13 Bankers by Simon Johnson

Author:Simon Johnson [Johnson, Simon; Kwak, James]
Language: eng
Format: epub
ISBN: 978-0-307-37922-1
Publisher: Knopf Doubleday Publishing Group
Published: 2011-01-10T16:00:00+00:00

The story of the financial crisis of 2007–2009 has been told many times.10 Policymakers, economists, and commentators have pointed to many causes and contributing factors, ranging from “oversaving” in China to basic human psychology.11 However, few would deny that a U.S. financial system that inflated an asset bubble with cheap lending, manufactured colossal amounts of complex and potentially toxic securities, levered up with debt to maximize profits, and binged on short-term funding played a central role in bringing on the crisis. Even under the theory (popular among Americans) that a glut of saving in China created a flood of cheap money in the United States, leading to overborrowing and the housing bubble, that money had to flow through the American financial system, which did a phenomenally poor job of allocating it efficiently.

This system was made possible by the rise of the financial sector over the past three decades. Members of the Washington establishment bought into Wall Street’s vision of free-flowing capital and unfettered innovation. Whether they were true believers or cynics out to maximize their campaign contributions or their future earning potential, policymakers helped the major banks by relaxing regulations, declining to enforce existing regulations, or neglecting to regulate new markets. This is why mortgage originators were allowed to make loans that got bigger over time, making them harder to pay off; why those mortgages could be packaged into securities that masked their intrinsic risk; why banks could stash those securities in off-balance-sheet vehicles and pretend they didn’t own them; why they could use fancy risk models that said that nothing could go wrong with those securities; why trillions of dollars of side bets could be placed on those same securities; and ultimately why trillions of dollars of assets ended up precariously perched on top of a bubble of debt.

In 2006, the air began leaking out of that bubble, housing prices began to fall, and borrowers unable to refinance their mortgages started defaulting in sharply rising numbers. In 2007, the mountain of assets based on housing values began to crumble as increasing defaults torpedoed the prices of mortgage-backed securities and collateralized debt obligations (CDOs). In 2008, the resulting avalanche almost brought down the global financial system. Key government policymakers made admirable efforts to save the financial system. But the actions they took ultimately demonstrated the importance of a particular worldview in Washington—the idea that big, risk-loving banks are crucial to our economy and our way of life.

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