Does a Financial Oligarchy Run America?

MIT economist Simon Johnson, formerly with the International Monetary Fund (IMF), is attracting a lot of attention for his call to break up some of the country’s big banks like Citigroup, Bank of America, and Goldman Sachs — banks that have acquired the “too big to fail” label, meaning their collapse could cause a chain reaction of failures in the world’s financial system (Nouriel Roubini likes to use the rather ominous term “global systemic financial meltdown” to describe this.). 

In an article in The Atlantic titled “The Quiet Coup,” Johnson compares America’s financial crisis to similar recent events in South Korea, Malaysia, Russia and Argentina, where lending seized up after financial institutions became overleveraged or built up too much debt.  But Johnson’s key point is 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.   

This is pretty tough language, especially coming from a man who considers himself a centrist.  In some ways, he follows the line Kevin Phillips has been arguing for years in books such as American Theocracy and Bad Money:  that the U.S. economy has undergone a “financialization,” whereby the financial sector has become the engine of the economy; and his thoughts are also reminiscent of the “elite theory” I was exposed to back in my political science days many years ago (from authors such as C. Wright Mills, G. William Domhoff and Thomas R. Dye), which argues the government is essentially run by a corporate elite.  “Throughout my time at the IMF,” Johnson writes, “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.”

But he takes these broader arguments a step further by linking them to the specifics of the Wall Street bonuses issue, the multi-trillion dollar bailout of our financial behemoths, and what in his opinion has been the government’s “lack of transparency” and “velvet-glove approach” toward the financial sector during the current crisis.  For Johnson, this is just “late-night, backroom dealing, pure and simple.”

The real crux of the matter is that he thinks we need to take a hard look at the financial system itself.  Following a temporary nationalization of major banks — which, though expensive (maybe on the order of $1.5 trillion), Johnson believes is essential in order to resolve the losses of the banks and to get them lending again — the financial oligarchy must be broken.  This means putting an end to the notion of “too big to fail.”  Larger financial institutions “should be sold in medium-sized pieces.”  And this should be backed up by appropriate “trust-busting” legislation which will put an end to firms which are so big and so interconnected that they can put the whole world’s economy at risk.

Though there has been much talk lately about the recession bottoming out, the “sprouting of little green shoots,” etc., Johnson is of a mind that unless aggressive action is taken the world economy is still vulnerable to Great Depression-like scenarios — and that at best we will limp along as the financial oligarchs continue “the looting of the financial system.”                             

In addition to his Atlantic article, Johnson has had recent appearances on Bill Moyers’ Journal and Terri Gross’ Fresh Air and is even credited with inspiring a public policy advocacy group called “A New Way Forward,” which is calling for the banks to be broken up.  You can also visit Johnson’s blog, The Baseline Scenario (which he shares with James Kwak).   

The library doesn’t own anything by Simon Johnson, but we do have plenty of books on the financial crisis by other authors.  For a recent list, please link to this previous post.

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2 Responses

  1. […] should be allowed to fail.  This is much the same perspective as Simon Johnson — see this post from last week. Possibly related posts: (automatically generated)Sat. Spotlight: Alan […]

  2. […] institutions are taken over by the government and existing obligations addressed; in addition, much like Simon Johnson, Hoenig believes over-large institutions should be sold off “in more manageable […]

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