The Bankers Have Won Completely

Today's title is a quote from Simon Johnson, founder of The Baseline Scenario, former chief economist of the IMF and now professor of economics at MIT. I quit reading Simon's website about a year ago. Here's why—

What I object to is this: who exactly is Simon Johnson trying to persuade to do something about these problems [in the banking sector]? Is it the Congress? Only they can pass a law changing the current regime. Here's Illinois Senator Dick Durbin talking about the banks' influence in Congress—

Sen. Dick Durbin (D-Ill.) has been battling the banks the last few weeks in an effort to get 60 votes lined up for bankruptcy reform. He's losing.

On Monday night in an interview with a radio host back home, he came to a stark conclusion: the banks own the Senate.

"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place," he said on WJJG 1530 AM's "Mornings with Ray Hanania."

My accusation against Simon Johnson? Inexcusable naiveté. My verdict? Guilty as charged.

My view then, and my view now, is that if you want to solve our Too-Big-To-Fail banks problem, you must first solve our the political corruption problem. But the latter is clearly unsolvable. The political system is irrevocably, completely broken, and has been for many years now. And it's getting worse. Wall Street's size and influence is greater than ever before. Johnson sums up our precarious situation in The Bill Daley Problem—

Today’s most dangerous government sponsored enterprises are the largest six bank holding companies: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.  They are undoubtedly too big to fail – if they were on the brink of failure, they would be rescued by the government, in the sense that their creditors would be protected 100 percent.  The market knows this and, as a result, these large institutions can borrow more cheaply than their smaller competitors.  This lets them stay big and – amazingly – get bigger. 

In the latest available data (Q3 of 2010), the big 6 had assets worth 64 percent of GDP.  This is up from before the crisis – assets in the big six at the end of 2006 were only about 55 percent of GDP.  And this is up massively from 1995, when these same banks (some of which had different names back then) were only 17 percent of GDP.

With Obama's hiring of J.P Morgan Chase executive Bill Daley as his chief of staff, Johnson now believes the bankers have won completely. My view is that the Big Banks had won completely when Barack Obama appointed Tim Geithner, Larry Summers and a host of Wall Street bankers to key positions even before he had assumed office.

Of course, my singling out of Simon Johnson is arbitrary and even a bit cruel. There are thousands and thousands of people on the right side of the issues who are equally clueless. Nevertheless, his guilt serves as a proxy for the guilt of all the rest. None of these well-meaning but hopelessly confused souls can get outside the box.

In the video below, Johnson argues that we need to prepare for another banking crisis sometime between three and seven years from now. If we lived in normal times, I would agree with him. His argument is based on what economists call the credit cycle—

A cycle involving the access to credit by borrowers. Credit cycles first go through periods in which funds are easy to borrow; these periods are characterized by lower interest rates, lowered lending requirements and an increase in the amount of available credit. These periods are followed by a contraction in the availability of funds. During the contraction period, interest rates climb and lending rules become more strict, meaning that less people can borrow.The contraction period continues until risks are reduced for the lending institutions, at which point the cycle starts again.

Economists argue about the relationship between the credit cycle and the business cycle. I'm not particularly worried anymore about another blow-up of the financial system. Even if the over-leveraged banks are still taking unconscionable risks, they will likely not be the source of our next crisis. I believe the next crisis will revolve around our soaring public debt, not once again insolvent banks. Of course, if the six biggest banks really are "government-sponsored enterprises" as Johnson said—that's what Too Big To Fail means—there's no real difference between a public debt crisis and a financial crisis!

Perhaps we should refer to the next meltdown as a Money World crisis. And see The Money World — Part II.

Note: Treasury includes Fannie Mae, Freddie Mac, Ginnie Mae, etc.

I will have to return to this subject some other time, but I believe that portraying what happened to our economy and what will happen next in terms of the "business cycle" or the "credit cycle" is just another form of denial, a comforting fiction—or discomforting, as the case may be —that mainstream economists (such as Simon Johnson) like to tell themselves.

Here's the video from Tech Ticker's story Bill Daley’s Appointment Proves "The Bankers Have Won Completely," Simon Johnson Says.

 

Comments

[Random Blowhard]

The next blowup will finish the United States as a world power and possibly as a first world country as well, if things go as badly as some predict. It will be a currency crisis followed by demands for another bailout by the TBTF banks.