The Corner

Deepak Lal’s Lecture on the Financial Crisis

Deepak Lal, the James S. Coleman Professor of International Development Studies at UCLA is well-known to free-marketers. Last month he gave a comprehensive yet concise account of what he believes led to the financial crisis and the likely consequences to the Adam Smith Institute in London. It’s well worth a read, and when it comes to the consequences, national-security conservatives should pay close attention.

For me, however, this section about Goldman Sachs is particularly interesting, as it echoes things we at CEI have been warning about since the second term of the Bush administration:

Finally, I want to consider who are the winners from this on- going global financial crisis? The answer is: China, India and Goldman Sachs!

Let us consider the latter. This also provides a clue to the political economy behind the current crisis in its epicenter the US. As in the numerous Third World financial crises the question to be asked is who are the ‘rent-seekers’ who created the crisis and whose reluctance to take a ‘hair cut’ prevents the domestic polity from accepting the obvious cures. So that ultimately the intervention of an external agency like the IMF is need to administer the necessary cures. The crisis was caused by financiers taking ever risky gambles with the complicity of the government. This is reflected in the changing share of US domestic corporate profits that have gone to the financial sector. From 1973 to 1985 it was 16%. In the 1990s it oscillated between 21-30%. In the last decade it reached 41%. This was accompanied by a dramatic increase in pay: which rose from 1999=108% of the average for all domestic private industries to 181% in 2007. This great increase and concentration of wealth has created a new financial oligarchy similar to the one in the early years of the last century, which has great political weight in the US. At its head is Goldman Sachs. It has provided the Treasury secretaries under the last 2 US presidents and numerous alumni have held and continue to hold influential posts in devising and implementing US economic policy. (see Simon Johnson: “The Quiet Coup”, The Atlantic Online, May 2009).

This explains some of the bailouts. Why for instance was Lehman allowed to go the wall but AIG was ‘saved’? Lehman had the misfortune of both being a major competitor to Goldman’s and being run and staffed by the ‘barrow boys’ from the Bronx rather than the Ivy League gentlemen manning its rival. AIG was saved I suspect because, as appeared when Congress forced AIG to disclose what it had done with its bail out money, it had to disclose that most if it was to pay off its counterparties, the major one being Goldman! It is ironic that just as the century old rise, decline and now fall of GM, which marked the era of American industrial ascendancy, with one of its chairman claiming that “what was good for GM was good for America”, should now be followed by an era in which seemingly “what is good for Goldman is good for America”, or more generally Wall Street.

If you’d like to see the lecture as delivered rather than read it, click here.

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