This is the best book I have read on the recent financial crisis of 2008 The authors present a historical study of how and why it happened and show why it will happen again if the US govt does not go through with breaking up financial institutions which are too big to fail Both the Bush and Obama administrations have allowed the big banks to remain BIG thereby allowing them to bring the world economy into crisis again by taking the extraordinary risks that they took to get us there in the first place in 2008 This is really a worry for all of us.The authors make some very salient points which must be disturbing for all Americans and for the image of their country as a functioning peoples democracy They show that six megabanks in the US control assets amounting to a staggering 60% of the nation s GDP The ex Wall street honchos have gradually cornered important positions within the administration as bureaucrats, outside as lobbyists, in the rating agencies and in congress and the senate This is no different from the small set of oligarchs who control most arms of the government in developing countries This is a very sobering and disturbing image of the country because it makes regulating the reckless financial industry very difficult The ex Wall street guys in Congress and the senate constantly work against the peoples interests for regulating the industry The authors show historically how Thomas Jefferson, Andrew Jackson, Theodore Roosevelt and Franklin Roosevelt fought to keep the individual corporations from getting too big to manipulate the political system against the peoples interests The Glass Steagall Act of 1933 kept the financial industry well regulated for 50 years from taking the reckless risks of today By the time of the Reagan era, Wall street had gradually colonized Washington and successfully pushed through relaxation of many key regulations setting the stage for complex, risky financial products like CDS, various derivatives etc People like Larry Summers, Tim Geithner, Robert Rubin, Hank paulson are all ex Wall street honchos and they certainly did not see the risks the same way naturally The authors make the following interesting assertions while discussing how to restore the health and balance of the US and global economy as a result 1 There is no evidence that large banks gain economies of scale above a very low threshold of 10 b in assets.2 The Glass Steagall act was in force between 1933 and 1983 and there is no evidence to show that it stifled innovation in the US economy in various fields, contrary to Wall street crowing about regulation stifling innovation.3 No financial institution should be allowed to control or have ownership interests of than 4% of the US GDP It should be 4% for all banks and 2% for investment banks.Though the discussions on many complex financial products are difficult to understand for the layman, the book is very accessible with regard to its core tenets In the era of globalization, whatever happens in the US affects the whole world It is certainly a worrisome future with the giant Wall street oligarchy controlling Washington putting all of us ordinary folks under immense risk of another meltdown like that of 2008 This book is a must read for the American and European people and take their countries back from the oligarchs. Rather than a review of 13 Bankers, I am wrestling with understanding the response to the book It makes me feel like I m missing something and did not get the secret decoder ring Unlike most books that explore the 2008 financial collapse, this book looks back to the political viewpoints of Jefferson and Hamilton In a nutshell, Jefferson didn t trust big government In addition to that, he didn t trust any highly centralized power and this included the banks In contrast, Hamilton did trust a centralized government with powers to encourage the finance system For Jefferson this is not tenable because you have two powers interconnected which leads to unchecked powers So if I m even close then that s step one of the decoder ring That s the basic argument The problem is now fitting those arguments into today s inauthentic political discourse How does one take this fundamental argument and transform it into good guys and bad guys Many reviews acknowledge Johnson s solid historical analysis of financial regulations and then dismiss him as a crazy conspiracy theorist See an example here rather than taking on Johnson s arguments, he s labeled as a conspiracist.I haven t finished the book but since he s invoked Jefferson, I presume his solution is democracy However, his first solution seems to be that America needs another Andrew Jackson or Franklin D Roosevelt And here is where I think my disappointment might develop More democracy means process And process is slow, difficult and demands people to work together This is the discussion America needs to have rather than finding and labeling the good guys and the bad guys Instead, by discussing the leaders of these complicated political movements, the argument simplifies the solution to a single person a super hero I will update upon completion of the book Final thoughts The book does provide a thorough examination of financial regulation Rather than pointing to a single politician, the book calls for greater regulation It argues that markets are not all knowing and are not self correcting. Even After The Ruinous Financial Crisis Of , America Is Still Beset By The Depredations Of An Oligarchy That Is Now Bigger, Profitable, And Resistant To Regulation Than Ever Anchored By Six Megabanks Bank Of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs, And Morgan Stanley Which Together Control Assets Amounting, Astonishingly, To Than Percent Of The Country S Gross Domestic Product, These Financial Institutions Now Emphatically Too Big To Fail Continue To Hold The Global Economy Hostage, Threatening Yet Another Financial Meltdown With Their Excessive Risk Taking And Toxic Business As Usual Practices How Did This Come To Be And What Is To Be Done These Are The Central Concerns Of Bankers, A