There is no question that the Obama administration has abandoned any vestige of laissez-faire capitalism. It may not be socialism, and it’s certainly not fascism, as some idiots--sorry, conservative thinkers--have declared, but it is at the least capitalism with a very strong dose of state planning. The real question is on behalf of whom, or under whose dictates is the planning being conducted. The obvious answer is the Obama administration. But that doesn’t end the questioning.
In an article in the current Atlantic, Simon Johnson argues that a “quiet coup” has taken place in the United States that has put the financial industry--Wall Street--in charge of the nation’s economic policy. “A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true,” Johnson writes. Johnson thinks that Wall Street’s dominance has continued during the Obama administration, and defined the limits of what it can do to pull the nation out of its current crisis.
Johnson surveys what has been done so far, which has largely been what the banks wanted, and who is occupying high policy positions in Washington. In a recent Wall Street Journal article, there is evidence of still another way in which the banks might wield influence. The article recounts how “some bankers say they turned the conversations [with the administration] into complaints about the antibonus crusade consuming Capitol Hill. Some have begun ‘slow-walking’ the information previously sought by Treasury for stress-testing financial institutions, three bankers say, and considered seeking capital from hedge funds and private-equity funds so they could return federal bailout money, thereby escaping federal restrictions.”
Seeking money elsewhere--that’s fine--but “slow-walking” the stress tests suggests that the bankers have been threatening to undermine the administration’s policies if they don’t become more compliant. That’s serious--and it does suggest an attempt to use their power to dictate what the government does. It’s the old strategy of the capital strike.
Johnson and others take the argument a step farther and suggest that one result of Wall Street’s dominance is policy that will not succeed in stemming the current crisis. I am not going to go that far. My colleague Noam Scheiber and my financial advisor Larry Lynn have convinced me to give Mr. Geithner’s plan a chance to work. But it is definitely true that the banks used their political power to rule out a more strenuous alternative to the Geithner plan. If the plan doesn’t work, there will be a reckoning--and not just on the economics of the Geithner bailout.
--John B. Judis