As we wade through a long line of international economic meetings – G20 ministers of finance last week, G20 heads of government in Pittsburgh coming up, IMF-World Bank governors meeting in Istanbul early October (and all the associated “deputies” meetings, where the real work goes on) – it seems fair to ask: where is regulatory reform of our financial system heading?
Long documents have been produced and official websites have become more organized. Statements of principle have been made. And the melodrama of rival reform proposals has reared its head: continental Europeans for controlling pay vs. the US for raising capital vs. the UK not really wanting to do anything. But what does all of this add up to, and what should we expect from the forthcoming summit sequence?
Nothing meaningful.
This is a sophisticated delaying action and you are seeing masters of economic policy spin at work. When something goes wrong on a colossal, global scale, here’s the playbook (e.g., as applied to capital requirements).
- Agree that there is a problem, but be very vague about it. “It’s complicated” is a good watch phrase.
- State some completely bland principles to which no can object.
- By all means, have a spat with the French or Germans. But then patch it up amicably at the big summit; agree to do a bit of everything, in principle. People are wowed by your leadership.
- Send the job of formulating technical details to a committee of experts, asking them to report at the end of 2009 – and then make adjustments through the end of 2010.
- Rely on the experts to produce a report of mind-numbing detail, which few really understand. The experts know their job and will deliver.
- Provide leaks of this work and your “true feelings” to sympathetic reporters. They will help declare victory against great, albeit vaguely specified, odds.
- At this point, it’s 2011 and either (a) new people are in power, or (b) other things have gone sufficiently well that everyone has forgotten about the financial fiasco of 2008-09.
The brilliance of this approach is that you can say, whenever someone objects that capital requirements are not being increased as much: “we are doing that, but the details are not yet fully settled,” or “but we agree with that principle; of course the details are complicated.”
And, in this context, the point of a G20 or IMF meeting is to have the world’s economic policymakers show mutual support. After all, our opinion leaders reckon, if everyone is on board, then this must be the right way to go.
There will be some minor changes, and these will be much trumpeted. But what will really change in or around the power structure of global finance – as it plays out in the United States, Western Europe, or anywhere else?
Nothing – and you know this because otherwise the CEOs of all our top financial institutions would be mounting massive PR campaigns against the proposals, with op eds, Internet ads, innumerable cable appearances, and a virtually constant presence at Treasury. Just think back to how active they were earlier this year, when FDIC-type resolution for big banks was on the table.
Unless and until our biggest financial players are brought to heel, we are destined to repeat versions of the same boom-bust-bailout cycle. If you find a government willing to state this problem clearly and really take action to confront the relevant powerful people, let me know.
By Simon Johnson
The Baseline Scenario 
I thought this was a good article.
Simon, I like most of your writings and statements on TV. I always enjoy it when you’re on Bill Moyers’ show. But for the life of me I don’t even know why you bring G-20 as a topic. You’ve said yourself the G-20 is pointless.
How about talking about our US Senators and House Representatives, and which ones have the best record on voting on financial regulation, and which ones have worst record voting on financial regulation?? Name names of which Senators voted against the cram-down bill. I read recently that Senator James Inhofe was at a town hall meeting and said he doesn’t need to study the health care bill.
James Inhofe’s words “I DON’T HAVE TO READ IT, OR KNOW WHAT’S IN IT. I’M GOING TO OPPOSE IT ANYWAYS”
http://www.boston.com/news/politics/politicalintelligence/2009/08/no_truce_in_hea.html
Why not let us know (in other words, name names) which of our legislators are not reading these bills. And let us know how they are voting on important bills like the cram-down bill. Frankly, when we can’t even get our own U.S. lawmakers to feel beholden to the voters, I don’t give a damn what is happening in Istanbul.
#4, #5 and #7 are very worisome.
Re Ted K
The G20 may or may not be “pointless” but the US does live in a global economy and has to pay attention to what the other 19 big economies think.
Especially as it owes some of the bigger ones rather a lot of money.
I would guess that you also think that the UNCTAD report on the need for reducing dollar dependency is equally irrelevant?
Simon,
Could you perhaps update this post with a link to where you have set out what you think feasible reforms to change the “power structure of global finance” would look like?
This going to lead to war, or a series of wars. I don’t know why the financial elites imagine any positive outcome, but perhaps they are not thinking about outcomes.
“If you find a government willing to state this problem clearly and really take action to confront the relevant powerful people, let me know.”
Perhaps it is time to dust off the the old dream of world government. The UN is not a government. The IMF and the World bank are not government agencies. Yet their staffs have the will and perhaps desperation will finally lead to action. Oh, won’t the wingnuts howl!
On the other hand, we could hand management of the world economy over to China.
