Zombie Oligarchs

At this stage in any economic stabilization process, the state-sponsored lifeboat for oligarchs starts to get a little crowded.  Governments don’t have enough resources to save everyone, and not all major borrowers can have their debts rolled over.  In emerging markets, it’s usually the shortage of foreign exchange that sets a limit on government largesse (see the start of our Atlantic article for more detail on this cycle); in the US and other industrial countries, it’s more complicated – mostly about constraints around bailout politics (Lorenzo Bini Smaghi made this point effectively in the fall).

The survival-failure decision is taken at the highest level.  In April 2008, after the failure of Bear Stearns, Dick Fuld had dinner with Hank Paulson and reportedly concluded, “We [Lehman] have a huge brand with Treasury.” As the broader problems within the financial system worsened, this proved worth less than he thought.

Fuld is still in shock, and seething. How could Paulson let Lehman go? “Until the day they put me in the ground, I will wonder [why we weren’t saved],” he told Congress.

This week, Daniel Bouton resigned from running SocGen, in the face of what he called “incessant” verbal attacks – a reference presumably to lack of support from Mr. Sarkozy; it’s not good when the President of France calls your proposed pay package “a scandal”.  And Ken Lewis may take a further battering – due in part to not being the best-connected with top people in Washington.

Some powerful people, naturally, can take this opportunity to elbow others out of the way.  A better reputation in the right circles or somewhat deeper pockets or the ability to pay higher compensation will carry you a long way while your competitors are having a hard time getting back on their feet. 

Mancur Olson famously argued that crises can break the power of vested interests.  That’s possible, but only happens when the crisis brings the right kind of reformer to power.  More often, crises lead to greater concentration of economic power and political influence.

This can be consistent with the resumption of rapid growth – after crises, some emerging markets just as fast, or even faster, than before.  But such an outcome seems unlikely today for the US and for the world.

There are three reasons why today’s surviving oligarchs are not likely to prove immediately dynamic.

  1. They have a lot of debt.  In emerging markets, this is the prevailing problem.  The debts of powerful people are being rolled over, but at high interest rates.  There is nothing in this part of our broader balance sheet issues that points towards new investment and expansion.
  2. They are worried about future reshuffles of power.  Obviously, the U.S. Treasury is involved in an awkward parent-adolescent shouting match with big banks (who is who?).  The banks likely reckon that they will win on the whole, but individual banks or particular CEOs may still suffer blows – through the politics of stress tests, the way compensation caps are limited, or something else.  This kind of uncertainty and continuing struggle is unlikely to encourage expansion.
  3. The most significant difference between the US today and many emerging market crises in the past is the exchange rate.  Post-crisis booms are often triggered by big nominal exchange rate depreciations – if you can hold the line on inflation (the IMF can help, and you can blame them for unpopular measures; perfect), then exports become hypercompetitive and you start a new cycle of capital inflows.  Even Japan had a strong export sector throughout the zombie bank doldrums of the 1990s.  The dollar, of course, is still the world’s preeminent reserve currency and problems in the eurozone mean this will continue for the foreseeable future; significant real depreciation is unlikely in the near future.  And at the global level, we can’t export our way out of this – there is no way that Mars can develop quickly enough as an export market.

Some new entry and productive reallocation of talent is possible in this situation.  For example, John Mack is saying that pay caps mean his bankers are leaving – among other things – for “other industries”.  But the G20 policy of stabilization-through-rollover, at the national and corporate level, means that incumbents’ implicit subsidies actually go up.  The environment for starting businesses in the US has not completely collapsed, but it has also definitely not improved.

So we get to keep many of our oligarchs, but relative to the recent past they will hunker down.  You might be fine with that – although remember that it does not prevent reckless risk-taking and an increase in your taxes down the road.  Larry Summers says this happens only twice per century, but his own argument is that we have moved away from the kind of financial system that was built in the mid-20th century.  If we’ve gone back to the wilder days of the 19th century, the cycles could be quite different (look at the NBER’s data).  If the US has really become more like an emerging-market-with-a-reserve-currency, that is also not encouraging.

We’re looking at a near term dominated by the existing economic power structure.  The remaining big banks (in the US) and big banks/corporates (elsewhere) are made invincible by campaign contributions, political connections, and everyone’s reasonable fear of a great depression.  It will be hard for outsiders to challenge that structure effectively – either as new companies or with new ideas.  But you won’t see a great deal of innovation, investment, and growth coming from these survivors.

How do we eventually escape the grip of zombie oligarchs?  We’ll have a fair amount of time to think that through.

By Simon Johnson

77 thoughts on “Zombie Oligarchs

  1. Simon,
    Thank you for all your economic writings and appearances to get Washington to break up the banking industry that is economically choking the country. Zombie oligarchs – love the title and so very appropriate!

  2. It seems the zombie oligarchs are dead and just don’t know it. You can turn to wiseacres extraordinaire John Forster and Tom Chapin for a much more engaging, if ghoulish, description of zombie oligarchs. If you haven’t already seen it, give the below a click. Funny stuff for hard times.

  3. The first step to end this madness is to make elections clean through public financing which will end special interest contributions.

  4. “How do we eventually escape the grip of zombie oligarchs? We’ll have a fair amount of time to think that through.”

    There is no need to think deeply. Significant socio-political changes have always been brought by revolutions throughout history, revolutions that were triggered by currency collapses and economic misery.

