Who Nationalized Whom?

Hank Paulson’s testimony yesterday was informative, if only because it illustrated that he himself still understands little about the origins and nature of the global crisis over which he presided.  Perhaps his book, out this fall, will redeem his reputation.

A fundamental principle in any emerging market crisis is that not all of the oligarchs can be saved.  There is an adding up constraint – the state cannot access enough resources to bail out all the big players.

The people who control the state can decide who is out of business and who stays in, but this is never an overnight decision written on a single piece of paper.  Instead, there is a process – and a struggle by competing oligarchs – to influence, persuade, or in some way push the “policymakers” towards the view:

  1. My private firm must be saved, for the good of the country.
  2. It must remain private, otherwise this will prevent an economic recovery.
  3. I should be allowed to acquire other assets, opportunities, or simply market share, as a way to speed recovery for the nation.

Who won this argument in the US and on what basis?  And have the winners perhaps done a bit too well – thinking just about their own political futures?

On who must be saved, we see the new dividing line.  If you have more than $500bn in total assets, post-Lehman, you make the first cut.  If you’re below $100bn (e.g., CIT), you can go bankrupt.

On remaining private, the outcome is more complicated.  Citigroup had the best political connections in the business, but turned out to be so poorly managed that the state essentially had to take over – in a complicated and ultimately unsatisfactory way.  Bank of America’s relatively weak political connections meant that the impulse purchase of Merrill Lynch could go very badly – and also led to a bizarre form of government takeover.

The prevailing idea and organizing principle for this new sorting is not Lloyd Blankfein’s “we’re the catalyst of risk” – investment banks are peripheral, rather than central, to nonfinancial risk taking and investment in this country.  It’s Jamie Dimon’s idea: just don’t demonize the competent bankers, let us take things over and we’ll smooth it all out. 

The problem with this approach is its “success”, from the point of view of the remaining bankers – their market share is up so sharply that it’s embarassing.  Of course, they can still argue that banking is a global industry with many competitors (some of which are even bigger, with more state assistance, promising much craziness in the years ahead).

But the real issue now is concentration in the political marketplace.  Hank Paulson dealt with a dozen big banks/similar institutions with deep connections to Capitol Hill and a very powerful small banking lobby.  Tim Geithner is looking at just a couple of big banks that are still independent .  Probably we should start to divide our big banks into the “nationalized” and the “nationalizers”.

The small banks still have clout – and you’ll see them in force on the regulatory reforms debate this fall – but they know now that they don’t get bailouts, and access to contigent state capital-on-amazing-terms is the ironic basis of modern financial power. 

We are looking at a concentration of political power in the US banking system that we haven’t seen since the 1830s: Shades of Andrew Jackson vs. the Second Bank of the United States.  We put up with a lot from our banking elite in this country, but historically we draw the line at financial power so concentrated it can confront the power of the President.

The logic for reform and for breaking up the big banks begins to build.  Bank of America’s fall was, in some senses, a fortunate accident for Goldman and JP Morgan.  But it has also given them an excessive and unsustainable degree of political power.

Of course, you also have to ask: Who can break that power, when, and how?

By Simon Johnson

76 responses to “Who Nationalized Whom?

  1. It would be interesting for you to comment on the appropriate way for a citizen to bring pressure on any institution(s) to break up the oligopoly.

    I’m a foundation director and support many grassroots activities. However, it is opaque to me as to the best way to channel, if at all possible, justifiable anger at the manner in which our financial system has been propped up. How to channel populist anger, when the issues are so very complicated and hard to translate into a sound bite, so that elected officials and the executive branch have no option but to respond? Or perhaps you are saying in the Quiet Coup that there is no way to do it. I realize that this forum speaks to those with interest, but that’s not enough to build pressure.

  2. There were rumors that Goldman-Sachs was in talks to acquire the Treasury Department. However, they were dismissed by a Goldman spokesman. “Why should we pay twice?” he asked.

  3. Walt,

    I think the best way is to set up a web site that keeps track of the lost taxpayer dollars. I don’t think that our investment/bailout of big banks will be repaid.

    Add to the mix the obscene profits made by those we bailed out and the fees they are charging us.

    Next look at their positions, for example JP Morgan is already assaulting the new credit card law protecting consumers. They say it will cost them 700M. If true it means it will save the rest of us 700M.

    Hopefully, when we see the actual cost in dollars to the oligarches, it will help the public understand and put pressure on the politicians.

  4. In my state we only have one Democrat U.S. Congressman. The rest are all Republican. Republicans are renowned for protecting banks and financial interests. Phil Gramm’s power base for years was the banking lobby. If people want change they can’t just listen to a jerkwad go “I promise no new taxes” and vote for him. You have to read the newspaper (or a high quality internet news site) and find out how they stand over a WIDE RANGE of issues. You have to see who pays for the campaign ads and who contributes to their campaign. When people vote for President, I doubt more than half of them are even familiar with their own state Congressmen. It gets down to this: You can’t choose people based on commercials. YOU have to make the extra effort to be a literate person.