Reading Williams’ Tragedy of American Diplomacy. He seems to argue that finance was subserviant as long as manufacturing was generating surpluses, basically depositing profits with the banks, not allowing debt to billow. When manufacturers began to use debt as leverage for acquisitions things got hairy.
Dear Ted K–While I wouldn’t have used your words, I think you’re totally right.
We have a health insurance oligarchy of sorts responsible (at least partially, if not mostly) for the healthcare inflation and consequential looming crisis that we uniquely face as a nation here in the United States. That industry is using its influence to block reform, just as is the case with financial re-regulation.
The difference between the fight for financial regulation reform and the fight for healthcare reform is that we know which US Senators and Representatives are opposed to reform in healthcare. It’s not at all clear who’s opposing financial regulation…but it would be enormously useful to know.
I imagine Dr. Johnson is either (1) unwilling to get caught up in the resultant political fight from him naming names or (2) genuinely uninterested in handling this from anything other than a macro-level non-interventionist academic point of view.
Daniel Habtemariam
Not China. For their bureaucrats, life is too cheap.
One of the things that struck me was the French and German allegation that the US hasn’t even bothered to implement Basel II yet… Recall that at the height of the crisis (earlier this year) the French/Germans wanted to talk about regulation more, and the US wanted to talk about stimulus/IMF support/monetary action.
The US seemed to tacitly admit that, yes, it hadn’t even adopted basel II. It’s hard for the US to press for any reform if it has a record of not living up to its treaty obligations. (Not that Basel II would have stopped the crisis or anything like that…)
I don’t think that’s the real issue… but it costs credibility.
I’m still not entirely hopeless for a couple of reasons. There was some talk about increasing capital ratios across the board, and going after tax/money havens.
Also, I don’t expect any movement on this until after health care reform has passed. Team Obama made the deliberate decision that health reform is their #1 goal, and they (probably correctly) recognize that the US public can’t handle more than one big issue at once. They are specifically NOT engaging this issue in order to keep attention on health care. Arguably, they should have engaged financial reform before health care (it would have been more popular, and more salient to the general public, and given more time to get a decent set of health care proposals done behind the scenes). I think this was a colossal error… I think, however, it was a strategic choice about which issue to prioritize, not a general desire to avoid the problem altogether. Team Obama directly declared that the financial regulation debates would occur in the Fall of 09, but that was before they failed to hit their August 09 deadline for health care (which, I would argue, is because they threw everything over the fence to Congress and asked for an impossible bipartisan compromise in a fractious parochial Congress – the fact that they might actually have to write their OWN legislation seems to have finally struck them like a lightning bolt).
If Team Obama survives the health care debate, it will enter the financial regulation debate with a lot less momentum. Hopefully enough…
It should be mentioned that points 1-7 are an outline of how all politics works.
Simon Johnson,
You write
“If you find a government willing to state this problem clearly and really take action to confront the relevant powerful people, let me know.”
which is a variant of your earlier
“The likely future is: more of the same, at least until we find a Jackson or a Roosevelt.”.
I say again, without variation:
FOUND: Simon Johnson can do it — UNFOOL the people by getting these histories in their faces, ONGOINGLY:
“Real Homes, Real Dow” at
http://homepage.mac.com/ttsmyf/RHandRD.html
And, the foregoing two mispricings abetted the two ‘misbehavings’ here (second chart):
“Real Dow & Real Homes & Personal Saving & Debt Burden” at
http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html
An exquisite article, it’s apparent Simon is British. Only British, with their sceptical and wise atttitude towards politics, can write a hilarious 7 point political “playbook” for solving crises. Reminds me of “Yes, Prime Minister”.
Civilized Americans (liberals), in their heart of hearts, still trust their government and their elected oficials, still think, they’re there to help them, to promote their interest. From an European point of view it’s a somewhat quaint feature of this great country, but I’m sure you’ll come around ;-)
I’ve always thought one or two more Nixons or Bushes are necessary for you to adopt the same leery attitude towards politicians, but now with Obama being such a disappointment what with Iraq, Afghanistan, health care, Guantanamo, rendition, financial regulation, consumer protection, transparency (former Obama’s flag issue, now stolen by Republicans), I think you’ll give up on all politicians long before this administration’s first term.
as always, excellent!
Simon Johnson “Unless and until our biggest financial players are brought to heel, we are destined to repeat versions of the same boom-bust-bailout cycle.”
Oh come on, you must know that even if “our biggest financial players are brought to heel”, we are destined to repeat similar versions of the same boom-bust-bailout cycle, most especially with the kind of regulators we have. And so as the mother of Boabdil told him when he lost Granada let us all stop “to weep like a woman for what you failed to defend like a man” and start working at getting the most out of the whole boom-bust cycle; and which might of course include bringing the biggest financial players to their heels.
