As someone who works in academia, I am astounded by the number of academics who blindly declare that "We had to bail out the banks! We had no other choice!" Although letting the financial industry fail is foolish, it is equally naive to claim that TARP was a resounding success. The world is not black and white, and we cannot leave policy to snaky technocrats with their own interests.
Enter Johnson and Kwak's sensible diagnosis: banks are too big. The solution is equally straightforward - break them up!
13 Bankers is a remarkable book, placing the financial crisis in the context of history. The authors discuss the US financial industry's development from Independence to the present. Current debates over financial regulation can be traced as far back as the 1780s, when Founding Fathers Alexander Hamilton and Thomas Jefferson quarrelled over the role of banks. Hamilton's prescription was government largesse and subsidies to industry, a sort of infant industry argument. Yet Jefferson was skeptical of banks, and thought that they could hamper democracy. As Jefferson wrote, "I sincerely believe... that banking institutions are more dangerous than standing armies." These sentiments were partly proved right, when President Andrew Jackson refused to renew the Second Bank of the United States's charter. The Bank's President, Nicholas Biddle, retaliated by ceasing lending, causing a nationwide recession. This tug of war between Hamiltonian and Jeffersonian ideas about banking have moulded American financial policy up until the present.
Johnson and Kwak claim that our financial problem today is fundamentally political: financial institutions capture Washington with lobbying and a revolving-door of policymakers. The ideology of unrestricted free markets also causes troubles. For example, the Federal Reserve refused to enforce predatory lending laws, because Fed Chairman Alan Greenspan was an ardent believer in Ayn Rand's libertarian philosophy. These factors created massive deregulation and led to a Wild West Wall Street with derivatives, arbitrage trading, and plenty of rent-seeking behaviour. What we should do, claim the authors, is deal with the political roots of the problem - this is the same advice Western entities like the IMF gave to Asian countries after the 1997 Asian financial crisis, after all. Let us follow our own advice!
I admire the authors' bravery; their analysis is not popular among Wall Street apologists and certain university economists. Johnson and Kwak realise that civil society is ultimately the answer: Washington is already corrupt, and Wall Street cannot be relied on to regulate itself. And so we must turn to The People. As they say towards the end, "What happens next will depend, improbably enough, on people like you." I can only hope, for all our sakes, that The People decide to organise and act. Our future, for better or worse, depends critically on what happens in the next few years.
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