Institute Of International Finance Wins Two Nobel Prizes

By Simon Johnson

In a surprise announcement early this morning, the 2011 Nobel Peace Prize and the Nobel Prize for Economics (strictly speaking: “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”) were simultaneously awarded to the Institute of International Finance (IIF), “the world’s only global association of financial institutions”.

This is the first time the Economics Prize has been awarded to an organization – although the Peace Prize has been received by various institutions (including the Intergovernmental Panel on Climate Change, the International Atomic Energy Agency, and Lord Boyd Orr – in part for his work with the Food and Agriculture Organization).

In its citation for the economics prize, the Royal Swedish Academy of Sciences said the IIF won for its work on capital requirements for banks, which proved that requiring banks to fund themselves with positive equity – and therefore have any kind of buffer against insolvency – would limit credit, be very bad for economic growth, and generally make all consumers less happy.  Based on this single remarkable paper, the IIF earned the prize for its:

 “achievements in the fields of consumption analysis, monetary history and for its demonstration of the complexity of stabilization policy”.

Put more simply, the IIF’s results showed that basic economics, modern finance, and pretty much all contemporary econometrics are completely wrong.  (See also this comment by Paul Pfleiderer of Stanford University.)

The Norwegian Nobel Committee, awarders of the peace prize, mentioned more broadly the IIF’s

extraordinary efforts to strengthen international banking and cooperation between regulators and those they are supposed to be regulating“.

Reaction to the prize was mixed, with the IIF itself seeming to feel that the financial sector was again under threat.  Charles Dallara, managing director of the Institute, immediately wrote to the G20 that he “sees no merit in the idea that any levy on the [Nobel Prize] should be paid into general revenue” (see “A Fair and Substantial Contribution by the Financial Sector: Preliminary Industry Comment,” on the IIF website.)

Josef Ackermann, CEO of Deutsche Bank and chair of the IIF’s board, is – by way of celebration – reported to be revising his group’s return-on-equity goal up significantly (from 20-25 percent where it currently stands for the corporate and investment banking division).  Presumably the return on zero equity will be substantial, at least in good years.

And Douglas Flint, Group Chairman of HSBC and also an Institute board member, is being even more assertive – pushing immediately for negative capital requirements for systemically important financial institutions.  If these are not granted at once in London, he is apparently threatening to move his bank to Sweden.

The U.S. Treasury will no doubt welcome the clarity provided by these prizes for the department’s own internal debates. Secretary Tim Geithner has done very little about seriously raising capital requirements, while endorsing higher capital in general terms – including in his testimony to Congress in early 2009.

“Sec. GEITHNER: The most simple way to frame it is capital, capital, capital. Capital sets the amount of risk you can take overall. Capital assures you have big enough cushions to absorb extreme shocks. You want capital requirements to be designed so that, given how uncertain we are about the future of the world, given how much ignorance we fundamentally have about some elements of risk that, there is a much greater cushion to absorb loss and to save us from the consequences of mistaken judgment and uncertainty in the world.”

Now the banks have been proved right, the Treasury Department’s lack of effort on really making the financial sector safer seems more justified.  As a senior offical told John Heilemann of New York magazine,

 “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.”

25 responses to “Institute Of International Finance Wins Two Nobel Prizes

  1. This Institution is reported to be a Globalists’ front.Even otherwise in economics very few non-Westerners have been honoured.Nobel Prize Committee is reported to be prejudiced and influenced by the likes of Rothschilds.Why else all these brilliant economists simply look on,and even endorse, the FIAT Money and Fractional Reserve Banking system/s which is/are a MERE fraud?

  2. Brock Sampson

    What, no Fields Medal in mathematics as well? They must be devastated to have been overlooked yet again.

  3. Alan the Mensch

    With notably rare exceptions (e.g. the whole thing), this post reads as if it was not an April Fool’s joke.

  4. umm, I THINK that this posting was an April’s Fools joke. The 2011 Nobel prizes have not been awarded yet.

    This post is a slam at Tim Geitner for not working to raise Capital requirements, and, as such, it is spot on.

  5. April Fools?

  6. Thanks to the commenters that reminded me that today is April 1. Phew! The IIF website isn’t bragging about their prizes.

