(For previous posts in this series, see here.)
Simon Johnson is a professor at MIT’s Sloan School of Management. He used to be the chief economist at the International Monetary Fund and in that role had to deal with many countries in financial crisis and had plenty of experience with oligarchies. He is hardly an ideologue. In fact, he calls himself a ‘centrist technocrat’, which is the kind of person that these international financial institutions usually have in their technical divisions. But yet he has no hesitation in identifying the current financial crisis in the US as caused by the same kind of oligarchies that he encountered in his dealings with developing countries in crisis. In a must-read article titled The Quiet Coup that appeared in the May 2009 issue of The Atlantic magazine, he describes how oligarchies work and how they end up ruining the economies of countries.
The problem is that because these oligarchies exert such enormous influence and power over their governments, they feel that normal market forces and business constraints that restrain lesser players do not apply to them. Hence they take much greater risks and when disaster strikes, as it inevitably will, they then turn to their friends and clients in the government to bail them out. This is exactly what has happened in the US.
Johnson says that when a crisis hits, countries come to the IMF for assistance. While the proximate causes of each country’s crisis differs, the ultimate causes all have a depressingly similar pattern that could be traced to the existence of an oligarchy. He says that while the economic solutions to each crisis are not hard to figure out, 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. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.
Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms.
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)… 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.
He says that while people can identify various proximate causes for the collapse, “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.”
Ultimately, it comes down to power. Who controls the government? The financial oligarchy in the US started running the country during the Reagan years and have continued to do so throughout all the administrations since. They prefer to do their work quietly behind the scenes while public attention is focused elsewhere such as on abortion or gay marriage or immigration or other hot-button social issues.
What the current crisis has done is threaten to rip the veil and expose how the government is really run and for whose benefit. When that is exposed, the people can rise up in angry protest so it becomes imperative to close the curtain again, to say that the problem is over, things are back to normal, nothing to see here, move along now. This is why they are rushing through major policies involving trillions of dollars practically overnight, so that they can claim that everything is back to normal. What they want to avoid is a close examination of what caused the crisis and what steps should be taken to prevent future ones.
Part of this strategy is to distract people with other issues. So you will see a concerted effort to exaggerate foreign policy issues or even create absurd events like the recent silly tea parties to protest the rise in the marginal tax rates for the highest income to 39.6%, although the new tax polices affects only raises the taxes of people earning over $250,000. Fortunately, the religious right or Christianist element in society seems to be in decline so the usual reliable standbys for distraction such as homosexuality, abortion, stem cells, and the like do not seem to be effective. People seem to be too worried about retaining their own job and homes to care about these other things. Even the frenetic cheerleading by Fox News (a faithful servant of the oligarchy) was unable to whip up more than lukewarm interest in the tea parties.
What Simon Johnson says is that there is a quiet power struggle going on behind the scenes between the government and the financial oligarchy to see who runs the show. In an interview on Fresh Air, Johnson says that the big financial firms like Goldman Sachs and JP Morgan Chase are already chafing at the restrictions placed on them by virtue of having received funds under the TARP (Troubled Asset Relief Program), and have publicly announced that they want to prematurely pay it back, though they are not going to pay back the billions that were secretly channeled to them via AIG.
(Incidentally, it has just been revealed that Edward Liddy, the head of AIG when it did the secret channeling of billions to Goldman Sachs, has $3 million stock in Goldman Sachs stock, received as compensation for serving on Goldman’s board before he moved to AIG in September 2008. We see that it is all a nice and cozy quid-pro-quo relationship. The phrase “conflict of interest” means nothing to these people. They see the role of the government as being to serve their personal interests and that of their companies.)
Johnson says that this is a test of power. If the government caves in and lets them get out from under TARP, it will mean that the oligarchy definitely is calling the shots. If the government can resist, then it means that people have a chance of regaining control.
I think Johnson is too sanguine to think that there is still a struggle for control between Wall Street and the government. I think that Wall Street won a long time ago and the real ‘struggle’, such as it is, is to find ways to once again hide their domination of the people elected to allegedly represent us.
POST SCRIPT: Trailer for 10 things I hate about commandments