Is the U.S. Becoming a Banana Republic?

In at least one significant way, "shockingly reminiscent" of "emerging markets" like Russia and Indonesia, it's acting like one, says a former chief economist for the International Monetary Fund.  And that way is . . . crony capitalism, giving special breaks and bailouts to an insulated favored class of the powerful -- in this case, Wall Street.

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. Several other factors helped fuel the financial industry’s ascent. . . .

Read on.

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.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

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. . . .

There follows a short history of "the ties between Washington and Wall Street."

Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. . . .

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing. . . .

The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. . . .

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on.

And now?

[T]he princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Names are named.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector. . . .

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. . . . As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. . . .

Big banks, it seems, have only gained political strength since the crisis began.

Devastating.  To second Tom Strong, who sent me the link,  "a (grim) must-read."

Simon Johnson has a solution, too -- one we've heard before:  temporary nationalization and trust-busting.  But he lays out the logic behind its authority.  "Anything that is too big to fail is too big to exist."

Also, going against the lulling attempts to restore an anesthetized confidence:

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse.

Comments

[PatHMV]

Just look at the position of Secretary of the Treasury over the past few years. At least since Clinton (and I'm sure before, that's just when my personal memory starts), it's been someone who "knows Wall Street," i.e, somebody who worked at a place like Goldman Sachs.

Combine that institutional assumption with the perversity of the Congressional regulatory committees being led (on both sides of the aisle) by men who are little more than wholly-owned subsidiaries of the financial industry, and you've got a recipe for big trouble.

I've been arguing forcefully against the bailouts since it was President Bush trying to push them down our throats.

Hey, here's an idea to reduce corruption. Right now, we make it easy to buy off (and just generally influence) Congressmen because we gather them all together in one place, on the taxpayer dime. What if we required that all meetings of Congress be held electronically, and prohibit Members from leaving their states for more than a total of, say, one month out of the year? Let them conduct all debates virtually, via videoconferencing and writings. When they want to have hearings, any witnesses called will simply go to the nearest Congressional office, be sworn by one of that Congressman's staff, and be questioned by video link by committee members who are each back home in their own districts.

WOW! I like that idea. A lot. I wonder if I can find a hard-core Republican rep to propose it.

[Ron]

Maybe we should force then to use Twitter; no more than 140 characters per argued position.

[Callimachus]

Something that concerns me deeply in all this is that just about every player in the top tier of the economic crisis, including the finance sector, is now trans-national. No matter the address of their headquarters.

Their interests no longer converge automatically with the national interest: Whatever the truth once was of "what's good for General Motors is good for America," the converse certainly was true: If America suffered, so did GM.

With important players in the game underway today, that no longer is necessarily true. Yet we continue to think of them and treat them like our spoiled children.

[realpc]

I don't know if this really started with Reagan. Maybe Reagan came along at a time when the distrust of capitalism generated by the Great Depression was wearing off, and the economy had run down and needed some de-regulation to get started again.

I don't know if the great power of financiers is anything new because after all governments have always depended on them. Ever since the lending industry got started, that is.

And I don't know if the recent bubble and crash are really anything new. They were just bigger than anything before because of globalization and technology.

Isn't the history of capitalism the story of bubbles and crashes? You would think people would learn, but they don't, and it's partly because so many do get rich in a bubble.

Before it crashed I was constantly hearing about someone who got rich from real estate. And the book "Rich Dad, Poor Dad" (a silly book, but a best-seller) gave only one example of how to get rich -- real estate.

No one could predict when real estate would crash. If you didn't buy a house right now you might never be able to, and you might never experience the wonderful benefits of home equity.

Anyway, all I'm saying is this guy seems to think this is all something new. It is new in terms of scale and complexity, but otherwise I think it's the same old story.

[RW Rogers]

Is the U.S. Becoming a Banana Republic?

Save for the fact that banana republics are notorious for military ineptitude, I might agree. As it is, in my darker moments, I think those who believe we are well down the road to participatory fascism may be right.

Capitalism is a such a successful system in comparison to all others because of the wonder known as creative destruction. When institutions become too big to fail and intervention short-circuits that destructive process, the results are unlikely to end up turning out as planned or as desirable. For example, while no one was paying attention, we just took a few banks that were too big to fail and concentrated even more deposits and power in their hands in the past few months. It seems to me that one solution to the problem of institutions too big to fail failing is to not allow them to get too big to fail in the first place. The government has opted for increased centralization and the pretense of stricter regulation as if the regulatory authorities already in existence had no part in current debacle.

[Ron]

Given our seemingly irreconcilable political divisions, maybe we're becoming a banana split republic...

[amba]

Ha!!

[Tom Strong]

That's a good one, Ron.

But unfortunately, I don't think there is an irreconcilable split when it comes to placing political authority in the hands of Wall Street executives. If anything, it seems in that regard we are most bipartisan.