13 BankersPosted: March 28, 2012 | Author: Greg Linster | Filed under: Reviews | Leave a comment »
Oligarchy, n., a government in which a small group exercises control especially for corrupt and selfish purposes.
The United States is ruled by an oligarchy that, despite almost wrecking the world economy, has only grown more powerful and more resistant to change. Perched atop this structure are 13 bankers who are involved with the six mega-banks (Bank of America, JPMorgan, Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley) that have been rendered “too big too fail”. How did this happen? How did the American financial system develop in this way? The answer to these questions is largely the subject of Simon Johnson’s and James Kwak’s book 13 Bankers.
It’s worth noting that the authors do a wonderful job of detailing the numerous financial crises that have occurred across the world (Korea and Russia were particularly interesting case studies). Overall, the book is very intelligible (most of the time) to the lay reader. Due to the politics and incentives (or lack of disincentives) in our financial system, bankers have been encouraged to engage in high risk investments. Here’s the catch though: when the risky investments work out, the bankers keep the profits, but when the investments fail, we (the taxpayers) take the losses and bail out the bankers. So the bankers have upside with no downside — sounds pretty nice, right? Although many people blame the advent of derivatives like credit default swaps in the early 90’s as the catalyst for the financial crisis of 2008, the root of the problem dates back much further. Johnson and Kwak, who also write an economics blog called The Baseline Scenario, argue that the origins of the most recent financial crisis dates back much further than much of the surface-level analysis in the news would have us believe. In fact, they believe the roots of the crisis are as old as the beginnings of the United States’ banking history itself. Thomas Jefferson, then, rightly feared what might happen if there were concentrated banking power amongst a few financial elites. Ultimately, the financial crisis of 2008 wasn’t really so much a financial crisis as it was a crisis in political economy. The fact that these six mega-banks came to control roughly 60 percent of America’s GPD is telling of how large and powerful they have become. Some bankers want us to believe that finance plays an important role in allocating capital throughout the economy and that unregulated finance is important for markets to work properly. After-all, Goldman Sachs CEO Lloyd Blankfein has assured the public that he is “doing God’s work”, since banks raise money for companies who employ people and make things. As a general rule of thumb, if someone tells you they are “doing God’s work”, you can be certain they aren’t. To return to a healthy balance in our economy, the authors recommend that banks be “busted”. Particularly, they suggest that each bank is limited to no more than 4% of U.S. GDP (investment banks would have a lower limit of 2%). Banks, then, could be allowed to fail without threatening the take-down of the entire economy. The best part of this solution is that taxpayers would no longer “have to” subsidize wealthy bankers through bailouts when things turn south. It’s important to remember that capitalism isn’t about only about incentives, it’s also about disincentives. Bankers are operating in a domain where there is a gross asymmetry, i.e., they are exposed to the upside and immune from the downside. In the end, Johnson and Kwak remind us that not matter how nicely we ask, bankers won’t change on their own accord. As they put it, “Simply asking bankers to behave differently will not work; the solution can only come by changing the rules of the financial system, which requires government action.” In the end, I’m not sure what the correct process to get there is, but ultimately I agree with the authors, the mega-banks do indeed need to become small enough to fail.