Simon Johnson & the American Oligarchs


In May’s Atlantic Monthly,
there is a scary but very convincing article called The Quiet Coup, in which Simon Johnson makes the case that the U.S. finance industry has effectively captured our government.

Johnson is the former chief economist of the International Monetary Fund,
a professor at MIT, the co-founder the blog The Baseline Scenario—and one of the guys who has consistently provided some of the smartest commentary as the financial crisis continues to unfold.

Agree with him or not, Johnson makes a strong case for this newest thesis.
Here are some clips:

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. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks,
buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans
to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.


Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Read the rest here.

Photo: Jim Bourg/Reuters/Corbis


  • Unfortunately and much to the disappointment of many of you, I don’t have a lot of time to cover this and respond to your name-calling attacks.

    I just will let you know how much I was shaking my head in disbelief when I read “the U.S. finance industry has effectively captured our government” rather than the other way around and “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,” after the government forcibly pushed banks into bad loans that got us here.

    A central government is good for interstate commerce, fighting wars, and going to the Moon. It is incompetent at running itself and running American businesses.

    Now, thanks to Obama, we’re going to owned by China. What’s a few trillion of borrowed and wasted money here and there?

    The “hate America” and “blame business” crowd is never going to admit the problems that government brought upon us and will never try to change it. So much for Obama “changing the way that Washington does business.” If anything, the only change he’s making is to make it worse. You’ll never guess who was AIG’s biggest recipient of campaign contributions.

    Where’s the bailouts for Main Street rather than Wall Street? Nevemind. Main Street doesn’t demand bailouts and it doesn’t want the debt and taxes thrown away to help Wall Street. I didn’t believe Obama, anyway.

    Here’s another head shaker from the article. “…there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary”, then “Nationalization would not imply permanent state ownership.” Hah! If anything, Obama and Geithner are grabbing more financial institutions not even involved in the banking crisis. And, just who was supposed to be monitoring and regulating the financial institutions during the growth of the problem, anyway–why, government!

    “Caps on executive compensation…” Wealth envy, pure and simple. As a result of this Obama suggestion, foreign countries are raiding America for our best financial managers who haven’t already resigned in disgust and who are needed to steer the financial ships safely to harbor.

    Let the market place shake out the winners and losers, eliminate government mandates that fly in the face of good business judgment, quit throwing good money after bad, strengthen the dollar rather than tell the world that it’s good to consider replacing the dollar as the world currency, etc., etc., etc.

    And, hey, George Soros isn’t doing too badly on the economic downturn that he predicted and helped create. Of course, there’s no outrage from the left about that.

    Celeste, where in the world did you read about this article? It looks like a piece being circulated among the left-wing, big-government crowd of which few have any background or understanding of finances and who cling to government and U.N. control of our futures.

    Good grief.

  • ^^^^^^
    -Spirit that worketh in the children of disobedience
    -Unclean spirit
    -Wicked one
    -Angel of the bottomless pit

  • Some companion pieces for your more intrepid readers:

    The Village Voice
    What Cooked the World’s Economy?
    It wasn’t your overdue mortgage.
    By James Lieber
    published: January 28, 2009

    Tech Biz : IT RSS
    Recipe for Disaster: The Formula That Killed Wall Street
    By Felix Salmon 02.23.09
    The Big Takeover
    The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution

    The Right Way to Fix Wall Street’s Pay
    by Nate Silver
    Posted Mar 19, 2009 12:49 PM

    Last, but not least, Harper’s readers should not miss
    Tom Geoghegan’s Infinite Debt, April 2009. Democracy Now! did an interview for those who don’t subscribe.

  • Thanks Celeste & Listener. I feel like I’m sorta in a global banking seminar. Lots of great reading ahead.

  • The banking crisis is about how Wall Street is rapidly LOSING it’s power that it gained in the last couple of decades. Unfortunately, the players already pocketed too many ill-gotten billions.

    The idea that the government is now in their pocket is preposterous. Actions of the government, whether appropriate or not, have devastated the financial industry.

    The government is advised by many financial insiders, which may lead to a bias of perception by them as to relative values. But ultimately the constant changing of direction, the ill-advised “stimulus” bill, the attack on the AIG bonuses, the forced ouster of the president of GM by Barack Obama, are not the sort of things that make financiers happy.

    Wall Street ran amok, with the happy assistance of members of government from the left and the right – neither really understanding the monster they were creating.

    Now Government is responding by itself running amok.

    That’s not good for anyone.

  • Good analysis, John – much better than anything that one could expect from those well-recognized publications of finance, The Village Voice and Rolling Stone.

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