Many people think the financial collapse was the result of a series of mistakes and unintended consequences. But James Kwak, co-author of the recently published "13 Bankers" doesn’t let the financial sector off the hook that easily.
Instead of the accidental, "banana-peel theory of the economic crisis," as Kwak joked, the entire financial system is flawed in such a way as to make the recent meltdown seem inevitable.
Kwak, who spoke Wednesday night at Sullivan & Worcester law firm in Boston, made the New York Times Bestseller list with "13 Bankers," a dissection of how Washington and Wall Street colluded to create a damaged system that is still a threat to the country’s economic health.
During the 1970s, the financial sector organized its lobbying force to combat what it perceived as regulatory overreach by the Ford and Nixon administrations, he said, and they’ve been chipping away at regulations ever since. That decades-long process has created a financial system that is both shielded from oversight and is largely separate from the "real economy."
Much of the financial system’s smorgasbord of complex instruments – structured notes, yield-spread premium compensation, synthetic CDOs – are intended mostly for the benefit of those within the sector and don’t do much good to outside players. Yet these same companies, a very small group, can disproportionately impact the "real" economy when things go bad.
The crisis could have been a chance to re-work the system in a healthier way, but that didn’t happen.
"We had an opportunity for structural change in the financial system and we have missed it," Kwak said. Instead, Congress passed the Dodd-Frank bill, which bets heavily that increased regulation is the way to go. While that may help, Kwak noted that these same regulators were basically the same ones who spectacularly failed in preventing our current economic morass. In addition, future conservative political administrations will likely peel back those changes, anyway.
Ideally, the financial sector could have moved away from its current, inward focus and channeled its innovation toward benefiting new customers.
That kind of mindset could fix some of the longstanding problems that affect a large percentage of the population, such as finding a profitable way for mainstream institutions to usurp parasitic payday lenders in poorer neighborhoods, or to guarantee safeguards for Americans who are now vulnerable to financial damage from long-term health problems or falling home values.
The entire economy benefits when companies find a way to benefit individuals, he said.
