In reviewing these three books, Simon Johnson offers the following.
By 2008, our executive and legislative branches had long been deep in bipartisan slumber, allowing vulnerabilities to build up in the form of overspending, rising consumer debt levels and lax (or nonexistent) protection for consumers against outrageous practices by the financial sector. This bigger picture is missing from Sorkin's and McDonald's blow-by-blow accounts, but it is a recurrent theme in "Past Due," by journalist Peter S. Goodman.
We can quibble about the relative importance of some details -- such as the role of China's high savings rate in lowering global interest rates and feeding the American credit boom -- in Goodman's highly informative account. But there is no question that politicians either believed that crazy "financial engineering" created a sound basis for sustainable growth or just loved what the financial system could do for them at election time.
And, as Sorkin relates, it is hard to escape the conclusion that the rhetoric regarding our supposedly free markets without government intervention just masks the reality -- that there is a revolving door between Wall Street and Washington, and powerful people bend the rules to help each other out. In an illustration of Wall Street clubbiness, Sorkin documents a meeting in Moscow between Hank Paulson, secretary of the treasury (and former head of Goldman Sachs), and the board of Goldman Sachs. As the storm clouds gathered at the end of June 2008, Paulson spent an evening talking substance with the board -- while agreeing not to record this "social" meeting in his official calendar. We do not know the content of the conversation, but the appearance of this kind of exclusive interaction shows how little our top officials care about public perceptions of favoritism.
In saner times, this would constitute a major scandal. At moments of deep crisis, understanding what influences policymakers and having access to them can help a firm survive on advantageous terms. Goldman Sachs was saved, in large part, by suddenly being allowed to become a bank holding company on Sept. 21, 2008. Our most senior government officials determined that the United States must allow Goldman to keep its risky portfolio of assets, while offering it essentially unfettered access to cheap credit from the Federal Reserve. In rescuing a crippled investment bank, the Treasury created the world's largest government-backed hedge fund.- - - -
The most significant result of the financial crisis is the emergence of six large banks that are undoubtedly too big to fail and therefore enjoy a strengthened government guarantee; Goldman, JPMorgan, Citigroup, Bank of America, Wells Fargo and Morgan Stanley are the beneficiaries of the doom loop. The most significant non-result is the fact that no comprehensive legislation has yet been passed to reform the financial sector. Without really serious reform, we have every reason to start counting down to the next financial crisis, and to the next fleet of Mercedes lining up before the New York Fed.
Johnson has historically offered more government regulation as a solution to this problem, mostly in the form of breaking up banks. Allowing banks to fail and permitting markets to self-regulate is to me a better solution. But given the explicit relationships discussed in all three of these books, of which Sorkin's is the only one I've read, I wouldn't count on much changing either way to fix the problems. Unfortunately, and contrary to the work of the founders of this country, we've moved much too far in the direction of a centralized and powerful federal government for it to serve general interests rather than special interests.
Of the incredible accounts to read in Sorkin's book, nothing was more so than accounts of the capitulation and obsequiousness by banking executives to Paulson, Geithner and Bernanke.
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