Economic Donkeys

Early in the First World War, British generals decided to attack German trenches with an initial light bombardment, followed by infantry walking in close order across No Man’s Land.  The result was tens of thousands killed in a series of military disasters, but the generals reacted with only small adjustments to their approach and essentially persisted in repeating the same mistakes for years.  “The English soldiers fight like lions,” one German general remarked. “True.  But don’t we know that they are lions led by donkeys?” was the reply.

Today, a year after global financial collapse and the ensuing tragedy for millions, our economic leaders are lining us up to suffer again (and again) through the same horrible experiences.

The collapse of Lehman Brothers in September 2008 demonstrated just how far our economic system in general and bank management in particular have gone awry.  Lehman borrowed at low interest rates in global credit markets, and invested over half a trillion dollars of other people’s money in assets which, today, are worth next-to-nothing: failed ski hills in Montana, now empty suburban housing in California, and crazy bets on derivatives (options to buy or sell securities, in various complex combinations).

Worries about these failed investments sparked a run on the bank.  And, after a mad weekend of trying to save Lehman, the U.S. “authorities” – meaning Henry Paulson (Secretary of the Treasury), Ben Bernanke (chairman of the Federal Reserve Board), and Timothy Geithner (President of the New York Fed) – decided to let it go bankrupt.   Creditors, realizing no major bank is safe if our leaders might now let them fail, pulled cash from major financial institutions and bought relatively safe US Treasuries and UK Gilts.

Today Lehman’s senior debt trades at a mere 10 cents on the dollar, suggesting its $600 billion in assets were a mirage.  This outcome is even more startling when compared to senior debt at Kazakhstan’s defaulting large banks, where management is now accused of serious malfeasance, yet that debt trades at 20 cents on the dollar – twice the price of Lehman’s debt. 

At the G20 meeting of finance ministers last week, political leaders united behind two key steps which they claim will “prevent another Lehman”: tighter controls on the pay of executives and more capital for banks.  France and Germany blame the crisis on lax regulation in Anglo-Saxon markets and excessive pay packets that encourage irresponsible risk taking.  The British and Americans counter that European banks have too much debt (i.e., in the jargon, are “overly leveraged”), and need to raise more capital.  The final communiqué proposes to do both, and we will hear more of the same at the upcoming G20 heads of government summit in Pittsburgh.  But, in reality, both sides want only minor adjustments that cannot solve the real problems posed by our financial system.

Tim Geithner, now US Treasury Secretary, is pushing for higher capital requirements for banks, i.e., they need to have more shareholder funds to protect against future losses.  But he surely knows that two weeks prior to its bankruptcy, Lehman’s management reported they were well-capitalized, with a tier one capital ratio of 11% — roughly twice what the United States currently considers is needed for a well-capitalized bank, and much higher than the American side is proposing in private conversations.

Christine Lagarde, France’s Finance Minister, and Angela Merkel, President of Germany, helped convince the G20 that bank compensation policies need to be amended to encourage long term incentives.  They want compensation packages to be limited and bonuses to be locked up, so we can be sure employees’ incentives are consistent with the long term survival of their banks.

President Merkel and Minister Lagarde need to look no further than Lehman for a model of how to introduce a good policy to align incentives.  The top management and many employees in the company were largely compensated in shares of the company which vested over many years, so when Lehman Brothers went down, it brought crashing down the lives and finances of its 20,000 employees.  Dick Fuld, the highly compensated head of Lehman, lost many million dollars – and presumably a large part of his total wealth.  Apart from criminal penalties (of the kind not seen for banking in a century), can we think of a better way of aligning incentives with the outcomes for a bank?

The real problem with our financial system is that our economic and political system work together to encourage excessive risk, and this risk in turn leads to cycles of prosperity and collapse.  In 1998, a much smaller Lehman Brothers was placed in financial peril by the aftermath of the Asian financial crisis and failure of Long Term Capital Management, a major hedge fund.  The Federal Reserve responded by lowering interest rates and other central banks followed suit.   This reduced the cost of obtaining funds, effectively bailing out Lehman and other institutions in trouble.

As markets have grown to recognize how quick the Federal Reserve is to bail out institutions (and executives) in trouble, they naturally respond.  In the 1990s, people talked about the “Greenspan Put” a term which derisively suggests that it is always safe to invest in risky assets, because the Federal Reserve is ready to bail out investors (a put is effectively a promise to buy an asset at a fixed price if you are unable to sell it to someone else at a higher price – this is a way to lock-in profits or limit losses on investments).  However, in months following the collapse of Lehman, we learned that the “Bernanke Put” is even more valuable since Chairman Bernanke, alongside the Bank of England, the European Central Bank, and central banks in much of the rest of the world, is prepared to take drastic measures to prevent asset prices from falling when there are risks of global collapse.

This policy of responding to the aftermath of bubbles, rather than addressing them before they get going, through tighter regulation, has become the mantra of most central banks.  It is usually combined with fiscal policy stimulus and other measures to support the economy.  Each time banks fail, by bailing the system out again, we teach our finance sector a lesson:  you can safely take too much risk because, when you lose, the taxpayer will pick up the bill.  We also send a simple message to creditors:  it is safe to lend to Goldman Sachs, or Barclays Bank, because taxpayers and our nations’ savers are standing by to cover your losses.  Rational bank executives and creditors respond as any person would: creditors lend to banks at low interest rates, and our banks gamble heavily hoping to make large profits.  Such a system is destined to fail, but the party can run for a long time.

While Ben Bernanke has done a wonderful job of preventing financial meltdown, his calls in 2002-2003 for very low interest rates, without fixing our financial system, contributed to the credit expansion that led us into the current mess.  In the United Kingdom, the Conservatives plan to transfer regulatory powers to the Bank of England, despite the fact that, like the Federal Reserve, the Bank of England has been a key component of our ever growing cycles of credit expansion and bust.

The “collapse or rescue” decision forced by Lehman’s failure is a symptom of a much larger systemic problem.  We need leaders, both in the financial world and in public service who recognize that our financial sector too often causes social harm.  There is no doubt that it also provides valuable services that are vital to the well-being of our pensioners and savers, and help manage and mitigate risk for our corporations.  Yet too often these activities cause losses, which, either directly or indirectly, become a burden on the rest of society. 

The pre-crisis activities and portfolios of Barclays, Goldman Sachs, and other “survivors” of this crisis were only slightly different from Lehman Brothers or Bear Stearns, which failed.  The “good” banks also securitized subprime assets, helped build the intricate web of IOUs between banks and insurance companies, and leveraged their balance sheets to enormous levels.  The winners were not better, they were just smart enough to make sure someone else held the bad assets when the music stopped, and they were powerful enough to win generous bailout packages from their governments. 

The danger we face is that, by bailing out these institutions and rewarding failed managers with new powerful positions, we have now created a much more dangerous financial system.  The politically well-connected, knowing they will most likely do fine in the next crisis, is now highly incentivized to take even greater risk. 

Once we admit this profound problem in our system, we can begin to think of the radical measures needed to solve it.  There is no doubt these solutions will include much greater capital requirements, so that bank shareholders know that they face substantial losses if their ventures fail. 

But, we also need to ensure that our regulators are not captured by the banks that they are meant to oversee.  This means we need to put checks on financial donations to political parties, and we need to buttress our regulators with more intellectual firepower and financial resources, along with rules that ensure independence, in order to be sure they can act in the interests of the broader population.

We also need to close the revolving door, through which politicians and regulators leave office to earn their nest eggs in finance, and “financial experts” move directly from failing banks to designing bailout packages.  The conflicts of interest are abundant and most dangerous.

Last week the UK’s chief financial regulator, Adair Turner, faced heavy criticism from the City, Chancellor Darling, Boris Johnson, and editorials in the Financial Times and Wall Street Journal.  His main offense was daring to raise the issue of whether parts of our financial system have become socially dysfunctional, in an interview with Prospect Magazine.  He called for greater capital requirements at banks, and he pondered how it would be possible for regulators to preserve the valuable parts of our financial system, while ensuring that regulation limited the harmful parts.  These are eminently sensible questions which anyone with a public spirit should understand are critical policy issues today.    

Sadly, these public rebukes to Lord Turner are a further indication that very few of our leaders are prepared to even discuss the real problem, let alone seek a sufficient solution.  Smart people and well-organized governments can, as in the past, behave like donkeys.

By Peter Boone and Simon Johnson 

An edited and shorter version of this post appeared today in the Sunday Times (of London).

138 responses to “Economic Donkeys

  1. A small quibble, but Angela Merkel is not President of Germany but Chancellor (Prime Minister, head of government). The President of Germany is head of state and largely a ceremonial post.

  2. This is an excellent post.

    I think it is somewhat dangerous just to say that banks need “greater” capital requirements, as opposed to say, capital requirements that “actually reflect what they are holding.”

    It is not just that parts of our financial system have become socially dysfunctional. It is also our government. Although I’m not sure where one ends and the other begins.

  3. andrew clayton

    It´s about “doing the right thing”. It seems like we have forgotten what this is or what this means.

