There’s been a lot of finger wagging at the unruly class recently. It seems we, the Main Street Taxpayers, have it all wrong. Our outrage over the AIG bonuses is class warfare. Our ignorance over the workings of government and finance is self-evident. Our anger over our lost jobs, homes and 401k’s is understandable, but misplaced. Our bus tours are inappropriate. Our pitchforks and tea parties are political theater. Our whining over unfairness is unbecoming.
So, basically we’ve been told to sit down, shut up, and be patient. Because this was all our fault. We the underfunded, overspent, and irresponsible taxpayers are to blame for this financial crisis. Or so the story goes according to the Wall Street pork masters, politicians and pundits (a.k.a. the cowardly, corrupt and clueless.).
But strangely enough, some other voices are starting to be heard above the din. And equally strange they are telling a far different story. One that points the fingers of blame not so much at the Main Street Taxpayers (although none of us remain completely blameless), as at the Wall Street Oligarchs.
And just in case you don’t remember from your long ago civics classes… An Oligarchy, according to Merriam-Webster, is:
… a government in which a small group exercises control especially for corrupt and selfish purposes.
In The Nation, Christopher Hayes warns us of what happens when Experts of the World Unite and weigh down one side of the balance sheet.
The outrage over the AIG bonuses occasioned a great deal of commentary about a resurgent populism, often in cluck-clucking tones of disapproval. But the rage, frustration and visceral sense of injustice associated with the bailouts are only part of the story.
There’s also the sense that an implicit social contract–by which we assign complicated technical matters to a class of talented experts and in return they figure things out–has been torn to bits.
Remarkably, the small class of (mostly) men running these failed financial institutions seem just as aggrieved. Instead of reacting to their failure with shame or apologies, many exude distrust of and contempt for the great unwashed who don’t understand their brilliance.
-snip-
the financial elites are ideologically bankrupt, intellectually discredited and morally debased. They have no reputational capital and inspire no confidence. And yet, just as the deftly named “legacy assets” continue to pollute the balance sheets of the major financial institutions, so too do these legacy elites continue to lurk on one side of the balance sheet of democracy. In other words, even if they aren’t worth listening to, they still wield power. They can still bring the whole thing down.
Which begs the question – if the financial elites are bankrupt, discredited and debased, why do they still wield so much power?
Well, it seems the key to their power is in the very nature of an Oligarchy. Oligarchs need enablers. Particularly, government and media enablers. The enablers are built into the foundation of the Oligarchy and then become embedded in the building blocks of all that transpires. So in the end, the enablers’ own survival requires that they endless serve and protect the Oligarchs.
And in the US, the Wall Street Oligarchs took over during The Quiet Coup explains Simon Johnson, former chief economist of the International Monetary Fund, in The Atlantic.
Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.
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. …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.
One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, … Henry Paulson, … John Snow, …Dan Quayle … Alan Greenspan.
These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. …
…Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks…
A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true…
Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. …To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.
Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. … This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.
And so the experts were all in place and the Wall Street Oligarchs took hold. Embedding themselves in the culture at large. Spinning a mystique of Wall Street that became celebrated and enshrined in books, movies and songs.
…In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country — and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom —trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.
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.
The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.
A party mood settled in and the Congo line was formed, sweeping everyone along in its wake. Occasionally someone stubbed a toe or stumbled briefly, but the rest of the revelers hardly noticed. The Congo line grew bigger and bolder. The music player faster. The step became quicker. And then the inevitable happened. The line of thrill-seeking revelers became too large to manage and too unwieldly to maintain. It began to swing wildly in every direction. The revelers could not keep up and Congo line bust open spewing revelers in every direction.
And in the aftermath, we are facing signs that say Welcome to America, the World’s Scariest Emerging Market explains former deputy director of the International Monetary Fund’s Policy and Review Department, Desmond Lachman in The Washington Post. (Political scientist Ian Bremmer defines an emerging market as “a country where politics matters at least as much as economics to the markets.”)
… despite their supreme arrogance, the country’s leaders never had a coherent economic strategy and that major decisions were always made on the run. I never thought that was how policy was made in the United States — until, that is, I saw how totally at sea Treasury Secretaries Henry Paulson and Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke have appeared so many times during our country’s ongoing economic and financial storm.
The parallels between U.S. policymaking and what we see in emerging markets are clearest in how we’ve mishandled the banking crisis. We delude ourselves that our banks face liquidity problems, rather than deeper solvency problems, and we try to fix it all on the cheap just like any run-of-the-mill emerging market economy would try to do. And after years of lecturing Asian and Latin American leaders about the importance of consistency and transparency in sorting out financial crises, we fail on both counts…
…I thought then, that the United States was not similarly plagued by crony capitalism! However, watching Goldman Sachs’s seeming lock on high-level U.S. Treasury jobs as well as the way that Republicans and Democrats alike tiptoed around reforming Freddie Mac and Fannie Mae — among the largest campaign contributors to Congress — made me wonder if the differences between the United States and the Asian economies were only a matter of degree.
Yet how often do U.S. leaders respond to growing signs of economic dysfunctionality by spouting nationalistic rhetoric … instead of facing our problems we extol the resilience of the U.S. economy, praise the most productive workers in the world, and go on and on about America’s inherent ability to extricate itself from any crisis. And we ignore our proclivity as a nation to spend, year in year out, more than we produce, to put off dealing with long-term problems, and to engage in grandiose long-term programs that as a nation we can ill afford.
A singular characteristic of an emerging market heading for deep trouble is a seemingly suicidal tendency to become overly indebted to foreign creditors.
In part two, Facing Down the Wall Street Oligarchs, I’ll recap where the US now stands in this financial crisis and explore what needs to happen next with both the Main Street Taxpayers and the Wall Street Oligarchs.
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Version of this crossposted at No Quarter on 3/29/09 —Major H/T to LisaB and Mountainaires for bringing to my attention many of the articles used both directly and indirectly in part one and part two. All of these articles are well worth a full reading and I respectfully urge readers to find the time if possible.
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