America's Financial Oligarchy Still Rules

Co-authored by Simon Johnson

“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”, says Simon Johnson, a chief economist with the International Monetary Fund in 2007 and 2008. In an article entitled “The Quiet Coup” in the May, 2009 issue of the Atlantic magazine he (with James Kwak) goes on to say that “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”.

How true! America is in financial crisis but instead of the financial oligarchy being broken up to permit essential reform they are continuing to use their influence to prevent precisely the sorts of reforms that are needed immediately to pull the economy out of its nosedive. Unfortunately, our legislators seem unwilling to act against these powerful financiers opting instead to succumb to their power and influence and continue to give them what they deem to be in their best interest instead of that of the taxpayers’. All this is happening because of the false belief by all concerned that large financial institutions and free-flowing capital markets are crucial to America’s position in the world and that whatever the banks say is true and what they want is necessary.

The government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it 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. There is no better time to take such action than now but it is evident that reform is but a pipe dream. America’s financial oligarchy is still in control and, as such, the long-term consequences will be dire!

The Powerful Elites have Over-reached

Johnson says that (and I paraphrase an edited version of ‘The Quiet Coup’ article in the following pages) typically countries in crisis are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. That certainly is the case with the powerful elites - the financial oligarchy - in America. In the case of the U.S. economic and financial crisis, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. That fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay and this weakness in the banking system quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

Financial Industry has Gained Political Power

The American financial industry gained political power over the years by amassing a kind of cultural capital, a belief system in which Washington insiders believe that large financial institutions and free-flowing capital markets are crucial to America’s position in the world … and always and utterly convinced that whatever the banks said was true.

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.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

America’s Oligarchs and the Financial Crisis

While many other factors contributed to the financial crisis that exploded last year, including excessive borrowing by households and lax lending standards, major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew. (See the article I wrote entitled “Our Worst Nightmare: The Puncture of the U.S Housing Bubble” back in early 2006 for a detailed account on just how such loans were handled.)

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on.

When the crisis first began the government was slow to react and then did so with a lack of transparency, and an unwillingness to upset the financial sector. The response so far is perhaps best described as “policy by deal” in that when a major financial institution got into trouble, the Treasury Department and the Federal Reserve engineered a one-of bailout and then announced that everything is fine without stating what combination of interests were being served, and how. This was late-night, backroom dealing, pure and simple.

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. This velvet-glove approach 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.

The Way Out

We face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have actually gained political strength since the crisis began and this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. (See reference to the new mark-to-market legislation below as a case in point.)

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: 1) nationalize the banks, 2) limit individual bank size, 3) update antitrust legislation, 4) cap executive compensation, 5) improve banking regulations, 6) increase taxation, 7) increase transparency and 8) increase competition.

(Regretfully, none of the above remedies are going to happen any time soon, if ever. Take a look at what happened just last week on April 2, 2009. The financial oligarchy’s lobby group, the American Bankers Association, was successful in having political pressure brought to bear, by legislators from both parties, against the Financial Accounting Standards Board to do their bidding which now gives banks more discretion in reporting the value of mortgage securities. These new mark-to-market rules will enable all financial institutions with such securities to report higher profits by assuming that the securities are worth more than anyone now is prepared to pay for them i.e. avoid recognizing losses from bad loans that they had made. As a result of having their way the financial institutions affected are now free to apply the new rules to their financial statements for the quarter that ended on March 31^st. How convenient!)

If no remedies are going to be initiated what does the future hold. According to Johnson it includes a global economy continuing to deteriorate and the collapse of the banking system in east-central Europe and then throughout the Continent This dramatic worsening of the global environment would force the U.S. economy, already staggering, down onto both knees and perhaps then, under this kind of pressure, and faced with the prospect of a national and global collapse, the American people will demand in no uncertain terms that their government finally break up the financial oligarchy and implement the abovementioned reforms.

Unfortunately, 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. There is no better time to take such action than now but it is evident that reform is but a pipe dream. America’s financial oligarchy is firmly in control and, as such, the long-term consequences will be dire!

