Author Archives: Simon Johnson

The Too Big To Fail Subsidy Debate Is Over

By Simon Johnson

No doubt there is still a lot of shouting to come, but this week a team at the International Monetary Fund completely nailed the issue of whether large global banks receive an implicit subsidy courtesy of the American government.   Is there a subsidy, is it large, and how much damage could it end up causing to the broader economy?

The answers, in order, are: yes, there is an implicit subsidy that lowers the funding costs for very large banks; the subsidy is big, with costs of borrowing for these banks lowered by as much as 100 basis points, i.e., 1 percentage point; and yet this large scale of implicit support is small relative to the macroeconomic damage that is likely to be caused by the high leverage and incautious risk-taking that the subsidy encourages.

If anything the IMF’s work provides a conservative (i.e., low) set of estimates.

Still, as I explain in my NYT.com Economix column, I’m a big fan of this work because the Fund’s report is very good on how to handle and reconcile the main alternative methodologies for getting at the issue.

The Fund offers an entirely reasonable approach that sets a very high quality bar. The Government Accountability Office (G.A.O.) is expected to produce a report on TBTF subsidies in the summer; their work now needs to be at least as careful and as comprehensive as that of the IMF. The same applies to the Federal Reserve and anyone in the private sector who attempts to dispute these numbers.

Citigroup CEO Named To “Key Administration Post”

By Simon Johnson

Just a few short days ago, it looked like Citigroup was on the ropes. The company’s proposal for redistributing capital back to shareholders was rejected by the Board of Governors of the Federal Reserve System. Given the global bank’s repeated fiascos – including most recently the theft of around $400 million from its Mexican unit – it is hardly surprising that the Fed has said “no” (and for the second time in three years).

The idea that Citigroup might now or soon have a viable “living will” now seems preposterous. If top management cannot run sensible financial projections (that’s the Fed’s view; see p.7 of the full report), what is the chance that they can lay out a plausible plan to explain how the company, operating in more than 100 countries worldwide, could be wound down through bankruptcy – without any financial assistance from the government? According to the Dodd-Frank financial reform law, failure to submit a viable living will should result in remedial action by the authorities.

Such action has now been taken: CEO Michael Corbat has been named to a top White House job, with responsibility for helping to develop “financial capability for young Americans.” Continue reading

Perhaps The Most Boring Important Topic In Economics

By Simon Johnson

International economic policy making is a contender for the title of “most boring important topic” in economics.  And within the field there is nothing quite as dull as the International Monetary Fund (IMF).  Try getting an article about the Fund on the front page of any newspaper.

And even for aficionados of the Fund, the issues associated with reforming its “quota” and “voting rights” seem arcane – and are fully understood by few.

Dullness in this context is not an accident – it’s a protective wrapping against political interference, particularly by the US Congress.

Now, however, the IMF needs a change in its ownership structure, and the sole remaining holdup is Congress.

The Obama administration let this issue slide for a long while, and then attempted to link it with financial aid being extended to Ukraine.  That attempt failed last week.

In a column for Project Syndicate, I discuss why this matters and what comes next.  Try not to fall asleep.

The Chinese Boom-Bust Cycle

By Simon Johnson

Should we fear some sort of financial crash in China, along the lines of what we saw in 2008 in the US or after 2010 in the euro area?

Given the rate of growth in credit and the expansion of the so-called shadow banking sector over the past five years in China, some sort of financial bust seems hard to avoid.

But this need not be the hard landing seen in more developed countries – and the impact on the world economy will likely be much more moderate.  At the same time, however, bigger problems await in the not-too-distant future.

Peter Boone and I review the details in a column for NYT.com’s Economix blog.

Stopping Russia

By Simon Johnson

The rhetoric of confrontation with Russia seems to be escalating, including with the remarkable suggestion – from Mike Rogers, the chairman of the House Intelligence Committee – that the US provide “small arms and radio equipment” to Ukraine.

Encouragement for a military confrontation is not what Ukraine needs.  As Peter Boone and I have argued in a pair of recent columns for the NYT.com’s Economix blog, Ukraine needs economic reform (with a massive reduction in corruption as the top priority).   This reform requires, above all, a massive and immediate reduction in – or elimination of – corruption.

Throwing a lot of external financial assistance at Ukraine’s government, for example with a very large loan from the International Monetary Fund, is unlikely to prove helpful.  Based on recent prior experience, such lending may even prove counterproductive.

And this seems to be exactly the path that our foreign policy elite has placed us on.

Ukrainian Chess

By Peter Boone and Simon Johnson

U.S. Secretary of State John Kerry arrived in Kiev on Tuesday.  The Obama administration is feeling real pressure from across the political spectrum to “do something”, but the US has no military options and little by way of meaningful financial assistance it can offer to Ukraine.  The $1 billion in loan guarantees offered today by Mr. Kerry means very little.