    Today, there will be no pitchforks, torches or armed insurgents. The battleground will not be the real world but the virtual one (which this blog is part of), just like the virtual financial system that we have built – the vast distributed simulation machine that runs before our eyes but cant be encompassed.

    Welcome to the 21st century, where men & women finally managed to orthogonalize their internal and external selves and where the real world is dominated by the virtual one.

  5. John Mack’s comment is pretty funny. Finance as an “industry”? Please. Someone needs to check the etymology of that word.

    Do Morgan Stanley employees have the qualifications to actually produce anything?

  6. Here is a nice graphical representation of the NBER data that raises questions about the desirability of moving away from the mid-20th century financial system – as Summers seems to be suggesting.

    Someone should put/replicate that graph in a safe/stable URL.


    Regarding Mancur Olson’s arguments, I’ve never been impressed by their internal consistency or empirical accuracy.

    He takes one good idea (smaller groups facilitates collective action due to coordination costs/incentive concentration) and hammers every nail in sight.

    In particular, he posits that this phenomenon by itself explains the rise and fall of nations. His basic conclusion is that societies choke themselves as the number and strength of social institutions increases. That is, societies are stronger when they have fewer social networks/organizations.

    In short: “Society is bad, markets are good. Society likes to prevent markets from working. When society gets too strong, it kills the markets, and then society dies.”

    This stands in direct contrast to the “social capital” crowd – which argues that the death of America is being driven by the disintegration of social networks due to the alienation of individuals (e.g. too much TV, too few community groups).


    Notably, Robert Putnam’s recent take in Bowling Alone. (They published their datasets online a while back.)

    And there’s a huge literature on the benefits of social capital in developing countries (e.g. Grameen Bank, etc.)

    As anything, the devil’s in the details – size, industry, interests, even individuals.

    But Olson’s arguments raising “social connectedness” as the driver of national decline is somewhat disconnected from reality.

    For radically competing view, Middle World Guy recommends Jared Diamond’s Books (Guns, Germs, Steel… Collapse).

  7. Spot on.

    I wouldn’t abandon Mancur Olson’s logic for the present administration just yet. I expect the consequences of our effective forbearance on banks/oligarchs will exacerbate the crisis sharply sooner rather than later and force a change in plan, force a change in economic leadership that the oligarchy might find less pliant.

    Secretary Volcker anyone?

  8. “f we’ve gone back to the wilder days of the 19th century,”

    But wasn’t a return to 19th century society the purpose of deregulation and the upward redistribution of wealth? (Good help is so hard to find these days.)

  9. I am fascinated that the solution being bandied about to address the catastrophic collapse of the US financial industry is to preserve the status quo.

    What are we propping up? A system that requires socialism to fix the errors? A system that saw the loss of three of the five major investment banking firms in the last year? A system that has drained the country of trillions in dollars from retirement and savings accounts, college funds and the US Treasury?

    It is astonishing to think that no one in power sees the value of protecting these executives, these firms, this economy, this nation, our citizens from such a catastrophic collapse in the future.

  10. Oligarchy is the power of a few, of a clique.

    A particular type of oligarchy is the plutocracy, where those few have been selected by money, giving them a demonic streak. That is who is leading the oligarchy. Geithner, or Summers belong to the oligarchy, Cheney or Bush, to the plutocracy (Bush was born into it, whereas Cheney is what the Romans called a “new man”).

    I understand that, at this point, and by pedagogy, you have to be somewhat imprecise and talk more mildly of “oligarchy”. Thus giving comfort to the vast American public as it comes to realize that its mind has been molded in the way serving its masters best.

    Patrice Ayme

  11. Love the last sentence. Zombie bank pandemic is global.

    Flowers Group Rejects Germany’s Bid for Hypo (WSJ)
    BERLIN — U.S. private equity firm J.C. Flowers & Co LLC said Thursday that its investors want to keep their shares in troubled lender Hypo Real Estate Holding AG, which Germany is trying to nationalize, and made clear it considers the government’s offer too low.


    However, New York-based Flowers said in a statement that it “continues to believe that HRE shares are worth more than €1.39 per share.” It said that, following an in-depth review of the offer, investors advised by Flowers who hold more than 14% of the bank’s stock “determined to retain their shares.” Other investors whose holding amounts to less than 1% of the total decided to sell up, Flowers said.

    “As long-term oriented investors, it is our wish to support the company into the future,” chairman J. Christopher Flowers said.

  12. Elvis,

    I thought you were dead. :)

    Seriously, I think the chance of outlawing big campaign contributions is very small. However, Obama has demonstrated that using the web to, effectively, get the general populace to fund campaigns has a real chance to break the power of the special interest groups. I haven’t been this optimistic about politics since 1960.


  13. why not a secretary spitzer? we need someone with the guts to do battle with these guys

  14. So here’s my question, where is the free market? With banks effectively not lending, but a need for lending, where is the deep pocketed individual / private equity firm / hedge fund etc. to make those loans. We are suppose to have a system where supply can meet demand. Right now we have a huge demand for credit, even from very credit worthy borrowers, large corporations, car dealers etc. Why is no one raising $100 billion dollars and opening Joe’s bank to meet that demand?

    I realize it’s more complicated than that to start a bank, and I realize there are other things that banks do that permeate the financial system, like commercial paper that backs money markets, and market making on exchanges, and being the Fed’s cashiers for currency trades etc. – however, I would have expected someone to start up a new entity, with a clean balance sheet and start lending if the government won’t do it and there is a demand for it.

