Month: March 2011

“A Healthy Financial System Cannot Be Built On The Expectation Of Bailouts”

By Simon Johnson.  Testimony submitted to the Congressional Oversight Panel, “Hearing on the TARP’s Impact on Financial Stability,” Friday, March 4, 2011.

I.                   Summary

1)      The financial crisis is not over, in the sense that its impact persists and even continues to spread.  Employment remains more than 5 percent below its pre-crisis peak, millions of homeowners are still underwater on their mortgages, and the negative fiscal consequences – at national, state, and local level – remain profound. 

2)      To the extent that a full evaluation is possible today, the financial crisis produced a pattern of rapid economic decline and slow employment recovery quite unlike any post-war recession – it looks much more like a mini-depression of the kind the US economy used to experience in the 19th century.  In addition, the fiscal costs of the disaster in our banking system so far amount to roughly a 40 percentage point increase in net federal government debt held by the private sector, i.e., roughly a doubling of outstanding debt. 

3)      In this context, TARP played a significant role preventing the mini-depression from becoming a full-blown Great Depression, primarily by providing capital to financial institutions that were close to insolvency or otherwise under market pressure.

4)      But part of the cost is to distort further incentives at the heart of Wall Street.  Neil Barofsky, the Special Inspector General for the Troubled Assets Relief Program put it well in his latest quarterly report, which appeared in late January, emphasizing: “perhaps TARP’s most significant legacy, the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail.’” Continue reading ““A Healthy Financial System Cannot Be Built On The Expectation Of Bailouts”” →

Is The New York Fed Making A Serious Mistake On Bank Dividends?

By Simon Johnson

An uncomfortable dissonance is beginning to develop within the Federal Reserve.  On the one hand, senior current and former officials now generally agree with the propositions put forward by Professor Anat Admati and her distinguished colleagues – our leading banks need more capital, i.e., more equity financing relative to what they borrow.

The language these officials use is vaguer than would be ideal and they refuse to be drawn on the precise numbers they have in mind.  The Swiss National Bank, holding out for 19 percent capital, and the Bank of England, pushing for at least 20 percent capital, seem to be further ahead and much more confident intellectually on this issue. 

But an important split appears to be emerging within the Federal Reserve system, with the Board of Governors and most regional Feds tending to want higher capital levels from today’s levels, while the New York Fed is – incredibly – pushing hard to enable big banks actually to reduce their capital ratios (in the first instance by allowing them to pay increased dividends). Continue reading “Is The New York Fed Making A Serious Mistake On Bank Dividends?” →

For Profit or For Students?

This guest post is contributed by Mark Paul and Anastasia Wilson. Both are members of the class of 2011 at the University of Massachusetts-Amherst.

For-profit colleges are expanding enrollments at a rapid pace, but it is questionable whether these revenue-seeking universities give adequate consideration to students’ welfare, retention/graduation rates, and overall economic well-being alongside their bottom line profits.

A new post by Judith Scott-Clayton, a professor at Columbia Teachers College and new weekly contributor to the New York Times Economix blog, explores the merits of for-profit colleges, arguing that in many ways these schools are more efficient at seeking funding opportunities for students and adopting new teaching technologies. These schools procure more Federal dollars per student and employ more cost-saving technologies, in the classroom and online, than their non-profit public and private competitors.

However, the real question is not a matter of efficiency, but instead concerns students and the taxpayers funding Federal loans and grants consumed by for-profits. Are the relative merits of profit-oriented schools, including their comparative advantage in securing Federal funding, being used to improve the return on investment for students or for their shareholders? On the macro level, does the growth of for-profit higher education promote new risks in the economy, as drop-out and loan default rates continue to increase?

Continue reading “For Profit or For Students?” →