Friday, March 27, 2009

Populist outrage and oligarchs

One reason populist outrage over the excessive bonuses at AIG and elsewhere in the financial industry doesn't miss the point is discussed in an excellent Atlantic article by Simon Johnson and James Kwak. Johnson was the chief economist at the International Monetary Fund in 2007 and 2008. He's currently a professor at the Sloan School of Management at MIT. His experience with IMF bailouts of faltering economies gives him a perspective on the crisis in the US economy which is not shared by many of the people working to solve our problems in Washington and on Wall Street.

He sees what's happening here to have much in common with the collapse of the Malaysian economy in 1998 and other emerging market economic crises: It's a case of oligarchs manipulating the government to maintain wealth and power. However, unlike the methods of corrupt crony capitalism in emerging economies (bribery, political graft, extortion, etc.), what the US has is an ideological predisposition to follow the big players' lead in matters financial, even when they are precisely the ones who have conjured the current fubar situation.

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.

The argument continues by looking at who the big players in government are (and were) -- Geithner, Rubin, Snow, Paulson, Greenspan, et al. -- and how they are and were intimately connected with major financial institutions, particularly Goldman Sachs. The political/governmental decision makers are one and the same as the financial guys. Furthermore, their worldview has become just plain common sense among so many politicians and policy wonks. Thinking like a megacapitalist is just the way you think in the halls of power.

I'm reminded of Louis Althusser and his ideological state apparatus.

Meanwhile the money keeps piling up around the financial services people and their companies as more and fancier financial products are developed, making more and fancier ways to make more and (presumably) fancier dollars. (image from the Atlantic)
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 postwar 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.
Keep in mind the capitalist rationale for having a financial sector in the first place: The bankers and brokers provide an essential service to the economy by aggregating savings and lending to business both so that goods and services can flow efficiently through the market and so that innovations and start ups can find necessary funding. For this the banks and brokerages deserve a profit (it is argued), and for this their employees and executives deserve a good wage. In recent years, however, wealth has been concentrated in the financial sector itself where it has flowed and eddied and swirled in a gyre of more wealth and (I'd argue) where it has created nothing but wealthy people. Well, according to Simon Johnson, it also created a worldview in which financiers could do no wrong and the rest of us were just too ignorant and innocent of economic realities to have anything worthwhile to say in economic policy discussions.

While it is true that the ginormous bonuses assorted AIG players received are only a tiny fraction of the many billions we taxpayers have so far poured into the company's ravenous maw, our outrage -- our populism in the face of a huge payday for the people who blew our economy to bits -- is exactly the right response. A populist pushback against the evident groupthink in Washington and on wall Street would be a healthy thing, indeed.

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