Global Crisis And Reform: Starting A Long Journey

I spoke Friday afternoon to MIT Sloan graduates (Reunion Weekend; slides attached), arguing that while we are likely done with a panic or “free fall” phase, we have only just begun to deal with the deeper problems revealed by the global financial crisis.

Think of it this way.  The United States has done well over the past 200 years or so because it was founded with strong institutions – rules and laws that mean we’re protected against government or powerful elites becoming too powerful – and over time these have generally improved, or at least not collapsed under pressure.  Yes, you can complain about (and aim to improve) many aspects of our society, but where would you prefer to set up a technology-based business or make any kind of productive investment or build your own human capital? 

Call this the rule of law, or protection against being expropriated, or sufficient constraints on executive power, but it adds up to roughly the same thing.  We strongly limited the power of the most powerful in our society – and this is in striking contrast to what happens in much of the rest of the world.

But over the past 20-30 years, we took our eye off this ball. 

The financial sector, under our noses, amassed enormous economic clout and mystique, and leveraged (pun intended) this into tremendous political power – both in terms of the belief that Wall Street can do no wrong, and that we should defer to financial “experts” both on the way up and during the crash (despite the fact their interests are not necessarily our interests).

Our institutions have been undermined by powerful people.  We’ve seen this before, of course, both around the world and also in the United States.   It’s Andrew Jackson vs. the Second Bank of the United States, or Teddy Roosevelt against the great railroad trusts and big oil, or the Pecora Hearings on the financial shenanigans that helped bring on the Great Depression.

Disproportionate power does not prevent economic growth; there are plenty of booms in banana republics.  But “banana booms” never prove sustainable.  You get reasonable rates of growth, perhaps even for a decade or more, but then a collapse.  Weak institutions are strongly associated with instability, crises, and lost decades.  In fact, a lot of what we think of as decisive macroeconomic policy – which the IMF, for example, traditionally focuses on – turns out to matter much less than how much you undermined sensible rules and norms during the boom.

When the crisis hits, you see the problems with glaring clarity – the political connections, the excessive and irresponsible behavior of financial elites, and the extent to which the executive has been captured by whatever branch of oligarchy was boosted by the boom.

The crisis per se does not weaken the powerful.  Sure, a few of them may go bankrupt, but this just increases further the concentration of economic power or, if you prefer, their market share.  It is for good reason that Jamie Dimon, ever the master of CEO semiotics, said to his shareholders recently: 2008 “might have been our finest year ever.”

Most countries are doomed to this oligarchy-boom-bust-oligarchy cycle.  The US broke free or at least temporarily broke away from versions of this cycle, arguably, three times already (Jackson, Roosevelt I, Roosevelt II).  Each time the reform process took 5-10 years; perhaps longer from start to finish.

Can we do it a fourth time and how long will that take?

By Simon Johnson

73 thoughts on “Global Crisis And Reform: Starting A Long Journey

  1. I think that depends on the amount of *pain* that everyday people are going to go through as a result of the misdeeds of said oligarchy and to the degree that media is independent enough to discuss the causes, results and the solutions surrounding the pain that everyday people are feeling in an honest manner. In short, I worry that we have achieved enough affluence that anesthesia, denial, and ignorance might prevail.

  2. The underlying reason for the consolidation of power in big corporations and the wealthy can be traced back to a single cause – the cost of running for elective office.

    Despite several attempts to reform election finance, the trend has been towards evermore expensive campaigns. In fact the Supreme Court has been instrumental in fostering this by granting “free speech” rights to corporations and knocking down attempts to limit spending.

    An unimportant seat in the house can now easily cost up to $1 million to win. This means that average people can’t afford to run for office, of if they do run they become beholding to those who fund their campaigns. This used not to be the case (or at least not as much).

    One of the reasons campaigning has become so expensive is that the only way to reach the swing voters who determine the outcome of most close elections is via TV. Once again ideas to make TV time free or nearly so in exchange for the license to broadcast have been thwarted, this time by the network owners who depend upon the revenue stream.

    Without electoral reform nothing substantive will change. We have a system where money votes, not people, and those with the money like it this way.

  3. A centralized financial power structure which has over relied on the worth of credentials per se and not rewarded/punished on the basis of good/bad judgment is, as suggested, becoming even more concentrated and oligarchical.
    It has a single point of failure however – the integrity of the US Treasury market. The fracturing of that may required for the fourth attempt to solve the problems

  4. The “growth” we saw in the last decade or so was built on a rotten foundation – mortgage brokers made huge amounts of money giving loans to people who could never pay them back. Those loans were bundled together in “innovative instruments” designed to “minimize the risk.” Wall Street made billions on these instruments.

    The fundamentals of business were completely ignored as we built that tower of toxicity – and today, those toxic loans sit, on the books of those many banks, clogging the pipes.

    Or maybe they’re not toxic after all – maybe the banks’ interest in snapping up more of these assets with Geithner’s now-dead PPIP shows the marketability of toxicity after all – maybe the executives weren’t “stupid” or “greedy” in the drive to own more bad debt – maybe it really was a wise investment.

    In which case, TARP was a trillion dollar boon for most banks and a catastrophe for everyone outside of Wall Street (and Lehman Brothers).

    When business people are rewarded no matter what their performance, we’ve removed any incentive for them to perform at their peak. And look where we are today – multiple “too-big-to-fail” companies enduring the failure of bankruptcy – multiple sectors in crisis – a banking community that has fallen off a cliff – health care costs that threaten to ruin each and every person in America who requires health care.

    There are millions of people now who have no income coming in; who will lose their homes, their future, their dreams because we invested heavily in recent years in Wall Street salaries, not in companies seeking to innovate new products that provide solutions to problems or meet consumer needs.

  5. The whole problem of campaign finance would not exist if the general populace actually cared about government and wanted to participate in it, both during elections and between election cycles. Most people aren’t citizens of the United States, they just happen to live here.

    The only way they get people out to vote is to give the election some sort of entertainment value, and that costs money to manufacture. This is kind of the catch-22 of reform. You have to keep the scandal alive to compete for people’s attention. And you’ll get whatever reform suits their emotional response.

  6. Why, exactly, should “ordinary people” need to endure the lion’s share of the “pain”? The problem (ccording to SJ) seems to be excessive concentration of wealth or power. This implicitly argues that those who currently have that wealth and power should be the ones to bear the pain. Not “ordinary people”.

    (To be polite, I relegated the longer version of my response to comments below.)

  7. Some countries (like Australia) have mandatory voting. If you fail to vote you pay a fine, like a parking ticket. Voting in a democracy should be seen as an obligation.

    I won’t go into all the objections raised by libertarians, but they are easily dismissed.

    For example, one can have an option of “none of the above” or “abstain” to register a protest, while still voting.

  8. This post seems (at first read) internally inconsistent.

    The counterarguments that will be raised to de-concentrating wealth and power are _exactly_ the arguments that SJ articulated with regard to “rule of law” and “expropriation” by government. Those with power and wealth will argue that they acquired that wealth “fairly”, according to the rules of the game as they were defined.

    SJ cites three prior episodes of reclamation of democratic power. In ALL three episodes, the language of action did not rest on the notion of “rule of law” or “expropriation”. It was populism.

    Andrew Jackson was a populist.

    Teddy Roosevelt was a “progressive”, and the progressives were the direct heirs of the populists. This remains true even though Roosevelt was a Republican and Jackson was a democrat. His populist tendencies were confirmed when he founded the progressive party _after_ his presidency.

    Franklin Roosevelt was a populist, as described in this story on the “revival of american populism”

    Looking at the Populist tradition, none of the three presidents (nor any spokesman of the populism movement in general) has blamed the failure to reform on everyday people. The problem has been excessive political influence of elites, and a lack of political will to use the tools of power (i.e. government) to alter the rules so they disfavor accumulation of wealth/power by the elite.

