Bank Shot

Simon Johnson over at Baseline Scenario has an excellent article on what the banking system is planning to do now that they've basically gotten everything they've wanted out of the taxpayer, government regulators, and the happy face economics media.

Now they want absolution of their sins, and they basically want to go back to business as usual, claiming that any further regulation and vilification will only harm the economy.

The big issue is of course the financial sector reform process. Some of my colleagues expressed great satisfaction with the progress made by the G20. But progressing down a blind alley is not something to be pleased about. I have yet to hear a single responsible official in any industrial country state what is obvious to most technocrats who are not currently officials: anything too big to fail is too big to exist.

If the bankers were just stupid, as suggested by David Brooks, then regulatory fixes might make some sense. But we know that bankers are smart, so it is their organizations that became stupid. What is the economic and political power structure that made it possible for such stupid organizations to become so large relative to the economy? Answer this and you address what we need to do going forward.

At a high profile conference in the run-up to this crisis, someone destined to become a leading official in the Obama Administration responded to a sensible technocratic critique of the financial system’s incentive structure (from the IMF, no less) by calling it “Luddite”. By all accounts, this is the prevailing attitude in today’s White House.

But the right metaphor is not breaking productive machines, or peasants with pitchforks, or even the poor vs. the rich. It’s as if the organizations running the nuclear power industry had shown themselves to be stupid and profoundly dangerous. You might wish to abolish nuclear power, but that is not a realistic option; storming power plants makes no sense; and the industry has captured all regulators ever sent after them.

The technocratic options are simple, (1) assume a better regulator, of a kind that has never existed on this face of this earth, (2) make banks smaller, less powerful, and much more boring.

And of course the banks will accept neither option. They will threaten to pick up their toys and go over to a country where they CAN run business as usual, and take millions of jobs with them. "Shut up and let us make money, or we'll bankrupt you," they tell Obama. And they are the ones holding the cards. There's a reason the banks have gotten everything they've wanted and then some.

The banks were allowed to get too big. Then they got greedy and corrupt. Now, cutting the financial cancer out will kill the economic patient just as surely as not operating at all.

Until Obama admits the size and power of the financial sector is the main problem, there will be no solution. Just more bailouts.