On PBS this evening (first airs at 9pm eastern; on the web from about 10pm), Bill Moyers, Rep. Marcy Kaptur, and I discuss where we stand – and what we’ve learned – a year after the US financial system almost collapsed.
There’s a detailed preview on Bill’s website – our conversation moved back-and-forth between people losing their homes in Ohio, how bank behavior brought us to this point, and where we go from here.
We also discussed the latest revelations that, at the height of the crisis earlier this year, Treasury Secretary Tim Geithner spoke primarily to a very small group of top bankers (at Citi, Goldman, and JP Morgan). Further implications are taken up in my Daily Beast column this morning.
Also today, coincidently, on NPR’s morning edition (about 21 minutes into the first hour; will be on-line around 9am), Alex Blumberg, Charles Calomiris, and I role play whether the administration’s reform proposals are “Jamie Dimon-proof”, meaning that Too Big To Fail will really be brought under control. I’m Jamie Dimon, Charles is Charles, and Alex is the President. It doesn’t go well for the taxpayer.
On behalf of the administration, Diana Farrell (Larry Summers’s deputy at the National Economic Council, NEC) responds by saying effectively: “big has its benefits”, and the best we can hope for is to regulate our massive banks. As I said in my NYT Economix column yesterday (reproduced after the jump here), I take the position of Louis Brandeis on this one: our biggest banks have simply become Too Big To Regulate.
The NPR story didn’t get into the tragic human dimensions of the crisis, but Rep. Kaptur was forceful on this point during the Moyers conversation. In part, this strengthens the case for a consumer protection agency focused on financial products – a point on which we agree with Ms. Farrell and her colleagues.
But, hopefully, senior staff at the NEC will have a chance to review the Moyers segment (it only takes 30 minutes or so) and reflect on whether big banks are really ever so beneficial when they make, facilitate, and now refuse to renegotiate loans that have ruined so many lives.
Big is Bad Again
At about this time after the near-collapse of its banking system, any democracy goes through a phase of soul-searching regarding its broader economic model. Around almost every water cooler in the U.S., people ask: Does the severity of our financial crisis reflect the disproportionate influence of a few incompetent investment bank executives, something about how dangerous our financial sector has become, or a deeper breakdown of capitalism?
The deeper breakdown view is, without doubt, gaining center stage – debated now in movies, TV, and radio shows. And of course this position is not just about the crisis; it builds on serious longer term concerns, particularly rising inequality, that are real and quite disturbing.
At least in general terms, opinion leaders begin to point the finger at big corporations, including both their stupidity and greed in economic terms and their ability to generate political cover through campaign contributions and simply stunning amounts of lobbying.
The US experienced a similar phase of reaction against “bigness” in the early 20th century, spurred both by the 1907 financial crisis (which led, among other things, to the creation of the Federal Reserve, at the time a radical new component of the US capitalist system) and also by the rise of industrial trusts – huge companies that began to form in the 1890s and which, by 1910, dominated the American commercial landscape.
In the 1912 Presidential campaign, there were three main views on how to handle mega-trusts: do nothing (President Taft), build up federal power to counterbalance and regulate concentrated industrial power (ex-President Theodore Roosevelt, running as the Bull Moose Progressive independent candidate), and break up big companies to reduce their power (Woodrow Wilson, advised by Louis Brandeis).
Brandeis’s views are the most relevant for our modern discussion. In 1985 Thomas McCraw won a Pulitzer Prize for Prophets of Regulation, in which he criticized Brandeis for not understanding basic economics when he argued that big business was too big to manage effectively and undermined the individualism that was essential to American democracy.
McCraw rightly pointed out that some big U.S. firms have been well run over the past century – in fact, many of the best jobs in this country continue to be with large employers (look at the pay packages and benefits around you). It’s also true that the undoubted power of major corporations has not prevented waves of productive technological change, mostly brought to us by start-up entrepreneurs.
