Can the U.S. Break the Oligarchy Cycle a Fourth Time? 20 comments
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By Simon Johnson
I spoke Friday afternoon to MIT Sloan graduates (Reunion Weekend; slides attached), arguing that while we are likely done with a panic or “free fall” phase, we have only just begun to deal with the deeper problems revealed by the global financial crisis.
Think of it this way. The United States has done well over the past 200 years or so because it was founded with strong institutions – rules and laws that mean we’re protected against government or powerful elites becoming too powerful – and over time these have generally improved, or at least not collapsed under pressure. Yes, you can complain about (and aim to improve) many aspects of our society, but where would you prefer to set up a technology-based business or make any kind of productive investment or build your own human capital?
Call this the rule of law, or protection against being expropriated, or sufficient constraints on executive power, but it adds up to roughly the same thing. We strongly limited the power of the most powerful in our society – and this is in striking contrast to what happens in much of the rest of the world.
But over the past 20-30 years, we took our eye off this ball.
The financial sector, under our noses, amassed enormous economic clout and mystique, and leveraged (pun intended) this into tremendous political power – both in terms of the belief that Wall Street can do no wrong, and that we should defer to financial “experts” both on the way up and during the crash (despite the fact their interests are not necessarily our interests).
Our institutions have been undermined by powerful people. We’ve seen this before, of course, both around the world and also in the United States. It’s Andrew Jackson vs. the Second Bank of the United States, or Teddy Roosevelt against the great railroad trusts and big oil, or the Pecora Hearings on the financial shenanigans that helped bring on the Great Depression.
Disproportionate power does not prevent economic growth; there are plenty of booms in banana republics. But “banana booms” never prove sustainable. You get reasonable rates of growth, perhaps even for a decade or more, but then a collapse. Weak institutions are strongly associated with instability, crises, and lost decades. In fact, a lot of what we think of as decisive macroeconomic policy – which the IMF, for example, traditionally focuses on – turns out to matter much less than how much you undermined sensible rules and norms during the boom.
When the crisis hits, you see the problems with glaring clarity – the political connections, the excessive and irresponsible behavior of financial elites, and the extent to which the executive has been captured by whatever branch of oligarchy was boosted by the boom.
The crisis per se does not weaken the powerful. Sure, a few of them may go bankrupt, but this just increases further the concentration of economic power or, if you prefer, their market share. It is for good reason that Jamie Dimon, ever the master of CEO semiotics, said to his shareholders recently: 2008 “might have been our finest year ever.”
Most countries are doomed to this oligarchy-boom-bust-oligarchy cycle. The US broke free or at least temporarily broke away from versions of this cycle, arguably, three times already (Jackson, Roosevelt I, Roosevelt II). Each time the reform process took 5-10 years; perhaps longer from start to finish.
Can we do it a fourth time and how long will that take?
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it is time for a repeat. la follette & teddy r. were both republicans. i don't see the cleanup coming out of today's republican party, however.
> jack
My brief summary is here. seekingalpha.com/user/...
Any thoughts?
HardToLove
In case my above seems unrelated to the article, it is through the increased power of government that the political influence of the "oligarchy" is really exercised.
Get government to behave as it should and have less power outside it's designed functions, and the influnce of the "oligarchy" is reduced.
HardToLove
both good comments. neither branch of "the party" can be relied on for anything but more of the same. too bad out of both branches you would be pressed to find 10 statesmen or public servants.
one possible, peaceful help would be one of the constitutionally aligned parties. it is where i am putting my efforts.
it is true that we have the best congressmen & senators that money can buy/
my intent was to point out that the republican party has changed mightily in the last 110 yrs.
> jack
This is a short article, but it defines the historic nature of the times. It is not clear that the political powers yet recognize any of this. I think that several commenters have reflected well upon that fact.
The Disconnect Has Become Too Great - Their Actions Belie Their Intent And Are Under Greater Scrutiny Than Before. Heck, Our "Representatives" Did Not Even Try To ACT Like They Read The Second Bail-Out Bill.
Uncomfortable People Do Not Make Compliant Citizens.
Nothing Like Hardship To Pique Interest In Public Affairs.