Wow, you dropped an acronym, IMPRESSIVE!! You can tell us about UNCTAD in your next post on “baseline” Morph. We’re waiting with bated breath.
You’ve heard of the “Chinese fire drill”. We need a more modern, pejorative expression to include the murdering aspect of that government. “Chinese coal-mining escape boogie”???
Let’s brainstorm people….
“…working at getting the most out of the whole boom-bust cycle; and which might of course include bringing the biggest financial players to their heels.”
Nice post. Could you say more about how “getting the most” might be accomplished?
Wonder if they pirate the software they use to operate their vital organ exchange. (No, no small-brains, evil chinese people, *not* chinese people.)
Among others, if the regulators want to hang on to their minimum capital requirements for banks based on default risks as measured by credit rating agencies, forcing them to also include a set of capital requirements for banks based on the “purpose” of the loans,as measured by some “purpose” rating agenci.
I am sure this would signify a much needed boost to the competitiveness of the smaller local banks.
Can A Leopard Change Its Spots:
There is much discussion of prudential regulation. The other part of the story is change in prudent monetary policy.
Bernanke testifying before Congress on asset bubbles said that it is MORE PRUDENT not to intervene in asset bubbles unless they affect output and prices.
Here are the direct quotes and source.
“…little or no evidence ..that the central bank is better able than the market to identify speculative bubbles and that it can successfully ” deflate” such bubbles without harming the broader economy.”…the
MORE PRUDENT response is to respond only as the outlook for output and inflation merits. Such a limited approach should also mitigate potential moral hazard problems that might arise were a central bank to, in effect take responsibility for the appropriateness of asset prices.”
S. Hrg. 109-596 The Economic Outlook Hearing of The Joint Economic Committee of Congress, April 27, 2006.
Whatever, but never ever were there so imprudent regulations like when the regulators, believing to be prudent, started a crazy worldwide race after the AAAs.
This is a great description of what happens when there isn’t a lot at stake, or when the stakeholders can game the system and win. But, again, I think this problem is too big. There is too much distrust in the system. As this grinds on, it will be in everybody’s interest to have functioning markets and I just don’t see that happening without building some trust back into the system. I don’t see trust coming back without some regulatory teeth.
It looks like things are ‘back to normal’ because bankers are getting some bonuses and a couple of them are making money on the volatility, but this is high-risk profits, the bonuses they are grabbing are out of the treasury till, and unless they can get back to building real businesses, they are just eating their own.
We’re only in the second inning.
Rely on the experts to produce a report of mind-numbing detail, which few really understand. The experts know their job and will deliver.
The report must place the blame squarely on people who were not responsible, and also leave out many key facts so that it is utterly useless. later, the drafters of the report will repudiate their findings citing political pressure, forcing another commission to be convened…that is, if anyone still cares.
Also, the people investigated must deceive the commission repeatedly (no consequences to them of course), and their words must be taken at face value.
It must be done in the most collegial atmosphere and only easy-to-answer and clueless questions must be asked.
Sadly, this crisis has had exactly the effect on me that you are talking about. I still think this country and our system are as good as any other and better than many, but I will never again give leaders in either business or government the benefit of the doubt. I now assume the worst, and a couple of years ago, I didn’t. That loss of fundamental trust is corrosive, and I know that I am not alone. There’s a lot of anger here. We’ll see what comes of this new attitude…
Armano, you seriously underestimate our naivete and innocence. Europe shares the likes of Franz Kafka and Neitzche. We have Thomas Jefferson and John Wayne.
I think I prefer to remain naive rather than adopt cynicism as a permanent worldview.
The real question is – cynical towards what? I sure wouldn’t want to be permanently cynical towards my family, my friends, my local community, my clients. That would be indeed detrimental for my mental and spiritual life. It’s much more preferable to be innocent in these things.
But to be naive and innocent towards you politicians is detrimental to your safety, your civil rights and your wallet.
And it’s really not so much about the specific people. I said Obama is disappointment, but I believe he is honest (for a politician) and is doing everything he can. The trouble is the whole political system is now so big, so incredibly huge, and effectively run by special interest groups and entrenched bureaucratic structures, that he, as a single guy, however powerful, can change only so much. The DoD is still run by military/industrial/congressional complex, the foreign policy by neocons, the Treasury is still under heavy influence of Wall Street, health policy is dominated by Big Pharma, Fed is basically a Big Bank Cartel and energy policy still takes marching orders from Big Oil.
And each time you threaten to clamp down on the power of this or that special interest group, they threaten, they fearmonger, they water down the bills, they do everything they can to thwart it – cap and trade effectively crippled and watered down to worthlessness, real health care reform gagged and maimed (giving the medical industrial complex even more power instead the other way around), DoD budget increased instead of massive cuts and so on. Hopefully Barney Frank will push through the Fed audit, but even now there are efforts byt Republican Senators to water it down (the Big Banks and Fed bureaucracy has a lot of clout and lot of bought-off economists on their side).