    Also, in ALL three cases, it has been the _President_ which has led the transition. Teddy expressed this best in coining the term “bully pulpit”.

    The language of Populism stands in _direct_ contrast to the conservative language of the “property rights” faction, which argues that these new rules are de facto an expropriation of legitimately acquired property (and furthermore discourage future investment).

    Although I find myself agreeing with SJ’s article, I’m confused. I am well aware of the research linking property rights to long term growth, but I’m also aware of research linking flat wealth distributions to long term growth. (And there’s conflicting research when these two principles come into conflict; in some Latin American cases land reform has led to long term growth in spite of American persecution of reformist governments; but land ‘reform’ has not proven so successful in certain African countries.)

    So at a superficial level, SJ’s current post seems internally inconsistent, indeed it’s almost self-contradictory in the lanugage it uses. I understand that SJ is trying to fuse together the populist and property rights viewpoints, but I’m not sure it works.

    There’s a group of people who would say that you are a populist, or you are NOT a populist. You can’t play on both teams. Some of the criticism of Obama has expressed just this sentiment.

  9. Actually, the problem of campaign finance reform would still exist, and mandatory voting does not completely change that.

    Much of the swing vote in the US is notoriously fickle. Even after 12 months of loud campaigning, and 24/7 news coverage, a substantial number of people remained undecided. And even “decideds” switched candidates, such that we saw significant fluctuations in candidate leaning right up to election day. Only 3 months before election day, Obama was behind.

    Moreover, campaign finance matters – even the best candidates need to get their message out, and the first ammendment guarantees that they can pay money for that privilege. (Campaign messaging is classified as the highest order of protected speech, that which is political in nature.)

    Even if everyone voted, that doesn’t mean that everyone would put effort into researching candidates and thinking through positions. And even if they did, they still wouldn’t necessarily make good decisions because money helps control the flow of information and individual ideology acts as an information filter.

    The internet may be helping this situation (increasing transparency, increasing speed of response to misleading information), but also may be hurting it (increasing self-selection of information sources and fragmentation of political orientation).

    Interestingly, our much-worshipped founding fathers did not think highly of the ability of commoners to make political decisions. Only wealthy white (often Christian) males were permitted to vote.

    It’s a bit of a conundrum.

  10. Property rights, in conjunction with our entire set of constitutional rights rigorously adhered to and the transparent rule of law are the strong institutions we need to create strong economic growth and wealth creation.

    In the abstract, people can argue that populist methods lead to flatter wealth distribution. In reality, they do not, and populist programs almost always retard economic growth.

    What really happens at the nitty gritty level of government is that socialist or so called populist initiatives must be coerced to be enforced. This coercion leads to greater and greater coercion and corruption, and attracts those individuals whose goal is to exert their will over others. These power mad individuals strive for greater and greater power and to create power centers around themselves. Alliances of these control freaks often occur to further their gaining of power and thus concentrations of power are formed.

    One only needs to look at the deep blue cities. These cities are almost all now one party governments. The public employee unions, in conjunction with the trial lawyers and environmental groups control these cities with an iron hand. Individual initiative in these cities is not only discouraged but punished. Jobs leave, the economy declines, the middle class is hammered and corruption rules. To get anything done, a payoff is likely required. And the distribution of wealth becomes skewed to the poor and rich interest groups.

    Take a look at Los Angeles, Thirty Five years ago, it was a booming, entrepreneurial city. It was the place for new ideas and where great dreams came true. Even though it was home to the rich and very famous, prices of real estate in Beverly Hills were not that much more than middle class areas. The middle class ruled. Schools were good. The populace was well educated. There were no dilapidated ghettos. Minority areas were significantly better than other populous cities. Services were good. Rents were low. Life was easy.

    Then the socialist/populists took over. Mountains of new regulations and restrictions were enacted. Taxes increased. Growth slowed. Crime increased. The government became less and less responsive. Services declined drastically. Schools went bad, and whites began to leave. Slowly but surely, the entrepeners stopped coming and stated leaving . Corruption flourished. It became harder and harder to run and expand a business. The economy stagnated and then declined. Jobs left. Where just a few years before there were thriving middle class neighborhoods, there were now ugly minority ghettos. The gap between the rich and the poor mushroomed. LA quickly under the socialists became a city where the middle class no longer could afford to live.

    What happened to LA is what happens when the government turns to populism and socialism. Decline and ruin is what you get, and btw a huge gap develops between the rich and the poor. The rich and powerful will always find a way to stay on top, even under the socialists. The rest get raped.

  11. The word “leveraged” isn’t a pun. It’s not even figurative or allegory or metaphor. It’s simply semantically correct.

    The fact that you can “lever” in financial power and “lever” societal power isn’t some accidental coincidence. It’s what leverage means.

  12. OK, Paul, are you really suggesting that the decline of Los Angeles, which is real, and the decline of California, which is real, has nothing to do with the financial handcuffs imposed by Prop 13?

    Prop 13 took away local control of taxing, forced all tax collection onto income taxes (which go down in hard times when the gov’t needs money to spend), and allowed the State to decide what money it would give back to local governments that they had collected.

    California and Los Angeles have many many problems, not just Prop 13, but populism and socialism aren’t really the key.

  13. Very curious, Simon & James, to have your take on the lengthy OpEd in today’s NY Times from Sandy Lewis & William Cohan. I take a good sign these questions are being asked.

  14. The 2008 presidential campaign cost $1.3 billion, which works out to $5.60. per eligible voter. I don’t think this is too much money. This election was hugely important, and disseminating information on candidates costs money.

    You can argue that the actual information itself is often of little value, and I would agree, but this is not a result of too much money being spent, but rather a reflection of the ignorance of many voters.

    Does money “vote”? Yes, of course, as money is a measure of power and influence and power and influence win elections. But electoral reform won’t change that fact.

    I would support mandatory voting, though. It might make the electorate take a little more interest in things.

  15. I think you misunderstood what I wrote. I didn’t say that everyday people *should* go through a lot of pain and suffering. What I meant was that until they *do* go through significant enough pain, there will not be enough impetus for change and reform. I’m not viewing pain here as *punishment*, but as a signal that something needs to be done to stop it and to prevent it in the future. Americans really do believe (in general) that “if it ain’t broke, don’t fix it”. Well, it’s got to really break for it to get fixed right, and I’m wondering if the worst may be past we are looking at nothing more than a bunch of band-aids for treatment.

  16. Exactly!!!!!

    The Golden Rule – the guys with the gold (and no scruples) makes the rules. But they could care less about our (or their own) long term viability. Or more likely they’re just too stupid to think in those terms or understand the devastating impact they’re having on the long term viability of the country they happen to live in. Maybe they’re just planning on moving somewhere else & sucking them dry next. My guess is that they’re well on their way to getting what’s coming to them. That includes Bernanke , Geithner & Paulson & hopefully all the other pseudo-intellectual fat cats.

  17. The idyllic description of LA before the “socialist/populists” took over is simply incorrect. It ignores, for example, the race riots of late 60s and 70s…

    Far from increasing, violent crime rates have _dropped_ in the last 3 decades, with much of that drop in the 1990s. (the per capita drop was even steeper)

    In fact, violent crime has continued to decline even during the recession.,0,1555647.story

    Generally, violent crime rates in LA mirrored the national pattern, which saw crime rates spike from 1980 to 1992 (Reagan and Bush I), then fall dramatically from 1992 to 2000, and hold level.

    Perhaps you could provide some statistics on how Los Angeles has become so much worse to live in over the last 35 years, particularly in regards to other cities that have similar immigration challenges?

