High Noon: Geithner v. The Bank Oligarchs

There comes a time in every economic crisis or, more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that – they say – will deliver you back to growth.  The person has political support, a strong track record, and every incentive to enter the history books.  But one nagging question remains.
Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble?  The form of these vested interests, of course, varies substantially across situations, but they are always still strong, despite the downward spiral which they did so much to bring about.  And fully escaping the grip of crisis really means breaking their power.

Not only is this a standard way of thinking about crisis resolution in many developing and post-communist countries, it also turns out to be a good guide to thinking about the US today.  We have a powerful banking industry that has mismanaged its way into deep trouble.  Yet these banks obtained an initial bailout – the Troubled Asset Relief Program, or TARP – on generous terms, and have consistently failed to use the opportunity provided by this government support to turn their operations around.  Not only that, but they have flaunted their power – and their arrogance – through paying themselves large and largely inappropriate bonuses.

We come now, this week, to the podium.  And Treasury Secretary Tim Geithner takes the stand (on Tuesday), to tell us how he proposes to use the remainder of the TARP funds, support from the Federal Reserve, and other policies to turn around the financial system and pull us out of recession.  We previously posed relevant technical questions for this week; answers (or lack of answers) to these should determine if Geithner’s approach is likely to succeed.  Think of that as a framework for reasonable technocratic assessment.  But there is also the key political dimension to emphasize.

The elites who run the US banking industry have had a great run of economic good fortune.  They used this wealth to further strengthen their political power, both through donations to politicians of almost all stripes and more broadly through taking positions of formal and informal influence throughout the executive and legislative branches.

Our unsustainable debt-fuelled boom, in other words, produced both the conditions for a major global financial disaster, and a political strengthening of the people who benefited most from the risk-taking and associated compensation packages that made this disaster possible.  Ending the financial crisis is relatively straightforward – a forced recapitalization and change of ownership/management in the banking system – although this will not immediately lead to an economic recovery (more on that here).  But seen in deeper political terms, decisive action to restructure large banks is almost impossible.  Such action would require overcoming perhaps the single strongest interest group in the United States today.

How can you do it?  The answer must be by splitting this powerful interest group into competing factions, and taking them on one by one.  Can this be done?  Definitely, yes.  In particular, bank recapitalization – if implemented right – can use private equity interests against the powerful large bank insiders. Then you need to force the new private equity owners of banks to break them up so they are no longer too big to fail.  And then… there is always more to do to contain the power of a lobby that is boosted by any boom and which, the more it succeeds, the more likely it is to ruin us all.

by Simon Johnson

Simon Johnson is a former chief economist of the International Monetary Fund, is a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics.


This entry was posted in economics and tagged , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *