James Kwak: The Problem is Bank-o-cracy

Click to listen to Chris’s conversation with James Kwak. (42 minutes, 19 mb mp3)

James Kwak extends Michael Lewis’s point and feeds my fascination with apocalyptic hysteria and helpless torpor as the twin markers of American politics these days. He makes it believable that the angry Tea Party wackitude in the far countryside and the smug sleepiness inside the Beltway and the media mainstream are both symptoms of the same “quiet coup” that James Kwak and his writing partner Simon Johnson diagnosed in The Atlantic last Spring.

To Simon Johnson, former chief economist at the International Monetary Fund and now professor of entrepreneurship at MIT, the deeper condition of the American republic looks all too familiar. The essential problem — easily recognizable if we were looking at, say, Thailand or Korea or Russia — is known in the trade as “state capture,” meaning the accretion of overwhelming political power by a financial elite, an oligarchy, known in our case as Wall Street, or in the title of the riveting analysis by Johnson and Kwak, Thirteen Bankers. The idea of “capture” extends by now past the political parties, Congress and the controlling agencies of the executive branch. James Kwak, in conversation, quips that “capture” encompasses “media capture,” too, and “ideology capture.” And the same oligarchy seems to be working its will in foreign as well as domestic misadventures:

JK: One of the parallels between the financial crisis and the Iraq War is that despite all the things that have gone wrong we still have largely the same people. We see the same people on TV, the same people in Congress telling us how we should understand the crisis and what we should do next. And during the Bush Administration people were saying, “Why didn’t anyone get fired for the Iraq War?” And the same question applies now: Why hasn’t anyone been fired because of the financial crisis?

I think there’s another parallel as well, which is that, again, the cover-up that’s going on by Wall Street today is this idea that the financial crisis was an accident, that it was a lot of people making mistakes—it was lenders making bad lending decisions, and homebuyers making bad borrowing decisions, and rating agencies making bad decisions when they rated these toxic securities, and unbelievably these investment banks holding onto their own toxic assets, and then regulators being asleep at the switch.

CL: Perfect storm.

JK: Yes, exactly. It’s the perfect storm theory. And what they’re trying to do is they’re trying to analogize the financial crisis to a natural disaster. How do you blame someone for a natural disaster? And you hear the same language from the Administration. You hear Timothy Geithner saying, “Well, do we want to protect against a hundred-year flood or a 30-year flood?”

I think this is all deeply wrong, and it’s an exact parallel to the Iraq War. Because you know, as we all remember, we invaded Iraq, we didn’t find Weapons of Mass Destruction, and what did people say? They said, “Oh, it was bad intelligence.” So people gathering the intelligence made mistakes, people analyzing the intelligence made mistakes, people brought the intelligence to President Bush and Vice President Cheney and they made an error of judgment because of the bad intelligence, and then a majority of the Congress went and voted for this war because they had been misled. It’s the same idea. It’s the same idea that it’s all an accident, it’s not our fault, it’s somebody else’s fault and it was just a big mistake. And in both cases that is just fundamentally wrong. I mean, we invaded Iraq because our political leaders wanted to invade Iraq, and our Congress voted for it because they did not want to be seen as voting against a war in the run-up to an election, and that’s all there is to it.

And with the financial crisis: I’m not saying that bankers wanted the financial crisis, but they engineered it. They engineered a climate of deregulation and non-regulation that allowed them to invent whatever products they wanted to, sell them to anyone they wanted to, increase their leverage so that they could make larger and larger profits, and they engineered that consciously. This was the product of intention, and it was bound to blow up. And it finally blew up. And that is the message that Wall Street does not want people to hear. They want people to think it was all a colossal mistake made by well-meaning people who had mistakes in their models. That is not what happened.

James Kwak in conversation with Chris Lydon in Boston, April 12, 2010.

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  • Ken

    James Kwak’s comments are cogent, timely and troubling. A democracy is only as strong as its citizens are devoted to diversity of opinion and open discussion and we live in a time when that devotion seems weaker and weaker. Blame the media, blame the bankers, blame the politicians, blame whoever we will– ultimately it is not about the people we can blame but the responsibility we ourselves either accept or abdicate for our own qualities. In other words, this is a moment when our own moral vision– or lack thereof– is revealed. We can choose either to hold the powers that be to account for not letting us do whatever we want to do (as per the Tea Parties and Libertarians) when we want to do it or not do what we don’t want to do; or we can hold ourselves to account for having lost our sense of right and wrong, of the common good, and of human decency and equality. Right and wrong are not about economics, they are about justice and compassion. What we are missing are strong political voices articulating these principles as fundamental to the fabric of American society.

  • nother

    “The love of money as a possession — as distinguished from the love of money as a means to the enjoyments and realities of life — will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease … But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still.”

    John Maynard Keynes wrote that in 1930, so it looks as though we have another 20 years to go before a revolution of reality sets in.

    I had two conversations with two separate people yesterday that embody this notion of “fair is foul and foul is fair.” The first was with a relative of mine who I had lunch with. A couple of years ago he decided to “cash in” on the credit he as accumulated over the years. After his divorce, he maxed out his credit cards and headed to the islands, with no intention of paying them. His house was out of his name, so there was nothing they can get from him. Down there he will collect social security and work under the table.

    The second conversation I had was at dinner with a 26 year friend. She went through all of college, including graduate school without taking out a loan, she worked her butt off to pay every debt off, because as she says, “I don’t like to owe, anyone anything.” She graduated at the top of her class, worked at Perkins School for the blind, and now is being sought after by top notch charter schools.

    Here is the rub:

    I was surprised to learn that my relative still holds four credit cards, two of them with $9000 limits. Even though he screwed the other credit companies, he still has credit because he has had so much credit in his life.

