The Cash Nexus
By Arnold Kling
There’s a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep the whole show up and running. The perception at least is that our country requires the dollar as a reserve currency, requires New York City as a major banking center with major banks, and requires fully credible governmental guarantees behind every Treasury auction and requires liquid financial markets more generally. Furthermore the international trade presence of the United States (supposedly) requires the federal government to strongly ally with major commercial interests, just as our government sides with Hollywood in trade and intellectual property disputes. To abandon banks is to send a broader message that we are in commercial and political decline and disarray, and that is hardly an acceptable way to proceed, at least not according to the standards of the real Washington consensus.
This analysis bears on one of the main policy recommendations of Johnson and Kwak, namely to break up the big banks so they cannot soil Washington with such powerful lobbying and privileges. I believe this recommendation will not achieve its stated ends and that Washington would find another way to assemble privileged financial institutions – no matter what their exact form — within its ruling coalition. Breaking up the large banks would be striking at symptoms rather than at root causes, namely the ongoing growth of political power and the reliance of that power upon an ongoing inflow of capital.
If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take. It would mean that our government no longer needs to worry so much about financing its activities.
I think that Tyler owes a footnote to Niall Ferguson, who sees this relationship between government debt and large banks as a historical phenomenon going way back. See also my macroeconomic lectures, number 8.
I think that our government became beholden to Wall Street for more than just financing its own debt. I think that Washington really came to believe that more home ownership is better, and that this goal requires cheap, lenient mortgage credit. If the government is focused solely on its own ability to raise money, then it is hard to explain why it would allow banks to treat AAA-rated mortgage securities as being as low risk as government debt.
Overall, I do think that Tyler is correct to point out that the relationship between government and banks was mutually beneficial. Many on the left, including Johnson and Kwak, describe the problem of our financial system as the banks overpowering the government, and this implies that government needs more power. Instead, my view is that concentrated power is bad both in banking and in government, and it is particularly bad when that power is used in combination.