A Banana Republic With No Bananas

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Experts on third world banana republics from the IMF and the Federal Reserve have said the U.S. has become a third world banana republic (and see this and this).

Are they right?

Well, let's look at Wikipedia's description of the four factors which make a country a banana republic.

Profits Privatized and Debts Socialized

The
first feature of a banana republic as "A collusion between the
overweening state and certain favored monopolistic concerns, whereby
the profits can be privatized and the debts socialized."

Check.

As I pointed out in November:

Nouriel Roubini writes in a recent essay:

This is a crisis of solvency, not just liquidity, but true
deleveraging has not begun yet because the losses of financial
institutions have been socialised and put on government balance sheets
. This limits the ability of banks to lend, households to spend and companies to invest...

 

The
releveraging of the public sector through its build-up of large fiscal
deficits risks crowding out a recovery in private sector spending
.

Roubini has previously written:

We're essentially continuing a system where profits are privatized and...losses socialized.

Nassim Nicholas Taleb says the same thing:

After
finishing The Black Swan, I realized there was a cancer. The cancer was
a huge buildup of risk-taking based on the lack of understanding of
reality. The second problem is the hidden risk with new financial
products. And the third is the interdependence among financial
institutions.

[Interviewer]: But aren't those the very problems we're supposed to be fixing?

NT:
They're all still here. Today we still have the same amount of debt,
but it belongs to governments. Normally debt would get destroyed and
turn to air. Debt is a mistake between lender and borrower, and both
should suffer. But the government is
socializing all these losses by transforming them into liabilities for
your children and grandchildren and great-grandchildren. What is the
effect? The doctor has shown up and relieved the patient's symptoms –
and transformed the tumour into a metastatic tumour. We still have the
same disease. We still have too much debt, too many big banks, too much
state sponsorship of risk-taking
. And now we have six million more Americans who are unemployed – a lot more than that if you count hidden unemployment.

[Interviewer]: Are you saying the U.S. shouldn't have done all those bailouts? What was the alternative?

NT:
Blood, sweat and tears. A lot of the growth of the past few years was
fake growth from debt. So swallow the losses, be dignified and move on.
Suck it up. I gather you're not too impressed with the folks in
Washington who are handling this crisis.

Ben Bernanke saved
nothing! He shouldn't be allowed in Washington. He's like a doctor who
misses the metastatic tumour and says the patient is doing very well.

Nobel prize winning economist Joseph Stiglitz calls it "socialism for the rich". So do many others.

Devalued Paper Currency

The second characteristic of a banana republic is "Devalued paper currency in the international community."

Check. Here's a chart of the trade weighted US Dollar from 1973-2009.

US_dollar

And here's a bonus chart showing the decline in the dollar's purchasing power from 1913 to 2005:

US_dollar


Politicians Use Time in Office to Maximize Their Own Gains

The third characteristic of a banana republic is:

Kleptocracy
-- those in positions of influence use their time in office to maximize
their own gains, always ensuring that any shortfall is made up by those
unfortunates whose daily life involves earning money rather than making
it.

Check. As I wrote last month:

Summers, Geithner, Bernanke and Congress like things just the way they are.

 

Of course they do ... they're bought and paid for:

  • Lobbyists
    from the financial industry have paid hundreds of millions to Congress
    and the Obama administration. They have bought virtually all of the key
    congress members and senators on committees overseeing finances and
    banking. The Congress people who receive the most money from lobbyists
    are the most opposed to regulation. See this, this, this, this, this, this, and this.
  • Obama received more donations from Goldman Sachs and the rest of the financial industry than almost anyone else
  • Summers and the rest of Obama's economic team have made many millions - even in the first few months of being appointed, or right beforehand - from the financial industry

The chairman of the Department of Economics at George Mason University
(Donald J. Boudreaux) says that it is inaccurate to call politicians
prostitutes. Specifically, he says that they are more correct to call
them "pimps", since they are pimping out the American people to the
financial giants ...

Corruption Remains Unchecked, Politicians Are Only for Show

And the fourth characteristic of a banana republic is:

There
must be no principle of accountability within the government so that
the political corruption by which the banana republic operates is left
unchecked. The members of the national legislature will be (a) largely
for sale and (b) consulted only for ceremonial and rubber-stamp
purposes some time after all the truly important decisions have already
been made elsewhere.

Check. There's no accountability.

For
example, former Vice President of Dallas Federal Reserve, who said that
the failure of the government to provide more information about the
bailout signals corruption. As ABC writes:

Gerald
O'Driscoll, a former vice president at the Federal Reserve Bank of
Dallas and a senior fellow at the Cato Institute, a libertarian think
tank, said he worried that the failure of the government to provide
more information about its rescue spending could signal corruption.

"Nontransparency
in government programs is always associated with corruption in other
countries, so I don't see why it wouldn't be here," he said.

As I noted in October:

William K. Black - professor of economics and law, and the senior regulator during the S & L crisis - says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts").

 

Indeed, as I have previously documented,
7 out of the 8 giant, money center banks went bankrupt in the 1980's
during the "Latin American Crisis", and the government's response was
to cover up their insolvency.

 

Black also says:

 

There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well.

PhD economist Dean Baker made a similar point, lambasting
the Federal Reserve for blowing the bubble, and pointing out that those
who caused the disaster are trying to shift the focus as fast as they
can:

The current craze in DC policy
circles is to create a "systematic risk regulator" to make sure that
the country never experiences another economic crisis like the current
one. This push is part of a cover-up of what really went wrong and does absolutely nothing to address the underlying problem that led to this financial and economic collapse.

Baker also says:

"Instead of striving to uncover the truth, [Congress] may seek to conceal it" and tell banksters they're free to steal again.

Politicians are for sale.

And Congress made a big show of passing derivatives reform legislation, but actually weakened existing regulations. In fact, the legislation was "probably written by JP Morgan and Goldman Sachs" (two of the biggest derivatives players). In other words, Congress just rubber-stamped decisions which were already made elsewhere.

The same is true with every other piece of financial "reform" legislation which has been passed. See this and this.

It's all for show, folks. Dodd, Frank, Obama and all the other
politicians of both parties (with the exception of a handful trying to do the right
thing) are "consulted only for ceremonial and rubber-stamp purposes
some time after all the truly important decisions [about economic
legislation] have already been made elsewhere"

Without the Bananas

Wikipedia gives some additional background on the term "banana republic":

Banana
republic is a pejorative term originally used to refer to a country
that is politically unstable, dependent on limited agriculture (e.g.
bananas), and ruled by a small, self-elected, wealthy, and corrupt
clique.

Well, America isn't dependent on limited agriculture like bananas. But just about the only areas of growth are in the military and in giant companies lavished with buckets of cash and special "favors" by Uncle Sugar.

As one commentator succinctly put it, America has become:

A banana republic with no bananas.