Simon Johnson Reminds Us That the Banks’ Quiet Coup is Still Very Much in Place

Simon Johnson wrote a remarkably blunt article for the Atlantic in May 2009 titled The Quiet Coup. In case you managed to miss it, it remains critically important reading. He provided an update of sorts in a New York Times column today.

Johnson, a former chief economist to the IMF, described how the financial services industry had effectively engaged in a banana-republic-style takeover of government. And the IMF’s experience of countries that had suffered economics crises due to mismanagement of the ruling oligarchs was that there was one condition that was key to whether reforms stuck: at least some of the ruling group needed to break ranks and be willing to cede power. Clearly, nothing of the kind has happened here.

Johnson depicted how the banking sector came to be bloated relative to the economy as a whole:

…elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them….

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.
Click the chart above for a larger view

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

In the New York Times, Johnson again looks at this topic and has to reframe it only a bit in the light of the intervening years: this isn’t just a US problem, it’s a “rich country” problem. This blog stressed, early in the crisis, how the Japanese were uncharacteristically strident in telling the US that its biggest single mistake in managing its real estate/lending crisis was its failure to clean up bank balance sheets and reform them. That advice was simply ignored.

And Johnson posits that it’s the economic heft that the financial sector comes to assume in big economies that enables them to block reforms. From the New York Times today:

When middle-income “emerging markets” encounter a financial crisis because of dysfunctional incentives in the banking system, the obvious reaction is to adopt reforms that make banks safer…Prominent people in other sectors are deeply annoyed at the collateral damage caused by excessive risk-taking by bankers.

And in most middle-income countries, the financial sector comprises at most a few percentage points of gross domestic product…

In contrast, in a country like the United States or Britain, the financial sector is much larger as a percent of G.D.P. – from 7 to 9 percent, depending on how exactly you measure it. This is a direct result of having accumulated more financial assets – a direct result of prosperity and the reasonable desire to save for retirement.

In addition, because rich countries are able to issue a great deal of government debt in the short-term and have central banks with credibility in limiting inflation, they are able to provide very large amounts of support, direct and indirect, that prevent prominent financial companies from collapsing.

There is no sector in the modern United States or Britain that is willing to stand up to big banks in the political arena. And top financial-sector executives continue to enjoy such high prestige that they are still called upon to run public finances.

I have one quibble with Johnson: corporate executives in other industries are in cahoots with Wall Street, so they’ve got no reason to gang up on them. Executive pay is now based on stock market returns, and worse, CEOs are increasingly selected based on how investor and media-genic they are, rather than how good they are at running things. And CEOs regularly buy themselves a new lease on life when performance is flagging by doing a big acquisition (Carly Fiorina at HP is a classic example). Moreover, CEOs of mid-sized companies and C level execs of big ones can further enrich themselves by going to private equity firms, another reason to make nice with the financiers.

That means that Johnson’s “rich country problem” isn’t just that of a bigger financial services industry; it’s also in the differences in the nature of the ruling groups. I invite readers to elaborate, but in developing economies, you often see certain families assuming near dynastic standing in public affairs, and economic power concentrated often in family businesses (again dynastic) which often play big roles in key industries and/or control critical resources (large landholders, meaning they control either agricultural resources or extractable commodities). But in more advanced economies, the tribalism is much more along class lines: CEOs of public companies, for instance, arguably have many common interests, and those in many cases compete with, and can even exceed, industry-based allegiances. So while the financial services industry brings this issue of where the loyalties of other power players into focus, the interdependence among members of elite groups looks to be much greater than even the financial services example indicates.

But consider a related question: the health care industry consumes an even bigger share of GDP than financial services, and with the exception of 2009, has also spent the most on lobbying. Now health care doesn’t engage self-destructive excesses that threaten to pull down the economy like finance; one can think of it as a vastly smarter parasite. But I put it to readers to consider whether the keenly sought “bend the cost curve” exercise will do much more than squeeze the weakest players (presumably doctors and small vendors) precisely because no corporate constituency has chosen to question the health care industry’s privileges. In other words, under any pressure, the elites (in particular corporate executives) will band together and if any sacrifices must be made, you can be sure they’ll come from ordinary citizens.

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36 comments

  1. bh2

    “Now health care doesn’t engage self-destructive excesses that threaten to pull down the economy like finance; one can think of it as a vastly smarter parasite.”

    Anything “regulated” by government tends to grow like a tapeworm. Healthcare will not become the first exception.

      1. bh2

        I think I get the gist of whatever was your comment about the many evils arising from abandonment of Glass-Steagall. However, G-S was dependent on government to preserve it, which failed — just when it was needed most to protect the public. Of course.