Brilliant, Historically Informed Account Of Our Troubled Political Economy In Bankers, Simon Johnson One Of The Most Prominent And Frequently Cited Economists In America Former Chief Economist Of The International Monetary Fund, Professor Of Entrepreneurship At MIT, And Author Of The Controversial The Quiet Coup In The Atlantic And James Kwak Give A Wide Ranging, Meticulous, And Bracing Account Of Recent US Financial History Within The Context Of Previous Showdowns Between American Democracy And Big Finance From Thomas Jefferson To Andrew Jackson, From Theodore Roosevelt To Franklin Delano Roosevelt They Convincingly Show Why Our Future Is Imperiled By The Ideology Of Finance Finance Is Good, Unregulated Finance Is Better, Unfettered Finance Run Amok Is Best And By Wall Street S Political Control Of Government Policy Pertaining To It As The Authors Insist, The Choice That America Faces Is Stark Whether Washington Will Accede To The Vested Interests Of An Unbridled Financial Sector That Runs Up Profits In Good Years And Dumps Its Losses On Taxpayers In Lean Years, Or Reform Through Stringent Regulation The Banking System As First And Foremost An Engine Of Economic Growth To Restore Health And Balance To Our Economy, Johnson And Kwak Make A Radical Yet Feasible And Focused Proposal Reconfigure The Megabanks To Be Small Enough To Fail Lucid, Authoritative, Crucial For Its Timeliness, Bankers Is Certain To Be One Of The Most Discussed And Debated Books Of Is the American form of government a democracy and secondarily, is the economic system a market capitalist one According to the authors of 13 bankers the answer to both questions is a resounding, No Kwak and Johnson are well known in financial circles for their highly influential blog, the Baseline Scenario The authors clearly detail the causes behind the global financial credit crisis which has persisted since 2008 To the authors, the primary reason for the crisis can be traced to the policies of the most influential financial institutions in the US, broadly dubbed the oligarchy, or the 13 Bankers The regulatory policies which allowed these banks to grow seemingly exponentially during the 1990s were driven by the lobbying muscle placed forcefully on the federal government, notably the Federal Reserve and the Clinton and later Bush Administrations The inexorable drive towards greater scale, greater consolidation and financial innovation euphemistically described as risk management eventually transformed banks from balance sheet lenders to fee generating trading factories bent on the packaging and repackaging of opaque financial instruments This process was known as securitization, which was the engine of massive job and income growth on Wall Street in the 1990s and the period leading up to the crisis This high stakes game of selling and trading collateralized bond pools was played by all the banks, commercial and investment alike Over time, the institutions became one and the same and the losses from the high stakes poker of securitization threatened the investment grade risk rating of the largest banks of the world Excessive competition resulted in an abandonment of credit standards by many institutions The securitization machine thus led to an asset price bubble which ultimately popped, nearly bringing all the major financial institutions to insolvency The catastrophe was prevented by the Federal largesse essentially taxpayer money The Federal deficit that has ballooned as a result of the infamous TARP, TALF, Freddie and Fannie bailouts as well as the conduct of multiple wars is to some, the great impediment to any so called sustainable growth in the future One could quibble with the authors on some details in their critique of derivatives and their understanding of subordination as it relates to ABS and CDOs but their dissection of the inequities entrenched in the American economic system is a credible and staggering attack on the Republic itself This book should be required reading for today s citizen and accompanied with Joseph Stiglitz s Downfall, which complements it nicely and clearly addresses the long term trend of income inequality The growing dispersion of income between the highest and lowest in America, a trend predating the crisis, would ultimately have choked off consumption and thus, corporate earnings and the roaring stock market of the 1990s The lower classes found a way to consume with available credit The ability of the American homeowner to dip into their home s equity was the only source of capital for continued consumption in the face of household income decreases for many families The issue of steadily declining income and increased lack of global competitiveness should now be Kwak, Johnson and every American s main concern The declining income of the American worker, the emasculation of the manufacturing sector, the eroding public educational system is the fault of many and the result of a host of variables and changing demographics The most dire consequence of today s massive deficit may be the loss of the country s great core competency its ability to educate, nurture and finance entrepeneurs This is particularly unsettling because the capital markets are only distributors, or redistributors of wealth rather than wealth generators Wealth generators produce enhanced productivity and importantly, jobs Assigning blame solely to the 13 Bankers distracts slightly from very serious cultural flaws that America must address which clearly Kwak and Johnson are sensitive to but are not fully captured in the book Greed is not only embedded in the psyche of financial professionals but in the DNA of America For every bad debt product there was a borrower, for every instrument there was a counter party, a consumer who was usually informed of the risk the exceptions of course are many and notable History will likely judge the Clinton Administration quite differently now that many realize how the decisions made to push home loans to unqualified borrowers were overwhelmingly made during his Administration Regulatory