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From today's Salon:

The Quiet Coup - Simon Johnson - The Atlantic

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government--a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF's staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we're running out of time.
...
The great wealth that the financial sector created and concentrated gave bankers enormous political weight--a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent. Of course, the U.S. is unique. And just as we have the world's most advanced economy, military, and technology, we also have its most advanced oligarchy.


"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Fri Mar 27th, 2009 at 05:34:31 AM EST
The Baseline Scenario

From 1945 until around 1980, the financial sector was one industry among many in the United States. Then something happened.

People in finance started making more money,* jobs in finance became more desirable, financial institutions became more influential, and the linkages between the financial sector and the political establishment became stronger. At the same time that our financial sector became more leveraged and more risky, it also became more powerful. The result was a confluence of interests between Wall Street and Washington - one more normally found behind the scenes of emerging market crises, the kind the IMF is called on to resolve.



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Fri Mar 27th, 2009 at 05:40:43 AM EST
[ Parent ]
The graph of Financial Sector profits as a % of corporate profits in the economy follows a similar trend and is equally stunning.
by Metatone (metatone [a|t] gmail (dot) com) on Fri Mar 27th, 2009 at 08:02:20 AM EST
[ Parent ]
This is the article Jerome provides a link to above.

Here's another quote that should interest us:

The Atlantic Online | May 2009 | The Quiet Coup | Simon Johnson

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn't be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn't roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there's a deeper and more disturbing similarity: elite business interests--financiers, in the case of the U.S.--played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better--in a "buck stops somewhere else" sort of way--on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for "safety and soundness" were fast asleep at the wheel.

But these various policies--lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership--had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector's profits--such as Brooksley Born's now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998--were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. (...)

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Mar 27th, 2009 at 05:45:45 AM EST
[ Parent ]
  1. globalisation made these changes inevitable (technological progress cannot be undone, capital can alays move around, etc...)

  2. they provided 25 years of unprecedented freedom and prosperity (somehow the impact of the crisis is not discounted from that 'prosperity')

  3. crises are inevitable and thus are a price worth paying to get the above 'prosperity'

  4. regulators are paid less than bankers, thus are less bright, thus less good at their jobs, and will thus never catch the bankers, so it's not worth regulating anyway

  5. the only alternative is State planification and that is Really Evil (look at the Soviet Union or, worse, France)


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Mar 27th, 2009 at 07:03:08 AM EST
[ Parent ]
I had not read it when I posted the above, but Greenspan has (yet) an(other) Op-Ed in the FT today, which touches most of the points:

1) Check (in a slightly different version: better economics):


The extraordinary risk-management discipline that developed out of the writings of the University of Chicago's Harry Markowitz in the 1950s produced insights that won several Nobel prizes in economics. It was widely embraced not only by academia but also by a large majority of financial professionals and global regulators.

2) and 3) Check.


Free-market capitalism has emerged from the battle of ideas as the most effective means to maximise material wellbeing, but it has also been periodically derailed by asset-price bubbles and rare but devastating economic collapse that engenders widespread misery. Bubbles seem to require prolonged periods of prosperity, damped inflation and low long-term interest rates. Euphoria-driven bubbles do not arise in inflation-racked or unsuccessful economies.

4) Check (in the "regulation is evil government" version):


But it is incumbent on advocates of new regulations that they improve the ability of financial institutions to direct a nation's savings into the most productive capital investments - those that enhance living standards. Much regulation fails that test and is often costly and counterproductive. Regulation should enhance the effectiveness of competitive markets, not impede them. Competition, not protectionism, is the source of capitalism's great success over the generations.

5) Check


I do not recall bubbles emerging in the former Soviet Union.

Yes, he actually wrote this.

Oh, and his solution: shovelling cash to banks to cover their losses.


The overall need [to fill the holes in bank balance sheets] appears to be north of $850bn. Some is being replenished by increased bank cash flow. A turnround of global equity prices could deliver a far larger part of those needs. Still, a deep hole must be filled, probably with sovereign US Treasury credits.