Comments

[drbob66:]

This appears to be a rehash of the Atlantic article (written by the co-author, Simon Johnson)...discussed ad nauseum on the internet for weeks now. Why not just provide a link to the original? It's better written, and there's nothing new in this version.

Apr 09 07:18 PM

[buckbuck:]

Unfortunately every American tax payer will pay dearly for the indulgences of the elite CEO's of financial institutions..........and we and our country will pay for decades!

Apr 09 07:57 PM

[THofler:]

At least half of the cause of this crisis is a plain old real estate bust. Here is my favorite wisdom on this issue.

"The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income
should be carefully verified."

Warren Buffett, March 2009.

Liberals still squawk about how good Fannie and Freddie are because their loans were "qualified." I checked the 2003 Fannie qualifications and their minimum downpayment was 2%. How many 10's of billions have the taxpayers pumped into them by now?

But no, Mr. Johnson would have us believe that the financial oligarchs are to blame, and Wash. DC folks like Franklin Raines had nothing to do with it.

Does Mr. Johnson suggest a bank Swedish style nationalization that would keep bond and preferred holders whole? Or does he suggest an RTC style takeover that would crush all investors, bond holders included? Naturally he won't say because he really means the latter. This is really all about government theft of investor assets on a trillion dollar scale. And now he is in a panic because the Bernanke actions are beginning to take effect, and the time window for the scam is beginning to close.

If Mr. Johnson is indicative of the power brokers at the IMF, then the institution should be dismantled.

Apr 09 08:15 PM

[Al-USA:]

This is serious folks. The Roman Empire, indeed, all great civilizatins, started their decline when the ruling class became parasitic. Things can change, as the Eastern Roman Empire (Byzantines) did reform in 1080 AD and a resurgence of the waning Roman civilization resulted.

But reform is needed, else this American Empire will follow all others, rising market or not, into the dustbin of history...

For the record, I am a trader so am invested in the market, long or short, frequently.

Also, where's the link to
"Warren Buffett, March 2009" quote above?

Apr 09 11:23 PM

[Lorimer Wilson:]

I have had a number of readers email me today with their comments and I would like to share them with you.

1. "Your article referencing simon Johnson is on balalnce an excellent article but I diverge from calls for more taxes – a lethal toxin to any economy especially in the huge doses it takes now – whether directly through payments to the irs or to the federal reserve / treasury in the form of bonds with artificially manipulated interested rates.
What I applaud is your recognition that an occult powerful elite controls the government lock stock and barrel. The treasury is but another division of goldman sachs and the legislators both conservative and liberal nothing but pages for these plutocrats.
As an advocate of limited government I was in favor of reduced regulation but see that some of it was overdone. There is a strong need to ride heard on these ravenous pigs on wall street who are destroying this country. Many belong in jail – including the “respectable” ones.
Although many abuses you cite are immediate causes of our problems, the more insidious problems we face are due to unbridled capital destruction which has run amok since the 1970s….until that problem is repaired america’s economy continues to disintegrate. The federal reserve and banks are insolvent. The suspension of mark to market is corruption of the most venal kind.
American icarus cannot save us and it was preposterous that anyone thought that those old hackneyed knee-jerk retro-30s policies could do so as they failed the first time around.
We definitely come from different political angles but your article was a net positive to the discussion and a sober view towards a solution."

2. "Brilliant! I am what you would call a "visceral" economist ,although I am not an economist per se. You have, sufficiently for me, described what the US economic culture has become. The English did this 80 or so years ago, at the end of their empire and so we are here. The "financial world" spread to every corner of our society...i.e. why produce real goods and services when you can make "money" in the financial world. A beautiful recipe for the kind of price inflation this country has never experienced. So let the current"D" continue till it remorphs into 25% price inflation or maybe worse dictatorship and oppression."

3. "Enjoyed your America's Financial Oligarchy, you are on the scent but it's much bigger."

4. "Loved your writing on America's Financial Oligarchy!!!!!! Very insightful and precise, right on the money."

