Is the US a banana republic?

Is the US a banana republic?

Simon Johnson

Neville Bennett

By Neville Bennett

Simon Johnson, who was the chief economist of the IMF, says that the finance industry has captured the US government: a state of affairs which usually describes emerging markets where an oligarchy takes big risks, confident that the government will bail them out.

I think this is an interesting topic as my previous article about oligarchy led to an animated discussion, and some very profound insights and contributions by readers.

What Johnson is saying is that the US is an oligarchy/plutocracy which I earlier defined as 'not merely the rule of the rich, but rule for and by the rich. The rich influence government in such a way as to protect and expand their influence, often at the expense of others'.

We know that the US banks have spent at least $340 million in the last year in lobbying against further regulation.

It has been money well spent as the banks remain pretty free to do as they please, while enjoying a 'too big to fail' status, meaning they can take huge risks and if these do not pay off, the taxpayer will assume the liability. They privatise profit and socialise debt.

I write about US banks, but there are similarities in the moral hazard aspect which involves British banks too, as well as kiwi finance and insurance companies.

Simon Johnson says that the recovery will fail unless we break the financial oligarchy that is blocking essential financial reform. We are running out of time to avert a recession.

This is pretty strong stuff. You do not often get a Professor at an elite university advocating that we 'break the financial oligarchy'.

I doubt he is a disciple of Lenin. I think he is a pragmatist rather than an ideologue. He is also pretty convincing and is well known for a solid book 13 Bankers.

Niall Ferguson sums up the nub of Johnson’s case: 13 Bankers describes the rise of concentrated financial power and the threat it poses to our economic well-being.

Over the past three decades, a handful of banks became spectacularly large and profitable and used their power and prestige to reshape the political landscape. By the late 1990s, the conventional wisdom in Washington was that what was good for Wall Street was good for America.

This ideology of finance produced the excessive risk-taking of the past decade, creating an enormous bubble and ultimately leading to a devastating financial crisis and recession.

More remarkable, the responses of both the Bush and Obama administrations to the crisis–bailing out the megabanks on generous terms, without securing any meaningful reform–demonstrate the lasting political power of Wall Street. The largest banks have become more powerful and more emphatically 'too big to fail', with no incentive to change their behavior in the future. This only sets the stage for another financial crisis, another government bailout, and another increase in our national debt.

The alternative is to confront the power of Wall Street head on, which means breaking up the big banks and imposing hard limits on bank size so they can’t reassemble themselves.

I first encountered Johnson’s thought in a very procative article in The Atlantic where Johnson said that while at IMF he got used to the depressingly similar syndrome where countries queued for loans because international banks had refused them. Each needed to make changes which encouraged exports and cut recessions.

But in every case powerful elites over-reached.

In these countries a tightly-knit oligarchy expected their political connections to absorb their problems. Oligarchs got favourable contracts, tax-breaks and access to foreign capital even though this situation had a whiff of corruption.

The US is now in a situation like South Korea in 1998, Russia and Argentina (time and again).

In these cases foreign investors suddenly assume the country will not be able to pay off is debt, so the affected country finds its credit disappears and it suffers a severe economic contraction. The similarity runs deeper: elite business interests make ever larger gambles with implicit government backing until the inevitable collapse. The elite uses its influence to prevent the reforms necessary to keep the economy out of its nosedive. People blame the regulators for being asleep at the wheel.

In the US financiers had a ball in inventing new profitable practices like securitisation, credit default swaps, and the like from 1973-1985. The financial sector earned 16% of profits, in the 1990’s; it doubled to 30% and in the last decade it was 40% of all profits.

This great wealth gave bankers enormous political weight: the US was the most advanced oligarchy in the world, able to get its way with bribes, lobbying and campaign contributions.

But its real power came from a belief system; the idea that large financial institutions and capital markets were crucial to the US’s position in the world. This was helped by the flow of top people from New York to Washington. Some thought service in Goldman Sachs was a kind of public service.

The banks also convinced the US elite and academia that markets were perfect and self-correcting.

We know Greenspan’s view, but Bernanke also said in 2006 that banks had made great strides in measuring and managing risk. As it happened the US government has spent $180 billion to cover losses deemed impossible by the huge insurer AIG alone.

Washington obligingly passed a river of deregulatory policy:
- free movement of capital across borders.
- repeal of regulation separating investment and commercial banking
- congressional ban on regulating credit default-swaps.
- increased leverage permitted
- an international agreement to allow banks to measure their own riskiness.

