The new American oligarchy

About two months after President Obama was inaugurated, he met with the CEOs of the 13 largest financial institutions to ask for their cooperation in averting financial collapse. The U.S. government was engaged in a major financial rescue effort to save the U.S. banking industry from collapse. In return, he asked that the bank CEOs hold off on big pay raises and bonuses that enrage the public. “We’re all in this together,” he reportedly said. “Help me to help you.”

He was pleading with them as if they were a sovereign power in their own right. “This administration is the only thing standing between you and the pitchforks,” he reportedly said.  The bank CEOs balked at Obama’s requests and since then have mobilized against even modest financial reforms.

This story is told in 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, by Simon Johnson and James Kwak. Simon Johnson is a former chief economist for the International Monetary Fund. His brother-in-law, James Kwak, has had a successful career as a software entrepreneur and business consultant. In many ways, they argue, the United States fits the profile of faltering Third World oligarchies the IMF has had to bail out. And Obama, so far, has not challenged this.

Their definition of an oligarchy is a nation in which economic power generates political power, and vice versa. They show how, for the past 30 years, a financial oligarchy has emerged and, under Democrats and Republicans alike, has steadily freed itself of governmental control while continuing to demand and get government bailouts. The recent bailout is only the latest and biggest of a long series, and is unlikely to be the last unless big changes are made.

The savings of Americans, instead of being invested in American industry and contributing to the nation’s economic growth, have been diverted to a kind of high-stakes poker game that benefits nobody but the winners, and in which the big losers are bailed out.  This will not end, they say, until the big banks are broken up, as President Theodore Roosevelt broke up the Standard Oil trust.

The power of the Wall Street oligarchy does not come merely from its huge contributions to the congressional and presidential election campaigns, nor from the revolving door between Wall Street investment banks and the executive branch of the U.S. government. It comes from the complexity of new financial instruments; ordinary mortals do not understand what a “credit default swap” is and are intellectually intimidated by those who do. It comes from an intellectual revolution which has established as conventional wisdom the idea that governmental activity is by definition bad and unregulated free enterprise is by definition good. It comes from a revolution in moral values, which takes the Gordon Gekko character in the movie “Wall Street” as a role model.

So you can have something called a “derivative” which is considered an investment, like opening a new factory, but is really equivalent to making a bet with a bookmaker on the Dow Jones Industrial Average or some other financial statistic.

Johnson and Kwak say the “too big to fail” banks need to be broken up into smaller units. They would limit bank assets to 2 percent of U.S. gross domestic product for investment banks and 4 percent for all banks. They chose GDP as the yardstick because that is a measure of the ability of the American economy to finance a bank bailout. This would affect six banks – Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.

Johnson and Kwak advocate stricter regulation of banks, but they don’t think regulation in and of itself is a sufficient answer. Regulators can be influenced or outsmarted, and regulations can’t cover everything. Nor is it an answer to say that next time there won’t be a bailout.  If a financial institution’s assets are so great that its failure will crash the financial markets and the economy, it will be bailed out.  The only way not to have banks too big to fail is to make them too big to exist.

Click on this for Simon Johnson’s article, “The Quiet Coup,” in The Atlantic Monthly about the takeover of the U.S. government by financial interests.
Click on this for The Baseline Scenario, the web log of Simon Johnson and James Kwak.
Click on this for the names of the 13 bankers President Obama met with.

Click on this for a review of 13 Bankers by Christopher Caldwell in the Weekly Standard magazine. Caldwell notes that the big Wall Street banks contribute more to Democrats than Republicans, and that they made their biggest impact on policy during the Clinton administration. He sees this as an opportunity for the Republican Party to break its Wall Street ties and stand up for the interests of the American people. I would be surprised but pleased if this happened.

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