The Bankers' Old Clothes

No, the financial crisis is not behind us. The underlying causes are still with us, and lie in wait to exact even more pain and misery upon us in the next "crisis."
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Why do our problems never seem to go away? Why are we continually talking about the same issues with little real progress made?

I was watching a wonderful movie on Turner Classic Movies the other night entitled, Wilson about Woodrow Wilson (You can admit it, you thought it was about the volleyball in the movie Cast Away).

The trusts and the big banks had been harming the country for decades, and yet it was Woodrow Wilson who saw fit to pass the Clayton Antitrust Act to rein in the power of monopolies and created the Federal Reserve to take the power of money creation out of the hands of private bankers. Even though the populist movement of the 1890's started with the Sherman Antitrust Act and William Jennings Bryan's "Cross of Gold" speech and continued through the presidency of Theodore Roosevelt, it wasn't until 1912 with the election of Wilson that real legislative progress was enacted. And some would argue that it took the bubble of the Roaring 20's and its eventual collapse in 1929 and the election of Franklin Delano Roosevelt before meaningful reform came to pass with the establishment of the SEC and the Securities Act of 1934.

I tell you this because many of you probably believe that the recent financial crisis is behind us. And many of you, like me, who realize there is more work to be done, feel as if we missed an opportunity. That the cards have been dealt and the winners and losers anointed. That the financial crisis is old news.

Nothing could be further from the truth. Momentous change sometimes takes decades to be accomplished. And when we fail, it is often because our impatience prevents us from applying the long hard effort that is needed over many years and possibly decades to accomplish real change. I, like many, rush to work on headline grabbing news, but when stories move to the back pages I become more a fair weather warrior.

No, the financial crisis is not behind us. The underlying causes are still with us, and lie in wait to exact even more pain and misery upon us in the next "crisis." Oh sure, the stock market is up, but that is when you measure it in dollars, and Ben Bernanke is printing so many of those so rapidly it would be almost impossible for the market to go down when valued in these rapidly declining dollars.

What are these underlying causes? First and foremost, it is that we have a banking system that is broken. Banks are bigger than they were before the crash and still utilize almost $30 of debt in their capital structure for every $1 of equity. And that isn't even counting the risk the banks are exposed to in the $600 trillion derivatives market which they find fit to keep off their balance sheets. Banks' managements hold sway over their boards such that lowly stockholders have no say in how the companies are run or how big of bonuses bankers pay themselves. And, our government continues to provide huge incentives to banks to keep borrowing, the most pernicious being that we all know that when they get in trouble again the government will force the taxpayer to bail them out.

During the crisis, I was dismayed by the lack of attention the crisis received by most economists. Being cynical by nature, I came to the conclusion that these professors were making more money advising banks, giving speeches to banks, partnering with banks, doing research for banks and offering expert witness testimony for banks than they were teaching grad students.

There were, however, a handful like Simon Johnson who put his research aside to take up the banner of banking reform as a full time job, and when I say full time for someone like Johnson, I literally mean 18 hour days. We owe him and the others who spoke out against the evils of the banks and their lobbyists an enormous debt of gratitude, the only admirable form of debt I know of in this over-leveraged world.

But now, who can we turn to keep the flame alive? To continue to fight the good fight when the crisis is no longer on the front pages.

My good friend Anat Admati of Stanford and her co-author Martin Hellwig have stepped forward with their new book, The Bankers' New Clothes. I changed the title for this piece to "Old Clothes" only to suggest that the games bankers play are anything but new. They have been playing us for fools for more than a hundred years.

Admati and Hellwig explain, in layman's terms, some of the silly arguments bankers make for keeping to the status quo and preventing any new regulation of the banks from ever being enacted. And they do a great job. If it was up to the bankers and their paid lobbyists and their bag-carrying congressmen, we would just all go back to sleep forgetting that the crisis ever happened. Or, as many bankers have argued, that the crisis was as natural as a hundred year flood, that things like this happen in markets all the time and certainly they were not to blame.

The book is readable by anyone with a ninth grade education, an incredible achievement given how arcane bank accounting and bank regulation is (and how little most Americans learn today in our schools by the ninth grade).

But, you are probably saying, why would I want to read a book about banking? And that answers my first question, why do our problems never seem to go away. For you see, if we each stick to what we know best, if we just do our own jobs well, if we leave it to professionals to manage politics and the economy for us, then I can assure you, they will manage it to enrich themselves at your expense. Capitalism allows for specialization of labor and trade amongst us allows that we each spend time on what we know best, but democracy requires that we all stay informed and involved. We cannot outsource our responsibilities and duties as good citizens to others. We must be well enough informed that we can see right from wrong. You don't have to be knowledgeable enough to run a bank, just smart enough to know when a bank is running over you.

Admati and Hellwig have made a gift to you. You don't have to go wrestle with banks' financial statements or their annual reports or their 10Q's You don't need to pull out your old accounting textbooks or call your college economics teacher to have her explain to you again why debt leverage increases risk. Admati and Hellwig have done all the hard work for you. But, you have to read their book. They aren't asking you to help them, they don't need to sell any books to pay their rent. They are asking you to help yourself and to help this nation.

I think you will be pleasantly surprised. It is a much easier read than the other book on my nightstand, Infinite Jest, the fantastic novel by David Foster Wallace, although that might have made as good a title for this book on bankers, the games they play and what they think of the rest of us.

John R. Talbott is a bestselling author and financial consultant to families whose books predicted the housing crash, the banking crisis and the global economic collapse. You can read more about his books, the accuracy of his predictions and his financial consulting activities at

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