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The Quiet Coup

There is a major piece in this month’s Atlantic Monthly on politics and our economic meltdown, available here. It’s been getting a lot of attention, as the author is a very credible voice with alarming insights. Here’s the lede:
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

I’ve bolded passages of Johnson’s argument that I find particularly striking:
Instead [of using violence or bribery], the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.
A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. . . . Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t.
Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. . . . 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.
I support President Obama in general, and I was heartened by his progressive budget, and overall I think he will prove to be a fine leader in many respects. But I remain disappointed in his economics team, headed by Summers and Geithner, having had a strong sense from the start that they are incapable of making the kind of transformation changes that are necessary to wrest our economy (and nation) back from the oligarchy that has usurped it, as Johnson outlines. Perhaps, even with the right people, the Obama administration won’t have political capital to do what needs to be done. But I’d love to see him try, and I really doubt it will happen with Summers and Geithner in charge.

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Ellen Scordato

posted March 31, 2009 at 3:47 pm

fantastic piece. I’ve been circ’ing it all over since you first posted it!
I too worry whether Obama’s administration has the political capital to make the kind of transformational changes “necessary to wrest our economy (and nation) back from the oligarchy that has usurped it.”
I am not sure that the American people have the political capital to make those kind of transformational changes, frankly.
When voters have to pony up cash to persuade their elected officials to vote in the public interest, as I have been continually asked to do even after the election, I see where the real capital is. And the oligarchy’s got it.

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Greg Zwahlen

posted April 1, 2009 at 12:16 pm

One point I found interesting was how the prevailing belief system–supported in the academy–was a big part of what shored up this arrangement. Thank goodness this is finally started to disintegrate.

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posted April 1, 2009 at 2:12 pm

Wow Greg Zwahlen, good finance article.
Ellen & Greg Zwahlen you’re right; it is unreasonable to hope that Obama can quickly change a system that has led many to make trillions of dollars.
At the same time I don’t underestimate his understanding of the problem. Like the article states we are not an emerging market we are the number one market.
It is well known that one of the most vital ways to maintain peace for a country is through the economy. We have many enemies, some of them capricious allies. As much as we have feared war these past 9 years; the truth is that we are closer to it than ever before. So the priority isn’t setting the wrong to right. The priority is maintaining a visible strong hold.
Simply put we have to put out the fire and attempt to make a new home at the same time.
It’s wise to remember that we are living in global community so oligarchs can travel to wherever suits them most. They are not necessary bounded to the U.S. anymore.
We’ve nailed ourselves to the wall in many ways, individually and collectively.
One of them is that we are no longer major manufacturers. Our primary industries are intellectual in nature. The financial industry is one of them. There is no incentive involved in minimizing financial innovation (Innovation contains high risk behavior) or handing it over to another country.
Pres. Obama is (I believe) aware of this as attempts are made to review American car companies and attempts to give them incentives toward viability. There may be more industries investigated in the future.
Now he may be able to find a solutions but we have made so many bad decions in all areas of our society that one has effected the other so the moves we can make are very limited.
The hand that Pres. Obama is playing is a tough one and has to be played very slowly. There are no simple answers.
I like the fact that this article is finally discussing something that is systematically destroying our country but as much as most would like to believe we where hoodwinked the truth is that we haven’t been interested in paying attention.
I say that because it was evident to me around 10 years ago. As much as I would like to believe in my own brilliance that fact is that I’m nowhere near Ivy League. If I could see the red flags it means others did too but there was no incentive because there was cash to be made (and unaffordable homes to buy) and most people don’t bother to learn about money.
If you don’t know your money someone else will and the person who knows it keeps it.
What has happened here is only a symptom of a larger problem we face as a nation.
Well I guess you can now say globally.

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posted April 6, 2009 at 4:37 pm

This article is really interesting yet it is slightly disingenuous. The IMF was also victim to the belief-system and supported many policies such as privatization and balanced budgets when nationalization and deficit spending was the better choice. In the Asian Economic Crisis in the 1990s Vietnam and China refused to heed the advice of the World Bank and IMF and they were the two countries to recover the quickest. The IMF and World Bank have not been immune from this belief system.

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