Tuesday I wrote about James Kwak's notion that Treasury Secretary Tim Geithner was an example of someone seduced by "cultural capital," that is, he had been co-opted by the culture of Wall Street. Although Kwak ascribed this idea to French sociologist Pierre Bourdieu, he was really extending an argument that his Baseline Scenario colleague, Simon Johnson, made in a much-discussed piece in The Atlantic arguing that the U.S., like a troubled emerging market, had been taken over by a form of crony capitalism. In turn, Simon's argument supports his call to nationalize banks and restore some sort of moral hazard, by punishing shareholders, creditors and management, although the details here are sketchy. Indeed, Johnson has argued that what's missing from the usual discourse on what to do with the banks is a consideration of what he calls the political economy, and what I take to be so-close-as-to-be-conspiratorial ties between Washington, Wall Street and a set of free market ideas.
Kwak, Johnson and those who agree with the crony argument, in both its strong (illegalities, fraud, conspiracies) and weak (cultural or ideological) forms, insist that we cannot go effectively forward until we have cleansed the system, making the same demands on American finance as the IMF makes toward corruption in some fiscally failing emerging state. But what does that mean in an extraordinarily large, complex financial system in a commercial democracy like the U.S.? If illegalities can't be directly pinned down, than we must enforce a kind of ideological, even a cultural, litmus test. Broad swaths of the population must be declared to be "Wall Streeters" or "bankers," who carry the contagion with them. Since this is clearly unrealistic, a stricter division has to be made: The leaders, boards and senior managements of "clearly" insolvent banks or banks that received TARP money must be fired, and their shareholders and creditors must be punished.
Anything less than this culling of the herd is popularly viewed as enriching the very folks who brought us down, despite the evidence of bank layoffs, rock-bottom share prices and beaten-down debt. In a more sophisticated (and more persuasive) telling, Johnson argues that banks must be nationalized then broken up to shatter the power they held over the political and economic system. Kwak is simply extending that to folks, like Geithner, who they view as a Wall Street fellow traveler, a culture carrier.
Now there are a variety of tactical and strategic considerations involved in nationalization and breakup that are important to ponder. But leave them aside. I'm most intrigued by the sense, embodied in Kwak's argument, that we must cleanse finance of wrong thinking, of the cultural contagion that was "Wall Street." This is a little like de-Baathification in Iraq. Who was an ideologue or party hack or killer; who was merely ambitious, unthinking, or who signed up thinking he was getting a teaching job? Who was not "infected," if just a little, by the culture of free-market finance? Who did not believe in the bubble just a little and where do we stop? (Few economists, left or right, can claim purity there.) And was that culture irremediably black, worthless in all its aspects? After all, free-market economics is not exactly -- despite the overheated rhetoric -- fascism, Nazism or communism. If you believe that conspiracies and crimes were committed, then there should be legal remedies: Take it to the courts. But extending that to the political economy, to ideology, to "cultural capital," leads to a set of impossibly murky, not to say subjective, standards.
Johnson's crony capitalism argument does serve one good purpose, however: It touches on perhaps the toughest issue of all, which is regulatory capture, both in its strong (corruption) and weak (group think) aspects. For all the optimism about reform, for all the structural schemes, we do not really have a way to insure that bankers, regulators, politicians and voters will not fall for the promise of size, leverage, rising markets, cheap mortgages and bountiful credit again. We can segregate every tainted soul, break up every big bank and tighten every regulation. And the possibility, the probability, is that we'll have to do it again someday. That doesn't mean we shouldn't clean up the mess (Johnson is never more persuasive than when he adheres closely to the need to restore moral hazard) and try to get it better. But we're fallen, economically and morally. And trying to fix that condition by separating pure from impure, right thinking from wrong, is just about the definition of ideology. At some level, all bubbles are ideological. - Robert Teitelman
See earlier story from Dealscape
See related Johnson story from The Atlantic
Robert Teitelman is the editor in chief of The Deal.
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