But Brandeis was right on the politics of size and what that meant in turn for the US economy – and he is very much in tune with the cutting edge of modern economics. When large firms can (1) shape their regulatory environment, (2) take advantage of lax regulation to take on more risk than they can manage, and (3) “put” the downside losses onto the taxpayer, we should be very afraid.
This exact problem has repeatedly slapped us in the face over the past 12 months with almost every development in the financial sector, and it remains inherent in every “too big to fail” bank. Brandeis was exactly right on the dangers that could arise from the financial system – even though he could not foresee how the creation of the Federal Reserve would, when combined with weak regulation, lead to even worse outcomes.
But we should not suffer another failure of imagination or apply Brandeis to our modern circumstances too narrowly. The problems before us now are not limited to the financial sector. Just as Brandeis argued, beginning with a piece entitled “Our Financial Oligarchy” in Harper’s Weekly, November 1913, we have allowed other parts of our economy to become “too big to regulate”. Any company that can set its own rules and then behave in a reckless fashion is potentially very damaging to both prosperity and democracy.
Teddy Roosevelt thought you could regulate and control monopolies, and his idea that “big corporate” could be controlled by “big government” was taken forward with some success by FDR, the reforms of the 1930s, and the way our system operated for 30-40 years after World War II. But the complete breakdown of financial regulation under great political pressure in the 1980s and 1990s should serve as a wake-up call, both with regard to banking and much more broadly.
We need to go back to Brandeis who, with his extensive experience on the interface between politics and law, thought that breaking up big firms was essential: “We believe that no methods of regulation ever have been or can be devised to remove the menace inherent in private monopoly and overweening commercial power” (Urofsky, p.346).
If we can update and apply Brandeis to finance and more broadly, we still have a chance to save the positive features of our American model.
By Simon Johnson
The material after the jump is a slightly edited version of my NYT Economix column yesterday. Anyone seeking to republish that material in its entirety should seek permission of the NYT. However, the material before the jump can be distributed freely, subject only to providing an appropriate credit and a link back to BaselineScenario.
The Baseline Scenario 
Maybe Wilson listened to Brandeis because there was a substantial US manufacturing sector that was able to generate growth by exploiting the export markets secured by the imperialism of the Open Door policy. Today US manufacturing isn’t able to ensure the American Way of Life. Until it picks up again maybe we’ll have to accept too big to fail.
Given these data why are we running around asserting that the U.S. isn’t a manufacturing nation? Granted, if these Census figures on American business are true, a failure in the financial sector would be disasterous, but again, if that’s the fourth biggest sector, why can’t we leverage the other three to create recovery?
From The Contrary Investor 10/08/2009 — this is too important a point to not be added here.
QUOTE ————–
But here’s the reason we believe the US government either is or would be in extreme circumstances willing to back the bulk of this exposure. Why do we think that? …
[charts showing the big “banks” and their derivative exposure on various measures would go here – kind of looks like this:
wfc *
c ****
bac ****
gs *************************************************
jmp ******** ]
Notice anything above? Of course you do. One name stands out like a sore thumb again and again – Goldman. We promise, this is not get down on Goldman day. Increasingly the press is doing a wonderful job of that, as is Goldman itself when it puts out press releases proclaiming record bonuses while another 5 million US citizens have lost their jobs. In the good old days (early 2008) when Goldman had not sought banking status protection, it was JP Morgan that stood out as having excessive credit exposure in their derivative book. Goldman makes them look like school children in comparison now that GS has to report to the OCC (the Office of the Comptroller of the Currency – US bank regulator, and we use that term very loosely). Whether the measure is credit exposure relative to capital, trading revenue as a percentage of total revenues, or the unbelievable notional derivatives to total assets multiple, Goldman looks like big time risk takers. Of course since we can’t see their book we can only speculate, but actaully we can corroborate zero. BUT, do you really think they would be accepting this type of risk relative to their financial sector brethren if the counter parties to their derivatives book were not implicitly or explicitly government backed? Not a chance. You know GS has some of the best information and connections on the Street. They would never accept this type of relative risk without solid and unquestioned backing. And just who is big enough to provide that type of assurance? You can answer the question for yourselves. Of course under the shroud of no-transparency, we’re just guessing. But it’s really hard to see it any other way. As we suggested, it’s good to be Goldman, no?