        This was not an accident. Many of the key players involved in dropping G-S had direct personal benefit from mega banks and their many criminal instincts. Not a single one of these people ever did a perp walk. Most got rich from it. That’s also not an accident.

        Eventually all “regulatory agencies” are captured by the industries they claim to regulate. The tapeworm continues to grow by siphoning off national revenue to feed itself. (Cf “Parkinson’s Law” for many examples.)

        The only effective regulatory mechanism is the marketplace, but even that will fail if government regulation cannot — or will not — assure that market is entirely transparent. Which, of course, regulators will fail to do because transparency would reveal their real paymasters to be criminals, causing reasonably informed people to abandon them. Regulatory agencies tend to look the other way (or have their actions blocked by “higher ups” who are political appointees) when the game is afoot. This means the only well informed people in the corrupt marketplace will be insiders (including Congress-critters). And they will also be the only big winners.

        “Power corrupts. Absolute power corrupts absolutely.” — Lord Acton

      2. bh2

        [Yves: reposted because the first attempt didn’t work and Thorstein evidently lost a posting, as well.]

        @Thorstein: I think I get the gist of whatever comment you made about the many evils arising from abandonment of Glass-Steagall. However, G-S was dependent on government to preserve it, which failed — just when it was needed most to protect the public. Of course. This was not an accident.

        Many of the key players involved in dropping G-S had direct personal benefit from mega banks and their many criminal instincts. Not a single one of these people ever did a perp walk. Most got rich from it. That’s also not an accident.

        Eventually all “regulatory agencies” are captured by the industries they claim to regulate. The tapeworm continues to grow by siphoning off national revenue to feed itself. (Cf “Parkinson’s Law” for many examples.)

        The only effective regulatory mechanism is the marketplace, but even that will fail if government regulation cannot — or will not — assure that market is entirely transparent. Which, of course, regulators will fail to do because transparency would reveal their real paymasters to be criminals, causing reasonably informed people to abandon them. Regulatory agencies tend to look the other way (or have their actions blocked by “higher ups” who are political appointees) when the game is afoot. This means the only well informed people in the corrupt marketplace will be insiders (including Congress-critters). And they will also be the only big winners.

        The more power to regulate is handed to corrupt government, the more power is captured by cronies to aid and abet their abuse of the public.

        “Power corrupts. Absolute power corrupts absolutely.” — Lord Acton

        1. Banger

          And then what? They just keep gaining power, money and influence. Is there a way out of the cycle?

          1. bh2

            There is always a way out. See Article V of the Constitution.

            It’s a question of sufficient political courage, not lack of sufficient legal means.

        2. Ben Johannson

          “The only effective regulatory mechanism is the marketplace. . .”

          AHAHAHAHAHAHAHAH!!!!

          1. bh2

            Conditional on full transparency, yes.

            Lack of transparency is assured every time you vote some honorable congress-critter up to Washington to “protect” you. Surely by now you’ve at least figured that out. When the gravy train pulls into the station, he or she will either get on board or be related permanently (and powerlessly) to the back bench.

            1. Ben Johannson

              Without corrupt government . . .

              Conditional on full transparency . . .

              Might as well say, “In a perfect world markets would work” because that’s what you’d need to reach those two conditions. If waiting for utopia is the plan, there is no plan.

      3. sleepy

        Yep, quite a typo there.

        Then again, I was mulling over your first comment before I read your correction, and what sprang to mind was the term “regulatory capture”.

        In our world, the functional difference in meaning of “regulation” and “deregulation” gets blurry.

      4. Mass Man

        So why the quotation marks? “regulated” seems to mean badly regulated, or deregulated. Putting “deregulated” in quotes seems to say that deregulation is a sham.

        Ironic use of quotation marks has gotten out of hand.

  2. doug

    A corollary for ‘rich country problem” is, in Yves phrasing, “profit uber alles country/globalized markets” problem. Profits are paramount. Government’s role is to ensure profits for the private sector by eliminating as much risk to those profits as possible/imaginable (not to mention providing finance-able asset opportunities plus profit underwriting through such things as tax breaks to attract/keep private sector businesses). Bending the cost curve in health care? Marginally, perhaps. But never ‘bend the profits’ curve!

    And, when all-but-guaranteed risk-free profit streams are financialized into assets by the cancerous finance sector… well, that financializes the so-called real economy sectors. 7 to 9% of GDP is an understatement in this regard. And, media savvy, charismatic, acquisition-oriented CEOs (and complicit boards) are yet one more corollary, as is the decline in, well, actual management of real economy products and services (left to middle management whose salary/benefits, of course, are tied to meeting ‘financializable’ profit targets).