  4. Beside greater capital requirements I like the idea of the Dutch economist Paul de Grauwe brought forward in the Financial Times Germany:

    Most bailouts happended through government guaranties on bank’s liabilities. Banks must pay a percentage for these guaranties. Now “the good times are rolling again” and banks want to free themselves of government meddling.

    Government should not allow that. Because essentially banks are converting an explicit guaranty with associated costs into an implicit guaranty for free. Instead they should continue to pay an insurance premium as a percentage of liabilities, which would increase to make up for the risk “too big too fail”.

    But of course that won’t happen. Personally I’m really astonished how fast society went from pitchfork to ignorance in regard to “banksters”.

  5. You are smart people, but your outward behaviour resembles that of donkeys too (I respectfully submit). We have another article in which we hear “they did bad things and they’re going to keep doing bad things and we need to do something about it. How? Specifically? We are not lions, we are sheep, led by wolves. The leaders are doing what is profitable for themselves by using “us.”

    We need to bring the us and the them a lot closer together. Angelo Mozilo used to justify his 100’s of millions by saying that he has a large family. The “leaders” don’t want to think of the rabble as their family; only as drones they can use to enrich themselves. We have a case of a too-successful species. I think we need a ceiling on financial success, as well as a floor.

    The flaw with Capitalism is that it creates its own positive feedback loop, snowballing to the point where the accumulation of wealth and power hurts people — eventually even those at the top of the food chain. Perhaps this means global governance? The UN has no teeth and is notoriously byzantine and corrupt. IMF and World bank are seen as grotesque resource-sucking machines. Who is to choose the people that would run such an enterprise? Those who participated in in the privatisations that we now see as Mafia Gone Wild?

    I think we need to think about this globally because the corporates have gone global and will use geographic arbitrage. If we can somehow create a level playing field world-wide, this might have a chance. No more paying kids in the 3rd world pennies a day to achieve competitive advantage. No more hiding money in Panama. Don’t give them a place to hide. So, again, you are saying most of the right things, but… why? And what are your actual policy recommendations? We know pretty much what we need to do. How are we going to do it?

    (By the way, war stories give me the heebeejeebies. Did someone go to war college?)

  6. I’m struggling to find something to poke holes in… There are some great points here, including the value of Lehman’s senior debt. 10% capital ratios don’t do much when your assets are _that_ hollow.

    Here is one additional observation:

    As to the international bickering, it strikes me that lower capital ratios are an effective trade subsidy. As many have noted, a government backstop is an implicit subsidy for risk, which is absorbed by the public. Since banks can operate cross-nationally with great ease, this becomes an implicit trade subsidy for the banking sector (in so far as finance can be considered “trade”). Thus, the dispute over capital ratios is in many ways a trade dispute, though I doubt WTO has authority over it.

    I think we saw – very briefly – this aspect bared to the naked eye when Ireland guaranteed its bank deposits in Oct. 2008.

  7. possibly these two pieces are totally off topic but maybe they can be read as canary in the coal mine stuff as sometimes London is called the Arab capital of the world

    http://www.timesonline.co.uk/tol/news/politics/article6831972.ece
    http://www.timesonline.co.uk/tol/news/politics/article6832361.ece

    those in possession of commodities be it oil or low-wage+skilled-man-power seem to be in command
    – to me at least it seems to be more and more the most likely explanation for governments’ behaviour towards banks

    – as those countries tend to have a lot of cash it seems probable to me that the banks are very much in with them and thus can pull the foreign scare threat card any time they like – that Britain as the smaller country probably makes it very vulnerable to this kind of pressure

    But if the pressure imagined by me exists than American government via messages from the probably heavily entangled banks should feel it almost as much as the British

    This morning I read this Atlantic piece on the Bank of America/Merrill-Lynch merger http://www.theatlantic.com/doc/200909/bank-of-america

    what I do not understand is why a big boss of BoA flinches at the threat of job loss just like an assembly-line-worker would notwithstanding that the latters whole livelihood is at stake whereupon I assume a BigBoss mustn’t cut down on eating butter or whatever food stands for luxury in the US.
    In case somebody knows: What makes job loss such a terrible threat to a CEO that he can’t shrug it off?

  8. “Wall Street Goes to Washington”

    now grows together what belongs together ;-(
    (jetzt wächst zusammen, was zusammen gehört http://www.spd-oestrich-winkel.de/Bilder/historie%20(18).jpg)

    http://www.washingtonpost.com/wp-dyn/content/article/2009/09/12/AR2009091202932.html?hpid=topnews

  9. Professor Simon made excellent points here and made them very lucidly. I especially like the comparison between Lehman Brothers and Kazakhstan. Oftentimes America waves its finger at other countries for some of the same offenses and blunders we commit in the here in the U.S.

    The point about the 11% capital ratio at Lehman before they went bankrupt is also excellent. If we don’t change that requirement, or change what the banks include as “capital” or “assets”, how can we NOT expect the same problems to crop up again, slowly but surely? It will happen folks.

    We already see Goldman Sachs behaving in some ways like the party hasn’t stopped. It’s like the leaders of Goldman Sachs are calling out to other investment bankers now saying “Come on boys!!! One more round!!! Don’t let me drink you under the table NOW!!!! This bartender Uncle Sam says our drinks go on Joe Taxpayer’s tab!!!”

    And what will happen at the G20 in Pittsburgh? I think we can write the script for that right now can’t we?? A bunch of important people with nice clothes shake hands and sit around a big conference table, with their little glasses of ice water while the cameras flash. Very very miniscule amount of progress is made on financial requirements and financial regulations, and almost nothing in the way of defining what can be considered “capital” or an “asset” on banks’ balance sheets. And EVERYBODY (America, Germany, England, France, etc… ) walks out at the end of G20 with a big smile and says “VICTORY!!!!!!”.

    And then we go to cute little statements like “Oh sure, we didn’t get everything we wanted, but considering all the players involved it was a miracle and a real boon to international cooperation!!!!” And more smiles. Why, there’ll be so much smiling and happiness after the G20 in Pittsburgh, some observers might get confused and think it was their own birthday celebration.

    But what will be done? What laws will be written to take away the underlying and systemic risks??? VERY FEW.

  10. These were not horrible experiences, they were wonderful ones. And everything is on track and going swimmingly well.

    Since all of the world’s wealth was not transferred to the financial oligarchs the first time around, it is only natural that they will need repeat what they have done as often as necessary to accomplish this.

    You well-intentioned readers seem to be under the mistaken impression that you should benefit from your contributions that you make daily. Your gods, the financial oligarchs, want you to serve them only. Please do as they say and sacrifice as necessary for them.

  11. My guess, in part based on a Frontline(PBS.org)piece, is that Ken Lewis, who is very working class and son of a single mom as I recall, has not forgotten his roots.

  12. “VERY FEW.”

    ever the unrepentant optimist you are …

    very few seems to say more than one while I expect a lot of artistics involving veils and creative wording but nothing else

  13. “These were not horrible experiences”

    as I learned from Rhett Butler in the autmn of 1953 when I first saw GWTW
    “you can make as much money from a society going down as from one establishing itself” (my paraphrasing)

    so when “they” bet on the party going on it must be because they bet on somebody’s decline

    I wish I knew why it was decided that Opel is going to the Russians and Vauxhall stays American – no I am not going off topic – these things all start to look more and more connected

  14. Your article tops off a weekend of retrospective amazement at how little progress has taken place over the past year. The NYT had a good overview yesterday. Huffington Post drew my attention to a piece in the Washington Post http://www.washingtonpost.com/wp-dyn/content/article/2009/09/12/AR2009091202932.html – So many intimate liaisons between Wall Street and Washington – all on the record – and that’s in addition to any secret affairs!

    As described so well in your article these relationships underlie and reinforce the policies supporting bubbles and “cycles of prosperity and collapse”.

    Your article leads me to think about the nature of the fear that must be driving the policy makers. Hobbes described fear as a primal driving force – but now it is not just materially based. The collective of public officials in this tale who are not speaking out and taking risks (as did Lord Turner) must be terrified of losing what I call ‘the mother bubble’ that is, the “ideological bubble” that holds their world together. Naturally, those in a position to materially benefit are simply delighted to re-enforce and take advantage of such fear. In light of all this, it is increasingly difficult to see how the fear of policy makers is driven or connected to well-intentioned effort to protect democratic society. What is becoming ever more obvious with the “cycles of prosperity and collapse” is that democracy itself is more and more threatened with each new wave of defensive measures to protect this ideological bubble.

    Maybe almost everyone who enters public service can not help but be seduced by the Wall Street ‘romancers’? It makes the policy makers who refuse to question and challenge the inevitability of bubbles look like victims in a very abusive relationship (albeit maybe with some hope of material security) that they can not help but “love” – the sort where the source of fear has to be dragged out of the sub-conscious – collectively in this case!

    p.s. This weekend was punctuated with other thought about democracy and freedom since I got to see the Last Night at the Proms for the first time (in my life) – ie. the HD live version… I learned from one of the commentators that Handel’s “Rule Britannia” composed in 1745 was a celebration of peace and rule of the people – the rise of democracy in its rudimentary form. It was an ironic experience (yes – and a little bit emotional too!) to hear so many people unite in this song – while I was also thinking about the weekend’s review of the past year in finance and politics.
    So if this reaction to your article this morning is too ‘emotional’ – I’ll blame it on “the Proms”!