    The most commonly cited complaint, cost of housing, largely reflects the fact that people _want_ to live there. Indeed, the shift back _into_ the city in recent years has driven a debate over whether “gentrification” is a good thing in LA.,0,3921841.story

    If California has a problem, many would argue it’s partly because it has received only $0.77 in federal spending for every $1.00 in federal taxes it paid, unlike states in the (neoconservative) deep south that received $1.20 or more for every dollar in taxes they paid. Over decades, that’s a massive transfer of wealth.

  18. It is possible that Obama’s “communitarian populism” can resolve the contradiction you describe by protecting both Main Street and Wall Street with a positive vision, in contrast to populism’s confrontational stance that is rooted in anger. We need more time to tell if Obama’s approach might work.

  19. Simon asked: Can we do it a fourth time and how long will that take?

    My thoughts: Do it in five years if you can ! Take back your democracy from the vested elites and make good your social contracts.

    The election of Barack Obama sends a powerful message. It elevates hope. The capacity to dream and accomplish what many consider impossible.

    The world will be cheering you on !

  20. Woe We Common Rubes.

    Again I feel a bit out of my league. At least as far as thinking my post may have an answer.
    I am of course one among the masses. I would point out though I am an aging once threatened with expulsion from school because of my hair length, notreallylonghair, I am also not a socialists in the negative connation popular today. I am or was a trusting mutual fund investor. Thus the we, and the rube. My High School was a Nebraska small town it was 1971.

    I have been reading here and there searching for information on the —economy –. I tried to think of a verb to describe what I think has been done to the economy. I am left only with that it is and was, something that was done.

    I read George Soros’s ‘The Crash of 2008’ with a bazaar theory of reflexivity that left me giggling. Gee so we effect the markets when we invest or not in, in ways we don’t know. Well he is the Billionaire. My giggling turns to shutters when I contemplate what the cost of our political economy is.

    A couple of quotes from the book are below. Again out of my league a bit but Soros argues Popper argues there is not final scientific proof for anything. I am greatly generalizing. All you can proof is what is not. This leads towards the more severe a test the better the remaining generalization. Soros however offers his own ‘giggle PROOF giggle’. Here I get more confused-er and confused-ered. Soros says his proof that a severe test proves the value of generalization is a market bet he made.

    His proof was success in search of a personal explanation, the severe test was not his judge of the business model he sites, it was of the political economy which is what has taken over the real economy. He who make some of his billions by manipulating short sales, international money markets and what ever he could. Yet he is the billionaire.

    I am also reading William Cohen’s House of Cards. I guess this rube thinks some of the unforeseen affects on the economy were indeed ‘exactly’ the outcome that the players were in the end aiming if not fully aware or willing to admit their aim, aiming at. As this ‘rube’ sees it anyhow.

    Later in the book Soros mentions the ‘Agency Problem’ which appears to me similar to ‘moral hazard’. I am not sure they are the same. For my purpose, or what I want it to be, I would go further than Soros statement that it’s an irony that lead similarly to the failure of the mortgage markets.

    Our top of the line, ultimate Capitalist Economy, especially those who had control of it, lead to expecting a socialistic ‘INSURANCE’ of their manipulations. What is dumbfounding to this rube is the extent that the ‘insurance’ on the bad loans, were used to make more loans good and worse. If the banker in population 390 Shickley NE did this he would be in jail. Yet before it failed it was and remains the best there was. Political Capitalistic Economic Inventions that lead to capitalinsuranceSOCIALISM. I mean before the fall. What actual Capitalism has to do now is join together to try and fix not just this mess but the process.

    If a small few actual American democratic regulations lead to slower real growth the loss would seem in hindsight to be only have realized better bottom lines.

    Not sure how to regulate how much money is given and spent to elect our governing officials. Or the free speech of all the issue issues advocates. How about whatever you raise and spend you have to give an equal amount of time/dollars to the opposing views?


    Many features of Popper’s scheme have been criticized by professional philosophers. For instance, Popper maintains the more severe the testing the greater value of the generalization that survives it. Professional philosophers question whether the severity of tests and the value of generalizations can be measured. Nevertheless, Poppers assertion makes perfect sense to me, and I can prove it by invoking my experience in the stock market. In the savings and loan crisis of 1986 there were grave doubts whether a mortgage insurance company, Mortgage Guaranty Insurance (nicknamed Magic) would be able to survive. The stock fell precipitously, and I bought it in the belief that its business model was sound enough to withstand a severe test. I was right and I made a killing. Generally speaking the more an investment thesis is at odds with the generally prevailing view, the greater the financial rewards one can reap if it turns out to be correct. It is on these grounds that I can claim that I accept Popper’s scheme more wholeheartedly than professional philosophers.

    pg 36 & 37
    PG. 193
    In the next two years, the government will play a disproportionately large role in the economy, because it will be almost the sole source of new financing. It will come to own a significant part of the banking system and, through the banks, a significant stake in commercial real estate. It will have a major say in the motor industry, but hopefully not in too many others. It will have a deep involvement in the residential housing market. This will give rise to a gigantic agency problem—the problem that arises when agents put their own interests ahead of the interests of their principals. The agency problem has been the undoing of socialism and communism. It would be a wonderful world if people contributed according to their abilities and received according to their needs, but in practice, those in charge tend to give precedence to their own and their loved ones’ needs. Ironically, the agency problem has also been a major factor in the undoing of the housing market in the United States. When investment bankers repackaged mortgages in CDOs, they thought they were reducing risk through diversification fact they were creating risk by separating the interests of agents from the interests of the owners.

    PG. 193

  21. Noting here I am a Canadian.

    I joined this blog because I am trying to understand what caused the economy — to tank again. — This after Enron / WorldCom / Arthur Anderson / deregulation of the US energy sector and hearing of failures in the US energy grid and a summer or two of rolling black outs.

    I guess I am exercising my democratic right to be informed.

  22. Amen!

    Your second to last paragraph identifies another part of the Oligarchy: Insurance and Drug manufacturers. They are also a big part of the political mess.

  23. Any individual, family, tribe, cult, corporation, or nation that abuses and abondons children is repugnant and doomed to fail.

    Theoretical socialism for the vast of the people is far superior in terms of economic and legal equality than the socalled freemarkets, or capitalism.

    Confusion and distortions are compounded the glaring fact that there is no pure soicialism, just as there are no free markets. The everwidening divide between thehaves and thehavenots in Amerika undermines and nullifies the core principles or our “unique experiment in democracy.” We cannot have a democracy aligned with the codes and principles expressed in our Constitution, and maintain the system we have now, wherein the predatorclass and select elites abscound impoderable fortunes through illicit means, which are employed to capture or control the mechanics of the government. We are either a democracy wherein the authority of the government is derived from the consent of the governed, or we are not. What Amerika is today is an corporatis oligarchy or more accurately a kleptocracy.

    Wall Street predatorclass parrots and message-force multipliers brute the hilarious fiction and pathological LIE obdurately proclaiming or rather dictating that FALSE assertion that “they acquired that wealth “fairly”, according to the rules of the game as they were defined.” This assertion and lynchpin of the predatorclass or elites justification for robbing, pillaging, and mercilessly oppressing the poor and middle class is a patent naked LIE! There is an old Sicilian addage: “Behind every great fortune is a great crime”. Nowhere is this addage more obvious and glaringly apparant than with the systemic and endemic criminal conduct of the predatorclass Wall Street oligarchs criminal, and the selective blindness, shielding, cloaking, and perpetuating of that systemic and endemic criminal conduct by the socalled regulatory agencies, and government officials the predatorclass oligarchs have captured, purchased, bribed, and now own and control.

    “Taking our eyes off the ball” is a grotesque understatement, or intentional mistatement.

