Who Is Carlos Slim in Today's Market?

By Simon Johnson

The US increasingly displays characteristics that we have seen many times in middle-income “emerging markets” – new dimensions of vast inequality, forms of financial instability that benefit the best connected, and consistently easy credit for the privileged. But this raises the question: who exactly is going to dominate our economic and political landscape moving forward?

In most emerging markets, a major crisis means that some powerful people and their firms fall from grace. After the Asian Financial Crisis (1997-98), some of the biggest Korean chaebol disappeared or broke up, numerous Thai bankers lost their top positions, and there was a discreet reshuffle among the Malaysian business elite. Russian oligarchs rise and fall with the price of oil; the process in Ukraine is similar, although somewhat murkier.

With every sharp turn of the cycle, new people rise to the front – taking advantage of low asset prices and the fact that most people struggle to borrow on reasonable terms. In Mexico, after the crisis of 1994-95, Carlos Slim consolidated his position in telecoms and used this as a launching pad to become one of the world’s richest people.

Three sets of players look positioned to do the same in the US today, mostly based on the amazing set of “carry trades” available if you have access to large amounts of cheap short-term funding (e.g., along the yield curve, from dollars into other currencies, and – arguably – into equity in some parts of the world).

First, obviously nothing can stop Goldman Sachs (GS) and JP Morgan (JPM). With unfettered access to the Federal Reserve and no effective controls on their ability to take risk, they are in the catbird seat. The weakness of other big banks is further icing on their cake. GS and JPM are symbols will loom large over the national and international economy for a long time to come, with the main threat (to them) coming from their rather too blatant market share in many products.

Second, the surviving big hedge funds will do very well (partial list). They can move fast, they have no regard for anything other than profit, and they will not be effectively regulated. Their access to credit runs through the biggest banks and this can be a double-edged sword – expect more instability in the future from hedge fund-bank dynamics (as Morgan Stanley found out last fall).

Third, foreign players with sovereign backing are also going to clean up. Their credit access comes not from the Fed (although our low rates help their funding costs), but from the fact that they control or are controlled by creditworthy government elites. These foreigners will be relatively diverse (European and Asian, with perhaps some others in the mix) and they have learned to be discreet within the United States. But a great deal of the speculative business to be had is cross-border, with a funding leg in the US and a high-risk asset piece in emerging markets; they are in great position to do this.

Top people in the Obama administration now begin to understand what they have wrought. The body language becomes uncomfortable when you bring up this topic and they are eager to discuss alternative ways forward.

But we are entering a new, more global era of state capture, and the US government (or, more precisely, its credit) was handed over – rather meekly – during the past 12 months.

Many states have been taken over by bankers; there is no shame in fighting and losing against what Jefferson called the “monied aristocracy.” But few governments, even the weakest, have handed over the keys as quietly as we did. As Lloyd Blankfein said, to an aide, on their way to the greatest sales job in the history of the republic, “You’re getting out of a Mercedes to go to the New York Federal Reserve. You’re not getting out of a Higgins boat on Omaha beach.”

The winners among our financial elite are very far from the Greatest Generation, but they are the Best Paid Generation for a reason.

Comments

[markfl:]

Baseline wrote:

"First, obviously nothing can stop Goldman Sachs (GS) and JP Morgan (JPM). With unfettered access to the Federal Reserve and no effective controls on their ability to take risk, they are in the catbird seat. The weakness of other big banks is further icing on their cake."

Unfortunately, Geithner, Summers, and Rubin are pals, and he and Paulson had ties to GS. I don't think its a stretch to say GS and the US Govt. are "genetically related." The are kin, and incestuous at that. Nevertheless, I'd bet 3 in 4 Americans have no idea who these people are. They have been amongst the most powerful men on Earth, but where there is ignorance their can be no democracy, and too many Americans are painfully unaware.

Oct 17 05:04 PM

[logicalthought:]

>>obviously nothing can stop Goldman Sachs (GS) and JP Morgan (JPM). With unfettered access to the Federal Reserve and no effective controls on their ability to take risk, they are in the catbird seat.<<

What I suspect will "stop" them will be a populist backlash that a fair number of politicians will ride to get (or keep) themselves elected. Although politicians are great at accepting campaign contributions (hence Wall Street's notorious lobbying power), for the politicians those contributions are really just a means to an end (attracting votes and, hence, power), and as soon as they sense that they can get more votes by explicitly running against the big banks (even if it means forgoing those banks' campaign contributions), they'll do it. That's the beauty of democracy: if we voters get sufficiently pissed off, we'll take our eyes off our big-screen TVs long enough to focus on changing things...

