AMERICAN OLIGARCHS

In the Comment section of today's Financial Times, Martin Wolf wrote about analogies drawn by former IMF Chief Economist Simon Johnson between Russia and the United States. The parallels stem from the outsized political authority wielded by, and public attention paid to, the largest U.S. financial institutions, which he compares to the Russian Oligarchs.

These institutions, deemed "too big to fail", are literally sapping the public dry on the belief that what is good for Wall Street is good for Main Street. And, like the oligarchs in Russia, while these companies and their shareholders represent a tiny percentage of the population of businesses in need of rescue, they are benefiting from almost all the stimulus money.

How could this distinctly undemocratic policy arise in a social democracy such as the United States? In short, because of the corrupting effects of money on the political system. In 2002, the financial sector booked 41% of all corporate profits in America, more than double the long-term average, and a lot of this money flowed to the political parties. By 2008, many politicians had been elected, and many bureaucrats appointed, in no small part as a result of contributions from members of the financial sector.

So, when it started to become apparent that the outsized financial profits had been made on the backs of ridiculously outsized bets that were quickly coming home to roost, the heads of the major banks were able to rally President Bush and his Treasury Secretary, former Goldman CEO Hank Paulson, to sell a terrifying scenario to Congress and the Fed of a financial domino effect in which the major banks and the global credit markets collapse, leading to runs on banks, a deflationary spiral, and general chaos.

Whether this scenario was accurate or not is anybody's guess (I personally do not believe in the "too big to fail" thesis and would not have voted to approve TARP), but trillions of dollars in public money have been spent and it is not clear that bank balance sheets and credit markets are showing any lasting signs of improvement.

The good news is that the ability of the financial sector to wield the same public policy authority is set to wane: relative wages in the financial sector fell from a 1933 peak of over 1.6 (the ratio of financial wages to non-farm private wages) to near parity in 1980. As of last year, the ratio was over 1.7, so if history is a guide we can expect non-financial wages (and political authority) to grow relative to financial wages for many decades to come.

The bad news, of course, is that the U.S. dollar and to the spending ability of the U.S. taxpayer have been dealt a lasting and awful blow.