Thursday, June 8, 2017

Book Review: '13 Bankers: The Wall Street Takeover and the Next Financial Meltdown' by Simon Johnson and James Kwak

Review by Mark Sumner
When the banks failed, stock market tanked, and the TARP money rolled out in the last months of the Bush administration, books on the topic were right behind. But even when those books weren't facile in their analysis, they were generally lacking in the one thing that makes for a compelling read: a good narrative that cuts to the heart of the problem. Without a coherent presentation of the central issues, reading about credit default swaps and mortgage valuation formulas can be a little daunting. And boring. And really quite pointless.
But now we're getting what might be considered the "second generation" of books on the financial crisis. Not only do these books provide a better narrative of the names and motivations behind the mess, they provide some idea of what we might do next. Most of all, they recognize something that's still slow to dawn on most people, especially if they're looking at the relatively rosy results from the stock market -- the financial crisis isn't over, and the real problems are still in our future.


13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson and James Kwak is one of these second round volumes, and reading it shouldn't just be a wakeup call, but a call to arms.
Their story begins with a meeting that took place in March of 2009. The stock market was down 40%, the shares in major banks were down as much as 95% despite billions in bailouts. And the banks were still handing out millions in bonuses to the executives who had caused the problems.
That Friday in March, thirteen bankers — the CEOs of thirteen of the country's largest financial institutions — gathered at the White House to meet with President Barack Obama. "Help me help you," the president urged the group. Meeting with reporters later, they toed the party line. White House press secretary Robert Gibbs summarized the president's message: "Everybody has to pitch in. We're all in this together."  ...
What did that mean, "we're all in this together"? It was clear that the thirteen bankers needed the government. Only massive government intervention, in the form of direct investments of taxpayer money, government guarantees for multiple markets, practically unlimited emergency lending by the Federal Reserve, and historically low interest rates, had prevented their banks from following Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual, and Wachovia into bankruptcy or acquisition in extremis. But why did the government need the bankers?
Any modern economy needs a financial system, not only to process payments, but also to transform savings in one part of the economy into productive investment in another part of the economy. However, the Obama administration had decided, like the George W. Bush and Bill Clinton administrations before it, that it needed this financial system — a system dominated by the thirteen bankers who came to the White House in March. ...
Despite the central role of these banks in causing the financial crisis and the recession, Barack Obama and his advisers decided that these were the banks the country's economic prosperity depended on.
It was at that meeting that President Obama told the bankers that he was "the only thing between you and the pitchforks." He demanded that bankers drop the bonuses and practices that were enraging the public and support new regulations. The bankers all may have nodded their agreement that day, but once they were back on Wall Street, they ignored the president and everyone else. How could they get away with it?
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. Financial sector money poured into the campaign war chests of congressional representatives. Investment bankers and their allies assumed top positions in the White House and the Treasury Department. Most important, as banking became more complicated, more prestigious, and more lucrative, 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.
They got away with it because what George Bush senior once referred to as "voodoo economics" has become not just mainstream, but the foundation of our system. The Wall Street influence was not just in the money that was driving campaigns, it was in the people. Wall Street was no longer just exerting pressure on Washington, Wall Street was Washington. The same people, moving back and forth between the Hill and the Street through one administration after another. The regulators who were supposed to be controlling Wall Street didn't miss the warning signs because they were stupid, they missed them because they were Wall Street people, brought up on the same Wall Street ideas as the people driving toward a leveraged and packaged disaster. Wall Street didn't believe they could be regulated, and neither did the people who were supposed to regulate them.
Even after the disaster, that attitude hasn't changed.
The political influence of Wall Street helped create the laissez-faire environment in which the big banks became bigger and riskier, until by 2008 the threat of their failure could hold the rest of the economy hostage. That political influence also meant that when the government did rescue the financial system, it did so on terms that were favorable to the banks. What "we're all in this together" really meant was that the major banks were already entrenched at the heart of the political system, and the government had decided it needed the banks at least as much as the banks needed the government. So long as the political establishment remained captive to the idea that America needs big, sophisticated, risk-seeking, highly profitable banks, they had the upper hand in any negotiation. Politicians may come and go, but Goldman Sachs remains.
If this sounds disheartening, that's just the start.  Johnson and Kwak take a look at the type of proposals now being put forth by Senator Dodd and conclude (quite convincingly) that they're almost completely worthless. The consumer protections aren't a bad idea, they just don't come close to addressing the real issue at the heart of the problem.
The problem is that the banks are still as large as they ever were. In fact, thanks to the buyouts of their failed neighbors using loans that we provided, they're bigger. Citigroup currently has over $2.5 trillion in assets. There's absolutely no evidence that banks need to be even a twentieth of this size to compete internationally, and there's certainly no evidence that the existence of such banks is good for the economy. The only thing that's certain is that banks this large provide a huge and looming risk. They are able to take any chance no matter how ridiculous, ignore any warning, reward their executives with a lavishness that would make Caligula blush, and at the end of the day come cap in hand, sure that the government will bail them out.
The solution that Johnson and Kwak propose is one that has been suggested by many others -- make the banks smaller. Use anti-trust regulation to break up these enormous banks, and set new limits so that no bank ever again has such a stranglehold on our nation that it becomes immune to its own stupidity.
The trouble with that solution is that, thirty years on from "morning in America," America has forgotten what reasonable regulation looks like. Reagan-Rand-Greenspan-Gramm economics defines our limits. We're two generations deep into "government is the problem," and the people who believe it are not only waving "moran" signs on main street, they're wearing pin stripes on Wall Street -- and in Washington. Even though we can directly point at the deregulations that allowed this cancer to grow, suggesting that we need to put those regulations back is now viewed as a shockingly radical idea by bankers, economists, and politicians who've somehow become convinced that "unregulated free markets" are somehow engraved in our constitution. The regulations being put forth by Senator Dodd have as much chance of stopping the next round of speculation and collapse as a Dixie cup does of holding Niagara.
Preventing another massive meltdown doesn't just demand that we roll back deregulation. It demands that we roll back the kind of thinking that led to deregulation. The safeguards put in place after the Great Depression saw us through decades of relative stability despite staggering changes and challenges on the world stage. Removing those guard rails has brought us the savings and loan disaster, two major crashes of the markets, and now a fiscal disaster that's still in its opening stages.
If we can't find our sanity, and the nerve to take the wheel away from the money-drunk drivers steering our economy, there is no government in the world large enough to bail out what happens next.

In the United States, we like to think that oligarchies are a problem that other countries have. The term came into prominence with the consolidation of wealth and power by a handful of Russian businessmen in the mid-1990s; it applies equally well to other emerging market countries where well-connected business leaders trade cash and political support for favors from the government. But the fact that our American oligarchy operates not by bribery or blackmail, but by the soft power of access and ideology, makes it no less powerful. We may have the most advanced political system in the world, but we also have its most advanced oligarchy.


Editor's note: This review was originally published at the Daily Kos, which notes that its "content may be used for any purpose without explicit permission unless otherwise specified." The original page can be found here. Like what you read? Subscribe to the SFRB's free daily email notice so you can be up-to-date on our latest articles. Scroll up this page to the sign-up field on your right. 

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