"Anything too big to fail is too big to exist." So writes Simon Johnson in "The Quiet Coup," an important, provocative piece in the May issue of The Atlantic.
We think that's pretty much the line of the year, and it points to the importance of bringing financial institutions--and, in some ways, finance itself--back down to a more appropriate size. "The Obama administration's fiscal stimulus evokes FDR," Johnson writes, "but what we need to imitate here is Teddy Roosevelt's trust-busting."
How did we get here? This is just the beginning:
In its depth and suddenness, the U.S. economic and financial crisis
is shockingly reminiscent of moments we have recently seen in emerging
markets (and only in emerging markets): South Korea (1997), Malaysia
(1998), Russia and Argentina (time and again). In each of those cases,
global investors, afraid that the country or its financial sector
wouldn't be able to pay off mountainous debt, suddenly stopped lending.
And in each case, that fear became self-fulfilling, as banks that
couldn't roll over their debt did, in fact, become unable to pay. This
is precisely what drove Lehman Brothers into bankruptcy on September
15, causing all sources of funding to the U.S. financial sector to dry
up overnight. Just as in emerging-market crises, the weakness in the
banking system has quickly rippled out into the rest of the economy,
causing a severe economic contraction and hardship for millions of
people.
But there's a deeper and more disturbing similarity: elite business
interests--financiers, in the case of the U.S.--played a central role in
creating the crisis, making ever-larger gambles, with the implicit
backing of the government, until the inevitable collapse. More
alarming, they are now using their influence to prevent precisely the
sorts of reforms that are needed, and fast, to pull the economy out of
its nosedive. The government seems helpless, or unwilling, to act
against them.
Top investment bankers and government officials like to lay the
blame for the current crisis on the lowering of U.S. interest rates
after the dotcom bust or, even better--in a "buck stops somewhere else"
sort of way--on the flow of savings out of China. Some on the right like
to complain about Fannie Mae or Freddie Mac, or even about
longer-standing efforts to promote broader homeownership. And, of
course, it is axiomatic to everyone that the regulators responsible for "safety and soundness" were fast asleep at the wheel.
But these various policies--lightweight regulation, cheap money, the
unwritten Chinese-American economic alliance, the promotion of
homeownership--had something in common. Even though some are
traditionally associated with Democrats and some with Republicans, they
all benefited the financial sector. Policy changes that might
have forestalled the crisis but would have limited the financial
sector's profits--such as Brooksley Born's now-famous attempts to
regulate credit-default swaps at the Commodity Futures Trading
Commission, in 1998--were ignored or swept aside.
Read it all. Please.
Source
Simon Johnson, "The Quiet Coup," The Atlantic, May, 2009