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Talking to Representative Barney Frank About Nationalism and Capitalism:

I have studied the abuses of capitalism and nationalism for fifty years and have written books about how to overcome these “isms”, doing research and supporting legislation that would transform capitalist markets into civil markets and empires into civil republics. I have spoken to people in the U.S. Congress about problems and solutions.

In this short essay, I describe ways I have spoken to Representative Barney Frank about how to establish a civil economy and transform the American empire into a civil republic. This essay is meant to be suggestive of alternatives although not in detail; readers could Google my name and go to a webpage where you can read my books for details. Below are my efforts to get Barney Frank to act on problems.

On Nationalism. Years ago I talked with Barney about supporting a stronger United Nations, hopefully moving through Congress toward enforceable international law, establishing a permanent multilateral peace force, and regional world courts. I said that history has shown how empires fail to survive through the centuries. The Aztec and Inca empires, the Mongolian empires, the Egyptian empire, the Greek and the Roman Empires, and the British Empire all self-destructed. Indeed American colonists were the “terrorists” fighting against the British Empire. I said to Barney “It is now time for our American empire to stop being the world’s policeman fighting ‘terrorists.’ It’s time to build a global system of governance supported by world law.”

Barney responded by saying that he would have nothing to do with creating a “world state.” His use of the word “World State” told me immediately where he stood.  I said, “But Barney, your predecessor, Representative Robert Drinan, was on the board of directors of The World Federalists. He argued for world law and a democratic global government. Fr. Robert Drinan organized a caucus of Congress members to discuss how to bring about world federalism. He worked in the spirit of John Kennedy who went to the United Nations and spoke about giving more authority to the UN through reform.”

Indeed, I think we need a new global governing system for chartering corporations. Corporations in the U.S. were chartered by states in the 19th century with strict (ethical) standards in their charters but then states began to compete for charters, reducing their restrictions, such as keeping their size small and insisting they operate for the common good.  Delaware won the battle to take away ethical standards but now nations are doing the same thing. The OECD estimates that capital held offshore amounts to somewhere between US $5 trillion and US$7 trillion. Approximately 1.4 trillion dollars are held in the Cayman Islands.

Barney dismissed the idea of a democratic world government as dangerous. So I never spoke to him again about the idea. So what could I say to him about capitalism?

On Capitalism. No one needs to study capitalism for decades to see how this market system is self-destructing -- ironically causing bigger government and more regulations. This “free market system” is set up to create state socialism by default. My effort has been to make the market more self-governing in order to reduce the need for bigger government and regulations.

I went to see Representative Frank in his Newton office about what I saw to be a financial crisis before it happened, before the “meltdown.” Barney said that he was looking into financial problems and asked if I had recommendations for people to come to his finance committee. I gave him suggestions. Then came the Great Recession, and I began to write emails to Barney about how to restructure the market so that such terrible recessions (and depressions) do not keep happening.

I emailed him about how “rating agencies” (like Standard and Poor, Moody’s, and Fitch) were paid by the very corporations that they evaluated. They give triple “A” ratings to corporate clients even when they are in deep financial trouble. I argued that this financial system needed to be changed. It is ludicrous for rating agencies to get paid by the corporations they monitor. It’s collusion.

“Dear Barney: Here is what you could do,” 

Have the rating system of corporations done by organizations that suffer from corporate misconduct. (The S&P does not suffer for its misjudgments and wrong calculations.) Rating should be done by pension funds like CALPERS, TIAA-CREF and other countervailing powers that have billions of dollars invested in the stock market. They (not S&P and Moody’s) have a vital interest in keeping businesses financially stable because they risk investing in this market. Their survival depends on sound and transparent corporate finance. 

Another alternative would be for the government to set penalties for misjudgments by rating agencies. If the SEC finds Moody’s ratings are unprofessional, or seriously miscalculated, Moody’s (or any rating agency) pays a penalty to the government for its mistakes. The penalty money goes to the SEC. The SEC now has an incentive to keep an eye on the rating agency. At the same time the penalty would give the rating agency a reason to get its judgment right, stay professional, not get cozy with corporate clients.

What has been done about rating systems since financial crisis?

Nothing. The “disaster” in ratings will happen again.

I said to Barney: “John Kenneth Galbraith wrote about the principle of ‘countervailing powers.’” Organizations in the Third Sector help keep the market self-regulatory, reducing the need for government agencies and regulation. The government should support countervailing powers in the market to make it self-regulatory. It is a major principle to follow in changing capitalist markets into civil markets.

I gave him examples of how governments acted on market problems in the past and could have done better.

 Here is one example I emailed to him:  

Willamette Industries was destroying the environment a decade ago. The government ignored it. The EPA and the State of Oregon were tied to business interests and refused to let citizens get vital information from the company. But when civil society groups finally documented the pollution and pressed for solutions, the federal government began to act.

