By Simon Johnson
On Friday afternoon, NPR’s All Things Considered broadcast Robert Siegel’s interview with me on 13 Bankers (further down that link there is an excerpt from the very beginning of the book).
We talked, naturally enough, about how the ideas in 13 Bankers connect with the current policy debate – specifically the financial reform legislation now before the Senate. As anticipated when the book went to press in January, some sensible measures to protect consumers of financial products seem possible – yet this progress just emphasizes how and why we have not yet broken through on Too Big To Fail issues.
But there is a broader point here also. What happened in 2008-09 should not be allowed to happen again. The nature of power in and around the financial sector has become so great – and so distorted – that it harms the rest of us.
I don’t think a majority of Americans understand how much influence financial institutions have in Washington, DC. Banks used to answer to Washington. They were once held accountable for their actions. That is no longer is the case.
We have not previously had such a concentrated banking system in the United States; it’s terrifying how much of our financial future is wrapped up in the big six. We don’t need this level of concentration and we should recognize the dangers that it brings. This view is not anti-finance – but we are very much against the way our biggest banks operate today, and we definitely (and in detail) oppose people who seek in any way to sustain the power of these organizations.
The NPR interview hit many key points but also – in 8 minutes – just scratched the surface. In 13 Bankers, we take you through the back story – the painful history that brought us here and that now makes it so hard to move forward.
But the book is not pessimistic. We offer American models of reform – instances from our history when elected representatives, with all their limitations and failings, took on concentrated financial power. Luckily for us, despite its massive and seemingly overwhelming advantages, big finance lost in each of the three big confrontations of the past two hundred years.
Each time, most Americans initially did not grasp how the system works, and this proved a major obstacle to reform. But each time political leadership was able to explain what needed to be done – and to persuade the mainstream that this was an important priority.
We can do it again. We must – the consequences otherwise would be too awful. Absent reform, another bailout – indeed a more costly bailout with global consequences, millions of jobs lost, and a ruinous impact on our government budget – is unavoidable.
The Baseline Scenario 
“I don’t think a majority of Americans understand how much influence financial institutions have in Washington, DC”
Simon,
You, Paul Krugman, Brad De Long, William Black, James Galbraith and other liberal economists that support the interests of ordinary Americans are each complicit in the ignorance of Americans. Your reach does NOT EXTEND beyond your faithful followers who already are in complete agreement with your sentiments and why we read your blog.
Congressional testimony, this blog, contributions to Economix, participating in obscure round chair discussions, esoteric articles, past appearances on Bill Moyers- It doesn’t cut it or reach the masses who watch you-tube, Jon Stewart, Stephen Colbert for their nightly news.
Robert Reich is making the effort to reach these people on you-tube. Don’t you think that’s a step down below his station and dignity?
We, your faithful, are already convinced by your arguments. Embrace the technology to reach the rest of society. Arouse their passions anyway you can. You have an important message to tell them, but you are not reaching out to them and they don’t know who you are.
What are you going to do about that? How about James Quak?
Have to partially disagree with the (above) argument of “13th Bankers” as being only familiar with readers of this blog. On the other hand, one can’t help notice the corporate bias and the media complicity of keeping many of those same arguments confined to “talking heads” on Sunday morning. It’s harder to argue in sound bites. There are also a lot more competing sources of where to get the news and information so it makes the task of public awareness a lot more challenging. (I went by Borders yesterday but your book isn’t there yet, will stop by the bookstore again on my way home from work later this week, amongst other searches………………)
I think most Americans do recognize the influence the financial sector has over Washington, but what they do not see is why this is a pressing problem. I think most people tend to associate financial lobbying with that of the health care industry, energy companies, etc., and so the political costs of consolidation in the financial sector get grouped together with this phenomenon of government spending that just makes everyone want to throw their hands up in the air. They do not see what distinguishes the influence of the financial industry from the others, which is the “doom loop.”
I’m not sure how it is possible to improve upon making this point, either, because most Americans are not accustomed to thinking in terms of price/cost. They understand that shouldering these immense costs is a bad thing, but they only appreciate that abstractly. As a nation, we are pretty much in the same position and have the same attitude as someone with affordability product mortgage that is about to reset.
