The Weekly Standard has a very interesting article about reform in the banking industry. And despite the common perception that Republicans are the party of big money, the author, Christopher Caldwell, argues otherwise in a discussion of the new book 13 Bankers, by Simon Johnson and James Kwak.
So every time the president accuses Republicans of trying to “block progress” or of defying “common sense,” as he did that night, he is executing a dangerous tightrope walk. His party’s electoral fortunes depend on his making forceful calls for reform of our banking laws. His party’s fundraising fortunes depend on his ensuring that no serious reform—of the kind that endangers the big banks’ size and power—ever happens. That may be why the Democrats’ strategy of painting the Republicans as obstructionists on finance reform has gained little traction. By the same token, if Republicans ever did get serious about reforming the banks—and even about breaking up an industry that has turned into a Democratic war chest—they would put Democrats in mortal peril. There seems no chance of this. Obama’s taunts show a confidence, verging on certitude, that Republicans’ hypocrisy is as deep as his own.
What does it mean, the inability or unwillingness of either party to change or discipline the big banks in any way, even after all the havoc they have lately caused? In the year and a half since the implosion of Lehman Brothers, Simon Johnson, who was the chief economist of the International Monetary Fund in 2007 and 2008, is the only person to have come up with a plausible explanation. He has done so by examining the United States as an IMF analyst would examine some bankrupt basket-case of a country in what used to be called the Third World. Johnson believes that the leaders of the American finance industry have turned into the sort of oligarchy more typical of the developing world, and that they have “captured” the government and its regulatory functions. Johnson laid out this bombshell thesis in the Atlantic a year ago.
Most countries rescued by the IMF are marked by tight links between the business elite and the political elite. They are oligarchies. Johnson defines oligarchy as a system whereby economic power can be translated into political power (and vice versa). When you try to fix a country dominated by an oligarchy, you immediately hit a frustrating paradox: Rescue plans make the oligarchy more powerful. Somebody has to decide which banks and industries get to use it, and which ones are set adrift. In this process, the cement company owned by the finance minister’s cousin does better than the cement company run by some schmuck in the hinterland. And it is not just that politically favored companies get the original infusion of IMF cash. Private investors can see what is going on and realize that it is “best to invest in the firms with the most political power (and hence the most assurance of being bailed out in a crisis).” So if the politically connected rich don’t pay, who does? “Most emerging-market governments,” according to Johnson, “look first to ordinary working folk—at least until the riots grow too large.”
Caldwell says the big banks should be broken up – nationalized in the short term, broken up and eventually sold with depositors protected and shareholders taking the loss. Caldwell then does a short reminder of some crises that precipitated the meltdown and revisits the real estate bubble, saying that the authors of 13 Bankers view of these is pretty conventional. Not conventional, however, is where the authors place most of the blame for the financial mess.
It is notable then, that for all their criticism of George W. Bush’s economic policy, Johnson and Kwak do not hold him responsible for the bankers’ takeover of the levers of power. Nor do they blame Ronald Reagan. Either Republican president would have been sympathetic to a deregulatory agenda, but Reagan confronted a recalcitrant Democratic Congress, and by the time Bush took office, Washington had already been offered up to Wall Street. Johnson and Kwak place the establishment of an American oligarchy squarely in the administration of Bill Clinton. “One of history’s curiosities,” they write, “is that this shift happened within a Democratic administration, headed by a president elected largely because of middle-class economic insecurity.”
Caldwell reminds readers of the revolving door between government officials and bankers that became really apparent in the 90s, including Roger Altman, Richard Gephardt among others. Here’s an article at NQ about that revolving door and how even spouses make use of it.
. . . Ideologically, of course, Republicans have long been the party more amenable to financial deregulation—and that is an important consideration if you believe that democracy is functioning properly. If you believe it has degenerated into a kind of oligarchy, however, the important question becomes not the ideology of the respective parties but the allegiances of the oligarchs. What are the allegiances of our oligarchs? Which is their political party?
Johnson locates the oligarchy in the upper reaches of the investment banking profession. What he doesn’t note is that these are overwhelmingly Democratic.
That Democrats are the party of the oligarchy gets more, not less, obvious when you move beyond Wall Street. The cliché that Republicans are the rich people’s party makes a certain amount of common sense if you are just looking around your Middle American suburb. You will notice that the man making $200,000 a year is marginally more likely to vote Republican than his neighbor making $50,000. But in suburbia, the word “rich” is really a kind of slang, meaning “slightly better off.” Johnson isn’t talking about those people. He is talking about people who are rich-with-a-capital-R, the ones who can convert wealth into political power, the ones whose annual income is measured in millions, or tens of millions. Again, how do they vote, and who is their party?
Caldwell kindly provides a graph.
Interesting stuff. But Caldwell doesn’t spare Republicans.
That presents a challenge to the usual way of looking at things, doesn’t it? Republicans have been paying a high price in both public opinion and political coherence to defend the prerogatives of a class that despises them. It was to cosset just these people with tax cuts that George W. Bush destroyed the balanced budget. It would seem that Republicans are either an exceptionally idealistic political party (pursuing their ideology to the point of self-destruction) or an exceptionally foolish one (convinced that anyone with a great big pile of money is their friend). There may be another explanation. To paraphrase something Clinton aide David Dreyer said many years ago, Republicans have done Lord Acton one better—they’ve been corrupted by power they don’t even have.
Caldwell goes on to say Senate Banking Committee chair Dodd isn’t negotiating with Republicans for a tougher bill but a weaker one.
The sympathies of Johnson and Kwak are with the left of the Democratic party, specifically with the SAFE Banking Act sponsored by Senators Sherrod Brown of Ohio and Ted Kaufman of Delaware.
No book on the meltdown will make you angrier than 13 Bankers. On the off-chance that it doesn’t make you as angry as you’d like to be, though, Johnson and Kwak also have an excellent blog, Baseline Scenario, that addresses some of these questions in a more heated way.
Here at NQ, Linda Anselmi wrote the following three great posts on The Quiet Coup:
That article also caught my eye when I did a financial round-up, but without the detail Linda brought to it.
Many, if not most of us, no longer declare allegiance to a party or even to particular politicians, preferring to see if their deeds match their words.
So, if you check out this site, do let us know what you think. If you’ve a background in finance, what do you think of this analysis?