Perhaps Simon Johnson is correct in his estimation of a captured financial/government combination than is discussed in detail to date. Here is his Atlantic Monthly piece a la IMF perspective…two paragraphs stand out for me on the first page, but explanation goes on for several pages.
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. 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.
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. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.
Dani Rodrik responds and states bankers were not as powerful as Johnson suggests, and the IMF does not have a stellar reputation in some areas regarding policy for emerging economies. He questions whether economists should rule the world as well. (h/t Mark Thoma)
Update: Then again, Pension Pulse has a quote suggesting the word banker is outmoded and limits are changed. (He has two graphs worth reading on pension mix of assets in public pension funds as well. The Mass Teacher Assoc. declared a drop of 29% value, about right for equities. Many teachers were not following the numbers.)
One senior pension industry insider wrote me tonight, telling me the following:
“Just read an interesting statistic that 37% of all private equity capital raised over the last 30 years was raised in the last three years. A giant experiment whose results won’t be known for another 5 to 10 years.”
A scary thought indeed, and he is absolutely right, we simply do not know how all these billions of dollars into hedge funds, private equity and real estate funds will pan out over the next decade.