I’m reading “13 Bankers,” a just published book written by Simon Johnson and James Kwak. The preface to this book says, “Even after the ruinous financial crisis of 2008, America is still beset by the depredation of an oligarchy that is now bigger, more profitable, and more resistant to regulation than ever.  The six megabanks … together control assets amounting, astonishingly, to more than 60% of the country’s Gross Domestic Product … continue to hold the global economy hostage, threatening yet another financial meltdown.”

The question:  “How did this come to be — and what is to be done?”

The book has seven chapters and I’m intending on reporting on each chapter and printing excerpts from each chapter.  Today, I’m excerpting Chapter One, “Thomas Jefferson and the Financial Aristocracy.”  This chapter is 25 pages and outlines the historical framework of today’s financial crisis.   The sentence that most caught my eye in this chapter describes banking after the big reforms made in response in The Great Depression:  “Postwar commercial banking became similar to a regulated utility, enjoying moderate profits with little risk and low competition.” Tomorrow, I’m excepting Chapter Two:  “Other People’s Oligarchs”

From “13 Bankers,” Chapter One:  “Thomas Jefferson and the Financial Aristocracy.”

• Jefferson was deeply suspicious of banks and criticized them in vitriolic terms, writing, “I sincerely believe, with you, that banking institutions are more dangerous than standing armies.”
• Jefferson was opposed by Alexander Hamilton, Washington’s secretary of the treasury, who favored a stronger federal government that actively supported economic development — particularly that government would ensure that sufficient credit was available to fund economic development and transform America into a prosperous entrepreneurial country.
• By 1825, when the United States and the United Kingdom had roughly the same population (11.1 million and 12.9 million, respectively), the United States had nearly 2.5 times the amount of bank capital as the United Kingdom.
• While Hamilton may have been right about economics, that was not Jefferson’s primary concern. His fear of large financial institutions had nothing to do with the efficient allocation of capital and everything to do with power.
• Although Jefferson lost the battle … the cause of restraining concentrated economic or financial power was taken up by three of his most important successors.  In the 1830’s, Andrew Jackson showdown with the Second Bank of the United States …. At the beginning of the twentieth century … Theodore Roosevelt….During the Great Depression of the 1930’s Franklin Delano Roosevelt was finally able to break up the largest banks and constrain their risky activities.
• Both Jefferson and Jackson saw a powerful bank as a corrupting influence that could undermine the proper functioning of a democratic government.
• By the late nineteenth century, industrialization had created a powerful economic elite that held political power at all levels, with its supporters in substantial control of the Senate, the Republican Party, and the presidency.
• By the late nineteenth century, the Senate had become known as the “Millionaires’ Club.”
• New industrial trusts  emerged late in the nineteenth century. … Standard Oil was an early pioneer of the trusts …A handful of bankers led by J.P. Morgan played a central role in this rapid transformation of the business landscape … Morgan’s empire handled … as much as 40% of the total capital raised at the beginning of the twentieth century.
• After McKinley’s assassination in 1901, Theodore Roosevelt adopted “trust busting” as a signature policy and made improved supervision of large corporations a major theme in his 1901 State of the Union address.
• The Panic of 1907, which nearly brought  the financial system crashing down, clearly demonstrated the risks the American economy was running with a highly concentrated industrial security, a lightly regulated financial sector, and no central bank to backstop the financial system in a crisis.
• The Federal Reserve Act of 1913 reduced the autonomy of the central bank and gave the government a stronger hand in its operations, notably through a Federal Reserve Board appointed by the president.
• The Federal Reserve Act did little to constrain the banks themselves, leaving them free to engage in  risky lending and generate huge economic booms that would be politically difficult to rein in.  (It) had the power to engineer a bailout, but not to curb the risky activities that could make one necessary.
• The 1920’s were a period of significant deregulation, as Republican administrations dismantled the system of state control developing in order to fight the First World War. … The anti regulatory policies of the 1920’s helped make possible a period of rampant financial speculation, driven by investment banks and closely related firms that sold and traded securities in an unregulated free-for-all.
• For the last seventy years there has been heated debate over whether the Fed could have prevented the financial crisis of 1929 from evolving in the Great Depression.  … Clearly something had gone badly wrong.  The problem was …there was no effective check on the private banks as a group, whose appetite for risk had created a massive boom and a monumental bust.
• The magnitude and severity of the Great Depression created the opportunity for a sweeping overhaul of the relationship between government and banks.
• FDR’s favorite president was Andrew Jackson. …Both men shared an appreciation for the working of democracy and a fear that unconstrained private interests could undermine both eh economy and the political system.  In a sense they were both descendants of Jefferson.
• In January 1926, Roosevelt said, “Our enemies of today are the forces of privilege and greed within our own borders  … Jackson sought social justice; Jackson fought for human rights in his many battles to protect the people against autocratic or oligarchic aggression.”
• The Glass-Steagall Act (1933) separated commercial banking from investment banking to prevent commercial banks from being “infected” by the risky activities of investment banks. …As a result J.P. Morgan was forced to spin off its investment banking operations, which become Morgan Stanley.
• The system that took form after 1933, in which banks gained government protection in exchange for accepting strict regulation was the basis for half a century of financial stability — the largest in American history.
• Postwar commercial banking became similar to a regulated utility, enjoying moderate profits with little risk and low competition. …The half century following the Glass-Steagall Act saw by far the fewest bank failures in American history.
• The laws of the 1930s were intended to protect the economy from a concentrated, powerful, lightly regulated financial sector.  In the 1970s they were beginning to look out of step with the modern world.
• By the 1990s, Jefferson and Jackson … seemed more irrelevant than ever, and FDR’s New Deal was under widespread attack.
• The 1990s were a decade of financial and economic crises … in emerging markets … from Latin America to Southeast Asia to Russia. Fast growing economies were periodically imploding in financial crises that imposed widespread misery on their populations. For the economic gurus in Washington, this was an opportunity to teach the rest of the world why they should become more like the United States.  We did not realize they were already more like us than we cared to admit.

