13 Bankers

"Obviously that’s way overstated, but it is remarkable that here we are in 2012, the fourth year after the crisis. We still don’t have an adequate regulatory system in place to prevent a crisis like this from happening, and the recent collapse of MF Global indicates that in many respects Wall Street hasn’t learned lessons either, in terms of the kinds of risks they’re willing to take. I’ve got this very simple view, which is that I don’t think regulation of the Dodd-Frank sort is going to work. The investment banks have got way too much talent, are way too creative and way too nimble for regulators ever to keep up. Therefore the real solution all along should have been to break these big banks up into smaller pieces, which is essentially what Glass-Steagall and the interstate banking regulations of the 1930s did. Once the banks are no longer too big to fail, then you can just let the market work the way it’s supposed to. If people take outsized risks and they get into trouble, then they just go bankrupt, and that is essentially what happened to MF Global. It hurts people, but it’s not a systemic crisis. “You get these windows of opportunity that are created by big external shocks like the financial crisis, and if you use the opportunity and direct all that anger at the right moment you can accomplish certain things.” That option was never seriously considered. We briefly toyed with the idea of nationalising the banks in the depths of the crisis. In the debate leading up to Dodd-Frank, there was actually one really interesting roll call vote. There was an amendment proposed that would have limited the size of financial institutions. It was defeated something like 60 to 30, and if you look at the list of the people who voted against it, it includes Chuck Schumer and all of these liberal Democrats. They’re the ones who should have been leading the charge against this kind of concentrated power, but given where they get their money, they weren’t willing even to consider it. That’s why we still haven’t solved this problem. In that one specific respect, Johnson is completely correct. It’s not just a matter of corrupt money bribing people; it’s also a case of intellectual capture. People just can’t think outside the parameters that are set by this community and just don’t entertain certain kinds of potential solutions to it. It’s not going to happen. That’s the nature of politics. You get these windows of opportunity that are created by big external shocks like the financial crisis, and if you use the opportunity and direct all that anger at the right moment you can accomplish certain things. Right now that window has slammed shut, and unfortunately it’s going to take another repeat crisis for it to open up again. In fact, given the way the debate has developed, the idea that we’d actually do more regulation in the US rather than less is off the table because of the right-wing reaction to everything. In general, I think deregulation is a good thing. It’s just that the financial sector is really different. It requires a stronger political muscle to make that sector not be of general danger to society. I think the China alternative is a big red herring. I just don’t think that in the long run the Chinese are going to look nearly as good as they do today. Buried in all that authoritarian decision-making are a lot of time bombs with regard to environmental degradation, with regard to repressed social anger at the way those decisions are made and so on. No matter how smart they are, they’re not that smart. No one can spend that much money in a stimulus and have it all go into productive investment. We’re going to discover in a few years that they’ve overplayed their hand and made lots of mistakes, just like in this much touted high-speed rail system that they have put in place. There’s obviously a tremendous amount of corruption and shoddy workmanship and we’ve only seen the tip of that particular iceberg. But if authoritarian states need more accountability, you can make the case that democratic political systems have been paralysed by the multiplication of checks and balances over time. That really creates a situation of what I call “vetocracy”. There are no forcing mechanisms to make the polity take a difficult choice, but there is enough participation that everybody can block things that they don’t like. In the US we have a particularly severe form of this because our constitution mandates many more checks and balances and many more vetoes in political decision-making than do the constitutions and basic laws of other societies. The economist Mancur Olson was right, I think, that over long periods of peace and prosperity, the vested interests that take advantage of this kind of political system tend to multiply. So I would relate our current problem to a bad institutional set of rules. Yes, every country needs political reform on different levels, but the US needs to trim back the number of these veto points and restore some mechanisms by which difficult trade-offs can be forced on the system. No, as far as I can tell, this is not an issue that anyone is willing to take up. For example, just to give you one possible solution – the super-committee that was formed as a result of the impasse over raising the debt limit. I think it actually points to one possible way of doing future budgets. Right now, an American budget is formulated by Congress. Essentially, 535 members of Congress have a six-month window of opportunity to load budgets up with tax breaks, subsidies, earmarks, exemptions for special interests and so forth. Contrast that to the Westminster system in Britain, where the government writes the budget and because you’ve got party discipline, it’s passed within a week or two of its being proposed by the Chancellor of the Exchequer. Britain also got into trouble for different reasons, but if you had a system in which the budget was formulated by a much smaller group of people, that had a lot of technocratic input and was then sent to Congress for a single up or down vote, you would eliminate many of the opportunities that exist under the current system. Is anybody interested in considering this as a long-term solution? No, there is no political interest in anything remotely like this."

