Robert Barone for Minyanville summarizes better than anyone else I have read the process whereby banking in partnership with government has grown out of all proportion to the real economy and throttled it, here:
Under all of the Basel regimes, "sovereign" debt is considered riskless. Everything else has a varying degree of risk to it which requires a capital reserve. Loans to the private sector have the highest capital requirements. ... The bias imparted with this sort of capital regime makes loans to the private sector unattractive, especially in times of economic stress where bank capital is under pressure. But, it is in times of such stress that loans to the private sector are needed to create investment, capital spending, and jobs. ... Simply put, the banking model in the west now promotes moral hazard (banks making bets that are implicitly backed by taxpayers) and Too Big To Fail (TBTF) policies while it stifles private sector lending. ... Isn't it clear that the relationship between the US federal government and the banking system is unhealthy, perhaps even incestuous, to the detriment of the private sector? That very same banking model is emerging in Europe with the emergency funding by the European Financial Stability Fund (EFSF) to recapitalize the Spanish banks and talk of a pan-European regulatory authority and deposit insurance.
What's missing from this otherwise penetrating analysis, however, is an appreciation of the extent to which banking has been redefined, particularly in the US as a result of the Gramm-Leach-Bliley Act of 1999, which finally overturned the Glass-Steagall Act of 1933.
Now companies as diverse as automobile manufacturers, investment banks, insurance companies and highly diversified multinationals like GE are deemed banking institutions which qualify for government TARP bailouts, FDIC protection, or preferred treatment at the Federal Reserve's discount window. Almost any big business that gets in trouble can now get "help" from the taxpayer by becoming a "banking" concern under the new definition of the rules, to the detriment of those trying to compete in our so-called free market.
Moral hazard doesn't extend now just throughout the traditional banking system, stiffing the disciplined, prudent smaller banks with high FDIC premiums to bailout the failures, it now effectively short-circuits the process by which an innovative small firm might grow one day to challenge GE's gargantuan share of the household appliance market, or in aircraft engines, nuclear reactors and the like.
As financialization of the economy deepens and grows, companies as they are with their relative advantages have those advantages locked into place, while those without market heft are frozen-out. Some people call this crony capitalism, others state capitalism. Almost any euphemism will do, it seems, the latest being venture socialism, which gets us closer to the truth.
In the end it's just good old-fashioned fascism from the 1920s. Obama absolutely loves it. George Bush practiced it. Bill Clinton signed it into law, with the help of Newt Gingrich.
But please don't call this stagnating, ossified, economy failed, free-market capitalism. Just like Christianity before it, you can't say something is a failure which isn't at all being practiced.
