Simon Johnson, currently a professor in MIT Sloan School of Management and formerly the chief economist of the IMF has published a long but very accessible and interesting overview of the financial crisis from a somewhat unusual viewpoint – namely what would IMF tell the US government if it could tell them anything. Johnson, by the virtue of having worked for the said organisation and having seen the unfolding of several crises in different countries up close and personal, is very disillusioned over how easy it is going to be to deal with deeper reasons and implications of this particular one. Now that the US should take the same medicine that the IMF has long been advocating in different places all over the (mostly Third) world, we will likely see how difficult it is going to be to administer it.
The main point of the article is that, just like in places like Indonesia, Ukraine, Philippines or Argentina before, the US has a similar (if somewhat more subtle and not as obvious) oligarchy that has a huge vested interest in dealing with the crisis in a particular way that would preserve the structure of the economy and society at large. The problem is, of course, that this particular way is not compatible with necessary structural adjustments and, instead of writing off losses where they originated, aims to distribute them over all the economic and social strata. And the relative subtleness of American oligarchy (which I think applies to the Western capitalist societies in general) compared to, say Russian or Indonesian one, makes it both much harder to see as well as to deal with – it relies on cultural rather than financial or economical foundations. Its rise to dominance is actually relatively recent development. This is illustrated by two particularly telling charts in the article.
Despite not being overly optimistic on how easy they would be to put into practice, Johnson does offer some solutions. Like Paul Krugman Kenneth Rogoff, he believes that the financial system needs to be recapitalised to a much larger extent that it currently is, and has previously maintained that doing that without also taking control (i.e. nationalising) would amount to a huge handout of public funds. This – the so-called “Swedish solution” that has also been supported in principle by Alan Greenspan and Kenneth Rogoff, and recently mentioned in passing and then dismissed on cultural grounds by Obama – entails nationalisation of banks, subsequent recapitalisation and then selling them back to the private sector once the storm has passed. There is a marked stress on noting that nationalisation is temporary, as permanent state ownership of the banking system runs very much counter to what most of the politicians, economists and population in general in the West would intuitively recognise as a good idea. However, regardless of whether the financial system would remain private or would be re-privatised if the nationalisation were to actually take place at some point, there seems to be a strong consensus that this should not mean turning back to “business as usual” under the same rules and regulations that we have had before. Johnson has underlined the need to “break the financial oligarchy” and suggested that the way to go would be to have, instead of current financial behemoths, a network of small institutions. However, I think there is an alternative to this, which would amount to a much more comprehensive solution.
If the current system were to be broken up, it could be done not by splitting the current giants into smaller, hopefully more manageable copies, but instead by splitting it along the lines of infrastructure and, for the lack of a better word, “merchant banking”. The “merchant banking” assets could indeed be split further into smaller units, in order to avoid piling up of financial risks that could once again undermine the whole system. The “infrastructure” part – basically retail banking along with plain vanilla lending – should be treated as a utility, just like our water and electricity companies or transport infrastructure. Those can all well be in private hands and don’t need to be micromanaged by the state. However, they often do operate under a specific kind of a constraint: their profitability is capped. Before crying foul and predicting the collapse of the financial system and the whole world, consider the utility companies – their profits being capped has not caused the quality of the service decline or even stagnate, nor have the investors turned away in disgust – quite to the contrary. Utility companies are, with their security and usually excellent earnings visibility, very much sought after investments.
As it happens, this would also take care of the perceived problem with “bonus culture”. Although I am sure that the relationship with bankers’ bonuses and banks’ profits is to some degree a mutual one, it is also clear that if banks were to become utilities it would also mean the disappearance of huge bonuses that seem to cause so much anger and resentment right now. It would certainly make the whole industry a lot less lucrative for certain people or at least for certain aims, but this is not necessarily a bad thing. I recently read an article somewhere that compared the current generation of bankers to the military of 18-19th century Europe – who used to be masters of their respective universe but are now perceived and treated as a public service. Another similar example could be Japanese samurai class, who, from their initial rise to power and eminence with Kamakura shogunate, became simple bureaucrats by late Tokugawa, and then were finally disbanded even as a nominally ruling class by Meiji Restoration. And although this would be quite against my own personal interest, I do believe that in the wider perspective this is what also needs to happen to bankers – they need to become servants, rather than masters of the universe.