America's bankers are oligarchs

Writing in the Atlantic, Simon Johnson, former chief economist of the IMF, takes a hard look at the econopocalypse and decides that the root of America's (and Europe's) economic woes is the cozy relationship between super-powerful bankers and government -- oligarchy. So, he says, we cannot fix the economy until we break up the banks, curb executive compensation in the finance sector, and turn it into "just another industry."

Typically, these countries are in a desperate economic situation for one simple reason–the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit–and, most of the time, genteel–oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon–correctly, in most cases–that their political connections will allow them to push onto the government any substantial problems that arise...

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership–recognizing reality–and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks–cleansed and able to lend safely, and hence trusted again by other lenders and investors–could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5trillion (or 10percent of our GDP) in the long term. But only decisive government action–exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health–can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces–the power of the oligarchy–is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

The Quiet Coup (via Making Light)


  1. If anything, I see the U.S. getting much, much more oligarchical in the near future rather than less.

  2. Unshackle the peoples government from the money trust…yes!
    Government regulation of another aspect human interaction…NO!

  3. Counting down to some anarchist calling for some make believe solution in 9… 8… 7…

    ah damn, that was quick.

  4. A common-sense, logical approach to fixing the current quandary and significantly reduce the risk of a repeat performance in the future.

    Ergo, doesn’t have a chance in hell of being done.

    1. Still waiting for a “Ron Paul warned about this in 1957” post.

      I think he first mentioned it when he was expelling the Tarquins.

  5. @Tak #13:
    Now I wouldn’t want to advocate
    Violence or bloodshed against the state
    But if some fiendish criminal mind
    Were to contemplate action of a similar kind

    It’s a
    Justified homicide
    You’re exploding head would make a beautiful sound
    Justified homicide
    You’re shredded limbs would decorate the ground

    Company man you got nothing to give
    You’ve been selling out since you were a kid
    You got your nose caught in the trough
    Excuse me if I cut it off


    Snog – Justified Homicide

  6. On a serious note, though, and having actually waded through the entire article (quite worthwhile), I can say that it strongly echoes the points made in the Matt Taibbi article posted the other day (minus the swearing and with a lot more authority).

  7. I strongly recommend reading the whole article before commenting. He may not be recommending what you think he’s recommending :) )

    the global economy continues to deteriorate, the banking system in east-central Europe collapses, and – because eastern Europe’s banks are mostly owned by western European banks – justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. the Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the US economy, already staggering, down onto both knees. The baseline growth rates used by the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the US Treasury is currently using to evaluate banks’ balance sheets becomes a source of embarrassment.

    Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.”

    This is his *optimistic* outcome scenario, by the way.

    My prejudices and opinions on economic matters tend towards liberalism of the Economist sort. However I can’t pretend that this scenario, which would have the added benefit of giving us a couple more decades’ breathing room on AGW and hence might actually save civilisation as we know it in the long run, wouldn’t lead to tens and hundreds of millions of corpses piling up against the windows.

    I hope y’all made the most of the golden years whilst you could; they’re dead and gone, we (mostly) haven’t actually felt it yet. (I guess it’ll sink in when cheap electronics built with an expected lifetime of perhaps a couple of years start packing up after five.)

  8. ” … These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government… ”

    Er, and who would be the judge of what is this ‘true value’? And it would surely take any organisation, government or not, more than 30 days to even get their head around the actual value of a messed up bank? More realistically it could take a year plus for any public body to set a price on a bank’s assets and then go through the tricky legal process of a forced takeover.
    I can appreciate the sentiment but this seems like soapbox politics.

  9. Unsustainable growth is unsustainable. Another valuable life lesson from the Reagan legacy project.

    Presidents in Cowboy Hats are bad news.

  10. The great thing about this article, and our current situation is, we’re not going into uncharted territory. Many other nations have been through this, and we know the cure.

    Whether or not we’ll take the medicine is the question.

  11. Don’t worry, Goldman Sachs and its alumni will save us–they’re the bestest and the brightest!

  12. “And the advice from the IMF on this front would again be simple: break the oligarchy. ”

    Ironic statement of the week.

  13. These numbers seem to be a revealing reflection of the outsourcing and Wal*Martization of the US economy. We no longer have any significant manufacturing sector jobs and what jobs are left have been subject to downward wage pressure for decades. A huge chunk other work that isn’t location-specific has been moved offshore.

    That leaves very view sectors where we still have a lot of high-paying jobs here in the US — the financial sector is one of them.

