Simon Johnson: “Quiet Coup” Prevents Solution To Economic Problems
FINANCIAL OLIGARCHY RUINING THE ECONOMY
“…
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.” The Atlantic, May 2009
Many believe that the US has become a financial oligarchy with large
financial firms running the government. There is certainly evidence to
that effect. Bailouts focused almost exclusively on “big banks.” The
cozy interchange of personnel between Wall Street and Government
aroused the ire of citizens and some in Congress. “Government Sachs”,
once humorous, is now a pejorative. Anger over the secrecy of the
Federal Reserve mounts. Corruption and cronyism dominate discussions of
what is wrong in Washington.
Simon Johnson is a Professor at MIT (Sloan School of Management) and
former Chief Economist at the International Monetary Fund. Dr.
Johnson’s experience and expertise provide him with a unique
perspective on our economic problems. In The Quiet Coup, an article from Atlantic magazine, he shares his views.
Dr. Johnson observed similar financial crises at the IMF and as
consultant to various governments. Usually these crises were in
third-world economies. Despite the size of our economy , Johnson
believes the current and developing financial condition of the US is
little different from an emerging country. According to Dr. Johnson,
the common denominator in all financial crises is governmental capture
by private, powerful interests. In our case, the oligarchy is the
fusion of the financial sector and the government.
[T]here’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.
In
his role at the IMF Dr. Johnson would have recommended the following
actions to solve our problem: 1. Nationalize the major banks, clean up
their balance sheets and then sell them back to the private sector in
smaller pieces; and 2. Change the regulatory apparatus so that banks
could never again become big, capture the political class or engage in
risks beyond those considered prudent.
While third-world countries go to the IMF begging for funds, we are
too big to be bailed out by the IMF or any other entity. Similarly, we
are too powerful (some would say arrogant) to allow outsiders to impose
a solution to “clean up” our government. Because there is no outside
force, US problems must be solved internally.
Without an outside enforcing agency, Dr. Johnson is not optimistic. He sees two plausible scenarios:
Scenario One:
The first involves complicated bank-by-bank deals and a
continual drumbeat of (repeated) bailouts, like the ones we saw in
February with Citigroup and AIG. The administration will try to muddle
through, and confusion will reign.
Our future could be one in which continued tumult feeds the looting
of the financial system, and we talk more and more about exactly how
our oligarchs became bandits and how the economy just can’t seem to get
into gear.
The first scenario is the one the Bush Administration chose and the
Obama Administration then expanded. This solution meets none of Dr.
Johnson’s recommendations. Specifically, “
t is inadequate to change
the behavior of a financial sector accustomed to doing business on its
own terms, at a time when that behavior must change.”
Scenario Two:
The second scenario begins more bleakly, and might end
that way too. But it does provide at least some hope that we’ll be
shaken out of our torpor. It goes like this: the global economy
continues to deteriorate, the banking system in east-central Europe
collapses, and—because eastern Europe’s banks are mostly owned by
western European banks—justifiable fears of government insolvency
spread throughout the Continent. Creditors take further hits and
confidence falls further. The Asian economies that export manufactured
goods are devastated, and the commodity producers in Latin America and
Africa are not much better off. A dramatic worsening of the global
environment forces the U.S. economy, already staggering, down onto both
knees. The baseline growth rates used in the administration’s current
budget are increasingly seen as unrealistic, and the rosy “stress
scenario” that the U.S. Treasury is currently using to evaluate banks’
balance sheets becomes a source of great embarrassment.
Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.
Either
scenario involves a great deal of economic suffering. Yet, our
politicians continue to convey signals of “green shoots’ and all clear
ahead. President Obama concluded recently in his speech at Brookings: “The skies are brightening. And the horizon is beckoning once more.”
There are several interesting points to Dr. Johnson’s article. First
is his assumption that our government will not apply any comprehensive
solution until markets create the next crisis. Johnson indicates that,
while economic collapse is necessary, it may not be sufficient: “… it
does provide at least some hope that we’ll be shaken out of our torpor.”
The next point is that Dr. Johnson does not discuss what happens if
scenario two does not motivate reform. This possibility appears to be
more than insignificant in his opinion: ” … faced with the prospect of
a national and global collapse, minds may become more concentrated [my emphasis].”
A third point pertains to Dr. Johnson’s lack of realistic
recommendations. He recognizes that the IMF approach cannot be used,
but never tells us what might be done. Given Johnson’s experience in
similar situations, his speculations regarding other actions, time
frames, political maneuvers, civil strife etc. could be invaluable.
Lest there be any doubt as to the seriousness of our situation, Dr. Johnson concludes:
The conventional wisdom among the elite is still that
the current slump “cannot be as bad as the Great Depression.” This view
is wrong. What we face now could, in fact, be worse than the Great
Depression—because the world is now so much more interconnected and
because the banking sector is now so big. We face a synchronized
downturn in almost all countries, a weakening of confidence among
individuals and firms, and major problems for government finances. If
our leadership wakes up to the potential consequences, we may yet see
dramatic action on the banking system and a breaking of the old elite.
Let us hope it is not then too late.
Dr. Johnson has written an excellent article. His insights on the
financial industry’s co-opting our government were especially useful.
His suggestion that we were becoming a “banana republic” put our
financial condition into perspective. Perhaps most important, Dr.
Johnson provided an analysis that is in the tradition of political
economy. That is, economic analysis was performed realistically, within
existing political and institutional constraints.
Despite a highly recommended and informative read, how this economic crisis resolves is still indeterminate.