Why Has Classical Capitalism Devolved To Crony-Capitalism?

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The money-shot: "People of privilege will always risk their complete destruction rather than surrender any material part of their advantage."

Here is the quote that perfectly captures our era: "People of privilege will always risk their complete destruction rather than surrender any material part of their advantage." (John Kenneth Galbraith) The trick, of course, is to mask the unspoken second half of of that statement: everybody else gets destroyed along with the Elites when the system implodes.
Union pension funds: toast. Government employees' pension funds: toast. 401Ks: toast. IRAs: toast. The echo-bubble in housing: toast. The Fed's favorite PR cover to cloak the enrichment of their financier cronies, the wealth effect:toast.
The primary tool the Elites use to mask the risk of complete destruction is magical thinking--specifically, that "given enough time, the system will heal itself."
That's rich, considering that the Elites' primary tool of avoiding destruction is crippling the market's self-healing immune system: price discovery. Thanks to ceaseless interventions by central banks, the price discovery mechanism has been shattered: want to know the price of risk? It's near-zero. Yield on sovereign bonds? Near-zero. And so on.

Prices have been so distorted (the ultimate goal of Central Planning everywhere, from China to the EU to Japan to the U.S.) that the illusion of stability is impossible without more intervention.

This leads to two self-liquidating dynamics: diminishing returns (every intervention yields less of the desired result) and the Darwinian selection of only those money managers who believe risk has been vanquished.
Everyone who pursues prudent risk management has either been fired or saw the writing on the wall and exited stage right. So the only people left at the gaming tables of the big institutional players are those individuals who are genetically incapable of responding appropriately to rising risk. Those who did have long been fired for "underperformance."
So how did classical free-market capitalism become state-cartel crony-capitalism, a Ponzi scheme of epic proportions that is entirely dependent on ceaseless central bank perception management and interventions on a scale never before seen?
We can start with these six factors:
1. Those who control most of the wealth are willing to risk systemic collapse to retain their privileges and wealth. Due to humanity’s virtuosity with rationalization, those at the top always find ways to justify policies that maintain their dominance and downplay the distortions the policies generate. This as true in China as it is in the U.S.
2. Short-term thinking: if we fudge the numbers, lower interest rates, etc. today, we (politicians, policy-makers, money managers, etc.) will avoid being sacked tomorrow. The longer term consequences of these politically expedient policies are ignored.
3. Legitimate capital accumulation has become more difficult and risky than buying political favors. Global competition and the exhaustion of developed-world consumers has made it difficult to reap outsized profits from legitimate enterprise. In terms of return-on-investment (ROI), buying political favors is far lower risk and generates much higher returns than expanding production or risking investment in R&D.
4. The centralization of state/central bank power has increased the leverage of political contributions/lobbying. The greater the concentration of power, the more attractive it is to sociopaths and those seeking to buy state subsidies, sweetheart contracts, protection from competition, etc.
5. Any legitimate reform will require dismantling crony-capitalist/state-cartel arrangements. Since that would hurt those at the top of the wealth/power pyramid, reform is politically impossible.
6. Understood in this light, it’s clear that central bank monetary policy—zero-interest rates, asset purchases, cheap credit to banks and financiers, QE, etc.—is designed to paper over the structural problems that require real reform.
Japan is a case in point: the Powers That Be in Japan have put off real reforms of the Japanese economy and political system for 25 years, and they’ve enabled this avoidance by pursuing extremes of fiscal and monetary policy that have eroded the real economy and created long-term structural imbalances.
In this 24 minute video Gordon T. Long and Charles Hugh Smith discuss through the aid of 17 slides the rapid advancement of Crony Capitalism in America. The facts are undeniable, but why is it becoming so obvious and undeniable? Why is it accelerating without any apparent 'checks and balances'? Where have the safeguards against this happening gone?