    1. washunate

      “Profits are paramount. Government’s role is to ensure profits for the private sector…”

      I would tweak that critique a bit. I think what you are describing is not the profit motive (a firm seeking to maximize the difference between revenues and expenses) but rather authoritarianism.

      It’s not simply that government is serving the private sector desire for profits. That has the hierarchy backwards. Rather, the government itself is an agent desiring much of the control. It is the public sector that is leading the charge to undermine constitutional governance and rule of law and human rights and so forth.

  3. The Dork of Cork

    Its all petro related I am afraid.

    In the past national capitals taxed their hinterland (in the interest of banks of course )however the banks remained somewhat attached to domestic economic activity however parasitic they may have been,
    Now national and of course larger financial capitals have no real connection with remaining rump industries in the so called developed world.
    Its now a simple question of farming pointless oil / international trade based production / consumption which has overpowered all domestic systems.

    If we look on this as fact then we can see why local politics has no meaning.

    Dublin now has fully detached itself from Ireland …it just needs to farm the countries declining petro (and not real local economy) tax base.
    House prices are lifting in Dublin and perhaps soon in Cork but the rest of the country is doomed.
    If we also look at car sales (the best indicator of a free banking / petro based economy) we can see a rising market share (of albeit a shrunk market) in Dublin and a dramatic shrinkage elsewhere.
    Dublin market share of Irish new car market
    Y2007 : 36.24 %

    Y2013 :43.09 %
    From a physical economic perspective this does not make any sense as a car in Dublin is a unneeded luxury good.
    These strange dynamics can only be explained via the process of rentier extraction which concentrates capital where it is not needed and therefore this capital cannot be used effectively.

    With each inflation / deflation / inflation episode the real domestic internal economies of the west decline to be replaced by a detached free trade / oil based economic ether of multinationals doing pointless jobs merely used to farm the oil ether.

  4. voislav

    There is something to be said about the class disconect in the rich countries. A whole system has evolved where you have complete isolation of the rich from the rest of the populace through private schools and universities that cater to that segment of the population. In poorer countries this has not developed yet, there is a partially shared experience for the rich and at least middle class population, educationally and culturarly. The rich in the poor countries are not yet removed from that common experience, although we might be only a single generation removed from that as many of rich in the the poorer countries now educate their children through the western private school system. It’s much easier to be a sociopath when there is an absence of human connection, where workers are just faceless drones rather than neighboors or schoolmates.

    1. James Levy

      Very true, but the disconnect is also spatial and psychic. Land and factory owners were from somewhere and lived somewhere. And they were along a continuum from plutocrats to the professional middle class. And they intermarried. With few elite colleges being co-ed until the later 1960s, men of the upper class largely had to “shop” for a wife on the local market if they didn’t live in a few of the big cities.

      That continuum is now shattered. Today’s “Davos Man” elite has no permanent ties to anywhere, has not served in his or her nation’s military, uses few public facilities (in NYC they now all fly in and out of Teterboro in private jets and helicopter out to the Hamptons) and can marry an international supermodel or someone they met at Harvard. If a natural catastrophe or pandemic hits, they have their various “ranches” with private medical facilities and armed ex-special forces security to keep them safe. Other than a source of purchasing power and a mechanism for ensuring their private property rights, nations mean little or nothing to them. And they are the most powerful and influential caste on the planet. This bodes very ill for governance in general and humane governance in particular.

      1. Fiver

        The global high-flyers are still heavily anchored in the US, where they can have their silly enclaves and private armies – no matter, they will be swept away along with the rest of us if they keep us on this trajectory.

  5. Ulysses

    “Under any pressure, the elites (in particular corporate executives) will band together and if any sacrifices must be made, you can be sure they’ll come from ordinary citizens.”

    Yes, indeed. And the elites that matter in this globalized economy are very much interested in serving the interests of the highest tier of the transnational super-wealthy class.