    Amerika has shapeshifted over the last 20 or 30 into a nation and a government of the predatorclass, by the predatorclass, and for the predator class.

    All you erudit statiticians and academicians can examine any indicator of America’s poor and middle class losses in the time frame for proof. Lower wages, lost bargaining power, amongst the worst healthcare and educations systems in the first world, the aforementioned wildly expanding divide between thehaves, and thehavenots, the dumbdowing, or numbnoneness of the collective population into ignorant realityshow, sensationalist, pornographic aborbed zombies robopathical chasing after false images of worth in the form of unaffordable McMansions and gass guzzling Hummers.

    Unless and until our leadership (and the Obama government has exhibited no inclinations along these lines to date) musters the courage and determination to honor, enforce, and uphold the RULE OF LAW, the Constitution, and the core principles that formally defined our once more perfect union, – America is doomed to join all the empire of the past in a rapid collapse into ruin, rubble, and revolution.

    Iredeemable debt instraments may have some value as an exotic highly investments, – but they cannot form the bulk of our financial system. I would like some explanation of how, (outside of fraud and PONZI schemes) debt and irredeemable debt can majikally be morphed into and investment product. Please explain!!

    Wanton lawlessness, abuse, incompetence, and catastrophic FAILURE cannot be countenanced in any business, (especially the socalled TBTF oligarchs) or any individual, and they certainly cannot be rewarded with trillions of the peoples dollars for wanton lawlessness, abuse, incompetence, and catastrophic FAILURE. No individual, and no corporation (particularly the socalled TBTF oligarchs) is above or beyond the law.

    Any individual, family, tribe, cult, corporation, or nation that abuses, abondons, or deprives its children (exactly what Wall Street, the government and Amerika is today) deserves whatever fiery and hell the predatorclass hurls us into.

  24. Thanks for the head’s up, Chubbco. It’s a good piece.

    In answer to Simon’s question concluding his post, we can do this a fourth time using the laws and prosecutorial powers available now. It is largely a matter of crafting a multi-pronged strategy for exposing obvious wrong-doing and taking action in the criminal and civil courts. A residual benefit would be new law/precedent if handled well.

    Given our president is a constitutional scholar and at least the intellectual equal of Andrew Jackson, TR and FDR, he should be able to navigate these shoals forthwith.

    A Pecora-style round of Congressional hearings, led by people familiar with financial markets and the law, would be a good start, as Simon noted a couple of months back on The Hearing ( Bear in mind, to be even remotely effective, a combination of experienced financial engineers + prosecutors needs to be on Congress’s side: As surely as night follows day, the surviving banks — including the former investment banks — will engage their best and brightest in the effort to retain whatever advantage the chaos and uncertainty has allowed them to realize during this disaster.

    One thing the Administration has to do is prepare the markets for a year or more of protracted hearings, during which much information regarding the strength of the balance sheets of these banks and former investment banks will become public knowledge. Along with the sweetheart deals done in the dead of night in the waning hours of the Bush Administration ( This likely will cause much of the trading-market activity to retreat to the sidelines as all of this is made public. And it likely will cause another revaluation of banks’ creditworthiness, which may result in another sell-off of individual bank stocks, and early termination of derivatives contracts by non-bank counterparts. Even tho the markets likely have discounted the profound weakness in these banks’ balance sheets already, this has been done only by approximation — real data likely will result in adjustments are are volatile vis-a-vis the equity of these stocks. Indeed, the announcement of such hearings likely will cause the implied volatility of the options on the bank stocks and the various indexes that track bank stocks to increase significantly, which is a barometer the Obama Administration and Congress needs to monitor closely.

    Still, this is a process that must be undertaken. It is vital to our survival, if we do not want our government and economy to re-trace the evolution of Rome at the beginning of the Caesars — Julius and Octavius, in particular. This is a critical juncture in our history: Life actually was very good for the average Roman under Augustus — he was revered as a god-given saviour to the Romans at a time of upheaval, and he led Rome to its Golden Age. But it was an age that was not free. Once-free citizens became subjects of a dictator, albeit an enlightened despot.

    Maybe the US is at the end of its run as the longest-surviving democracy, and maybe we are an historical outlier. And a modern-day outlier. One could argue that every year we survive as a democracy is a year further into the far right tail of history’s implied and actual distribution of forms of successful governance: Maybe there is an historical mean-reversion toward autocracy or oligarchy, given the natural tendency for power to become concentrated. I believe we’re about to find out over the next few years.

  25. For those talking about voting as a mechanism for reclaiming some power: maybe. If you can’t choose candidates who will make changes, then what’s the point?

    Plus, have you forgotten how easily the GOP disenfranchised a substantial number of voters in at least a few states (FL, OH, probably a few others) in 2000 & 2004? In fact, did so effectively enough that it swung the 2000 presidential election.

    The GOP did so, right out in the open, for all to see. And the Supreme Court (and that was before Bush appointed even more right wing/pro-corporation judges), upheld that disenfranchisement in a decision that: (1) was like the Dred Scott decision in that the S.CT did not really need to make it (could’ve left it to the state courts to decide, state Supreme court had decided a recount was needed i.e,. state’s rights which supposedly the GOP supported); (2) has since stated that the decision is not to be used as precedent. Just a one shot deal designed to place Bush into office.

    A few Congresspeople did “investigations” and nothing happened. For all I know, the pro-conservative GOP corporation is still making the easily rigged electronic voting machines & states are still paying for them & intending to use them (sorry, I can’t remember the name of the manufacturer). The MSM has ceased to cover the issue. So what’s to stop it from happening again? What’s to stop a determined state GOP (or Dem) bureaucracy from once again deregistering & disenfranchising thousands (or even millions) of eligible voters. Because the people w/power think they might vote the “wrong” way?

    Sure seems easy for people to forget just how little the members of the Bush Administration & many state members of the GOP cared about the rule of law for at least 8 years. And how little has been done since then, to try to stop it from happening again.

  26. Other countries manage to hold elections and the candidates manage to get their points across at much lower cost. In fact many European countries have restrictions on how much can be spent.

    The problem with the current US system is not the absolute amount (although that is a disgrace), but that it is spent disproportionately by those who represent the big money interests.

    There are many steps that could remedy this, for example giving free air time to candidates. If a long enough segment was provided candidates could detail their positions rather than depending upon sound bites and emotionally laden ads to influence voters.

    Real policy positions take time to explain, the present arrangement is designed to make voters less informed, not more so.

  27. I know that it is a difficult process, but why do we always avoid taking on the Founder’s mechanism? I have no idea why a rationale justice would think that money is the equivalent of free speech, but if We the People decide we want limits on money in elections we should add an Amendment. It should simply say that “Money is not the equivalent of Speech.” Just as I think that if the government wants to be to wire-tap Americans or anything else they have tried to sneak by with the Patriot Act – it requires having to go through this arduous process. If Americans want these changes – there is a way.

  28. Prop 13 helped California. The line that Prop 13 handcuffed California is total nonsense. The California State Budget has mushroomed in growth nearly every year for the last twenty. Tax revenue has risen much faster than population, income growth and inflation combined because taxes have increased, and because real estate values have also risen . But that revenue growth is still not enough to keep up with the demands of the special interests.

    The California legislature is wholly owned by leftist special interests and spends what ever these parasites ask them for. The legislature has totally ignored infrastructure or tax relief, and is not responsible to the general public one iotta. With the public employee union campaign funds, grotesque gerrrymandering, the media’s biased reporting and the ” one man, one vote” Senate, California State Elections have become a complete joke. California functionally is a one party State, with no checks and balances except for the initiative process. Arnold was the exception to the rule, because he was a popular celebrity.

    Crime rates in LA are rigged. Recent drops in crime statistics are because of the way, crime is now counted.