END QUOTE ——————-
– apolgies to The Contrary Investor for clipping this from their report.
“In a government of laws, the existence of the government will be imperiled if it fails to observe the law scrupulously. Our government is the potent, the omnipotent teacher. For good or ill, it teaches the whole people by its example. If government becomes a lawbreaker it breeds contempt for law: it invites every man to become a law unto himself. It invites anarchy.”
Justice Louis Brandeis
The “news” here (to me ), is that the Administration responded – Diana Farrell- “Big has its benefits”. It seems that the administration’s strategy to this point, has been to ignore the “annoying but harmless Joe public” – they will eventually tire and go away.
Yes there is a manufacturing sector – but can it find enough financing from the too-big-to-fail to enable the American Way of Life, i.e. home ownership along the lines of 500 sq ft/person, private transport (I recall that the aviation industry has great hopes for private aircraft ownership), generous energy efficiency standards, etc. Maybe Wilson could expect to leverage the manufacturing sector to sustain growth after tackling the financial oligarchy. Can Obama expect the same?
You wrote:
“It’s also true that the undoubted power of major corporations has not prevented waves of productive technological change…”
Your statement seems to overlook that fact that while “waves of productive technological change” have occurred, they have been dampened and delayed due to problems with our patent system. Particularly with the inherent advantage that larger established companies have in hiring patent lawyers to stifle smaller and newer companies or individuals.
Reagan’s “morning has arrived” for America has reached the “darkness of night” of Bush II and whatever may follow to reach morning again will need a revolution in thinking in the majority of its people.
As you point out, business stifles technological innovation period (unless you count foamy-er shampoo as a technological innovation). Electric vehicles are a case in point.
Today’s crisis is about the past 30 years when bubbles became a way of life. I’m surprised by how sparse today’s coverage is of our computer software that come into its own in those 30 years.Are those programs doing the job they are supposed to be doing?
Software has done more legislating of rules in the past 30 years than all the world governments combined. In financial circles it has largely been written by mercenary programmers at the request and payment of venture capitalists.
There is no debate of software’s role in today’s crisis because there is a disconnect between persons who understand the software discipline, and persons who understand politics. I picked book-keeping software as a topic of study 30 years ago because (1) I had learned the industrial data model at a young age, 50 years ago, and (2) when I set out to apply a software version of book-keeping into my building business in 1979, I soon saw that this important cultural control discipline was being programmed like a train headed for a wreck.
Now the wreck is upon us. We saw warnings of it in the 80s S & L crisis, 90s DotCom bubble, and in the 00s the Ponzi Bond Scheme. Now a fullfledged disaster is upon us, with strong evidence of more to come, that most everyone in this circle knows must be fixed. My question asks: “How do we go about investigating whether our record-keeping system itself is causing a great deal of today’s pain?”
I personally know that it is. I also know that I don’t know how to get this message out to person’s that can create the fix. The problem is that both the book-keeping framework and software that would code its proper framework of rules are deeply abstract disciplines. I have programmed a prototype version of the proper book-keeping framework that proves that the framework is programmable.
If anyone has a suggestion on how I would get my 30 years of experience studying this topic out to where it can do some good, I would love to hear about it. The problem, I promise you all, is not going to go away until the book-keeping framework is repaired. Book-keeping has been the de facto control language for commercial trade for 670 years. Today’s standard practices are bogus and must be repaired.
