Wednesday, April 1, 2009
Hannan / The Economy The Scariest Story You'll Read All Week
Posted by Caleb Hannan on Wed, Apr 1, 2009 at 12:02 PM
Fortunately, or unfortunately depending on your tolerance for bad news, there are people like Simon Johnson, the former chief economist at the International Monetary Fund, to explain, in detail, the depths to which we are screwed.
The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.The problem, says Johnson, is that these one-size-fits-all solutions don't fit in a sophisticated economy like America's. Mainly because the people responsible for the current mess are the same ones still wielding power.
Read all of Johnson's article, "The Quiet Coup," in the Atlantic's May issue or here. And pass it along to anyone who dares utter the word socialism in an effort to spook you. Because in the end, the oligarchy Johnson describes is much, much scarier.In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn't be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn't roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.
But there's a deeper and more disturbing similarity: elite business interests--financiers, in the case of the U.S.--played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
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