  5. So how do we get that information out to the public? Is there a inexpensive way?

    I think that a comparison should be made between who makes what contribution and how someone votes and what position they take on an issue.

    Ok, so we set up the information in a verifiable way and send it out to our email lists and ask others to forward it.

    Or maybe we set up a web site.

  6. Perfect. There is nothing to add.

  7. Coming, as I do, from Chicago, I understand the value of clout – and the reasons for developing a political machine to maintain and control power.

    I never expected to see Wall Street execs like Henry Paulson take a page from the master boss of them all, Richard J. Daley.

    We are today seeing machine politics at its most sophisticated and most ruthless. It has institutionalized “too-big-to-fail” into our economy. It has privatized profit and socialized loss for some of the wealthiest companies in the world.

    The biggies know now that whatever risk they engage in will be profitable for them – and any downside to the risk will be picked up by the taxpayer.

    It is shocking – and it is exceptionally damaging to the country.

    Seems that last fall, even before McCain lost, Country First was forcefully replaced by Goldman First.

    And what we need to do today is socialize the profits of those who benefited greatly from the socialization of their losses. Let them stay big – but make them pay for profiting on the backs of the American public.

  8. annie simon

    The answer to your question at the end . . China. How? Should be interesting.

  9. Hire a PR company. The best you can find. It sound cynical but look how successful the other side in running the show. (eg, Pfizer. Big Tobacco. Private Health Industry. American Banking Association …)

  10. Charles R. Williams

    The more we regulate the financial sector the more political influence the banks will buy. The more discretion resting in the hands of regulators the more political influence they will buy. If we want to regain control over our economic destiny we need to do four things: reduce leverage in banking, tilt the playing field in the direction of regulated commercial banks vs shadow banking, make sure no bank is too big to fail by designing a fast and efficient liquidation process for insolvent banks, and minimize the discretion of those who regulate banking.

  11. Start by writing to your rep and senators in Congress. Yes, yes, we know Dick Durbin said the banks own Congress – but these are people who do not want to lose the next election. If you remain silent, you are complicit in the sale of Congress to the banks.

    Let them know of your ire and recommend strongly that they implement a bailout tax on the extraordinary profits and an income tax on the bonuses paid to anyone who works at a firm whose losses have been socialized.

    It is time for the nation to socialize their profits similar to how we’ve socialized their losses.

  12. I would like to see a clear explanation somewhere, anywhere, of existing anti-trust law and regulation, and how it applies, or does not apply, to the mega-banks. Do we not have a framework for breaking up the banking oligopoly, or is it in law/regulation already, and the problem is simply a refusal to use the tools we have?

  13. I see the basis of this whole problem as the concentration of power in the US in the two party system. Whenever we face an issue, like TBTF or Goldman Sachs influence in politics, and can actually muster outrage as some of us have, we find our elected representatives to be too closely aligned with the power to effect change.

    When we turn to potential third parties for change, such as a Ron Paul, MSM immediately dismisses the attempts at outrage and change as fringe or whacko. And so, attempts such as hiring a PR firm and airing TV ads to educate the public as to the problems we recognize would probably never be allowed…the powers that be would threaten the media with loss of revenue.

    The internet is thick with bloggers that express outrage at this economic mess and our political situation…but it seems to end there. A post or two about how we feel – we have vented our frustrations and we move on.

    If there is a solution to having multiple viewpoints heard at a national level, maybe the time is right to initiate that change. Our Oligarchy appears hellbent on maximizing their profits even as we the people are still floundering…maybe this is the populist crisis…the “good crisis” that we shouldn’t let “go to waste”.

  14. SJ:

    “access to contigent state capital-on-amazing-terms is the ironic basis of modern financial power”

    Precisely true. For many intent’s and purposes, it grants banks the ability to print money that is backed by the power and resources of the government. The constraint is that the money must be lent, and that the bank must be willing to absorb the risk of loss on the loan. The notion is that banks are much better at allocating investment funds than the government…

    Of course, if the govt. also absorbs the risk of loss (for those banks with political power)… Well, so much for incentives.

    What has been happening for the last 8 months is even worse. The ACTIVE subsidization of bank capital – paying deposits on reserves (which is an obscenely stupid thing to do since it suppresses money velocity in a recession) as well as ridiculously low discount rates and rates on capital investment (in spite of high spreads) – are a hidden transfer of funds to banks.