  15. whess
    but I am told that all these guys are worth their huge incomes because they are not like us … that they are above our Ängste=angsts, possessed of superior analytical abilities and real leadership etc.

    I know that no human being can ever be anything but human but shouldn’t they at least pretend to be what they claim they are?

    Military history is full of guys who showed extreme bravery because they believed honour demanded it therefore no matter how correct that “analysis” of Ken Lewis’ childhood woes was I refuse to accept such explanations for people who are not shy to claim via their salaries superhuman abilities.

    on top there are lots of advisers swirling around – there must be another than a “Freudian” reason

  16. Allowing the markets to work by allowing the banks and investment houses to fail seems part of the solution since backing their overvalued assets merely encourages bad bets. Proposed regulatory reform seems inadequate at this point because even Lehman prior to its collapse met the new proposals.

    However, when Lehman went down, Wall Street panicked. So it seems we have built a house of cards that is so risk-laden that the collapse of one card risks bringing the whole structure down.

    So everyone plays nice. The regulators and the bankers go to the same restaurants. A lot of the players have vested interests in the current system, as was recently reported in light of the Madoff scandel that the SEC regulators all wanted to get jobs with hedge funds and financial houses. The cyclical bubbles tend to hurt the already downtrodden more than the affluent.

    Simon implies that more radical change is needed that better aligns assets with their real world value (a point the Krugman makes in his critique of macroeconomics in the NYTimes), interest rates be allowed to respond to demands for credit, and that risk remain with the risk-takers.

  17. If Lehman’s “$600 billion in assets were a mirage”, shouldn’t some accounting firm be getting sued into nonexistence right now (a la Arthur Andersen)?

    All capital requirements are meaningless if you can just make up numbers for your balance sheet.

  18. “Hobbes described fear as a primal driving force”

    Goethe calls fear AND hope the biggest enemies of mankind (in Faust II)
    – hoping that the “crisis” is over seems to confirm he is right in saying that

  19. Legally making up numbers is the best thing that ever happened to accounting. Before, there were all these cumbersome rules about what you could write down.

  20. Personally, I hope the crisis never ends, but I fear it might.

  21. So it seems [emphasis added] we have built a house of cards that is so risk-laden that the collapse of one card risks bringing the whole structure down.

    Some myths are just too profitable to try to pop them.

  22. Allowing the markets to work by allowing the banks and investment houses to fail…

    Free markets work best when monopolists or oligopolists are propped up with unlimited government support.

  23. do not forget the support for real-goods-markets in the form of the military securing shipping lanes, air ports etc.

    ooops, government is always evil and military is always blood-thirsty and stupid (except when they happen to be convenient and obedient)

  24. Well, us corvids will be well fed, at least.

    Prof. Johnson, there’s going to be wars. At this point, I don’t see how the real conflicts between powerful global factions and between rich and poor are going to be resolved, otherwise. Not if no-one is willing to engage them through policy and diplomacy.

  25. I am all for the military preventing people from messing with what’s rightfully the profit of the financiers.

  26. There is only one powerful global faction. The poor are powerless so they don’t count.

  27. What makes you think they are human?

  28. It’s even better than a trade subsidy.

    Keeping rates low, subsidizing risk, almost forces
    them to blow bubbles in other countries’ economies.
    Take the money, pull out the rug, and voila, clean
    them out. Works every time.

  29. Some of the poor believe they have a weapon and it is outbreeding the others
    whoever are the mighty who brainwash them into believing that those will one day realize that they sit in a tight spot and have to use that weapon
    that’s the best nightmare I have on offer currently …

  30. they still sh..t, don’t they?

  31. Lavrenti Beria

    “The politically well-connected, knowing they will most likely do fine in the next crisis, is now highly incentivized to take even greater risk.”

    For this, the above, to be the outcome both after what we have been through and what we still face is tantamount to the ruling clique’s launching of a war of aggression on the people. But there is no surprize here. And it is not merely a question of there being a passive difference between disperate elements in a system who at the same time happen to be pursuing different ends, it is rather the vision of our entire political leadership that the people are a resource to be plundered, exploited. To them we are a vast pool of wealth there solely for their personal enrichment, rubes as it were, or “the colonized”, even better.

    Even to speak of a future repleate with reform when after having caused what has to be the greatest crisis in 80 years, its progenitors are on their feet for round two is, at best, imbecilic, and at worst, collusionary. In a political environment where ownership of the very persons charged with protecting its integrity is in the hands of special interest paymasters, one no longer has democracy but a tyranny of warlords. Would you have tried to reform Willie Sutton?

    All that remains to the people of the United States are mass demonstrations and economy stopping strikes. And anyone handicapped enough to believe that the recent brownshirt rage over healthcare and government spending has the endemic corruption at the core of the system as its object needs to change emetics and quickly. We’ve overfulfilled our fascist quota for the year, thank you.

  32. If we were organized, united and gutsy enough, we might not even need to come to violence. We can now rock the system in all legality. All we have to do is organize some kind of general bank run: take money out of our accounts and stop putting 401k money into stocks until the government breaks up large banks into small entities.

    I was also thinking about guerrilla action that would not involve violence. Some years ago hackers undertook a concerted action against the “Church of Scientology”. If some hackers now decided to target financial institutions such as Goldman Sachs in order to severely disrupt their businesses, they sure would earn our eternal gratitude.

    It is true that the poor are powerless, as Yakkis says, but only because we are disorganized and divided. Some poor are even brainwashed into thinking that they are middle-class.

  33. all through history there have been hitches when the little ones tried to take things in hand
    for example: if all the banks crashed at once would government be able to pay out?
    I somehow guess that it would be us who’d pay the bill

    and most of all as you can read in this blog again and again the “little ones” like to take other “little ones” to task because they acted not quite as ethical as decent “little ones” should.

    Even if there were legitimate reasons for reprimand it would be much better for all of us, if we kept the to-task-taking restricted to the real movers and shakers – after all we can trust the big ones to go after us so why help them with the job via going at eachothers throats (yes I believe that classes exist and no I am not a socialist but only because I can’t forget facts)

    one more thing:
    over here banks are advertising all over the place to get money for which they are willing to pay high interest for a certain amount of time – here is one 1,5 % normal rate 2,5 % teaser rate but I remember also having seen 3 and 4 % in the past months – is this a scheme to get money into their coffers cheaper? and what for? to use it as gambling chips? – all the time before the crisis they were not that generous with interest as compared to public rates – of course if I were to park cash there it would be government guaranteed … what a swell deal being a banker is …

  34. D. Christopher Leonard

    Jared Diamond (in Collapse) noted that societies in which elites can shield themselves from the consequences of the crises they cause typically fail badly. He also noted that elites have short term interests. Both comments aptly describe our current situation. Disproportionate executive compensation signaled (and continues to signal) that any mechanism for short-term gain however risky it might be (cloaked in the fairy tale of efficient markets theory) will be pursued. It is also clear that financial elites and their political epigones will survive not only the current crisis but also any attempt at regulatory reform.
    At least in the wake of the collapse of 1929-32, financial elites were divided (many commercial banks opposed to Morgan and international financiers such as Warburgs) and this appears to have made possible reforms. Similarly, many industrial corporations wanted managed competition rather than a free for all. Currently (with perhaps the exception of Frank in the house) the Senate is effectively in the hands of the financial community (e.g. Dodds, Schummer, Lieberman)

  35. Both the asset and liability sides of the balances sheet that were mis-calculated.
    This is why simple non-risk sensitive ratios like leverage ratios should remain as part of the regulatory capital framework. I would also make them proportional to the asset size, something like making the min capital requirement is 4% of for the first $100 Bil of total assets, 6% of total assets from $100 Bil to $500 Bil and 10% of assets above $500 Bil.
    The more aggressive the company is with valuing its assets, the more capital it will need.

  36. Those 3 and 4% rates make me think that European banks are desperate. We know they are in trouble, and many of them are too big even for their governments to bail out. In order to earn decent returns with that money, they’ll have to take even greater risks.

    The idea of banding all the governments together to bail them out is good in theory, but will save maybe just one or two of them. The political repercussions will also be more serious than in the U.S. both for bailing out some depositors and for not bailing out others. The ECB might have to step in like the fed did.

  37. I fear the end of this will have more in common with the fall of Rome than the rise of fascism…

  38. Instead of relying on the regulators of the country when a bank is domiciled, any country can use its own regulation to enforce capital requirements on operations of banks on its territory.
    All it takes is to force banks set up local operating subsidiaries instead of operating as branches of subsidiaries located in Great Cayman and similar tax havens.
    But do the regulators really want to go after the tax havens??

  39. Uncle Billy Cuncator: “The flaw with Capitalism is that it creates its own positive feedback loop, snowballing to the point where the accumulation of wealth and power hurts people — eventually even those at the top of the food chain. ”

    It’s not like we haven’t known that since the era of the Robber Barons. But somehow we don’t seem to have learned what to do about that.

