While it is generally accepted that we have the best politicians money can buy and that who you know is much more important than what you know. Another long suspected unhealthy relationship, generally accepted as true but never proven. Meaning the revolving door between big business, particularly the finance sector, and big government. We now have a study by professors Ran Duchin and Denis Sosyura of the University of Michigan Ross School of Business detailing exactly that. I can’t say I’m really surprised by any of this but it certainly illustrates that while we may preach free market capitalism what we practice is anything but. Further an economic strategy based on crony capitalism, influence peddling and gross inefficiency guarantees economic failure.
Some excerpts:
A new study by Ross professors Ran Duchin and Denis Sosyura found that banks with connections to members of congressional finance committees and banks whose executives served on Federal Reserve boards were more likely to receive funds from the Troubled Asset Relief Program, the federal government’s program to purchase assets and equity from financial institutions to strengthen its financial sector.
Further, their research shows that TARP investment amounts were positively related to banks’ political contributions and lobbying expenditures, and that, overall, the effect of political influence was strongest for poorly performing banks.
The researchers used four variables to measure political influence: 1) seats held by bank executives on the board of directors at any of the 12 Federal Reserve banks or their branches (the Federal Reserve is involved in the initial review of CPP applications from the majority of qualified banks); 2) banks with headquarters located in the district of a U.S. House member serving on the Congressional Committee on Financial Services or its subcommittees on Financial Institutions and Capital Markets (which played a major role in the development of TARP and its amendments); 3) banks’ campaign contributions to congressional candidates; and 4) banks’ lobbying expenditures.
They found that a board seat at a Federal Reserve Bank was associated with a 31 percent increase in the likelihood of receiving CPP funds, while a bank’s connection to a House member on key finance committees was associated with a 26 percent increase, controlling for other bank characteristics such as size and various financial indicators.
“Our findings also suggest that qualified financial institutions were more likely to receive an investment from CPP if they were bigger and had lower earnings and lower capital,” said Duchin, U-M assistant professor of finance. “This is consistent with an investment strategy seeking to support systematically important institutions experiencing financial distress.”
Source:
Banks and Bailouts: Playing politics?
12/21/2009
