artnews’s posterous

This new Atlantic article by a financial insider shows how threatening the current banking/financial crisis is. It echoes points I quoted in my article on Geithner's banking plan -- a bailout well-received by Wall Street and Washington pundits, but not progressive or many centrist economists -- and the dangers and series of banking scams are vividly portrayed by Matt Tabbai's  new Rolling Stone piece. Here's a link to my piece, written before Wall Street, joyous that taxpayers and not hedge funds will take virtually all the risks in buying up toxic assets, greeted the Geithner banking plan with an upswing in stock prices. His proposal later in the week to broaden overisght of the essentially unregulated non-banking institutions is long overdue, but won't be enough to stop the economic crisis. I also have  added an angle about populist rage as boosting union political efforts:

http://www.huffingtonpost.com/art-levine/could-anger-at-aig-and-ge_b_177893.html

These views about the Geithner plan and the dangers of the current Wall Street-favored recovery plan are also echoed by Paul Krugman's commentaries. Krugman followed up late this week with a scathing look at the Obama administration's continuing  faith in the magic of the marketplace:

It has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic...

The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that...

After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.

And finance became anything but boring. It attracted many of our sharpest minds and made a select few immensely rich.

Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie...

In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago.

To be fair, officials are calling for more regulation. Indeed, on Thursday Tim Geithner, the Treasury secretary, laid out plans for enhanced regulation that would have been considered radical not long ago.

But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

As you can guess, I don’t share that vision. I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.

 
Let's hope that a Nobel Prize winner and others are wrong. Noriel Roubini, though, "Dr. Doom," thinks it might work.

You can get an overview of previous explanatory journalism of how we got in this mess -- although the Rolling Stone piece is by far the most accessible and entertaining -- in my earlier round-up piece:
http://www.huffingtonpost.com/art-levine/7-trillion-meltdown-101-h_b_147285.html

Here's more information on the Atlantic article:

In the upcoming May issue of The Atlantic, former IMF economist Simon Johnson writes about the way the finance industry has effectively captured the US government.  Johnson argues that the state of affairs is more typical of emerging markets, and that recovery will fail unless we break the financial oligarchy that is blocking essential reform.

 

He summarizes, “The conventional wisdom among the elite is still that the current slump ‘cannot be as bad as the Great Depression.’ This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.”

 

I invite you to read the full essay, now posted at http://www.theatlantic.com/doc/200905/imf-advice.