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Hephaestus's picture

I have been thinking about writing a new novel. It would be similar to a Grisham novel perhaps. I don't want it to be too realistic though. War is everywhere and I've looked through the eyes of imaginary spies often already. Front line war books about training ME morons who cant even get to the enemy before they attack themselves is kinda old too. We need something over the top. I'm thinking the NSA vs CIA to be specific. The setup: The American economy is about to crash. The Russians and Chinese are attacking the dollar and winning. Western countries have run out of gold/silver. The wheels are falling off the cart and both of these um... agencies are getting nervous. Enter Anonymous for a cameo.  How hard could it be to convince the NSA that some of the CIA turned on them? This could lead to some serious fun.  I mean think about it. The NSA can: Alter police databases, empty bank accounts, assume control of newer cars, fuck with GPS systems, infiltrate and spoof comms, take over and use foreign satellites, change newspaper headlines and more....The CIA has trade-craft, language, wet work skills and more...... No support needed for these guys just drop them off and right to work it is. It would go something like this. Spook stops off at a gas station and uses a burner card to pay for gas. Unknown to him this triggers a police call and IDs him as an escaped psycho mental patient! The espionage pro gets away and calls in to have the cop problem taken care of... and....the call rings one of Darrell Issa's aides. At the same time the Director of the CIA receives an untraceable email claiming that rogue (patriotic?) CIA agents are trying to take down the govt. On the same day about ten NSA guys don't show up for work because they are duct taped to a tree deep in Yosemite park. In addition Druge starts running a headline claiming that the CIA has proof that the NSA is attempting a coup on the US govt. The NSA sees this headline first of course! Believing they are being served up as a scape goats the nerds run for cover. Once they reach the back up systems the hackers instantly upload all the coke snorting, hooker killing, baby raping dirt they have collected over the years on DC. This is an attempt to take down the govt. before the spooks can kill them........5 minutes later Nancy Pelosi checks the news and finds out she is front page.  And then the ball really gets rolling - CIA cars suddenly deploy airbags and accel blindly. NSA specialists running like hell with jacked up cyber ninjas hot on their heels. The news says Putin has annexed NY city. Congress starts shooting each other. The president moves to an "undisclosed location".......and when he gets in the bunker the doors lock right before the power and ventilation shuts down. Homeland security breaks into Langley!

Screw the book this should be a movie!

PS ISIL explained http://www.c-span.org/video/?c4508223/isis

NidStyles's picture

Paragraphs homie, use them.

Dr Strangemember's picture

NAR: Don't forget, today is the BEST DAY to buy real estate!  

flacon's picture

Why do some people insist on calling our current system CAPITALISM?

Zirpedge's picture

At Flacon, ha ha true, peope have tried to call it "corporatism" because it's like Mussolini said, it is the merger of corporate and political power, or fascism, which is often characterized as militarized along racist imperatives. 

Western "Capitalism" hasn't existed for decades. Articles like this only support that false paradigm. 

Who wrote the title of this article? Is it click bait? Nobody is that naive. 

Anusocracy's picture

"So how did classical free-market capitalism become state-cartel crony-capitalism...?

For those capable of thinking outside the box, the appropriate question is:

Would free-market capitalism become (state) cartel crony-capitalism outside the existence of government?

MachoMan's picture

Exactly.  We have social competition and that's all...  any compulsion to cateogrize it or fit it into a cubby-hole are simply indicators of our own personal issues.  This is what dominates every economy...  competition...  Some people think that the government is being utilized to prevent competition, however the very act of preventing competition is a form of competition...  there is certainly a beneficiary in the process.  It's a concrete jungle filled with apes wearing jeans.

Anusocracy's picture

When you have been immersed in the Government Universe your entire life, it is difficult to see the cause and effect of government.

Rican's picture

The short answer to the article's thesis question is: central planning.

Totentänzerlied's picture

Private (including legal/moral) persons own most (>90%) of all capital. That's one definition of capitalism ... just not the one most people use most of the time.



Mr. Ed's picture

"NAR: Don't forget, today is the BEST DAY to buy real estate"


Yeaaahh!!!!  Real estate is ALWAYS a good investment, no matter how much you overpay!  Yeah!  It's never a bad decsion, buy it!  It's value will never, ever go to zero!  (okay, close maybe, but never exactlly zero!)  Get it before the price moves out of reach!  Get it now cause it's goin fast!  Become a member of the property owner class!

(just cause it's flat as a board alkali scrub 59 miles from nowhere priced at 10x it's real value is no excuse to back away... go for it!  You won't regret it, the NAR says so)

sgt_doom's picture

"everybody else gets destroyed along with the Elites when the system implodes."

Ahhh, you sure about that, dood?