5. "I thought your article was quite compelling.
The points I made to my people when I forwarded it to them are the same I would make to you, for what they're worth...
I completely disagree with Johnson's solution to nationalize the banks (let 'em fail), but he's a central banker's central banker, so you have to consider the source. That said, I agree completely with his diagnosis and his fingering of the banking power elite. What I find funny is that he writes as if the bankers are somehow a separate entity from government officialdom. Ha. The bankers ARE the government and everything that's done is ...surprise surprise...designed to funnel money from you to them and keep them alive and bonused up, even when they should be wearing a toe tag.
Alternative 2 is what we'll get. The fascist "elite"will drag us down. Understand this and you understand just about all you need to know.
Thanks for brining this to people's attention. Goldman IS the Treasury and JPMorgan IS the Fed."

6. "I just completed reading your article "America’s Financial Oligarchy Still Rules." I'm also 75 years old and have been around a while. And, I just don't understand why you writers don't really name who these mystery entities are and how much obvious financial clout they really wield over our whole lives. Just in case you, for some reason, don't know the name of just one of the biggest foreign corporations that is eating our lunch, I've attached a couple of Excel documents that show their latest published public holdings along with their rank amongst shareholders. Want more?—e-mail me."

7. "Your article makes sense.
The FDIC is part of the problem. Sheila Bair has failed in her responsibilities. It should seize and shut down any all insolvent banks including the likes of Citibank.
The Federal Reserve, the private offshore for profit bank cartel, that serves the purposes of the finance oligarchs, and not the needs of the public, should be seized and brought into the US Government as a department within the the Treasury. This government bank could then issue credit to the real economy, not the fictitious economy of the oligarchs.
The 1.5 quadrillion in derivatives on the books, reported by the Bank for International Settlements ("BIS"), has to be wiped out, not pushed off the backs of the oligarchsand on to the backs of the public.
Anything short of these measures is folly."

Apr 10 12:22 AM

[Lorimer Wilson:]

Below are some more emails I received from readers regarding my article on Johnson's insights into America's Financial Oligarchy which may be of interest (continued).

8. "I did enjoy your article, and I fully share your views on the oligarchy and its power.
What concerns me is that I do not see a way to get rid of it, short of a global economic disaster. Those who criticize the present system have too many different answers to the problem, and have been unable to start a more general resistance movement. Too many answers make it very difficult for people to get together in a search for the most effective alternative.
I look forward to continue reading your articles on this crisis."

9. "Read with interest your recent article "America's Financial Oligarchy Still Rules".
What I cannot fathom is why so many knowledgeable, intelligent commentators still do not get the true underlying problem. It is not the banks, not the Fed nor the Treasury, not international finance not the government but rather it is THE DERIVATIVES. This is why nothing must fail and why trillions of $ are being created and thrown at the resulting chaos.
Fannie, Freddie and Lehman almost took the whole world financial system down. Ergo no bank or major company can ever be allowed to fail in the future! The best we can ever hope for is for a temporary delay in the resulting coming debacle. There is no answer to this problem other than collapse. The derivative market is so huge and controlling (particularly the CDS portion) that there is not enough money in the world to resolve this mess.
If unsophisticated boobs like me can see this problem clearly, I can't understand why others don't get the big picture. Maybe most are too scared to lay the truth out there or maybe psychologically most commentators can't handle the ultimate horror. When examined in the light of the real problem, the derivatives, everything that is going on makes perfect sense. Start with the real problem and work backwards and you will see that the real answer is that there is no answer."

10. "Since this crises has started I never read such a usefull article on this issue and very honest. I agree that the financial sector has a problem with basic element of functionality - all we need is more regulations and less greed. I come from Bosnia and Herzegovina and in the past 20 years we felt the power of big finanaciers - we had a war and now we have a poor economy. Right now I work for an commercial bank from Austria as a middle level manager in retail sector so I have a lot of information about it first hand. YOU HAVE RIGHT."
11. "I am a modest professor of economics for political science students at a local university, in Lisbon, Portugal. After some thought I cannot come up with a better solution for the present crisis than this: Universal pardon of all debt, whether private or state, full nationalization of the banking system worldwide, and a fresh start for everybody, free of debt."