"This inequality book documents how powerful the financial services industry has become, precisely on the issues the financial industry has a stake in. Because whenever you have any problems with finance or the macro-economy or the stock markets, what do the Fed officials do, and what do the Treasury officials do? They call the bankers. We were talking about how the US has become more unequal and political power more unequally distributed. This is a two-way process – as the rich become richer they have more respect from us, their voices are heard more, they have more money to spend on campaign contributions and lobbying, and they become more powerful. That enables them to rig the game in their favour, by getting rid of regulation, by reducing their tax rates, by getting subsidies for their businesses and so on. That’s the big picture. The finance industry is the best exhibit for that story, and 13 Bankers tells that story wonderfully. It shows how the finance industry became what it is, not because of its genius – though obviously there were some very smart people – but because, politically, we got rid of some regulations. We also allowed banks to make huge profits through a system in which there were implicit government guarantees for their risk-taking. Then, after the financial crisis came, the finance industry was politically powerful enough that it actually prevented any sort of radical reform. On the contrary, the most important major banks became bigger and continued to dominate the economy, and the share of the largest seven banks has actually increased significantly since 2006. No, I don’t blame greed. Everybody is greedy to some degree. Greed is part of human nature and you can’t blame human nature! The key is to have institutions that make sure that the human urges that we have are channelled in the right direction. We want people to be ambitious. We don’t want to say that Steve Jobs shouldn’t have been ambitious. He was ambitious and he was greedy and that was a good thing, because his greed and ambition were channelled in a creative way. The problem is that in society over the last 20 years – and Wall Street is a poster child of this – we have created a platform where the ambition and greed of people, often men, has been channelled in a very anti-social, selfish and socially destructive direction. The risk-taking that for Steve Jobs and Bill Gates led to innovation has led to exploitative behaviour and risk-taking at the expense of the government and poor people for the Wall Street bankers. What’s to blame are the institutions. We have let our institutions fail. This is a political problem and the solution is also political. What I mean is that we have to make sure that the political institutions in the US have the same resilience that they showed at the turn of the century, during the Gilded Age. At that time we had a situation where a small fraction of the population was very wealthy, and extremely powerful. Money in politics was everywhere. But, in the end, there was a progressive movement. It was a populist movement that became part of the mainstream political parties, both Republican and Democrat. It led to Teddy Roosevelt and Taft and Wilson taking action – passing laws against trusts, against the financial industry, against the role of money in politics. It really changed the picture. That was an instance when there was a significant challenge to the inclusive institutions in the US, and the institutions proved resilient. We have to do the same thing now. It cannot be something we dream up in our ivory towers – it’s something that the American people have to take part in. It has to be a grassroots movement. Will it be Occupy Wall Street? No, I don’t think so. But it’s still important because it’s indicative of how a grassroots movement can develop, and it’s already articulating what many people feel is unfair and wrong about the political system. At the moment, the political parties are not really listening, but I am an optimist. Perhaps in the next few years, there will be more openness to their complaints, and the political system can self-regulate itself. There is some of that. The Thomas Frank book, What’s the Matter with Kansas? is about that. In some ways, it’s the opposite of the Larry Bartels inequality book. There is truth to both of them. But the Larry Bartels narrative appeals much more to me. It’s not that people are so stupid as to be systematically voting against their interests – it’s just that once the political system becomes so unresponsive to what’s going on at the bottom, then whatever the bottom votes for or wishes is not so important. At that point, perhaps they are more likely to vote on the basis of secondary concerns."