    Are the barriers to entry such that it’s just impossible? Do these investors see the current banks getting back to semi-normal too soon to capitalize on this market? Hell if I had an extra couple hundred grand laying around I’d start making private loans for car purchases at 7-8% right now in a heart beat.

  15. Simon and all,

    As the results of the stress tests come into the public domain, let’s all get together and ask the government to disclose the exposure of the FDIC to loss on a bank by bank basis.

    Public outcry for information can be effective in this country.

    The FDIC is by far the largest, most senior creditor in just about every bank.

    The taxpayer is on the hook for any losses incurred by the FDIC in excess of the reserves it has accumulated from insurance premiums paid to it by banks.

    The question aims to uncover the value of liquid assets in relation to senior debt. Liquid assets would be cash together with marketable securities and loans that have not been adversely classified, marked-down or written off.

    The answer would reveal the extent to which the FDIC is exposed to assets whose value is subject to interpretation and possible loss.

    It would complement the stress test results scored on the ratio of tangible common equity to assets. This ratio presents a picture of the extent to which assets excluding intangibles cover total liabilities including preferred shares on which dividends are paid.

    The stress tests were intended to measure capital adequacy in future adverse scenarios. Yet we lack a generally understood view of the banks’ balance sheets at the present moment in time.

    Properly managed, this approach could help restore confidence in the banks and government’s support for them. More on that in another post.

  16. Zombie oligarchs? Sounds as if we are back with Pareto and Mosca bemoaning the incompetence of Giolittan elites in post-unification Italy. Or perhaps Lampedusa’s dictum that things change in order to remain the same. The model for the U.S. may be less developing world oligarchies than Christian Democratic hegemony in post war Italy (cf. Gramsci’s modern prince).

  17. One of the reasons that I think that Narrow/Limited banking might catch on is that it is a conservative proposal largely backed by more liberal or moderate politicians. It is mainly associated with Irving Fisher, Frank Knight, Henry Simons, and Milton Friedman. On the other hand, the Lib Dems are currently behind it in some sense, as is Buiter.

    Since I follow Burke in preferring Reform to Revolution, I’m willing to accept a rather long and arduous process. On Narrow Banking, here:

    Click to access KevinJames.pdf

  18. “We are suppose to have a system where supply can meet demand. Right now we have a huge demand for credit, even from very credit worthy borrowers, large corporations, car dealers etc. Why is no one raising $100 billion dollars and opening Joe’s bank to meet that demand?”

    That seems to be typical of financial crises. From Kindlerberger’s “Manias, Panics, and Crashes”:

    “There is considerable testimony from various crises to suggest that borrowing in crises is difficult and sometimes impossible:

    . . .

    “1873: ‘The National Trust Company of New York had eight hundred thousand dollars of government securities in its vaults, but not a dollar could be borrowed on them.

    . . .

    “1884: . . . The exorbitant charge [of 4% per day] was, of course, the direct result of the distrust prevailing, as there was no actual scarcity.”

    Sound familiar? :(

  19. If the “top talent” abandons the financials, innovation could come from unexpected new enterprises they develop. While the current oligarchy struggles to save itself, entrepreneurs will find new ways to fill the needs which zombies can no longer address. Creating a ghost of the ghost system would not be innovation– new approaches may grow as financial folk get their thoughts tweaked by moving into non-financial organizations. Of course there would be predatory ventures, but surely some would be positive. The administration could encourage the process by standing firm on salary restrictions for bailed out banks.

    Yeah, it’s a Pollyanna contemplation. And a new system would generate a new oligarchy. But we can facilitate innovation if we entice talented people out of the zombie carcasses. And if they are willing to think in new ways. And if we regulate effectively… And if bullfrogs had wings, they could fly.

  20. Simon

    Thanks from us all for raising the topic of the oligarchs so effectively.

    As to how we get rid of them, pace cat lady, the last thing we want is trench warfare with the oligarchs. That would be far too expensive, and un-necessarily slow. Try:

    – Taxing size and complexity in financial institutions. Call it a surcharge on their FDIC premiums, recalculated to represent recent experience of defaults. Good for the Federal deficit too, though that may not show in the accounting.

    – Make it much easier for shareholders to launch class actions for negligence against Board members. Most of those who will be bankrupted (lawyers will be found to sue any pockets as deep as these) will be the oligarchs who have already fallen by the wayside; but it will scare many of the survivors into retirement. (Just our luck if AIG turns out to have issued all their professional negligence cover; but that is limited. It will be worth giving the shareholders some federal funds to bankrupt some oligarchs.)

    – Back that up by legislating that in future responsible executives will be personally liable is some solid degree for the debts of a regulated financial institution that goes int any form of bankruptcy or receivership. This is really to protect future taxpayers against bank executives who take a ‘heads I win, tails the taxpayer pays’ attitude; but it will scare some more of the existing oligarchs.

    – Enact term limits for tenure as CEO or Chair of a regulated financial institution. Term limits have their inconveniences, but are excellent anti-oligarch medicine.

    Mix and take the prescription as political opportunity offers – or can be made.

  21. We are propping up the system to make the oligarchs and politicians immune to the consequences of their own actions (or omissions).

  22. Tom,

    We have also seen that, at least so far, the concentrated contributions of large financial interests have far outweighed the diffuse web contributions in actual political clout. When focusing only on the financial arena, has there been one significant difference between the Bush and Obama administrations? All I see are continuations of the same theme as has been pointed out very well here on this blog as well as by Krugman, Naked Capitalism etc.