<despairing wail>


In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Mar 27th, 2009 at 07:48:49 AM EST
[ Parent ]
by Jerome a Paris (etg@eurotrib.com) on Fri Mar 27th, 2009 at 08:17:07 AM EST
[ Parent ]
Let's do an LTE on this. I need to go out for lunch now, so any earlier drafts welcome...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Mar 27th, 2009 at 08:18:57 AM EST
[ Parent ]

Dear Sir,

Why did you feel the need to give yet another opportunity to Alan Greenspan to try to deflect blame from his immense responsibility in the current economic crisis ("We need a better cushion against risk", 27 March)? He did acknowledge that he did not do his job as a central banker to quash the bubble, as he could have, but that somehow did not rate an article let alone a headline in your news section. Instead, we get the claim that bubbles are good because they only happen in apparently prosperous times - with a cameo appearance from the Soviet bogeyman, where bubbles did not happen - that regulation is not necessary because regulators - of which he was the most senior - failed this time,  and a suggestion that giving another $850 billion to the banks is necessary to clean his mess, ie will put them on the sound footing they need to go on another unregulated (sorry, "competititve") binge.

I understand his need to write this shameless pamphlet. But what, exactly, is your purpose in publishing it?




In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Mar 27th, 2009 at 09:15:38 AM EST
[ Parent ]
Middle sentence is  a bit convoluted.

Dear Sir,
Why did you feel the need to give yet another opportunity to Alan Greenspan to try to deflect blame from his immense responsibility in the current economic crisis ("We need a better cushion against risk", 27 March)?

His admission that he did not do his job as a central banker and quash the bubble as it formed rated neither an article nor a headline. Instead, you give pride of place to his self-serving claims that bubbles are good because they only happen in apparently prosperous times - with a cameo appearance from the Soviet bogeyman, where bubbles did not happen - that regulation is not necessary because regulators - of which he was the most senior - failed this time,  and a suggestion that giving another $850 billion to the banks is necessary to clean his mess, that is tol put the financial institutions on the sound footing they need to go on another unregulated (sorry, "competititve") binge.

I understand his need to write this shameless pamphlet but what, exactly, is your purpose in publishing it?

by Colman (colman at eurotrib.com) on Fri Mar 27th, 2009 at 10:03:38 AM EST
[ Parent ]
Thanks, I'll send that soon unless anyone has other comments to this wording.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Mar 27th, 2009 at 11:09:10 AM EST
[ Parent ]
Well, change "tol" to "to"!
by Colman (colman at eurotrib.com) on Fri Mar 27th, 2009 at 11:11:07 AM EST
[ Parent ]
While attempting a self-serving rewrite of his own contribution to recent bubbles, AG, in his 27 March op-ed, admits that trust in the mathematical certainties that have inspired financial markets for years now has been ill-placed, since even the most sophisticated models have proved incapable of assessing risk and predicting disaster. This leads logically enough to questioning the notion of enlightened self-interest (pillar of supposedly efficient markets), since it is apparent to all that players on financial markets, relying on those sophisticated models, have been singularly misguided. Yet even unenlightened self-interest, producing boom-and-bust cycles and profound crises that cause "widespread misery", is preferable, according to Mr Greenspan, to regulation: untrammelled free-market principles must prevail, bubbles included.  (The alternative would seem to be "unsuccessful economies", see Soviet Union).

And so he reaches his main point: the major US banks must be massively re-capitalised. $250 billion public money from the TARP did some good, says Mr Greenspan without a hiccup, but a great deal more is now needed, from "private or public sources". Yet he admits that private investors will require higher capital-to-assets ratios before putting money into the banks. Conclusion? This is a call on public funds. The theoretical underpinnings of free-market capitalism are uncertain, but it's still the best thing we've got, and regulation will kill it. But government must come to the rescue, and the taxpayer pay off free-market capitalism's debts for a generation or so. Privatise gains, socialise losses. Thanks for everything, Mr Greespan. Now just go.


by afew (afew(a in a circle)eurotrib_dot_com) on Fri Mar 27th, 2009 at 10:18:49 AM EST
[ Parent ]
You should send it separately!

