Thursday, May 3, 2012

13 Bankers - Simon Johnson and James Kwak

"Never before has so much taxpayer money been dedicated to save an industry from the consequences of its own mistakes. In the ultimate irony, it went to an industry that had insisted for decades that it had no use for the government and would be better off regulating itself--and it was overseen by a group of policymakers who agreed that government should play little role in the financial sector."

13 Bankers is one more book of the post-2007 financial crisis cohort. This is, along with This Time is Different, by Carmen Reinhart and Kenneth Roggoff, the "must-have" book on financial crises. The authors of 13 Bankers are Simon Johnson, former Chief Economist at the IMF, and James Kwak, former consultant at McKenzie, and both of them are co-authors of the blog The Baseline Scenario, created in September 2008 with the objective of explaining what the mess was all about. The Baseline Scenario is now one of the most widely read blogs on economics in the World.

With such a background, one might think that the authors would blame the crisis on supply-side explanations, but that is far from being the case. The main argument of the book is that banks are too large and have a tremendous leverage over Washington, in addition to having imposed the ideology that markets are self-regulating across the political spectrum. All this has resulted in a lack of effective regulation which, added to financial institutions whose failure brings the economy to its knees, has resulted in the worst crisis since the Great Depression. The solution to prevent future crises is, according to the authors, to break up banks that are considered "too big to fail" and cap and weight the size of their assets. The limit for a retail banking institution would be 4% and that for an investment bank would be 2.5% of US GDP (to give you an idea, the assets of Bank of America are equivalent to 17% of US GDP today). Comparing the policy recommendations of this book with those presented by Hank Paulson is striking: while Simon Johnson and James Kwak are under no illusion about the effectiveness of financial regulation, Paulson remains a convinced proponent of a market-based financial system with tougher rules.

The authors argue, rather successfully, that the crisis of 2008 is similar to the ones originated in emerging markets in the 1980s and 1990s, and which the United States tried to solve from the outside. Most of my American colleagues get offended when they read this. They even get offended when I refer to the 2007-08 financial collapse as "the Big Mac Crisis", just like the refer to 1994-Mexico as the Tequila Crisis, 1998-Brazil as the Samba Crisis, 1998-Russia as the Vodka Crisis, and so on. The reality, in any case, is that the quality of governance in the United States has decreased considerably over the last 30 years, basically since Reagan said that the government is the source of all problems in the World: reaching deals in Congress is harder, the budget of regulating agencies gets cut regularly in real terms, and so on.

The authors also argue, rightly, that the decision to break down the banks, or in fact any decision aimed to prevent a financial crisis, is political. Technocrats can only take you too far: regulations affect the balance of power between government and market participants, which has political implications. The authors say it better than I will ever be able to do it:
"while occasional libertarian academics and politicians have favored deregulation in its pure form, real companies see regulatory or deregulatory policies simply as a way to improve their market position or profit-making potential." 
Therefore the calculation to take any given policy measure must be taken using political parameters into account. Recognizing that this is Marxism would have made this book unsellable in the United States; but that's what it is: Marx's ideology applied to the rescue of markets.

At the time of its release, the media campaign around 13 Bankers was tremendous: building on the previous success of their blog, the authors created a website for the book where they uploaded all the reviews and material related to it. Kwak even authored an article for the Huffington Post that summarizes the book in one page (less than this post) and 4 charts!

As I said, this is one of the two books about the 2007-08 financial crisis that a person must have. The first added value of this book is that it collects a lot of material (press, other books, academic journals) around the subject; the second is that it makes complicated terms and definitions easy to understand (disclosure: the NYT agrees with this statement up to an extent, while the San Francisco Chronicle thinks that 13 Bankers is actually a tough read). Last but not least, 13 Bankers brings the Jeffersonian anti-finance populism back to the political arena.

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