    In 1970, the average price of a home in LA County was $22,000, while the average income was approximately $10,000. Just before the collapse, the average sale price for a home grew to over $500,000, while the average household income was below the national average of $50K. In LA County from 1990 to 2006, there was new housing built for only 400,000 people, and that does not count the amount of housing need to be demolished to build that new housing.
    (There is little raw land available or allowed for development). Over that same period, officially LA County grew by 800,000 people and unofficially in the millions. Two and three families to house have become common. LA officials have actually sued developers on large available parcels for building large developments. LA officials have not let the necessary construction of new units to keep pace with demand, hence prices went out of sight.

    As far as LA’s race riots, there is a problem of expectations. LA in the old days held great promise and expectations for minorities weren’t met. When Kareem Abdiul Jabbar came to UCLA in the mid 60’s and visited the local hood, he exclaimed ”
    ” What ghettos? These are not ghettos!”. LA has long had nice black areas like Baldwin Hills, Leimert Park and the West Adams district.

  29. How about a voting lottery? Everyone who votes is entered. Give several prizes. That should increase turnout. Besides, it’s the American Way! ;)

  30. Speaking of the founders and the internet, I think that the internet provides close to the ideal of freedom of the press, as they experienced and envisioned it. Presses were small, abundant, and inexpensive to use. It was almost as easy to be a pamphleteer then as it is to be a blogger now. :)

  31. I concur with Shiller’s
    “The financial crisis that afflicts the country is largely a result of speculative bubbles, built on false hopes, in the housing and stock markets.”
    I reckon that most all economists agree, but won’t say so unless cornered, because it’s too embarassing to the profession — since very instructive real asset price histories have long been kept little-apparent! Just look at the first chart here:
    Fooling the people got us here. To date, saying so is largely avoided, for two reasons: blame-dodging; and later, “Fool ’em again!”.

  32. or a negative lottery. if you don’t vote, you might get appointed to a government post.

  33. Laissez-faire buyers beware!

    It rhymes. I have quickly scanned Simon’s Atlantic Article ‘The Quiet Coup.’ Well gee I’m not feeling better. I have also read Paul Krugman’s The Return of Depression Economics. I’m trying to figure out from ‘House of Cards’ if Bear Stearns could have survived, did they really have enough assets if the market of their fellow financiers had not turned on them? Whether in the long run that the best may have been a mellowed the melt down.

    Krugman talks about hedge funds in chapter six, page 120:

    … “Hedge funds don’t hedge. Indeed, they do more or less the opposite. To hedge, says Webster’s, is “to try to avoid or lessen loss by making counterbalancing bets, investments, etc.” That is, one hedges in order to make sure that market fluctuations do not affect one’s wealth.

    What hedge funds do, by contrast, is precisely to try to make the most of market fluctuations.

    Page 121:
    …. “Hedge funds with good reputations have been able to take positions as much as a hundred times as large as their owners’ capital; that means that a 1 percent rise in the price of their assets, or decline in the price of their liabilities, doubles that capital.”

    Page 128 and 129:

    … “There are, for obvious reasons, no hard numbers on just what happened in August and September of 1998, but here is the way the story is told, both by Hong Kong officials and by market players. A small group of hedge funds—rumored to include Soros’s Quantum Fund and Julian Robertson’s less famous but equally influential Tiger Fund, although officials named no names—began a “double play” against Hong Kong. They sold Hong Kong stocks short—that is, they borrowed stocks from their owners, then sold them for Hong Kong dollars (with a promise to those owners to buy the stocks back and return them, of course—as well as a “rental fee” for the use of the stocks in the meantime). Then they traded those Hong Kong dollars for U.S. dollars. In effect, they were betting that one of two things would happen. Either the Hong Kong dollar would be devalued, so that they would make money on their currency speculation; or the Hong Kong Monetary Authority would defend its currency by raising interest rates, which would drive down the local stock market, and they would make money off their stock market short position.

    But in the view of Hong Kong officials, the hedge funds weren’t just betting on these events: like Soros in 1992, they were doing their best to make them happen. The sales of Hong Kong dollars were ostentatious, carried out in large blocks, regularly timed, so as to make sure that everyone in the market noticed. Again without naming names, Hong Kong officials also claimed that the hedge funds paid reporters and editors to run stories suggesting that the Hong Kong dollar or the Chinese renminbi, or both, were on the verge of devaluation. In other words, they were deliberately trying to start a run on the currency.

    Did the hedge funds actually conspire together? It’s possible: while an explicit agreement to manipulate the price of, say, Microsoft stock would land you in jail, a comparable conspiracy against the Hong Kong stock market (which had about the same capitalization in 1998) apparently falls through the legal cracks. It’s also possible there was no contact at all. But more likely there were hints and winks, a few generalities over a round of golf or an expensive bottle of wine. After all, there weren’t that many players, and they all knew how the game worked.
    >>> “Most countries are doomed to this oligarchy-boom-bust-oligarchy cycle. The US broke free or at least temporarily broke away from versions of this cycle, arguably, three times already (Jackson, Roosevelt I, Roosevelt II). Each time the reform process took 5-10 years; perhaps longer from start to finish.
    Can we do it a fourth time and how long will that take?”
    By Simon Johnson<<<
    Financiers’ Oligarchy? Do we have to decide that taken to its most extreme Capitalism becomes Oligarchy? (To put it nicely.)

    I think we Mutual Fund Rubes might say, NO, There Ought to be a Law! And yes we will. I think the populists furry would be raving anger if most Americans really knew whatever it was that happened and didn’t have to worried about the countries future than figuring it out. If for no other reason than the engine of American Capitalism needs fuel, I don’t mean oil, and you have to have the rubes dollar before it can be invested to grow. How long, this time, is different.

    I said in my earlier post I was one of the masses; not a socialist, but a mutual fund investor. I am also a member of a Labor Organization. Long-haired Labor there is a phrase to coin so to speak. People who really know what they are talking about mention globalization of both financial and labor sectors, that globalization will have to be in the how long this time.

  34. “Crime rates in LA are rigged. Recent drops in crime statistics are because of the way, crime is now counted.”

    I’m sorry… how so? Are national crime rates likewise rigged? You dismiss thirty years of crime statistics with a flippant comment that they are “rigged”. Can you, perhaps, offer some evidence?

    Regarding the one-party system in California, I sympathize with California. In Boston, one-party rule has perpetuated a considerable amount of corruption and incompetence. Sadly, however, every time we flirted with a non-Democrat, we suffered the spectacle of that individual sucking up to the Worst President in the History of the United States ™. California likewise seems to crave a second party, just not the second party they currently have. The Governator’s fortunes were largely linked to how closely he chose to link himself to Bush.

  35. I would have the thought that the real “American Way” would be to do it like “Pop Idol” or “So You Think You Can Dance”.

    First, mass auditions in 8-10 American cities, which pulls in lots of jokers and no few talented policy wonks, politicans and demagogues. Skim out the frivolous ones in LA or Las Vegas in an intense politician’s boot camp, until you have a top 20.

    Then, for the main show, each contestant performs some Presidential activity under the tutelage of some former President, statesman or legendary staffer (a debate, a State of the Union speech, a simulated crisis handling) and is critiqued by a panel. At the end of the show, everyone in the states can vote for who they like the most (as many times as they like). Bottom two voted. All on live TV, of course.

    “So You Think You Can Be A Presidential Idol?”

  36. I don’t think it’s a given that the growth of the last decade or so was illusory, or that somehow it has now been all undone. It’s an empirical question, which to my knowledge has not yet been answered.