  7. Good one. Almost got me. It is useful to increase the public awareness of the IIF.

  8. Well, after Yunus, Obama and the Berlusconi (!) candidacy, I was actually inclined to believe it – until I read the date…

    I do think the Nobel prize committee loses every year more authority.

    Good post!

  9. markets.aurelius

    This ain’t no April Fools’ joke:

    http://www.businessweek.com/magazine/content/11_15/b4223049606432.htm?campaign_id=yhoo

    The TBTF guarantee supporting the SSG at GS, while laughable, is no joke. From the article:

    “While SSG’s results aren’t published, the unit has been a major profit contributor at Goldman Sachs—the biggest in some periods, according to former SSG executives who asked not to be identified because they don’t want to speak publicly about their former employer. Investing and lending, which includes SSG, proprietary trading businesses, and investments in hedge funds and private equity, generated 32 percent of Goldman’s 2010 pretax profit, almost twice the profit from investment banking and money management combined, according to company reports.

    “Created during the late 1990s, SSG bought distressed assets in the aftermath of Asia’s financial crisis and profited in the Enron bankruptcy, one former employee says. A gain on an investment in Accordia Golf, Japan’s largest golf course operator, contributed about $500 million of revenue in the fourth quarter of 2006. Without SSG’s profits, analysts say, Goldman Sachs would find it hard to match its historical returns. The bank’s annualized return on average common shareholders’ equity was 13.1 percent in the fourth quarter of 2010, down from 41.5 percent in the same period in 2006, company reports show.”

    Any risk, any time. Without fear of consequence. That’s what the TBTF guarantee is. Party on!

  10. winchestereast

    the prize will be accepted for the institution by Steagall Glass, a former employee of the US Treasury Dept whose retirement ushered in the new golden age of Global Financial stability

  11. Is this the prize Obama won in 2009? This is so completely ludicrous as to border on the macabre.

    Since both Simon and Markets are serious men, this can’t be an April Fools joke, can it?

    hehehe

  12. Unfortunately I read this on Google Reader and your RSS stream lists this as being published on 3/31/11. The same thing happened to Microsoft with the release a day early. Microsoft Files Lengthy Antitrust Complaint Against Google

    http://www.tomshardware.com/news/Microsoft-Antitrust-EU-Google-Antitrust-European-Commission-Complaint,12488.html#xtor=RSS-181

  13. All joking aside, I wouldn’t want to live in a world where global banks can be effectively regulated.

  14. nihil obstet

    I kept reading the first part thinking “No. No. No! That can’t be right!” with my outrage meter going through the roof. The “awarders of the peace prize” line seemed to indicate a serious indictment. It wasn’t until the comment on the return on zero equity that I relaxed. At least, I think that’s a joke. Isn’t it?

  15. Desi Girl - Doing God's Work

    Happy All Fools Day!!!

  16. When will President Obama have to give back his Nobel Peace Prize?

    Syria will be another interesting country to watch as President Bashar al-Assad follows in his dad’s footsteps of power, Hafez al-Assad; though Bashar doesn’t have the oil wealth to buy off the restless natives, as does Saudi King Abdullah bin Abdul Aziz.

    President Obama didn’t get ahead of the curve on the (democratic) revolution that was taking place in Egypt and slow to respond on Libya three weeks ago when the rebels were in the best position to take on Tripoli and Gaddfi, although they reported that Pres Obama approved authorization (“findings”) for the CIA to help NATO target Gaddfi tanks on the ground. The democratic push started in Tunsia, then Egypt is giving hope (and courage) for repressed peoples. These revolutions (pushing for more economic and political reforms) would have happened sooner had the U.S. not poured billions of military aid into these dictatorial countries. Of course, Israel is not a happy camper to all these changes because it will also mean that Israel have to eventually come to terms with the Palestinians; it’s hard to give up the upper hand of power (and double standards) when you’ve enjoyed and been propped by the biggest donor of military aid and political support—the U.S.A. No joke, as the world keeps turning.

  17. The Basel Committee makes a shocking confession!

    The Basel Committee for Banking Supervision, speaking for all sophisticated bank regulators around the world, issued today an urgent statement regarding the discovery of a fundamental mistake committed in Basel II and which they now understand was responsible for causing the current financial crisis.