    HOWEVER, I will argue one point in favor of the banks – the recent Citigroup quarterly earnings report highlights some serious flaws with using mark-to-market to force banks to take immediate losses in a credit-crush-downturn…

    Just as the stock market fluctuated 40% down and up in 3-4 months, Citi’s paper-profits were boosted by a recovery of asset values. In a widespread banking-led downturn, asset values and bank profits are massively endogenous, and entirely a result of easily manipulated and very unstable expectations. With the Fed doing a pathetically incompetent job at managing money supply expectations in the latter half of 2008, and Hank Paulson’s Treasury tripping over itself to stuff its foot further in its mouth, expectations collapsed on October 2 through October 10th… (that is precisely when people lost faith in the Fed’s will to use the tools that it promised it would use).

    In such circumstances, the banks were absolutely right to reject MtM. Acceptance of MtM would have collapsed many institutions that are better kept as going concerns (with major management changes) while allowing a handful of well-capitalized hedge funds to scoop up massive amounts of assets at pennies on the dollar in the midst of a world-wide liquidity crisis.

    The resulting concentration of wealth, and ridiculous unfairness, could have crippled our society even more. It would have mirrored the Panic of 1873, with the oligopolistic Gilded Age that followed. (Carnegie, Mellon, Rockefeller, etc.) Exactly what SJ is fighting against may have transpired (UNLESS the Fed directly compensated, which it appeared unwilling to do due to ideological impotence).

    It is no coincidence that those individuals who most aggressively argued against government support of the economy were those who were well-capitalized enough to make a killing on the disaster.

    MtM in combination with a well-run Fed and well-regulated financial sector would have been ideal. MtM in the presence of a pathetic Fed and soggy Treasury would have been an even worse disaster than what we had.

  15. What’s the CEO of Honda’s income? What does Honda produce? Hundreds of thousands of great cars.

    What’s the CEO of Goldman’s income? What does Goldman produce? Nothing.

  16. A CALL TO ARMS FOR THE REAL ECONOMY
    The recent and varied mea culpas that have appeared in the media and around the Internet by economists and others in relation to some of the professions´ perceived failures are a welcome relief since a little humility goes a long way. The thinking and theories of many economists have been twisted and misused; some willingly and others unwittingly.
    Well, welcome to the world, none of us are invincible, not even Goldman Sachs! This latter simply understands the game a bit better and is extremely focused on pushing the envelope to serve their god, “profit”. Nothing inherently wrong with that since all societies need their vultures to keep the field clean, but we have let this population get out of hand by forgetting the basics.
    At the risk of over simplifying, financial assets do not in and of themselves create real wealth, except on the margin. One might see this as meaning basically that the US Treasury, the Fed, and the financial sector-whether shadow or otherwise-do not in and of themselves create real wealth. They simply provide services, which basically comprise asset allocation and reallocation. As such, they are secondary in nature and dependent on creators of “real wealth”. While these secondary service providers can be more or less efficient and, therefore, contribute to real wealth through their efficiency, the difficulty is that over time these two areas–government and finance–have in large part stopped operating in favor of the real economy and begun to operate for the purpose of self perpetuation. They have in nominal terms over time taken on more and more control over less and less because, instead of receiving the benefits that government and the financial sector can provide to grow, the real economy is made to pay for a self perpetuating nightmare in which more and more financial assets are controlled by them to the detriment of the real economy.
    I would venture a guess that there are those in banking and government who understand this. However, why ruin a good shell game. We do in fact need balanced government and finance but what we have been getting is a re-feudalization of the world instead of an ever more even playing field.

  17. Where did all of Goldman’s profit dollars come from? You? Me? The rich? The poor? Working people? The government? Anybody know? Anybody care?

  18. If you go to their website, you can download a PDF that explains how their phenomenal business acumen is responsible for such profits.

    (http://www2.goldmansachs.com/our-firm/press/press-releases/current/2009-07-14-q2-results.html)

    No mention, curiously enough, of Paulson’s assistance in clearing the decks of competitors, funneling them money through TARP and AIG and assorted other federally funded assistance….

  19. Lavrenti Beria

    There will be no solution to this problem short of massive public demonstrations and the general strike and these may be closer in time than you realize. Paul Craig Roberts spoke yesterday at Counterpunch of the “real crisis” that is yet to come:

    http://www.counterpunch.org/roberts07162009.html

    The extant public paralysis draws life from two things, (1) the naive hope that the system will change somehow through its own mechanisms, and (2) the lack of an organizing principle. I submit that both of these elements might give ground of their own weight given enough of what Roberts’ prognostications have to offer.

  20. Any visitors here from South Carolina??? Governor Sanford has been very “frugal” with taxpayers’ money. He was even willing to pay for PART of the airline ticket to fly off and commit adultery. You can read about that and other trips Governor Sanford took on taxpayers’ money.
    Judging from the fact Governor Sanford will NOT be removed from office, you can see why politicians behave the way they do. Just click the link below.

    http://news.yahoo.com/s/ap/20090717/ap_on_re_us/us_sc_governor_travel

  21. Regarding the statement, “The people who control the state can decide who is out of business and who stays in…;” what gives the state this right? We’ve seen the Feds go into the banks, the auto companies, the insurance companies, and so on, and make the decisions about survivability. Under what authority can this happen? What is the constitutional precedent for such actions?