    All this financial jiggery-pokery ought to have, to some extent, lowered the cost of capital of American/global firms and this will have created some value. Plus there is all the economic activity created by incomes in the financial sector, and amongst consumers who used their house prices to prop up their spending, which had a knock-on effect in terms of matainig business confidence at semi-decent levels for years. That’s all on the plus side.

    Now on the minus side, you have the contraction of consumber spending, contraction of investment, expenditure of bailout funds and a few other things.

    Is the minus side bigger than the plus side? As I say, it’s not a priori, it’s an empirical question.

    It would be fun to see a back-of-the-envelope type calculation for this.

  37. “Can we do it a fourth time and how long will that take?”

    Not on our current trajectory.

    Not a chance.

  38. The main point of Prof. Johnson’s article is right on. I don’t think Jackson and Teddy Roosevelt did much to fight concentrated power. Robert La Follette did– as did many other progressives of that era—including those who were politically active in the New Deal. The argument here is a Populist one, right from the Ocala Platform. Those words still ring true. The last President to ingenuously use populist rhetoric was Harry Truman, running for re-election in 1948. Obama has espoused an ersatz populism but has done nothing to mobilize the discontented…he is too busy collecting campaign funds from the big banks and top manufacturers in this country. Show me one specific statement that Obama has made identifying actual people and companies that have exploited consumers and workers, a statement that explains the mechanisms of exploitation. As long as we have people like Geithner in Treasury we have a tool of the big banks running the show, with the blessing of the President who appointed him.

  39. California wasn’t a one-party state as recently as the 1990’s. Curt Pringle was the Republican Speaker of the Assembly as recently as 1996. It was only when the Republicans started pushing anti-immigration propositions that they lost all support in the Hispanic community, and lost the ability to win enough seats to win the state assembly.

    That said, for a “one party system” it is truly notable that for 21 of the last 26 years the governor of California has been Republican — and has not had a veto overridden.

  40. My dear, dear man, what a genius you are, and no one is listening. Campaign finance reform is a given. All campaigns should be publicly financed, no dout whatsoever. And yes, taming the present oligarchy may never happen. Not only are they politically entrenched, with planted influence withing the administration, but also with an almost endless supply of lobbying power.

    Take health care reform. Oh, how we need it. And according to the report just issued by the Council of Economic Advisors (White House), the single payer option is by head and shoulders the best option. But, check out Congress: It is very unlikely to happen, although now that this report has been issued, Obama’s “we can’t start from scratch” may be a non-starter. It just could happen, if the main stream media incites the public to move against Congress (the election cycle is only about six months away).

    But the central issue is going to be difficult to tame: the climate is ripe for reform, but too many have been bought for serious reform to happen. And, more importantly, this is true globally. Only China remains “flush” but even they can’t stem the tide.

    And, we are confronted with major environmental problems, and international tensions that are likely to drain the major governments of resolve to come to enough grips to overcome the oligarchs.

    I see this as a never ending downward spiral, unfortunately. And, the results will not be pretty!!

  41. Weren’t Bernanke & Geithner’s jobs for the last how many years supposed to be preventing a financial crisis like this from happening? Wasn’t that what they were being paid to do? They undoubtedly were asleep at the wheel. Why not charge them with malfeasance in office? Think that would get anybody’s attention?

  42. The underlying issue is not macroeconomics, or populism vs capitalism – it is legality. Systems and individuals that are ordered and structured by laws, and ethics work more effeciently, and with greater equanimity. Humans are by nature (and history past and present proves this point without a shadow of doubt), – are savage carnivorous heartless viscious predators. In a world where there are no laws, – there are no laws for anyone.

    If societies are to prosper, laws and order must be FORCED upon humans and corporations to insure that savage brutal bloodthirsty predators do not devour every living thing on earth.

    I liken the predatorclass swindlers and thieves on Wall Steet to the Ebola virus. Ebola seeks to exist by devouring it’s host. It invades and dominates, then rapidly devours its host and seeks to leap to other hosts to replicate the cycle. In the end, everything is left putrid and rotting and dead. But along the way, the Ebola virus, like the predatorclass swindlers and thieves on Wall Street are rabidly insatiable and pathologically bent on conquering, dominating, and devouring everyliving thing on earth, and once entrenched, immune to any treatment or remedy. Once Ebola or the predatorclass theives and swindlers on Wall Street gain purchase upon or within the host, – the host is doomed, the host is dead. In this horrid analogy the American poor and middle class are the host. The predatorclass swindlers and thieves on Wall Street are Ebola. The only hope is to prevent and prohibit this allconsuming virus from taking root, or if it does rear it’s hideous head to quaurantine and isolate this beast until it devours itself and the hopefully few poor hosts, rots, and dies, and then to incinerate everything the virus touched or could possibly have infected.

    The predatorclass must be forcefully regulated and monitored to prevent and prohibit profligate lawlessness and grotesque Ebola like abuse.

    Failure to enforce strict guidelines and prophylactic protections from the profligate lawlessness and grotesque Ebolalike abuse of the predatorclass exposes the people, American poor and middle class to the kind of wanton criminality and thievery we have recently experienced, and the potential for lethal viral outbreaks, and massive devastation.

    The predatorclass thieves and swindlers on Wall Street and thier TBTF oligarchs CANNOT be trusted to act in goodfaith, goodwill, or in the peoples best interest, or within the confines of the law, – they must be rightfully and factually viewed and confronted as a lethal predatory virus that MUST be forcefully regulated, monitored, minimized, and contained. If not, we’re doomed to repeat the kind of Ebola like economic outbreaks currently experienced on a global scale by every nation on earth as in the “great unwinding.”

  43. I’ve taken a quick look at Simon’s article in The Atlantic — The Quite Coup. — It’s very good and you can find it by following the link “under our noses” in his post above. Highly recommended. His analysis is very good. And better still! He has a remedy.

    I think we are very lucky to have a pubic intellectual of Simon’s calibre. It’s common sense not to trust every expert. But my intuition tells me Simon is very-very good at what he does. Simon and his Baseline friends are demonstrating tremendous leadership and courage in this time of financial crisis.

    I agree with Min’s comment above on the internet, press freedom, and pamphleteering.

    What Simon has proposed in his latest Atlantic article would not be allowed in totalitarian countries where authority cannot be challenged. Consider the Inquisition, or Soviet Russia, or China today.

    It’s not so dire. It could be much worse.

    I rather like the idea of using democracy to assert the rights of citizens. It is what democracy is there for!

  44. I think the best example I have heard to illustrate our current situation is the government working hard to figure out how to reinstate the “no money down” home-buying experience.

    If true, this must rank as among the quickest attempts in history to re-inflate a bubble. Given that this “give the people what they want now!” thinking – forget the cost – still provides the backdrop of the current jolly times in our markets (the equity market anyway, the bond traders are a little more reasoned, apparently), I am guessing it won’t be too much longer before we are in for another dose of pain.

    This relates to Simon’s question because I agree with the poster above who said that we will have to impetus to change only when the pain of not changing is greater than the pain of change. That means that as the crisis eases, the motivation for reform goes down. Sadly, I think if we are to fix the glaring systemic flaws discussed here, it will come only at the cost of a continuation and deepening of the ugliness we witnessed a few months ago.

  45. I might add here, not only leadership and courage, but intelligence and a rare degree of public service, in the best sense of these words.

    When I first joined this blog, I was thinking, this financial melt surely illustrates the importance of regulation and our legal system. The social contracts we agree to through an abstraction called the “polity”.

    It could be much worse. At least we don’t live in a country with insurgents, in the jungles or forests, fighting for land reform or a Stalinist invasion.

  46. If California were a one party state we would have not had any trouble passing a budget bill. I grew up in a one party state, and California does not come close.

