Simon Johnson Reminds Us That the Banks’ Quiet Coup is Still Very Much in Place

[marmar]

Simon Johnson Reminds Us That the Banks’ Quiet Coup is Still Very Much in Place
Posted on January 3, 2014 by Yves Smith


Simon Johnson wrote a remarkably blunt article for the Atlantic in May 2009 titled The Quiet Coup. In case you managed to miss it, it remains critically important reading. He provided an update of sorts in a New York Times column today.

Johnson, a former chief economist to the IMF, described how the financial services industry had effectively engaged in a banana-republic-style takeover of government. And the IMF’s experience of countries that had suffered economics crises due to mismanagement of the ruling oligarchs was that there was one condition that was key to whether reforms stuck: at least some of the ruling group needed to break ranks and be willing to cede power. Clearly, nothing of the kind has happened here.

Johnson depicted how the banking sector came to be bloated relative to the economy as a whole:

…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….

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

In the New York Times, Johnson again looks at this topic and has to reframe it only a bit in the light of the intervening years: this isn’t just a US problem, it’s a “rich country” problem. This blog stressed, early in the crisis, how the Japanese were uncharacteristically strident in telling the US that its biggest single mistake in managing its real estate/lending crisis was its failure to clean up bank balance sheets and reform them. That advice was simply ignored. .......................(more)

The complete piece is at: http://www.nakedcapitalism.com/2014/01/simon-johnson-reminds-us-banks-quiet-coup-still-place.html

[Laelth]

1. k&r for the truth, however depressing it may be. n/t

-Laelth

[socialist_n_TN]

2. Yeah well at least this seems to hint that it's systemic......

and NOT a factor of "individual actors" or "greed". This is capitalism in all it's unvarnished "glory". As long as the system is in place, there will be "greedy actors" who will take advantage of it. And as long as the system is in place, there will be no long term "regulation" of the system.

Smash the system and institute economic democracy. It's the only way that this will be stopped.

[marmar]

3. Shameless self-kick.

[L0oniX]

4. ...and the new flood insurance rates are going to help them aquire more homes and equity...

and fuck over the middle class again. One friends flood insurance went up to 9k a year ...he's being forced out of his home because of it. I hear reports of even 20k a year increases.