Suppose the International Monetary Fund (IMF) performed the same diagnosis and proscribed the same tough medicine for the US as it would for any financially-distressed emerging economy.
That is exactly what Simon Johnson lays out in The Quiet Coup, appearing in the May 2009 issue of The Atlantic. Simon Johnson, currently a Professor at MIT’s Sloan School of Management, should know; he was Chief Economist at the IMF during 2007 and 2008.
Johnson summarizes the characteristics of financial crises with which the IMF has dealt over the last few decades, the tough remedies prescribed, the resistances these countries have presented, and the results. ‘Every crisis, of course, is different. … But I must tell you, to IMF officials, all of these crises looked depressingly similar. … [T]he economic solution is seldom very hard to work out. … [but] the biggest obstacle to recovery is almost invariably the politics of countries in crisis.’
As you read about these crises, you will be amazed (and I daresay depressed) by the similarities to our own current situation.
Johnson is particularly concerned about implicit ‘partnerships’ between the government and ‘oligarchs.’
‘Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.’ (…)
‘At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.’ (…)
‘To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.
‘Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse’
I recommend you read the whole article. I can’t do it justice in this post.
Simon Johnson will be interviewed 31 March 2009 on NPR’s OnPoint.