Simon Johnson and James Kwak write a popular blog, The Baseline Scenario. They have written a very credible book on the crisis, which I have . It covers all of the bases in a methodical way, and there was little with which I could find fault, and it does so without conspiracy-mongering, or name-calling, while still finding fault with a great many parties.
The intro to the book begins with the 13 bankers meeting Pres. Obama at the White House in March 2009. (Thus the name of the book.) The Obama Administration treats the bankers with kid gloves, because they are afraid of a crash in the banking/economic system. But like the old saw, where if you owe the bank $1000 and can’t pay, you have a problem; but if you owe the bank $10 billion, they have a problem — the US government concluded that they had to protect the banks in order to protect the system as a whole.
Now, part of this stems from a false belief system, thinking that we had to bail out the banks — we didn’t need to bail out the banks. We could have resolved them through a new Resolution Trust Company. Rather than bail out holding companies, we could have let holding companies fail, and protected the few operating subsidiaries that people and institutions rely upon. But part of this stemmed from the influence that large banks exercised over the US Government. So many in the government benefited from campaign contributions from banks. Many had worked for the banks and had friends there; many wished to work there eventually.
The book takes us back to the beginning of the US, and all of the arguments over whether we needed a central bank or not. This is one of the few places where I disagree with Johnson and Kwak. I don’t think we need a central bank, though we do need to regulate credit in order to avoid banking panics. They view Jefferson as right in viewing large banks as being a threat to government sovereignty, but naive that a central bank was not needed, while Hamilton was more practical, but would not see the risk of political corruption.
Think of the Greenspan era, which was central banking at its worst. The least little squeak during a recession would make Greenspan open up the monetary spigots, and he would keep them on well beyond when stimulus was needed. Because of demographics, his actions did not lead to price inflation, but asset inflation. Thus the bubble that we face now. Extra dollars did not chase goods; extra debt chased assets.
They take us through the international crises of the ’90s which largely did not affect the US, but would sound familiar to us today. We don’t think of ourselves as having aristocrats in the US, but major CEOs seem to play that role well.
They catalogue the changes in policy that allowed for securitization, for swaps, for unregulated swaps, for increases in leverage, for decreases in regulatory oversight, and increasing influence over US policy by financial companies. Further, with the regulators outsourcing much of their responsibility for setting capital levels to the rating agencies, there was a further opportunity for failure, as the rating agencies rated novel securities for which they had no track record.
With sloppy regulators like the Office of Thrift Supervision, the stage was set for and a race to the bottom in lending standards. In the short run, more lending promoted higher profits, but in the long run sealed the demise of many lenders.
The crisis hit, and the leverage that had been built up was unsustainable. It rippled through many areas of the financial sector, hitting the firms that had cheated most the hardest. Over two years, from February 2007 to March 2009, the first wave of the crisis shook the banks, and many failed. Many smaller banks continue to fail, having no influence over the government.
Their solution to part of the crisis is modest, at least, more modest than I would pursue. They suggest that the six largest banks be broken up. Good, let’s do that. They suggest consumer safeguards; yes, protect dumb people to some degree, but make them wear a scarlet letter “D.” (My thought, not theirs – you can’t have it both ways. There should be stigma if you can’t protect yourself.)
It is a very good book and one that I would heartily recommend.
You have to have average intelligence to read this book. It is not a book that everyone can read. Also, very few graphs. No pictures. That doesn’t affect me, but many other people have a hard time reading a book with little in graphics.
Who would benefit from this book:
Almost everyone would benefit. It does a great job laying out the problems, and the solutions that they offer are eminently reasonable. Again, you have to be willing to read a book where the words are big, the sentence structures are complex, and you already understand something about economics.
If you want to buy the book, you can buy it here: 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.
Full disclosure: I received a free copy of their book at the Fordham Conference, as did all of the other attendees. I never promise to review a book that I receive for free, and I never promise a favorable review. That said, when I receive free books, if I have a lot of them (normal), typically I do triage and pitch the ones that look like losers. I do a similar filtering when book agents e-mail me to review books. I really only have time for good ones.
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