Friday, April 23, 2010

The Banks that are too big to fail- should not exist

13 Bankers. The Wall Street Takeover and the Next Financial Meltdown.  (2010.) Johnson and Kwak.

The currently proposed reforms of Wall Street by the Obama Administration are too limited.   To protect our economy and our society we need to
1.     Re-establish the Glass Steagal act of 1933 which separates savings banks from commercial banks.
2.     Break up the banks that are too big to fail.
3.     Add  substantive regulation to the markets.
   This recent  work  develops the important thesis that the U.S. is being directed and exploited by an Oligarchy.  This Oligarchy protects  their profits and their privileges, they dominate the government.  And, they will continue to do so until they are stopped.  The authors argue that in the crisis of 2007/2009, which the oligarchy  created, the the rich seized billions of dollars for themselves.  They made massive profits from the economic disaster. The Great Recession cost  the homes, the jobs, and even the lives of working people.  It is devastating our schools. This is the nature of our current state.
13 Bankers has additional importance since it was published in Spring 2010 just as the Washington/ Wall Street debate on regulatory reform reached its zenith.

Johnson and Kwak describe in detail the self serving economic theories which the wealthy and the powerful promote, such as those advanced most notably by the University of Chicago economists.  These theories known at various times as Free Market Capitalism, or the Washington Consensus serve the elite well.  They are very profitable while the impoverish working people and assault unions.
The authors note,
“ In the dark days of late 2008- when Lehman Brothers vanished, Merrill Lynch was acquired, AIG was taken over by the government, Washington Mutual and Wachovia collapsed, Goldman Sachs and Morgan Stanley fled for safety morphing into bank holding companies, and Citigroup and Bank of America teetered on the edge of being bailed out- the conventional wisdom was that the financial crisis  spelled the end of an era of excessive risk –taking and fabulous profits.  Instead,  we can now see that the largest, most powerful banks came out of the crisis even larger and more powerful.  When Wall Street was on its knees, Washington came to its rescue- not because of personal favors to a handful of powerful bankers, but because of a belief in a certain kind of financial sector so strong that not even the ugly revelations of the financial crisis could uproot it.”  ( P.11)
The current  “rescue” of the banking system was organized by  Hank Paulson formerly Chairman of Goldman Sachs, Larry Summers, Timothy Geithner and others who learned their perspectives working with Robert Rubin in the Clinton Administration.  Between  1989 and 2000, these and other “experts”  such as Ben Bernanke created exactly the kind of markets that collapsed in March of 2007, and now the same people are designing our “recovery”.  Who do you think will organize the next bailout?

 Stiglitz, Johnson and Kwak, Prins and the  others authors  agree that the current proposals for regulatory reform are too limited.  We need some version of the re-imposition of the Glass Steagal act of  1933 which separated banks from financial investment and trading companies.
In his book Stiglitz makes a strong case that the U.S. should change policies that led to the belief that some banks were too big to fail.  Simon Johnson and Kwak go further and argue that banks should be reduced in size so that no bank is too big to fail. 
Johnson and Kwak are at their best in providing a description of how Wall Street used its growing economic power to gain political power.  The response they propose is obvious.  If you hope to defend our society and to regain democracy, the large financial corporations, the Oligarchy, must be stopped and broken up- just as Standard Oil and AT& T were broken up in their time.  The authors of 13 Bankers follow the economy regularly on their web site  The Baseline Scenario:

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