And I would argue those 2 (and a slew of others) are far more detrimental than an often figurehead President.
MM
On Jun 08 10:54 AM Jimbo wrote:
> Regarding Jack Gordon's comments,above, I don't see the Democratic
> party doing much to solve the problem either. Both major parties
> have been co-opted by "influence" and Washington has become a house
> of political prostitution. We require a constitutional amendment
> to limit congressional terms of office and laws making it a felony
> for any former member of congress or any former federal employee
> to lobby congress. I only hope that a peaceful political revolution
> takes place before the situation becomes literally violent.
I've been yakking w/friends about that. Limit sens/reps to 2 terms and then they must go home and live with their neighbors for at least one term. Then they could run for office again.
I think that might engender a behavioral change.
HardToLove
On Jun 09 12:09 AM mikebrah wrote:
> Yes, the current system is fairly bass ackwards. Congressmen should
> absolutely have term limits, whereas I actually believe the Presidency
> should have no term limit. Every 4 years everyone in the country
> is allowed to vote yea or nay against the president, but as a citizen
> in Missouri I am powerless to oust Chris Dodd or Barney Frank.
>
>
> And I would argue those 2 (and a slew of others) are far more detrimental
> than an often figurehead President.
>
> MM
Posted Jun 10, 2009 10:18am EDT by Aaron Task in Newsmakers, Banking
Related: JPM, C, XLF, BAC, ^DJI, GS, FAS
News the Obama administration plans to back away from dictating compensation for all of Wall Street is a victory for those who worry about overzealous government meddling and the dangers of wage controls.
But it's also another missed opportunity by the administration to take advantage of the crisis to materially change behavior on Wall Street, which is becoming something of a hallmark of the Obama administration. Obama's Chief of Staff Rahm Emanuel has said "you never want a serious crisis to go to waste," but that's exactly what's happening when it comes to the issue of reforming Wall Street.
In the latest example, the government has abandoned the idea of regulating compensation for all of Wall Street, which was probably doomed from the start. But the administration is also reportedly dropping plans to restrict executive salaries at firms receiving bailout funds, and is only going to restrict bonuses instead.
President Obama and Tim Geithner are now hoping the rest of Wall Street will "voluntarily" follow the same guidelines as firms operating under TARP, similar to the "best practices" banks are asked to abide by, The Wall Street Journal reports.
Given banks operating under TARP have already been raising base salaries to get around the government's restrictions on bonuses, it's hard to imagine Wall Street doing anything on a voluntary basis, especially when it comes to compensation.
This backtrack on compensation reform should not be viewed as a one-off event but as part of a pattern of behavior from the new president.
From day one in office (even during the post-election transition), Obama has talked tough about changing the culture of Wall Street and railed against excessive greed and egregious pay packages. But talk is cheap and his actions tell a different story:
* Most notably when it came to the TARP program, the Obama administration has maintained the policies of its predecessor. Even avid Obama supporters like George Soros and Paul Krugman expressed frustration with this missed opportunity to hit the "restart" button on how the government deals with struggling financial firms.
* Under the guise of preventing "systemic risk", counterparties to Wall Street firms, even those surviving on government bailouts, were made whole via TARP funds. That's in stark contrast to how the automakers' creditors were treated. Similarly, the Obama team hid behind the "sanctity of contract law" amid the uproar over AIG bonuses but felt no compunction in redoing contracts between Chrysler, GM and their creditors; in the process, the administration overturned the way secured vs. unsecured creditors have historically been treated in bankruptcies.
* After a lot of proposals about how to reregulate Wall Street, including discussions about creating a new uber-regulator and/or merging some existing regulators, the administration has backed away from the reform agenda, "suggesting the current alphabet-soup of regulators will remain mostly intact," The Wall Street Journal reported. Most notably, the push to regulate derivatives has slowed, which critics say is the result of heavy lobbying by the industry's largest player, JPMorgan. (As an aside, I'd much rather see the government focus on getting the right regulatory regime and let Wall Street firms do what they want on compensation within those confines.)
With big banks repaying TARP funds and the market in rally mode, the acute stage of the crisis appears over and the zeal to reform Wall Street is fading. But if the regulatory regime remains largely unchanged and bonuses restrictions only apply to a handful of firms still under TARP, what's really changed after all the sturm and drang?
