Johnson, who thunders away against the political influence of the financial industry on the influential website the Baseline Scenario, spent only 18 months at the IMF before leaving in August 2008 to denounce the political power of the banks — first in an article in the Atlantic (“The Quiet Coup”), then on his blog, and finally in 13 Bankers. The big financial firms have become an oligarchy, Johnson argues, comparable to those in, say, Argentina, Indonesia, or Russia — a self-perpetuating elite able to use its economic power to dictate government policy even in the midst of a meltdown. Only a bust-up of the biggest banks, based on antitrust principles, would curb their power. With the passage of the financial reform act, Johnson lost the battle, at least for now.
Does the debate sound familiar? It is reminiscent of the climate of opinion in the United States in 1912, in the aftermath of the Panic of 1907. Expert opinion then, too, was bitterly divided about what to do about the “money trust.” In a four-way presidential race — Republican William Howard Taft, “Bull Moose” trust-buster Theodore Roosevelt, Socialist Eugene Debs, and Democrat Woodrow Wilson — the centrist Wilson won. The Federal Reserve System was established, but otherwise banking continued its familiar patterns.
But we haven’t seen a panic like the one that began in 2007 before. That is why, in my view, Gary Gorton’s Slapped by the Invisible Hand stands out clearly as the best business book of the year on the economy. He tells us what happened, and we will be quicker to understand the next mania, panic, and crash because of it.
A hundred years ago, political scientist Theodore Marburg noted that every panic brought something new to light. “Accumulating experience should in time enable us to prolong the interval of recurrence,” he wrote, “if not eventually to prevent the recurrence entirely, just as epidemics of disease, formerly thought inevitable, are now prevented.” It took a while, but he was right. Once we got the hang of it, the quiet period lasted three-quarters of a century.