  40. All one needs to do is stop and think about the ownership of the Federal Reserve Bank and the membership of the Federal Open Market Committee.
    Sure the Fed is independent of the politicians, at least in theory. But by its very design it is partially owned and thus heavily influenced by the biggest banks. One should also keep in mind the heavy influence of the Fed on academic and think-tank economists.

  41. PS. Regulatory capital ratios should involve only tangible equity, without goodwill and intangibles

  42. I still favor wild-guessing as the method of valuing assets.

  43. Some have, but they lacked the money, aptitude, social skills, discipline, and PR machine to get it done. Maybe some very intelligent people can figure out how to use the greed and fear of others to reduce the world’s economies to smoking ruins, at which point things can be organized in such a way that they stick?

  44. Echoes of american banks pushing out the high rates on CD’s as they try to keep themselves afloat.

  45. “at which point things can be organized in such a way that they stick?”

    that is the biggest illusion of them all and the desire for that is the gap which lets in the authoritarian/dictator/populist. Any organization/regulation/rule besides that the apple falls to the ground is by nature outdated almost at ratification because life loves to create Black Swans all over the place, not just big ones but mini ones without end. That’s why rules have to be adjusted from time to time and no matter how sound the basic design was by that time you will have factions who want to get side gains from the adjustments. So instead of the sober guys and girls who one created the basic rule the adjusters tend to be bunches of hysteric people who see a unique occasion to prove how smart they are by creating the ultimate solution that will STICK.

  46. …or it could be a bad mix of both.
    Or we could work on how to ‘get a grip’ on those emotionally driven bubbles…

  47. “He also noted that elites have short term interests”

    He doesn’t seem to be referring to the elite of the elites, then. Was Rothschild thinking short term when he dispatched each son to a different country. We have some dynasties and custodians of the fortunes of dynasties that manage to plough through history.

  48. A former Bank of Canada governor, David Dodge said the global recession and economic downturn will be longer than forecast and Capitalism will emerge changed. It will be interesting to learn what he meant by this.

    I am looking forward to the philospher Michael Sandel’s lecture series to begin this fall and aired on PBS. I find his argument persuasive. That free market fundamentalism is flawed and has occupied too central a place in governing political, social and economic paradigms. I take him to mean is that other values need to occupy a central place in our governing paradigms.

    Our time and place in history is different from all others in that literacy and numeracy are no longer exclusive to ruling elites. And we have this wonderful new tool for communication called the internet. I count myself among those who feel we need to revisit the paradigms which govern our world.

    It seems MIT where SJ now teaches is developing course work on “social entrepreneurship”. This is a good start.

    I saw a program on Frontline World this weekend. It is incredibly sad. The Taliban have taken their war into Pakistani cities. The Americans did not want another Vietnam in Afghanistan. So it appears the Pakistanis have shouldered this burden of fighting a guerilla war they did not start and its consequences. The Taliban are now recruiting child soldiers in the slums of Karachi. This is all very alarming and depressing. Utter madness born out of desparation.

  49. …but it wasn’t profitable for Lord Turner.

  50. I think Nemo is right. The use of even a crude measure (like leverage ratios) depends on some very complicated accounting issues being resolved first.

  51. Although going by my gut I would vote for their having long term interests but I’m beginning to doubt that “they” are into empire-building – maybe those of you with children can check your own feelings …
    it seems to me that when the dynasties of old placed their children all over the world (tu felix Austria nube) there was a wish for eternal life, for outwitting death involved – you had to have somebody to have mess read for your soul and probably a lot of other things – as we have created the mobile flexible with-it cool type as an ideal I wonder as he/she see their children still as an entrance ticket to eternal life

  52. I know where you are coming from, Silke, and appreciate it greatly, but there are those that profit from boom and bust, and encourage it. I think we can find an alternative for stability and human progress that doesn’t require initial fascism and death.

  53. “So it appears the Pakistanis have shouldered this burden of fighting a guerilla war they did not start”

    why oh why do I seem to remember that the Security Service of Pakistan (SIS?) liked the idea of establishing the Taliban very very very much and the Taliban gave a safe haven to Al Qaida?
    but of course that part of the story is obviously Western propaganda ;-(

  54. (btw I used the term “positive feedback loop” while reflecting on the fact that you are only one of about three people who have used this expression correctly on the econ blogs in the last years. A couple of engineers have corrected the use of “negative feedback loop” when inappropriate; glad to see proper usage getting traction)

  55. You make your point well in observing the relationship between super salaries and superhuman abilities. But then, wasn’t this the story behind the Wizard of Oz?

    The question is the ability to have empathy and who one identifies with. I suspect Ken Lewis never saw himself as one of the club.

    A lot of business leaders are extremely narcissistic and this results in a lack of empathy. Yes, they can make hard choices but they also suffer some fatal blindness. I suggest reading Jim Collins’s “Good to Great.” The business leaders he profiles there are not narcissistic.

    As to military leaders, being more of a literary type, I suggest considering Henry V who walked among his men the night before th battle of Agincourt. Although Washington kept his distance, he kept himself available and was well aware of the conditions of his men. The same was true of Patton. These leaders took care of their men, but they also demanded the most of them.

  56. Which myth are you refering to?

  57. all I am warning against is the belief that there are definite long-term, perfect, ideal solutions for anything

    to date I have to meet somebody who has all the electric sockets in his home in the right place and that is totally independent from how much planning went into the decision …

  58. “Clearly General Haig is about to make yet another gargantuan attempt to move his drinks cabinet six inches closer to Berlin…”(Blackadder)

    More on Donkey… ooops Field Marshall Haig:

  59. Lavrenti Beria

    If one were to take seriously the public presentation of a maggot like Bernancke, thoughtful, hands together and touching his chin almost prayerfully, one might get the impression that a pedestal had been reserved for him at St. Pats while his cause was under consideration at the Vatican. But all one really needs know of this poseur is his role as author of the present crisis, his shenanigans late last year, particularly during the BOA episode, and his abject refusal to account for monies doled out at his instruction since. In a society where a declaration of war required the approval of a parliamentary body and where torture was seen by its leadership as unspeakably odious, a reptile like Bernancke would have been sent packing ages ago. But in Washington, where the moral attainment of a whorehouse madame would be considered exemplary, we have the Bush and Obama Administrations, the United States Congress, and Bernancke’s reappointment. And I would heartily agree with you about the foundations and academia. They are part and parcel of the same structural rot. I mean what can you say on behalf of an intellectual culture that has brought us much of what we’ve had in the last 30 or 40 years, Larry Summers, for example. I mean really.

  60. “I mean what can you say on behalf of an intellectual culture that has brought us much of what we’ve had in the last 30 or 40 years, Larry Summers, for example. I mean really.”

    Same people who did not see anything wrong with the system that led to the worst economic downturn in decades are now arguing for caution in implementing any changes that might reign in the big banks.

  61. When you say “goodwill and intangibles” is this part of accounting language in regards to items that are permitted as assets at the banks? Back in 2008, IIRC, wasn’t there a change in rules that permitted insured banks to take “equities” as collateral — meaning they are holding even more nothing than we think? This could be common knowledge.. I just don’t recall the specifics of what’s permitted or not.

  62. Simon, an excellent piece once again. It seems that adequate, forth-right, non-corrupt financial regulation is at the core of this issue. Not only the authority to regulate (i.e. legislation), but the “boots-on-the-ground” regulation. The question is how does produce a regulator function independent of both politics and financial corruption? Now this next suggestion I’m sure will receive many boos and hisses. U.S. Supreme Court justices are appointed for life. Although this does not remove the politics completely, the “for-life” appointment is(was) intended to eliminate detrimental influences to the decision making of the court. It seems that the health of our economic system, which is greatly influenced by the financial system, is at least as important as US Supreme Court decisions. So, although the Supreme Court may be an imperfect example I don’t have another to exemplify an arrangement that would give financial regulators the incentive to function “above” politics and corruption.

  63. The War in Afghanistan, which began on October 7, 2001 as the U.S. military operation Operation Enduring Freedom, was launched by the United States with the United Kingdom in response to the September 11 attacks.

    http://en.wikipedia.org/wiki/War_in_Afghanistan_%282001%E2%80%93present%29

  64. The War in Afghanistan, which began on October 7, 2001 as the U.S. military operation Operation Enduring Freedom, was launched by the United States with the United Kingdom in response to the September 11 attacks.

    http://en.wikipedia.org/wiki/War_in_Afghanistan_%282001%E2%80%93present%29

  65. Tried to post this on another blog, but for some reason the system didn’t allow it through. In any case, it’s probably relevant enough to post here as a controlled screed. Are the people below Donkeys?

    How does “Ed” Truman become “Ted” Truman?

    Here’s a paper from back in 2004, written by Truman, Roubini, Setser, Cline and Gelpern that appears to offer good suggestions on how to effect orderly debt restructuring. Maybe this can give us some clues on how to proceed, or not to proceed? After all, we are looking at some major debt restructuring, are we not?

    Article 42505903 at scientific commons.