Paul (above) has a valid point.. the message does need to get out…. but I am afraid that today’s American Hemoginy does not know or read history, which to paraphrase Sam Clemens , is why “History doesn’t repeat itself…but it often rhymes”.
Our President has chose to spend his ample political capital trying to fix our broken helathcare system, a laudible goal, but IMHO, a less important one than fixing the TBTF problem so well articulated here on BS. Healthcare will slowing sink America in a degenerative sort of way, while the shock of another TBTF calamity is more like a stroke…. the patient may die in either case, but former feels worse along the way and lives longer, while the latter feels great until till the shock, and fails more quickly.
What we need is another Andrew Jackson… but we probably won’t get one till after the stroke, when the damage to the patient is severe.
Jackson was a nasty dude.
Just wanted to say that the book is very good so far (I was surprised to find it on the shelf at the Silver Spring Borders yesterday). Can’t wait to really dig into the meat of it.
Paul above does have a good point–you need to get your message out to a broader audience. Although I feel that interviews on the Colbert Report/The Daily Show might still be a bit of preaching to the choir, it might wider your reach a bit–and would be great television.
I’m sure they’d have you on.
…and just adding this – Wall Street does indeed have Congress over a barrel… in fact, over several barrels.
Question: On Passage of the Bill (H. R. 1424 As Amended )
Vote Number: 213 Vote
Date: October 1, 2008, 09:22 PM
Required For Majority: 3/5
Vote Result: Bill Passed
Vote Counts: YEAs 74 – NAYs 25 – Not Voting 1
Measure Number: H.R. 1424 (A bill to provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes. )
Measure Title: A bill to provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes.
Progressives simply DO NOT have a VISIOn, or a clear way to speak about our policies.
Conservatives speak of free market, God, guns, gays.
We are all over the map, and sound like policy wonks.
Simply put, let’s make this a PG conversation, suitable for every age group.
Public good (progressivism) versus private greed (conservatism).
Private greed extends throughout the economy because capitalism is based on scarcity and concentration of wealth.
The public good was advanced buy our constitution as “govt, of, by and for the people”
Use the “public good” progressive frame once every day in conversation.
How many geeks/freaks and socially demented people like me download mp3 of economic podcasts like NakedCapitalism, Bloomberg, Marketwatch, Bill Moyers etc….??? How many would download economic insight podcasts in the state redneck state I’m in, where not a SINGLE county voted for Obama, where probably less than half of the state’s population have health care coverage and have probably been put into a state of hyper-paranoia that some government worker is going to reach into their chest and rip out their pacemaker because of many misleading statements by Tom Coburn and Sarah Palin???? May I be so arrogant as to say I could probably count them with the fingers on my two hands.
TBTF and the arguments against Naked Credit Default Swaps don’t sell well on the Letterman/Leno time slot. That’s why the bankers keep winning. I don’t think you can get on Simon for not making himself available to the media. I know he’s done a lot of PBS and its reach is wider than most think.
The masses are awake, trust me. If this former ditto-head can wake up, anyone can. September 2008 economic meltdown was a smack across the collective American face with cold water. A true wake up call. It got EVERYONE’s attention. I mean, welfare for Wallstreet and Bankers? Both the right and left were livid and wanted to know WHY it had to happen. Only the most diluted and unplugged dope-head missed that fiasco.
Amen. But Simon is doing his share of the work. It’s up to us to pitch in and do some too. I’ve posted the NPR link on Facebook and Google Buzz. I should learn to post it other places, Digg, etc. When the book comes out in paperback, I’m going to buy a bunch and mail them around.
Angela, I totally agree. It has their attention — but they are looking for solutions in their own way. The finance experts on this site are not questioning fundamentals upon which the whole money world rests — they are players in the money game and simply trying to make better rules and more effective referees. The masses are more likely to ask how perpetual-growth capitalism can be reconciled with a finite ecosystem. I never hear anything about that here. They are more likely to ask how many middle class people can “invest” and draw dividends from the labor of others, through RSPs, pension funds etc., before the whole edifice becomes top heavy and topples over. They know investing is an upper class game that has been extended to the masses. They respect real entrepeneurs but think it should not be possible to make money without doing productive work. The masses see more clearly than the experts that the corrective changes need to be made at a much, much deeper level than Simon proposes. They know the value of incentive and competition because they see how cleanly and elegantly it works in nature. But they know nature cooperates too. And they know what a parasite is.