    “David Rothkopf, former managing director of Kissinger Associates and deputy undersecretary of commerce for international trade policies, published his book Superclass: the Global Power Elite and the World They Are Making, in 2008. According to Rothkopf, the superclass constitutes approximately 0.0001 percent of the world’s population, comprised of 6,000 to 7,000 people—some say 6,660. They are the Davos-attending, Gulfstream/private jet–flying, money-incrusted, megacorporation-interlocked, policy-building elites of the world, people at the absolute peak of the global power pyramid. They are 94 percent male, predominantly white, and mostly from North America and Europe. These are the people setting the agendas at the Trilateral Commission, Bilderberg Group, G-8, G-20, NATO, the World Bank, and the World Trade Organization. They are from the highest levels of finance capital, transnational corporations, the government, the military, the academy, nongovernmental organizations, spiritual leaders, and other shadow elites. Shadow elites include, for instance, the deep politics of national security organizations in connection with international drug cartels, who extract 8,000 tons of opium from US war zones annually, then launder $500 billion through transnational banks, half of which are US-based.”
    http://www.projectcensored.org/the-global-1-exposing-the-transnational-ruling-class#_edn33

    1. Banger

      Excellent, particularly for noting the connection between the national security goons (increasingly made up of contractors) and organized crime. Some years ago Misha Gleny wrote that about 15 to 20% of the global economy is illegal–I believe it is a bit more than that today. I don’t believe anything coherent can be said about world politics unless you have peered underneath the skirts of the actual oligarchy. We have to never forget Mao’s saying that all power comes out of the barrel of a gun.

      1. Alejandro

        I believe Mao was referring to coercion, which is abuse of “power”.

        Adaptability is not imitation. It means power of resistance and assimilation. -Gandhi

  6. slothrop

    So we should expect some kind of Rooseveltesque figure to emerge to save us from the banks? Except Roosevelt didn’t do that. He gave the banks a purely debt-backed currency, which is what they’d always wanted. Interest-bearing money means debt can never be paid off net-net. The figure to emerge will be a Chris Christie type who will rally the people around justice and fairness as he prosecutes sacrificial lambs after everyone’s money has been bailed in to service that debt. Get your money out of the banks people. The 10yr is climbing.

    1. Ben Johannson

      Banks like deflation, not inflation. And our currency is not backed by debt, it is debt-based; there’s a big difference.

  7. DakotabornKansan

    “I have this feeling in my stomach that I felt in other countries, much poorer countries, countries that were headed into really difficult economic situation. When there’s a small group of people who got you into a disaster, and who were still powerful. Disaster even made them more powerful. And you know you need to come in and break that power. Either you break the power or we’re stuck for a long time with this arrangement. And you can’t.” – Simon Johnson, Interview with Bill Moyers, February, 2009

    No one paid any attention to Simon Johnson’s warning in 2009 and the kleptocracy of crony capitalism is thriving even more today.

    Yves writes, “under any pressure, the elites (in particular corporate executives) will band together and if any sacrifices must be made, you can be sure they’ll come from ordinary citizens.”

    “The new breed of players, the “flexians,”who operate at the nexus of official and private power, cannot only co-op public policy agendas, crafting policy with their own purposes in mind. They test the time-honored principles of both the canons of accountability of the modern state and the codes of competition of the free market. In so doing, they reorganize relations between bureaucracy and business to their advantage, and challenge the walls erected to separate them. As these walls erode, players are better able to use official power and resources without public oversight.” – Janine Wedel, Shadow Elite: How the World’s New Power Brokers Undermine Democracy, Government, and the Free Market

  8. Oguk

    Simon Johnson led me to reading NC (I’m a proud lurker here). I started reading the Economix blogs sometime a year ago, and Johnson’s articles always interested me the most. I still remember this piece http://economix.blogs.nytimes.com/2013/01/31/jacob-lew-mary-jo-white-and-dunbars-number/ and thinking, this is pretty good thinking.
    Regarding the potential for real conflict between corporate and the banking sectors, I think Johnson is pretty aware – “There is no sector in the modern United States or Britain that is willing to stand up to big banks in the political arena.” His articles are a well-articulated challenge to the powers that be to take specific steps in the right direction, though I’m not sure where he would stop, I mean, he’s only about reforming capitalism, and I have no idea what he would think about MMT and that kind of thing. He is probably a voice crying in the wilderness, but I respect him for trying. And he’s helped me learn a lot.

  9. j gibbs

    The only quibble I have with the post and any of these comments is that we are not really seeing anything new here. Since the turn of the Twentieth Century, industrial capitalism has been an extraction process in which big finance has capitalized and recapitalized every revenue stream through creation of bank money and debt which could be serviced only by inflation. This process was interrupted briefly by market crashes and depressions and punctuated by two big wars and quite a few small ones, but in each case the uber rich kept control of government and used the crises and depressions to become even richer. Even Roosevelt’s vaunted New Deal was run in large part for the benefit of Rockefeller interests while creating enormous hoopla about its opposition to Morgan interests, and it is certainly arguable that US entry into WWII was stage managed with a view to protecting Rockefeller oil interests in South Asia, since there was really no other plausible explanation for the hostile actions against Japan which provoked its attack on Pearl Harbor, although of course Roosevelt also was determined to protect British imperialism even though he could not carry the country along with him until Pearl Harbor gave him an excuse. Similarly, the attack on the TWC in 2001 gave Bush the excuse his handlers longed for to invade Iraq, which was threatening the price of oil by turning on its spigot as the ME number 2 producer. This action was particularly noxious to the banks whose energy loans demanded an increase in the price of oil from $20 to at least $40 or $50, and the energy companies who of course would have preferred $100.

