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The impact of the Dodd-Frank bill upon small and regional banks has caused them either to consolidate or go bankrupt

THE EFFECTS OF CRONY CAPITALISM ON THE U.S. ECONOMY



Crony capitalism in the U.S. occurs when Republican and Democratic congressman write legislation, provide corporate subsidies, give government grants, or provide special tax breaks to favor a large number of public and private firms, such as defense manufacturers, big pharma, the big Wall Street banks, multinational corporations, the entire agricultural industry, etc. Large multinational corporations use lobbyists to influence politicians who are directly involved in the legislation of policies affecting those companies. For example, General Electric spent $134 million in lobbying from 2009 to 2014. They paid zero U.S. taxes in 2010. Northrop Grumman, Boeing and Lockheed Martin spent $280 million combined on lobbyists during the same time period to persuade the government not to cut defense spending.
The multinationals also make large campaign donations to super PACs supporting individual politicians and both major political parties in return for favorable treatment. The total contributions from super PACs to both the Republican and Democratic Parties from 2015-2016 was $488 million. Total campaign donations to both parties during the same time period was $10.2 billion. Multinational companies and other special interest groups make substantial donations to the political campaigns of politicians who will do favors for them when they are elected, or will continue to do favors for them when they are re-elected. This makes the elections or re-elections of those politicians almost certain, and the payback doesn’t end there. In an article by Shamus Cook in 09/2010, posted on globalresearch.ca, he wrote, “Congressmen who have recently retired make the perfect lobbyists: they still have good friends in Congress, with many of these friends owing them political favors; they have connections to foreign presidents and kings; and they also have celebrity status that gives good PR to the corporations. Often, these congressmen have done favors for the corporations that are now hiring them, meaning that the corporations are rewarding the congressmen for services rendered while in office, offering them million-dollar lobbyist jobs (or seats on the corporate board of directors) that requires little to no work.” One of the biggest examples of crony capitalism in the U.S. is the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into federal law by President Barack Obama on July 21, 2010. The bill put heavy regulations on the financial industry with the intention of preventing the collapse of the Wall Street banks. Included in the bill is the possibility that banks determined to be “too big to fail” could be broken up. The bill also protects consumers with rules that keep borrowers safe from fraudulent bank loans.

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Wall Street banks are the largest and most profitable investment banks in the world, whose banking clients include huge institutions, corporations, and governments. Wall Street drives the U.S. equity market because they can easily afford to stay in compliance with the Dodd-Frank regulations, enabling them to invest billions of dollars into corporate bonds issued by the big multinational companies. For example, in 09/2016, Bank of America held $85 billion in corporate bond debt. As of 02/2017, Morgan Stanley held $12 billion. U.S. investment-grade corporate bonds had an average return of 8.4% through 09/2016, according to the Bloomberg Barclays US Corporate Bond Index. At that rate, Bank of America would have made at least $7 billion in interest from their corporate bond investments in 2016. Morgan Stanley would have received $1 billion. The returns from their corporate bond investments, combined with other investments, has allowed the owners of the Wall Street banks to achieve great wealth. The big multinational companies are raising capital by selling corporate bonds to the Wall Street banks and other investment firms. Amazon raised $31.6 billion in capital from their corporate bond sales as of 09/2016. Apple has already raised $5.5 billion as of 02/2017. The multinationals are using their capital to buy back stock. In the 12-month period ending on 03/2016, multinational corporations spent a record $589.4 billion on stock buybacks according to S&P Dow Jones Indices, beating the previous record of $589.1 billion set in 2007.

The reason for the massive stock buy-backs is that they reduce the number of outstanding shares available in the stock market. If the companies’ price/earnings multiples remain unchanged, this should result in higher share prices. Multinationals also use their capital to pay out dividends to attract investment firms and individual investors. These investors are looking for big companies with positive earnings expectations. They know that when they buy large blocks of stock from these companies, they are certain to receive good returns on the dividends. This creates demand for the multinationals’ stocks, leading to increases in their stock prices. In 02/2016, Apple raised a total of $12 billion in corporate bond sales. All of it was used to pay out dividends to shareholders. The continual stock price increases of the multinationals are a direct result of the massive stock buybacks and the dividend payouts, making the majority shareholders of those companies very wealthy. Another consequence of the Dodd-Frank bill has been the consolidation of the U.S. banking system. The number of community banks shrank 14% between Dodd-Frank’s passage in 2010 and late 2014. The reason for this outcome is that the bill placed regulations that were designed for big Wall Street banks upon small community banks and larger regional banks, forcing them to either divert more resources to compliance or, if they couldn’t afford the expense, to go bankrupt. Small businesses employ half of all private sector employees in the U.S., and they have created approximately two-thirds of all new jobs since 1995. However, they are no longer creating jobs at the rate needed to grow our economy because they lack access to capital. This is because the regulatory overreach created by Dodd-Frank has resulted in the inability of community and regional banks to lend to small businesses. Small business owners have an 80% chance of having their loan applications denied.


According to the Bureau of Labor Statistics, in 2015 the number of businesses less than 1 year old was 6.7 million, a loss of 400,000 from the high of 7.1 million in 2006, nine years earlier. This is because without access to capital, small businesses can neither be created nor expanded, which has resulted in 95 million people out of the labor force according to the November 2016 jobs report and a 62.9% labor force participation rate in January of 2017. These unemployed workers are not included in the official government unemployment rate because they have quit looking for work. The lack of small business expansion has caused middle class wages to stagnate. Median household income peaked in 1999 at $57,909, and there has not been any year since that it has been higher. The latest data available shows that in 2015, median household income was $56,516, a drop of $1,393 over a 16-year period. To summarize, the Dodd-Frank law is an example of crony capitalism because it allows Wall Street banks to invest billions of dollars into the corporate bonds of huge multinational corporations, enabling the bank owners to increase their wealth from the interest payments on those bonds. The multinationals use the capital raised from selling bonds to Wall Street banks to buy back their stock and pay out dividends, causing continual increases in their stock prices. This has resulted in vast wealth accumulation among the majority shareholders of those companies. After leaving office, the politicians are hired as lobbyists by the same multinational corporations they favored while in office. As lobbyists, the retired politicians are paid million-dollar annual salaries. The impact of the Dodd-Frank bill upon small and regional banks has caused them either to consolidate or go bankrupt. The bill has also prevented existing banks from loaning money to small businesses. This has led to the obstruction of business creation and expansion, which has produced massive unemployment and wage stagnation in the middle class.

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Robert Steven Ingebo -- Bio and Archives

Robert Steven Ingebo, is president of FRI Corporation


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