changes encouraging home ownership to the unqualified were exacerbated by the end of the end of Glass Steagall which opened the door for the era of mega banks as Clinton era banking reform and the Greenspan agenda brought down the walls between high risk investment banks and previously sleepy, conservative depository institutions High stakes poker started soon thereafter Wall Street is a very complicated place surrounded by very complicated walls with a labyrinth of piping that likely needs to be reconfigured or dismantled In order to Occupy or even end Wall Street as we know it today in 2011 one must understand the details I highly recommend this book. This book penned by two of the most vocal commentators on the 2008 financial crisis, takes a systematic approach to uncover the causative factors which helped trigger the crisis and brought the entire American economy to a standstill.The book starts with the origin of modern banking in the United States, dating back to the late 18th century and the First Bank of the United States, and henceforth goes on to narrate the influential role that finance would come to play in the future the contrasting ideologies of two of America s founding fathers, Thomas Jefferson, who was highly suspicious of wealthy financiers and Alexander Hamilton who wholeheartedly believed in free market capitalism, are very well presented.There is also ample coverage given to the causal factors leading to the Great Depression of the 1930s and the slew of regulatory measures that followed which kept the financial systems relatively healthy for the next few decades A brief section is dedicated to the emerging market crisis of the late 1990s and how the U.S through the IMF preached the austerity measures that it itself would fail to take a decade later.There is also an interesting chapter on the emergence of academic finance, and how it transformed Banking from a rather boring and unexciting field to a happening and increasingly competitive field, thereby becoming highly quantitative and complex in the process The collapse of risk loving financial institutions like Salomon Brothers,Drexel Burnham Lambert and Long Term Capital Management are also assessed and analyzed in details, and the major deregulatory environment that flourished post the 1990s, which gave unrestricted access to cheap capital for large financial institutions and encouraged risk taking, is dissected and scrutinized in details, finally the failure of regulatory agencies to monitor excessive risk taking and how Wall Street through it s far reaching influence in Washington always managed to win every situation in its favour The authors also provide a succinct analysis of the Too Big to Fail institutions and how they managed to secure government bailout packages without any conservatorship or cut in executive compensation.The role of financial innovation and the toxic assets it created like CDS Credit Default Swaps ,inverse floaters and exotic variants of MBS Mortgage Backed Securities , which triggered a domino like effect spiraling and creating repercussions through the entire financial system leading to the collapse of two major investment banks Lehman Brother Bear Sterns , are also quite well explained This book proved to be a highly educative and informative experience for me, as I got to know many of principal causes of the crisis and how a similar event can be averted in the future through stringent regulatory measures. This is the second book I ve tackled regarding the 2008 financial crisis I liked this one The research and info came across nicely and it was presented in a way that anyone could understand The author focused on the banks and their risky behaviors, all to make the next dollar I found it interesting how the author talked about the government bailouts, but still, the bigger fish swallowed up the weaker ones. This is a superb explanation of how the supremacy of Wall Street, and its cosiness to Washington, helped cause the financial crisis, and made true reform afterward much difficult Johnson and Kwak go back as far as Thomas Jefferson and Andrew Jackson to examine the nexus of politics and banking They explain why bankers and politicians are so close, and why politicians always seem to bend to the will of the banksters it s not just about campaign contributions traditional capital , or the revolving door between Wall Street and Washington human capital It s also about the ideology of finance, what they term cultural capital the idea that a large, sophisticated, mostly unfettered financial sector is unambiguously good for America Politicians and legislators have bought into this ideology, which makes reforming the system incredibly difficult.Johnson and Kwak don t argue that a bailout was unnecessary Instead, they argue it should have been done differently Taxpayers got the shaft It didn t have to be that way temporarily nationalizing the banks would have been a much better deal for Main Street The FDIC engages in nationalizing a bank every time a retail bank fails, and no one has conniptions about that sort of nationalizing But the behemoth investment banks brokerages, when they became too big to fail, had gained so much political clout that nationalization was seen as undesirable by the decisionmakers.Not only did the major banks become too big to fail, but after the crisis they are even bigger and profitable When the next crisis occurs, these banks will again be too big to fail, and taxpayers will have to foot the bill for bailouts again The solution is to limit the size of the banks It can be done, the authors argue, but only if there is political will to do so.Read this in conjunction with Bethany McLean and Joe Nocera s All the Devils are Here The Hidden History of the Financial Crisis, which covers the period beginning about 30 years before the crisis, up to the implosion, and doesn t address the bailouts These two books will tell you almost everything you need to know about it. The authors basic premise in this book is that the only way to prevent future financial crisis is