Willamette Industries agreed in July 2000 to pay a fine ($11.2 million) to the federal government to settle pollution claims, according to the Justice Department and EPA. EPA Administrator Carol Browner called the settlement on violations of the Clean Air Act involving factory emissions the largest in agency history. Under the plan, Willamette will also be required to spend $74 million to install new pollution-control equipment at its 13 factories in Oregon, Arkansas, Louisiana and South Carolina.  Browner estimated that cleaning up the emissions from the Willamette plants would keep an average of 27,000 tons of pollution out of the air. She said that is the equivalent of taking 287,000 cars off the road.

So, this is how governments work at best in capitalist markets with pressure from non-governmental organizations (NGOs). But how would a government handle this case differently by following a (civil market) model? How could the government create a civil market?

First, the money from this public fine for Willamette Industries should have been given to those Third Sector organizations (NGOs) that exposed the problem. It cost them a lot to do the investigation -- against both business and government interests. The money would reward them as whistleblowers and strengthen their associations. In this case, the money would be given to the Northwest Environmental Defense Council, its parent EDC, and the Plumbers Local 290. The reward would pay for their work to expose the problem.

Barney did not reply. I said: “Support the Third Sector like this and help create justice in the market.”

In the midst of the financial crisis, I emailed Barney to support legislation for a Consumer Financial Protection Bureau being advanced by Elizabeth Warren. (He agreed that it was a great idea.) But I argued the government agency would not work by itself without the Third Sector. It would become just “another regulatory agency” doing nothing to protect the public. More must be done to change the market system. The government, I said, supports capitalist markets, not civil markets.

I said, “Governments fail to protect consumers -- regardless of which parties are in power, Republicans or Democrats.  It is not just one party or the other. Every new administration appoints experts from business to regulate their market sector. The government’s reasoning is that businesses and their executives know best on how to act on corporate misconduct.

 I said: “Business leaders in these government agencies will protect their market sector.” This collusion of a “government-market system” has been going on for a century. It is still unresolved.  A Consumer Protection agency will be dysfunctional in the future just like the SEC, FCC, FTC, and other government agencies. The staff will not really (seriously) regulate the market. So what should be done in this case?

I sent Barney a list of consumer organizations that were in the nonprofit (Third) Sector. I said that they should be part of the legislation that helps to protect consumers. The government cannot do this regulation alone. These nonprofit organizations included The American Council on Consumer Interests, the American Council on Science and Health, the Center for Auto Safety, the Coalition Against Insurance Fraud, Consumer Action, the Consumer Federation of America, Consumers Union, the U.S. Consumer Public Interest Group, and others. Such groups should be associated with the Consumer Protection Agency and by legislation have the opportunity to give advice and counsel.

And they should have access to the mass media. If new staff on the government’s consumer agency did not “see” a consumer problem, these NGOs could go to the mass media and inform the public. They would be “whistle blowers” with inside information. They would increase transparency about how the government is not acting properly.

Elizabeth Warren is a hero (for progressives) but she will not be in government very long. It is not just Republicans who will dump her. A new elected government will toss her out. It’s the system.

Again, the principle to follow is: Create “countervailing powers to solve this problem.” Barney took no action on my suggestion to bring in the Third Sector and countervailing powers. 

Corporate malfeasance happens so often that it should be obvious to government representatives. Lehman Brothers cooked its books so that its quarterly reports would make the firm look far more solvent than it actually was. It used “repurchase agreements” ("repos"), which are short-term loans to disguise $30 to $50 billion worth of liabilities. Their balance-sheet manipulation began in 2001.

This kind of corporate misbehavior is constant. It demonstrates the systemic failure of the government to protect investors, creditors and the larger economy from corporate fraud. The Securities and Exchange Commission, which had personnel investigating Lehman at the time, completely missed what was going on right under its nose. Strange. It keeps happening. It was like the Madoff scandal. The government in such cases is part of the problem, supporting and subsidizing the capitalist system.

A big way for government to treat market problems is to stop subsidies that are unwarranted. For example, big agricultural corporations get every kind of corporate subsidy, including dairy price supports, export-enhancement programs, and payments for not growing certain crops. Other privileges include special deals for ranchers, oil companies, and lumber companies to graze on, drill in, or cut resources from federally owned lands at drastically reduced prices. Each case needs Congressional research but our representatives do not act on the market problems.

Other examples of corporate privilege include cable companies and utilities, which are granted exclusive monopolies over their regions, using the law to outlaw systematically any competition. Businesses argue for restricted competition at the international level. Large corporations saw the North American Free Trade Agreement (NAFTA) to be a way to secure “compensatory” protections and other favors. The administration “negotiated concessions” for flat glass, durum wheat, home appliances, wine, peanuts, textiles, sugar, and citrus and vegetable interests, all “politically sensitive industries” that needed “relief.”