    Screed-like musings: Roubini’s become huge since then, Setser promoted to direct govt. service, Truman, while not a household name, a big hitter in the shadows. Who is “Bill Cline”? Is he a fellow that was once involved with the Institute of International Finance? What a collection of characters that thing is… 350 of the most powerful institutions in the world, run by Josef Ackermann (St. Gallens, Deutsche Bank), and Bill Rhodes (Citigroup and what looks like every high power networking group in the world. A longshot here, but is he a descendant of Cecil Rhodes? He attended Secret-Globalist-Cabal-High which indicates he might have come from some serious money. There are plenty of “Williams” in the Cecil/Frank Rhodes lineup. Interesting, the german connection at IIF — Ackermann with Deutsche Bank, and Rhodes the family name which originates for the most part in Germany. We know what Roubini and Setser and Truman are up to publicly, but what is Cline doing these days?

    Anna Gelpern comes to us from Harvard Law and that hotbed of Fabian wackiness, LSE. She’s currently at Rutgers. And is she cute! She’s a friend of the Peterson Institute, like Simon “The Implacable” Johnson and EdTed Truman.

    (Ackermann went to a school long considered a center of study for social progress as well. One of the big voices in the blogosphere now — or rockstar as Felix Salmon described him — James Kwak is studying law now as well. Are these folks going to be laying the legal foundation for Phase II of our new world?)

  66. It looks like “quality” is beating quantity at every turn.

  67. That came off as more than a little disrespectful. There are donkeys, and then there are braying asses.

  68. I agree.

    The accounting firms are inept, and this situation was made much worse by unbelievable examples of the greater fool theory.

    No one held a gun to investors heads and told them to buy these worthless assets. When you are betting serious money you should use your own judgment not tout sheets like S&P or Moody’s.

  69. Is Bill Rhodes dad this Ed?

    http://www.cies.org/stories/s_erhodes.htm

    Which brings up a stupid question: how many people named Rhodes are Fulbright Scholar and vice versa?

    Bill Rhodes goes way back with the Rockefeller family. Did his dad too?

    If it’s the same Ed, Ed wrote “Global Politics in a Changing World,” with a fellow named Richard Mansbach who currently teaches PoliSci at Iowa State. Mansbach is a VERY good friend of the Fulbright machine, and “has trained diplomats from throughout the world at Austria’s Diplomatic Academy through a Fulbright Fellowship – his third such award. “I can probably do more speaking engagements but I have obligations with my Fulbright Fellowship in Vienna.”

    http://www.las.iastate.edu/150/mansbach.shtml

    Edward was widely rumored to have been a spook. He wrote a book with a fellow who trains them. His son headed one of the largest financials in the world, and seems to be more connected than a neural network.

    So… who was Ed’s dad? Class?

  70. Actually, we are following the Russian example in the 1990s–a sort of laboratory for how a transfer of public goods to private hands can be wildly successful.

  71. The myth of too big to fail: that it would lead to collapse.

  72. Supreme Court Justices are supremely political. When have you seen Thomas, Scalia, Roberts, … ever consider an issue from a viewpoint other than their party?

  73. only they have all that Siberian gas to pay for the extravaganza for a while …

  74. You might appreciate the symmetry of Larry Summers being the oligarchs’ advisor on how to do this.

  75. It astounds me that our socalled leaders are so week and cowardly to allow a bunch of swindling thieves, PONZI scheme operators, and criminals to threaten the financial security of the US, the global financial system, and cause irreparable harm to the American people.

    “The real problem with our financial system is that our economic and political system work together to encourage excessive risk, and this risk in turn leads to cycles of prosperity and collapse.”

    I don’t understand how our leaders are so enthralled by people who are such grotesque FAILURES and wanton criminals?

    Is it simply money, the capture issue. Is it the false imaginings these monsters truly being allknowing exceptional masters of the Universe?

    What on earth could possibly compel our leaders to bailout FAILED institutions whose FAILED management bruted and pimped FAILED, (not to mention criminal PONZI scheme) products? I’m mystified. If it is money alone, and all the indications lead one to believe it is, – then the solution is obvious and critical. LIMIT the AMOUNT of MONEY anyone, or any LOBBY, or any OLIGARCH, or CARTEL, or PONZI scheme shade can contribut to ANY and EVERY politicial, or POLITICAL PARTY!!!

    Our socalled leaders have betrayed the American people! Thefew have way to much power and sway over themany. Which leads then to the question of what exactly is America. Are we an Oligach, and Kleptocracy? What the hell are we. One thing I am certain of, based on the dastardly deeds of our financial titans and the government officials they own and control – is that America is no longer a democracy. The people have absolutely NO say, and NO representation in the conduct of our government. If they did, then Goldman Sachs, CITI, BofA, Morgan Stanley, et al would no longer exist, and thier FAILED, CRIMINAL, PONZI SCHEME operators, would be in jail or (if there was any real justice) worse, and all the FAILED products and socalled innovative products would be banned, or harshly regulated and controlled.

    Instead we have a situation, where worst, most criminal, most heartless, most greedy, most unAmerican operators are given carte blanc from a captured government at the taxpayers expense, to the extremely deleterious impact on the greater society, and the other 99.5% of the population who are not predator class.

    One last point, relating to the lion metaphor which my erudite brother Nick Foresta articulated. In the wild, male lions have basically three main functions in the evolution of the pride. They mate, they sleep, and they take care of the hyena’s or any threat to the pride. Our financial lions have perverted this evolutionary necessity, – FAILING to care of or eliminate hyena’s or any threat to the pride.

    “This policy of responding to the aftermath of bubbles, rather than addressing them before they get going, through tighter regulation, has become the mantra of most central banks. It is usually combined with fiscal policy stimulus and other measures to support the economy. Each time banks fail, by bailing the system out again, we teach our finance sector a lesson: you can safely take too much risk because, when you lose, the taxpayer will pick up the bill. We also send a simple message to creditors: it is safe to lend to Goldman Sachs, or Barclays Bank, because taxpayers and our nations’ savers are standing by to cover your losses. Rational bank executives and creditors respond as any person would: creditors lend to banks at low interest rates, and our banks gamble heavily hoping to make large profits. Such a system is destined to fail, but the party can run for a long time.”

    Until our leaders and our financial oligarchs learn or (preferably are taught) that there is no future if the pride, – the collective society is protected and defends against marauders and wanton abuse, – what little remains of our once more perfect union or the grand experiment in democracy that defined America – is doomed!

    Heads must roll. Heads must roll!!!

  76. We’re back to Rutgers. The author of Global Politics… is this fellow:

    http://www.cgsd.rutgers.edu/CVs/rhodes.shtml

    From the Hermon school’s website, we can see that Citi’s William Rhodes has a father named Ed. So who was this Ed?

    And is the Edward at Rutgers related to William?

    btw the Rutger’s Edward Rhodes seems to have been a fan of Dr. Strangelove:

    http://www.foreignaffairs.com/articles/44683/gregory-f-treverton/power-and-madness-the-logic-of-nuclear-coercion

  77. some guy in a cube

    Oh my God, what is wrong with you people? How dense are you?

    The solution is simply to turn banks into utilities, along the lines of the old US Bell System.

    The bankers are guaranteed a modest rate-of-return (say, 4% in today’s dollars) in exchange for engaging pro-social behavior.

    What’s that you say, the bankers will lose their incentive? Let’s call that bluff: they can go get a job at Walmart.

  78. I don’t think you get it “some guy in a cube.”

    The point is not to solve the problem. That is easy and there are many beautiful solutions like the one you propose.

    This is a blog where we try to think of ways to preserve the privilege of elites in the lifestyle to which they have become accustomed.

  79. Cline is a Peterson Institute guy too:

    http://www.iie.com/publications/author_bio.cfm?author_id=44

    What was he doing between 1964 and 1969? He doesn’t seem like the kind of person that would spend 4 years on his dissertation.

  80. I don’t understand how our leaders are so enthralled by people who are such grotesque FAILURES and wanton criminals?

    That’s easy. They’re narcissists.

    By the way, every 2 and 4 years, you elect the same guys no matter what they do to you. Almost no one is even willing to consider electing someone from a third party. They’ve got ya and you’re going to keep electing the same group of republicrats until the human species dies out, or the U.S. finally collapses, whichever comes first.

  81. From Reuters today:

    http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE58926A20090910?sp=true

    “But turning the lessons of Lehman into action is proving difficult, partly because governments appear to be losing their appetite for big, controversial reforms as economies start to revive and change seems less urgent.

    The European Union and the United States, for example, plan new bodies to monitor system-wide risks. But EU leaders have insisted the new European Systemic Risk Body can make only non-binding recommendations if it spots a problem, thereby preserving national sovereignty.

    In the United States, debate still rages on the exact role of the Federal Reserve in monitoring future risks.

    “The American regulatory structure is in total disarray and what has been proposed to fix it is partial, and even then there is heavy resistance,” said Hal Scott, Nomura Professor on International Financial Systems at Harvard Law School.

    “I don’t see us coming out with any significant change to the structure. The right rules and the wrong system is what we might end up with.”

    Said an official at a major U.S. bank, “Would the new EU risk body be heeded if it said the Spanish housing market is overheated? Would a newly systemic Fed have acted sooner on an asset bubble in the United States?” There are grounds for doubt in both cases as no government wants to kill a boom, he added.”

