Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.
+1 212 318 2000
Europe, Middle East, & Africa
+44 20 7330 7500
+65 6212 1000
Posted by: Michael Mandel on March 31
In the latest issue of the Atlantic, Simon Johnson, former chief economist of the IMF, writes an article entitled The Quiet Coup. His premise: The financiers have taken over the U.S., and need to be cut down to size.
But there’s a deeper and more disturbing similarity: 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.
His solution: Nationalization, and breaking the banks into smaller pieces.
The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government.
Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.
and then he ends with a depressing note
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.
For anyone who has read down to the bottom here. You know, I understand what Johnson is saying, but I just can’t bring myself to believe it. He draws the analogy between the U.S. and the emerging economies that the IMF used to shepard, but I think that analogy is a false one.
The role of the U.S. in the global economy should be that of the risk-taking innovator—very different than that of a small emerging country. The problem is not that the U.S. took chances, but that it took the wrong ones. The route out of this mess is more innovation and risk-taking, not less.
(and folks, if you think my posts are conflicted these days…well, you are right. But I’m getting somewhere, I think).
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.