You said “Around almost every water cooler in the U.S., people ask: Does the severity of our financial crisis reflect the disproportionate influence of a few incompetent investment bank executives, something about how dangerous our financial sector has become, or a deeper breakdown of capitalism?”
I fervently wish those questions were being discussed all around the U.S. Sadly, I suspect the water cooler topics are more likely to be Jon and Kate’s latest accusations, Tom DeLay’s dancing feet breakdown, and who will win the big game this weekend.
Bread and circuses.
Actually, I think people are more concerned with their own micro economic concerns than with the big picture stuff. (Rightfully so, IMO) You’re more likely to hear dicussions about job security, mortgage rates or the real estate market in most work places. The only folks talking about about the “deeper breakdown of capitalism” around the water cooler work at the Peterson Institute.
I’m worried that politicians in Washington are seeing great potential in the rapidly expanding symbiotic relationship between our national government and the “too big to fail” banks. Unfortunately the great potential they are seeing isn’t what that relationship can do for the country, but what it can do for the politicians. There appears to be no interest in Washington in eliminating the “too big to fail” problem.
I totally agree with Rep. Kaptur and your assessments of the banks in regard to the average taxpayer and the housing crisis. I too am in danger of foreclosure due to medical expenses (another issue). The mortgage company is always gives me a different story every time I try to negotiate some type of modification. I never get the same person twice when I call. One time they say they will work with me, the next time they threaten foreclosure. I have contact numerous agencies including HUD and none of them have been of any value.
Oh the mortgage company did do one thing for me! In the past twelve months when the value of houses dropped sharply, they arbitrarily raised the value of my home by $20,000. Now my property taxes are going up and so is the insurance. No wonder they are eager to foreclose!
I watched Mr. Johnson and Rep. Kaptur just a few moments ago on Bill Moyers.
I despise Bill Moyers.
He has helped foster the current tidal wave of immigration that is a tax on the working poor all the while wearing a smug look of self satisfaction for being in his own head only a champion of the American poor.
However, watching on his show Rep. Kaptur’s spirited call for homeowners to tell foreclosing banksters to get lost made me stand up and clap and cheer by God! I have a new hero!
To me , Immigration and how to achieve a stable, prosperous, homogenous and assimilated country is the national Question. However, Government corruption whether by Mexico drug Cartels or New York Banksters forming an oligarchy are currently the biggest threats to my Government. No one is talking about it on the media.
Currently the media on the left and right are sending up a giant Health Care smokescreen that is covering all the dirty deeds of those on Wall street that want to keep their profits, give us their losses, and be immune from any risk incurred from trying to swallow the world whole.
Thank you Mr. Moyers. I still hate you for chain migration and Anchor babies and attacking E Verify and for shooting down Sen. Barbara Jordan’s 1995 Immigration commission proposals and for being a cheerleader for worker visa fraud and having my family having to leave the town they lived in for generations leaving to find work where they don’t have to speak Spanish and the 100 million extra people we would not have without the immigration changes you wrought, …but at least you got Rep. Kaptur and Mr. Johnson on the air to help spread a little light on the evil growing green shoot that is an oligarchy sprouting up in my country.
regards,
Delmar Jackson
Andra / CathyG, sorry I have to disagree. As a contractor I’ve worked on 3 continents and in many different companies, and always come across people that see the same big picture being discussed here. Yes, there is the ‘publicly cooler chat’, but get these people out of work and in open discussion on current events and they see it the same way, maybe from slightly different perspectives, but the underlying perception is the same.
I had a much longer comment, but thought it best to leave it for the conspiracy theorists, they seem to do a great job at feeding the misconceptions.
Sadly, my personal experience bears out CathyG’s opinion to almost the complete exclusion of Ardra’s. Football pools, game tickets, football stadium tours, sports scores, celebrity gossip, and talk about last night’s reality TV shows dominate the majority of conversations I witness around my job. Almost never does the sad political or financial state of our country pop up.
It will catch all these people completely off guard when the next bubble builds and pops in a couple years.