  23. The influence of the zombie banks will continue for a long while.

    The Democrats have developed over the years in the deep blue metropolitan areas like Chicago, New York, Philly and LA, a sophisticated pay to play corruption scheme, whose primary purpose is to grab, maintain, and perpetuate their hold on power.

    Their schemes thrive in situations where the government rules are complex, difficult, opaque and largely require good access to the decisions makers in government to fulfill compliance. These corrupt schemes create a symbiotic relationship with the outside concentrations of money and power like the corporate elite, and the unions who who have the ability to finance lavishly the political campaigns of these politicians, ( largely Democrat) that in turn overwhelm their opponents. The more difficult, complex and opaque the regulations the better pay to play works; that is why there are such incentives to create complex difficult and opaque rules as we are now seeing from the Obama Administration. These schemes have been filtering up to the Feds for while, but Obama has taken the pay to play idea to a whole new level.

  24. The Oligarchs or , more specifically, the Plutocrats, will remain in power until strict regulations are instituted to make all Lobbyists conversation, proposals and interviews open and published. It will depend on the will and patriotism of our legislators who must insist on this.
    The general public are bothered by the recession but are detracted with the “Circus” atmosphere to keep them occupied with sports events, Reality shows, beauty contests, dance contests and many other distractions.
    All of these events are certainly good for our morale and add to our quality of life.
    “A spoon full of sugar” may be fine, but a cup of sugar can make you seriously ill.

  25. “How do we eventually escape the grip of zombie oligarchs?”

    Since they own the government, there is not much point expecting that our elected representatives will do much of anything for us.

    Historically, when things get really bad, and the government is unresponsive, people take matters into their own hands. I suspect that we may be on our way to going that route in the foreseeable future.

  26. Wow… good thing the corporate elite didn’t lavishly finance any non-opaque, non-corrupt non-Democrats, so we never ended up where we are today…

  27. Another great analysis, and many outstanding suggestions for potential solutions. Tragically, – this analysis and potential solutions will fall on deaf ears and recede into the musky caverns of critical discourse and academic theory.

    Unfortunately, American leadership (corporate and political) lacks the will, or the courage, or the decency to resist the illicit temptations of the “zombie oligarchs” whose imponderable wealth, in the form of direct or lobby contributions, revolving door opportunities promising entrance into the lofty perches of the predator class, and actual bribery and graft effectively buying or extorting or coercing protection, shielding, and over favoritism and extroadinary largess from the government – all at the tax payers expense, and brutal disadvantate.

    The predatorclass owns America. History suggests this has always been the case. Yet the critical difference is found in the hyper-accelerating widening divide between thehaves’ and thehavenots. American who were born into hardship and struggle after the depression and two world wars, – did possess the sense of entitlement, nor hold to the concept of American exceptionalism. The social contract was more equitable, and the peoples expectation was that through good citizenship and hard work, a greater level of prosperity would be gleaned for thier posterity. Note this vision of prosperity was rooted in traditional middle class values and expectations, (a home, a car, a vacation, and a college education for the kids) not the delusional greedmongering and unrestrained viscious pursuit of the illusion of wealth (bling, BMW’s, Ferrari’s, Hummer’s, McMansions, servants. The America dream morphed over the years of relative prosperity into the American nightmare the illusion or actual capture of extraordinary material wealth became the primary metric for valuing the worth of a human being, a society, and a nation. The rabid pursuit of the is perverse illusion forced the erosion of our individual, societal, and national principles, standard or codes of ethics, and laws to increase and entrench material wealth. Thehavenots never quite capturing real wealth compiled monsterous debts to feed the illusion.

    Now that the divide grows wider and more disparate by the hour, – Americans must confront a real horrorshow shock, as all the former percieved and actual entitlements, safteynets, rights, freedoms, privileges, opportunites, and the illusion of access to great wealth – to the socalled American dream is suffocated by the crushing weight of imponderable debts and deficits and economic volatility – and all to save, shield, and prop up the zombie oligarchs, and the predatorclass cronies who own and control our government.

    It may be logical and noble to “…follow Burke in preferring Reform to Revolution,” and be “…willing to accept a rather long and arduous process.” Many Americans cannot and will endure the long and arduous process as real pain and suffering will force asymetical options for survival, – and for a rapidly expanding population of Americans – revolution may be the best hope for reform.

  28. Simon Johnson wrote:

    “Mancur Olson famously argued that crises can break the power of vested interests. That’s possible, but only happens when the crisis brings the right kind of reformer to power.”

    The right kind of reformer is a particular kind of entrepreneur.

    In their 2006 textbook on International Economics (7th ed.), Paul Krugman and Maurice Obstfeld define “the problem of collective action”:

    “While it is in the interests of the group as a whole to press for favorable policies, it is not in any individual’s interest to do so.”

    Krugman and Obstfeld continue:

    “In a now famous book [The Logic of Collective Action], economist Mancur Olson pointed out that…the problem of collective action can best be overcome when a group is small (so that each individual reaps a significant share of the benefits of favorable policies) and/or well-organized.”

    From a 2009 book co-authored by Clayton Christensen, a Harvard Business School professor who originated the canonical Model of Disruptive Innovation:

    “Regulations ultimately change in reaction to [disruptive] innovators’ success in those markets.”

    Krugman and Obstfeld provide evidence that Christensen’s innovators equate to Olson’s small group. Specifically, the co-authors summarize research which makes it plain that, in their words:

    “Politicians are, indeed, for sale”

    Of course, successful entrepreneurs in a given industry are the small group that has the motive and the means to buy changes to regulation that disadvantage the industry’s old guard.

