The Quiet Coup - The Atlantic. One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you.
I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1. Asia and Latin America during the crises of the late 1.
Over that time, from every vantage point, I saw firsthand the steady flow of officials. Every crisis is different, of course. Ukraine faced hyperinflation in 1.
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Russia desperately needed help when its short- term- debt rollover scheme exploded in the summer of 1. Indonesian rupiah plunged in 1. South Korea. But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess.
Yet the economic solution is seldom very hard to work out. No, the real concern of the fund.
Typically, these countries are in a desperate economic situation for one simple reason. Emerging- market governments and their private- sector allies commonly form a tight- knit. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini- universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets.
Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption. But inevitably, emerging- market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.
The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. The government is forced to draw down its foreign- currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah.
The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions. It will, in other words, need to squeeze at least some of its oligarchs. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging- market governments look first to ordinary working folk.
Eventually, as the oligarchs in Putin. So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends.
If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions. In extreme cases, they. The real fight in Thailand and Indonesia in 1. In Thailand, it was handled relatively smoothly.
In Indonesia, it led to the fall of President Suharto and economic chaos. From long years of experience, the IMF staff knows its program will succeed. This is the problem of all emerging markets. Becoming a Banana Republic In its depth and suddenness, the U. S. In each of those cases, global investors, afraid that the country or its financial sector wouldn. And in each case, that fear became self- fulfilling, as banks that couldn. This is precisely what drove Lehman Brothers into bankruptcy on September 1.
U. S. 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. 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. Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.
S. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer- standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for . But these various policies. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector.
But for the past 2. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Several other factors helped fuel the financial industry. The invention of securitization, interest- rate swaps, and credit- default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 4.
Together, these developments vastly increased the profit opportunities in financial services. Click the chart above for a larger view.
Not surprisingly, Wall Street ran with these opportunities. From 1. 97. 3 to 1. In 1. 98. 6, that figure reached 1. In the 1. 99. 0s, it oscillated between 2. This decade, it reached 4. Pay rose just as dramatically. From 1. 94. 8 to 1.
From 1. 98. 3, it shot upward, reaching 1. In that period, the banking panic of 1. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.
And just as we have the world. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts.
Although lobbying and campaign contributions certainly play major roles in the American political system, old- fashioned corruption. Instead, the American financial industry gained political power by amassing a kind of cultural capital.
Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking- and- securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to.
Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free- flowing capital markets were crucial to America. One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co- chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W. Bush. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.
These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni. Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round.
A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U. S. I vividly remember a meeting in early 2. A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2.
Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn. As of last fall, AIG had outstanding insurance on more than $4. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions.
Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long- Term Capital Management in 1. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.