  22. Regarding Goldman:

    It’s interesting to note that even the business press is turning on Goldman:

    http://money.cnn.com/2009/07/17/news/companies/goldman_sachs_tarp_ingratitude.fortune/index.htm?postversion=2009071710

    They are being accused of lacking “class” and being politically incompetent at managing their image.

  23. StatsGuy: “Precisely true. For many intent’s and purposes, it grants banks the ability to print money that is backed by the power and resources of the government. The constraint is that the money must be lent, and that the bank must be willing to absorb the risk of loss on the loan. The notion is that banks are much better at allocating investment funds than the government…”

    That’s probably true. However, investment for the general welfare is something that cannot be entrusted to any private institution. Harold Stassen was a perennial candidate for the Republican nomination for President. He thought that the Federal gov’t should have ongoing public works programs. That would have injected money into the economy, provided jobs, and maintained infrastructure, as well as doing things like readying the electronic grid for wind power. Not such a bad idea. :)

    “HOWEVER, I will argue one point in favor of the banks – the recent Citigroup quarterly earnings report highlights some serious flaws with using mark-to-market to force banks to take immediate losses in a credit-crush-downturn…

    “Just as the stock market fluctuated 40% down and up in 3-4 months, Citi’s paper-profits were boosted by a recovery of asset values. In a widespread banking-led downturn, asset values and bank profits are massively endogenous, and entirely a result of easily manipulated and very unstable expectations. . . .

    “In such circumstances, the banks were absolutely right to reject MtM. Acceptance of MtM would have collapsed many institutions that are better kept as going concerns (with major management changes) while allowing a handful of well-capitalized hedge funds to scoop up massive amounts of assets at pennies on the dollar in the midst of a world-wide liquidity crisis.”

    So true.

    “The resulting concentration of wealth, and ridiculous unfairness, could have crippled our society even more. It would have mirrored the Panic of 1873, with the oligopolistic Gilded Age that followed.”

    This time, I think that the Gilded Age arrived before the panic.

  24. E. Barandiaran

    Simon,
    You know the answer to your question in the last paragraph: The Three Marketeers (see http://www.time.com/time/asia/asia/magazine/1999/990215/cover1.html)
    Leave aside The Maestro (he should have retired 20 years ago) and replace him with Tim Geithner, the Marketeers’ assistant in the Committee to Save the World (yes, there was one; read

    http://american.com/archive/2009/july/when-they-were-young/article_print)

    The problem with Rubin and his two protegees is that they have been part of the problem for too long. Can RR change? He seems to be the only one that may have enough influence on BHO to do it. But I don’t think he will do it–he profited too much from Citigroup to open the door to questions.

  25. I don’t think the crisis is purely a PR crisis. If people outside of Wall Street were not losing their jobs by the hundreds of thousands every month, if “Main Street” America felt confident they could be employed by Christmas, be able to pay for college, retire with a minimum level of security, we would not care one fig about Wall Street profits and bonuses.

    But we do care – because the transfer of wealth from middle class to wealthy has been extraordinary in these last years.

    And in the last year alone, trillions of taxpayer dollars have been funneled into the coffers of financial firms – traditionally known to be some of the wealthiest companies in the world.

    Concurrently, millions of people have lost their jobs and experts keep talking about a “jobless recovery” (and as a writer, there are few phrases that disturb me more than “jobless recovery” because it defines something that is inherently false.)

    For people terrified of losing their jobs – or terrified that they will never find one to replace the job they lost – it is impossible to understand how bailed-out firms in a sector that collapsed catastrophically last fall can reap such phenomenal profits in this recession.

    This is far bigger than a PR snafu…

  26. Johnson asks:

    Of course, you also have to ask: Who can break that power, when, and how?

    Wait! I know! “Progressives”!

    But maybe not. They seem pretty busy selling us down the river on thus “public option” (or “plan”) thing…

  27. Precisely, sir.

    You are 100% correct but are running straight into the prevailing winds. State power will expand exponentially in the coming years. Decades from now a much weakened US economy may see the wisdom in these simple solutions. Too late.

  28. Pay the Cassandras. And that means paying the people who aren’t in it for a career. You need people with less to lose.

  29. To revise and extend my remarks:

    Don’t pay them to organize or even by the project. Pay for technical infrastructure. Freedom of the press belongs to those who open-sourced it, and all that.

  30. Walt:
    how about encouraging people not to mail in their August mortgage/credit card payment until Congress passes a cap on the maximum size of a bank?

  31. Bill Bradbrooke

    In the wake of Andrew Jackson’s assault on the Bank of the United States there was a severe, nation-wide recession. Record keeping wasn’t all-consuming in those days, but one analyst perusing birth and death records of the time estimates that as many as 700 deaths from starvation in 1837 in New York City alone. That’s right: starvation and New York City.

