Thursday, February 26, 2009

Taking on the Oligarchs

As the former chief economist at the International Monetary Fund, Simon Johnson has seen his share of crony capitalism in places like Russia and Indonesia. So when he starts warning about the unchecked influence of the financial lobby on the US government, we should all listen.

Given the mistakes made on Wall Street and the sheer size of the financial losses, one would think that Congress would take a tough line on the banks: wipeout shareholders, remove incompetent management and close down the zombies. But as Paul Krugman laments, this is not what the government is doing:
"...what they’re actually doing is underestimating the problem, doing too little too late, and not being open and honest in trying to assess the true cost. The actual plan seems to be to keep the banks semi-alive by implicitly guaranteeing their liabilities and dribbling in money as necessary, all the while proclaiming that they’re adequately capitalized — and hope that things turn up. It’s Japan all over again.

And the result will probably be a deeper, long-lasting crisis."
I don't think there's some vast conspiracy of financial managers seeking to control the government. Rather, the influence of the financial industry on the government is more of an emergent phenomenon, the result of the frequent exchange of talent from Wall Street to Capital Hill and back. I don't think Tim Geithner or anyone else is being insincere in their plans for fixing the banks; unfortunately, that doesn't mitigate the result.

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