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Break the banks or go bust

Like many of you, I've read a lot about the ongoing financial meltdown in the hopes of gaining an understanding of what is a decidedly complicated situation. This month's issue of Atlantic has one of the best pieces I've come across, in part because it describes what it is we need to do to get us out of this mess.

Ultimately, it's not about derivatives or bonuses or regulations. It's about politics, says the author, Simon Johnson.

The lead-in to the story summarizes matters quite nicely:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government - a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we're running out of time.

This is not a short story - the printout runs 11 pages - but it is worth the investment of time.

Wrote Johnson:

Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks.

Johnson offers some eye-opening statistics:

  • Until the mid-80s, the financial sector never accounted for more than 16 percent of domestic corporate profits. By this decade, they had soared to 41 percent.

  • Average compensation in the financial sector ranged from 99 to 108 percent of the private sector in the '50s, '60s and '70s. It took off in the '80s and by 2007 hit 181 percent.

  • Wall Street paid out $18 billion in bonuses last year, amounting to 13.5 cents for every dollar of federal assistance, not that it was quid pro quo.

Johnson argues that Obama and company have got to play real hardball and break the political power of the bankers and others who have gotten us into this mess. And the public outrage notwithstanding, he said the bankers have gained, not lost power since the crisis began.

Johnson maintains that, absent a disarming of big finance, the nation is in for a continuation of shell games, band-aid solutions and worsening economic conditions. Hence, the need for change.

The power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

An interesting, understandable and compelling read.


Economic bailout | Recommended reading
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