I’m reading the book, “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.” I’m hoping to get some insight into our nation’s economic crisis.
The authors of this book are Simon Johnson and James Kwak. Their book arrived just in time for the debate that is now going on in Washington about financial reform.
In today’s Huffington Post, Johnson has an article praising “three blistering speeches” by Senator Ted Kaufman (D., DE) “cutting to the heart of the financial reform matter: the deregulation of finance has gone too far and big banks now need to be reined in; the continued prevalence of fraud among Wall Street’s biggest bankers; and why the administration’s proposed ‘resolution authority’ would do nothing at all to end the problems associated with Too Big To Fail financial institutions.”
I’m going to be working my way though the 280 pages of this book in the next few days and I intend of posting excerpts from each chapter. Here are excerpts from the Introduction:
- Why did even the near-collapse of the financial system, and its desperate rescue by two reluctant administrations, fail to give the government any real leverage over the major banks?
- By March 2009, the Wall Street banks were not just any interest group. Over the past thirty years they had become one of the wealthiest industries in the history of the American economy, and one of the most powerful political forces in Washington.
- The ideology of Wall Street — that unfettered innovation and unregulated financial markets were good for America and the world — became the consensus position in Washington on both sides of the political aisle.
Wall street banks are the new American oligarchy — a group that gains political power because of its economic power and then uses that political power for its own benefit. - In the United States, we like to think that oligarchies are a problem that other countries have.
- In 1998, it was part of the worldview of the Washington elite that what was good for Wall Street was good for America.
- The major banks gained the wealth and prestige necessary to enter the halls of power and sway the opinions of the political establishment, and then cashed in that influence for policies — of which derivatives nonregulation was only one example — that helped them double and redouble their wealth which bring the economy to the edge of a cliff, from which it had to be pulled back with taxpayer money.
The government chose not to impose conditions that could reform the industry or even to replace the management of large failed banks. It chose to stick with the bankers it had. - The largest , most powerful banks came out of the crisis even larger and more powerful.
- Congress appears likely to adopt some type of banking reform, but it is unlikely to have much b ite. … the core problem — massive powerful banks that are both “too big to fail” and powerful enough to tilt the political landscape intheir favor — will remain as Wall Street returns to business as usual.
- In 1983, Citibank, America’s largest bank, had $114 billion in assets, or 3.2% of U.S. gross domestic product (GDP). By 2007, nine financial institutions were bigger relative to the U.S. economy than Citibank had been in 1983. At the time of the White House meeting, Bank of America’s assets were 16.4% of GDP, JP Morgan Chase was 14.7% of GDP and Citigroup was 12.9% of GD
- The conditions that created the financial crisis and global recession of 2007-2009 will bring about another crisis, sooner or later. … The alternative is to reform the financial system … a central pillar of this reform must be breaking up the megabanks that dominate our financial system and have the ability to hold our entire economy hostage.
You might want to gather some austrian / libertarian economist writings as well. If anything, Austrian economists are the ones that not only predicted the great depression and its reasons, but also our current recession. I offer that if you do not balance your reading, your going to read more of a book on politics than economy. Already in the introduction, some of the suppositions and conclusions seem erroneous.
Robert, I’ll be interested in your analysis. Tomorrow, I’m going to summarize chapter one, and give excerpts, “Thomas Jefferson and the Financial Aristocracy.” I want to read this book quickly because I’m giving it as a birthday present next week.
I think part of the thesis of this book is that politics and the economy are intrinsically entwined.
What Austrian economist are you referring to?
There are a number of interesting and important isues out there in what has been a difficult and frustrating time. People have found themselves unable to take power back from the banking industry following what amounts to the looting of wealth from many homeowners and its conversion into toxic layers of debt. This debt brought down the economy and is keeping it down, while people are thrown out of their homes, which become owned by banks and stand empty. The housing bubble, a creation of scarcity, changing taste (does anyone want the old time small working class houses you see from I-75 near the St E complex?) a belief in the political imperative of steadily appreciating home prices, and the desire to fuel a consumer economy with debt instead of wages, went amok in classic bubble mentality, as all the insiders try to strip the corpse before it bursts.
You hear in many places the conservative revisionist history of the economic meltdown, which blames attempts to expand homeownership, the Community Reinvestment Act (which does little but publicizes whether depositories serve the communities their depositors come from), the privatized and politicized Fannie Mae and Freddie Mac, and all those people with “dinged” credit risks that banks say they were being forced to serve. But in fact the industry would only serve if they could rip them off with a segregated “subprime” mortgage market. No one made the banks do that. Eventually subprime tactics spread to prime market and the race to the bottom was on.
Some questions about banking.
