If the US acts looks a Banana Republic and acts like a Banana Republic…

Simon Johnson, a professor at MIT’s Sloan School of Management, (formerly the chief economist at the International Monetary Fund) has a great article at the Atlantic. Johnson draws parallels between the ongoing financial crisis on Wall Street and the many political-economic crises that result in emerging market economies due to the power of oligarchs over political institutions.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

Because these elites have so much influence over the political institutions that theoretically govern and regulate them, the oligarchs are able to successfully prevent meaningful reforms and instead transfer losses onto the state and citizens.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

It’s a great non-partisan article and certainly paints Wall Street in an unfavourable light. Why it resonated so much with me is shortly before I read it, I had been reading Money For Nothing, an article on Forbes by Glenn Harlan Reynolds of Instapundit fame.

Reynolds argues that current Wall Street political donators might want to reconsider where their financial contributions are headed because of the backlash surrounding the AIG bonus fiasco.

If these donations had been given out of love and admiration, Wall Street donors would have reason to feel jilted. But if–as is generally the case with political donations–they were more in the order of protection money, then Wall Street donors may instead feel duped. They might want to ask themselves what protection, exactly, they got for their investment.

Perhaps folks in the financial industry should tell them no and consider donating to candidates who believe in free markets–and who possess a bit of backbone–instead. If incumbents’ offers of “protection” are illusory, you might as well support people who believe in what you do. A Congress with a sense of decency and a respect for markets would be better protection than the questionable gratitude of politicos anyway.

Now I agree with Reynolds when he says that a lot of political elites are pandering to the electorate with their attacks on Wall Street and conveniently forgetting the role government and regulators played, or lack thereof. But I don’t think the answer is making sure that politicians who are bought, stay bought.

Perhaps the answer is to limit the overwhleming influence that the financial elites have over political institutions and strengthening democratic institutions so the US can prevent the riots from getting too large.


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