The problem with Big is that it allows risks that small banks cannot take due to size. It looks good on the surface to have these banks take some of these risks, but people seem to forget that while a Big bank can absorb more, it is the med. and small banks who cannot. They will fail at a higher rate in the domino effect caused by the large banks even if the med. and small banks investments were sound to begin with as we are watching.
So the Big banks get bailed, and the small banks get taken over when they fail creating larger banks. Anyone see a problem coming?
“McCraw rightly pointed out that some big U.S. firms have been well run over the past century – in fact, many of the best jobs in this country continue to be with large employers (look at the pay packages and benefits around you).”
I disagree with this sentiment.
For the most part those better “pay packages and benefits” are due to the undermining of competition through size — i.e. effective monopolies or monopolistic competition.
I have said this hundreds of times: The primary economic role for government in a Capitalistic economy is to ensure competition in the marketplace, because the natural drive for business is towards monopoly – which ultimately undermines value.
BIG instituions and concentrated wealth and power marks the end of Capitalism.
I suspect we are headed towards armed rebellion (not immediately) – metaphorically aimed right between Jaime, Ben and Timmy’s eyes (and all they represent).
“McCraw rightly pointed out that some big U.S. firms have been well run over the past century – in fact, many of the best jobs in this country continue to be with large employers (look at the pay packages and benefits around you).”
I disagree.
Those “pay packages and benefits” are, to a large degree, the result of monopoly or monopolistic competition, and the benefits associated with that.
The benefit of Capitalism – innovation, better products and services, and the creation of value – are all undermined through monopoly and monopolistic competition.
The primary economic role of government in a Capitalistic economy should be to ensure competition in the marketplace. *** It seems we do everything but that.
“It’s also true that the undoubted power of major corporations has not prevented waves of productive technological change, mostly brought to us by start-up entrepreneurs.”
I disagree.
The assertion is lame and hollow. How do we have any idea what innovation was “lost” because of “the power of major corporations”? We don’t.
Representative Marcy Kaptur’s heart is in the right place, and it was great to see she has some awareness of what is going on, but her continued effort to forestall the foreclosures reflects the mediocrity in thinking that plagues CONgress.
– The housing bailouts are a moral hazard.
– The housing bailouts bailout the lenders and financial industry gamblers.
– Housing bailouts reward people who borrowed irresponsibly and punish people who were responsible and didn’t.
– Housing bailouts keep the prices of homes too high.
– Housing bailouts add to the debt bubble.
If we would let the housing bubble deflate naturally, more people would eventually be able to buy homes, including rhe responsible people.
Where along in our history as a country (U.S.) did long-term prudent thinking become completely submerged to short-term thinking exclusively?
We are doomed.
Finally…
Overall, a great job Simon. I really appreciate that you are doing what you do – and sharing your perspective with the public.
Bookkeeping? Or accounting? The accounting standards are subject to as much influence as the government.
Perhaps you could share more.
Or maybe you are talking about something that I have seen over and over in the computing side of things: lack of oversight (quality assurance) of the data and it’s manipulation.
Examples: Incorrectly programmed calculations. Intentionally programmed “glitches” to create certain results. People working with data who have no understanding of the data, and can’t identify things that don’t make sense. Databases without data-dictionaries, and the same data with different names in different databases. Raw data provided by unreliable sources (e.g. worldwide partners).
You have the tools to break banks up, the Sherman and Clayton Acts. Make breakup a fait accompli and the oligarch’s mind control efforts will be dropped in the managers’ rush to seize the prize pieces of their banks. Make government guarantees contingent on antitrust compliance and it’s done. Get someone at Treasury who knows how to throw her weight around.
