13 Bankers | Simon Johnson

Summary of: 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
By: Simon Johnson

Introduction

In ’13 Bankers: The Wall Street Takeover and the Next Financial Meltdown’, author Simon Johnson uncovers the story of how large banks gained tremendous power and contributed to the Great Recession of 2007-2009. The book delves into the history of the interplay between politics and the world of financial institutions, revealing how an oligarchy of powerful banks has historically shaped the American economy, and influenced decisions of numerous presidents. Johnson also highlights the need for regulation and oversight, as well as the potential risks if effective reforms don’t take place.

The Wall Street Protecting President

Blame for the Great Recession of 2007-2009 was squarely laid on Wall Street and large banks that made reckless decisions and brought the world economy to its knees. However, when President Barack Obama met the leaders of the thirteen major banks in March 2009, he painted himself as their protector instead of calling for urgent reforms. The banks were “too big to fail,” and the president made sure they understood that his administration was keeping them safe from public backlash and media scrutiny. Despite his campaign promises of modest investment bank reform, Obama took the bankers’ side, proving the deep resonance of Wall Street’s ideology. As the banks survived, they strengthened their image as the new American oligarchy, using their political power to advance their economic interests. The lack of post-crisis reforms means that the next collapse could be even more severe.

The Evolution of American Financial Power

The story of America’s banks is one of political power, market failures, and regulatory reforms. While the modern financial system is dominated by large banks, this was not always the case. In the late 18th century, Thomas Jefferson was already wary of the potential power of banks, especially after hearing Alexander Hamilton’s arguments for the central Bank of the US.

The ensuing fight between Hamilton’s Federalist Party and Jefferson and James Madison’s Democratic-Republican Party would shape America’s finance sector for decades. Jefferson was right to worry about the concentration of financial power, but Hamilton’s central banking system enabled the economy to develop. Despite some early stability, the banks were soon to face their first political nemesis.

Andrew Jackson believed a powerful bank could undermine a democratic government. To this end, he vetoed efforts to re-charter the Bank of the US in 1832, ultimately killing it completely. While this level of fragmentation may have hampered efficiency, the US still managed to achieve incredible innovation in the 19th century, creating agricultural tools and transportation and communication systems.

By the beginning of the 20th century, the US had entered a new period of financial instability. The Panic of 1907 highlighted the need for better regulation and oversight. Despite concerns about the power of investment bankers to abuse the emerging Federal Reserve System, the Fed was established in 1913.

Initially, the first Federal Reserve Bank of New York president, Benjamin Strong, allowed Wall Street to have full discretionary powers, even as the antiregulatory policies of the 1920s made the country vulnerable to market forces. Harding and Coolidge’s hands-off approach opened the door for risky, speculative trading, leading to the stock market crash of 1929 and the Great Depression.

Franklin D. Roosevelt’s government took control, leading to tighter regulation and oversight. The Glass-Steagall Act separated commercial and investment banks, and the Federal Deposit Insurance Corporation was set up to protect bank depositors. The powers of the Federal Reserve were also expanded to regulate savings account interest rates.

The story of America’s banks is a long and complex one, and the balance between market efficiency and government regulation has been a difficult one to strike. Nonetheless, the evolution of the banking sector has benefited the American economy, especially in times of crisis.

The Evolution of the Financial System

The gradual deregulation of the U.S. banking system led to a once-stable environment becoming increasingly risky. Banks followed the “3-6-3 rule,” but deregulation allowed for new competitors like Charles Schwab to emerge. High inflation led to the phasing out of commercial bank interest regulations, saving and loans to delve into riskier loans, and a new conventional wisdom to emerge: the Efficient Market Hypothesis. The election of Margaret Thatcher and Ronald Reagan made deregulation the dominant financial theme of the 1980s. Derivatives came to prominence in the early 1990s, providing a new profit path for Wall Street. The resulting mergers and acquisitions led to the creation of megabanks and the concentration of power and money into a financial oligarchy.

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