to downsize banks that are too big to fail They describe the history of banking in the US concentrating on the presidencies of Jefferson, Jackson, Teddy Roosevelt, Franklin Roosevelt, Reagan, George H W Bush, Clinton, George W Bush and Obama The authors see the big banks as oligarchies with enormous political power Surprise, I laugh The book was tedious reading at times and I m glad there was no final exam As explained in the book, the banks do have enormous talent on their staffs They recruit the best and the brightest from the best colleges in our country While salaries have not increased overall in the United States in the past 10 years, salaries in the banks have increased dramatically Most large banks have their own economists on staff Banks are always on the lookout to recruit the best mathematicians and physicists to help find the latest loophole, to produce the best financial products, to make the most money for the firm It makes me wonder how the government regulators can identify fraud when they are up against such talent This book showed me that the financial crisis was not due to the banks rather a combination of the failures of our government policies and the banks With so many different ideas on how to fix financial problems in the future expressed by so many different policy makers, I hope we can get it right this time In a nutshell, this book was interesting but tedious reading. I don t know why I keep reading about the financial crisis of 2008, it just makes me angry Anyway, this is a one of the several good books I ve read on the subject It has a longer term focus than some, including a section on the history of banking in the United Staes since the founding of the republic, and doesn t give a blow by blow description of what happened in the week that Lehman brothers failed Rather, it is about how the banks and the regulatory system got into this fix in the first place The authors do a better job than most in explaining the jargon behind financial transactions, starting with the basics such as, what is a bond I think I can summarize their conclusions as to how the mess got so big as 1 to make big money on financial transactions you need to borrow a lot of money short term, which can go badly very quickly when you loan it out long term and your creditors know things are going badly 2 a lot of new ways of loaning money or taking bets on other people s transactions were invented, because you can t charge high fees on plain vanilla financial products, 3 they found lots of buyers for these complicated products who didn t know what they were getting into or, if they did, figured that nothing bad would ever happen to them, and 4 all this occured in an intellectual climate in which it was believed that minimal government regulation of the financial sector was good for economic growth Ignorant sub prime home buyers can t take most of the blame because there was a parallel bubble in commercial real estate, fannie mae and freddie mac were mostly not to blame as they couldn t engage in subprime lending, but there certainly was some poltical pressure in both the Clinton and George W Bush administrations to increase the proportion of American households owning their own homes The authors advocate a cap on the size of banks as a proportion of gross domestic product as the best way to keep future mistakes from getting out of hand They also support the idea of a consumer financial services regulatory agency The book was written while legislation was being considered but before federal financial regulation was modified, so I can t say to what extent their secondary suggestions, such as consumer finance regulation, were in enacted They seem to be hopeful that eventually effective restraint will be enacted, referring to the 6 year gap between the financial panic of 1907 and the establishment of the federal reserve, and then the roughly 22 years after that in which the federal reserve gained an effective organizational structure I m less optimistic. Some things that I bookmarked while reading the core function of finance is financial intermediation moving money from a place where it is currently not needed to a place where it is needed The key questions for for any financial innovation are whether it increases financial intermediation and whether that is a good thing continues to talk about innovations in credit cards mostly being ways of making pricing complex much of the positive effect of homeownership is due not to ownership itself, but to other factors that differentiate owners and renters mostly looks like income and length of time in the home apt the founder of Daewood also placed a big bet on cars in talking about the chaebol of Korea overextending we briefly owned a Daewoo Oh, so depressing, and yet, so useful in understanding how we got to this damn place over the last 30 years In particular, what seems like a long digression about oligarchs financial crises in Russia, Indonesia, South Korea, etc turns out to be provide plenty of a ha moments later, seeing some of those very things somewhat disguised in our own economics politics over the last couple of years.There s a LOTR quote not sure if it s in the original books or just the movie in which Galadriel says something to the effect of the quest being on the edge of a knife stray but a little, and you shall fail or fall, I can t remember which and the end of this book feels that way to me There s this moment that we re in and honestly, may have already passed through where the status quo of the 1990s 2000s could have been overturned It won t last forever, and maybe it s already gone.
Simon Johnson is a British American economist He currently is the Ronald A Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management He has held a wide variety of academic and policy related positions, including Professor of Economics at Duke University s Fuqua School of Business From March 2007 through the end of August 2008, he was Chief Economist of the International
- 305 pages
- 13 Bankers
- Simon Johnson
- 12 October 2019 Simon Johnson