Too Much Finance?

I highly recommend this article by Simon Johnson: The Quiet Coup – The Atlantic
(May 2009)

There are two key points to take away.

First: the financial sector has far too much political power in America. The intermingling of Wall Street people and politicians has produced a very unhealthy ‘oligarchic’ interdependency between the two. Specifically, the ruling elites have blended into one that shares a common worldview of the importance of finance and the methods that are necessary to do finance as a practical business.

This common belief system extends to include the ‘market knows best’ syndrome that allowed someone like Alan Greenspan to completely ignore the emerging bubble in housing prices. And it now underpins the Obama administration’s complete inability to grasp the continuing danger of allowing behemoth banks to dominate our economic landscape. The very existence of a ‘too big to fail’ concept should warn us that we have an unbalanced economy. Nothing should ever be too big to fail. So the concept should never be discussed. The facts of the past few months have shown us that the big banks are only too willing to threaten the government by resorting to claims that if they are allowed to go under the consequences will be dire.

My reaction to ‘too big to fail’ has always been: nationalize and break up. A modern version of trust busting. Holding the nation to ransom is unforgivable, yet banks like Citibank, and Bank of America are all too keen to rush to Washington and announce their impending demise. Fearful politicians who have bought the market doctrine are also only too keen to oblige with another handout.

The second thing to take away from Johnson’s article is that our current malaise has a much higher likelihood of persisting while the financial sector retains its prestige and clout.

Bankers have been very good at pressing their claims ahead of other sectors of society. They have become immensely rich in the process and they have been very generous with political contributions.

This unabated power twists public policy away from an evenhanded approach. It also prevents strong solutions like nationalization that are unpalatable to the oligarchs from being considered let alone being acted upon. Conversely it also means that solutions to economic problems that are enacted are more likely to contain benefits to banks.

Because of this power the banks lumber along close to insolvency and continue to operate as usual even though their business models are exposed as total failures. The economic damage accumulates: we need an efficient and healthy banking system to help drive an overall recovery. But we have lost the power to rule force the banks to choose: fix themselves or be fixed by us. The power relation is inverted: they tell us what to do and we comply by bowing down to their supposed expertise.

This is a rotten state of affairs.

It undermines democracy and it undermines our economy.

That’s why Johnson’s article is such good food for thought.

Addendum:

Also, you might want to read this editorial from the New York Times which sounds the same alarms: NYT Editorial on Finance Reform One aspect the editorial plays up is the effect the power inversion I commented upon has undermined the credibility of pretty much every aspect of our regulatory structure. The extraordinary lack of oversight and the unquestioning acceptance of laissez faire economics go hand in hand. Belief in deregulation is virtually indistinguishable from a belief in self regulation. The Reagan ‘dead hand’ of government is anathema to the government itself. So no alarms go off when asset bubbles emerge because the bureaucrats themselves have disarmed the alarms. They have become so infected with market ideology they are unable to envisage solutions not market centered. With the proverbial foxes in place no wonder the chicken coop was pillaged with such ease.

This too has been my mantra: we have suffered the collapse of a worldview. The failure extends all the way back to the curriculum at the schools we rely on to train our elites. Our political elite and our financial elite both learned the same economics. They both came of age in the Reagan era. They see no fault in moving from one to the other. there is no cultural check and balance to keep either in line.

The country became obsessed with finance. And finance became dominated by one theory. We lost our variation. As Darwin taught us the loss of an ability to be variable means the loss of adaptability, and ultimately condemns us to fail.

So. As we construct the new economy who can we rely upon to guard our interests? Not the foxes, that’s for sure.