I mean, the super-rich really don't appear on that Forbes list, don'tcha know by now?  Sure, a few appear at the very bottom, perhaps, but they really have far, far more billions, 'cause it is unable to be tracked through private records (foundations, trusts, unregistered trusts, offshore havens, etc.).

KnuckleDragger-X's picture

You have to remember that magic word 'globalism'. When the system goes down this time it all goes down with no place to run. The elites think they they can buy and bribe their way out but when people are starving and there is nothing to buy at any price money including gold becomes worthless. I hold gold and silver for the 5 to 10 years after the collapse when civilization starts to reform. till then it'll be barter and trade.

Stuck on Zero's picture

Those who control most of the wealth are willing to risk systemic collapse to retain their privileges and wealth.

"Systemic collpase" but not personal destruction.  The rich and ruling class play a game of chicken but they do not go down with the state.  The elites always have escape plans of some sort whether underground bunkers, cash in Switzerland, villas in France, private jets, and ranches in Uruguay.  They never risk themselves or their fortunes ... they always gamble with someone elses money.  Witness the behavior of the Saudi elite when Hussein invaded Kuwait ... they all jumped in their private jets and flew to London with hundreds of tons of gold.

spastic_colon's picture

it appears you have succeeded in writing your novel / s

ShorTed's picture

...and did it all in the 2 minutes after the article posted.

stant's picture

You left out the exploding oil tankers , and fertilizer plants near ill deeds of the past and near the date

Professorlocknload's picture

Humm, the movie "The Player" comes to mind.

Raymond K Hessel's picture

That was like reading a condensed version of every psychotic comment posted to ZH. 

lordbyroniv's picture

RETUR TO MOTHER !!!!!!!!!!!

Hephaestus's picture

Red 105 standing by ready for debrief and new orders! Take that shit death star We got em!

Hephaestus's picture

We fruit bats are one motherfucker of a bitch. I totally agree.   Now quit whining on a finance chat room and get ready for some epic well ........everything!

That was my last post goodnight my friends and fare thee well!


http://www.cnn.com/video/?/video/offbeat/2014/09/11/bts-bat-terrorizes-news-anchors.wate&hpt=hp_c4&from_homepage=yes&video_referrer=http%3A%2F%2Fwww.cnn.com%2F Ah ha ha ha we are every where!

Ignatius's picture

Capital is always at risk.

Bell's 2 hearted's picture

Other [read: taxpayers] Peoples Capital at risk

LooseLee's picture

"Why Has Classical Capitalism Devolved To Crony-Capitalism?"


Greed & Fear.....the human condition.

Kirk2NCC1701's picture

Yes.  But these have been particularly concentrated and amplified in Corporate Governance (the Board Members who are supposed to watch the CEO and his Exec).

The CEO and Execs can do NOTHING of substance for any length of time, that the Board does not explicitly or implicitly approve.  In the Final Analysis:  "The Buck Stops with the Board", and corporate Boards have failed ABYSMALLY.

p.s. I have these views from several retired Execs (EVPs), some of whom also sat on Boards of other companies, and retired in partial or total disgust.  In their own words: "I became totally disgusted with Corporate Governance -- or lack thereof -- in the 90s." 

Some elaborated: "We became the 'Bitches of Wall St', when Exec Comp Plans became a much bigger part of Stock Performance.  Juicing stock prices by any and all means became the Cause Celeb for execs.  In the Roaring 90s it became so prevalent, that you were a Fool if you didn't play the same Merry-Go-Round Game.  We all knew it couldn't last -- not without downgrading our domestic Mfg capacity, laying off tons of people, and helping China and various powers in Asia to rise.  But, hey, we got our Bonuses and Golden Retirement Parachutes!"

sgt_doom's picture

Corporate boards have actually succeeded, you clowns who still hold with sane and rational thinking still don't get it:

every board that the "legendary" Martin Feldstein of Harvard has been on have succeeded dramatically --- HCA, hit with the largest out-of-court penalty settlement ever for Medicare/Medicaid fraud; Eli Lilly, hit with the largest criminal penalty for fraudulently marketing a drug that killed; and, AIG/Financial Products, involved with the largest insurance swindles in human history and had to be bailed out by the US government.

Yup, Feldstein's directorships and boards have been eminently successful at crime.

Kirk2NCC1701's picture

Agreed.  Except that the morally-troubled Execs I cited had difficulty wrapping their (old-school) morals around the Feldstein et al "Nouveau Harvard" morals. 