You wicked people!!! I bet all of you are community organizers!!! It makes me so sick!!! Who need Bill Moyers when we have Glenn Beck to save America!!! I saw Glenn Beck for the first time on a poster at my dentist’s when I had my last tooth removed, and it was love at first site. Here are some clips of Glenn Back from The Colbert Report on Comedy Central. I got this from a link on Andrew Sullivan’s blog.
http://www.colbertnation.com/the-colbert-report-videos/252013/october-08-2009/bend-it-like-beck
Simon, I have to say, “THANK YOU!” for your scepticism and your example of Lous the XIV…
You have a powerful voice PRECISELY because of your HONESTY, AND THE IMPORTANCE OF WHAT YOU SEE, and that you are concerned about which can RALLY OTHERS TO NOTICE!!! I Beseech you, forget about who may or may not like what you say! When you speak the truth, it is divine, and you are in a divine space here with your efforts!!! Peace be with you!!!
Simon Johnson said this (quoted on Greeenwald):
“Rahm Emanuel, the President’s Chief of Staff has a saying. He’s widely known for saying, ‘Never let a good crisis go to waste’. Well, the crisis is over, Bill. The crisis in the financial sector, not for people who own homes, but the crisis for the big banks is substantially over. And it was completely wasted.”
That saying is actually the core principle of what Naomi Klein calls “disaster capitalism”, and I am sure that is much closer to what Emanuel had in mind, not the reform and regulation Simon Johnson was referring to. It always causes me a moment of cognitive dissonance reading Simon Johnson making the Emanuel reference, it shifts the perspective to the other side of the looking glass.
This crisis was not wasted at all – the people close to Emanuel’s heart made trillions of it, before, during, and since the collapse and the bailouts. This was the most successfully “exploited” crisis so far.
Now, “crisis cycle” capitalism has become an institution, and the foundations for the next round have been put in place. It is all “bull”, all the time – first on economy and earnings, then on bailout gains, then back to the economy.
b.
I totally agree. The banking “crisis” WAS taken care of exactly how Rahm wants to take advantage, more specifically, it IS the kind of crisis, and it is going along just swimmingly… I am not being partisan with this statement–both parties are bought and paid for by the agents of the privately held Federal Reserve…
I hope everyone is ordering and reading their END THE FED book by Ron Paul, and writing their (most likely) NON-REPRESENTING elected officials to insist they support HR1207 and S604.
I keep saying this….meet the new boss, same as the old boss. How this country is run is akin to a person taking over the counter cold medicines. They treat the symptoms but don’t treat the cause of the symptoms. That’s all this country / our government ever does and it’s very depressing.
I saw the Moyer’s show and although I heard specifics I didn’t hear any general thoughts that I didn’t already believe. I was particularly bothered by the fact that a prediction of things getting a lot worse and possibly being worse than the Great Depression. We have truly lost our way, but I often wonder if we ever knew where we were going in the first place.
I also found the comments of the representative about her dealings with Mr. Dimon and JP. Morgan Chase very interesting / sad. Newsweek did an article on this wolf in sheeps clothing a couple of weeks ago and painted him out to be the all knowing financial presence in our country. It even pointed out how much President Obama listens to this guy. Again, a very sad state of affairs.
Thanks for referencing the bill numbers. I will look into them.
In our state (Kentucky) Ron’s son Rand Paul is running for U.S. Senate. I can only hope he beats long odds and wins this seat.
I am thinking about buying a few cases of the book “The Creature from Jekyll Island” and passing that on with Ron Paul’s “End the Fed”…
CLEARLY the game that the privately held federal reserve plays is one where the bigger the loss the better because they have orchestrated and campaigned and legeslated (with their puppet legeslators) that for the “good of the public” they will always be bailed out…so while they take larger and bigger risks to try to maximize their take, winning is good, and losing is fine since they have systemitized this method of convincing everyone that it would be just disasterous to let poor little toobigtofail fail…
I recommend everyone ordering a case or two of ‘THE CREATURE FROM JEKYLL ISLAND” and asking your loved ones and people in a position to change public opinion, to read this–we need to END THE FED.