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    Default Financial Oligarchy Blocking Reforms

    the Atlantic

    Economy May 2009

    The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

    by Simon Johnson


    In part reads.

    The Wall Street–Washington Corridor

    Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

    In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

    Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

    One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

    These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

    Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

    A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

    Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

    Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

    As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

    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.

    The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

  2. #2

    Default Re: Financial Oligarchy Blocking Reforms

    Thanks for interesting article, Moneymajix. I hadn't realised the extent of how incestuous are the relationships between Wall St and government.

  3. #3
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    Default Re: Financial Oligarchy Blocking Reforms

    Goldman Sachs

    Market Watch story
    http://www.marketwatch.com/news/story/Goldman-Sachs-bailout-bonanza/story.aspx?guid=%7B504CB844%2DC558%2D4E40%2DB928%2 D80C16DECBC05%7D

    Goldman was the second largest donor to the Barack Obama campaign and the fourth largest to the John McCain campaign in the 2008 presidential election. Former Goldman Sachs employees such as Henry Paulson and Robert Rubin have held high positions in the federal government, regardless of which party was in the White House.
    Goldman Sachs was founded in 1869 by GermanJewish immigrant Marcus Goldman. In 1882, Goldman's son-in-law Samuel Sachs joined the firm which prompted the name change to Goldman Sachs
    In May 2006, Henry Paulson left the firm to serve as U.S. Treasury Secretary, and Lloyd Blankfein was promoted to Chairman and Chief Executive Officer. Former Goldman employees head the New York Stock Exchange, the World Bank, the U.S. Treasury Department, the White House staff, and firms such as Citigroup and Merrill Lynch.
    In March 2009 it was reported that in 2008, Goldman received billions of dollars from its insurance arrangements with AIG, including $12.9bn from funds provided by the United Statestaxpayers to bail out AIG

    Lloyd Blankfein

    He is the Gala Chairman of the Rockefeller family's Asia Society in New York. He also serves on the board of the Robin Hood Foundation, a charitable organization seeking to alleviate poverty in New York.

    Asia Society

    The American International Group (AIG) was the major sponsor of the Society's 50th anniversary in 2006

    Annual Dinner Gala Committee:Jews have headed the Fed for 32 of its 91 years, including 30 of the last 39.

    Alan Greenspan & Ben Bernanke from 1987

    Paul Warburg, an immigrant German Jew and a driving force behind creation of the Fed.

    Harvard's President, Lawrence Summers, a former Secretary of the Treasury in the Clinton Administration, was an academic and government economist before taking the reins at Harvard.

    Robert Rubin Treasury Secretary under Bill Clinton

    Maurice R. Greenberg headed American International Group (AIG) in 1997. Founded by non-Jew Cornelius Vander Starr, in 1919 as a Shanghai based offshore insurance company, Greenberg joined AIG in 1960 after two stints in the U.S. Army, one as an attorney, and eight years at Continental Casualty. Greenberg's early success in turning around AIG's failing North American operations led Starr to name him as his successor in 1967. Over the next thirty-eight years, Greenberg built AIG into the world's third largest insurance company, and the largest U.S. insurer. Before his 2005 troubles with New York's Attorney General Eliot Spitzer led to his retirement, Greenberg was regarded as one of America's foremost business leaders and philanthropists.

    Goldman Sachs, which was created and long run by Jews

    A Goldman veteran, Joshua Bolten, served as President George W. Bush’s chief of staff. “Over the past few years, people from Goldman Sachs have assumed control over large parts of the federal government. Over the next few, they might just take over the whole darn thing,” writes New York Times columnist David Brooks.
    Humanity is just a discretionary ponzi scheme

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