  47. Don’t discount your insurgents before they are hatched Tippy Golden. Thehaves have no idea, and evidently no concern of how desperate and injured are thehavenots. Perhaps “it could be worse” for you, but for many of your fellow Americans the idea of socalled democracy in this context is hollow and moot, and the pain and suffering all to real. The people have no voice, and no influence in the government. We voted enmasse for Obama with the audacious hope for change and to right to horrible wrongs of the fascists in the bushgov, – but NOTHING has changed, and Obama has backtracked or renigged on all of his campaign promises, so – where is this thing called democracy! How does it work, or how is it applied if you are poor and middle class. IT DOES NOT!

    The predatorclass are rewarded for criminal conduct with trillions of taxpayers dollars and by heaping imponderable debt and deficits on our children.

    From my pedestrian perspective, we (poor and middleclass Americans) are enduring and suffering through an economic horrorshow unseen in my lifetime, and one that I am more than concerned will lurch into my daughters future with much much worse to come. Upon what math do you base your optimism? Where are the green shoots, outside of the continued perpetuation of speculator driven PONZI scheme bubbles certain to burst. Where are our jobs? Where are our wages? Where is our healthcare? When can we actually dream again of retirement? How do we educate our children or dream of sending them to college? Many of your fellow Americans who were formally gainfully employed are now worried about paying the upsidedown mortgage and food and clothing for our kids, – and all this horrorshow reality for thehavenots, – while the have bath in luxurious luxury heaped upon them by the government misusing our tax dollars and compromising our childrens future the cloak and feed the predator class.

    The cauldron is reaching the boiling point. The energy will be released one way or another. The predatorclass imagines there is this structure or cages, and confinement that isolates thehaves from thehavenots, – but they are wildly mistaken.

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

  48. A thousand pardons for the many typo’s, – I write with fury and desperation, but for clarity I meant to say: (Many of your fellow Americans who were formally gainfully employed are now worried about paying the upsidedown mortgage and food and clothing for our kids, – and all this horrorshow reality for thehavenots, – while {thehaves} bath in luxurious luxury heaped upon them by the government misusing our tax dollars and compromising our childrens future {to} cloak and feed the predator class.)

  49. Tony,

    Since I joined this blog my appreciation of being Canadian has greatly improved. (Fish not knowing the water they swim in.) I’m very lucky to still have my job. But like everyone else I am worried.

    I hear your anger and pain.

    The corporate media has been “captured”. But Americans still have press freedom through blogging, freedom of association, and a generous right to free speech.

    Why not take a page from the Obama play book and use the internet to organize? Why not take a cue from Bill Moyer and organize peaceful marches on the streets to take back your democracy?

    It’s called freedom of association.

  50. For anyone who’s interested, here are some campaign finance reform bills pending in Congress:

    The Fair Elections Now Act bills, 2009 S. 752 and 2009 H.R., would establish a system of public matching funds for candidates who limited their contributions to not more than $100 per donor. This limit applies separately as well to contributions to the candidate’s leadership PACs. Participants would also be limited to expending in a campaign not more than the qualifying contributions they received plus the matching funds. For comments of the sponsors, and commentary on the bill, see Durbin, Specter, Larson, Jones Introduce Bills to Reform Financing of Congressional Elections, Cong. Doc. and Pub., Mar. 31, 2009; Should Taxpayers Subsidize Pols? Apr. 3, 2009.

    The Let the People Decide Clean Campaign Act, 2009 H.R. 158, seeks to amend the FECA to provide for expenditure limitations and public financing for House general elections. In addition to expenditure limitations on a candidate, § 301 of the bill would ban any person from making any “independent expenditure” with respect to a House election. See Obey Kicks Off 111th Congress with Call for Fundamental Campaign Finance Reform, US Fed News, Jan. 6, 2009.

    The Clean Money, Clean Elections Act of 2009, 2009 H.R. 2056, proposes to reform financing of House elections. It presents another voluntary, contribution limit-public financing scheme. See Rep. Tierney Introduces Clean Money, Clean Elections Act of 2009, US Fed News, Apr. 28, 2009.

    The Clean Law for Earmark Accountability Reform (CLEAR) Act, 2009 H.R. 2038, 2009 Bill Tracking H.R. 2038, would amend the Federal Election Campaign Act of 1971 to prohibit an authorized committee of a candidate who is a Member of Congress from accepting contributions from any entity for which the candidate sought a Congressional earmark. See Reps. Hodes, Giffords Introduce Legislation To Ban Campaign Contributions Linked To Earmarks, US Fed News Apr. 23, 2009; Giffords Seeks To Break Lobby-Lawmaker Tie, Ariz. Daily Star, Apr. 23, 2009; Giffords’ Earmark Bill A Good 1st Step, Ariz. Daily Star, Apr. 24, 2009.

  51. Perhaps we should enquire as to which institutions have been central to the general pattern of growth and political stability in U.S. history. The popular view and endorsed by many historians is that the central political institutions of the Republic are most central. These were developed in reaction to the perceived centralization of power in the crown and the un-representative character of parliament in the mid-18th century. Hence, political power was to be divided to inhibit the growth of either a too-powerful executive (the imperial president) or of political factions. The framers, as self-made ‘aristocrats’ were deeply suspicious of popular power and did their best to insulate the higher echelons of power from the will of ‘masses’ who could be swayed by inflamed rhetoric. Jefferson was concerned about the concentration of economic power (that being fungible ) translates into political power, hence is vision of a citizenry of yeoman farmers – property holders beholden to no one else and therefor capable of independent political judgment. Madison and Hamilton,amongst other, had different concerns.
    The ‘aristocratic republic’ (modeled on the supposed nobility and virtue of the Roman Senate) didn’t even outlast Jefferson’s life (he admits in one of his last letters to Adams that they were now irrelevant to the world they had made). Finally, it should be noted that Jefferson’s famous phrase, ‘life, liberty,and the pursuit of happiness’ is a significant modification of the Scots Enlightenment, ‘….,and the pursuit of property.’ Why this turn of phrase? In part because they had to fudge the central question of the ‘sanctity of property rights’. If property rights were central and inviolable, then human chattel were vouchsafed forever. The issue of the political economy of slavery figures in the failure of the Articles of confederation, its central to understanding the ‘balance’ between state and federal power in the new Republic (think of the 3/5 rule, the electoral college) and the ramifications of the ducking of this issue play out in the early history of the Republic.
    What happens around the time of Jefferson’s death is the ‘Jacksonian revolution’ – a move towards popular government with a concomitant resentment of (Eastern, wealthy) elites. I would guess that SJ is referring to the revocation of the charter of the national bank as the first crisis between financial elites and the potential for dispersed economic power. But didn’t this reflect as much the interest of other regional elite with banks that issued scrip (currency) and were notoriously unstable? One also needs to remember that the Jacksonian era also was responsible for government sanctioned ‘removal’ of indigenous people, the growth of serious political cronyism (i.e. ‘corruption’ in the language of the Framers).
    So if that’s the first great crisis – and reform, I’m in doubt. The second great crisis goes unmentioned – the civil war which was not just a ‘political’ crisis, it was also a struggle over the political economy of slavery and the fundamental weaknesses in federal power instituted to vouchsafe chattel slavery. We are still dealing with the consequences today.
    The other great perspective, one more congenial to economists, is that a stable system of property rights is all that really matters. In this sense, it hardly matters the form of government as long property rights are ensured and there is third party enforcement of contract (one of the few roles of government in the minimalist ‘night watchmen’ conception of the state). The problem with oligarchy is not the concentration of power in a few hands, it’s that with concentrated political-economic power, elites don’t abide by the rules. But one needs to remember how many political scientists and development economists used to sing the praises of ‘authoritarian democracy’ such as late-Franco Spain or the city state of Singapore. Indeed, it was often proposed that too much democracy was a bad thing because popular sentiment would lead governments to appease the masses, and abandon the appropriate growth oriented policies. Robert Dahl went so far as to assert that low voter turn-out in the U.S. was a sign of citizen contentment. Indeed a god many have assumed that a significant degree of political mobilization in a citizenry is dangerous to both political and economic stability.
    As to the second and third crises, both the Progressive era and the New Deal were elite responses to the likelihood of popular mobilization, which in the U.S. as Statsguy noted, is typically in the language of populism. In passing, it’s worth noting that classic populism (in the U.S.) is a largely agrarian phenomenon. In T. Roosevelt’s era, the response was to the repeated collapse of agricultural commodity prices from the 1870s on. While TR is remembered for “trust-busting”, that’s not the core of populism. Progressives, in the name of reforming government were often anti-democratic (and anti-immigrant). Municipal government reform sought to end machine politics like Tammeny Hall in NYC. But the move from ward-based to at-large aldermanic systems disenfranchised immigrant (ethnic) voters concentrated in inner cities – and ensured their political domination.
    So much has been written about the New Deal that it’s barely worth repeating. While the response to the collapse of agriculture was in part, populist, the emptying-out of the countryside (i.e. the family farm) and the rationalization of agriculture has been at best a mixed blessing. The recognition of collective bargaining and other labor law reforms was not a response to populism but to the very real fear that American workers would turn to Communism (as a good many did) although for many, Fascism may have been just as appealing (indeed Hoover accused Roosevelt of being a Fascist). Of course, Ne Deal legislation did much else in terms of stabilizing the economy and in other areas of social reform.
    Finally, the fourth (or by my count fifth) great crisis was the so-called Regan Revolution that launched the country on its path to the current crisis. Thirty years of anti-government rhetoric while simultaneously inhabiting the state for the interests of political cronies, the whole sale attack on new deal social legislation, financial regulation, the masterful use of the politics of resentiment (right-wing populism), and the exploitation of racism as a political strategy.
    In sum, I think SJ’s historical interpretation has some merit but I am concerned with cherry-picking the aspects of history that appeal to our arguments at the expense of recognizing the complexity of that past. I also think we should acknowledge the tension between Republican constitutionalism and Lockean contract theory as the play out in our history.

