What Ails the Body Politic

Here is the key bit from an article by Tim Fernholz on The American Prospect website. He focuses on economist Simon Johnson's analysis that the financial industry is corrupt and has bought the politicians:

His argument, in a nutshell, is that the last 25 years have seen deregulatory policies driven by the banking interests, leading to an over-large financial sector that has captured the political process. Financiers promoted free-market ideals, served in government, and funneled millions into the political process. Now, the risky behavior of major financial institutions, combined with the public policy they promoted, has created a major crisis. But the bankers' political power hasn't waned, and they are preventing the government from acting aggressively to start recovery.

Johnson and other economists across the ideological spectrum have fashioned a rough consensus that the government needs to take insolvent banks into receivership and use anti-trust tactics to break them apart, producing a financial sector that is small, simple and heavily regulated. But Johnson doesn't believe this will happen unless the financial crisis becomes even more severe; otherwise, the political incentives standing in the way will be insurmountable even if the price paid by the economy is, in the long-term, devastating.

On the other hand, the results of the recent G-20 economic summit offer a glimpse of the current political response to the economic crisis: return to the status quo. Leaders blame the crisis on technical decisions made by regulators and the central banks that set monetary policy; they hope to prop up the existing system, and, with slightly more regulation, continue on with essentially the same game.

Many economists see in this approach as complacent, and indicative of a fundamental misunderstanding of the financial sector's structural problems. Johnson's contribution is identifying the political factors that contribute to the rosy-eyed government consensus in the face of many academics' hard-edged analysis.