Breaking the Oligarchy

“If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.” The chief economist for the International Monetary Fund, Simon Johnson, has an article in the May issue of Atlantic Magazine [" The Quiet Coup "] that is a must-read. It’s written in language everyone can understand… it draws important and disturbing historic parallels… and it will make you sick, whether you are an “oligarch” or not. The four-part article is here . A single page suitable for reading and printing is here . Here’s a taste what may seem eerily familiar, although in fact it describes third -world and “emerging-market” countries whose economies have collapsed: [I]nevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms. The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs. Squeezing the oligarchs, though, is seldom the strategy of choice among

emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or— here’s a classic Kremlin bailout technique— the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone , most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. It’s not all bad. Simon — who was, after all, in the business of rescuing failed economies — does have some suggestions for us. But it will be expensive, it will take a long time, and it requires the political will to “break the oligarchy.” That starts with recognizing that any institution “too big to fail” is too big, period. It’s time to start enforcing Antitrust laws, again. Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations. This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist. Another step must be to develop rational limits on the pay of oligarchs through regulatory, tax, and corporate policy reform, along with “more transparency and competition.” It is not a little startling to read that the same disease is eating at the root of our economy that has ruined so many others in the third-world. But Simon Johnson makes sense. Will Congress and the Obama administration listen?

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Breaking the Oligarchy

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