Sunday, April 19, 2009
"Anything that is too big to fail is too big to exist."
Dan Radmacher
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From the RoundTable blog
"Anything that is too big to fail is too big to exist."
That statement by Simon Johnson, former chief economist for the International Monetary Fund, in the May issue of Atlantic Monthly should be a guiding mantra for this nation in the coming years.
Johnson's article, "The Quiet Coup," is a must-read for anyone trying to figure out the causes of the financial meltdown and whether there is any hope for recovering from it.
During his time with the IMF, Johnson saw a lot of nations go through the type of convulsions our financial system is now seeing -- but all these nations have been emerging markets.
Still, the root cause is the same. As Johnson put it, "the powerful elites ... overreached in good times and took too many risks."
And the prescription doesn't change because the crisis is happening to the world's strongest, richest economy. But it does make it harder to force the painful remedy.
"If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary," Johnson wrote.
The Bush administration wouldn't even consider such a radical notion, and the Obama administration has been equally resistant. Johnson says that reluctance reflects the powerful and fundamental influence of America's financial oligarchy -- the same pervasive influence that helped create the crisis.
Johnson doesn't fall into the trap of assigning one root cause for the crisis. Many policies and attitudes led to the nation's financial downfall -- cheap money, Fannie Mae and Freddie Mac's enabling of bad housing loans, deregulation, etc.
But, as Johnson wrote, all of the government policies that helped precipitate the fall had one thing in common: "Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector."
Policies that might have deflected the crisis, but cut into the financial sector's profits, went nowhere.
Now that the collapse has come, the ingrained power and influence of the financial sector is making the solution more difficult to implement.
That influence is not merely the result of the money the sector has poured into campaign contributions, though that is certainly part of it. Nor is it simply a result of a revolving door between the big investment banks and the highest levels of government, though, again, that is a big part of it.
The main reason that the sector exerts so much influence is because it has become such a large portion of the nation's economy. Since the 1980s, the financial sector has generated a larger and larger share of domestic corporate profits.
For most of the latter half of the 20th century, the financial sector earned less than 16 percent of the nation's domestic profits. By a few years ago, that number had grown to 41 percent.
Think about the implications of that. Two-fifths of profits generated in this nation came not from making things or selling things but from chasing money. Combine that with the mistaken but pervasive notion that the princes of high finance had somehow learned to master risk, and the course was set for disaster.
Despite the financial collapse, the sector's influence remains strong, as seen by the deference still paid to the banks the federal government is attempting to save. As Johnson wrote, the Treasury Department is acting as if the banks hold all the cards, "contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations."
Or, as Matt Taibbi put it a bit more bluntly in last month's Rolling Stone: "The gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an 'Alien'-style death grip on the Treasury and the Federal Reserve."
It's bad enough that this is monumentally unfair and has led to trillions of dollars of taxpayer exposure. Johnson makes the more important distinction that the approach simply won't work, because it won't provide sufficient incentive to change the behavior that led to the crisis.
"The government's velvet-glove approach with the banks is deeply troubling, for one simple reason," Johnson wrote. "It is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change."
This brings us full circle to Johnson's quote at the top of this column: "Anything that is too big to fail is too big to exist."
If this does not become the guiding notion of the recovery, if the Obama administration cannot find the courage and will to take on the financial oligarchy and cause it to face the real consequences of its behavior, the path ahead looks grim.
Johnson describes that path of continued half-steps and bailouts this way: "Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can't seem to get into gear."
There was plenty of populist rage over the bonuses paid to American International Group executives back in March, but that appeared short-lived and, frankly, misdirected. There's plenty that citizens need to be upset about, and constructively directed rage might be necessary to turn the government toward the more difficult, but more probably effective course.
But such a populist uprising depends upon an informed citizenry, and this crisis is practically defined by its complexity and reach. It's a lot easier to watch "American Idol" and hope someone else figures it all out.
If you don't want to take that easy way out, I recommend Johnson's Atlantic article as a starting point for your education. You can find it here: tinyurl.com/dh24b7.
Radmacher is The Roanoke Times' editorial page editor.