Many of them think the real problems can only be corrected in the aftermath of utter collapse. They are apocalyptic because they do not see any other way out. They have a wider and more concrete view than the experts — their perspective is that the financial/corporate system is poisoning their food as well as raiding their pension funds with bankruptcy tricks. Very few of the experts on this site will ever be homeless — but for many of them it is a possibility. They believe in work but they feel like slaves because they have no feeling of security or power. I think they are very much awake, and forming their answers within the hearts and imaginations of the young. That is always how history moves itself forward.
I think I work with those diluted and unplugged dope-heads. They are current ditto-heads, believing every word that comes out of Limbaugh’s mouth. Nothing but Fox, and Drudge all the time. I still hear from them how this was all caused by Barney Frank and the Community Reinvestment Act.
I’m glad you woke up, but there are too many who still listen to the Fox version of this, and they have a bigger platform, and are louder.
It’s in the nature of progressives to be policy wonks to some extent. The more you read, the more gray the pictures become, and that complexity and nuance doesn’t result in Tea Parties. It results in the herding of cats.
Can you imagine Simon being invited to Hannity’s show to make his case?
I often wonder where he gets the time to teach, testify, keep up with the news, and write this blog. What else can one guy be expected to do? If people would rather watch American Idol than read the Business pages of the NY Times, what can you do about that?
That is where bitterness takes them. It is scary — bitterness was what gave Hitler power. Maybe you could try talking to people under 20.
That same day Dr. Meltzer replies; “Yes, deposit insurance is what makes the banks subject to regulation and intervention. That opens the door to mischief of many kinds.”
On March 9, 2010 Art Consoli wrote to Dr. Allan Meltzer regarding his article in the WSJ. Art said:
> Good article!
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> The problem is definitely the government.
>
> Here’s an article I wrote wherein I take the problem back to what I believe is its root – deposit insurance.
>
> > October 8, 2008
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> Raising the level of insurance on bank deposits is like pouring gasoline on a fire.
>
> By: Art Consoli
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> There are many reasons why this financial crisis occurred but every one ultimately comes to rest at the throne of the banking industry. The banks did a poor job of making loans: mortgages, credit cards, and automobiles.
> Congress and regulations can’t make the people who run banks smarter or get them to do a better job. The only thing they can do is to examine the role they play in allowing the industry to continue to do a poor job.
> What Congress did to encourage poor performance was to provide depositors with insurance on their deposits. This eliminated measuring the banks’ performance as a criterion for obtaining working capital. What other businesses are able to obtain their inventory (in the banking industry, the inventory is money) without regard to how well the business performs? Does any depositor check the financial statements of a bank before he or she gives it money? No!
> All depositors look for is the interest rate. The only thing we want to know is how much is the bank going to give us for using our money. And the higher the interest rate, the more we give them. And who wants the most money? The banks that are doing the worst, that’s who. They want – no, desperately need – the most money. And why do we not care how well run the bank is? Because we know the government will give us our money back if the bank fails. Yes, I know there are limitations but they can be circumvented.
> Certainly deposit insurance helped restore confidence in the banks during the depression, but now deposit insurance has outlived its usefulness. By allowing poorly-run banks to obtain deposits the FDIC allows them to stay in business
> Take away deposit insurance and depositors will become much more interested in how well a bank is run. Poor performers won’t get deposits and well-run banks will get all the money they can use.
> AND properly managed banks won’t have to match the higher interest rates offered by the poorly run banks. Yes, as a depositor I want high interest rates but what I don’t want is a bank putting my money at risk in poor investments. And isn’t that the only way a bank can pay high interest rates? It has to loan my money to less capable borrowers and more risky projects; those who will pay anything to get their loans.
> In addition, good banks won’t have to pay the cost of deposit insurance Remove this expense from the bank’s operation and they will be more profitable. Banks will be better investments for those who want to buy their shares.