Written By Mike Bock

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.

In the 3rd Congressional District, Dr. Mark MacNealy is the Democrat who is challenging the incumbent Representative, Republican Mike Turner. Last evening, after the primary vote, there was a “victory” get-together by a group on enthusiastic MacNealy supporters at the Trolly Stop in the Oregon District.  Dr. Mark was unopposed in the Democratic Primary.

I think Dr. MacNealy has the potential to be a great candidate. He has an engaging intelligence and wit.  His is an attractive personality. Dr. Mark is a physician, a neurologist, 60 years old, living in Vandalia. He has volunteered many hours to help poverty patients.  Dr. Mark has the life experience that gives him not only an in-depth knowledge concerning health issues, but also insight into the overall challenges facing citizens in our district.

Dr. Mark told me that he is working many hours each day on fund-raising and has been having some good success. I didn’t ask how much has been raised.

Money is important in politics, but money is not everything.  Prior Democratic candidates, Dick Chema, and Jane Mitakides, who were defeated by Turner, both spent hundreds of thousands of dollars in their campaigns.  But their campaigns were ineffectual. These previous Democratic candidates never delivered a message that resonated with sufficient voters.

We make a mistake when we analyze why Carne, Mitakides and Chema failed by emphasizing how money corrupts the process and noting Turner’s cash advantage.  We must remember that it is the message that is of central importance, not money.

In 2008, I wrote, “To Defeat Turner, Mitakides Must Communicate A Compelling Reason For Change.” But, Mitakides failed to deliver a compelling message.

At the get-together, I spoke briefly with Dr. Mark’s campaign manager, Joseph Roberts, and expressed to him my conviction that election victory depends on Dr. Mark defining and delivering a convincing message.

I told Roberts that the campaign web-site is unclear, but the message in the web-site seems to be that Dr. Mark’s candidacy is all about creating jobs for the 3rd District. I said that, if Dr. Mark is contemplating putting job creation as the central message, in my judgment, that would be a bad idea.

“Elect me, and I will bring jobs to the region,” to me, is not credible.  Without some specific proposal, the promise to create jobs is really meaningless. And, as I see it, there is no sensible proposal for job creation that a congressional candidate can make. The promise to create jobs, therefore, to me, just sounds like so much political speak and, I feel, if pushed as a central message, will quickly brand Dr. MacNealy as just another politician seeking to say whatever will get him elected.

Mitakides tried to emphasize jobs in her 2008 campaign. This is what I wrote, in a post addressed to Jane, at the time:

I saw a bumper sticker that says, “Jane = Jobs.” But isn’t Turner in favor of jobs as well? He is also in favor, no doubt, of apple pie and motherhood. In a debate, if asked about his record about jobs, Turner would certainly be able to muddy the issue. Hasn’t he helped bring jobs to Wright Patterson Air Force Base? Can’t he take credit for bringing some new businesses to the region?

If you assert that “Jane equals jobs,” the burden of explanation falls on you. If you have a plan to create jobs, it is not indicated on your web-site, and if “Jane equals jobs” is shown to be basically an empty slogan, your case for change is ruined. The point is, even for those paying attention, I don’t think it is likely that the issue of jobs will be sufficiently compelling to bring enough voters to your candidacy. And the other issues/goals you state in your web-site, I fear, have the same problem.

I would like to be part of an energized campaign that would send Dr. MacNealy to Washington.  After all, in 2008 I wrote, Mike Turner Is A Bum, For Our Democracy’s Sake, Let’s Throw The Bum Out

In Dr. Mark, I feel, the messenger should be the message.  Voters in the 3rd District, of both parties, want to send someone to Washington of integrity, intelligence, empathy — a person experienced in diagnosing and solving problems, a person who is dedicated to making the system work.  The message:  Dr. Mark is the problem solver, not a partisan loyalist.  Mike Turner is the politician — a willing participant in a political machine, — showing little inclination for independent thought or action.

Here is the diagnosis I would encourage Dr. Mark to make:  Our democracy is in trouble. The failure of our economy, the failure to create jobs is a system failure.  Our system of democracy is failing and we need representatives dedicated to making democracy work.

These thoughts about system failure should be backed up with a specific plan of how Dr. Mark will conduct himself as congressman to make the system of democracy in the 3rd District more robust, more healthy.  I’m wondering if he could use the words of a physician to good end, and compare the body politic with the body human.

Dr. Mark, for one thing, I feel, should outline a specific plan that will show how he will spend the $1.3 million allocated, each year, for congressional work in Ohio’s 3rd District.  He should demonstrate his creativity and thoughtfulness in the details of an organizational plan that he should propose, as part of his election contract with voters in the 3rd District. He should show an organizational structure, as demonstrated in a proposed office budget, that would contrast markedly from the one used by the current crop of professional Washington insiders and politicians, ie., Mike Turner.   Mike Turner already has a record of how year after year he has chosen to spend this $1.3 million.

Last year, I wrote, and was ignored, Advice For Gary Leitzell And David Esrati: Make The Campaign All About Democracy, System Structure

And here I give a summary of several previous articles:  If We Are To Have A Great Future, The Ascending Issue In Our Democracy Must Be Democracy Itself

Written By Mike Bock