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Mar 27th, 2009 at 11:07:51 AM EST
[ Parent ]
That's what I was going to say.
by Colman (colman at eurotrib.com) on Fri Mar 27th, 2009 at 11:11:19 AM EST
[ Parent ]
While attempting a self-serving rewrite of his own contribution to recent bubbles, Alan Greenspan, in "We need a better cushion against risk", admits that trust in the mathematical certainties that have inspired financial markets for years now has been ill-placed, since even the most sophisticated models have proved incapable of assessing risk and predicting disaster. This leads logically enough to questioning the notion of market efficiency through enlightened self-interest, since it is apparent to all that, in relying on those sophisticated models, market players have been singularly misguided. Yet even unenlightened self-interest, producing boom-and-bust cycles and profound crises that cause "widespread misery", is preferable, according to Mr Greenspan, to regulation: untrammelled free-market principles must prevail, bubbles included.  (The alternative would seem to be "unsuccessful economies", see Soviet Union).

His main point is that the major US banks must be massively re-capitalised by "private or public sources". Yet he admits that private investors will require higher capital-to-assets ratios before putting money into the banks. Conclusion? This is a call on public funds. Though the theoretical underpinnings of free-market capitalism are uncertain, it's still the best thing we've got, and regulation will kill it. But government must come to the rescue, and the taxpayer pay off free-market capitalism's debts for a generation or so. Privatise gains, socialise losses. Thanks for everything, Mr Greenspan. Now just go.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Mar 27th, 2009 at 11:36:38 AM EST
[ Parent ]
About 1):

'Goodbye, homo economicus' by Anatole Kaletsky | Prospect Magazine

The answer lies, ironically, in the fact that economics is so politically important: the second great merit of rational expectations lay in its key ideological conclusion--that deliberate policies of macroeconomic stimulus by governments and central banks could never reduce unemployment and would merely exacerbate inflation. That government activism was doomed to failure was exactly what politicians, central bankers and business leaders of the Thatcher and Reagan periods wanted to hear. Thus it quickly became established as the official doctrine of the political and economic establishments in America--and from this powerful position it was able to conquer the entire academic world.

To make matters worse, rational expectations gradually merged with the related theory of "efficient" financial markets. This was gaining ground in the 1970s for similar reasons--an attractive combination of mathematical and ideological tractability. This was the efficient market hypothesis (EMH), developed by another group of Chicago-influenced academics, all of whom received Nobel prizes just as their theories came apart at the seams. EMH, like rational expectations, assumed that there was a well-defined model of economic behaviour and that rational investors would all follow it; but it added another step. In the strong version of the theory, financial markets, because they were populated by a multitude of rational and competitive players, would always set prices that reflected all available information in the most accurate possible way. Because the market price would always reflect more perfect knowledge than was available to any one individual, no investor could "beat the market"--still less could a regulator ever hope to improve on market signals by substituting his own judgement. But if prices perfectly reflected all information, why did these prices constantly fluctuate and what did such movements mean? EMH cut this Gordian knot with a simple assumption: market movements are meaningless random fluctuations, equivalent to tossing a coin or a drunken sailor's "random walk."


"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Fri Mar 27th, 2009 at 08:21:01 AM EST
[ Parent ]
Euphoria-driven bubbles do not arise in inflation-racked or unsuccessful economies.

So bubbles are not just inevitable, they are the sign of a not unsuccessful economy.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Mar 27th, 2009 at 08:21:28 AM EST
[ Parent ]
It's pretty much an argument from mental illness - manic depressives don't feel sad during happy times, therefore irrational bouncing-rubber-ball mania is a sign of robust mental health.

Mmm. Okay.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Mar 27th, 2009 at 09:25:16 AM EST
[ Parent ]
Yeah, the guy who jumped from the Empire State building was in perfect shape when I saw him passing in front of the first floor window... In fact he succeeded in flying!

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Fri Mar 27th, 2009 at 09:40:33 AM EST
[ Parent ]
I think this paragraph is pretty important:

The Quiet Coup - The Atlantic (May 2009)

Instead, the American financial industry gained political power by amassing a kind of cultural capital--a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America's position in the world.
by Metatone (metatone [a|t] gmail (dot) com) on Fri Mar 27th, 2009 at 08:03:04 AM EST
[ Parent ]
Of course, to solidify my point from above, all the policies that the writer mentions as manifestations of this cultural power of Wall Street were enthusiastically embraced, supported and promoted by the IMF internationally.
by Metatone (metatone [a|t] gmail (dot) com) on Fri Mar 27th, 2009 at 08:06:05 AM EST
[ Parent ]

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