    From elsewhere in the book co-authored by Christensen:

    “Those disruptors that successfully dismantled the regulations that stood in their way succeeded by circumventing the regulation — by innovating in a disruptive market that was beyond the regulators’ reach or was peripheral to their vision.”

    For a banking entrepreneur, an ideal peripheral market to disrupt is one wherein:

    1. customers become (more) creditworthy
    2. a lot of money can be made directly (i.e., independent of banking)

    In 2008, Christensen co-authored a book titled Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns. From Disrupting Class:

    “In the last three decades, increasing numbers of cognitive psychologists and neuroscientists…have produced a multitude of schemes to explain…that people learn differently from one another…

    Students need customized pathways and paces to learn…

    We state above that in the first phase of the disruption of the instructional system the software will likely be complicated and expensive to build. The reasons for this can be traced to the use of the existing commercial system when marketing the system, as noted previously, as well as to the relative immaturity of Web 2.0 software. Within a few more years, however, two factors that were absent in stage 1 that are critical to the emergence of stage 2 will have fallen into place. The first will be platforms that facilitate the creation of user-generated content. The second will be the emergence of a user network, whose analogues in other industries would be eBay [i.e., an online market is a type of user network]…

    The data suggest that by 2019, about 50 percent of high school courses will be delivered online…

    80 percent of courses taken in 2024 will have been taught online.”

    A provider of said market is likely to be put out of business by competitors if it does not:

    1. introduce online markets that provide new and improved ways to showcase and earn money from expertise
    2. introduce a loan program for consumers of customized education ASAP
    3. make the popularity of the company’s markets and loan program mutually reinforcing, so a borrower who performs well in the markets — thereby demonstrating her ability to earn a high and/or fast-rising return on her expertise — is rewarded with a lower interest rate
    4. take advantage of new government regulations to become a bank, as a means of increasing the amount of money the company can lend
    5. introduce other loan programs and financial services that complement the markets

    Together, these new banks can be expected to facilitate a lot of economic growth.

    Paul Romer is a Stanford economist who originated New Growth Theory, which updates growth economics for the information age. Romer:

    “Perhaps the most important ideas of all are…ideas about how to support the production and transmission of other ideas…North Americans invented the modern research university…As national markets for talent and education merge into unified global markets, opportunities for important policy innovation will surely emerge…There are…safe predictions. First, the country that takes the lead in the twenty-first century will be the one that implements an innovation that more effectively supports the production of new ideas in the private sector.”

    Once the pockets of these new banks are deep enough, then, the regulation of banks can be expected to change in ways that best promote economic growth.

    By definition, these changes will end the reign of the kleptobankers.

  29. Forgive the double post, and many typo’s but for clarity – I meant to say: (Americans who were born into hardship and struggle after the depression and two world wars, – did {NOT} possess the sense of entitlement, nor hold to the concept of American exceptionalism.

  30. Above, I wrote:

    “A provider of said market is likely to be put out of business by competitors if it does not:

    1. introduce online markets that provide new and improved ways to showcase and earn money from expertise”

    Details upon request.

  31. Obama didn’t really get smaller contributors. He is a creature of the big boys even more than Bush was. He used a clever trick where they had big donors break up their contributions into small amounts so that they didn’t have to be reported. This allowed him to circumvent all of the electoral rules. It was probably illegal but no one cares as we has now won the election (and controls the attorney general & other investigators)

  32. I don’t think we are returning to anything. We’re seeing a shift to a new reserve currency, we just don’t know it yet.

    And we are propping up the existing system and powers that be because we don’t have a new one — yet. How many of you still have your money in these banks? Mine’s been in credit unions for over 20 years. I don'[t support these banks and oligarchs at all unless forced to, as in paying the taxes I can’t avoid.

  33. Absolutely. But why not develop a new paradigm. A organization that exists to exactly counterbalance the focused lobbying of the financial industry. A moveon type org that channels money in the same way as other special interest groups. Only this one would grow from and be responsive to grass roots interests. I’m sure that many politicians would be happy to do the ‘right thing’ if the right thing was rewarded. They could do the right thing, get ‘paid’, and keep their self esteem all in one neat little package. Why not. It seems the time is right for this.

  34. The Freedom of Information Act has specific exceptions for financial information – they don’t have to release anything.

  35. You can laugh but zombie banks will outlive us all.

    Think about it: at the end of the month you will get your paycheck. What you gonna do with it? You will put it in a zombie bank like the rest of us. And what are they gonna do with your money? They will pay their own salaries. They can last for ever like this. They have nothing to fear. They will not carry out their mission but who’s gonna make them? You won’t even know your bank is zombie.

    Zombie banks are stronger than us.

  36. Aimzz,

    To be bi-partisan in my criticism, the Republicans are not much better. They just don’t have their system of corruption down as well as the Democrats and the Republicans are not shielded from criticism from the media as much.

    The reason 80% of the Republicans in the Senate are Rinos is that way they can be “flexible” in their positions, meaning they are less principled and their position can easily be bought for the right price. That price may not be money; in the case of people like Mc Cain and Graham it’s favorable press coverage. Others, it’s the mullah, period.

    Here in California, the every single Republican in the legislature has been bought and paid for. They go through the motions of protesting take hikes, but in the end they always go along. It has been all choreographed so the big interests get what they want in the end.

