According to many observers, the global financial system and economy slipped on a world-historical banana peel, causing the recent financial crisis and the most severe recession since the Great Depression. It was all a gigantic accident caused by mistaken models and excess optimism. In October 2008, Alan Greenspan famously said that the "view of the world" that he had used to guide economic policy for almost two decades was flawed.
More generally, books about the financial crisis make it seem like a comedy of errors of epic proportions: mortgage lenders making bad lending decisions; homebuyers making bad borrowing decisions; rating agencies stupidly giving AAA ratings to what turned out to be toxic waste; investors blindly buying the toxic waste; supposedly sophisticated banks such as Lehman Brothers and Citigroup stupidly holding onto large quantities of that same toxic waste; and senior government officials somehow thinking that the damage would be contained to the subprime mortgage sector.
But the financial crisis was no accident. It was the product of intentional action by a banking industry that knew exactly what it was doing. Of course, the bankers and their lobbyists did not intend to torpedo the global economy; but they did intend to create the unregulated environment that made the excesses of the past decade and the crisis of 2008 possible, and they used their growing political power to make it happen.
It was as if the government first repealed the laws against littering, eliminated all public sanitation services, and subsidized the consumption of bananas . . . and then the global economy slipped on a banana peel.
13 Bankers is not a story about complex financial instruments and economic models, although they crop up occasionally in its pages. It is a story about political power--about how one very large interest group made a large amount of money, amassed political power, and used that power to make even more money, placing our economic prosperity and our taxpayer dollars at risk in the process.
Recent economic and financial theory has largely ignored the role of politics, at least when it comes to developed countries such as the United States. The prevailing conceit has been that economic outcomes result from open competition in the free market. Government's role is to correct imperfections in the market, and the free market ideology that has been politically dominant for the past few decades limits government to a very small role indeed. More fundamentally, the idea that economic power could be used to gain political power, which could then be used to gain greater economic power, has been largely absent from mainstream economic discourse.
But it was not always thus. Politics and economics were once closely joined in a single field called "political economy." Adam Smith saw himself not as an economist but as a moral philosopher and dedicated one volume of The Wealth of Nations to the relationship between government and the economy. John Stuart Mill's Principles of Political Economy was a leading economics textbook in the nineteenth century. And Karl Marx's Capital is subtitled A Critique of Political Economy. It was only in the late nineteenth century that economics began toward the abstract, mathematical discipline that we know today.
Modern free market economics and academic finance, while claiming to be apolitical, have nevertheless served the political interests of the financial sector. Recently, Justin Fox, John Cassidy, and Joseph Stiglitz have all documented the development of free market orthodoxy and its increasing popularity in the United States. Free market ideas lay behind the policies sought by the banking industry in the past three decades, from the non-regulation of derivatives to the effective repeal of the Glass-Steagall Act to the relaxation of capital requirements for investment banks. Those ideas served as the intellectual cover for the industry's campaign to demolish any constraints on its ability to make money, and even to harness government support for its money-making initiatives--such as the efforts by both the Bill Clinton and George W. Bush administrations to increase homeownership, which helped fuel the market for complex mortgages and mortgage-backed securities.
Now that the booming markets of the 2000s have come crashing down, the banks would like to preserve the fiction that economics and finance are abstract, apolitical subjects that require only technocratic expertise. As long as legislative debates hinge on technical issues such as maximizing efficiency or ensuring liquidity, the Wall Street banks and their lawyers and lobbyists will hold an advantage over congressional staffers. More importantly, nothing will be done about the fundamental cause of the structural imbalances of our economy and the excesses that led to the financial crisis: the political power of the financial sector.
The message of 13 Bankers is that politics matter, however. The lesson of the financial crisis and the governmental response to it was that the large banks were so powerful--due to their central role in the economy--that both Republican and Democratic administrations felt compelled to bail them out.
And the situation has only gotten worse since. The current legislative session has driven the message home: as Deputy Treasury Secretary Neal Wolin said recently, the financial sector is spending $1.4 million per day on lobbying against financial reform. There has never been a clearer example of an industry using its money and its political power to further its own economic interests.
In this situation, clever tweaks to the regulatory system will be of little use without a more fundamental shift in the political balance of power. Regulators can be captured or, more simply, fired and replaced by the next Wall Street-friendly president. What we need is a change in the conventional wisdom in Washington, away from the idea that what is good for Wall Street is good for America, and toward the idea that we should be skeptical of the megabanks and their supposed financial innovations. This will take time, but when the conventional wisdom changes -- and it must -- the political consensus will change as well. It is with this goal in mind that we wrote 13 Bankers.