
Since then, the meaning behind the language has become more clear. "Complementary for a financial activity" means anything. Anything at all. Gramm-Leach-Bliley not only gave the new banks an incentive for destruction through fiscal instruments, it gave them the ability to buy up the pieces—on their own terms, at their own rates. It let them move into industry after industry, and particularly into the production and shipment of basic commodities, displacing all those poor old clients in passing.
Imagine if your loan was held by an institution whose incentive was not to collect the interest from your payments, but to make you fail in those payments. Imagine that they could gain more from your failure than your payment, and at the same time pick up your business almost as an afterthought. Stop imagining. We’re already there. The incentives enshrined under Gramm-Leach-Bliley turn banks from the supporters of growth, into the consumers.
Since 1999, and even more so since 2008, investment banks have moved away from being banks. They've become owners of oil fields and tankers, coal mines and distributors, power generators, gold and silver, iron, copper, seaports, airports. … It’s as if the game board of enterprise had been tipped on its side, and all the little tokens are sliding—slowly at first, but with increasing speed—into the maw of creatures with names like Morgan Stanley and Goldman Sachs.
The astounding thing is … it’s not astounding at all. It’s the predictable outcome of a law designed for just this purpose. It’s the opening notes of "Toccata and Fugue in D Minor."
Matt Taibbi famously described Goldman as a “vampire squid,” inserting it’s high-suction orifice into every source of potential profit. Awful as that sounds, the truth is that it’s too nice. Goldman, like the other mega-entities fostered by Gramm-Leach-Bliley, is a cancer eating at the heart of capitalism. Without regulation, the magic hand is quickly—quickly—ushering the system toward an end game, toward a situation where “monopoly” is far too mild a term.
Right now, there's absolutely nothing standing in their way. Nothing is likely to get in their way.
Why? Because while we often speak as if capitalism and democracy go hand in hand, the truth is that relationship is far from friendly. The truth is there is a basic incompatibility between a system dedicated to the idea of holding all men equal, and a system whose purpose is to show they are not. From the beginning of the United States, proponents of capitalism feared the exercise of democracy. They always feared that citizens would act to restrict the wealth and power of the elite. Unfortunately, they were wrong.
Just as Gramm-Leach-Bliley signaled the end of the idea that banks should act as agents to promote responsible growth, Citizens United made clear that corporations are free to act to promote their own power through the system without limit and without reprisal.
That combination is a malignancy driving deep into the system. We don't have centuries to resolve this. We don't have decades.
Listen, you can hear the orchestra tuning up. Ladies and gentlemen, please rise …