Millions of people have a great deal to lose if the situation gets out of control, and the Russian leadership is behaving in an unpredictable manner.  The sharp drop in the Russian stock market index on Monday morning, alongside an emergency hike in interest rates by the Central Bank, demonstrates that Russia’s financial elite was also caught completely off guard.

Mr. Kerry can and has made threats, but it would be better to join the Europeans in helping to calm the situation.  There is a completely reasonable and peaceful path to a solution available, but only if everyone wants to avoid a major conflict. Continue reading

Preventing Civil War in South Sudan

By Simon Johnson.  This post comprises the first two paragraphs of a column that appeared on the NYT.com’s Economix blog on Thursday, December 26, 2013.  To read the full post, click here.

The news from Juba is very bad. South Sudan is in the throes of political conflict and serious fighting, with several hundred people reported dead and more injured, that has the potential to become civil war. Unless cooler heads prevail, the situation in the capital Juba, Bor (the capital of Jonglei state, about 125 miles to the north of Juba), Bentiu (capital of Unity state, which has a lot of oil) and elsewhere could spiral out of control.

The outside world needs to get serious about preventing the escalation of this conflict; we can do this by applying appropriate economic pressure to all the military forces involved and by enduring that oil revenues are not used to fuel the conflict. This will require China, India, France and the United States to cooperate closely and in ways that may not come naturally.

To read the rest of this post, click on this link to NYT.com’s Economix blog: http://economix.blogs.nytimes.com/2013/12/26/preventing-civil-war-in-south-sudan/?_r=0

Fiscal Madness And Entrepreneurship

By Simon Johnson. 

This post draws on points discussed in class #7 of Entrepreneurship without Borders, a course at MIT Sloan.  More details on the course are here.

With the US government in partial shutdown (including suspending a significant amount of research and development activity) and the very real threat of a default on US government debt looming, now is a good time to ask – can the US maintain its edge in technology-based entrepreneurship?  What would it take to squander the advantages we currently have?  Can other countries catch up or surpass us on this important dimension that matters a great deal for technological innovation, productivity improvement, and job growth? Continue reading

Economic Statecraft, Women, and the Federal Reserve

By Simon Johnson. 

This post draws on issues discussed in class #6 of Entrepreneurship without Borders, a course at MIT Sloan.  The syllabus and other materials are available here.

The US has a long and generally successful track record of using “economic statecraft” to advance its positions and values in the world.  We helped rebuild Europe and Japan after World War II, with a judicious mixture of aid and access to the US market.  Similarly, as the Iron Curtain fell after 1989, the US stepped in with targeted financial support and general encouragement to converge on the European Union’s political and economic institutions.  The International Monetary Fund (IMF) and the World Bank, where the US has a big voice, have also played positive roles in many instances over the past 70 years.

No policy is perfect or without controversy.  But surely this approach is better than relying primarily on military power in the way preferred by former dominant powers – think of Rome, the Ottomans, or even the British Empire (where there was some commerce, but also a lot of coercion.)  But can we continue to apply the same economics-first approach to the next frontier for economic development – women’s rights?  Whether Janet Yellen becomes the next Chair of the Federal Reserve will provide some insight into the answer to that question. Continue reading

Starting With Chile

By Simon Johnson

This is a summary of class #5 in Entrepreneurship without Borders, a course at MIT Sloan.  For links to the course syllabus and summaries of earlier sessions, see this post.

Chile has experienced strong and relatively sustained economic growth in recent decades.  The economy has also proved more resilient to outside shocks (including to the price of copper, the largest export) than many others.  This is a case of good macroeconomic management, including by the central bank.  But there remains the question of how to create enough jobs and increase income levels – including for people at the lower end of the income distribution.

Start-Up Chile is an innovative approach to changing the culture about new ventures (see these FAQS).  By enticing would-be entrepreneurs with relatively small grants to spend at least 6-7 months in Chile, this initiative hopes to create role models and stronger connections between young Chilean people and global business opportunities.  If the entrepreneurs move on – as many do – perhaps this just helps build Chile’s position in global networks.  See this recent assessment, or the organization’s own 3 minute video pitch. Continue reading

Entrepreneurial Endeavor

By Simon Johnson

Below is a summary of points from Class #4 of Entrepreneurship without Borders, a course at MIT Sloan.  Use this link to look at earlier sessions.

The conventional view about entrepreneurship in emerging markets is that it is difficult or perhaps impossible for new start-ups to have a great deal of impact.  Local markets are dominated by big players who have a great deal of power and who can make life difficult for young competitors (e.g., a frequent complaint in South Korea).  Weak institutions, such as contracts that are hard to enforce, tip the balance towards large incumbents – many of which are based on a long-standing family business.

There is also often a culture (social norms and expectations) that does not view failure as a positive learning experience.  And access to capital and other critical inputs (e.g., talented workers) may be limited or not available to entrepreneurs at a price that makes the firm viable – or that allows for rapid growth.

