In Part One we glanced at the proposition by the former IMF chief economist, Simon Johnson, now a professor at MIT’s Sloan School of Management, that there were strong parallels between oligarchs of emerging economies and the US financial sector. This second part looks at his analysis of how the financial sector has grown disproportionately to other sectors in the economy over the last two and a half decades.
“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."
It might be argued that these developments need not necessarily lead to cosy dealings between financial “oligarchs” and a captured government, which is where Johnson began. But in fact they did, he argues. Very much so. The dismantling of Glass-Steagall under Clinton (part of a muddled view on Clinton’s part of giving every American a route to owning their own home) is a very clear example of just how successful a hugely expensive and sustained lobbying effort by America’s big banks can be. Lobbying is a lot more transparent than, say, the behind-closed-doors chats between oligarchs and top officials in Putin’s kleptocratic Russia, but when you throw in campaign contributions and bought politicians you are three parts there. It has all indeed been very good for bankers.
"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 post-war 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.”
From great wealth comes great political muscle. Johnson points out that in the US banking panic at the start of the 20th Century, when J. P. Morgan (the banker, not the bank) strode the stage, the panic was only settled by agreement amongst a cohort of private bankers. Unfortunately this display of power led directly to the arrogance and malpractice that culminated in the stock market crash and the great Depression. As a consequence the US government introduced legislation that effectively ended the dominance of its banking oligarchs and it took US banks some five decades of continuous lobbying to dismantle that legislation sufficiently to pull things back to their way of thinking.
“ …the American financial industry gained political power by amassing a kind of cultural capital – a belief system… Over the past decade, the attitude took hold that what was good for Wall Street was good for the country… Washington insiders… believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world."
Now the pendulum has swung again and politicians, under pressure from an irate public on both sides of the Atlantic, have once again moved into a regulatory phase with the aim of controlling “too-big-to-fail” institutions. So far, however, three years after the fall of Lehmans, bank lobbying against meaningful re-regulation is still not doing too badly…
Further reading on financial regulation:
- Regulation after the Crash by Viral Acharya and Julian Franks
- Revising Basel II—But at What Cost? by Vishal Vedi
- Tripping over Prudence—Ideas for a Sensible Fix for Basel II by Samuel Sender and Noel Amenc
Tags: Bill Clinton , Clinton administration , economic governance , George W Bush , Glass-Steagall Act , IMF , International Monetary Fund , J. P. Morgan , kleptocracy , MIT , oligarchy , oligopoly , Paul Volcker , President Clinton , Putin , Russia , Simon Johnson , US government , Vladimir Putin , Wall Street , Washington