My new friend Michael Barrow recommended an eye opening article in The Atlantic: “The Quiet Coup” by Simon Johnson, a professor at MIT’s Sloan School of Management and chief economist at the International Monetary Fund during 2007 and 2008.
From his perspective on both sides of IMF bailouts over the decades, Johnson describes the current US financial crisis in very familiar terms. It is a crisis brought on by a corrupt oligarchy, the same story at the heart of all IMF interventions. Unfortunately, it is doubtful the IMF is adequately capitalized or politically powerful enough to address this one, even if our government were to become wise, humbled or desperate enough to request their help.
The introduction to the article reads:
“The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, 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.”
The recommended solutions are once again the same ones that almost all informed economists outside government and Wall Street have been recommending for months now. They are those strong solutions that are completely abhorrent to the members of the elite oligarchy who sit in the seats of power at the Treasury Department, Federal Reserve and other regulatory agencies:
“The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.”
But he adds a critical component:
“This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.”
And Johnson offers specific advice that will be familiar to readers here:
“Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. …………. Banks that remain in private hands should also be subject to size limitations.
This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.
To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation.”
Johnson closes on a plea to federal financial regulators, those intimately intertwined members of of our own US financial oligarchy, to wake up to reality. The game is over.
“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.”
It is ironic that Barak Obama, a leader many feared would be too left leaning, is in fact such a strong defender of the financial elite and our own corrupted system of crony capitalism. Hopefully, before his political capital is all squandered, he will wake up to reality and do the job he was elected to do – restore some sanity, balance and fairness to the system and end the rein of the Wall Street oligarchy.