> If the government does provide the bailout then it better quickly begin to get its house in order. The days of free spending are over. Serious cuts will be required for our country to get back on the productivity, prosperity track. AND one of the first places to reduce costs would be to eliminate the FDIC.
> With no FDIC we would save the cost of that department and we would cut the tie that binds the government to the financial institutions. Banks would have to compete and perform. The market would deny those that are poorly run the funds they need to continue.
> Providing deposit insurance is just another form of subsidies. And when we subsidize anything including poorly-run banks don’t’ we “insure” that we will get more of them.
> Art Consoli
>
>
>
>
>
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We need to keep deposit insurance to protect the innocent and vulnerable depositors, and let the bank and stockholders take the loss. Do you seriously think all depositors are capable of influencing how the bank is run ? Without deposit insurance they will just use safe deposit boxes anyway. What are you thinking?
Simon, Give me a link to an online petition supporting your proposals and I’ll sign. Or send me to a website where I can easily attach my name to a well-drafted email to my senators and reps and I’ll send it.
I’m serious. The somewhat-informed public (like me) WANT to be heard in the corridors of power. But we don’t know how. Make it easy for us! Enlist your friends in new media to create a movement. Give us a place to add our names to the roll call of those who want to see an end to TBTF.
Since the Titanic analogy is getting tired, let’s move over to the passenger jet. We’ve sucked geese into all engines, and all but one have ceased functioning. The last one is sputtering along, but the inevitable is just that. Down, down we go. All the jabbering in the world will not keep it from crashing. The whole point of all this blog punditry and book-pushing is to keep certain people in the public eye for when the big rebuild starts.
We have the sort of emergency — unemployment-wise that necessitates gargantuan intervention and a planned economy. A few hundred billion here and a trillion there is just enriching the same conspirators that helped set this thing off.
Whatever you propose in the book is meaningless unless we can educate, vet, and monitor a whole new group of government administrators. And that doesn’t mean Volcker with his old-world German ties, and it doesn’t mean Elizabeth Warren with her folksy nurturing fables. It means new, untainted people, not selected by the establishment. Got that? *Not* from the same sick group that is bringing us warfare and GMO food and delightfully efficient Siemens trains.
Jabber on.
It wil take some nastiness to break the political capture… the eggs broken in that process will pale in comparison to the omlette we are currently cooking with everyones nest eggs….
Why is there this cognitive dissonance … unemployed people on social security and medicare organizing to oust the Democrats to prevent financial reform and higher taxes on the rich?
If the Democrats choose to pass tougher legislation regarding TBTF it will boost their status with moderate voters. This would be an excellent way for Pres. Obama to unite the Democrats and build on the teamwork that was required to pass HCR. If Republican legislators drag their heels and try to water down TBTF legislation it will destroy them in the eyes of most voters.
I beleive you are wrong…. people don’t care about TBTF becase they don’t understand how close we came to financial meltdown… and they are blissfully unaware of the speeding train heading their way… to them it is the light at the end of the tunnel….
There are many reasons for USA taxpayers to be virtually ignorant of their political economy. Importantly mass media communications is devoted to entertainment which gives the people the circuses to dull their brains and seek capitalistic nirvana of endless consumerism. You make your hole and sleep in it. The other most important reason is Wall St owns Congress and government. All empires fall apart from within, neither terrorists, maniacs, idiots or any ism such as socialism could do what Wall Street has inflicted on USA. Wake up USA.
Mr. Consoli,
Deposit insurance should be kept, but investment banks need to be separated from retail (or commercial) banks. When the lazy fatcats only have each others’ money to play with, they magically become more risk diverse. Amazing concept eh???
You also have “shadow” banking Art, but you might blow out a brain cell if we go there.
While I agree with the sentiments in Mr. Cohen’s post, the argument that ‘if only we could reach the people everything will be allright’ is not the case. I just watched a basketball game where Capital One, with its usurious interest rates, has a huge advertising campaign with 2 huge Viking Basketball players. Its tedious, only slightly amusing and guaranteed to be absorbed by 95 percent of its intended audience. Simon’s carefully reasoned arguments will go in one ear and out the other of 90 percent of the population and most will tune it out.
