By Rudy Barnes, Jr.
Crony Capitalism is the illicit relationship between big business and government. Since the beginning of the pandemic the mega-corporations on Wall Street have received vast sums from the CARES Act and the Federal Reserve to prevent layoffs and continue their operations, but they have since laid off thousands and are paying generous dividends to attract investors.
The deceit is now exposed. After the stock market crash in March, the stock market is booming again with investors once again clamoring for overvalued stock despite unemployment being at an all time high and the economy failing catastrophically. It’s clear evidence of crony capitalism, with Wall Street attracting greedy investors with stock buybacks and dividends.
The money for the buybacks and dividends has come from Congress and the Federal Reserve, Congress made sure the CARES act provided a loophole for its patrons on Wall Street, and the Fed continues to provide them with billions in cheap money. Wall Street is awash in cash. It has all it needs to attract investors with public money.
The corruptions of crony capitalism are obvious. Wall Street controls most of the means of production in America and has bought Congress with their contributions. They have avoided regulation and received a large chunk of congressional pandemic aid for business--even small businesses; and they have been receiving cheap money from the Fed since 2008 as well as a continuous flow of cash from 401(k) plans. They don’t need to make a profit to attract investors.
The pandemic has exposed crony capitalism as a cancer on America’s economy. The sums are staggering. Wall Street franchises were treated as small businesses to qualify for Cares Act funding, and the Fed has increased its flow of cheap money to Wall Street. Before the pandemic the unrestrained greed of corrupt capitalism went largely unnoticed--but no more.
The pandemic has closed many small businesses that were providing a measure of competition for the mega-corporations of Wall Street and Silicon Valley, and many will never reopen. Most of the aid for failing businesses has gone to Wall Street and Silicon Valley. They were never in danger of closing, but happy to get the cash and eliminate their competition.
The stock market represents the heart of corrupt capitalism, but not the economy. Investors in stocks that offer generous returns bolstered by buybacks and dividends made possible with public funding from Congress and the Fed are a part of the problem. They are collaborators with crony capitalists in sharing the fruits of their unrestrained greed.
The obvious solution is to regulate big businesses and restore the competition lost in mega-mergers. The problem is that Congress is beholden to crony capitalists who fund their campaigns and are reluctant to provoke their patrons with unfavorable legislation. But voters have the final word. They can make it clear to Congress that they must end crony capitalism.
Zachary Karabell has noted that “Stocks are recovering while the economy collapses. ...On March 23, U.S. stock markets closed the day after a multi-week plunge of nearly 30%. Since then, the U.S. economy has been in free-fall, with more than 26 million people filing for unemployment, waves of retail stores on the edge of bankruptcy, energy and oil companies teetering on the brink, travel grounded, and the GDP was down 4.8% in the first quarter and this quarter is likely to be much worse. The stock market? Overall, stocks are up across all indices more than 30% from that low point in late March.
What is going on? How can it be that stocks are soaring when the economy is crashing? Market movements are often head-scratching, but in this case, the answer may be relatively simple: because of moves by the Federal Reserve, financial markets are awash in money, vast, water-hose supplies of money. Since March, the Fed has committed to lend or buy trillions of dollars of financial assets, which by some estimates might end up exceeding $8 trillion dollars by the time all is said and done. No one knows how high that figure will climb. By way of comparison, during the last financial crisis in 2008-2009, the Fed ended up adding about $3 trillion over the course of several years.
And it’s not just the Fed. Congress has allocated almost $3 trillion in economic aid; the Bank of Japan is doing much the same as the Fed for the world’s third largest economy; the European Central Bank is not far behind, and multiple governments around the world are following suit.
The result is that even as real-world economies freeze and implode in the short-term, financial markets are buoyed by a tsunami of liquidity.
