The Silent Takeover of America's Financial System

A Warning Ignored

In the aftermath of the 2008 financial crisis, Simon Johnson, the former chief economist of the International Monetary Fund (IMF), cautioned that the same flawed policies he had observed in unstable economies had now taken root in the United States. Johnson predicted a "Quiet Coup" if the U.S. failed to take immediate action, with the financial system capturing the government and continuously bailing itself out until the country's resources were depleted. Unfortunately, his warnings were not heeded and the situation has only worsened.

The State of Our Financial System

Recent discussions have highlighted the trillions of dollars of distress in the financial system, with the expectation that taxpayers will be responsible for bailing out these institutions. This was evident in the 2023 bank bailouts. Considering the current national debt of $35 trillion, it's clear we can't afford these bailouts. However, they will continue, driving the national debt up to a projected $50 trillion or more. Eventually, the debt will become too large to manage, leading to either a hard default, where interest payments are stopped, or a more likely soft default, where inflation is allowed to skyrocket, eroding the national debt along with our personal savings. This process will result in the middle and working classes being stripped of their wealth.

Johnson's Warning: Overlooked and Forgotten

Simon Johnson's warning is particularly poignant, despite any reservations one might have about the IMF. Johnson is well-versed in the behavior of dysfunctional governments, having observed the patterns that lead to their collapse. In his warning, Johnson described how a small group of powerful elites, typically from the financial sector, would take control of policy. Knowing they would be bailed out, these elites would take excessive risks, confident in the knowledge that any losses would be covered by taxpayers.

The Subtle Seizure of Power

Johnson provided data to support his claims. From 1973 to 1985, the financial sector in America never made more than 16% of the domestic corporate product. However, by the early 2000s, it was earning 41%. The sector used a portion of these profits to lobby for the repeal of regulations that separated banking and investment banking, allowing banks to gamble with taxpayer-guaranteed funds. The sector also lobbied to increase leverage, allowing it to make large bets with small amounts of money, again backed by taxpayers. The culmination of these actions was the 2008 crisis, with banks making trillions in risky loans. When the situation deteriorated, banks turned to Washington for bailouts, using the real economy as leverage to secure more favors.

The Washington-Wall Street Alliance

In return for their support, politicians and their staff were rewarded with lucrative positions or even direct payments. Ben Bernanke received $250,000 for a single speech at a financial conference. Janet Yellen was paid $7 million in speaking fees by Wall Street banks, including a single speech for hedge fund Citadel that netted her $292,500. Johnson's conclusion is that the American financial system is seriously ill, surviving only on a series of bailouts. He believes the only solution is to force banks to recognize their losses, which would bankrupt them, and then sell them to new management who would not have access to bailouts.

The Future of America's Financial System

Given the lobbying power of the banks, the likelihood of breaking up the country's megabanks is minimal. Unless there's a significant change in Washington's approach to the banks, we can expect more financial crises, more bailouts, more national debt, and a continued countdown to financial disaster. The opportunity to address this issue was missed in 2008, and it will likely take an even larger crisis before politicians are willing to confront their lobbyists and the financial coup that has taken control of our republic.

Bottom Line

The warnings were there, but they were ignored. Now, the American financial system is in a precarious state, with the potential for a significant crisis looming. The question is, will the necessary changes be made to avert disaster, or will we continue on the same path, with the same players calling the shots? What are your thoughts on this situation? Share this article with your friends and sign up for the Daily Briefing, delivered every day at 6pm.