Banks were not alone in causing the crisis, but they and the hedge funds were big beneficiaries of the twin housing and stock market bubbles: profiting from a huge number of transactions founded on a small base of assets. [Readers might recall an article I did at the time saying assets were leveraged 40 times].

Despite these insane practices which eventually brought the sector to its knees, vast bonuses were paid out. The CEO of Merril Lynch confessed he had over-invested in sub-prime and walked off with $162 million. In 2008 Wall Street paid out $18 billion in bonuses, while the government had to provide $243 bn in urgent assistance.

Johnson details many dirty deals and concludes that there cannot be a recovery until the banks are healthy.

And, he thinks they must be broken up to become healthy.

The Atlantic article remains an important piece of analysis (I have the space merely to introduce it). Readers who wish to go further, and look at Johnson’s current concerns will find his website interesting.

He also writes in the Financial Times and there reiterated that the fight to reform the American banking system had been lost. The US is in his eyes a banana republic, dominated by the rich.

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* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR.
nevillebennett@clear.net.nz
www.bennetteconomics.com

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What has Bernanke done since 2006 to provide any confidence that his misguided view about banks' credit risk policies has changed to better reflect the demands of post GFC economics? (sorry we're still in the GFC).

Back in NZ, we've got the boss of Westpac telling us we need to be more confident (i.e. go out and borrow more and spend it on stuff that you don't need). If my fringe competiton has been removed (finance companies), I can jack up my lending margins as a result and safe in the knowledge that if there is a housing crash around the corner, the government of the day here and in OZ will bail me out so I don't have to spend too much time worrying about tweaking my credit policy. Hence, we probably haven't learnt a lot since 2008. 

The US is not the greatest world power by chance. They play a hard game of Grand Strategy encompassing all aspects of the basis of the country's power; economic, military, monetary, financial.

As Michael Hudson says, the US always acts in what it sees as its best interests.

We are accustomed to knock their methods, which often seem harsh to us, but underneath the apparent chaos there is an understanding of the basis of power.

To me this is like the Norman worship of power - the family wealth all goes to the eldest son, thus the family wealth is concentrated.

The US was not created as a noble endeavour in social justice, that was propoganda. It was created as a refuge for wealth.

How else can you reconcile the creation of a slave owning state under the guise of a bunch of claptrap called the constitution? That was just to get the plebs to fight on behalf of the plantation owners, shippers (of slaves and cotton) and financiers.

The US was built on the wealth of Europe. Ignore the popular rubbish of "bring me your poor and downtrodden", they can come too, of course, but "Come all ye wealthy of the world and we will protect you" would have been more accurate.

Now, don't get me wrong, there is a lot of good in the US, but be aware that it is based on an understanding of what makes a nation powerful.

So, to come back to your article. A world dominating banking system is an essential and successful part of the US Grand Strategy, so don't be surprised if the US government is loath to mess it up.

The US understand that massive wealth is essential for a successful and free society and they are not diffident about this.

 

We find this all rather scary, but power is scary. It gives you the ability to do a lot of good or cause a lot of harm.

 

Treasury suggests $ 2 Trillion debt cap raise is needed to ensure government can keep borrowing through the 2012 presidential election:

http://www.reuters.com/article/2011/05/04/us-usa-budget-limit-idUSTRE743...

The Greenback is the reserve currency of the world , so how can the country go bankrupt , when all they need do is inflate the system with more printing .

....... Sad for the Chinese government , holding all those US Treasurey deposits . Meebee they ought to stop being complicit in rigging the system to suit themselves , and float their currency as an alternative to the $US .

The world's economy would be much healthier , and more efficient  , if we had more individual currencies in the trade , not less . Bust up the bloody silly Euro  ,and  float the Renimbi .

Congress assumes it cant go bankrupt....its like "housing can only go up in value"....and "this time its different".....etc...........

regards

 

It will be a public revolt that will bring an end to the corruption and scum govt banking rorted system in the USA...the final straw may have landed unknown to all...it may be a social media organised run on specified banks..or a determined effort to bugger the govt by overloading the communication system....you will not know until it happens. Rest assured it will take place.

I suspect already the biggest growth sector is that which provides personal security to the wealth bloated who are hiding out behind huge walls or trapped on top of highrise rubbish hopeful that the mob will not find them. They will !