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Goldfinger Would Envy Latest Taxpayer Shakedown

By Simon Johnson
January 04, 2013 12:26 PM EST
Simon Johnson
Simon Johnson

It has become fashionable to despair of our supposed recent lack of technological progress. All the big inventions of modern society -- jet engines, television, nuclear weapons -- were on the scene by the early 1960s.

Proponents of this view should watch the classic James Bond movie “Goldfinger.” Made in 1964, this entertaining (and politically incorrect) thriller features an egomaniac financier intent on irradiating the U.S. government’s official gold holdings to drive up the price and make what he estimates will be a profit of about $180 million (about $1.3 billion in today’s money).

Goldfinger’s technology -- including a dirty nuclear device and nerve gas delivered by aircraft -- seems very modern in some ways. The physical equipment of the mid-1960s is very similar to what today’s villains have at their disposal.

Yet Goldfinger’s economics are completely anachronistic. A modern archvillain would create the conditions for a major financial crisis, and walk away with cash compensation while sticking the rest of us with the kind of tax bill that came due this week. This isn’t fiction: Our recent fiscal-cliff experience and the next round of the debt-ceiling debacle (due around the end of February) are the direct result of irresponsible behavior in the financial sector.

Perfect Crime

But this modern financial crime is so perfect that no politician even wants to connect the dots from banking crisis to fiscal pressure. If you want to know why, consider what happened over the past decade.

The best way to pocket $1.3 billion today is to take excessive risk at a large global financial enterprise. When times go well, you get the upside. Sanjai Bhagat of the University of Colorado at Boulder and Brian Bolton of the University of New Hampshire estimate that executives at the 14 largest financial institutions in the U.S. received about $2.6 billion in various forms of cash compensation from 2000 to 2008 (with about $1.5 billion going to the five best-paid individuals).

This compensation was based, of course, on profit that proved illusory because it wasn’t adjusted for risk. When these risks materialized, in the form of losses on loans to the housing sector and associated derivative exposures, there was a major negative impact on the economy.

Whether or not you like the countermeasures taken by the government and the Federal Reserve, this was a huge hit to economic growth that was directly due to the buildup of mismanaged credit risk in big financial firms. Lehman Brothers Holdings Inc. was allowed to fail, but the rest were saved on very generous terms.

And their executives were allowed to walk away not just with their previous compensation, but in many cases also with bonuses for 2008 and 2009 that were made directly possible by government (and taxpayer) subsidies. As Neil Barofsky, a former special inspector general for the Troubled Asset Relief Program, writes in his book, “Bailout,” there was excessive deference by Treasury and other parts of government to the notion that Wall Street talent must continue to receive top dollar lest something bad would happen to the world (the kind of threat that Bond villains enjoy making).

We face some longer-term fiscal issues, to be sure, particularly arising from our reluctance to control health-care spending. These are problems that we need to confront in coming decades, as the population ages and the cost of medical technology increases.

Debt Explosion

The more immediate fiscal concerns -- because of the rapid widening of federal-government debt -- are due overwhelmingly to the impact of the financial crisis. According to the Congressional Budget Office, federal-government debt will increase by 50 percent of gross domestic product (call that $8 trillion in today’s money) over the next decade as a direct result of the severity of the financial crisis that was brought on by mismanaged risk taking.

Your taxes went up this week -- I’m talking about payroll taxes, paid by all Americans. And, in the coming years, either you will pay more tax or your Medicare benefits will be clipped, or both.

Yet politicians of both parties prefer to leave the financial sector out of fiscal-policy discussions -- ignoring the problem that brought us to this point and that can hurt us again.

The concept of “too big to fail” financial institutions was solidified by the crisis of 2008. The practice of implicit government support to these companies continues. This is a dangerous, nontransparent and unfair subsidy scheme, and is the result of political influence, not any kind of market or competitive outcome.

And our official fiscal projections are wrong, precisely because they don’t take into account the buildup of risks in the financial system, and the ways in which these threaten our fiscal future.

Goldfinger would have loved this. Make off with $1.3 billion and stick everyone else with a bill in the trillions. Even better, get the politicians shouting at each other and unwilling to change the conditions that make future shakedowns possible.

The resulting smokescreen is perfect for another round of villainy.

(Simon Johnson, a professor at the MIT Sloan School of Management as well as a senior fellow at the Peterson Institute for International Economics, is co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.” The opinions expressed are his own.)

To contact the writer of this article: Simon Johnson at sjohnson@mit.edu

To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net

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