    That’s the bottom line.

  82. Bond Girl, These are not accounting issues. They are bookkeeping issues. There is a big difference between the two. Accounting is a business strategy run subject to a double-entry bookkeeping framework of rules. That framework is 670 years old. Double-entry rules are always simple to understand. However, just the conversation in these comments tells that the bookkeeping framework is not being followed in today’s software systems.

    I know it is not being followed because in 30 years of study I have yet to meet an accountant or a software developer who could define bookkeeping’s simple debits system versus its credit language. Well intended but ignorant bookkeeping practices is the source of today’s banking nightmare. And banking will never be regulated without the bookkeeping framework of rules being followed.

    If you don’t believe me, just wait awhile and things will get progressively worse. Those of us who care to correct the mess are going to have to learn how bookkeeping — the de facto language of commercial trade for 640 years (before it was abandoned by software developers) — works.

  83. What does the Lehman Brothers professor of Financial Success at the Harvard Business School have to say about it?

  84. I guess that many people who read this site will glide their eyes over your words in a passive manner. But what you said Mr. Andrew Clayton is very deep and goes to the lowest root branches of the problem. Very few people go to church, read the Bible, or even go so far as to search their own personal conscience of what is right and what is wrong.

    Proverbs 20:17
    Bread gained by deceit is sweet to a man, But afterward his mouth will be filled with gravel.

    Proverbs 23:5
    Will you set your eyes on that which is not? For riches certainly make themselves wings; They fly away like an eagle toward heaven.

  85. Very few people go to church, read the Bible…

    But those who do seem to be brain-damaged. They always side with people who want to do wrong by others, possibly because of what they are being told in Church.

  86. Just bumped into Anna Gelpern’s old employer a few days ago. Felix Salmon had posted this where he mentioned “the godfather of sovereign bond markets”:

    http://blogs.reuters.com/felix-salmon/page/2/

    Leo works at Cleary Gottlieb Steen & Hamilton LLP and… so did Anna Gelpern (then she went to the treasury, etc).

    Prof. Gerlpern’s page has recently been updated to reflect that she’s on leave for 2009/2010. It doesn’t tell us what she’s up to though:

    http://www2.warwick.ac.uk/research/warwickcommission/about/commissioners/gelpern/

    Fascinating thing this Warwick Commission.

    http://www2.warwick.ac.uk/research/warwickcommission/about/

    (Will they get a handle on Dark Pools?)

    Oh look, another LSE alum, Avinash Persaud. And looks like he’s got the finance experience to know what he’s doing too: “He is currently Chairman of Intelligence Capital, a financial consultancy. Previously, he was managing director, State Street Corporation; global head, currency and commodity research, J. P. Morgan and Director, fixed income research, UBS.”

    Cannot. Wait. To. See. What. These. Folks. Cook up.

  87. Admittedly, I am one who was fooled and tragically “foiled again” believer stupidly, that Obama was a real agent of change, that some new paradigm would be constructed that would put the predatorclass back in the keep, and give the people the rights, freedoms, and hopes we all dreamed of and the hope we imagined existed when Obama was elected. Sadly all those hopes and dreams have been shattered, and now we, or at least I recognize that the predatorclass owns and controls the government, and that there will be no change, and no politician giving voice to the voiceless, and more alarmingly that the same fiendish criminals shades and shaitans that brought the entire global financial system to the brink of collapse are somehow, for some unknown, unknown reason highly favored, protected, and shielded by our socalled leadership.

    But know this predators, – in a world where there are no laws, there are no laws for anyone biiiiaaatches. We all play by the rules, stop at stop lights, wait in lines at the grocery store, and basically act as though the world is civilized and ordered in our daily lives because we believe there is some basic justice and fairness in the system that defines our society…. until we don’t. Then all hell breaks loose. “In a moment, in the twinkling of an eye, at the last trump: for the trumpet shall sound, and the dead shall be raised incorruptible, and we shall be CHANGED.” Any cursory examination of history will prove this point. I’m Wicca and don’t hold any faith in any single book or believe any organized religion has an merit or worth. All the worlds socalled organized institutional religions, and particularly the bastardation of christianity, judaism, and islam are drenched in ocean of innocent blood, – but the simple math should alert these socalled mastersoftheuniverse, that stomping on people, robbing people blind, heartlessly redirecting the peoples wealth and resources into predatorclass offshore accounts, acting wantonly greedy and criminal ways, – will NOT go unanswered, or unpunished. Predators bleed like every other human being. They can feel pain, and terror, and loss, and if things continue on the present trajectory – there will be a reckoning, and blood, and a balancing.

  88. This is possibly disconcerting. Why did the Warwick Commission change its name? It used to be “The Warwick Commission to the World Bank.”

    In 2007 it was a commission to the WTO?

    http://www2.warwick.ac.uk/research/warwickcommission/archive/

    From whence the cash to pay the distinguished commissioners? Apparently a little from Warwick itself and most from CIGI:

    http://www.cigionline.org/person/jim-balsillie

    Balsillie co-founded the company that makes the Blackberry Device. (Just a thought… all Blackberry users’ information goes through the company itself, right? Do they have the best business intelligence in the entire world due to having a near monopoly on corporate communications that is actually a mix of business and private?) Also note that Balsillie gave the founding donation to the Perimeter Institute for Physics, where, coincidentally Eric Weinstein (Brilliant Hedge Fund/Physicist dude) recently hosted his “Economic Manhattan Project.”

    So… what is Warwick Commission’s current relationship with World Bank and WTO? Should we be worried about corporate influence on world banking and world trade?

  89. He’s also at the Center for Global Development:

    “…the Center actively engages policymakers and the public to influence the policies of the United States, other rich countries, and such institutions as the World Bank, the IMF, and the World Trade Organization to improve the economic and social development prospects in poor countries.” Is that what they’re really doing? Really? Any proof that this isn’t just the usual smokescreen?

    http://cgdev.org/section/about/

    So if Warwick is still “the commission to the World Bank,” then both Gelpern and Cline are working to influence it. So, to sum up… Roubini is Mr. Global, the face of the NCD (New Constructive Depression), Setser used to work with Roubini and after his stint as macromoney blogger at CoFR, he’s moved on to government. Truman is a Peterson soldier through and through, as are both Gerlpern and Cline. What do you say? We’ve got a ton of debt — let’s get restructuring.

  90. “no government wants to kill a boom”

    there probably is hardly any country on earth (maybe with the exception of North Korea or Burma) that CAN easily AFFORD to kill a boom. There just are too many foreign policy aspects interfering.

    The more I read of you Americans thinking about the current problems the more I wonder at the feeling/belief you seem to have in the almost unlimited wiggling room of the US. I sincerely wish it were still so but for example dependance on oil has changed a lot –

    yesterday I read this piece in the NYT http://www.nytimes.com/2009/09/13/opinion/13turki.html?th&emc=th

    my gut tells me I have never read anything in a nearly as assertive tone from that region before – forget the subject Israel and whatever your opinion may be on it – just concentrate on that it reads like Saudi-Arabia is dictating the US how to behave – before this they always sounded like wise old advisors never like this

  91. Hi Tony,
    what a pity the Wicca do not go for reviving the Olympians which are the gods whose furies and whims I can understand best …

    one question
    are the Wicca into Robert Graves’ White Goddess (who is triple also)? – Wikipedia doesn’t mention him
    and talking of Robert Graves: before you root for bloodshed a good read is his WW1 memoir “good bye to all that”

  92. I remember dimly that there once was a movement called Theology of Liberation in Latin America and it claimed to root for the poor – guess what the Vatican/Pope thought of it and did to it …
    – and no protestants have no superior record it is just harder to keep track of because they are not so concentrated – but besides that the Bible is a great read almost as exiting as Homer

  93. “Should we be worried about corporate influence on world banking and world trade?”

    of course we should be – remember there were Krupp and Thyssen and they sure had their say

    – interesting point about the Blackberry – it would indeed be amazing if corporations (on government wishes or not) haven’t built in a backdoor to those devices somewhere or if they haven’t done so out of sheer hubris contemplate doing it.

    just imagine how interconnected it all is
    – the company marketing the self-directing vacuum cleaner is the company that supplies soldiers with little devices they can send into court yards in Iraq to have a look around and maybe blow something up before they have to take the risk of entering themselves.

    Joseph Weizenbaum the dear now late computer wizard of ELIZA-fame from MIT complained decades and decades ago that research at MIT was more and more financed and thus directed by the military – and they would not want backdoors to be built in??????

  94. Makes you wonder about the “Intel Inside” program, doesn’t it?

    {shudder}

  95. Yakkis
    An amusing if trivial post. I presume you have data to support your claims? Maybe you are just mouthing off?

    ‘Brain damaged people': Do you claim this attribute for ‘people who go to church’ or ‘people who read the Bible’ (either or both)? Are you suggesting brain damage is a result of the above? Any verified supporting data?

    ‘They always side with people who want to do wrong by others’ Same question re supporting data. Who are ‘they’ What quantity of evidence is expressed by ‘always’?

    Possibly because of what they are being told in Church’ Possibly? Surely you can be more precise than ‘possibly’? Maybe recheck your research?