    I’d like to see some similar charts for the other remaining major sectors of the US economy.

  14. A few better quotes could have been:

    “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.”

    “One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.”

    “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:
    • insistence on free movement of capital across borders;
    • the repeal of Depression-era regulations separating commercial and investment banking;
    • a congressional ban on the regulation of credit-default swaps;
    • major increases in the amount of leverage allowed to investment banks;
    • a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
    • an international agreement to allow banks to measure their own riskiness;
    • and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.”

    “Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.”

  15. Hm. If the banking industry is an oligarchy, then was the previous administration an oliogarchy?

  16. “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 than the Great Depression…”
    “You ain’t seen nothin’ yet…” – BTO
    You think it’s bad now? Wait until this time next year when GM is gone, Chrysler has been sold to FIAT, and Ford is coming to Obama with a tin cup -probably sooner than later. Many won’t be convinced of the depth of this crisis until unemployment hits 15% or more (twenty-one(21) million or more) -nationwide (If UE hits 25% -that’s thirty-five(35) million- it probably will be too late for the economy at that point). It’s time that the Obama administration started making hard decisions to trim the dead wood from the banking industry -like was done back in the Eighties- and introduce some legislation with teeth to regulate the banking and financial sectors again. The sooner the tough choices are made the sooner we will be out of this mess.

  17. #32, I think the Obama administration did make their hard decision; They pushed Geithner into Treasury and brought on board Larry Summers. Obama’s decision has already been made. He’s going to support the banker’s interests above all else.

    It’s been completely obvious that the insolvent banks have to be resolved through receivership/nationalization, like the RTC. It has also been absolutely and completely resisted by the industry. Their demands have been met. This is national (and probably international) suicide, I think. There won’t be a bailout/Fed program/”Legacy Asset” auction big enough to satisfy the appetites of the FIRE sector. I guess we get to keep shoveling money into their maws until we run dry.

    You’d think the one lobby group that has at least some regard for it’s members, the AARP, would be sounding the alarm. All I see is some bright, but non-influential investment bloggers waving red flags. Everyone else seems to be in a stupor or is hoping it all comes back next year…I guess.

    Jaysus, is this bleak.

  18. I will agree with him on a number of points here but he is missing it completely in a number of different aspects.

    First and foremost he paints a rosy picture of the IMF. The Structural Adjustment Policies attached to IMF lending have generally been regarded as problematic on a number of fronts(read some Stiglitz). They were terribly undemocratic, forcing poor countries to open their markets to subsidized competition from abroad, lead to increasing consolidation of industries, negatively affected the poorest of emerging country populations, rushed through the sell-off of national industries, at a fraction of their actual value, in a rather corrupt fashion to domestic elites or multinationals. Good job there guys… thats who I want to listen too. They are just looking for some legitimacy in a world where they have been in ill repute for quite some time.

    Second the finance industry isn’t the only oligarchy with its’ tentacles wrapped around Washington. Is this guy kidding? Has he been ignoring the military industrial complex, the health insurance and pharmaceutical industries. The veritable revolving door between government, lobbying, high-ranking military personnel and contractors. Lets have no illusions here, this kind of capture enters the root of our political system and extends across all of the world’s economies developed and emerging.

    Third the fundamental problem is inequality. There is too much money and power concentrated in too few hands. American middle class purchasing power dried up a while ago and they have been trying to pump life into it by extending the lines of credit for years, through second mortgages, lowering the requirements for credit cards, car loans, and homes, lowering interest rates. While wages have been stagnating for years.

    Now concurrently through tax avoidance, government tax cuts, offshoring, and by any other means possible the wealthiest of the world have been accumulating more and more money which they need to invest before it loses value to inflation. Well pray tell where are these good investments when there is no one to buy their useless shit anymore, since the individuals that spend the bulk of their incomes on purchasing are up to their necks in debt. That leaves the only way to make money is by speculating on assets that exist, and commodities (wait wasn’t the price of gas 4 dollars). So what did the bankers do? They speculated on commodities futures and made magical CDOs and CDSs, that were triple A rated through collusion that was pretty much criminal, that no one understood and which were based off a useless risk management equation.

    Most economists still think the economy is a perpetual motion machine. Most of them didn’t catch this coming because the field is terribly compartmentalized and detached from reality. They have their heads too far up their abstract models and aggrandized sense of self importance to see any semblance of reality coming.

    Idiots.. MIT, IMF alike.