If people in power really wanted reform, Simon wouldn’t have to worry about having his arguments heard because he would have a real voice: as Secretary of the Treasury.
risk averse, I should have said, not risk diverse. Although maybe they should do that also (haha)
Simon Johnson correctly states “What happened in 2008-09 should not be allowed to happen again”
But, for that not to happen again, more important is that the silence of 199x-2010 should not be allowed to happen again.
Some few of us stuck out our necks while sticking out your neck did not win you any applauds. Most did not say a word. How can we make sure that debate always triumphs any silencing consensus? http://bit.ly/HIi3x
Most of those Monday-morning-quarterbacking should be ashamed because what was going to happen was already quite clear on Saturday night.
I agree with anyone who says that you need to be more in the “mainstream” in order to create an adequate following. There are two problems which occur to me. The first is that the general populace of this country is not only clueless and unsophisticated, but suffers from terminal short attention span, which, even when exposed to highly logical and meaningful arguments, will either tune them out before understanding enough to be incited, or just plain fail to “get it.” The second is that the media which you should be on will generally not have you on because they would feel that their advertising dollars (mostly from the plutocrats) would be threatened by honoring an opinion counter to their interests, or fear, for the first reason, that their audience would become bored by intellegent rhetoric. It is sad, but there are a couple of places where you may get wider hearing: first 60 Minutes, which likes to run stories that are fascinating, and generally devotes enough air time to their exposees to have their viewers get it, and second MSNBC or CNBC, which seem to show a fairly liberal bias, but which also are respected and widely watched. Or, better yet, maybe you could interest Glenn Beck, but probably not.
Good interview, Simon, but way too short. And, how many of the masses listen to NPR. Maybe 1%, if that, and most of those folks who do are already on our side. Try to get on Morning Joe. It is a great venue, and has pobably the most astute and non-slanted view of any morning program with any real substance.
He’s been on.
http://www.colbertnation.com/the-colbert-report-videos/221463/march-12-2009/it-could-be-worse—simon-johnson
And He’ll be on Tuesday. http://13bankers.com/events/#public
Simon Why not reach out and make a pitch directly to MoveOn.org about the importance of Financial Reform with teeth? MoveOn has 5,000,000 members and currently this weekend held parties to view Michael Moore’s Capitalism: A Love Story. When MoveOn collectively decides to take on an issue, they have a lot of political muscle and push hard.
Maybe Simon could reach out to Ron Howard and friends and ask them to follow up on their spoof of Pres. Obama and CFPA with a video where past presidents motivate Pres. Obama to pass TBTF legislation.
http://www.funnyordie.com/videos/f5a57185bd/funny-or-die-s-presidential-reunion?rel=auto_related&rel_pos=1
It is time to put to bed all notions that the financial crisis was caused by foolish consumers.
The motive for selling subprimes to the unqualified may have been ‘rationalized’ by the phoney promotion of homeownership for all- but billions in profits seem a truer motive. Churning mortgages into a pyramid of derivatives ( worth $180 trillion ?)
makes homeowners pawns & suckers.
As far as credit card excess–the same question must be asked: who made off like bandits ? Not the borrower, for sure.
The exploitation of naive or greedy working folks whose incomes have frozen should never be forgotten. The immense transfer of wealth from the middle class to the top 1% is the bottom line on ‘who made it happen.’
Case closed.
how I wish your proposal were possible to be acted out in real life but believe it or not administration by the uninitiated/ inexperienced/innocent/untainted is going to lead straight into another kind of disaster
– pick the highly experienced, shrewd and devious, the canny and wily operators with a narrow focus on the welfare of the non-glitzy part of the population (a nick-name close to “old fox” is a good label to look out for), keep a non trusting eye on them all the time, never ever hope for their possible saviour-dom or laud them for it but keep the sleuthing going all the time.
But also make sure they have a secure power base and if their chastity isn’t up to the present Zeitgeist let them indulge in affairs and/or emergency sex to their body’s delight. Think twice before you accuse them of corruption/deal-making etc always evaluate first if what they are doing is good for the pockets of those which have been so shamelessly robbed …
… which incidentally aren’t only the tax payers – all those who thought that the interest on their savings provided enough of an extra income are harmed by the low interest rates while being threatened at the same time by dreams of allowing higher inflation rates (I hear 4, 6 and even 8 % being proposed instead of the current ones).