Why do banks, instead of making their money by taking in deposits at one interest rate and lending it at a higher one, now make so much out of fees and penalties (Prof. Elizabeth Warren calls them “tricks and traps”) so that they want you to mess up and pay late, overdraw your account and similar things? Should penalties be revenue neutral, rather than profit centers? And why are they paying at such low rates and lending at high ones?
How good is “innovation” in finance? Securitization and the secondary market, selling mortgages “downstream” for money to make more loans, started out as good thing. Banks didn’t have to wait for years for people to pay off old loans in older to make new ones. But it became the engine of destruction, as incentives to make bad loans for large up front fees and sell them downstream where hopefully practical and legal protections “laundered” the defects overwhelmed the system. Part of the problem was that all the insiders were in on the take, creating the appearance of trustworthiness without the reality. Who in a capitalist economy makes the incentives proper?
Should we permit complexity in finance? The securitization tranches, derivatives, and Collateralized debt obligations became a hall of mirrors, counting the same wealth over and over. No one understood these deals. We have learned that insiders set up deals chosen to fail, sold them to less sophisticated buyers and then “shorted” them, betting on them to fail, essentially what happened in the classic comedy/Musical “the Producers.” Only we know the Zero Mostel character is a disreputable crook. Insiders are always in a better position in a situation of complexity, and there is no way to educate everyone else enough to make things anything near equal. Much of this economy has been little more than a lottery or casino, bearing no relationship to anything that is productive under any economic theory this side of anything goes.
What does it mean that finance is such a huge part of the “domestic product”? Is finance supposed to be the blood supply of the economy, and not the “real” economy that gets goods and services to people who need them or want them? How much of all that wealth of the 90s and 2000s was illusory, created by spurious accounting, “getting things off the books” that should be on them, pretending that debt is wealth, and manipulating time like the legendary “Ponzi schemes” that we saw so much of. Should finance be kept under scrutiny and control to keep it from running amok and substituting fake wealth for real wealth?
Many conservatives challenge this whole analysis. They challenge any criticism of whatever happens for any reason in the marketplace (except when government appears and “distorts” the marketplace for any purpose other than having the biggest sharks become the richest sharks). Often this results in a kind of postmodern world with no consistent economic narrative, each deal is different and presumed legitimate, as are the economic and political winners, whoever they are lucky enough to be. They warn about stifling regulation, embrace Wall Street and denounce the politicians who serve them, and otherwise sell the snake oil myth of the “free market”. This requires an alternative history explaining the current mess, which apparently needs to blame government and the poor. But how serious is this? Can people, who have some power as voters, get their brains around the economy, and also have the combination of hope and realism to be in an emotional place to do something?
Also since we have chosen to have our political leaders raise private wealth to fund their campaigns, and banks are where the money is, you have a hard time doing anything about them politically. Simple and obvious steps, like closing the first mortgage loophole in bankruptcy Court’s “cramdown” power, essentially recognizing reality, would give some leverage to homeowners keeping their homes when the housing bubble, appraisal fraud machine has taken advantage of them. But this was off the table quicker than single payer health care, even when the banks were coming to Washington with their hands out. “Banks own the place” said Sen Durbin. Particularly given how much larger and dominant they are. When did we last bust any trusts, or make big banks smaller?
Last of all we have bigger questions. Who polices the police? How does anyone keep integrity when so much money can be made in its absence? How do we avoid the Soviet Union model of planning that is always inadequate, without pretending that an unregulated economy won’t always runs amok. Supposing regulators had the power to regulate and recognized that the prosperity of the era was a fraud built on sand? Would they have slowed it down? What else do we value, some would say worship, than wealth and dreams of wealth, and maybe control of our own environment to the end of getting rich and being rich? Do rules matter, and if so, how do we make them wise and honest?
Should be an interesting book review.
Stan, you ask,what I’ve concluded is the key question about so many issues: “Can people, who have some power as voters, get their brains around the economy, and also have the combination of hope and realism to be in an emotional place to do something?”
In other words, can we get our democracy to work to solve problems and to create a future for the next generations worthy of the sacrifice and dreams of our ancestors?
What do you call a form of government where 90% of the membership of its legislative body (the House of Representatives) are safe from any election challenge? What do you call a form of government where the wishes of big money calls the tunes? Our system of government is not a democracy at all and we are deluded if we think it to be so. Citizens in this country are under a constant barrage of powerfully effective misinformation and propaganda that destroys the capacity for authentic democratic deliberation, and deliberately creates a passive acquiescence to the powers that be.
So, I am pessimistic that your question can have a positive answer. But, everyone paying attention should make an effort. My personal response is to attempt my own version of grassroots activism — seeking to reform the local political party I am a member of, the Montgomery County Democratic Party, and seeking to transform the local system of public education in the community in which I live, Kettering.