  37. Simon-I am not sure the system is as immune to collapse as you imply. The only thing preventing a major sovereign debt failure by the U.S. is the willingness of foreign central banks to buy Treasury bonds. They cannot do this forever. Eventually it will cause serious inflation problems for the countries buying U.S. debt much as it did for the Japanese when they were buying U.S. treasuries to stabilize the international trading system in the 1970’s. At some point this crisis may get much worse.

    Campaign finance reform is also not as difficult as it might seem. Restoring the tax credit for small individual campaign contributions would be a big first step. Up until 1976 individual taxpayers could receive a tax credit up ut to $100 for contributions to candidates for federal offices. Jimmy Carter used this as a major source of funds as had Hubert Humphrey. The Congressional Democrats eliminated it as part of their effort to bring down Mr. Carter. The Republicans didn’t care because they had plenty of small contributors without the credit. There are several reforms like this which if properly explained to the American people and acted upon could level the playing field in our politics.

  38. Don’t be too sure those pitchforks, torches and armed insurgents. We’re walking on eggshells. There is a thin veneer of civilization which can be easily swept away.

  39. Don’t be too sure those pitchforks, torches and armed insurgents won’t come out. We’re walking on eggshells. There is a thin veneer of civilization which can be easily swept away.

  40. I don’t have the page numbers, but I clearly remember the wife of a young investment banker reportedly telling NEWSWEEK of the string of home parties pre-election. I believe the same article quoted Michelle as saying, “What do we have to do?” I wish I’d kept the back copies.

  41. “There are three reasons why today’s surviving oligarchs are not likely to prove immediately dynamic.

    1.They have a lot of debt…” So, Dr. Johnson, you’re raising awareness of a negatory oligarchical institutional infrastructure. Thank you. But specifically, what set of policy prescriptions will work to effectively…reduce debt, and bring about a JUBILEE?

  42. “Some powerful people, naturally, can take this opportunity to elbow others out of the way. A better reputation in the right circles or somewhat deeper pockets or the ability to pay higher compensation will carry you a long way while your competitors are having a hard time getting back on their feet.”

    This is an obvious reference to none other than GS.

    I have to ask – EXACTLY WHAT does GS do for the American economy? WHAT beneficial role does it play? Is it not simply a very well-connected extractor of wealth? Does it not exist primarily for the enrichment of management? What has it ever “produced” that was of lasting economic value?

    Were I the Sec Treas, my first moves would be to break up this behemoth, to revoke its charter as a charade of a bank holding company, to silence its Global Investment Research Service, and to ban its speculative and market-manipulative principal trading desk.

    Of course, that is why I would never get to be the Sec Treas.

  43. Imagine that – Obama swept in after the crash to corrupt the system. He certainly HAS accomplished so very much these last 100 days.

    You might want to check the timeline, Paul. The crash happened on the Republicans’ watch, when Bush/Cheney were in office. The man presiding over the socialization of Wall Street was a Goldman Sachs guy by the name of Henry Paulson.

    Complexity and opacity were the innovations given to us by the best and brightest and most highly paid boys on Wall Street….

  44. This is not going to be a Great Depression – it’s going to be a GREAT REPRESSION. A depression is exactly what this country NEEDS to disgorge itself of two decades of credit fueled illusory “growth.” It is debt deflation and deleveraging.

    Instead, we are headed for a period of taxpayer and corporate REPRESSION for the benefit of the financial sector and their bondholders. Among these institutions, I number Fannie and Freddie.

    For these zombie institutions to keep their bondholders whole, they are going to have to retain an extraordinary amount of GDP. This can only come through higher private and corporate borrowing rates, along with crippling taxpayer subsidies.

    The only people such a GREAT REPRESSION will benefit will be the management teams at these institutions and their largely foreign (Chinese) bondholders. Growth in the rest of the economy will be REPRESSED by this policy for at least a decade.

  45. Would that you were Sec Treas, Blankfiend.

    What I question is why US Treasuries and the dollar are entrenched as the worlds only safe haven, and stable reserve currency. Are all these brilliant economists and financiars incapable of simple math?

    How does Amerika inflate it’s way out of this horrorshow. In a perfectworld where the toobigtofail finance oligarchs are allowed to dictate policy and manipulate markets, – there may be some perfect formula of interactions and interpenetrations that would provide or present the perfect field for a real recovery and return to the halcyon days of unrestrained casino capitalism – – but this ain’t a perfect world. There are unknown unknowns and Black Swans and chaotic asymetric possiblities and opportunities the predatorclass fails to account for, and ignores.

    Amerika rules by force! Our hypersuperior military is the collateral final abiter of all our debts, and buyer beware indeed. Nothing changes here, unless and untill American leadership changes, and apparently that’s happening. The rest of the world must, therefore account for this sad reality, and work towards ways to undermine and eventually erase Ameriken hegemony.

    The American people are unimaginably uninformed and malleable, – but the rest of the world is not.

    Slowly, methodically the rest of the world is and will continue realigning to combat and contest Ameriken dominance and hegemony. Our empire is dying, like all previous empires, rotted sickened from within and crushed by the monsterous debts, deficits, and crimes heaped on the peoples backs by the predatorclass.

    In a world where there are no laws, – there are no laws for anyone.

  46. A thousand pardons again, but I meant to say: – (Our hypersuperior military is the collateral (and) final abiter of all our debts, and buyer beware indeed. Nothing changes here, unless and untill American leadership changes, and apparently that’s (NOT) happening.