    What is different about the latest crisis is that the revenue stream of the laboring classes has now been fully capitalized by credit card debt, student debt, mortgage debt, while price inflation has been limited to the stealth variety by the fact that labor has been stripped of bargaining power and wages can no longer be escalated so easily. These days, while there is no serious competition within most product lines, every product of capitalism must compete with every other product for the shrinking income of the 99% who make up the consumer market. There would not appear to be any transmission mechanism for the next round of price inflation which will be required to continue servicing all existing debts, and this suggests we are due very soon for another crisis in which equity will have to be liquidated in favor of the senior securities which aren’t going to disappear.

    Unfortunately, what isn’t going to happen is a change in power relations or in the habits of thought which make all this business as usual in our ‘free enterprise’ system. So, the only question that will remain is who will become richer and who will become poorer among those who remain financially able to speculate in these asset markets. Further, there is a question of how much additional degradation can be imposed upon the laboring classes in the richer countries whose dreams of middle class status appear increasingly of the ‘pipe’ variety. But I would love to hear from anyone with a sensible idea of how any of this misery can be avoided without turning the society upside down, since the politicians have now been entirely captured by the large financial interests and it doesn’t matter who one votes for or who one elects, because they all serve the same masters and really have no personal interest apart from joining the ranks of the ultra rich themselves, as anyone who has watched the performance of our current Chief Executive can plainly see if he retains a shred of objectivity.

    1. Banger

      I guess I would include some more differences. The most obvious is the moribund condition of the left and the corruption of the systematic corruption (as opposed to episodic) corruption of the federal and, to a lesser degree, state governments by corporate oligarchs. This makes even rudimentary reform impossible.

    2. Ulysses

      This misery cannot be avoided without turning our society upside down. Society is long overdue for being turned upside down!! It will be risky, sure, but most of us really have nothing to lose. Jamie Dimon, Arianna Huffington, Larry Summers and their ilk have a lot to lose, but I have no compassion left for them.

    3. Ellen Anderson

      @j gibbs. This is one of the most helpful comments I have seen in a long time. Thank you!
      Reform of industrial capitalism may still be possible but it is not desirable.

    4. F. Beard

      But I would love to hear from anyone with a sensible idea of how any of this misery can be avoided … j gibbs

      Sure:

      1) Ban further credit creation by the banks, at least temporarily.
      2) Hand out new fiat equally to the entire population to counter the deflation caused by 1).
      3) When all deposits are 100% backed by reserves then remove all government privileges for the banks including implicit ones such as the lack of a Postal Savings Service.

      The above is a bare minimum. Other things to be considered are land reform so that all citizens can be sufficient in food and shelter, a generous Living Income Guarantee, and the redistribution of the common stock of all large companies equally to the entire population.

      And, of course, one should pray for wisdom to accomplish such things or others peacefully.

  10. allcoppedout

    The thing we never get is democracy, other than the form based on the Athenian slave economy, bulldung rhetoric and morality that allows genocide. Yves is on to something in juxtaposing the health and financial sectors, but I’m not quite sure what this is. I’m essentially a Leveller and see little place for inherited and privately accumulated wealth, but this leaves many questions on how we share work, reward and a degrowth that would give us more. I don’t think we can enter the organisational analysis required until we admit leadership is a dark art and break the legal-corporate paradigm apart. What chance when the Nazi right claim the comedy series Blackadder is left-wing propaganda and we should be proud of WW1?

    Currently we haven’t even got round to an examination of our deep ideologies.

  11. impermanence

    The professional class [responsible for administrating the system] sold-out decades ago, so nothing is going to change until it becomes desperate for their leadership. Since the elite still have nearly unlimited resources, things are not going to be changing any time soon [unless a major crisis (or two) arises].

    This era has proven [once again] that people will do EVERYTHING to get something for nothing.

  12. Crosley Bendix

    Simon Johnson completely skips over the brutal effects of the IMF’s and the World Bank’s policies. He also doesn’t get the fact that only the powerless get the shaft under neoliberalism.

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