  52. Bond Girl – do you think that the only reason people came out to vote in 2008 was for the spectacle/entertainment value? I have to disagree with you. I think perhaps there are politicians and campaign strategists who may agree with you, but most people I know are sick of the scandals, the hypocrisy and the endless attack ads.

    What I saw in the last campaign – what I think people voted for was hope. Obama should never have won that race. I really believe that election showed we don’t want to be the advocates for torture. We want a fair shot for the middle class. We don’t want to start wars for no reason. Most of us don’t believe black people are different than white people.

    We want to believe the American dream can be achieved by most people in America (however improbable it may be).

    And the man who is president is from a solidly working class family – of mixed heritage – a true American mutt. Scandal didn’t drive people to the polls last fall. Hope did.

    On election night in November 2008, a massive crowd gathered in Grant Park, Chicago – not far from where the massive crowds went mad in ’68 at the Democratic Convention, where the police beat the protesters and Dick Daley issued his “shoot to kill” order. It’s a city that’s been called “Beirut on the lake” because of its racial divisiveness.

    It’s the city that Martin Luther King, Jr. once pointed to as more hatefully racist than Mississipi, that southern state where in the 1950s, a Chicago boy named Emmett Till was murdered because he grinned at a white girl. Chicago was worse than that, King thought.

    And in November 2008, we witnessed a racially diverse crowd come together in peace in Chicago to cheer the new president of the United States, a black man who calls Chicago his home.

    Cynics can say that people like me are a bunch of stooges and stupid and nothing matters anyway – but I don’t believe them. I believe people can and do make a difference. Think global – act local. It works.

    Obama won an improbable victory last fall because his message of hope and change resonated with Americans who long to live up to the lofty ideals established for us long ago. We haven’t reached that ideal yet – but we yearn for it anyway.

    In terms of reform today – I truly hope we don’t waste a good crisis, to quote Rahm (my old Congressman.) On the bubble about that – but I hope none-the-less….

  53. In his link, Kafka writes:

    “Then again, I may just be assuming that any government descending into oligarchy would inevitably provoke revolutionary insurrection. Is anyone else ready to grab a picket and chant — Regulation not revolution!?” — LOL.

    A picket for hatching insurgents?

  54. Here’s the link to the piece mentioned by Chubbco.

    Don’t hold your breath waiting for answers!

  55. Indeed, it is looking increasingly likely as each month passes by that the only way to produce real change is as a result of significant social unrest. That’s very scary and I truly hope that I am wrong!

  56. Well I’m a cynic – but rather than labeling you a stupid stooge, your eloquence has warmed my cold, cold heart, moving me to embrace you as a fellow American in the hope and love that connects us all as fellow human beings… Yes We Can! Yes We Can! Yes We Can! YES WE CAN!
    And while you’re all worked up into a hot lathered frenzy, I’m just gonna keep sticking it to you… you like it like that, don’t you? You KNOW you do! Yes you do! Yes you do! YES YOU DO!!!
    Never underestimate the stupidity of the general public. They’ll turn out to cheer you on in droves.
    And oh – just because it throws a wrench in the water works of national pride you’ve got running there, I’ll just toss it out there for ya –
    Have you ever seen the tapes of the crowds in Germany gathering to embrace der Führer? If there’s anyone who knows how to pin the tail on the oligarchy, it’s Hitler.
    Personally, I just think it sucks that Obama hasn’t even bothered to produce a golden calf for me to worship. Seriously, I’m really starting to feel ripped off.
    But hey – call your friends up and get them back to Chicago for some more fervent hope-raising. Melt my cold, cold cynic’s heart once again… dot dot dot… ahhhhhh dot dot dot…

  57. The people like games!

    Hopefully with HDTV, we can all just get our own channel – I think that would work. Nobody expected Twitter to succeed either… dot dot dot – see that makes you think “ah, a salient point indeed… I must think more on this…”

    Also, we like games. Torture us all you want but keep us entertained, damn it. The major networks and studios aren’t cutting it – so maybe Obama can give us free cable?

    Gotta go, my public access gig starts in 15. I am so setting the curve. uhm… dot dot dot…

  58. Anne-Obama raised the seed money for his campaign from Wall Street, taking over twice as much money from Wall Street PACs as John McCain. Rahm Immanuel, while in Congress, took more money from Wall Street PACs than any other member. People have deceived themselves into believing that a change of skin color is the same as a chnge in the power structure.

  59. I like this post, you should try to get it published in a more detailed form somewhere. I would add a fourth reformer, Lincoln, who tried to get the money power under control with the national banking system.

    Regarding American politics I think much of the problem does go back to the founding fathers, particularily Hamilton. His version of Federalism was designed to create a British style upper class based in Finance and the defence industry. Sadly even though the Federalist party died his vision of the U.S. is the one that is closed to our current reality. We need reform again desperately.

  60. Simon & James –

    1) Does the Financial Times front page story 6/8 suggest that the Fed and FDIC are now simply refusing to cooperate with the TARP, saying that it won’t work? Does this reflect a change of mind of longstanding view?

    2) The weekend FT claims that Angela Merkel’s criticism of the central banks was not politically motivated, and she’s angry that they are loosening credit rather that implementing regulation suggested by Germany during the last G8. True? Was the regulation proposed a useful model?

    Krishna Guha, Edward Luce and Saskia Scholtes, “Bank clean-up in jeopardy,” Financial Times, June 8, 2009.,Authorised=false.html?

    Bertrand Benoit, “Merkel makes a mark,” Financial Times, June 6/June 7, 2009.,Authorised=false.html?

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