Monday, May 17, 2010

Government Corruption

Government corruption is many things, quite a few of them in the eye of the beholder. Hence, there is a problem of knowing it when we see it.

Meanwhile, our government's role is to provide a level playing field for capitalists. Unfortunately, it strays from this role. The government is at its worst when it engages in various forms of social engineering.

The government also forms alliances with the organizations is supposed to regulate or oversee. How can a government avoid corrupting itself when it settles virtually all business controversies by accepting money from the offending corporations? The most depressing example is the lucrative relationship between the government and the tobacco industry. For sickening behavior, what is worse than a government extracting as much tax revenue as tobacco addicts can pay?

Possibly the only example that might surpass the government/tobacco joint venture in punitive taxation is the example that would arise if the US were to legalize recreational drugs. Millions of people favor the legalization of marijuana, and when they speak of legalization they always mention the windfall tax revenue that legalization would include.

To put things in stark terms, if government corruption is driven by corporate interests, it is as though the criminals are advising the police.

In my view the real question boils down to assessing the integrity of government employees and elected officials. Last year in NY City there were problems with crane inspectors. A couple were giving passing grades to cranes and crane operators in exchange for bribes. The lax inspections led to a few deaths and a considerable amount of destruction -- and at the bottom of it all there was criminal behavior.

With respect to the oil leak in the Gulf and the Transocean drilling rig, it now appears the government inspectors from the Minerals Management Service were failing to perform adequate inspections. However, there has been no suggestion of bribery or criminal behavior on either side. Just plain old government ineptitude.

In the recent mine explosion it appears that mining company was regularly cited for safety violations, but the company was also known to make the required improvements. However, it looks as though the government's rules for action to meet safety standards were lax enough for the explosion to occur. Still, by all measures, mining fatalities have dropped by about 95% over the last few decades.

Of course we need coal and oil, and we cannot construct buildings without cranes. Nevertheless, in those industries a lot of government regulatory effort is put into creating and maintaining safe operating environments. Safe for the employees and safe for anyone else touched in any way by the work being done.

That is not always the way it is. Especially in the financial industry. Inasmuch as all companies want to stay in business and maxmize their profits, they all develop an understanding of their markets. When it comes to lending money, lenders know how to identify borrowers who might fail to repay their loans. If we were asked to lend our own money to strangers, I think all of us would ask the same obvious questions and reach the same obvious conclusions about who gets a loan and who does not.

That's when the government steps in. It's social engineering time. Politicians know the number of affluent creditworthy voters is much smaller than the number of people with marginal creditworthiness. It takes only a second to realize that politicians will happily promise the world to voters who have no assets and later make adjustments to government finances to accept the risk created by laws that encourage lenders to underwrite loans to people unlikely to repay them.

How do politicians do this? They hire inspectors to check the safety of financial entities and their products. The government gave its de jure stamp of approval to S&P, Moodys and Fitch by naming them Nationally Recognized Statistical Organizations. And thus a credit rating from any of the three was incontestable. Hmmmm. Apparently the inspectors at S&P, Moodys and Fitch were less than fully competent. Or maybe overworked, maybe unaware of the aggregate impact of their ratings.

Were the financial inspectors taking bribes? No. Were they rating securities according to accepted methods? Yes.

But the only reason these outrageously risky securities were created comes back to two points. First, the financial industry understood that some of the risk was carried by the government by way of loosening standards at Fannie Mae and Freddie Mac. Second, the financial companies creating these risky securities realized that on one hand they were forced by the Community Reinvestment Act and subsequent legislation to lend money to potential deadbeats, and on the other hand, they were now positioned to exploit this requirement in ways the government regulators and inspectors did not grasp.

Thus, by creating rules forcing banks to extend loans to minority group members with poor credit profiles, the government created something else that was unintended. The government engaged in a logical fallacy known as the Fallacy of Composition. After getting started by the government, a number of financial companies jumped in and worked the fallacy until disaster hit.

Would the financial hurricane have struck if all lenders stuck to basic lending principles of lending money to people with good credit scores, decent job prospects and ample downpayments? No.

Is this an example of corruption? Of government stupidity? Of corporate greed? Or all three? All three. But the first mistake, the one that started it all, was made by the government when it believed the path to fairness involved the suspension of sane credit practices for a certain class of borrower.

Meanwhile, when it comes to global ranking for government corruption, the US government gets high marks for its relative honesty. Ecuador, however, is way down the scale. Nigeria? Disastrously corrupt.

But you seem to think Nigeria's corruption arrived with the discovery of oil. As though the arrival of western oil companies and money were the forces that sent Nigerian leaders off course. As of today, about half of Nigeria's population of 150 million has indoor plumbing and electricity. That sounds terrible until you consider that before there was oil money things were worse. Of course the country is as corrupt as a nation can get.

Worse, Nigeria is now about 50% muslim -- and climbing. The dominance of Islam guarantees the country will regress and remain in its benighted state forever.

It boils down to this. Our government should confine itself to regulating the playing fields and leave the capitalism to capitalists. Forming revenue-driven partnerships and other revenue-driven relationships between government and industry is a bad idea.


Post a Comment

<< Home