  47. I keep wondering if the lesson of the last eight months for the financial community is “too big to fail” is the best way forward. Does bigger and bigger lead to less and less risk for financials because the taxpayer will always, in the end, have to rescue these gigantic institutions when they screw up?

  48. Number, and words — NBER has an abundance of those. But, again, it would be nice to know who funds them. “National Bureau” makes it sound like it’s a government institution. It is not. Who funds CEPR? Who sits on the funding committees at these places, as well as NSF, and funnels millions into “research” that is benefiting only the “oligarchs.” Please people, stop watching what they’re saying and focus on what they’re doing. Stop being suckers.

  49. Tony,

    Since WWII, the world’s economy has grown to unforeseen and unimagined levels of prosperity due to “Amerika’s dominance and hegemony”. Yes, America has imposed globally it’s financial system which was based upon liberty, free markets, and the rule of law constrained by constitutional protections. This has been a very good thing. It is only because of those attributes of liberty and Capitalism that the world has prospered.

    Since the Clinton Administration however, we have seriously wandered off the true path of freedom, free markets and the rule of law. When the Clinton Administration and the Fed began violating the equal protection and property rights of Banks through its forced imposition of the CRA and subprime loans, our financial system began to unravel.

    The situation the banks found themselves is kinda like dealing with the Mob. Once you’ve been pulled into an illegal enterprise deep enough, there is no easy way out. You can fight it and get beaten up or you can sit back and learn to enjoy whatever advantages your situation has. Some bankers obviously learned to enjoy their predicament. You see once the Government Mob has ensnared you into crime, not only can they easily blackmail you, you in turn after a point can blackmail them back for their crimes. So after a while, you come to this understanding that there are no constraints on criminal activity by either you or your criminal partner, the government.

    This is where the financial system ended up, from the Auditors, to Bond Rating Agencies, to the loan brokers and appraisers, to the traders, to the investment bank management all the way up into the SEC and other government regulators, there was rampant fraud. The Rule of Law completely broke down.

    That is why the financial system collapsed. People involved in the system were at first forced into violating people’s rights, one thing led to another and pretty soon the criminality was rampant. In effect, the wholesale corruption collapsed the financial system.

    It does not help that our exalted Dear Leader persists in his assault on the rule of law with moves like his faux bankruptcy proceedings and other fun stuff.

  50. Could swear Rahm Emanuel played harmonica in a band called Zombie Oligarchs in Chicago in the 80s, so you could have trademark issues–seriously I think you found a book title there

  51. Interesting post, as usual. Some good comments as well.

    An observation. President Obama specifically singled out hedge funds as villains in the Chrysler bankruptcy.

    Who knows what the bankruptcy judge will decide. But Obama’s obvious irritation over the hedge funds might influence a tougher stance re: Wall Street.

    And that would be a good thing. A significant number of Obama voters have been waiting for him to put the hammer down on this crew. These voters want the place cleaned up, reformed and re-regulated.

    Chrysler may have brought the President one important step closer to doing what needs to be done.

  52. Interesting comment Paul. I agree with you that “Since the Clinton Administration however, we have seriously wandered off the true path of freedom, free markets and the rule of law. When the Clinton Administration and the Fed began violating the equal protection and property rights of Banks through its forced imposition of the CRA and subprime loans, our financial system began to unravel.” We divide however in heaping all the blame on the Clinton administration, and on the concept of this thing called a freemarket. Clinton may have uncorked the Pandora’s Box of corportist financial malfeasance
    and perfidy, – but a much broader, much more diverse population of Americans benefited during the Clinton terms, and there never was, is not now, and never will be freemarkets. All markets are crony capitalist markets at best, or the bandit capitalist markets we see today owned, controlled, manipulated, by the predatorclass, who gleans the bulk of all the profits.

    Secondly it is in my opinion the bushgov that destroyed America. No government in America’s sordid history did more damage to our credibility, our economy, our Constitution, and our society than the bushgov. The bushgov ghoulishly exploited the horrors and the dead of 9/11 to dismember, dismantle, and reengineer the Constitution and deceptively prosecute and profiteer wantonly from an illegal bloody costly war of choice based on OSP/OSI concocted fictions, myths, exaggerations, dodgey sexed up hype, and naked patent lies.

    The bushgov operated above, beyond, outside of, and in total disdain for the rule of law and the Constitution for eight years. The bushgov systemically perverted the rule of law, the Constitution and America’s core principle to conform to the tyrannical dictatorial policies that Ron Paul diplomatically labelled “soft fascism”, – but I frame unequivocably as blatant fascism, (rabid nationism, oligarchic rule, message-force multiplying of propaganda and disinformation with the specific intent of decieving the population, overt glorification and entrenchment of militarization (neverendingwar), overt and covert oppression of the population, ruthless suppression of dissent, or any questioning, challenging, or opposing the dictates of the government, grossly onesided favortism and government largess directed toward the predator class exclusively, the systemic promoting and advancing of policies that robbed and pillaged the poor and middle class, to feed the predator class, – and wanton profiteering). The bushgovs ruthless lawlessness and wanton disregard for the Constitution tarnished forever the image, undermined our credibility at home and abroad and ushered America, and the world to the brink of economic collapse.

    The last two elements particularly are largely responsible for the current economic crisis. Eight years of gutting, robbing, and pillaging poor and middle class to feed the superrich, the predatorclass poured sand in the engine of the American economy. All the wealth flowed to the top 1%, the poor and middle class lost confidence, lost wealth, lost bargaining power, lost jobs, lost earning power, lost representation in the government, lost the rule of law, lost rights, freedoms, and protections, – and naturally the heart and engine of the American economy, (a healthy posperous middle class) lost spending power and effectively collapsed, tugging the global economic system with it into the abyss.

