A very important article by an expert, discussing the necessary next step to solve the financial crisis

Here is some sound advice from an experienced professional.  I strongly recommend reading this in full;   ”High Noon: Geithner v. the American Oligarchs“, Simon Johnson, The Baseline Scenario, 8 February 2009.Johnson was chief economist of the IMF, now a professor at the MIT Sloan School of Management and senior fellow at the Peterson Institute for International Economics.

Excerpt

There comes a time in every economic crisis or, more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that – they say – will deliver you back to growth. The person has political support, a strong track record, and every incentive to enter the history books. But one nagging question remains.

Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble?  The form of these vested interests, of course, varies substantially across situations, but they are always still strong, despite the downward spiral which they did so much to bring about.  And fully escaping the grip of crisis really means breaking their power.

Not only is this a standard way of thinking about crisis resolution in many developing and post-communist countries, it also turns out to be a good guide to thinking about the US today. We have a powerful banking industry that has mismanaged its way into deep trouble. Yet these banks obtained an initial bailout – the Troubled Asset Relief Program, or TARP – on generous terms, and have consistently failed to use the opportunity provided by this government support to turn their operations around.

… The elites who run the US banking industry have had a great run of economic good fortune. They used this wealth to further strengthen their political power, both through donations to politicians of almost all stripes and more broadly through taking positions of formal and informal influence throughout the executive and legislative branches.

Our unsustainable debt-fuelled boom, in other words, produced both the conditions for a major global financial disaster, and a political strengthening of the people who benefited most from the risk-taking and associated compensation packages that made this disaster possible.  Ending the financial crisis is relatively straightforward – a forced recapitalization and change of ownership/management in the banking system – although this will not immediately lead to an economic recovery (more on that here).

But seen in deeper political terms, decisive action to restructure large banks is almost impossible.  Such action would require overcoming perhaps the single strongest interest group in the United States today.

How can you do it?  The answer must be by splitting this powerful interest group into competing factions, and taking them on one by one.

Can this be done?  Definitely, yes.  In particular, bank recapitalization – if implemented right – can use private equity interests against the powerful large bank insiders. Then you need to force the new private equity owners of banks to break them up so they are no longer too big to fail.  And then there is always more to do to contain the power of a lobby that is boosted by any boom and which, the more it succeeds, the more likely it is to ruin us all.

Afterword

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To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest these days:

Some of the posts about  solutions to the financial crisis:

  1. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  2. Slow steps to nationalizing the US financial sector, 7 April 2008 — How this will change our society.
  3. A solution to our financial crisis, 25 September 2008
  4. The last opportunity for effective action before disaster strikes, 3 October 2008 — How to stabilize the financial system.
  5. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
  6. Dr. Bush, stabilize the economy – stat!, 7 October 2008
  7. The new President will need new solutions for the economic crisis, 9 October 2008
  8. A brief note about our financial system: Intermediation, disintermediation, and soon re-intermediation, 16 October 2008
  9. New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
  10. A look ahead to the end of this financial crisis, 30 October 2008
  11. Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009

Originally published at Fabius Maximus and reproduced here with the author’s permission.

One Response to "A very important article by an expert, discussing the necessary next step to solve the financial crisis"

  1. Anton Kleinschmidt   February 20, 2009 at 3:46 am

    One of the key steps in solving the present banking crisis is to re-populate the top table at the troubled banks with people who know how to manage a bank in extremis. The crisis is being exacerbated by a profound lack of real lending and risk management skills. Instead we have banks that are managed by marketing and sales types who have absolutely no idea what to do to salvage the situation.