The Quiet Coup

An excerpt from “The Quiet Coup“:

But there’s 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. The government seems helpless, or unwilling, to act against them.

Source: http://www.theatlantic.com/doc/200905/imf-advice

6 thoughts on “The Quiet Coup

  1. Simon Johnson’s article is amazing. In only four pages he explains the root causes of the global banking crisis, how powerful banking oligarchs run institutions that are now too big to fail, why banks WON’T start lending despite all the bailouts, where we are likely headed and why.

    Our government is racking up an enormous tab bailing out banks because they really expect it to pay off and work politically. Save the banks, and then they’ll “do the right thing” and save the economy by lending. Here’s an excerpt… ” As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend. ”

    Politicians act shocked and surprised when the banks won’t subsequently start lending money. Congress just doesn’t get it, they don’t know a thing about money or about human nature.

    The most important idea expressed in this article (in my opinion) is how a small number of banks and financial institutions have become too big to fail. It seems like they can hold the whole world hostage to their demands. They have found a comfortable way to control the world even in weakness. Essentially it amounts to feed me because if I die, then you die. Here’s the quote… “Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail.” later on it reads … “But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.”

    There’s so much that can be said about this article. I’m really impressed with how much was said in only four pages. More than ever I get the sense that nothing is invincible and can be depended upon 100%. We need to start taking care of ourselves.

  2. his premise is all wrong, and the data/evidence do not support his conclusion, only that there is correlation, NOT causality. after reading this, i come away with the belief that GOVERNMENT, NOT lack of regulation, is the cause of the entire mess. government created the easy money, the tight money, the regulation, the incentives, the disincentives, the penalties, the clinton initiatives etc etc… which in turn created this bubble, just as they created EVERY excess in the past. regulation, if you read the papers from ’03-’05 was in fact in place, congress just decided to attack the regulator and attempt to discredit him.

    one other thing i would add, and to which i agree – there is a significant lack of parallel risk between corporate ceo’s, high-level executives, traders of these firms, that exercise extreme risk, for the simple reason that the upside is huge, and the downside limited. sort of acts like a long option – if they win they make millions of dollars, if they lose, they could get fired, but lose no money. in fact, look at brian hunter, who singlehandedly blew up amaranth. he had little downside, in fact, had already made money enough to las the rest of his life, so he goes “all in” in texas hold’em terms. yest he lost billions, but he walks away with the money he made before, and now has a new fund. that is effectively what happened at all these public companies that traded CDS’s, CDO’s etc.

    my solution to the above principal-agent issue is simple: no more coporate veils for such firms – make them all partnerships. do you think jimmy cayne would approve of such positions in the bear internal hedge fund, that there was a 5% chance that cayne would not only lose all his stock, but his house and all his possessions should the 5% chance occur?

  3. AIG made banks profitable in Jan. and Feb. at Taxpayers expense!!!

    The statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner’s (and thus the administration’s) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

    For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this “one time profit”, which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers’ money flows into the market. If the administration is truly aware of all these events then the potential fallout would be staggering once this information makes the light of day.

    http://zerohedge.blogspot.com/

  4. There is one main root cause for this problem and it’s eating countries world wide. That root cause is called –corruption–.

  5. In South Africa we have 4 major banks which have no sub-prime,limited derivatives exposure and have all been profitable over the last year and the previous 20.

    Our banking lending practices are more conservative and in 2006 South Africa introduced the National Credit Act-
    Standard Bank has grown its book value at over 20% p.a compunded over the last 20 years and has a return on equity of 25%

    E

Comments are closed.