    The bushgovs extreme lawlessness, corporatist, crony capitalist, feed-the-predatorclass, wanton profiteering, and revolving door policies forced and advanced absurd levels of deregulation, collusion, tax evasion, fraud, PONZI scheme’s. Compounding the horrorshow crisis was the bushgovs refusal to monitor or enforce existing laws, the shredding of regulations and hoisting of new laws and deregulation that encouraged and eventually entrenched systemic endemic lawlessness, wanton profiteering, and obdurate disregard for their fellow poor and middle class Americans into the markets and the financial system.

    I lay the blame for this economic collapse (and will gleefully defend this position) squarely at the hooves, I mean feat of the fascists wanton profiteers in the bushgov.

    That said, the Obama’ team – sans the fascism, tyranny, rank deception, blatant criminal conduct – is sadly – apparently continuing many of the bushgov’s corporatist, crony capitalist, rob and pillage the poor and middle class Americans to feed the predatorclass policies, and overt favoritism and largess toward select oligarchs and predatorclass cabals.

    It is this reality, and this reason why I do not see reform as a viable option. The predatorclass will not reform itself and they own and control the government. We either suffer, hazard and endure the status quo, wherein the predatorclass owns and controls the government, robs and pillages poor and middle class Americans, and funnels imponderable illgotten wealth into predator class offshore accounts – or more asymmetric options are employed to advance and secure the best interests of America’s poor and middle class.

  53. I think it’s more interesting to look at the commonalities between the two administrations than the differences.

    Much of Obama’s early funding came from Wall Street, and his vote for FISA [cough] reform in August and TARP in October were telling indications of his views on executive power and the proper role of the banksters, respectively.

    I grant that it’s nice not to be governed by insane people who openly advocate torture, but that’s setting the baseline rather low, eh?

  54. Tony:

    I am a regular reader, and irregular poster on Baseline, and agree wholeheartedly by your epistle… we are watching, without realizing, The End Of The American Century….. The Oligarchs control, and our inability to wrestle power back will result in the inevitable transfer of currency reserve status abroad, and thus our house of debt will inflate away along with our safehaven status…

  55. Tony-

    I didn’t mean to let the Bush Administration of the hook. Bush was a weak administrator. He had a “hands off” managerial style where he would often let Department Heads run some hare brained scheme without any supervision like he let Paulson and Bernacke do with the Bailouts. There were many bad regulatory events as a result but one of the worst next to the bailouts was the relaxation of banking reserves with no public debate,

    Repeating the” Bush the fascist” line is just so incredibly lame, though. Repeating a lie endlessly does not make it true. Please point out specific examples where Bush violated American’s civil liberties. The facts are that you can’t. Waterboarding Terrorists and tapping their phone lines don’t count. They are terrorists and don’t deserve the rights and protections of the American Constitution or the Geneva Convention.

    The problem with the financial system as Anne in a succeeding thread points out is criminality. The rule of law must prevail for the financial system to work. Without the rule of law, contracts become meaningless and unreliable, and commercial trades decline drastically as a result.

    Speaking of fascists, how bout your Boy Wonder Obama. He runs roughshod over Bankruptcy law and now he’s threatening the livelihood of bondholders if they don’t go along with his illegal schemes. And people wonder why the banks won’t let the Tax Cheat in Chief Timmy and childhood buddy, our exalted and righteous Savior, clean up their toxic assets.

    Prepare yourself for a long, deep “L” recession and recovery with these clowns in charge.

  56. I stand on the claims above which though incendiary, are factual and accurate descriptions of the bushgovs ideologies, policies and actions, and challenge you and or anyone to look up the word fascist, compare with the bushgov ideologies and policies and get back me.

    That said, – I appreciate that the term fascist is offensive to you Paul, and in the interest of good sportsmanship, I will refrain from using it again in the future on this site.

    We agree on the “L” recession, and what for me is a shattering betrayal of Obama campaign promises by his economic teams selections, and that teams overt favortism, shielding, and extraordinary largess (at the taxpayers expense) toward the finance sector, and select finance sector oligarchs exclusively.

  57. I am just a housecat, but I thought everyone knew that in any nation that needs to borrow large sums of money on a continuous, elected officials really represent the debt markets?

    Think I am going to go wash my tail…

  58. But was it ever so different: Kevin Phillips showed a long time ago that in America, laissez-faire has been a myth: government and oligarchs/plutocrats have been in bed for a long time. Yet, that did not stop Edison, Bell, the Wright brothers… Ford, Hughes, Watson… and more recently Noyce/Moore/Grove (Intel), Bezos, Bloomberg, Google, Gates, Jobs. That’s what makes America great, and it will continue, ossified dinosaur oligarchs notwithstanding!

  59. But was it ever so different? Kevin Phillips showed (see http://tinyurl.com/phillips-w-d ) a long time ago that in America, laissez-faire has been a myth: government and oligarchs/plutocrats have been in bed for a long time. Yet, that did not stop Edison, Bell, the Wright brothers… Ford, Hughes, Watson… and more recently Noyce/Moore/Grove (Intel), Bezos, Bloomberg, Google, Gates, Jobs. That’s what makes America great, and it will continue, ossified dinosaur oligarchs notwithstanding!

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