That troubles many investors, who see either sharp spikes of inflation or dire reckoning ahead for stocks and bonds. Respected investor Jeffery Gundlach, one of the most influential bond managers, warned this week that markets will soon head south fast and the people should be more “wary of panaceas.” Analysts at Bank America posit that the recent market strength is simply a dead-cat bounce like what happened in 2008 before a more intense crash later that year. Others believe that all the liquidity in the world cannot compensate for the collapse of real-world economic activity and these moves by the Fed and governments are the equivalent of flooding a drought stricken area with water for a few days. It feels like a relief, but if there is no rain in the months after, it does little good.” See
Paul Krugman has observed: “What’s bad for America is sometimes good for the market. Stock prices, which fell in the first few weeks of the Covid-19 crisis, have made up much of their losses. They’re currently [April 30, 2020] more or less back to where they were last fall, when all the talk was about how well the economy was doing. What’s going on?” Krugman first emphasizes that “the stock market is not the economy,” and notes that while “since 2007 productivity growth has slumped..,stocks have done very well.”” Krugman defends the Fed’s low interest rates and quantitative easing to support Wall Street with cheap money, and aid from Congress derived from more government borrowing to stimulate the economy. He admits that “I have no idea where the market is heading.” See Paul Krugman, N.Y. Times, April 30, 2020.
Peter Whoriskey has noted, “Since the coronavirus pandemic was declared, Caterpillar has suspended operations at two plants and a foundry, Levi Strauss has closed stores, and toolmaker Stanley Black & Decker is planning layoffs and furloughs. Steelcase, an office furniture manufacturer, and World Wrestling Entertainment have also shed employees. While thousands of their workers are filing for unemployment benefits, these companies rewarded their shareholders with more than $700 million in cash dividends. They are not alone. As the pandemic squeezes big companies, executives are making decisions about who will bear the brunt of the sacrifices, and in at least some cases, workers have been the first to lose, even as shareholders continue to collect.”
...William Lazonick, an emeritus economics professor at the University of Massachusetts at Lowell, has been one of the leading critics of companies that distribute cash to shareholders through stock buybacks and dividends rather than reinvesting the profits into employees, innovation and production. For companies that are continuing to do buybacks and issue dividends during the crisis, he said, it is business as usual. “In a downturn like this, the first thing a company should do is give up any distributions to shareholders,” Lazonick said. “But in a crisis, companies will differ. Some will care … and some will rob the workers, who should expect that their continued employment will be the company’s first concern.” See
In an earlier article, Peter Whoriskey reported that “Public companies received $1 billion in stimulus funds meant for small businesses.” He also noted that “Some of the companies that
received the loans were large in another way. Their CEOs have been making millions.” See https://www.washingtonpost.com/business/2020/05/01/sba-ppp-public-companies/?utm_campaign=wp_post_most&utm_medium=email&utm_source=newsletter&wpisrc=nl_most.
“The fear of missing out has played a role in recent market movements but that’s “not a good sign,” according to Andrew Harmstone, head of global balanced risk control strategy at Morgan Stanley Investment Management. “The fear ... of missing out, or another term for that traditionally has been greed, right? It is definitely playing a role in the current market,” he told CNBC’s “Street Signs Asia” on Tuesday. Markets saw a relief rally in April, with the S&P 500 and Dow Jones Industrial Average posting their best monthly performances since January 1987. But the surge came after the initial shock of the coronavirus pandemic and a historic plunge in global equities in March. Harmstone argued that the gains came as investors denied the “damage that’s actually been occurring to the global economy.” He explained the behavior indicated that “people still think that things are going to go back to normal, or what they were recently, quite quickly.”
Investor optimism has been fueled by the prospect of authorities lifting lockdowns and relaxing other restrictions intended to curb the spread of the coronavirus. Those measures had taken a huge toll on global economic activity.
But the real extent of that damage will become “visible” in the next phase, beginning with “actual bankruptcies” or at least downgrades of companies, Harmstone said. The market is likely to respond accordingly, he warned. “The key element here is that volatility remains extremely high,” Harmstone said. With the markets seeing big shifts in either direction every day, a 1% move is comparatively “small” nowadays, he added.” See https://www.cnbc.com/2020/05/07/investor-fear-of-missing-out-not-a-good-sign-for-the-markets-morgan-stanley.html.
For earlier commentary on crony capitalism (April 17, 2019), see