So my whole point is – even if you’re willing to give your favorite politicians the benefit of the doubt (as Boris writes), you cannot expect them to change much. The really honest people in politics are far and between, always were, always will be, unless the American public starts to read their Jefferson again and understand that the key to government effectiveness, transparency, accountability and to breaking the power of lobbyists is a decentralization of power.
Uh… Who exactly appointed these elitist fascists of the G20 to rule on behalf of “the people”? Why would you expect these elitist fascists to treat “the people” as anything but serfs, and to act as lords? To expect them to act against the corporate moneyed interests is ludicrous, that would be like a shark eating itself by the tail. This is feudalism all over again. Am I wrong to see the G20 as merely the gathering of our “enlightened paternalistic moneyed class,” the 5% who owns 95%, who have absolutely no intention of doing anything but benefiting themselves at the expense of the 95% of the sheeple?
I think there was a Star Trek episode that once solved this problem. How much better our lives would all be, if we simply got our pitchforks (or like Star Trek used a machine that vaporized the people), and killed the top 5% of the greedy moneygrubbers on the planet and redistributed their money evenly to all. We could do it on Halloween night, every 5 years: 1st 5%, then 4.5%, then 4% and so on. Every 5 years the greedy vanish and the money gets redistributed to everyone. And nobody, not nobody, in the top 5% can get a waiver or pay a “stand-in” to take his place. If you have that greedy, avaricious gene in your makeup, you will exploit the rest of the population, and true to your nature, rise to the top. Once you do, poof! If we simply agreed to cull the herd in that manner, every five years, within 100 years we’d live in a virtual paradise. We’d weed out the elites, the princes, the royalty, the blue bloods, the massive trusts and hoarded resources. Wars would end, corporate takeovers would end, “too big to fail banks and their huge interest payments would vanish, absurd CEO bonuses disappear. Trade would be simple, local, and beneficial to all because you’d only trade with those you knew and lived with. Of course I’m not really suggesting we do this, I’m just thinking outside of the box, and talking about Star Trek. Besides, if the elite can “think outside the box” and decide on lists of elites for the Greenbriar underground nuke shelters (a scenario in which 6 billion-plus die and few thousand self-selected elites live); if the elites can discuss monetary policy to protect their 5% while the other 95% can “eat cake” and live lives of economic servitude, and if the elites can discuss eugenics as a “trickle-down” option, perhaps a bit of “trickle-up” eugenics might be good for society. Not “Society,” I mean society. The place where you and I live.
I mean, somebody remind me again why we need these self-appointed Lords of the G20, anyway, and what exactly they have to do with Democracy? Aren’t they merely the high lords of the New-World-Order Elites, the “Shadow Government” by which the capitalists and multi-national corporations rule? What exactly, do they contribute to us, the 95% who are not them? Who are they, why are they in charge, and under what form of government do we now live? When did we, the 95%, agree to this? Why do their decisions get handed down as law, and (the Patriot Act notwithstanding) under what set of rules am I living, that I, a US citizen, am required to lick their boots for a living? If it is not fascism (government by, of and for the corporations), then please define it, because I’d like to know. It seems to me to incorporate an element of economic feudalism to it, or Villeinage, where captive serfs send their “bail out” tax dollars to the lords of capitalism, and keep the dregs to feed the wife and kiddies. Amuse yourself by drawing the parallels in reading http://en.wikipedia.org/wiki/Feudalism (admittedly a weak source)
It appears that Mr. Geithner agrees with the findings of my solo and joint research papers. They are at http://ssrn.com/abstract=1336288 and http://ssrn.com/abstract=1321666. First the Fed endorsed (in deed not in word) my papers with the stress test. Now the Treasury endorses their conclusions also. I only regret that Mr. Bernanke and Mr. Summers did not cite my papers in a footnote.
Spot on, Simon!! After all, there is too much risk to stepping, even tiptoeing, outside the box, internationally, that is. There’s been lots written about where we are headed in the global economy, and lots more to be written, and very little will include the IMF or G-20, as forces to be reckoned with. I am interested to know what your response is to Stiglitz recent statements in Iceland regarding a “W” recovery (double dip) and his reasoning. I also find him to be spot on in this, and have felt that way for some time. The markets, I believe, are strictly playing to themselves, and so cannot be regarded as in indicator of our economic direction. I do believe that the serious problems we have at every government level with economic well being, together with the continuing weakness indicated by the bleak unemployment and continuing foreclosure problems coupled with the weakness of the overall credit sector underscores the abysmal likely rate of recovery. I think and “L” is overly optimistic, and that China is trying to float a sinking trade economy.