Kaptur: "Wall Street and Washington Is a Circuit"

Bill Moyers Journal (PBS, October 9, 2009):

BILL MOYERS: ...Treasury Secretary Geithner is on the phone several times a day with a select group of very powerful Wall Street bankers, especially Citigroup, J.P. Morgan, Goldman Sachs... And these are the bankers who helped bring on this calamity and who are now benefiting from it. What does that say to you?

MARCY KAPTUR: That says to me that Wall Street and Washington is a circuit. And because Mr.Geithner headed the New York Fed that that historic relationship, unfortunately, continues. And it gives them special access and special power to influence policy.

SIMON JOHNSON: Well, I think it really tells you how the system works. The system is based on access and is based on what on Wall Street shaping Washington's view of what's important.

It's the people who are very close to Mr. Geithner before when he was the head of the New York Fed. Before he became Treasury Secretary. These people have unparalleled access...

MARCY KAPTUR: ...I recently asked Chairman Bernanke of the Federal Reserve, 'Let me ask you a question. Would you be willing to consider a reform where the Cleveland Fed would have equal power to the New York Fed, in terms of how the Fed is run?' And his answer was, 'No.'...

SIMON JOHNSON: Remember Wall Street convinced us that trading derivatives without any regulation, that all these kind of crazy housing loans, which are very dangerous for consumers. That all of this was sensible. All of this was a good way to sustain growth. That was wrong. That wasn't it. That wasn't that's not the end of the story. In the crisis, when things got bad, they also convinced the key people in Washington that they, the bankers, the big bankers, the Wall Street bankers, who are really responsible for all of these problems, they should be saved. Not just their banks, but they individually and should be saved. Their jobs, their pensions, all their perks. It's an extraordinary moment.

BILL MOYERS: You asked on your blog, just this week, a question I want to put to you now, and to both of you. You asked, 'Does this crisis reflect something about the disproportionate influence of a few incompetent investment bankers or a deeper breakdown of capitalism?'' What's your answer to your own question?

SIMON JOHNSON: Well, definitely, this disproportionate influence of some fairly incompetent bankers, that's for sure. That's what we're seeing today. That's what we've seen over the past few months. I think on the issue on the issue of capitalism, we have to take this very seriously. To me, at least, the financial part of our capitalism is very seriously broken... the big financial players are absolutely against any kind of sensible regulation. And I think they're going to win... These are very smart, very profit-oriented people... Follow the money. The money is where Jamie Dimon says it is. Jamie Dimon says, 'You ain't seen nothing yet,' in terms of his lobby in Washington. He's on the record as saying, this is his big initiative right now.

-- http://www.pbs.org/moyers/journal/10092009/watch.html

Simon Johnson (The Baseline Scenario, October 6, 2009): Over the past 30 years Wall Street captured the thinking of official Washington, persuading policymakers on both sides of the aisle... This was pervasive cultural capture or, to be blunter, mind control. But when the crisis broke it was not enough. Having powerful people generally on your side is not what you need when all hell breaks loose in financial markets. Official decisions will be made fast... If you run a big troubled bank, you need a man on the inside – someone who will take your calls late at night and rely on you for on the ground knowledge. Preferably, this person should have little first-hand experience of the markets... Tim Geithner, Secretary of the Treasury... Geithner’s phone calls were primarily to and from people he knew well already -- who had cultivated a relationship with him over the years... The Obama administration had to rescue large parts of the financial sector, given the situation they inherited. But it absolutely did not have to run the rescue in this exact fashion -- bending over backwards to be nice to leading bankers and allowing their banks to become even larger... The idea that you could leave big US bank bosses in place (or let them get stronger politically) and do meaningful regulatory reform later has always seemed illusory -- and this strategy now appears to be in serious trouble.

James Kwak (The Baseline Scenario, October 12, 2009): At a panel discussion at the Pew Charitable Trusts (captured for posterity by Planet Money), Alice Rivlin floated the idea of breaking up big banks. Luckily for us, Scott Talbott of the Financial Services Roundtable (a lobbying group for big banks) was there to slap that idea down.

Talbott: “We need big companies, and they can be managed, and they are being managed...”

Alex Blumberg (Planet Money): “But why, why do we need big companies?”

Talbott: “They provide a number of benefits across the globe. We have a global economy, and these institutions can handle the finances of the world. They can also handle the finances of large, non-bank institutions like General Electric or Johnson & Johnson. They need these institutions [that] can handle the complex transactions. Simply breaking them up ... then you’re discouraging a company from achieving the American Dream..."

There are two things I object to strongly. The second is easy. The American Dream is for people, not companies... When Talbott says “American Dream,” what he really means is “American Bank CEO’s Dream”...

The first is this “we need big banks to serve global corporations” line. I’ve heard this before and I don’t buy it, for a number of reasons...


Simon Johnson and James Kwak (The Washington Post, September 29, 2009): The next couple of months will be crucial in determining the shape of the financial system for decades to come. And so far, the signs are not encouraging.

Simon Johnson and James Kwak (The Washington Post, October 6, 2009): ...the "blame China" story (or the "half-blame China" variant) suffers from serious problems. First, it takes two to tango... Second, the Chinese government did not lend to American home buyers directly... Third, there is no particular reason why a "giant pool of money" should produce a bubble.

Fast-forward: September 2010: Michael Hirsch, now at the National Journal, explains why presidents, from Ronald Reagan through Barack Obama, have put Wall Street before Main Street. In his book Capital Offense: How Washington's Wise Men Turned America's Future Over to Wall Street, he looks into how that preference has caused numerous economic crises around the world...

"Greenspan grew very passionate about [Rand] ... and her philosophy ... Then October 2008 ... he said my entire intellectual edifice has collapsed."