So pick somebody who is truly itching for a good fight with the robber barons and allow her to go for it with her hands free and not tied behind her back.
Please never forget that the losses that generated the current crisis were NOT caused because some banks were too big to fail. It is the way many of those losses are now being distributed between the investors, the banks and the supposed taxpayers that is being affected by the too big to fail.
If we get rid of the too big to fail but keep using credit rating agencies to allow for absurd low and discriminatory capital requirements we will have done nothing to correct what brought us here.
Simon Johnson is very concerned about how the losses are distributed in the society and that is good, but more importantly he should be concerned with how to avoid the real stupid losses that brought us this crisis… as it is always better not having losses to distribute.
Per
is there a way to explain to a laywoman how smaller banks will be able to compete with outfits like the one mentioned in this piece?
you are my last hope – if you can’t do it probably nobody can do it – but maybe my wondering about it at all is just housewife level world view stupidity??
http://www.timesonline.co.uk/tol/news/world/europe/article7079477.ece
Big banks normally go for big clients or big securitized operations and small banks for small and medium clients and individual operations. The first types were the ones most favored by the regulators and that is the main reason the big grew bigger yet.
Yes, when it comes to how to redistribute the losses it is clear you have to lobby Congress but when it comes to be favored by regulations then you have to lobby the Fed, the Basel Committee, and keep friends with the IMF and the Financial Stability Board and all regulators and alike, like the Simon Johnson´s of this world.
The first and most important thing for the small and medium banks to be able to compete is to take away from the big the regulatory advantages awarded them. And this is no news. While an Executive Director at the World Bank 2002-2004 we read many reports that explicitly denounced that the big banks were specially favored… but few really cared.
Yes we can cap the too big to fail size… but that is unnatural kommissar’s way of doing things. I much prefer to start by not giving the big comrades special advantages.
Perhaps the following paragraph from my book Voice and Noise, 2006, helps to further illustrate what I am pointing at: http://voiceandnoise.blogspot.com/
“BASEL and microfinance: Most of our old banks were doing micro-financing through their small local branches where the local bank manager knew everyone and could even call up the borrower’s mother to remind her of the importance of her son’s commitment. Those loans never caused any bank crisis but were nonetheless almost prohibited by the work of Basel regulators that required that all loans should be such that they could be monitored by bank officials’ continents away—without access to mothers. In this sense, our efforts to develop new micro-financing entities are just reconstructing what Basel helped to demolish.”
This comment from Artt suggests that bankers were stupid. Baloney. They outsmarted all of America by buying Congress and placing guys like Hank Paulson at the helm when their stuff hit the fan.
Per
thanks for trying to help – I am honestly grateful – it is nice to know you are still there for the likes of me
but in this case your answers show me that I am obviously not able to phrase the question in a way that it is comprehensible to somebody who is a professional in the field of what keeps nagging me
in part the NPR interview by Simon Johnson provided an answer by saying that the US-banks went into the trillions. The piece of the vanished Abu-Dhabi guy’s outfit had “only” 600plus bn – but then Abu-Dhabi is only one of the UAE not to mention the other oil-field-holders in the area and nobody knows of how much of a unified action they might be capable or willing or planning on and my question is are the big banks may be necessary to defend “our” stuff against an attack from them – Mr. Johnson said no because they are even to big for that but my answer then is what if “they” combine forces would then such big banks be necessary?
Sorry I see now that I did not understand your question.
But of course in the end it is not the size of any banks that really matters. What matters is its credibility and the credibility of the whole financial system as such.
Also when a bank gets to be so big that no one really understands what it is up to, it is for me very hard to interpret that as a symbol of strength.
Finally you quote “The Abu Dhabi Investment Authority is believed to have assets worth some $627 billion”. This does not necessarily mean anything… in fact Signe could have more net equity!
thanks Per
(but then why didn’t Mr. Johnson say so but instead answered by throwing around the bigger numbers of the American banks – I guess I’ll either have to learn some basics about the stuff or give up on trying to understand the world and just vote for the next outfit with the most feel good appeal ;-)((()
And of course I meant “Silke” having more equity.