They just could not go to Church/Confession week after week, and still hope for Forgiveness for... Persistent and Premeditated Sins.  Clearly not everyone had the same moral fiber/constituency to resist, and became far more successful by worshiping a different deity: Mammon.

Herd Redirection Committee's picture

A crucial aspect of confession is actually repentance.  Meaning "I won't do what I done no mo'"

exi1ed0ne's picture

It's not suprising when they all sit on each other's boards.  It's a big club, and we aint in it.

anachronism's picture

This is the best essay that Hugh-Smith has written in quite a while. But as ever, Charles stops short of coming up with a solution, or a process towardcoming up with a solution, leaving us with the implication that there is none.

eclectic syncretist's picture

Yes, but clearly defining the problem is the best first step towards solving it. 

GeorgeWKush's picture

For capitalism not to become crony, there must at least be a set of truly constant rules. If that is not the case then "free market capitalism" (assuming a "free market" is possible) will always be like a strategy game where the most successful players can change the rules ingame, basically rigging the market to their own advantage and corrupting the entire system with their greed.

MachoMan's picture

Absolutely.  The problem though is that humans have not actually been able to devise and implement a solution.  The issue is that the world's economy (life) is incredibly complicated and any police action to ensure competition by the rules fails for all the reasons central planning fails.  Unfortunately, if left to our own devises, we end up the same.  To regulate or not to regulate.

GeorgeWKush's picture

I suspect the reason is just as much that there have a lack of will to implement a solution amongst those with the power to do so, as it is lack a of ability. A solution should include decentralisation and redistribution of power, away from those who have it in whatever system is present, such a thing will never be easily done.

MachoMan's picture

So your thesis is that, despite millennia of intelligent thinkers tinkering with how we interact, we just haven't come across the right idea?  That despite millennia of trying literally every government (as well as anarchy) the solution hasn't occurred, but for a lack of implementation?  You've got to be shitting me.

If there is an answer, and somehow it manages to be perfectly implemented, it will exist for merely an instant.  From there, humans ruin it.

Duke of Earl's picture

Once you place a rule on capitalism it is not longer pure capitalism.  In fact, the only entity which could place a rule would be a government which is the first step toward cronyism.

GeorgeWKush's picture

If your definition of pure capitalism is a free market in the sense that the market is completely free of rules and regulations, then I am afraid that pure capitalism is just as big a utopia as pure communism. Anarchy in the market works the same way as anarchy anywhere else, one or multiple persons/entities that are stronger than the others eventually make their own rules and gradually forces more and more people to follow those rules as their power grows. The concept of "free market" can only work if your definition of the free market is the one which has the least possible rules in order sustain itself, if not it is doomed to disintegrate into cronyism.

fallout11's picture

Well said, which is why true anarchy is an unstable state....someone inevitably is always trying to become the next local "government", be it the local gang leader/strongman, religious leader/immam, clan leader, or militia commander. Saw this firsthand in Somalia during a series of church missionary trips there over a decade.  Without the rule of law (or whatever passes for same) and enforcement of it, contracts cannot be enforced, price discovery cannot exist (coercion and deception prevail), and free markets cannot operate (because you cannot trust people).

fallout11's picture

Not all mathematics problems have a real solution.

SumTing Wong's picture

There's a solution, but CHS can't advocate it. There would be people talking about terrrrrism. And he is one of the elites that is privileged, also. So if he says we should page Dr. Guillotin, then he just might get too close-up of a view of the situation.

Notsobadwlad's picture

Look to the things that will make it naturally crumble and then look to what is going on today and check for a match.

Parasites can only live as long as the host survives and is healthy enough to feed them.

Skateboarder's picture

Cheap Energy + Free Debt + Human Nature --> Ponzi Schemes + Currency Debasement.

Quus Ant's picture

corrupted human nature.  Let's not get it twisted.

Skateboarder's picture

No - corruption is part of human nature. It is the individual's choice to shun it or wield it.

Quus Ant's picture

a child is not born corrupted.  Augustine's purile understanding of the revelation fucked it up for everyone.

centerline's picture

Alas, but a child first develops a sense of self.  Id, the Ego then Super-ego.  So, on the basis of relative stupidty - or perhaps sociopathic behavior - the super-ego is not very effective and lesser mechanisms drive.