Endeavor is an organization that works hard to address these issues, particularly by creating a local and global network of people who want to help entrepreneurs.  These communities have done very well in some countries – including in South America (see this visual representation of Endeavor’s impact in Argentina).  Continue reading

Thinking About Doing Business

By Simon Johnson

In class #1 of Entrepreneurship without Borders (at MIT Sloan) we discussed attitudes towards starting a new business.  In many countries, people want to become entrepreneurs, but they can access only limited types of opportunities.  Relatively small established elites, often with strong political connections, are able to mobilize the resources needed to build a company that can do well.  Class #2 focused on the details of the current situation in Portugal – the macroeconomy will presumably begin to improve and the basic enforceability of legal contracts seems fine, but we do yet see a breakthrough in companies being created by new entrepreneurs.  Below is a summary of the discussion in class #3.

The World Bank’s Doing Business indicators offer a rich set of data with many insights into the various barriers facing small and medium-sized business – as well as potential entrepreneurs.  These numbers provide a first-pass comparison across countries focused on (a) regulation, and (b) contract enforcement.

Singapore and Hong Kong are the impressive leaders of the pack (see Table 1.1 on page 3 of the executive summary of this report).  Countries can grow with an unfavorable environment, measured in this way, but this is more likely with a great deal of natural resources (e.g., offshore oil in Angola, ranked #172).  For most countries, it would be wise to look for a set of reforms that make it easier to do business.

Experience in Georgia since the mid-2000s is encouraging.  The government used the Doing Business indicators and related work to target their priorities – and made a great deal of progress, for example in terms of reducing the number of licenses required (for all kinds of activities) and creating a legal fast-track for applications (i.e., pay a premium and get your passport faster). Continue reading

Where are the European Entrepreneurs?

By Simon Johnson

This post is based on class #2 in my MIT Sloan course, Entrepreneurship Without BordersAn edited version appeared this morning on the NYT.com’s Economix blog.

Europe today is relatively rich on average, and there is undeniable potential for further convergence towards Northern levels in use of technology, organization of firms, and productivity levels.  We witnessed some impressive economic improvements over the past 20 years as Eastern Europe left behind its communist system – in part due to the creation of dynamic new firms (e.g., in Poland) and in part as a result of investments by foreign companies (e.g., in Hungary).  But the extent of North-South productivity convergence within Europe has proved disappointing since the formation of the euro area in the late 1990s.

Southern peripheral Europe is now in the midst of a serious economic crisis – precipitated by the realization that sovereign debt may actually be quite risky.  The immediate financial market pressure receded last year when the European Central Bank indicated that it will intervene to keep yields (i.e., interest rates on government debt) at manageable levels, but there is still the critical question of when growth will turn – and what rate of growth is sustainable in the medium term. Continue reading

Entrepreneurship Around the World: An MIT Course

By Simon Johnson

“Entrepreneurship Without Borders” is an MIT Sloan class, primarily designed for MBA students.  The course looks at economic growth, financial crises, and the distribution of income through the details of entrepreneurship in various parts of the global economy.  Below is a summary of class #1, from September 4, 2013.  The full running order of classes is here; all readings are freely available, with the exception of Harvard Business School cases.  The course consists of 12 sessions through mid-October, and summaries or other perspectives will appear regularly in this space. 

Entrepreneurship is a broad and sometimes amorphous concept, particularly when we try to compare business conditions around the world.  Who has a lot of entrepreneurs and what does that mean?  Should policymakers always want more people to start their own firms?  Who exactly is an entrepreneur and does using the same definition make sense in all places?

The Global Entrepreneurship Monitor (GEM) has done a great service by bringing clarity and some transparent data into this discussion.  (The specifics below refer to their 2012 report.)

A particular strength is that GEM looks, through opinion surveys, at what the broader public believes about starting their own business – including whether they think there are opportunities, whether they have the right personal capabilities to be an entrepreneur, and whether they are afraid of failing. Continue reading

Remember Citigroup

By Simon Johnson

On Thursday of last week, four senators unveiled the 21st Century Glass-Steagall Act.  The pushback from people representing the megabanks was immediate but also completely lame – the weakness of their arguments against the proposed legislation is a major reason to think that this reform idea will ultimately prevail.

The strangest argument against the Act is that it would not have prevented the financial crisis of 2007-08.  This completely ignores the central role played by Citigroup.

It is always a mistake to suggest there is any panacea that would prevent crises – either in the past or in the future.  And none of the senators – Maria Cantwell of Washington, Angus King of Maine, John McCain of Arizona, and Elizabeth Warren of Massachusetts – proposing the legislation have made such an argument.  But banking crises can be more or less severe, depending on the nature of the firms that become most troubled, including their size relative to the financial system and relative to the economy, the extent to which they provide critical functions, and how far the damage would spread around the world if they were to fall. Continue reading