Review of "The Wall Street Takeover and the Next Financial Meltdown"

Finances

Critical Book Reviews

"America's Oligarchy"

Johnson, Simon., & Kwak, James. (2010). The wall street takeover and the next financial Meltdown. New York: Pantheon Books.

Paperback: $15.95

ISBN: 030747660X

Knopf Doubleday Publishing Group

Simon Johnson is one of the most frequently cited economists of the 21st century and was considered a "go to guy" during the recent economic meltdown. Simon Johnson, previously the chief economist of the International Monetary Fund, Professor of Entrepreneurship at MIT, and author of the controversial "The Quiet Coup."

Johnson and Kwak's, "The Wall Street Takeover and the Next Financial Meltdown" asserts that Washington has and will accede to the vested interests of an unbridled financial sector that runs up profits in good years and dumps its losses on taxpayers in lean years. Moreover, without genuine reform through stringent regulation of the banking system as first and foremost an engine of economic growth, the country and the global economy are positioned for another financial meltdown" (231 ). Johnson and Kwak suggest, "…reconfigure the megabanks so they will be small enough to fail" (6). Any contemporary economy needs a financial system to process payments as well as to transform savings in one part of the economy into productive investment opportunities in another part of the economy.

But the past three presidents have made the determination they need this financial system; one that is dominated by 13 bankers. With the highly potent and combustible mix of exotic mortgages and complex derivatives these 13 banks grew to a level that their failure threatened to destabilize the entire financial system, and dare say egregiously impact the global economy; providing insurmountable leverage against, with and over the government. The minimal impact the governments regulatory controls had on the financial engines of the 13 proved almost laughable in the face of the monumental bonuses issued to major stakeholders, namely the CEO's and upper echelon of the companies within months of gubernatorial bailout.

There is no wonder, however, that this situation came to pass. For the past 30 plus years, financial institution money has been lining the campaign coffers and war chest of congressional representatives and investment bankers wrangled top positions within the White House's administrations and the Treasury. In essence, before the Wall Street bankers came to the proverbial fight, they had already won. The post-Depression regulatory system was designed to force disclosure of publicly relevant financial information; established limits on the use of leverage; drew bright lines between different kinds of financial activity and protected regulated commercial banking from investment bank-style risk taking; enforced meaningful limits on economic concentration, especially in the banking sector; provided meaningful consumer protections and contained the financial sector so that it remained subordinate to the real economy (Weisman & Donohue, 2009). Needless to say, the post Depression regulatory system was "hodge podge" at best and failed to effectively deliver on its promises.

The impact and undeniable message the bailouts and the political / financial "friendships" provided to the American people and the global economy as a whole is that the government "chose to stick with the bankers it had" (Johnson & Kwak, 2010). The message is clear and straightforward: "When times are good, the banks keep the upside as executive and trader compensation; when times are bad and potential crisis looms, the government picks up the bill" (12). Little to no consideration was given to choosing another option, a different financial structure, and real regulation, considering that both the Bush and new Obama administrations were heavy with high ranking administration officials that came from Wall Street. "Reform was put off until after the most powerful banks had grown even bigger, returned to profitability, and regained their political clout" (11).

Johnson and Kwak maintain that the current government saving of overly powerful financial institutions is not a new phenomenon in the history of American economics. Thomas Jefferson faced a similar situation with the financial aristocracy. Jefferson lamented in his 1801 State of the Union Address, "Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with these institutions" (Cherry, 1998). The nation's 7th president, Andrew Jackson was equally distrustful of banks, and his secretary Nicholas Trist echoed Jackson and Jefferson's sentiment when he wrote, "Independently of its misdeeds, the mere power, - the bare existence of such a power -- is a thing irreconcilable with the nature and spirit of our institutions" (Sears, 1924).

Oligarchy, government by the few, is what Johnson and Kwak purport has been America's system and will continue to be so in the future; positioning the country for yet another financial meltdown. "The Wall Street Banks are the new American Oligarchy -- a group that gains political power because of its economic power, and then uses that political power for its own benefit" (6).