    My 26 year old friend just tried to buy a modest Jeep Wrangler and they will not give her a loan. She has to get her parents to co-sign for her. She is pissed!

    Now, if things were as they should be, a banker (in the form of a human) would sit down in front of both of these people, look down at their records, then look them in the face, and the decision would be easy. But things are not as they should be. Until we bring those “pitchforks” to Wallstreet, we must grin and bear these “semi-criminal, semi-pathological propensities.”

  • jan loudermilk

    Mr. Kwak,

    Thank you and Simon for the effort you have put in… I hope real change occurs, but I have my doubts.

  • R

    What a sexy story James Kwak tells. Talking about things no one can verify, spoken after the fact so we can all just listen rapturously to his apparent mystical capabilities. Whispering sweet words into ears eager for someone to tell them all. And oh did he mention that anyone buying his book will contribute to his own deep pockets?

    It seems to me I’ve heard him before. In the form of those seeing videos of the World Trade Center collapse and explaining that tiny puffs of smoke are actually huge government conspiracies and that you just can’t trust what you hear, unless we’re listening to him and then he is the only believable person around.

    Maybe he is right in what he warns. But why was he not manning the klaxon BEFORE we all lost a fortune? And why is he now looking to line his own retirement account and warning that if we don’t listen to him another similar misfortune will befall everyone, except perhaps those buying his book.

    Sorry Mr. Kwak. Heard it before. Your ideologies and well slanted politics are coming through louder than your expertise over what happened. I think the quote is 20/20 hindsight is perfect. Your analysis might be perfect but your delivery tells a far different story.

  • Druthers

    What a breath of fresh air, it is like coming home after having lived on Mars.

    However, I fear the machine is rolling on like a tank without a driver – the oops we just ran over a body as in the video;

    Our banksters are drawn to money like moths to a flame.

  • Daniel Smith

    Chris: Your interviews with Kwak and Lewis are teriffic. I’ve just assigned them to my students in a class on political economy of environment and social justice. Your attempt to push Lewis to discuss commonalities across analogous realms (war, environment, finance) is especially welcome.

    But here’s the thing. My students are going to ask me, I know, having read several radical political economists writing about Marxism, World Systems Theory, and more generally about the broader historical context of financial and ecological crises…the question will be: why doesn’t anybody EVER talk about the deeper roots of the succession of crises that in many ways define modern economies? We do know, don’t we, that these things come along on a regular basis? Less frequently than they used to, but still regularly. Then the system gets incrementally reformed, if we’re lucky it stays stable and relatively equitable for a while, then wealth starts to accumulate, which means power accumulates, the system becomes increasingly rigged in favor of the wealthy, they forget that they do not have total control and lose any sense of proportion and caution, and we’re off and running on another crisis. (Which, notice, can be a good thing in some ways. At least it opens the possibility of reform. If the elites were smarter or more cautious, then there would be no opening.) All this is pretty well hard-wired into the system, from the particular form of capitalist labor exploitation, to the need for incessant systemic growth borne of ubiquitous competition among publicly-held firms, to the links (or lack of barriers) between wealth and political power.

    None of this is rocket science. But nobody will touch it. What are we to make of that? Perhaps you could help! Have you considered someone like John Bellamy Foster or Immanuel Wallerstein as a guest to follow up on Kwak and Lewis. (Giovanni Arrighi would have been perfect but sadly he died last fall.) There are plenty of others–it would take some research to find who would be the best for this sort of forum.


    Daniel Smith

  • Emily Corwith

    To your commentator “R” – I for one am grateful that someone with Mr. Kwak’s obviously high intelligence has, together with Simon Johnson, taken the time to flesh out what appears to be a reasonable hypothesis … it is nutritious food for thought. Why the resentment over book royalties? I don’t get it …

  • Wilson McDuff

    Kevin Phillips (Author of Big Money) is another potential guest who understands the subject matter and is able to articulate it to listeners. Like Mr. Kwak, Kevin Phillips has helped me to integrate economic analysis with a coherent political/historical narrative.

  • Daniel Smith

    From a few interviews I’ve heard with him I think Kevin Phillips is teriffic, but I believe he’s only a little wider in his scope than Kwak et al. I’d say that to really get outside the box you need someone who can speak to Braudel, Wallerstein et al. (long duree and world systems), and also Marx. I always add Marx with some hesitation because he’s such a hot button. Marxism (and it’s neo-variants) may not have all the solutions, but the insights that come out of that line of scholarship, if thoughtfully considered, are absolutely crucial to understanding this stuff from a historical perspective. ds

  • Potter

    Wealth and power are addictive. Daniel Smith above asks the same question on behalf of his students that I would ask and that Chris asks in another way: How do we get our financial system and our government ( lawmakers) to work for us and not for selfish interests? And how do we not not evolve to essentially this again.

    Kwak, Johnson, and others, like Paul Krugman, Bob Kuttner, Robert Reich, Elizabeth Warren, and Gretchen Morgenson, John Stewart have their work cut out.

  • Bryon

    Daniel Smith:

    My other beloved podcaster, Robert Harrison, just did this one, which you might enjoy:


  • But the rich have always oppressed their true critics, and any discussion of the way they exercise their power (as in a discussion of oligarchy) that does not acknowledge this is not complete. If Kwak and Johnson don’t experience repression in their lives, that’s terrific, but many of us do (www.dontfearyourfreedom.blogspot.com), and we know that what is really happening in America is a total shift from a government of, by and for the people to one that is brutally enforced and is no less than fascism which has been a very long time in coming (http://en.wikipedia.org/wiki/Smedley_D._Butler).