    Come on Yakkis, you have posted some good comments about our real and serious issues. This post of yours is hardly worthy of a person who seems to have an enquiring and analytical mind?

    Hope you appreciate this comment.

  96. Yep
    and I remember how I shuddered when your people gave in to Obama’s demand to keep his Blackberry …
    once again reason had been thrown out of the window because fashion demanded it …

  97. Uncle Billy,
    How are we going to do it?

    Let us be realists. People will seek to take advantage other folk and not be restrained by ethics or conscience.

    In many cases in life we have to regulate a process which must work irrespective of an individual’s belief system. Sad but that is the world.

    No regulation works perfectly but the best seem to be those which are always visible and are punished.
    Take road rules or air traffic as examples. Regulations may limit actions, may prohibit actions, may rquire actions, may otherwise allow actions.

    So, let us develop a set of rules. Now the 10 commandments at one time were a metric for behavior. Can we begin to draft regulations with as few words?

    If we start now we will be further ahead at the end of the day than if we wring hands and chatter.

    Clearly there are many clever people contributing to this thread. Can we move the solution ahead?

    Over to you Uncle Billy. At least a starter rule set from you will serve to focus us all on the main game?

  98. let’s us face it. the real solution is to go back to a time when financial crises were non-existent i.e. when there was no financial industry i.e. when usury was not allowed at all. the fact is as long as there exists a financial industry, these problems will never go away. they will always resurface, with greater vengeance too. but you need more than just logic to ask society to get rid of usurious practices. you need faith.

  99. there’s the date when a war begins and there’s the time before it – the run up and there are also the actions of the on the face of it non-involved others while a war is fought

    If I remember correctly I learned from the articles of this guy http://www.nicholasschmidle.com/articles.html that politics have not changed much in the border regions of Pakistan since Churchill’s fought there http://www.gutenberg.org/etext/9404 or since the former Lawrence of Arabia was barracked in Waziristan.
    another name worth checking up on Pakistan’s not having done anything to involve itself would be Dexter Filkins. Jeffrey Goldberg might also be worth a try. I have stored it as “the Pakistanis have their own ideas of how tribal politics should be handled” and these would let the Taliban get pretty close to Pakistan’s stash of atomic weapons – of course it is only the old imperialistic mind set that would object to such a development …
    if somebody would have told you after 9/11 “for heaven’s sake do not poke into that hornets’ nest” would you have listened? would the situation be better today if you had listened? I doubt it, with or without you the Taliban would have eventually felt the urge to expand and they would have found powerful sympathizers for that urge in Pakistan.

  100. Friend Silke,
    So you watched Rhett in 1953? Seems like you must have some miles on the clock.

    Now the question we all face is: do we have a new year’s experience each year or ensure we have the same year’s experience again and again? Maybe our ‘opponents’ in the financial juggernauts are seeking to ensure we have a repeat experience and we may well be obliging them?

    Opel to Russia and Vauxhall to America? Have I missed some news? Maybe Russia is to take over Germany (east and west?) after all and thereby enter the EU? Ho hum all this plotting and scheming and to what end? Vanity of vanity, all is vanity?

    I am relying on you to explain all this.

  101. @notabanker

    I think starting with the 10 commandments is an excellent idea as I think they are excellent rules

    No 1 goes something like I am God your master you are not to have other gods besides me (ich bin der Herr Dein Gott, Du sollst keine anderen Götter haben neben mir)

    I vote for respect for human dignity to replace God in the No. 1 rule – If you adhered to that you would never maneuvered somebody with no means into subscribing to a mortgage and you would not leave people without a RIGHT to adequate health care

    or as one Greek guy I knew liked to put it “it’s good for the life” or “it’s not good for the life”

  102. “Opel to Russia and Vauxhall to America? ”

    Opel is going to Magna who seems to figure as an Austrian outfit (supplier of parts for the automobile industry which gets VW and others fuming that they will not continue to buy from an outfit turned competitor) and the deal is financed by a Russian bank called Sberbank (which this morning is said all of a sudden to be in deep trouble) and the London Times said that GM has decided to keep Vauxhall.

    I wish I could explain any of this – I just want to finish my life under American “supervision” – and the fact that GM keeps Vauxhall makes me fear that they leave the continent to itself and just keep control of the “aircraft carrier islands” in the Atlantic.

    – this morning the radio news were full of voices fuming about the deal, all of a sudden claiming that part of the 4,5 bn taxpayer money which will be spent to save Opel will be siphoned off to save Russian jobs plus much other sinister sounding economic stuff. Before the deal was closed the voices were always loudest who fumed about the lack of respect GM showed to Germans (sending representatives which were considered to be not high enough in the hierarchy to be fit to negotiate with Germans)

    Do not count on me to explain it – our journalists always leave me with more questions than answers – that’s why I try to get some education on an American blog – and yes I have been around a while. I was born in 1942 and got my first chocolate at the age of four in Nuremberg of all cities from this marvellous guy with the beautiful smile wearing this smart looking uniform (they were a couple of one white and one black guy strolling around together looking for kids to give chocolate to to make them happy (probably would be immediately arrested as potential pedophiles these days ;-(
    – “mine” was the black guy – my girl friend got the white guy

  103. Our financial system is placed on the tip of a double edged sword, hard to define whether it would do any good are more harm to the economy. I agree with you on the point that the same mistakes are set to repeat at a much higher level of risk for the failure of the financial system.

  104. Didn’t see this late post. A goody!

    Honestly, notabanker, I think I know my strengths and weaknesses — I’m a great beta tester. I can find fault with everything. Not a great creator, designer, builder, and I have a mouse’s vision of history. So better minds should have at it, and I will try to tear it down with the help of many others. What survives just might be our workable model. Commandments are great, but let’s please keep gods out of this — it’s the clergy who taught the wolves how easy it is to fleece the flock.

  105. Peter Boone and Simon Johnson The real problem with our financial system is that our economic and political system work together to encourage excessive risk,

    So you still do not know what happened? Let me repeat it again, slowly.

    “Our economic and political system did not work together to encourage excessive risk”, they worked excessively in trying to sell risk-adverseness by selling the illusion of risk-free instruments.

    The losses in all really risky ventures during the last five years are not but a fraction of the losses of all the supposedly risk-free ventures.

    The world does not need the risk adverseness that come with a baby-boomer’s wish of laying down dying calmly, but the intelligent risk-taking that propels it forward.

  106. correction:
    Opel is going to Magna who seems to figure as an Austrian/Canadian outfit

  107. Sorry Notabanker. I realized too late that I would offend some people when I used the word always, forgetting that the Christians I know don’t really represent the general mass of Christiandom world-wide.
    You have obviously been fortunate enough not to meet these ones in any large numbers.

  108. Gee, I agree with you. Please note that European banks are substantially more leveraged than American banks with Capital ratios on average of 50 to 60/ 1. The Swiss 80 to 1.

    The American subprime fiasco was the straw that broke the camel’s back, but the entire international banking system was apparently way overleveraged and for all practical purposes broke long before that.

  109. Since we are on the subject of the Bible and the Ten Commandments, how about reviving just the 9th one?
    “Thou shalt not lie”

    I think that one would take us pretty far.

  110. Although I didn’t know it at the time I made my original post (which I am still sorry I posted),
    there is some research surprisingly:

    http://en.wikipedia.org/wiki/Religiosity_and_intelligence

  111. it seems Luther’s text as given today by our EKD*) does not have “thou shalt not lie” but just the much more specific “Du sollst nicht falsch Zeugnis reden wider Deinen Nächsten” which means you are not to say something untrue about your next one
    therefore I vote for our Nr. 9 and 10 with their lists of what we are not allowed to want to take from our next ones i.e. everything he has including wife and personnel.
    “Du sollst nicht begehren Deines Nächsten …”
    http://www.ekd.de/glauben/zehn_gebote.html
    also No. 7 “Du sollst nicht stehlen” =you shall not steal sounds quite nice.

    *) EKD= Evangelische Kirche Deutschlands entitled to taxes collected through the state via a percentage of income tax (same applies to the Catholics and Muslims understandably want to aspire to that status also)

  112. Praedor Atrebates

    1. NOTHING is allowed off-book. Ever. And on-book, MUST be valued at current market.

    2. ALL bonuses/extra compensation for top execs must be in the form of stocks in the organization and they may NOT be cashed in at all until after 8 years (say) or until the exec leaves the corporation, whichever is longer.

    3. Too big to fail comes to an end. Period. ALL institutions must be made “too small to matter” in a collapse.

    4. The Fed gets audited (and shut down upon adverse results) and never again may hand money over to any banks or financial institutions without express legislative OK and must (ALWAYS) claw back any and all monies, with interest, upon termination of any “rescue operation”.

  113. “3. Too big to fail comes to an end. Period. ALL institutions must be made “too small to matter” in a collapse.”

    How do you keep foreign banks from buying all your too small to matter outfits and bleeding them white?

    I seem to have read somewhere that one of the reasons for the desire to become big is to become too big to swallow?

  114. There is one, and only one effective regulator of any financial system: GOLD.

    The present god-awful mess was impossible pre-1971.

