Jun 21, 10
Read in June, 2010
This is the best book I have read on the recent financial crisis of 2008. The authors present a historical study of how and why it happened and show why it will happen again if the US govt does not go through with breaking up financial institutions which are 'too big to fail'. Both the Bush and Obama administrations have allowed the big banks to remain BIG thereby allowing them to bring the world economy into crisis again by taking the extraordinary risks that they took to get us there in the first place in 2008. This is really a worry for all of us.
The authors make some very salient points which must be disturbing for all Americans and for the image of their country as a functioning peoples' democracy. They show that six megabanks in the US control assets amounting to a staggering 60% of the nation's GDP. The ex-Wall street honchos have gradually cornered important positions within the administration as bureaucrats, outside as lobbyists, in the rating agencies and in congress and the senate. This is no different from the small set of oligarchs who control most arms of the government in developing countries. This is a very sobering and disturbing image of the country because it makes regulating the reckless financial industry very difficult. The ex-Wall street guys in Congress and the senate constantly work against the peoples' interests for regulating the industry.
The authors show historically how Thomas Jefferson, Andrew Jackson, Theodore Roosevelt and Franklin Roosevelt fought to keep the individual corporations from getting too big to manipulate the political system against the peoples' interests. The Glass-Steagall Act of 1933 kept the financial industry well regulated for 50 years from taking the reckless risks of today. By the time of the Reagan era, Wall street had gradually colonized Washington and successfully pushed through relaxation of many key regulations setting the stage for complex, risky financial products like CDS, various derivatives etc. People like Larry Summers, Tim Geithner, Robert Rubin, Hank paulson are all ex-Wall street honchos and they certainly did not see the risks the same way - naturally!
The authors make the following interesting assertions while discussing how to restore the health and balance of the US (and global economy as a result) :
1. There is no evidence that large banks gain economies of scale above a very low threshold of $10 b in assets.
2. The Glass-Steagall act was in force between 1933 and 1983 and there is no evidence to show that it stifled innovation in the US economy in various fields, contrary to Wall street crowing about regulation stifling innovation.
3. No financial institution should be allowed to control or have ownership interests of more than 4% of the US GDP. It should be 4% for all banks and 2% for investment banks.
Though the discussions on many complex financial products are difficult to understand for the layman, the book is very accessible with regard to its core tenets. In the era of globalization, whatever happens in the US affects the whole world. It is certainly a worrisome future with the giant Wall street oligarchy controlling Washington putting all of us ordinary folks under immense risk of another meltdown like that of 2008.
This book is a must read for the American and European people and take their countries back from the oligarchs.