    Stelios Theoharidis

  19. It always comes back to this true value. According to Hayak, The only way to figure out what the true value for something is is to place it on the free market. When government tries to to find something’s true value it fails because markets are too complex because of their interconnections. Take something as “simple” as an Ikea bookshelf and just try to list all the different industries involved. Don’t forget about the glue in the particle board or the finish. If you want another example take a look at what happened with food during the Great Depression. People were starving while FDR was telling farmers to burn their crops and kill their livestock because it was thought that food prices were too low.
    If you can accept the above statement, then why not let the banks go bankrupt. That would allow the market to sell off their assets at fair market prices and completely cut out unneeded bureaucracy. Bankruptcy does not mean everything just disappears. The valuable parts are purchased by the successful and the waste is discarded at a loss to the very people that caused the problem. As the article states, government was part of the problem so why are we so quick to look to them for the solution.
    One final thing to consider, politicians can be bought because they don’t have a direct stake in the outcome of the sale. The potential for using money to gain influence or outright bribes would be too tempting for other banks to give up. I also wouldn’t look to laws for help because they are rarely perfect and often have loopholes. The only way I see of bribing the private sector is to pay a higher value for a given asset and isn’t that to goal of all of this?

  20. “This was late-night, backroom dealing, pure and simple.”

    i hate to always simplify things so much – but the understanding of this situation depends on who you think the “power elites” are

    also – whether or not the “economic theater” is based on anything in the “real world”

    economy is a tool of public opinion – or is it vice versa?… i wont be specific, you be the judge –


    “The great thing about this article, and our current situation is, we’re not going into uncharted territory. Many other nations have been through this, and we know the cure.

    Whether or not we’ll take the medicine is the question.”

    …it’s always hard to tell how much is planned and how much is organic (am i still talking about the economy?) lol

  21. So, in order to break up the cozy relationship between bankers and government, we should get get government more involved in the micromanaging of banks.

    So we’re on the right track then!

    I know an old lady who swallowed a spider,
    that wiggled and jiggled and tickled inside’er.
    She swallowed the spider to capture the fly,
    I don’t know why she swallowed the fly,
    Perhaps she’ll die.

  22. if government is the old lady

    and the public is the fly

    then who is gonna keep building the web?

    wait wait – the economic system is the fly, and the public is the old lady and the spider is the auto-industry?

    wait no…

  23. Well, the federal takeover and break up of these unsustainable financial monopolies is a start. However, I propose that first crashing the Dollar and the Euro into a brick wall might work to our benefit in the long run; I think a North Atlantic Union makes a lot of sense, but I don’t see it happening without a common currency. A loss of faith in the $ & € could help us move toward making that a reality.

    Why do we persist in being so nostalgic about the imaginary lines we’ve drawn all over the landscape? If we are ever going to get any respect in the Intergalactic Council, we must absolutely strive for a credible global government.

  24. Higher officials should forfeit their right to privacy and their right to ownership (yes, give all their money to the state) for the duration of their office.

    We common citizens are losing control of our governments, and badly need to reverse this trend.

    One idea is to get more involved in the local (ie: town) politics, were you can make a difference, starting to clean the govt from below.

  25. Banking will never be “just like any other industry”: Money is a MEANS OF EXCHANGE – the great facilitator, the thing that gets you anything you want, people kill, maim and destroy for it.

    So let’s remember what we’re dealing with here.

    There will always be people who concentrate, through whatever means, money into their hands, who channel it and control its distribution. If there weren’t, there would be people who’d figure it out – it’s a natural component of humanity to do this.

    If somehow all the bankers behaved in a more moral way, we might be better off. But high salaries attract greedy people, so the equation is already imbalanced. On the other hand, pay peanuts, get monkeys – and you don’t want monkeys looking after our most important resource (although I can think of one or two that we believe we elected to control positions).

    So step one is get real, understand the situation, and then do something.

    My solution? Build replicators – for everyone.

    With respect

  26. firstly – slizzerred — thems fightin’ words – and ur an alien/commie bastard (j/k) but u better hope i dont catch u when im wearin my sunglasses….

    and secondly – walter – – consolidation of funds wont have any meaning when enough humans ascend and realize their true psycho-kinetic powers

    after the singularity all trade will be based on mental/pyro/kinetic/hypnotic prowess –

    and thirdly – make me a grilled cheese sandwich bitch (also known as transcendental awakening)

  27. So, how much does it cost to stop global warming from making huge parts of the world uninhabitable? 1% of the GDP?

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