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21 April 2011, Gateway House

How powerful are the world’s bankers?

The 2008 financial collapse has economists pondering over the stability of global economies and the ability of those with financial power to maintain their wealth. If such a situation recurs, who will be held accountable?

Editorial Advisor, Gateway House

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Followers of the American economist Hyman P. Minsky hold a conference in New York City each year to see how much progress has been made in controlling the world financial system. Minsky, not a mainstream economist, maintained that financial markets are inherently unstable and if left unregulated will go haywire and implode doing large scale damage.

Minsky’s theory was never more popular than after America’s financial meltdown of 2008. The subprime crash rocked the world, destroyed $13 trillion in wealth in the U.S and according to Asian economist Andrew Sheng, wiped out some $48 trillion in global wealth holdings.

This year the forum focused on whether international regulators could act together to curb the mega banks. The answers were not optimistic, especially because most speakers felt the U.S hasn’t even cleaned up its own mess. If there’s a global lesson, says Galbraith, “it’s that it’s ludicrous for the U.S. to tell China and other counties how to run their financial systems.

China and Asian governments are drawing lessons from the causes and how the U.S. managed the aftermath, noted Sheng, whose book “From Asian to global financial crisis” compared Asia’s 1997 crash to the 2008 global one. China’s leaders are engineers. They are deliberative and move cautiously. They see that national governments may be able to deal with national banks but not with “too big to fail– too big to jail” global ones, Sheng noted.

Bank bailouts are over in the U.S. and with the Federal Reserve printing money to drive investors into stocks, the 2008 collapse seems like a fading memory. That’s why U.S. banking regulator Shelia Blair got attention when she told the conference a similar meltdown could happen again.

“I am not going to stand before you and claim that the inherent instability of financial markets can be regulated out of existence,” said Bair, who runs the Federal Deposit Insurance Fund which protects U.S. savers from bank deposit losses up to $250,000. Blair then went on to say that Dodd-Frank financial reform legislation could be used to mitigate the worst effects of another financial shock.

Two other U.S. officials tended to take a more hands-off position. Charles L. Evans, president of the Federal Reserve Bank of Chicago called the crash a “once in a lifetime crisis” caused by a “myopic focus” on compensation from short term profits, which he suggested wouldn’t happen again. Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia talked about the importance of having the central bank set an inflation target, ignoring the Fed’s central role in fostering the crisis. Both officials took the position that no one could have detected the hidden and corrupt financial arrangements that turned billions of dollars of U.S housing loans into toxic securities.

But U.S. economist James K. Galbraith, a former chief staffer of Congress’s Joint Economic Committee and a long time government watcher read from testimony of Financial Crisis Inquiry Commission that noted Fed Chairman Ben Bernanke was warned in detail by housing lenders in 2005 how corrupt housing lending had become and how in their view it would precipitate a severe collapse.  “The Fed should at least have the courage to admit it knew but didn’t act. If government had followed the military’s rule all officials involved should have been removed from their positions and an official inquiry started to see what they knew and when they knew it”, he declared.

Gary B. Gorton, a Yale professor who at been at AIG Financial Products, the small brain trust that wrecked the giant insurance company by writing $480 billion of policies on dubious housing bonds, said the economics profession had lost all credibility by pretending to act like it foresaw the crash when “no one had” .

“This was a massive intellectual failure by economists. You go to a conference and it is never on the agenda. You ask, how could they have screwed up so badly? No one wants to talk about it.”

Phil Angelides the chairman of the Financial Crisis Commission was even more pessimistic about the future. Wherever I go the question I get from the public is, why is no one held accountable? The concentration of financial assets among the 10 largest banks is greater now than before the crisis when the Washington bailed out the big banks.  “Of course it can happen again”.

He said Americans are deeply cynical about the failure to prosecute bankers. They ask me: “Is the government just an insurance company for those with financial power. What we are grappling with now is far greater than the financial crisis. It is the eradication of trust”.

On Wall Street, where big bonuses are back and the U.S. economy seems to be slowly recovering, well off Americans sharing in a stock market rally. Bankers are betting that like the regulators, the general U.S. public also sees the crisis fading into history.

Washington officials like Blair say it is not yet too late to bring charges against the bankers involved. “Justice moves slowly” she told the audience. But few others from the President on down talk that way. Midway through the meeting, the New York Times did a package of stories about how funds that law enforcement agencies wanted for Wall Street prosecutions were blocked by officials of the Obama Administration. After America’s other big banking crash in the 1980’s more than 1,000 housing financiers were charged and convicted, it noted. The impression that Obama is the protector of the bankers is hard to ignore. His opponents want even less government action. If a change is to come, it may be up to independent U.S. voters to bring the fight to Wall Street.

Bob Dowling is Editorial Advisor to Gateway House.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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