Charting the ascent of 'the American oligarchs'

10:11, March 25, 2010      

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Alan Greenspan, the master of monetary mumbo jumbo, leaned back in his chair and grew uncharacteristically forthright.

"If they're too big to fail, they're too big," the former Federal Reserve chairman said when asked about the dangers of outsized financial institutions.

It was October 2009, and the man who helped make megabanks possible was sounding more like Teddy Roosevelt than the Maestro as he entertained what he called a radical solution.

"You know, break them up," he told an audience at the Council on Foreign Relations in New York. "In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole."

Greenspan the bank buster crops up near the end of 13 Bankers, Simon Johnson and James Kwak's reasoned look at how Wall Street became what they call "the American oligarchy," a group of megabanks whose economic power has given them political power. Unless these too-big-to-fail banks are broken up, they will trigger a second meltdown, the authors write.

"And when that crisis comes," they say, "the government will face the same choice it faced in 2008: to bail out a banking system that has grown even larger and more concentrated, or to let it collapse and risk an economic disaster."

The banks in their sights include Bank of America Corp, JPMorgan Chase & Co and Goldman Sachs Group Inc. Though Wall Street may not like "13 Bankers," the authors can't be dismissed as populist rabble-rousers.

Johnson is an ex-chief economist for the International Monetary Fund who teaches at the Massachusetts Institute of Technology. Kwak is a former McKinsey & Co consultant. In September 2008, they started the Baseline Scenario, a blog that became essential reading on the crisis. When they call Wall Street an oligarchy, they're not speaking lightly.

Drawing parallels to the US industrial trusts of the late 19th century and Russian businessmen who rose to economic dominance in the 1990s, the authors apply the term to any country where "well-connected business leaders trade cash and political support for favors from the government".

Oligarchies weaken democracy and distort competition. The Wall Street bailouts boosted the clout of the survivors, making them bigger and enlarging their market shares in derivatives, new mortgages and new credit cards, the authors say.

These megabanks emerged from the meltdown more opposed to regulation than ever, the authors say. If they get their way - and they will, judging from current congressional maneuvering over President Barack Obama's proposed regulatory overhaul - Wall Street will retain its license to gamble with the taxpayer's money. This isn't good for anyone, including the banks themselves, which often feel compelled by competitive pressure to take suicidal risks.

Obama finds himself in the middle of a struggle that has coursed throughout US history - the struggle between democracy and powerful banking interests. The book's title alludes to one Friday last March when 13 of the nation's most powerful bankers met with Obama at the White House amid a public furor over bailouts and bonuses.

Crisis buffs won't miss much if they skip ahead to the last chapter, where the authors debunk arguments that curbing the size of banks is too simplistic. A more complex approach, they say, would invite "regulatory arbitrage, such as reshuffling where assets are parked".

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown is from Pantheon (304 pages, $26.95).

James Pressley writes for Bloomberg News. The opinions expressed are his own.

Source:China Daily
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