    Paulson did what Paulson knew how to do. Here’s a hypothetical: you’re at sea, a storm overtakes you, you abandon ship and are in a lifeboat. You have a few moments to take action to prevent the lifeboat from sinking. Who do you want in the lifeboat with you, an able bodied seaman who can set a sea anchor and get a storm jib up or a meterologist who can theorize about the causes of the storm?

    All I ever hear from you is that the power of the government should be turned on big banks. What happens when you succeed? What happens when bigness has been eliminated altogether from the private sector? What’s left? fiat power, or, oh my gosh, a command economy! And who runs it? why economists, naturally.

  32. Question for all, but especially Simon:

    BofA is on thin ice for (among other reasons) swallowing Merrill Lynch under extreme duress from the feds.

    Can’t the feds similarly compel GS to swallow one or more struggling banks (CIT perhaps) to similarly shore up the system or disperse risk or whatever excuse is given these days for “helping govt prop up the ‘private’ sector because we can’t do it all ourselves!”??? After all they are technically a “bank holding company” but they hold no banks!!!

    Just a thought.

  33. Antitrust law still exists but seems to have been relgated to those goofy-but-still-on-the-books laws you read about in comedic pieces. It’s illegal to carry a duck on your head and so forth.

    We certainly should dust those off and flexibly apply plenty of others which simply aren’t used where they clearly can be.

    To me, it looks like a case for RICO. Civil and criminal.

  34. Underlying all of this is the state of American democracy.

    Here in Canada we do have lobbyists. But we don’t allow earmarking. We also have a six-week election cycle. Furthermore, when you cast your vote for a party it gets $1.75 in federal money (ie, your tax dollars). It’s a way to reduce reliance on large political donations.

  35. Having said this, Canada is far from perfect. The volume of complaints here can be as intense as anywhere else. But I wonder if this isn’t partly because the political process and media are adversarial in nature.

  36. Nationalize CIT and then sell it off.

  37. yeah… Think about the nature of that critique. It is really rather disgusting. It is not born of moral or political conviction, but of fear that all of the elites are going to be taken down.

    I think that the honchos on Wall Street would probably rather keep wages low for a while out of political fear, but the average trader or banker is so cretinous that he would not stand for it, so the managers are trapped. Can’t lose the best and the brightest!

  38. Johnson is right it sounds like Paulson still “understands little about the origins and nature of the global crisis.”

    Here is an interesting work on a few commentators who not only understand the crisis, but also saw it coming:
    “No One Saw This Coming”

    http://mpra.ub.uni-muenchen.de/15892/

    Simon Johnson has also been an invaluable resource throughout the crisis.

  39. How about encouraging depositors to withdraw their money from these larger banks and put their money in smaller local or regional banks or credit unions? If enough money was withdrawn, it would force the government to nationalize these banks the same way it would with any other failing bank.

    The downside is that this would be difficult to organize. But if it became clear that such a movement had a real chance of shutting these banks down, then it would also cause larger depositors to begin withdrawing money above the FDIC limit since it wouldn’t be insured.

    Of course, the downside to such a strategy, is that even if it actually worked, it would be difficult to predict what the ripple effects might be through the economy and larger financial world. My thinking however is that in all likelihood the government in such a scenario would be forced to nationalize the bank and cover even depositors above the FDIC limit to insure financial stability. And it would certainly break the political power of the banks.

  40. And considering the power of Blogging in general and Baseline Scenario in particular, use this power to spread the word via every electronic means available. Ella’s idea of a web site is good but the power of the Blog is just amazing. I speak as someone new to the game and already struck by how quickly ideas are promulgated.

  41. bayardwaterbury

    Can you say “election finance reform?” No doubt at all that this, other than a real grass roots revolution (second Civil War), is very possibly the only way to get to where we need to be. In the interim (forever), we just need to let things go as they are. It’s not as if the national or global economies are likely to survive the rule of the international plutocracy. No wonder China is upset with what is happening. In China, there is no election reform necessary, but if the populace you govern is about 2 billion strong, you try to do the right thing. Tienanmen Square is not the place you want to go again.

    No, on all fronts, we have to continue to blog our little hearts out, and hope that our President and Congress will find sanity and backbones, otherwise, the GS’s of our world will continue to be the social virus that they have become (the metaphor is appropriate, since they continue to survive by constantly morphing and stealing our strength through canny use of our media).

    Things are changing. Those of us who still remember the calm reassurance of life in the ’50′s, also remember that the top marginal tax rate was 90%!! AND there was a Congress controlled by the GOP, as well as the Eisenhower White House. A relatively small adjustment on taxes could really make a huge difference in what happens, especially if the GS’s of the world continue to pay multi-million dollar bonuses.

  42. I agree.

    Prior to the financial crisis, I was completely in the dark about the practices of investment banking and finance in general. I assumed that if the Dow Jones Industrial Average went up, then everything was going well for the economy. I honestly believed that was good for wall street was good for the economy. I feel that americans in general still feel this way – I know that my friends and parents do. They feel much better about the economy now simply because the stock market has improved.

    In spite of being a resident physician, I have read articles and books on finance to try to understand what has happened to our economy. Unfortunately, I am finding that I am alone among my group of friends (whom are all highly educated – post with post-doctural degrees). Whenever I try to explain to them what is going on, eyes glaze over.

    Can anyone recommend an article that explains the crisis and unhealthy influence the banks have on our government that I could share with others.

    I hope and pray for the one article, movie, TV show ect…that can break this crisis down in simple terms to explain. The issue is – would anyone care?

  43. I agree.

    Prior to the financial crisis, I was completely in the dark about the practices of investment banking and finance in general. I assumed that if the Dow Jones Industrial Average went up, then everything was going well for the economy.

    In spite of being a resident physician, I have made it a point to educate myself on finance and banking. The more I learn, the sicker I feel about the whole situation. Unfortunately, I am finding that I am alone among my friends and colleagues (whom are all highly educated – post with post-doctural degrees). Whenever I try to explain to them what is going on, eyes inevitably glaze over.

    Can anyone recommend a well written article/article series explaining the crisis and the unhealthy influence banks have on our government that I could share with others (one that is objective, well written, and free of sensationalism)? Does anyone have suggestions on how to vent anger at this situation in a constructive manner?

  44. Exactly.

    Even over the past couple of years as wealth concentrated in the upper 1% no one was complaining. The expansion of credit kept everyone able to feel they were winning in the economy too.

    It’s a disgusting breakdown in the meritocracy that well governed capitalism should produce. Those who’s firms have collapsed take vacations with the money they made from predatory lending. Those firms that legitimately survived or were propped up reap the benefits of being the sole survivors.

    Longer term economic justice is an unknown concept.

  45. Tippy Golden

    Start here. Simon Johnson’s article in the Atlantic. (1.1 million views.)

    http://www.theatlantic.com/doc/200905/imf-advice

    Also check out Simon on the Bill Moyer show.

    http://www.pbs.org/moyers/journal/02132009/watch.html

  46. Cameron:

    I feel your pain. Some recommendations:

    Matt Taibbi writes some great stuff for Rolling Stone. Also Michael Lewis (Vanity Fair, I believe) and Bill Bonner (Dailyreckoning.com). And you’ll know how we got to where we are today if you read the political essays of Gore Vidal (especially “The Day The American Empire Ran Out of Gas”). Vidal’s thoughts were 20 years ahead of the curve.

    Will anyone care? Probably not.

  47. Tippy Golden

    Cameron, I’d never heard of Paul Krugman or Joseph Stieglitz until some months after I joined this blog. (Which tells you how much I know about economics.) If you don’t know who they are you might want to check them out.

  48. we should make politicians wear uniforms that are covered in adverts, broadcasting their major money-backers. then we should boo them mercilessly till their uniform is acceptable

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  51. Maybe members of Congress should not be allowed to vote on anything that would effect a campaign contributor. Harsh but it would break the pay to play system and unlike campaign finance reform would not run afoul of 1st amendment issues in the corporatist supreme court. I think that it would tear the heart out of earmarks and loopholes.

  52. Alan McConnell

    Very good article, great comments! But even so
    there is something to add.

    Namely: what kind of a financial syterm, if any,
    do liberals want? It strikes me that most of
    the comments are reactive. We must develop a
    new “ideology” or “theory” of how a financial
    system _should_ work.

    E.g. insurance for individual houses is good.
    Insurance for insurance for insurance for some
    kind of securities — aka credit default swaps –
    is not. All of us can give similar examples.

    Before a web site is set up, I’d like Messrs
    Johnson and Kwak to get together with e.g.
    Krugman and Stiglitz and James Galbraith and
    Dean Baker and work out the means to the over-riding
    goal.

    What is the Over-riding Goal? It is: since money
    is damned important, ain’t nobody should be
    allowed to screw around with it.

    (Technical Aside: now I’ll submit this, and hope
    that the WordPress message I’ll get will be
    replyable to. Thanks to James Kwak for taking
    an interest in this problem)

    Best wishes,

    Alan McConnell, in Silver Spring, MD

  53. Can you possibly recommend a little background reading? I’m currently reading “Secrets of the Temple.” I’m going to look into the Gore Vidal stuff recommended below, as well. Thanks.

  54. When the electric utilities became too essential to fail, they were broken up and forced into a regulatory system that assured a fair return on equity but also protected the nation and its people against the oligarchs. Maybe the government ought to repeat this solution with banks that consider themselves too big to fail.