We live in a corporate state.

I asked Barney if he would help me create a “Council of Social Advisors.” A new Council would counterbalance the power and authority of the Council of Economic Advisors. The official advice to Presidents then would not be just from economists but also social scientists. We need social statistics.

Here is an email to Barney along these lines.

Sent: 11/11/08

Dear Barney,

 

I have talked with Amitai Etzioni and he is willing to work with you on the legislation for a Council of Social Advisors that would work in parallel with the Council of Economic Advisors.

He was an advisor to Bill Clinton in the Whitehouse; president of the American Sociological Association and the key figure leading the communitarian movement in the United States. He is aware of the need and happy to advise you on the legislation.

Sincerely,

Severyn Bruyn

Barney did not reply. So here I include more emails to Barney as examples of what government could do to change a capitalist economy into a civil economy. 

1101/08

Dear Barney,

…We talked in your Newton office about “social investment” and stopping excessive derivatives like credit default swaps… I am now urging you again to go beyond the old capitalist system and prevent these market crises from happening in the future. …

What to do today?

Guidelines for Action in 2008.

1. Stop this “derivative system” that has grown so excessive.

This derivative system has become very complex but it is time for Congress to stop it. Financial markets started putting out derivatives in the early 1980s and forgot how to invest in substantive fields like manufacturing and agriculture. During the 1990s, the demand for excessive derivatives and swaps based on debt went sky high. I think that all excessive "leveraging" must be stopped. The people who created the problem should not be the people who solve it.

2. Emphasize transparency in all markets. The Great Depression allowed Congress to create more transparency in stock markets and now this crisis should give Congress the legitimacy to provide more civility in the whole private sector. For example, there must be a new public system in the private sector for rating bonds and corporations. To think about how to do this, read Kenneth Galbraith’s principle on “countervailing powers.” And read: A Civil Economy and A Civil Republic and A Future for the American Economy. We can talk if you like.

3. Push for “public standards” in the private sector of trade associations that match the standards in government. This is different and difficult but essential to go beyond capitalist markets. I am talking about [relative] self-regulation through trade associations with their own oversight as well as government oversight and enforceable regulation. This means that trade associations should write standards (principles) of health, safety, and environmental protection into their nonprofit constitutions and corporate bylaws and establish their own independent observers of membership behavior. Trade associations should set up judiciary systems and watchdogs in their corporate (nonprofit) associations. There are 25,000 trade associations in the business sector. The government cannot monitor the whole market by itself. Business must do some of this work on self-regulation as well as Congress maintaining government regulation through agencies.

Here’s part of the government problem. The SEC regulates the sale of stocks and bonds but a different agency regulates some derivatives, and others go unregulated. Insurance is regulated by states. With collateralized debt obligations and credit default swaps, it's difficult to know who regulates what. Large financial institutions compete in multiple markets and across state and national lines. By adjusting their legal status, companies can effectively choose their own regulator; this makes it difficult to hold them to strict rules. We need an overall plan and trade associations should be part of that plan. The government is vital to this process but it is always falling short. Despite all the regulators, half of our financial markets--controlling some $10 trillion in assets--are hardly regulated at all. These include investment banks, hedge funds, and mortgage companies. The latter are not banks but made the bulk of sub-prime mortgages.

4. Consolidate the powers of the government regulatory system and provide funds for larger agency staffs. A new regulatory system must be created in ways that keep new political parties that come into power (e.g. Republicans) from allowing agencies to destroy their function in monitoring the market. For example, we cannot permit corporations to grow so large that they "cannot fail". More careful studies should be made on market concentrations that are permissible so that new political parties in office will adhere to them.

Guidelines for Legislative Action in 2009

1. Establish a Council of Social Advisors.,,.We need a new Council of Social Advisers to gather information and advise the President on how to develop civil markets. This Social Council would assist the President in the preparation of a Social Report by gathering timely and authoritative information concerning civil development in the economy. The Council of Social Advisors would develop indicators in tandem with indicators of the Council of Economic Advisors. Many years ago this proposal was introduced into the U.S. Congress by Senator Walter Mondale and almost passed. It is still feasible.

This Social Council would gather statistics on changes in demography, urban density, poverty, health, education, science and technology related to the development of a civil economy. It would analyze information to determine whether such trends would interfere with the achievement of public policies. It would submit to the President studies relating to civil (social) investment. It would appraise programs of the Federal Government to assess the extent to which they contribute to a self-governing economy. This Council would help build civil (not capitalist) markets, build on the idea that a market is based on a concept of justice as well as on a concept of freedom. It would assume that a market should work for the common good. It would study the degree to which profit making is advanced with public standards in markets that become self-sustaining. It would examine how a public domain is developed through a private domain. 

