Learning from the economist, the criminologist,
the activist, the journalist, and the professor.

Following up on my last post, I would like to introduce to you some of what I think are the best sources for understanding the late 2008 US ‘Financial Crisis’.

Putting a name on the ‘Financial Crisis’: The Quiet Coup

First up is Simon Johnson, a former chief economist of the International Monetary Fund, and his excellent essay “The Quiet Coup” from the May 2009 issue of The Atlantic magazine. Coming from someone so firmly ensconced in the global financial establishment I read the essay as a revelation. Here is an excerpt:

Becoming a Banana Republic

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets …

…global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector.

Read the entire essay here.

Johnson went on to write a book (with James Kwak) entitled 13 Bankers: Wall Street Takeover and the Next Financial Meltdown that goes much further in explaining the historical events leading up to these takeover of the United States’ government by a ‘financial oligarchy’.

You can read the book’s introduction here.

The Amazon.com page for the book is here.

If you want to know why it’s called 13 Bankers, click here.

I have to admit I haven’t read the book myself yet. When I ran into Vermont’s independent U.S. Senator Bernie Sanders at this year’s Strolling of the Heifers festival and congratulated him on ensuring that the Federal Reserve audit provision remained in the Congressional ‘Financial Reform’ legislation that was signed into law this year, I asked him if he had heard of the book. He told me he was in the middle of reading it and would be quizzing me on it’s contents next time we ran into each other. Good on ya, Bernie!

I have been reading Simon Johnson and James Kwak’s blog “The Baseline Scenario” for quite awhile – I would recommend their “Financial Crisis for Beginners” page as a good place to start if you’re visiting it for the first time.

Confronting the Cause: Using the ‘F’ Word

Next up is William Black. William Black was the litigation director of the Federal Home Loan Bank Board during the Savings and Loan ‘crisis’ of the late 80s and early 90s. His appearance on PBS’s Bill Moyers Journal (about, official site) on April 3, 2009 is, at the risk of repeating myself, revelatory.

From the show:

BILL MOYERS: I was taken with your candor at the conference here in New York to hear you say that this crisis we’re going through, this economic and financial meltdown is driven by fraud. What’s your definition of fraud?

WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, “I create trust in you, and then I betray that trust, and get you to give me something of value.” And as a result, there’s no more effective acid against trust than fraud, especially fraud by top elites, and that’s what we have.

BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you’re saying here, that it was in the boardrooms and the CEO offices where this fraud began?

WILLIAM K. BLACK: Absolutely.

BILL MOYERS: How did they do it? What do you mean?

WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you’re a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there’s going to be a disaster down the road.

BILL MOYERS: So you’re suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

WILLIAM K. BLACK: Yes.

The entire transcript is available here.

William Black’s February 25, 2009 piece from The Huffington Post entitled “The Two Documents Everyone Should Read to Better Understand the Crisis” is an essential read.

Black uses one of those documents as the starting point for this June 11, 2009 presentation at the Armand Hammer Museum of Art and Culture Center in Los Angeles. It is long (over an hour and a half in total). If you’d like to skip the introductions, Black starts his presentation at about six and half minutes in.

Well, that’s the view on the ‘Financial Crisis’ from “the economist” and “the criminologist”. Next post, I’ll get to the views from the activist, the journalist, and the professor. Thanks for reading!