When in the NPR interview discussing higher capital requirements Simon Johnson talks about returning to before 1930 and hints at capital requirements of 30%… which is plain ludicrous.
And then he mentions that Lehman Brothers Lehman Brothers 2 days before it failed had 11.6 percent tier one capital new capital requirements and so if the Basel Committee would put us where Lehman failed… what would be the use of that.
The 30% and the 11.6 percent are not at all comparable, and Simon Johnson should know it.
The existing tier one capital presented by Lehman Brothers as a percentage of assets, 11.6 percent, was calculated on the net assets, which result from deducting from the gross assets a lot of assets or collaterals that perhaps should not have been deducted. In fact compared to how the traditional capital ratios were calculated Lehman Brothers would most probably not have even half of that tier one capital percentage it reports… and that is not even taking in consideration their off-balance assets.
One of the most serious regulatory problems we have is that the Simon Johnson´s of the world can say this type of things, and simply get away with it. How on earth are citizens and legislators to know?
Had not the regulators allowed the netting of assets or, in the case of the banks, the risk-weighting of these, which reduced the size of the expressed assets dramatically, the world would have been warned much earlier about how overleveraged the system really was… as a result of the regulators allowing it.
Simon Johnson wants the assets of a bank to be only 3 percent of GDP, nothing wrong with that, but, were the banks to invest in AAA rated securities, risk weighted according to the Basel Committee at only 20%, they could end up with 15 percent of GDP… without anyone really knowing it.
Per
you really do something for my ego which is always very down after having listened to one of these interviews and made to feel very stupid – all those figures and abbreviations being thrown around it feels very much like experts only interested in talking to experts but wanting to sell their books to us masses nonetheless or to recommend themselves as government consultants via their books – a project which probably isn’t hurt by big sales. And then you come along and I realize that my purely gut-based feeling is perfectly correct.
“without anyone really knowing it”
and that is the whole purpose of the thing isn’t it – to rob steal and plunder protected by smoke screens galore
thank you Per – it is time I get off the topic again – the villains are going to win like they always have and when everything is in ruin they will cash in again by doing an I am the saviour stunt
Do you have something like spring in Venezuela? right now it starts around here and it’s gorgeous … :-)))
Silke, if it all just was to “to rob steal and plunder protected by smoke screens galore” then perhaps things would not be too bad things would be just what they are… it is when they come to save us that things really get bad… I am not telling this lightly but I swear this particular crisis would not have happened if not for the current regulatory paradigm that our current regulators still follow against all common sense.
Sorry… no Venezuela for me I am stranded in DC courtesy of the oil curse. http://bit.ly/P4m
Per
thank you again and have a really good time wherever the times take you to (your daughters also ;-)
btw I agree on the saviours being just as and often more dangerous than the villains.
one last word I heard a bit here and there from a Amartya Sen when he peddled his book – I am underimpressed – way too willing to applaud romantic ideas – I think the “shock” for me was on the BBC World Service “Forum” A World of Ideas
I began reading 13 bankers by Johnson and Kwak yesterday and thought of another great book, Bad Money by Kevin Phillips, dealing with the financial crisis brought on by the deregulating business folk. I think we have a big a crisis in our superficial belief in free markets. We will lose our manufacturing jobs and soon lose the skills to make things in this country. Corporations will run the world using low wage workers whereever they can find them. Free trade is like free love: it sounds good but does not work. We need to take care of our culture and the environment (ecological issues) first before falling in love with free trade dogma. Thanks.
I made spelling errors above so try this (please delete the above reply from yesterday):
I began reading 13 bankers by Johnson and Kwak yesterday and thought of another great book, Bad Money by Kevin Phillips, dealing with the financial crisis brought on by the deregulating business folk. I think we have as big a crisis in our superficial belief in free markets. We will lose our manufacturing jobs and soon lose the skills to make things in this country. Corporations will run the world using low wage workers wherever they can find them. Free trade is like free love: it sounds good but does not work. We need to take care of our culture and the environment (ecological issues) first before falling in love with free trade dogma. Thanks.