Corruption Weakens Democracy
Many of our institutions are showing signs of wear. They are cracking. Retired military intelligence officers are working as consultants for foreign countries. The justices of the highest court in the land have no code of ethics that they must follow and have failed to create one of their own. So far, four justices have been found to have used questionable judgement when reporting gifts, financial transactions or presiding over cases where there may be the appearance of favor: Chief Justice, John Roberts, Justice Clarence Thomas, Justice Neil Gorsuch and Justice Sonia Sotomayor. Corruption is not always a criminal activity. A system can be corrupt without being criminal, but when the corruption goes unchecked criminality usually follows, bribery, pay to play, money laundering, etc. Lying is a form of corruption that we often see these days. While lying to Congress is criminal, lying to the public to get elected to Congress is not. You can blatantly lie about yourself and your accomplishments to gain office in this country. Once elected, the only way to remove the liar is to either pressure them to resign or uncover a crime they may have committed and go through trial by jury to decide guilt or innocence.
The Fed’s findings
The Federal Reserve (Fed), whose mission it is to “provide the nation with a safe, flexible and stable monetary and financial system,” is also showing the cracks from corruption. The Fed released their study of what went wrong at Silicon Valley Bank (SVB) and their part in its collapse.
The report summarizes:
The review finds four key takeaways on the causes of the bank's failure:
Silicon Valley Bank's board of directors and management failed to manage their risks;
Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity;
When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough; and
The Board's tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.
The Fed is meant to operate independently, but it isn’t immune to pressure from interested parties. The Lyndon B. Johnson, Nixon, and Trump administrations wanted favors from the Fed. Greg Becker, former CEO of the failed SVB, was also a member of the SF Fed Board from 2019 till the bank’s failure in 2023. There is something troubling about having the entity being regulated also being part of the regulatory arm. It sounds like having the fox guarding the hen house. While the Fed sent notices to the bank to improve their operations, they were also lax on enforcement of their recommendations. Three banks failed in about three months. It may not be just the fault of the Fed, but it is their mission to maintain a safe, flexible, and stable monetary and financial system and it is debatable if they are having success doing so.
Pouring gasoline on the fire
When the Glass-Steagall Act was made law in 1933, it separated commercial banking from investment banking. It was created to protect the country from another financial disaster like the Great Depression of 1929. In the 1980s, less than 50 years later, Milton Friedman’s economic theories took hold and the belief in the power of the “free” market to regulate itself was put into practice. It helped to pave the way to relaxing the regulations that were thought to be holding back the unbridled growth of the burgeoning finance economy. Glass-Steagall was dismantled during the presidency of Bill Clinton and the down hill plunge on the financial roller coaster began. In less than 15 years we suffered the 2008 financial meltdown. During those 15 years neoliberal economics was successful in transferring 50 trillion from the bottom 99% to the top 1%. The financial and monetary system has been far from stable. The country has suffered from several rounds of serious disruptions: There have been a series of economic booms and busts since the 80s: the housing bubble that burst, the savings and loans bubble that burst, the dot com bubble that burst, and the mortgage-backed securities bubble that burst in 2008.
July 1981 to November 1982, there was a recession and 10.8% unemployment
July 1990 to March 1991, there was a recession and 7.8% unemployment
June 2003, there was a recession and 6.3 % unemployment
October 2007–2009, there was the great recession and 10% unemployment
As in 1933, after the Great Depression, regulations were drawn up in response to the financial meltdown of 2008 to avoid another occurrence. The Frank-Dodd regulations were developed to better regulate the banks and protect the system. The regulations were in place for a scant 10 years and by 2018 the banks were lobbying for their roll back. It was argued that the requirements and oversight policywere too onerous for small to mid-sized banks to manage. SVB was considered mid-sized and had lobbied Congress hard on the subject. The Frank-Dodd regulations were rolled back during the Trump Administration. The Fed now reports that the rollback of regulations was partially responsible for the failures at SVB. Removing the barrier between commercial and investment banking made the banks larger and their activities more complex to monitor. These fast-growing financial institutions were beyond the Fed’s reach.
When it is suggested that a “fundamental economic U-turn” is required to course-correct and repair the current U.S. economic policies that have created the unbalanced financial environment we are experiencing, it sounds frightening. However there have already been a series of frightening twists and turns, booms and busts, repetitive bank failures, recessions and depressions that have brought much instability into the lives of the public. We can see it happening today and we know it to be historically true. You may be asking ‘what is corrupt here?’ The banks and their regulators just made mistakes. The banks and their regulators did not perform their stated duties. SVB chose high risk over stability and the Fed chose insufficient oversight of an institution that they knew was in trouble, resulting in yet another loss of trust in the banking system as several banks failed and had to be bailed out to give the appearance of a return to stability.
Corruption can undermine democracy by weakening democratic institutions and, in turn, weakened institutions are less able to control corruption. Corruption if often subtle. Be vigilant about signs of it in your own behavior. Align your words with your actions. Keep your promises. If you decide that you cannot follow through on a promise made, then be honorable and upfront about it. Don’t do things and say things that you would not want directed back at you. What words you speak and what promises you make are still up to you to decide.