Simon Johnson's piece in the upcoming Atlantic is one of those must-ready things bloggers occasionally go on about. But it's not a fun must-read. It's more of a depressing must-read. Sort of like watching Hotel Rwanda. The central thesis is that America's financial crisis is as much a problem of political power as of economics. Ridding the banks of toxic assets without ridding the political system of the bank's influence will prove, in the long-run, insufficient. What's so depressing about Johnson's article is that his insights come because he's examining America in much the same way he'd examine a banana republic. As a former IMF troubleshooter, he's used to assessing the financial problems of small economies and delivering unwelcome news. In most cases that news is uniquely unwelcome to the elites who birthed the problem and must now be displaced. "The biggest obstacle to recovery," he says, "is almost invariably the politics of countries in crisis." Different countries, of course, protect their elites in different ways. And the American system has developed a process of power transmission that is particularly subtle, and will likely prove particularly difficult to undermine:In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.
We let the financial sector have free rein of our political system because we believed they deserved it. To paraphrase Calvin Coolidge, the prevailing sentiment held that what's good for investment banks was good for America. And in some ways, the current crisis has only emphasized that belief: What's been bad for investment banks has, after all, been very bad for America.The implicit mission of the Treasury Department has been to restore the financial sector, not replace it. Christina Romer explained that "private firms that are kind of doing us a favor...coming into this market to help us buy these toxic assets off banks' balance sheets," and Geithner spoke of the "financial expertise" needed to price the assets that the financial system originally mispriced. We're angry at the financial sector, but it's not clear that our government has actually lost faith in it. On Friday, in fact, Obama held a summit with 15 of the nation's top bankers where Bank of America CEO Ken Lewis explained that "at some point you have to stop focusing on the past, and focus on the present." Robert Kelly, CEO of Bank of New York Mellon, agreed. "Our interests are very much aligned with the administration's," he said. What makes this crisis different, Johnson argues in his article, is not that the economic fundamentals are different, but that the political fundamentals are. Smaller economies needed the IMF. By the time they came to Johnson, they were in a position where they had no choice but to make difficult decisions and upend their existing political economies. The U.S., by contrast, "is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering." No one can make us do anything.Depressing stuff. But don't take my word for it. Some banks are too big to fail and some articles are too good to blog. Read the whole thing.
