Saturday, April 11, 2009


The former chief economist of the IMF, Simon Johnson, has an article titled The Quiet Coup in the May issue of The Atlantic Monthly. The headnote to the piece reads:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming... is that the finance industry has effectively captured our government - a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF's staff could speak freely about the U.S., it would tell us what it tells all countries in this situation; recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression we're running out of time.

Johnson writes:

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

As Johnson examines what he calls "The Wall Street-Washington Corridor," he observes

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

The "channels of influence" he describes are in effect a network of personal connections, all amplifying the power they tap into. And that power, of course, creates a certain glamor:

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway.

--a glamor that concealed ignorance:

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t.

Despite everything, the governments' bailout of the banks is dead set on trying to preserve the illusion:

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand.

Johnson concludes by saying that the US faces "two plausible scenarios" or possible paths it can take. You can probably guess what these are before reading his explications.

Last week, Elizabeth Warren released a report to the Congressional Oversight Panel on the bailout that was rammed through the Congress last November. You can watch a video summary of it here. But will it make any difference to Congress-- or the Obama Administration? As long as Geithner's running things, certainly not.

Today A New Way Forward is holding demonstrations in cities across the US. William Greider talked about A New Way Forward and its day of protest a couple of weeks ago on Bill Moyers' show.

Honorary Co-Chairs of A New Way Forward:

-Jane Hamsher, Firedoglake
-Mike Lux, Open Left

Sponsors and Elder Counselors of A New Way Forward

-Simon Johnson, Former IMF Chief Economist, Baseline Scenario
-Chris Hayes, Washington Editor, The Nation
-David Sirota, Syndicated Columnist, Author
-Joe Trippi, Change Congress, co-founder
-Zephyr Teachout, Visiting Assistant Professor of Duke University, Dean Campaign
-Joe Costello, Energy, Communications, and Political Economy
-William Greider, "Come Home, America", National Correspondent, The Nation
-Yves Smith, Economist, Naked Capitalism

Not exactly flaming radicals, are they. But have you noticed, Larry Summers and Timothy Geithner have started to claim that the crisis is past and the "recovery " begun? This is surely crony capitalism in its most supreme, apparently perfected form.

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