After all, we need to have enough money to be able to buy those new 3D big-screen TVs!

Oct 17 06:32 PM

[The Geoffster:]

Forget tea parties. We need pitch fork brigades.

Oct 17 09:28 PM

[surfgeezer:]

Although I agree with your premise that the winners in the US will use cheap US currency to buy foreign equities and foreign funds will be buying relatively cheap US assets. I disagree that this is somehow a 12 month developed problem. I would argue the debt problem was decades in development. The financial crash that required a very expensive parachute to save a crash landing was also a long time in making. Arguing about the shape or cost of the parachute once we've landed is disingenuous and unhelpful. If your article was meant to argue that we now need to uncouple from the harness before ill winds blow us back off another cliff I will agree and leave the politics to the voters.

Oct 17 09:42 PM

[untrusting ...:]

Another great Simon Johnson article with much truth in the thrust of the article. Too bad, that the average American just does not understand how the politicans, lobbyists, and financial elite have worked together to steal the American way of life and concentrate power and wealth in the hands of a tiny minority.

Oct 18 01:18 AM

[Moon Kil Woong:]

The losers so far have been the following:

The middle class that is shrinking, losing their assets (home, stock, interest rate, and dollar collapses and devaluation), getting bilked by banks through taxpayer funded everything, being defrauded by the Federal Reserve backstopping all bank bonds and thus profit with taxpayers guarantees,

The conservative, prudent and hardworking. We now work harder for more, get less interest on what we save if not lose it outright due to property and stock market devaluation, get the added tax of dollar devaluation thrust on us depriciating everything we own which is igniting inflation (non-core because it's mostly commodities which the government likes to tell you is unimportant), and who must now support with their savings the government, the rich financial bailouts, and the poor and needy.

And small and medium sized businesses that can't compete againt too big to fail zombie institutions that can't loose, can spend as much money as they want because it's the taxpayers on whatever they want, who must suffer this downturn without being recognized by anyone both in Obama's and Bush Jr.'s term in office, who get no tax relief, must shoulder a semi-socialized corrupt system of heath care built by Nixon that doesn't even adequately cover their employees that they pay for and rises 2-10x inflation every year for the past 2 decades, who must survive in an environment of falling spending and rising commodities prices, and must try to keep in business and pay their employees no matter how terrible each administration makes the economic situation (they can make it bretty bad). Small businesses and medium sized businesses are the heart and blood of the economy not bankers, too big to fail financial, auto, insurance, and other businesses, and large lobbyist related corporations. The failure of government to regognize this simple fact is dooming to failure all government stimulus initiatives.

As for Haliburton who got tons of no bid contract government contracts in Iraq, got magically rescued from practical bankruptcy by a swetheart asbestos liability settlement, and gets tons of government military work their offshoring to avoid tax liability is 100x worse than all the other US corporations that do so. Even though it's Cheney's company, it should not be exempt from being stripped of all its government contracts and barred from doing business due to its moral rectitude on tax policy. Furthermore, all their Iraq contracts should be reviewed for graft. The odds of that happening are about as slim as the government helping small businesses and the middle class or rewarding those that save money.

Thus I can fully understand the author's point of view. While by design or not everyone must admit that all economic liability is being transferred to the middle class and small and medium sized businesses to the benefit to others. Pretty soon no one will care because they will all be gone along with a free market economy and truly capitalist system.

Oct 18 02:49 AM

[NavyDavey:]

Seriously, please explain it to "us" Americans. Grace us with your wisdom. I love to hear the self-deprecating attitudes after such periods as we've had, smacking of self-loathing. The conspiracies and unsubstantiated rumors abound, in a world made by our own doing. All that has happened, is what happens in any society with TOO MUCH liquidity for too long. Excess, over borrowing, over spending to keep our high going. It's happened before. But instead of taking responsibility, people (like you) begin to dream that it was "they" who did it. Because "they've" been planning for years to suck us dry and take over. Stop being the victim and start being a capitalist. Because, that is all this is . . . capitalism. A system where "you make the bed you sleep in."


On Oct 18 01:18 AM untrusting investor wrote:

> Another great Simon Johnson article with much truth in the thrust
> of the article. Too bad, that the average American just does not
> understand how the politicans, lobbyists, and financial elite have
> worked together to steal the American way of life and concentrate
> power and wealth in the hands of a tiny minority.

