Perhaps that quote should have been "First, kill all the bankers"?.

[David Farber <dave () farber net>]

Begin forwarded message:

From: dewayne () warpspeed com (Dewayne Hendricks)
Date: March 31, 2009 8:09:58 AM EDT
To: Dewayne-Net Technology List <xyzzy () warpspeed com>
Subject: [Dewayne-Net] Perhaps that quote should have been "First,  
kill all the bankers"?.

[Note:  This item comes from reader Randall.  DLH]

From: Randall <rvh40 () insightbb com>
Date: March 31, 2009 1:36:05 AM PDT
To: johnmacsgroup () yahoogroups com, Dewayne Hendricks <dewayne () warpspeed com 
>
Subject: Perhaps that quote should have been "First, kill all the  
bankers"?.

[[Money Shot:   The conventional wisdom among the elite is still that  
the current slump “cannot be as bad as the Great Depression.” This  
view is wrong. What we face now could, in fact, be worse than the  
Great Depression—because the world is now so much more interconnected  
and because the banking sector is now so big. We face a synchronized  
downturn in almost all countries, a weakening of confidence among  
individuals and firms, and major problems for government finances. If  
our leadership wakes up to the potential consequences, we may yet see  
dramatic action on the banking system and a breaking of the old elite.  
Let us hope it is not then too late.]]
----
<http://www.theatlantic.com/doc/200905/imf-advice>

The crash has laid bare many unpleasant truths about the United  
States. One of the most alarming, says a former chief economist of the  
International Monetary Fund, is that the finance industry has  
effectively captured our government—a state of affairs that more  
typically describes emerging markets, and is at the center of many  
emerging-market crises. If the IMF’s staff could speak freely about  
the U.S., it would tell us what it tells all countries in this  
situation: recovery will fail unless we break the financial oligarchy  
that is blocking essential reform. And if we are to prevent a true  
depression, we’re running out of time.

by Simon Johnson

-----------
The Quiet Coup
ONE THING YOU learn rather quickly when working at the International  
Monetary Fund is that no one is ever very happy to see you. Typically,  
your “clients” come in only after private capital has abandoned them,  
after regional trading-bloc partners have been unable to throw a  
strong enough lifeline, after last-ditch attempts to borrow from  
powerful friends like China or the European Union have fallen through.  
You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its  
clients what they don’t want to hear. I should know; I pressed painful  
changes on many foreign officials during my time there as chief  
economist in 2007 and 2008. And I felt the effects of IMF pressure, at  
least indirectly, when I worked with governments in Eastern Europe as  
they struggled after 1989, and with the private sector in Asia and  
Latin America during the crises of the late 1990s and early 2000s.  
Over that time, from every vantage point, I saw firsthand the steady  
flow of officials—from Ukraine, Russia, Thailand, Indonesia, South  
Korea, and elsewhere—trudging to the fund when circumstances were dire  
and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in  
1994; Russia desperately needed help when its short-term-debt rollover  
scheme exploded in the summer of 1998; the Indonesian rupiah plunged  
in 1997, nearly leveling the corporate economy; that same year, South  
Korea’s 30-year economic miracle ground to a halt when foreign banks  
suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked  
depressingly similar. Each country, of course, needed a loan, but more  
than that, each needed to make big changes so that the loan could  
really work. Almost always, countries in crisis need to learn to live  
within their means after a period of excess—exports must be increased,  
and imports cut—and the goal is to do this without the most horrible  
of recessions. Naturally, the fund’s economists spend time figuring  
out the policies—budget, money supply, and the like—that make sense in  
this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest  
obstacle to recovery, is almost invariably the politics of countries  
in crisis.

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.

In Russia, for instance, the private sector is now in serious trouble  
because, over the past five years or so, it borrowed at least $490  
billion from global banks and investors on the assumption that the  
country’s energy sector could support a permanent increase in  
consumption throughout the economy. As Russia’s oligarchs spent this  
capital, acquiring other companies and embarking on ambitious  
investment plans that generated jobs, their importance to the  
political elite increased. Growing political support meant better  
access to lucrative contracts, tax breaks, and subsidies. And foreign  
investors could not have been more pleased; all other things being  
equal, they prefer to lend money to people who have the implicit  
backing of their national governments, even if that backing gives off  
the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste  
money and build massive business empires on a mountain of debt. Local  
banks, sometimes pressured by the government, become too willing to  
extend credit to the elite and to those who depend on them.  
Overborrowing always ends badly, whether for an individual, a company,  
or a country. Sooner or later, credit conditions become tighter and no  
one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous  
companies teeter on the brink of default, and the local banks that  
have lent to them collapse. Yesterday’s “public-private partnerships”  
are relabeled “crony capitalism.” With credit unavailable, economic  
paralysis ensues, and conditions just get worse and worse. The  
government is forced to draw down its foreign-currency reserves to pay  
for imports, service debt, and cover private losses. But these  
reserves will eventually run out. If the country cannot right itself  
before that happens, it will default on its sovereign debt and become  
an economic pariah. The government, in its race to stop the bleeding,  
will typically need to wipe out some of the national champions—now  
hemorrhaging cash—and usually restructure a banking system that’s gone  
badly out of balance. It will, in other words, need to squeeze at  
least some of its oligarchs.

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.

Eventually, as the oligarchs in Putin’s Russia now realize, some  
within the elite have to lose out before recovery can begin. It’s a  
game of musical chairs: there just aren’t enough currency reserves to  
take care of everyone, and the government cannot afford to take over  
private-sector debt completely.

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