How Bankers Protect Their Outsized Pay Packages

“ The death of Lincoln was a disaster for Christendom. There was no man in the United States great enough to wear his boots and the bankers went anew to grab the riches. I fear that foreign bankers with their craftiness and tortuous tricks will entirely control the exuberant riches of America and use it to systematically corrupt civilization.”

• Otto von Bismark (1815–1898), German Chancellor, after the Lincoln assassination

The Dangerous Business of Banking

Commercial banking is a business that can make money out of nothing, lend it and get paid back with interest and administration fees. How could anyone mess that up?

But they often do. History is replete with bank crashes.

* A 2023 CNN repor t found that in 2008, 25 banks failed immediately according to the Federal Deposit Insurance Corporation’s database.

* Over the three years that followed, nearly 400 banks failed.

* In 2023, t he FDIC noted four bank failures: The Heartland Tri-State Bank; Silvergate bank; SVB Bank; and First Republic Bank.

The Tightly Sealed Black Box

We must see the US banking system correctly. If this sounds pedestrian, note how before the 2008 crisis regulators, mainstream economists and financial journalists all thought that the banking system was rock solid. What they understood about it was wrong then and remains wrong now. The bankers have kept an accurate picture of the inner workings of the bank system from them to protect bankers outsize pay packages.

To explain the cause of the 2008 crisis the bankers created a narrative that is false so that the reforms did not affect their outsized paychecks. They use the Big Lie tactic; a lie so enormous people believe it must be true. No one could get away with it if it wasn’t. But the same people: regulators, economists and financial journalists, who are the gatekeepers of information about the banking system to the public, and who were fooled before the 2008 crisis were also fooled after it.

Regulators

A humbled former Federal Reserve Chairman, Alan Greenspan admitted his understanding of the banking system was flawed in the title to an article he wrote for Current Affairs: Never Saw It Coming: Why the Financial Crisis Took Economists by Surprise.

Economists

Politicians were so aghast at the complete failure of their trusted economic advisors to warn about the precarious state of the banking system that in 2010 a House committee asked leading economists to appear and explain. In opening remarks, Chairman Brad Miller said, “It would be great to have some reliable guidance to lead us out of this mess, but what we thought was authoritative guidance failed to see the mess coming and may actually have helped create the mess to begin with.”

Economist David Colander whose publications, awards and achievements would fill a list too long to repeat, gave some extraordinary testimony:

* Economists use a model called by the authoritatively sounding name: Dynamic stochastic general equilibrium modeling (DSGE) for policy recommendations on the banking system. It is a pure theoretical model and is never checked empirically against what is actually happening in the banking system.

* Economists “telling policy makers that existing DSGE models could guide policy makers in their search in the dark was equivalent to telling someone that studying tic-tac toe models can guide him or her in playing 20th dimensional chess”.

* “Unfortunately, what Lionel Robbins said in the 1920s remains true today, ‘’What precision economists can claim at this stage is largely a sham precision. In the present state of knowledge, the man who can claim for economic science much exactitude is a quack.’’ (Robbins, 1927, 176)

* “I have pushed macroeconomic researchers on why they focused on the DSGE model, and why they implied, or at least allowed others to believe, that it had policy relevance beyond what could reasonably be given to it, they responded that that was what they believed the National Science Foundation, and other research support providers, wanted.”

There were several economists who did correctly assess the precarious state of the financial system pre-2008. Cameron Cooper of In the Black accounting newsletter describes six of them. There were others.

* Those who were wrong were kept in place to devise the reform of Dodd Frank.

* Those who were right were relegated to obscurity.

Financial Journalists

The Financial Times is read by the richest and most powerful players in global politics and finance. Its American editor Gillian Tett submitted a paper to the Central Bank of France to explain why journalists didn’t see the crash coming entitled, Silos and silences: Why so few people spotted the problems in complex credit and what that implies for the future.

Drawing on her earlier training as an anthropologist she quoted a theory of Pierre Bourdieu that, “the way that an elite typically stays in power in almost any society is not simply by controlling the means of production (i.e. wealth), but by shaping the discourse (or the cognitive map that a society uses to describe the world around it.)”

In plain language, the bankers have kept critical aspects of the system’s closely held secrets by often using under-opaque jargon. Yet many of these aspects of ‘high finance’ are not that difficult. We will break into that vault of secrecy shortly. First, how the bankers falsely “shaped the discourse” regarding the 2008 crisis and why that matters today.

Originally published at https://jandweir.substack.com.