Bankers’ Conspiracy Theories Make to the Mainstream

As a young man I wandered for a while in the fever-swamps of paranoid politics, where conspiracy theories flourished like fungus.  The current issue of The  Atlantic  almost (but not quite) made me nostalgic for the bad old days, for prominently featured is a lurid tale of a bankers’ conspiracy run by Goldman Sachs to turn America into a corrupt banana republic—and it is signed by a former chief economist of the International Monetary Fund. How cool is that? Simon Johnson, the author of the  Atlantic  story, is manifestly paranoid. Therein lies a tale.

It’s all a plot, Prof. Johnson insists:

In a primitive political system, power is transmitted through violence . . .

Instead, the American financial industry gained political power by amassing a kind of cultural capital-a belief system . . . .Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world . . . One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W. Bush . . . It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni-including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman . . . as an institution that was itself almost a form of public service . . .

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here . . . [Taxpayers’] money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand . . . Big banks, it seems, have only gained political strength since the crisis began.

In fact, reality is quite different: The Obama administration has empowered a gaggle of academics and put the banks under the thumb of the federal government to an extent never imagined, let alone implemented, in American history. They can’t pay themselves anymore—although we know that the money was just a cover story, and they really went into banking in order to perpetrate their conspiratorial designs upon the unsuspecting nation. In Johnson’s rendering, this is all a smokescreen to confuse the public and cover up the Vast Conspiracy that puts bankers in control of government.

I do not believe that Prof. Johnson is clinically insane. It is unlikely to be the case that he suspects co-workers of poisoning him, or hears voices in his head instructing him to do away with his mother. Nonetheless, his response to the banking crisis is paranoid in the strict sense of the word. Chemical imbalances in the brain doubtless explain paranoia in many cases, but so can adverse circumstances. Some forms of paranoia represent an illusory attempt to gain power over a world in which the paranoid has no real power at all. Political paranoia, e.g., conspiracy theories, flourish among the powerless.

Imagine a prisoner in a windowless cell, who does not know of what crime he may be guilty, or who his accusers might be. Every variation in routine, every utterance or grimace of his warders will loom great in significance. Franz Kafka created just such a world in  The Castle  and  The Trial , made all the more poignant by the conscious adoption of a biblical narrative style, as Franz Rosenzweig observed. But Kafka’s employment of biblical narrative is ironic. In the Bible everything is significant; in Kafka’s everything may be insignificant. Thus Kafka portrays the paranoid’s world all the more forcefully.

Prof. Johnson is not locked in a windowless room, but in an important way, he is just as powerless as our hypothetical prisoner. The whole policy apparatus of Keynesian economics, the belts and levers and pulleys and stimulators and stabilizers that made up the magic tricks of the International Monetary Fund, has ceased to work. We are in an entirely different sort of crisis. The financial system has crashed because the housing market has crashed, and the housing market has crashed because there aren’t enough American families to buy the houses on offer. Consumer spending has crashed because the retirement funds of the baby boomers were locked up in home equity that has evaporated during the past two years.

Economists like Prof. Johnson are experiencing a dreadful sense of powerlessness. There must be a conspiracy to explain why our policy prescriptions don’t work any more. Perhaps a witch has conjured Satan to sour our cow’s milk, or Goldman Sachs is secretly controlling the government.

Whether or not the government bails out banks, the crisis will continue. One school of thought, represented by San Francisco Federal Reserve Bank President Janet Yellen, insists that the crisis occurred because the government let Lehman Brothers fail last fall. Another school, represented by Prof. Johnson (and New York Times columnist Paul Krugman) believes that the problem is that the government didn’t allow all the other banks to fail. Both schools are wrong. The banking crisis is merely a surface manifestation of a deeper problem. The West failed to produce a new generation large enough to buy the existing housing stock, or fund existing pension programs, or maintain the wealth that the West thought it had. That is why we are poorer, as I show  in the current issue  of First Things .

By the way, the fact that my name is Goldman is only coincidence and is no proof of a conspiracy.