13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, By Simon Johnson and James Kwak, (Pantheon, $26.95, £16.99)
After the crash comes the reckoning. Or, according to this polemic from two of the sharpest critics of the banking establishment, everything carries on much the same. Merely recognising the history of successive financial crises does not, it would appear, prevent us repeating it.
The authors are not the first to point the finger of blame at bankers following a financial meltdown. In 1720 the South Sea Bubble, a frenzy of speculative investments in South America, imploded. Jonathan Swift, a savage critic of England’s Whig political oligarchy, turned his gloriously vicious attention to the clique of financiers who ran the South Sea Company. In “The Bubble”, he argued: “The Nation too too late will find, / Computing all their Cost and Trouble, / Directors Promises but Wind, / South-Sea at best a mighty Bubble.”
With this book Simon Johnson and James Kwak, who also write a well-regarded economics and finance blog, further fortify their entrenched position as leading critics of Wall Street. As a former chief economist of the International Monetary Fund, Johnson in particular can claim to have an insider’s perspective.
The book has two interwoven strands, one focused on policy and one on power. The first is more convincing than the second. The authors document the unwinding of the New Deal restrictions on financial services and the sharp increase in bankers’ relative pay and status. They trace the rise of securitisation that enabled a common-or-garden housing boom to be pumped up into a bubble big enough to threaten the world economy. It is hard to argue with the principle of their solution, that banks must be restricted in size – especially since the wave of crisis takeovers has concentrated the US banking industry yet further.
The more controversial question is this: whether bankers are a lobby group like any other, albeit one whose money and ideas secured unusual commercial freedom and regulatory forbearance, or whether they come closer, as the authors assert, to an actual self-perpetuating political oligarchy. The faintly sinister title refers to the 13 heads of financial institutions summoned to a crisis meeting at the White House in March 2009.
Here the authors come close to overstating their case. Yes, there was a revolving door between investment banks, particularly the ubiquitous Goldman Sachs, and successive US administrations. Yes, the financial services industry gave (and gives) heavily to congressional campaigns.
Yes, too many financial regulations were weakened or circumvented. But is this an oligarchy to be compared to the cronies who clustered around Indonesia’s dictatorial Suharto? Or to those who carved up Russia’s mineral and industrial wealth in the 1990s? In an economy and society as open and diverse as the US, that comparison slightly strains credibility. After all, financial services also became untouchable in other countries, such as the UK, where politics is far less polluted by campaign contributions and there is much less personnel interchange between private sector and government.
More plausible (and possibly more insidious) than direct lobbying is the other form of influence the authors discuss, that of “cognitive capture”. The most powerful ideas are those that are widely accepted even by those without a vested interest: in this case, that what is good for Wall Street is good for America, or what is good for the City of London is good for Britain.
This book puts America’s banking system on trial and possibly tries one charge too many. Reckless endangerment to the global economy? Guilty as charged. Grievous bodily harm with malice aforethought? Not proven. But the authors’ main thrust is very well made: the burden of proof is on financial institutions to show that what they do is socially and economically worthwhile, not on governments and regulators to prove that it is not.
In Swift’s vision, the bankers are caught in their own trap. Denied the credit they need, they become worthless. In a poem of revenge, “The Run Upon The Bankers”, he fantasises: “A baited banker thus desponds, / From his own hand foresees his fall, / They have his soul, who have his bonds; / ‘Tis like the writing on the wall.”
But they did not fall after the South Sea Bubble. Little was done to prevent a recurrence. And on the strength of the regulatory and legislative response taken so far, neither are they being radically constrained as a result of the 21st century’s financial crisis. Johnson and Kwak may be writing a we-told-you-so sequel after the next cataclysm all too soon.
The writer is the FT’s world trade editor