Apr 10 12:39 AM

[Jimbo:]

Part of the reforms needed would include term limits on serving in Congress( but try to get Congress to authorize a Constitutional Convention!!). The second reform is a tough law making it a criminal offense for any former member of Congress to lobby. I concur completely with the author but Congress stands in the way of any resolution.

Apr 10 12:45 PM

[Tony Daltorio:]

Wall Street is "teacher's pet"!

Apr 10 02:14 PM

[ebworthen:]

Civil war and death is the only answer, unfortunately.

Our system will collapse from within.

The middle class will revolt while the entitlement class riots for free cheese.

The elites will lose their heads, and rightfully so.

Apr 10 02:38 PM

[Gedankonomist:]

The financial oligarchy has been firmly entrenched since 1913. That was when the FED was brought into existence. If you don't know what the true purpose of the FED is and how it is used to control this country, you need to read "Creature from Jekyll Island" by Griffin.

Apr 10 02:41 PM

[rosey99:]

Most of the posts on SA are, perhaps necessarily, one or another exposition of personal greed together with intellectual hubris. It's nice to see something different for a change. It seems pretty obvious at this point that the aim of most politicians is to restore the previous status quo. We will simply lend and borrow our way out of this. And by doing so restore the banking system, and the credibility of those who run it. It seems like a risky strategy to me, and I have real doubts that they will be able to pull it off, even in the short term. We seem to be beset by an entire generation of Americans who are deeply committed to a belief in their own greatness. I think this is a top-to-bottom phenomenon, and that the bankers merely exemplify it. "Pride goeth before a fall." Or something like that.

As for those in Washington, they will flee like rats leaving a sinking ship when the inevitable political backlash - and I think it could be a big one - comes. I don't see any great conspiracy here, just a bunch of people committed to ideas that <em>used</em> to work, in a bygone era of low taxes, high deficits, and bubble after bubble after bubble. That's all they know how to do, and it has always worked before. . .Right? It is a happy coincidence that the measures now in place, if they work, will also restore the financial services community to the pinnacle of power and influence in our society. We still seem to believe, as do the members of congress, that we can come through this without substantial alteration or sacrifice.

I don't know how "dire" the long term consequences are yet, and I don't think anyone else does either. I do get a strong sense that the clock is ticking, and even just a few more months of this may unleash a genuine anger and despair in the American polity so powerful that some pretty awful ideas might get serious consideration. When a people so addicted to their historical infallibility get backed into a corner, it can get very interesting indeed.

Just an observation. . .Thanks for the post.

Apr 10 03:11 PM

[Kunst:]

Our political leaders are bought and paid for by the financial and corporate leadership. The mechanism is campaign contributions, which no candidate (except for the rich, which creates a different problem) can do without. Politicians work for those who pay them, and I don't mean their salary. Public financing of all political campaigns is essential. Prohibit legislators from voting on any matter that affects a large contributor.

Apr 11 04:51 PM

[wineo:]

It's not just the financial system. All this countrys' systems are inefficient and rotten through and through. The energy system, the healthcare system, food and agriculture, everything is putrid. We need a complete overhaul.
Our problems are not modern day phenomenon, they have been with us and developing for many years with Democrat as well as Republican administrations. So don't expect Obama to step in and solve any problems - he is part of the problem.

Apr 12 03:30 PM

[wineo:]

An Afro-American man doesn't just jump out all of a sudden like Obama did and become President of the USofA. Somebody somewhere was behind it, many somebodies with huge sums of money organised to put this man in office. Who are these men and what are their agendas? The military agenda is obvious. The energy agenda doesn't include natgas, so that is skeptical. The healthcare agenda doesn't include single payer so that's a loser for most of us and a winner for somebody else.
The real simple lying and deceipt of the man comes with the selection of a puppy. He talked about shelter puppies but now has chosen a Portuguese Water Dog, which is a special dog only available from a few breeders in America. There are no PWD's available at shelters.
So unless he has some real good excuses for the above, he is a lying weasel piece of shit, our President.

Apr 12 03:51 PM

[User 487857:]

Watch the Obama Deception, it explains it all.

Sep 17 07:48 PM