  55. It’s all very well those of us who know that something is badly wrong getting wound up by it but, in the end, democratic forces have to prevail. It requires mass education, for which the web is so suited. It requires the recruitment of an army of concerned people who will, neighbourhood by neighbourhood, speak to their friends and colleagues and explain how this country has to change (US/UK et al). It requires a return to real integrity in those who purport to represent us.
    Otherwise, I fear that we will see a form of democratic force that will be VERY uncomfortable- massive social disorder.

  56. I looked at the Roberts article and I am not impressed. One would expect a former Assistant Secretary of the Treasury would know that US manufacturing output has been increase. But, it is the form of high productivity/high automation manufacturing. We make airplanes, not shoes.

    It takes services to maintain those high tech machines. We have built an economy around the concept that some things are better hired out than DIY.

    Clark then tells us that 70% of the economy is “dead”. Yes, the consumer has cut back, but he hasn’t died. If savings and load payments are increased to 7%, the spending is still 93%.

  57. I’m new to this website (discovered it by accident). Great comments, everybody. I’m amazed at their intelligence and thoughtfulness!

  58. We need a web site that promotes a specific set of reforms. A panel of “wise persons” could be chosen to select the reforms. The reforms should be listed and the panel should appoint a moderator to summarize and vet the discussion for each proposed reform. Trash should be be removed so the discussion remains at a high level. Registered participants should be allowed to vote on the proposed reforms. Once it is in decent shape, take it public and allow the registered public to vote (possibly separately) so you can see how we are doing in persuading the public. The objective is reform of the banking industry not destruction of the banking industry. My top reform would be to make naked credit default swaps illegal.

  59. Where were you in the Basel II debate when some of us wanted to discuss the bias in favour of the large banks? What did you say about this while at the IMF?

    At this moment, well into the crisis, the faulty principles of Basel II still rule.

    We do not read your opinions on what to do with Basel II, NOW, but I guess you just find it more juicy for your agenda to go after your banker oligarchs than to discuss with the regulators… and perhaps even less risky for yourself.

    And by the way this goes for many who comment on this blog.

  60. Taibbi’s piece about Goldman Sachs might be “sensationalist”, but I wouldn’t dismiss it altogether just for that. The article is replete with facts, true accurate facts that can be checked. All those facts obviously do not amount to to Taibbi’s provocative claim that GS is the source of all evil, but those facts deserve a good hard look. Nobody’s really objective, you need to separate the facts from the rhetoric.

    Taibbi’s article can be found here:

    part1:

    http://contreinfo.info/article.php3?id_article=2774

    part2:

    http://contreinfo.info/article.php3?id_article=2775

  61. Per, how great to have someone of your stature contributing.
    Many of us who comment here must feel, as I do, that our in-depth knowledge is woefully deficient but, instinctively, we know that something is badly wrong.
    But let’s not criticise the spirit of what SJ/JK are doing (that’s how I read you, apologies if wrong).
    You, clearly, have an important insight. What are your recommendations?

  62. The root of our current problems lies in that the financial regulators decided they could arbitrarily meddle with the risk-allocation mechanisms of the markets. The regulators tax with large but still acceptable capital requirements anything that in the eyes of the credit rating agencies could be deemed as risky, and subsidize with extremely small capital requirements that the credit rating agencies hold carries low risk. For instance, when lending to AAA borrowers, the banks are authorized to leverage their capital 62.5 to 1.

    How do we fix it? Clearly by ordering the financial regulators not to intervene in this way. And also by starting to think about what the real purpose of the banks should be. That has not been on the agenda for decades.

    And no you do not have to apologize I do criticize Simon Johnson for focusing on the bad bankers and refusing to take up the issue of the regulators being wrong (and again not because they sold their souls to bankers).

  63. Personally, I think we need to rid the world of “shadow banking.” If we are investing other people’s money, there needs to be regulatory controls over it.

    It was also my understanding that we loosened controls on banking, setting up the crisis of today, when we said good-by to Glass-Steagall. Not sure why this was done during the Clinton Adminstration, but if the effect was to establish unregulated banking, perhaps we need to consider implementing a new millennial form of this.

    Profit is fine – what I most object to with this crisis is that profit was made taking unreasonable risks with other people’s money. When the risk didn’t pan out, the government stepped in with the TARP to save the day.

    No consequences for those who engage in the risk. But plenty of consequences for those of us outside of the shadow.

  64. social networking sites is the only way to organize efforts, talking to elected officials in ineffective against entities with deep pockets and vast political/media influence. start a facebook campaign (must have simple and catchy name) directed at e.g. goldman sucks. start expanding people numbers. all efforts mirrored to other sites: hi5, myspace, bebo, orkut and twitter. prepare simplified distribution material: publications, posters, video clips, songs and every possible medium of information. brainstorming will produce hundreds of smart ideas. once the awareness phase is mature enough then starts the “lobbying” in the streets

  65. Simon, your response?

  66. “We put up with a lot from our banking elite in this country, but historically we draw the line at financial power so concentrated it can confront the power of the President.”