    The mistake was that though the markets and the banks were already incorporating the information about the possibilities of default that were contained in the credit ratings when calculating the corresponding risk premiums to set interest rates for their clients, the regulators based the capital requirements for banks on exactly the same credit ratings, and so, unwittingly, accounted for said credit information twice.

    The result of it was, of course, the excessive financing of everything that was officially deemed as having a low risk of default, like whatever had swell ratings like Greece and securities backed by lousily awarded mortgages to the subprime sector; and the insufficient financing of whatever was officially deemed as more risky, like the small businesses and entrepreneurs who are vital for maintaining that dynamism of the economy that creates jobs.

    The Basel Committee expresses its most sincere regrets for such a mistake and promises to take immediate corrective action.

    PS. April Fool´s joke disclaimer: Sorry, unfortunately, the Basel Committee and the sophisticated bank regulators, three years into a crisis of its own making, are still not (publicly) aware of their mistake.

    The Independent Evaluation Officer of the International Monetary Fund has recently in an Evaluation Report come to the conclusion that, for IMF at least, “the ability to correctly identify the mounting risks was hindered by a high degree of groupthink…” The reason why the truth of what happened does not come out must probably now be attributed to group-interests.

  18. realitycheck

    Hehe, good one Simon.

  19. Of course it was April 2nd in New Zealand when this was published so no-one here was fooled.

    In fact for tomorrow’s news today send me $10 and I’ll email it to you!

  20. Herbert Wetherby

    “the ability to correctly identify the mounting risks was hindered by a high degree of groupthink…” The reason why the truth of what happened does not come out must probably now be attributed to group-interests.

    And this is exactly what I have been saying about the institutional psyco babble, the industry has over diagosed itself has been chaseing its tail in the name of basil since close to 1984. Now they want to take those conditions and apply them today so there are layers of corruption that can never affect the top brass. We know this is baked into the cake and to change the recipe now might even create a middle eastern civil war, and who needs that when you’re STILL tryin to cover your tracks from an insurance bailout.

  21. Stephen A. Boyko

    “Sec. GEITHNER: The most simple way to frame it is capital, capital, capital. Capital sets the amount of risk you can take overall. Capital assures you have big enough cushions to absorb extreme shocks.”

    But unless and until risk is differentiated from uncertainty (see: http://readingthemarkets.blogspot.com/2009/10/boyko-were-all-screwed.html), errors of conflation will continue to result in noncorrelative information that will thwart the capital market.

    Reality is contextual. Conflating “risk” with “uncertainty” produces the unintended consequences of contingent and unforeseeable liabilities for market practitioners. This jeopardizes market effectiveness. Holding market participants who deal in uncertainty to the condition of determinism conveys regulatory rights without attendant regulatory responsibilities. Imposing commands to attain predictive capability on capital markets characterized by “uncertainty” undermines market resiliency and increases the probability of systemic failure. Such regulation imposes sanctions on unforeseeable events that stifle free market innovation and adaptability.

  22. Sadly, I would have to say that within the G3 (United States; Euro Land; and Japan), that Japan is out of the equation for a decade or more? Who will fill the slot is the real April Fool’s Joke :-))

  23. Oh ho ho… !

    Reality mimics art. Just wait till the Federal Reserve decides that a better way to tighten the money supply is to pay banks a higher IOR on their massive reserve balance – thus getting banks to slow down lending by paying them a massive subsidy NOT to lend.

    http://www.newyorkfed.org/markets/ior_faq.html

    There are two fundamental things to understand what the Fed is doing:

    1) They don’t agree with most people on what money is. Their understanding of “credit as money” is a direct parallel to the arguments banks use to limit requirements to raise equity capital.

    We (in the US) just spent 30+ years shifting from an equity financed world to a debt financed world (a world with endogenous/privatized money) because a handful of economists built some models showing it’s more efficient in an idealized equilibrium.

    2) The academic members of the Fed don’t care about distributional implications of bank policy – just about hitting inflation targets. The non-academic members of the Fed do care about distribution implications. And they work for the banks.

    Thank you for the chuckle.

  24. Awarded Economics Prize to an organization is a great step. By this the IIF will get public awareness.

  25. Good job..hohoho almost got me.