13 Bankers or 1 Federal Puppet Master?

On the news that Goldman Sachs allegedly engaged in securities fraud and also posted $3.46 billion in quarterly earnings, the intersection of politics and high finance is of special interest.   My Political Economy of Regulation class read Simon Johnson’s “Quiet Coup” about the cozy relationships between Wall Street and federal regulators as a possible example of capture theory (making a convincing case to some).

Now Johnson is back with 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, bolstering his case with the help of co-author James Kwak.  Tyler Cowen reviews the book for The Huffington Post and comes to a much different conclusion:

Much as I admire their analysis and exposition, I see the problem a bit differently than they do. Whereas they see banks as the puppet master and our government as the fool, I wonder whether it is not more accurate to think of the government as running the show….

[N]amely 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.

Back to square 1, I guess.  I see a discretionary writing assignment for Friday on the horizon.


UPDATE: Russ Roberts interviews Johnson on EconTalk, and a summary of the interview.