Anyone out there who believes the industry's "near-death experience" last fall and nine months in the government penalty box is going to materially change the culture and (more importantly) the actions of those on Wall Street, please raise your hand. I have a bridge I'd like to sell you....
What's a person to do.?We elect an agent of change who has proven himself to be anything but. In fact he may have been selected by folks because he can represent this image and do nothing.
Perhaps you should lead the popular uprising we all are yearning for.
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The loss on the holdings, which include mortgage-backed securities, reflected a decline in their value as the recession carried over into the first three months of this year. The cumulative loss on the Bear and AIG holdings come to $16.46 billion since they were taken over last year.
The Fed is hoping that if it holds onto the securities long enough, they will eventually rise in value once the economy returns to full health again, the housing market heals and the financial and credit crises are past.
The Fed's new report, which will be issued monthly, comes as lawmakers have demanded more information about the bailouts, and a slew of other programs intended to spur lending and stabilize the banking system.
The monthly report provides some details beyond the Fed's weekly snapshot of loan and debt-buying programs on its balance sheet. Those details include collateral pledged by borrowers, ratings on collateral, and the number of borrowers for some programs.
However, the Fed did not budge on lawmakers' requests that it identify borrowers for emergency and other loans. Fed Chairman Ben Bernanke has repeatedly argued that doing so would risk a run on a bank or other financial institution, undermining the purpose of the program.
As lender of last resort, the Fed's programs are intended to bolster the financial system, a key ingredient to lifting the country out of recession.
The monthly report showed that the Fed's commercial paper program reported net income of $2.14 billion in the first quarter. Commercial paper is the crucial short-term debt that companies use to pay everyday expenses. The Fed began buying commercial paper last year when that market virtually came to a halt after credit problems intensified last fall.
It also reported net earnings of $1.2 billion in the first quarter on other loan programs, including emergency borrowing to banks and investment firms. The Fed reported $4.57 billion in earnings under its regular transactions involving Treasury securities.
As of late May, the report said that trusts affiliated with Sallie Mae, GE Capital Credit, CarMax, Ford Credit, Harley-Davidson Motorcycle, Honda and Nissan were among the issuers of securities participating in a Fed program intended to spark lending to consumers and small businesses. Investors in the Term Asset-Backed Securities Loan Facility, or TALF, get loans from the Fed to buy newly issued securities backed by, among other things, auto and student loans, credit cards and business equipment.
It also said that borrowing banks have put up $965 billion in collateral to back emergency and other Fed loans that averaged $448 billion in daily borrowing as of late May.
"In the latest example, the government has abandoned the idea of regulating compensation for all of Wall Street, which was probably doomed from the start. But the administration is also reportedly dropping plans to restrict executive salaries at firms receiving bailout funds, and is only going to restrict bonuses instead."
Watching CNBC (Comedy NBC) today while they had Barney Frank on. I'm no fan but he did say something I found encouraging. They are apparently giving serious consideration to a shareholder right to vote on compensation (wouldn't be binding, but he said the feeling is that since board members can be voted out, they would likely be quite responsive) and have abandoned legislative salary legislation. Their plan now is for some regulatory input, but that would be only a "suggestion", if I understand correctly.
Regardless of that, I do think that since so many boards have either abdicated their responsibilities, or have formed way-to-cozy relationships with the compensation consulting firms and the company officers they are supposed to compensate, the shareholder input sounds as if it has some promise.
We'll need to see the details, but the potential is there. I seem to recall some kind of overhaul of the proxy voting process last week that may also help, but I don't recall any details.
HardToLove
"However, the Fed did not budge on lawmakers' requests that it identify borrowers for emergency and other loans. Fed Chairman Ben Bernanke has repeatedly argued that doing so would risk a run on a bank or other financial institution, undermining the purpose of the program"
Subpoenas (or is it subpoenii ? ;-) have been issued and the Fed has replied it will comply.
Apparently there is some upside to populist sentiment when it is on the right side of things.
HardToLove
Keep that information coming - it's hard for most of us to keep up with it or, in my case, always understand it's implications.
Thank you for taking the time,
HardToLove