I met a traveler from an antique land
Who said: Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them, and the heart that fed;
And on the pedestal these words appear:
“My name is Ozymandias, king of kings:
Look upon my works, ye Mighty, and despair!”
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.
Ozymandias; Percy Bysshe Shelley
I’ve just finished Simon Johnson and James Kwak’s recent book, 13 Bankers. It’s the most thorough and incisive description of the 2008 financial meltdown I’ve read yet, and I’ve been reading pretty steadily since the series of books about the crash have started coming out a few months ago. It’s not quite as readable a financial swashbuckler as Michael Lewis’ The Big Short or William Cohan’s House of Cards, but what it lacks as a page-turner, it makes up for by being a far more scholarly and detailed treatment of the entire phenomenon than the other two books.
The differences aren’t particularly surprising. Both Lewis and Cohan are former investment bankers (Lewis at Salomon, Cohan at Lazard Freres), and each has already produced a vivid portrait of the firms they worked for (Liar’s Poker for Lewis, and The Last Tycoons for Cohan). Both men are great storytellers, as anyone who can make the intricacies of life in the investment banking business interesting reading must be. And in this case, they have pretty interesting material to work with. The oddball characters whose willingness to bet against the entire financial world’s common wisdom is the focus of Lewis’ tale are just irresistible, and Cohan does a similarly great job of describing the cowboys who ran Bear Stearns into a ditch. Between the two books, we get a pretty compelling picture of both the excitement and the perils of being what Tom Wolfe described in Bonfire of the Vanities as a “master of the universe”, as well as a sobering look at the fairly frightening lack of care and understanding with which those financial titans ran their shops and our money.
Since many of us have recently been burned by smoldering vanities from Wolfe’s “Bonfire”, the masters of the universe are even less appealing as character types than they were when Wolfe wrote his novel in 1987, but our current circumstances are in part the result of the same arrogance that Wolfe caricatured in his book, and both Lewis and Cohan describe their recent offerings as being in some measure sequels to their previous portraits of the real people Wolfe drew from.
Those portraits are interesting, and the anecdotes contained in those books certainly help to add color to the tale, but in the end, the story of how we came to our present pass is less a story of individual malfeasance or chicanery (though there’s plenty of that to go around) than it is the story of a systemic failure, a misplaced confidence in unregulated markets that led policymakers to dismantle much of the regulation that had largely succeeded in stabilizing the international financial system for 50 years (an unprecedented run of stability in the history of financial markets that brought with it an equally unique stretch of steady growth in personal wealth, both in the US and around the world).
This is important not just as a historical curiosity, but because we are currently watching the Congress and the administration shrink from their duty to curb the power of the financial industry and protect the integrity of the markets by replacing and updating the regulations whose removal made the recent collapse at least possible, and quite likely inevitable. More to the point, Johnson & Kwak point out that innovative financiers will always seek to evade the restrictions placed on them by regulation, and will eventually succeed. The first wave in the recent success of such evasions (along with easing of regulations that prevented savings & loans from making speculative bets with their receipts) produced the S&L crisis of the late ‘80s, and fueled the go-go finance that Lewis and Cohan chronicled in their first books, and Wolfe fictionalized in his. Instead of learning from that bailout, we proceeded to extend the loosening of regulations to commercial banks as well. Ten years of intense lobbying by commercial bankers made possible the “modernization” (read: repeal) of commercial bank regulations that culminated in the Gramm-Leach-Bliley Act, which allowed the creation of bank holding companies that could own both commercial and investment banks at the same time, subjecting the federally insured consumer assets held in the commercial banks to the far riskier practices common in the investment banking world.
At the same time that the legal requirements for regulation were being weakened, the enforcement sections of regulatory bodies were suffering from the combined effects of having their budgets slashed and being run by people who believed it to be their mission to hobble their own agencies. What few regulations remained frequently went unenforced, and those who believed in the original regulatory missions of the agencies saw the handwriting on the wall and left in droves. All of this was viewed by many policymakers as a positive development, all part of making government small enough, in the famous words of Grover Nordquist, to “drown it in a bathtub”.
13 Bankers addresses itself directly to that degeneration of financial regulations, from a far more systemic and academic perspective than Lewis or Cohan’s contributions. Johnson is the former chief economist for the IMF, and he brings to the analysis a perspective that is informed by having been involved in stabilizing economies in the developing world that have sustained the sort of shock that we have just been through. The book is an extended version of an argument that he has been making elsewhere for the last 18 months, and he makes a convincing case. His thesis is that the root cause of the sort of risk-taking behavior that leads financiers to wreck their own economies and leads governments to let them take such risks is the capture of the government by a financial oligarchy that relies on the public treasury to underwrite its risks. He does a very thorough job of documenting that capture in our case, and argues that just as a precondition for IMF help in a developing country is the breakup of these oligarchies, so we must make a breakup of our own financial oligarchy a condition of the bailout we have just provided to them.