Children's Stories

Simon Johnson ridicules the political and media elites conclusion that Americans are "angry" and that the road to policy and political success lies in "populism:" "Populism"

The problem we face is not that the broader population wants pointless or destructive revenge on a financial elite that has done well. Nor is it the case that, if left largely to its own devices, our major banks will guide us back along the path to sustainable growth.

The consensus technocratic assessment is simple: We are smack in the middle of a doomsday cycle of repeated boom-bust-bailout (our version; the Bank of England’s take). The core issue – banks considered “too big to fail” – was not resolved in or after the crisis of 2008-09; if anything, as these banks have increased in size, the problem is now worse. We are therefore doomed to run headlong into another crisis.

The fact that dramatic banking reforms would be popular does not make them populist. It merely means that a broad cross-section of our population has woken up to part of our appalling reality. Sure, they are angry – but with good reason, and the remedies they seek are entirely appropriate. Most of our elites are on the side of the broader population on this issue; only the diseased heart of Wall Street holds out.

Frankly, true populism of the Huey Long variety can't work today because Americans - at least among likely voters - are better educated than in the past. A buffoon like Long wouldn't last 5 minutes in today's environment. Not only that, the idea that Barack Obama - who last year was waving his Ivy League credentials and sending his political allies out to mock Joe The Plumber - can transform himself into a shirt-sleeved populist is ludicrous. The other problem: the resentment and redistributionist impulse underlying populism is not really present - yet. People don't resent the fallen Masters of the Universe for their wealth. They are furious that nothing has changed since the on-set of the financial crisis, except that the economy is in a much more precarious position.

Nearly two years after Bear Sternes, and 18 months after Lehman/AIG, there have been no changes in basic finance law outside of a few marginal adjustments in the rules relating to short selling. Oh, sure there's been a lot of talk about - here we go again - "comprehensive reform." And there's been the faux-outrage over AIG bonuses. But absolutely nothing has changed that could prevent or at least alleviate another failure on the scale of Lehman Bros.

The problem with Lehman was not just its failure; it was that the failure was so chaotic. While the near-contemporaneous failures of Washington Mutual and Wells Fargo were handled expeditiously, Lehman was simply dropped into bankruptcy without warning. There was obviously no mechanism in place to wind down the affairs of an investment bank like Lehman, and 18 months later ... there still isn't! Similarly, we lack any kind of systematic way of handling another AIG situation. Instead, the plan apparently is to improvise a rescue when/if the time comes.

Do we really need "comprehensive reform" to accomplish the basic goal of preventing chaotic failures among financially significant entities? No one complains (much) about the Wachiva/Wamu failures because they were resolved according to settled law by a government agency following established procedures. Lehman and AIG, on the other hand, were improvised solely by the executive branch and the Fed and we are still living with the unhappy results of that improvisation today.

The analogy to the Bush-era post-9/11 reforms are obvious. The Patriot Act may have its noisy detractors, but it was passed and then renewed, by large congressional majorities, and its basic reforms have lasted. Meanwhile, the reforms that the Bush Administration put into place on its own initiative - designating unlawful combatants, military tribunals, GITMO, water-boarding and the rest - have withered from unrelenting assault despite their being useful and supported by a majority of the voters. Would it have killed Bush to involve Congress in the creation of military tribunals from the beginning, rather than go through years of court cases, Supreme Court decisions, and pompous speechifying by the legal Left? I don't think so, and we wouldn't be in the position we are today where GITMO can theoretically be closed at the stroke of a pen.

Similarly, if another AIG or Lehman situation presented itself tomorrow, it would be just as fraught and controversial as its predecessors because - again - regulators would not be acting under color of law, but only improvising in the face of an emergency. It really doesn't have to be this way. Yet, instead of promulgating such basic reforms, we are stuck with Chris Dodd and Barney Frank - two guys widely seen as having contributed to the crisis - arguing over what style of comprehensive reform we should adapt. The problem is that every attempt at comprehensive reform since 2005 has failed, but only after a months-long effort resulting in less than nothing.

People are not furious because they are jealous of someone's wealth. They are furious because absolutely nothing has been done to address even the most basic regulatory gaps that have allowed our economy to be damaged. Populism - even professional grade Ivy League populism - isn't the salve to this anger. Problem-solving and prioritization is.