MFG 2.0

How Finance Wrecked The Economy

Great article in the Atlantic online written by a former IMF executive named Simon Johnson that illuminates how powerful the U.S. financial sector has become -- and how eerie the parallels are between the United States and other corrupt, third-world governments of the modern era.

One key point that I keep coming back to is, doesn't it seem that everything that has happened -- both in terms of the deregulation of the financial sector, and now the questionable bailouts of the financial sector, seem to have policies written by, and for, Wall Street:

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or. . .the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac. . .

But these various policieslightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownershiphad something in common. . .they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector's profitssuch as Brooksley Born's now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998were ignored or swept aside.

And what's been the result of this "Most Favored Sector" status for big finance? Unprecedented profits (much of them illusory) and political power (which is, on the other hand, quite easy to see).

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. . .

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:
insistence on free movement of capital across borders;
the repeal of Depression-era regulations separating commercial and investment banking;
a congressional ban on the regulation of credit-default swaps;
major increases in the amount of leverage allowed to investment banks;
a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
an international agreement to allow banks to measure their own riskiness;
and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

Simon's prescription is temporary nationalization, and he backs the argument up with solid arguments. The whole article is a must-read. In fact, I'll include the link again here.

TAGS: Innovation
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