"The Wall Street Takeover and the Next Financial Meltdown" fits well within the context of the larger academic discipline in that it provides insight into the current system of public administration; offers structural reference points to assess and learn from; and affords opportunity for critical review. Johnson's background, in particular, bespeaks his argument. He is not looking at the financial crisis as an abject third party, but as someone who was in the fray as it occurred. This makes Johnson's and Kwak's arguments relevant, pertinent, and worthy of heeding. Anyone interested in historical and contemporary governance and public administration would benefit from reading this book. Moreover, those interested in international relations, the global economy, and consumers in general can greatly benefit from the review of this book; both from a professional and personal perspective.

Not only is the historical information and parallels outlined in the book relevant and important, the comparison and contrast to modern day governance provides valuable information as to America's system of governance and the power the financial system has to effectually thwart, influence, and control it. Readers of this book can use it in a variety of ways; as a history lesson, financial guide, and a contemporary review of public administration.

Sorkin, Andrew Ross. (2009). Too big to fail. New York: Viking.

Paperback: $18.00

ISBN: 0143118242

Grand Central Publishing Company

Henry Paulson was the United States Secretary of the Treasury from 2006 to January 2009. A graduate of Harvard, Paulson joined the firm of Goldman Sachs in 1974, and was named CEO of the company in 1999.

In Sorkin's book "Too Big to Fail" he dedicates almost an entire chapter to Henry Paulson; his history on Wall Street and his tenure in the Bush administration. According to Sorkin's writings, Paulson had concerns about the market early on in his appointment as a part of the Bush administration. During his first briefing with President Bush in 2006, Paulson is said to have warned that the "economy was overdue for a crisis" (Sorkin, 2009). "Where there is a lot of dry tinder out there, you never know what will light it. We have these periods every six, eight, ten years, and there are plenty excesses" (61).

Ben Bernake worked closely with Paulson; and the two were determined to ensure the financial sector remained operational for a long enough period of time so that it could repair itself. This policy of self repair was referred to by Bernake and others within his group of federal colleagues as the "finger-in-the-dike" strategy. He and Paulson worked together to secure the first 85 billion dollars for the financial bailout of A.I.G. Paulson is said to have agreed to the bailout even though it ran counter to what the Bush administration's system of free market principles, and his own expressed belief that reckless behavior should not be rewarded.

However, this was an emergency, a financial crisis of a magnitude he had not seen before in his thirty two years on Wall Street. And because of the sheer magnitude of the problem, he agreed with Bernake that in this situation, "pragmatism trumps ideology" (Cassidy, 2008). Paulson in his book and personal account says that in order to save free enterprise capitalism, "he had to preside over government intervention and bank bailouts, so "I had been forced to do things I did not believe in to save what I did believe in" (Paulson, 2010).

The most serious charge levied against Paulson and Bernake is that their response to the crisis had been ad hoc -- non-generalizable and for a specific purpose, as well as contradictory in rescuing Bear Stearns but allowing Lehman Brothers to fail. There were moths prior to the first use of taxpayers' money that the pair dismissed the danger from the subprime crisis and then quite suddenly announced that the situation was grave enough to justify the bailout (143). In total, Paulson and Bernake wanted 700 billion dollars of tax payer and government funding to purchase distressed mortgage securities, and then within a few months, used the money to shore up Wall Street by purchasing stock in banks instead. Paulson and Bernake's reversals were and still are deeply unsettling to the millions of Americans who defaulted on mortgages and lost jobs as a result of the faulty financial bubble bursting.

The views on Paulson's role and responsibility as it relates to the financial crisis are as divided as the Democrats and Republicans' in government. Some have argued that Paulson was the voice of reason; that he was responsible for balancing the unintelligent responses of a lame duck president (uncredited, 2009). Others have argued that he didn't want to look like a patsy to his friends on Wall Street or his new cohorts in the Bush administration. The insider account rendered by Paulson is about as close to the fire as one can get. He was instrumental in the plan developed to bailout Wall Street, and at the same time, because of his history, had an intimate knowledge of the banking industry itself. The book is relevant, and because of his background, his accounts bear noting. What is interesting about Paulson's argument, if you will, is that it is his argument. He talks a great deal about the inherent conflicts he faced from 'being on both sides of the fence', or the perception that he was doing so. The book is written as a Memoir; not a textbook on how to manage the financial crisis, but more on what he did as a part of the process. As with Sorkin's boo, Paulson's memoirs provide a great deal of insight into the inside activities, processes, and antics of the financial crisis. Those interested in a verbatim account will find the book useful. Its value lies in understanding what occurred, and possibly using the information to provide insight as to how to avoid a similar situation in the future.