The Quiet Coup – The Atlantic (May 2009)

Good article in the Atlantic on the financial crisis — worth a read.

The Quiet Coup – The Atlantic (May 2009).

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;
• the repeal of Depression-era regulations separating commercial and investment banking;
• a congressional ban on the regulation of credit-default swaps;
• major increases in the amount of leverage allowed to investment banks;
• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
• an international agreement to allow banks to measure their own riskiness;
• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

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3 Responses

  1. This appears to be right on in its assessments of cause and effect. Me–well, I am somewhat cynical as to the eventual outcome. In large part because the administration seems to be trying to enlist the financial powers and, therefore, there is a real probability that any regulatory reform will be limited. FDR tried the same tactic thinking that the leaders in the business world really understood the financial crisis and would put aside their own narrow self-interest and support actions that would benefit the country as a whole. Then as now, it didn’t work.

  2. “From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing”

    In hindsight? This one sentence tells us that this piece is written by someone in the mainstream. Most of them act surprised that allowing capital free reign would, oh my gosh, cause a problem. It’s like who would have ever thunk it?

    A lot of economists and pundits on the left have decried each of these changes as they came up. They warned that such regulations and laws would lead us to ruin. But people like Simon Johnson pooh poohed such criticism at the time. It’s only now, once everything has blown up in their and our faces, that some of them are now things, “Houston, we have a problem”.

  3. Spot on. What’s most interesting is that it shows cause, effect, roadblocks and solution. The author does not have hope that the correct solution will occur. Unfortunately, he’s probably right.

    How inefficient can a financial system be where 40% of total corporate profits in this decade are made by transfer agents not the actual savers and borrowers.

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