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 (NYSE:GS) and JP Morgan (NYSE: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.