    Very strange indeed, how everyone, including the authors Boone and Johnson, is running around like chickens with their heads cut off.

  115. what was the status of Gold in 1929?

  116. In 1929, the previous credit expansion was stopped by GOLD. A massive correction ensued: the Depression.

    Today, the world is a madhouse of disorder and there is no objective limit to manipulation.

    There is no comparison between the magnitude of disorder that prevailed up to 1929, and the magnitude of the present world economic chaos.

    You will get regulators, and supervisors of regulators, and super-regulators, and super-super-regulators, and – nothing at all will change.

    But, have it your way – you are in the majority.

    I really don’t wish to argue, and will answer no further posts, Thank you.

  117. A very well written artice, I would say. These’re my views:

    1. Normandy assault was expensive but the war was won.
    2. A regulation for the derivatives trade would fal to reign in the whole SFP empire at this stage.
    3. Executive compensation shouldn’t be curbed for many a reason.

    Read the whole thng: http://wp.me/pAEMz-2T

  118. Why is anyone, individual or institution, with any sense of moral ethic still “investing” in any of the banks and organizations who bugger around their balance sheets, have and sell complicated–as in meaningless–assets (to whom), and generally thumb their noses at their families, communities, and world? There are alternatives. We’ve had our monies in a local credit union since 1998 when US Bank was gobbled up by a bigger fish. We did not want to participate in what was obviously–way back when–a feeding frenzy of massive proportions. The economy, any economy over the long run is self correcting but it boggles my mind–and whining about Geitner, Bernanke or whoever fixing or not the situation is just childish; they are doing the best they can with the tools they’ve got and more credit to them and Paulson for pulling us back from the brink–that creations such as Bank of American have any share holders, employees, supporters left anywhere.

  119. Ahhh Olymians, curious analogy. The Goddess works in mysterious ways. There is no single book, and no single prophet providing or describing all the wisdom and intelligence of creation. This or that klans or tribe, chooses to rigidly conform to this or that book, or this or that prophet based on this or that klans political and economic ends. Religion in the institutional religions arcana is a secondary concern, to the more potent forces of dominating others through wealth, political power, and warmaking.

    I do not root for blood, but it seems inevitable that when the people finally recognize that the predatorclass are slowing, insidiously, and ruthlessly enslaving them, – there will blood.

  120. Actually Uncle Billy I was after a brief macro top-down expression of key points to be regulated (10?) and some expression of metrics. Clergy are unfortunately men and their track record is mottled indeed. However damming all clergy is acceptable to many but a little loose rhetoric?

    Not looking to have God run the scene as I realise he is not acceptable to some folk (joke).

    I still think your eminently sensible and thoughtful critiques contain the substance for 10 CSF’s? How about a try? You may tempt others to contribute.
    rgds

  121. Yakkis,
    As per my comment to Uncle Billy, my thought was re the brevity of the rules. A good example for regulators/politicians?

    No lies (of course for some folk who believe they are the product of primeval soup it hardly matters)? But I can say amen to that.

  122. Sorry Silke I have enough trouble with English language. Are you a Bible student? Not much point being moral if you are an atheist?

  123. Silke,
    I note your amendment ‘replace God with a vote for human dignity’

    Now, in the absence of God’s rule (external absolute?), who interprets what ‘human dignity’ comprisees in each case? Should we just leave it to the ‘greek guy’? I would not like to have left such ruling to Hitler. Stalin is quoted as saying ‘gratitude is for dogs’ and I understand he oversighted a famine when 7 million people died. Hardly a person to inspire trust?

    Then if a personal interpretation is sufficient how do we manage for consistency? Why not use the same process to manage road traffic. A reasonable defense for drivers would then be ‘I considered my actions good for the life’?

    Seems like this may need a little tightening up?

  124. All of this just indicates very clearly that all of our leadership, all whom we elected to take care of business, so to speak, has completely and utterly lost its moral compass. As Bond Girl said earlier, it is truly and pathetically hard to determine where the government ends and the oligarchy begins. It seems to be all within the power continuum that seeks only its enrichment, and has no concern at all about the public weal. Such a shame. Politics has always been this way to some extent, but usually there has been a core of the leadership with the courage and clear headedness to pull us back from the abyss. Amongst todays leaders, there seem to be almost none who wish to stand and be counted. There are a few, and those (among them Elizabeth Warren, Barney Franks, Sheila Baer, and — perhaps — Ben Bernanke) frequently are drowned out by the stentor of the oligarchy.

    I noted the march over the weekend. Some good, some bad in all that. I can foresee this kind of demonstration becoming open rebellion if things don’t change. Since our leadership seems to have lost or abandoned its moral compass, there is little else that might shake them outside of real revolution (see France circa 1775-8). This could rip apart the social fabric of this nation, and ultimately the globe at large.

    Your article points out not just the core problem in the finance world, but the more serious underlying tears in our social fabric.

  125. I second that opinion. But please be reminded of the fact that the line separating Wall St and lawmakers is often thin and blurred. At this point of time, all the major banks have a firm grip on Washington.

  126. We have our starting points, and they do not have to be considered a “religious” problem by the state.

    1) Only do to others what you would want them to do to you.

    2) Do not do anything to others that you would not want them to do to you.

    3) If anyone looks like they’re going to take advantage of your adherence to 1 and 2, kick their ass.

    Blast that into their brains every morning with the pledge of allegiance and have Beyonce and Taylor Swift do a couple of catchy tunes based on their wisdom, and we might be off to a start, again, maybe.

    {Rabbi Hillel shakes his head in bewilderment.}

  127. Well there are those that think they came from a primeval soup made of stardust, formed with a bang, in an endless universe possibly created by a girl named Suzy. For these people, we might want to tell them that the only thing that gives their lives meaning is making good decisions. We could define good decisions as those that contribute to the well being of their family. We could extend the definition of family to be “every living thing.” In this case though we probably need to make an exception that says: Never eat any animal that is cuter than you are.

  128. Let’s try Marxism again, but this time with ubiquitous webcams and no death. It’s got to be better than this.

  129. People can be full of many different things: ideas, joy, religious fervor. You, senor, are full of gold.

  130. Dewd, if you weren’t making me look half-sane, I’d say knock it off.

  131. Frederik Marain

    Paul De Grauwe is a Belgian economist (University of Louvain).

  132. You’re right and I’m wrong. My apologies.

  133. the task as I understood it was NOT to replace God in anything but to take the 10 commandments as a framework to formulate rules for behaviour in finance
    and in my book you do not need to evoke God (to me the constant evocation of God seems quite often against the 2nd commandment in Luther’s wording – sorry to use the German again but as I discovered only yesterday the Anglos and we seem not to use wording with the same emphasis)*) – there are millenia of human thinking available in writing that have defined again and again in the most detailed ways what and how we should deal respectfully and humanely with our co-human beings, rules which in the past and the present have quite often been misused by the christian churches – latest example from yesterday’s reading http://entertainment.timesonline.co.uk/tol/arts_and_entertainment/books/non-fiction/article6828043.ece
    and no this is not sensationalist as every person having been a teenager in the 50s in Germany could tell you – the threat of being taken away to a home was ever present especially for single moms and their children and due to the war there were a lot of them – ours probably didn’t send their catches into adoption though, just kept them as cheap labour – I understand laundry work was quite “popular”

    Both Hitler and Stalin either believed strongly in an “ism” or proclaimed to do so and to be under superior guidance by their understanding of the mumblejumble of it (a simple reading by my “greek guy” would have dismantled most of it – do not underestimate the decency of so-called simple people) – and that they both didn’t have a god in their sick ideas doesn’t disqualify it as a religion-like thing
    and btw according to Arnold Toynbee whose 12 volume study of history is one huge effort to destroy the M..rxist view on history and who was to the best of my knowledge so much of a Christian that he said especially for a historian quite unpalatable things about the big mistake of a people who had missed out on J..sus c..ommunism is a kind of stepchild of christianity (I am quoting from memory having read the 4 volume version a bit more than thirty years ago)

    and last but not least – no I am not a Bible student, I read it as I read any other book and I am most decidedly not an atheist I am an agnostic and believe me there is quite a difference and that difference is very dear to me –

    Das zweite Gebot
    Du sollst den Namen des Herrn, deines Gottes, nicht mißbrauchen.

    PS: sorry of the acrobatics in the text – I am trying to outsmart the automatic censor

  134. I cannot claim to get your meaning but shudder at “rigidly conform”
    – what I liked about the Olympians when reading about them first as a kid of about 9 was how fickle and unpredictable and thus true to life around me they seemed – nothing rigid there just common alternately benign and mad humans

  135. for all of you who like to refer to Rome here is a nice and informative audio which tells the story as I know it ;-).
    If you listen carefully you realize that it was a long drawn out event with lots of ups and downs and btw in the beginning when the interviewee says the Rhine he mis-speaks it is of course the Danube and I didn’t hear him mention that the Goths of Adrianople had been PERMITTED if not invited to enter the Roman empire
    btw I like the audio because it makes very clear that the situation became so dramatic when the pressure came from several sides simultaneously …

    http://itunes.apple.com/WebObjects/MZStore.woa/wa/viewPodcast?i=59633209&id=268551358