    We may have drawn a line historically, but not anymore. A President who empowers Geithner, Summers and Emmanuel is not in confrontation with financial power, but is instead its facilitator.

  67. I don’t know that many people on this website blame Paulson for pulling out the stops to keep the world financial system intact.

    I think the real anger comes from the fact that for decades here is an individual that aggressively strives for deregulation, and defends the tremendous profits in the financial sector as proof of the efficiency of the free market system. Famously, he stated that 20% of people contribute 80% of “value” in most firms… Implying that the distributional inequities are driven by the fact that most people are simply less valuable than the small handful of high earners…

    In other words, the financial system earns amazingly high compensation because it DESERVES it – that it really is contributing some amazing factor to national productivity.

    Yet when the market finally unveils the financial windfall for what it is – a very sophisticated ponzi scheme that is taking extraordinary risks on leveraged money – the government absorbs the downside, thus discrediting the entire argument.

    Those who earned their millions, or billions, in finance over the last 20 years simply did not deserve it. Period. They earned it not by virtue of contributing to national efficiency by allocating capital so well. They did not even earn it through extraordinary skill at seeking (unproductive) rents in an unbiased free market.

    They earned it by seeking rents through political power in a rigged game.

    I’m sure most people would agree that:

    - Paulson did a pretty bad job

    - Paulson _could_ have done an even worse job, so maybe we should be “thankful” he didn’t

    - Paulson is a hypocrite and an extraordinary crook

    On the issue of big-banks, a lot of people wanted to see them go down because they _deserved_ it. We swallowed out pride, but now what do we get from Goldman?

    A swift kick in the teeth…

    I really, trully, sincerely hope that Goldman continues to blow the roof off of compensation at least through this December. I hope they do even better next quarter. So that when the legislation gets written after the Congressional Recess, every committee member gets their chance to grandstand. Maybe we’ll get some financial regulation with teeth.

  68. I am sorry, but you don’t get to dismiss the most important point with a parenthetical…”Of course, they can still argue that banking is a global industry with many competitors (some of which are even bigger, with more state assistance, promising much craziness in the years ahead).”

    This is a huge issue. Finance, whether you like it or not, is a global industry, and one in which we had a significant competitive advantage. Compare todays league tables to those of a few years ago – just replace citibank with GM and CSFB with toyota and you get the idea. Those who advocate breaking up these firms are channeling the management of GM in the 1070′s.

  69. Because when someone has a 10% to 15% market share it is hard to argue they are a monopoly…..

  70. HERE HERE STATS GUY!

    You say it well….

  71. CBS from the West

    Yes, but. Your final paragraph suggests that you believe that the reason we don’t see any real change is because the outrages are not quite big enough yet, that there is some threshold that we have not yet exceeded but well might in the near future.

    I hope you’re right, but I fear you are not. I think the level of corruption that is endemic and systemic in our political system is so high that no level of outrage will move it to do the right thing(s). The richer the financial industry gets, the more influential it will be with its government cronies. Yes, the Congressmen will all grandstand–but behind the scenes they will still enact only the legislation their masters allow them to. Maybe a cosmetic reform, if that.

  72. Then the nation is doomed. Shadow banks cannot continue to suck astronomical sums out of the economy without terrible consequences for the other economy out there – the one responsible for employing most Americans.

    Unemployed people cannot engage in commerce. Consumer spending is supposedly 70 percent of our economy. That’s a much simpler equation than the ones the Harvard MBAs were using to justify over-leveraging their businesses.

    I suppose the wealthy one percent can keep dancing on our grave but in the end, they’ll fall into it too….

  73. The main problem is that you keep on seeing it only as a local problem without wanting to face that so much of what went wrong had to do with the regulations concocted in Basel.

    If a crisis detonated by investments in safe assets, mortgages and houses; in a safe country, the USA; and in safe instruments, rated AAA is said to be caused by excessive risk-taking, and not an excessively misguided risk-aversion then I guess you will never be able to get it… and getting it is the beginning of any solution.

    Now on a local level I also do not understand how a society allows so much of their financial markets to be influenced by non-transparent credit scores and which are used as an excuse to open markets for lending to those you should not lend to… and to such an extent that I have even seen US parents more worried about their children credit scores than their school-grades.

    Why look for shadow-banking in the shadows when it so much of it bathes in the sunlight of your own backyards.

  74. Walt, one way to bring pressure on the big institutions might be to follow Catherine Austin Fitts’ suggestion (from who’s site, Solari.com, I found this link). She proposes pulling our money out of the big banks and investing it in smaller community banks that sevre teh communities that you live in. Her calculation is that, due to the leverage that these banks maintain, that even pulling out less than 1% would cause them great pain.

    Look into her site and this article and see if it’s something worth promoting. I think it is.

    http://solari.com/campaign/july4th.htm