The quiet coup in Washington; America’s legalized corruption (the Atlantic)

Having divested myself of all expectations of regular or thoughtful blogging; I freely offer some of my Sunday evening reading to you – pure parasitic blogging. Links to some other great “Sunday evening reads” can be found on the right in my – Links of the Day. I highly recommend the Truth about Forgiveness from last Sunday’s Washington Post; it’s not the kind of thing you can excerpt quotes from. (HT: Scot McKnight who always has good links in his Weekly Meanderings: e.g. Is America Losing Faith or the future of leadership: The Facebook Generation vs. the Fortune 500 by Gary Hamel. 12 values you will have to take into consideration.)

Simon Johnson, formerly of the IMF has a fascinating article in the Atlantic (May?). This falls under the topic of of what I frequently refer to as the “legalized corruption” in the West, which seems to be far more lucrative than the illegal corruption we rightly condemn here. (I seem to be on an economics kick lately):

[Intro:] The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. . . . Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. . . These personal connections

were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. . . . Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. . . As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. . . .

. . . Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector. . . .

. . . 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. . . Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. . .

. . . The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary. . . To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), . . . Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible. . .

. . . This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy. . . To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. . .

Not that the IMF necessarily has the correct solutions, but the “corrupt” dynamic noted here in The Quiet Coup (a rather long essay) is something I have thought about a fair bit.

(Maybe I’ll see you next week; maybe I won’t.)

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