Monday, April 06, 2009

More on Simon Johnson and the IMFing of the US economy

Simon Johnson

"No sólo ha fracasado el neoliberalismo, sino una forma de funcionamiento del sistema mundial de los organismos internacionales." (Not only did neo-liberalism fail, but also the functioning of the global system of the internatal mechanisms.) - Argentine President Cristina Fernández, March 2009

Continuing with my reservations about the analysis of former IMF chief economist Simon Johnson, The Quiet Coup The Atlantic May 2009 ...

Criticism of Johnson's article has been coming from a variety of Democratic/liberal sources, including Tim Fernholz at Tappped (Why the IMF approach? 03/30/09; More criticism of Johnson and the IMF 03/31/09) and Dani Rodrick (Simon Johnson's morality tale 03/30/09).

Thinking about Johnson's position some more, the key problem in his approach to the current financial system's crisis is that although nationalization (i.e., recognizing that some major banks are in reality insolvent) is considered a more liberal (left) position at the moment than the Geithner plan, he seems to be clinging to the IMF "neoliberal" faith in deregulation. He doesn't emphasize better regulation at all. He assumes that hedge funds and private equity funds will basically have no new regulations. And he proposes that the largest banks be reduced in size and kept that way through anti-trust legislation and enforcement.

He argues that banks too big to fail shouldn't be allowed to exist in the first place. He generalizes it even more: "Anything that is too big to fail is too big to exist."

I take this to mean that he thinks that through antitrust laws, not only in the financial sector, but in the rest of the economy, that we can adopt a policy of never bailing out failing companies in the future. Presumably, it also means that banks would be simply allowed to go bankrupt and close their doors in the future, rather than be taken over by the FDIC and kept in operation until they can be resold in a healthier form, or their assets and liabilities parceled out to other institutions.

This is very unrealistic, both in his faith in antitrust laws and in the neoliberal assumption that the state can stand on the sidelines and watch companies critical to the economy go down. It's neoliberal utopianism, as far as I can see.

And that's why his definition of the problem sounds so suspicious to me, even though it's clearly partly accurate. He is not only be diagnosing the financial problem. It seems to me that he's even more focused on defending the IMF's Washington Consensus form of neoliberal economics. So while parts of his diagnosis of the corruption of the American financial and political elite could fit comfortably into a left or even radical-democratic analysis, that's not really what he's up to. My reading is that he's presenting the Washington Consensus as being focused on combating elite corruption and crony capitalism, not on slashing social services and public infrastructure projects, which is what happens in reality with countries that become wards of the IMF .

And at least from what appears in the Atlantic article, he's not giving up his IMFish neoliberal faith in the miracles of deregulation of financial companies. He's just packaging it in a Progressive-era wrapping of of antitrust militancy. Dani Rodrick also dings him for his Pollyanna presentation of the IMF approach.

Strong and effective government regulations and honest, consistent enforcement of them are critical. And that is a major area in which the overly cozy relationships between the political and financial elites has been devastating. As Joe Conason argues in No More Refuge for Scoundrels 03/31/09:

Massive fraud has been at the center of this crisis from bottom to top, as everyone paying attention must know. The criminal mind-set extended from the bankers and mortgage agents who made loans to unqualified borrowers and sometimes tricked them into signing agreements they could not fulfill. (Among the most industrious marketers were many with actual criminal records, whose entry into the mortgage industry was not blocked by the state regulators.) They marketed those same bad loans with false assurances of their soundness to convince investors to buy them—and somehow induced rating agencies to offer hollow testaments to their creditworthiness. Investors then resold the toxic packages to other investors both here and abroad. At every step, the inflation of the bubble was hastened by fraud, forgery and deception.
The decisions of the G-20 summit this past week were yet another reminder of the massive failures of the IMF economic dystopia of privatizing everything that can be privatized, slashing government expenses to the bone, radical deregulation, hostility to labor and throwing the doors open to the international "free market" in capital and everything else.

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