Oct 18 10:11 AM

[Mike from NYC:]

As the rich get richer and everyone else gets poorer people will finally wake up hopefully. I believe in Capitalism, but something is seriously wrong and Capitalism is becoming its own worst enemy.

Without economic democracy there can't be political democracy. Every revolution, including the American Revolution, was instigated by economics, whether it be taxation or a vast separation of wealth.

Oct 18 11:30 AM

[lastboyscout:]

Sorry Davey, but I'm not buying everything that your selling. I agree, pull your self up by the boot straps, and get over it. Recognize, adapt and overcome................. when you have a tyrannical govt. putting roadblocks in front of your every move, capitalism is capitalism no more. Capitalism requires freedom to make choices, pay who you want how much or how little you want. To make a product the consumer wants and are willing to pay enough to provide you with a health profit or an obnoxious profit, what ever the market bears. If a business fails, it should fail, no matter how successful it was at one time or how big it is, the business NEEDS to fail, broken up and let others buy the profitable pieces. I cannot understand how the Fed govt can own private business, making business decisions, decision that affect others who have survived and now being punished for surviving without govt intervention.
The difference between past downturns and now is that our gov is now in business with competing with capitalism, where it never was before. Unfortunately, a lot of us will never get a chance to make our own bed again; we will be sleeping in a bed infested with bedbugs. Or another analogy, the deck is stacked against us, and the best gambler will loose, only the house will win.


On Oct 18 10:11 AM NavyDavey wrote:

> Seriously, please explain it to "us" Americans. Grace us with your
> wisdom. I love to hear the self-deprecating attitudes after such
> periods as we've had, smacking of self-loathing. The conspiracies
> and unsubstantiated rumors abound, in a world made by our own doing.
> All that has happened, is what happens in any society with TOO MUCH
> liquidity for too long. Excess, over borrowing, over spending to
> keep our high going. It's happened before. But instead of taking
> responsibility, people (like you) begin to dream that it was "they"
> who did it. Because "they've" been planning for years to suck us
> dry and take over. Stop being the victim and start being a capitalist.
> Because, that is all this is . . . capitalism. A system where "you
> make the bed you sleep in."

Oct 18 11:51 AM

[knight:]

The only way to stop GS JPM is to ban lobbying all together until this happens nobody will care about your interest.

Oct 18 03:28 PM

[sunnsea:]

This is getting to smell more and more like the Weimar Republic, not the United States of America. And the populism could take a very nasty turn. But then again we never had our right-wing tendencies bombed out of us like Germany, Italy and Japan. Since we have not had such a regime, I suppose it follows naturally than one must go right first, have a national conflagration, have a benefactor nation come in help rebuild truly democratic institutions and develop the New Deal that was meant to be before being short-circuited by the 1946 Republicans with the passage of Taft Hartley and it has really been downhill for labor since and since 1970 for the American Middle Class as a whole. But when in power the Democrats, instead of standing up for working and middle Americans, have proven themselves nearly as corruptible as their Republican partners. So the whole of cards will start collapsing. Unfortunately, Obama, as with Clinton before him, appears more like the tottering 84-year von Hindenberg not a strong "I welcome their hate" FDR. So we have a continuation of the Carter-Clinton neo-liberalism: that post-Nixon toxic combination that is fully at home with false "globalism, aiding and abetting with their Republican pals in creating a low-wage, high-welfare state based on cheap imported products, and high interest credit, instead of adjusting New Deal principles and strategies and maintaining the high-wage, low welfare policies that the New Deal promoted. Will Europe and Japan need to come in and help us rebuild our nation to that high wage, low welfare state, eliminating the dominance of Goldman and JP Morgan? Afterall, those Mercedes and BMWs that many posters love to drive did not come out of nowhere.

Oct 18 06:07 PM

[rennert:]

Voters to change the course. What a joke. Ralph Nader fought all his life to keep our cars and butts safe. He could turn things around. The others no matter what party are all bought chickens bought by the lobbyists.

Oct 19 09:25 PM

[MSimon:]

Sunnsea,

If organized labor is good for business Crisis Motors and Government Motors are in an excellent position. The Unions own the business and they have access to government capital. It will be interesting to see how well labor does as management.

You have to wonder though. If labor is so good at running a business why Unions have not started more successful businesses.

Oct 20 01:04 AM