2. Support Public Accountability Systems in the Private Sector

Public Accountability systems have developed in the private sector to operate for the good for all stakeholders and citizens. They work for the common good by contracts, standards, monitors, and regulators to whom enterprises are answerable. This quiet (relatively unknown) system development should be supported by government policies…

I said to Barney: “We need to transform capitalist markets into civil markets. And ‘government’ must be part of this transition. The purpose of government in my opinion is to create conditions for a (relatively) free economy to become self-governing, that is, to require markets to become transparent and publicly accountable to stakeholders. Government can play a role in this revolutionary reform.”

Below is an email I sent to Barney in the midst of the financial crisis. I wrote: “Here is what you can do immediately”:

“1. Require that trading of all derivatives be done on open exchanges where parties have to disclose what they're buying and selling and have enough capital to pay up if their bets go wrong. The exception in the current bill for so-called "unique" derivatives opens up a loophole big enough for bankers to drive their Ferrari's through.

2. Resurrect the Glass-Steagall Act in its entirety so commercial banks are separated from investment banks. The current bill doesn't go nearly far enough. Commercial banks should take deposits and lend money. Investment banks should be limited to the casino we call the stock market. Nothing good comes of mixing the two. We learned this after the Great Crash of 1929, and then forgot it in 1999 when Congress allowed financial supermarkets to do both.

3. Cap the size of big banks at $100 billion in assets. The current bill doesn't limit the size of banks at all. It creates a process for winding down the operations of any bank that gets into trouble. But if several big banks are threatened, as they were when the housing bubble burst, their failure would pose a risk to the whole financial system, and Congress and the Fed would surely have to bail them out. The only way to ensure no bank is too big to fail is to make sure no bank is too big. Nobody has been able to show any scale efficiencies over $100 billion in assets, so that should be the limit.”

Below is an email I sent to Barney, hoping to give more details on a specific problem during the financial crisis. 

Dear Barney,

I think that customer owned banks and community development finance institutions (CDFI) are accountable to their stakeholders. Here is a note from some community banks on how government policies can be helpful. Maybe your staff can decipher suggestions in this crisis:

 “The CDFI Fund will bolster many CDFIs’ balance sheets if it keeps to its schedule of disbursing both 2009 and supplemental stimulus appropriations by October 31, 2009. If it bogs down, the number of CDFIs in serious trouble or failing will increase sharply. The Neighborhood Stabilization Program may help communities devastated by foreclosures, but its value will diminish steeply if it is implemented slowly or politicized. The Capital Magnet Fund and the National Affordable Housing Trust Fund, both approved in the Housing and Economic Recovery Act (HERA) of 2009 (PL 110-289), could backstop our nation’s affordable housing production system, but Congress has not yet funded them.  (The Capital Magnet Fund, much like the CDFI Fund core financing programs, is valuable because it strengthens balance sheets with equity.) In addition, working through the challenges of block grant distributions for the National Affordable Housing Trust Fund could leave a trail of institutional carcasses. You can restore liquidity to community development finance institutions (CDFIs) in several ways:

        In 2008, Congress gave all CDFIs access to membership in and, potentially, liquidity from the Federal Home Loan Bank (FHLB) system. More than forty nondepository CDFIs are pursuing this possibility. The Federal Housing Finance Agency is working on regulations. Rapid implementation could address $1 billion or more of pent-up demand for FHLB financing.

        The Troubled Asset Relief Program (TARP) is currently an option for community development banks but not for other CDFIs. Although some restrictions on TARP funding may be a problem for some CDFIs, more public issues such as executive compensation will not be problems. The CDFI Fund’s Advisory Board has recommended that the U.S. Treasury use TARP funds to make long-term, low-cost loans to CDFIs. If this is not possible, the Treasury could make equity equivalent (EQ2) investments in loan funds and some equity funds and secondary capital investments in community development credit unions.

        The Term Asset-Backed Securities Loan Facility (TALF) program might provide liquidity to CDFIs that lend to small businesses if it gains momentum for its original purposes.

        Congress should enact pending legislation to provide a federal guarantee to certain CDFI bond issues. This bill would authorize up to $1 billion per year for five years in long-term debt at government-backed prices…

This was too much. Barney called me on the phone and told me to quit sending emails. He was too busy to answer them. I said: “I know that you are busy and these ideas are complex but give me a staff member to talk to -- so I can give specific instructions. I will go over the details with your staff” Barney said: “I do not have enough staff members. No more emails.”

So I stopped calling on Barney Frank to help me change the capitalist system.

 

 

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