Month: October 2010

Thoughts On The Macroeconomic Impact of Goldman Sachs

By Peter Boone and Simon Johnson

The influential Goldman Sachs economist Jan Hatzius has a new research note out (with Sven Jari Stehn), “Thoughts on the Macroeconomic Impact of Basel III,” arguing that the move to raise capital standards for banks will put a serious crimp in growth in the United States – knocking 1.5 to 2 percent off gross domestic product in the next few years. Their findings are questionable, but in any case we should broaden the discussion to consider exactly how banks like Goldman Sachs affect our macroeconomic dynamics going forward – particularly if they are able to effectively lobby against higher capital. Growth based on risky banking has a tendency to prove illusory.

There are three issues. First, what is the short-term impact of raising capital requirements? Second, how should capital be increased? And third, and perhaps most important, do we really need global banks like Goldman Sachs to operate in their recent “high risk – highly variable returns” mode?

In their note, which is not in the public domain, Mr. Hatzius and Mr. Stehn are willing to acknowledge that raising capital standards can help make banks safer and that this is good for sustained growth over a sufficiently long period of time (think a decade or more), as the Bank for International Settlements suggests. But they make the case that raising capital – at least in the form that this is likely to take place – can slow growth over the next several years. Continue reading “Thoughts On The Macroeconomic Impact of Goldman Sachs” →

The Government Does Have Something To Do with It

This guest post on the relationship of business and government comes to us from Lawrence B. Glickman, chair of the History Department at the University of South Carolina; the author, most recently, of Buying Power: A History of Consumer Activism in America; and an occasional contributor to this blog.

One of the most telling statements of our political era, made ten years ago this week by Dick Cheney during his Vice Presidential debate with Joe Lieberman on October 5, 2000, was actually a misstatement that went largely unnoticed. And therein lies an important lesson about the place of government in our political culture.

In response to the Democratic nominee Lieberman’s jibe that Cheney had profited handsomely from the job he had recently departed as CEO of the Haliburton Corporation, the Republican nominee replied, ”I can tell you, Joe, the government had absolutely nothing to do with it.” Amid the laughter and applause of the audience, Leiberman chuckled good-naturedly and joked about joining the private sector himself.

Following the debate, media analysts focused on what the New York Times called Cheneys avuncular self-confidence but, like his opponent, they largely passed over the fact that his statement was a whopping lie. Despite his denial and his antigovernment rhetoric, the company Cheney ran depended on billions of dollars of government contracts and loan guarantees. It would not be an exaggeration to say that government was Haliburton’s primary source of support.

Continue reading “The Government Does Have Something To Do with It” →

Why China Is Unwilling to Revalue the Yuan

The following guest post was contributed by Ian Lamont, an MIT Sloan Fellow. He was previously the managing editor of the Industry Standard, and has also researched China’s state-run media and communications policies.

For years, China has been subject to enormous external pressure to increase the value of its currency, or let it float on the open market. While doing so might relieve pressure on foreign economies by boosting their exports and reducing trade deficits, it runs counter to Beijing’s domestic priorities, which involve doing everything it can to preserve economic growth and domestic stability, and by extension, its hold on political power.

All countries exploit the dynamics between their political and economic systems. But China’s situation is exceptional. For three decades, the government of the People’s Republic of China has perpetuated a grand political dream, claiming a single-party political mandate from the Communist ideals espoused by Mao Zedong, while simultaneously drawing power from the capitalist canon. Beijing has been able to pull it off, largely through the promise of spreading wealth and opportunities to even the poorest of villages and maintaining benefits for cadres and workers in state-owned enterprises which cannot easily be absorbed into the capitalist system. A high rate of GDP growth is required year after year to maintain this state of affairs.

A sudden change in the value of the Yuan could have the effect of throwing a wrench into the works, potentially setting off a chain reaction of factory closures and layoffs across the interconnected networks that drive China’s export-oriented economy. In the short term, China might be able manipulate legislation, the banking sector, and welfare levers to prop up key industries or regions. But in the long term, it is uncertain if these steps would be enough to preserve social stability or continued loyalty to the Communist Party. Continue reading “Why China Is Unwilling to Revalue the Yuan” →