Author Archives: Simon Johnson

Go For Gold

Posted on April 1, 2013 | 25 Comments

By Simon Johnson, April 1, 2013

In both 13 Bankers (2010) and White House Burning (published 2012, paperback just came out) James Kwak and I weighed the merits of going back on a global gold standard.  In those books, we ended up siding with the prevailing fiat currency system – in which money is backed by nothing more than your confidence in central banks.

In the light of recent events – in the US and in Europe – I feel we should reconsider the arguments.  On balance, I am now in favor of going back on gold for ten main reasons. Continue reading →

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Sir John Peace Should Resign As Chairman of Standard Chartered Bank

Posted on March 21, 2013 | 11 Comments

By Simon Johnson

On Thursday, March 21, Sir John Peace conceded that he lied to investors on March 5, 2013 when he said of Standard Chartered Bank,

“We had no willful act to avoid sanctions; you know, mistakes are made – clerical errors – and we talked about last year a number of transactions which clearly were clerical errors or mistakes that were made…”

Specifically, he now says that these remarks were “both legally and factually incorrect” because Standard Chartered had previously conceded that it deliberately laundered money. 

In plain English, what Sir John said is called lying.  Or, if you prefer the language of securities lawyers, he engaged in deliberate misrepresentation.  He also violated Standard Chartered’s deferred prosecution agreement with US authorities.

Here is the full statement today.

Sir John should resign immediately as chairman of Standard Chartered. Continue reading →

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“Some Of These Institutions Have Become Too Large”

Posted on March 7, 2013 | 52 Comments

By Simon Johnson

In a recent interview with PBS’s Frontline, Lanny Breuer – head of the criminal division at the Department of Justice – appeared to admit that some financial institutions were too big to prosecute.  In the “too big to fail is too big to jail” controversy that ensued, lobbyists and other supporters of big Wall Street firms tried all kinds of complicated ways to spin Mr. Breuer’s words.

Their job got a lot harder yesterday when Eric Holder, the attorney general, stated clearly to the Senate Judiciary Committee,

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,” (Watch the video for yourself.)

According to Mr. Holder, speaking as the top enforcer of the country’s laws, “some of these institutions have become too large.”

Senator Sherrod Brown (D, OH), a leading voice for making the biggest banks smaller, reacted in this way, Continue reading →

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A Growing Split Within Republicans On Too Big To Fail Banks

Posted on February 7, 2013 | 50 Comments

By Simon Johnson

An interesting debate is developing within the Republican Party on how to approach the problem of too-big-to-fail financial institutions.

On the one hand, a growing number of influential voices are pushing for measures that would limit the size of megabanks or even push them to become smaller. Richard Fisher, president of the Federal Reserve Bank of Dallas, continues to draw a lot of attention, as does Thomas Hoenig, the former president of the Federal Reserve Bank of Kansas City and now vice chairman of the Federal Deposit Insurance Corporation. And Jon Huntsman planted a strong conservative flag on this issue during his run for the presidency in 2011.

This assessment is now shared much more broadly across the right, as seen in recent opinion pieces by George Will and Peggy Noonan, as well as regular analysis by James Pethokoukis of the American Enterprise Institute, including on the issue I write about today. See this Holiday 2012 survey, provided by the Dallas Fed, with links to views in favor of and against breaking up the big banks. Continue reading →

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The Debt Ceiling Confrontation Is Playing With Fire

Posted on January 24, 2013 | 26 Comments

 By Simon Johnson

Congressional Republicans are again threatening not to increase the ceiling on the amount of federal government debt that can be issued. On Wednesday, they agreed to postpone this particular piece of the fiscal confrontation, but only until May. The decision to turn the debt ceiling into some form of showdown is a big mistake for the Republicans — and dragging out the indecision is likely to prolong the agony of uncertainty and have damaging economic consequences for the country.

I made these points at a hearing on Tuesday of the House Ways and Means Committee, but unfortunately the Republican majority seems determined to persevere with its destabilizing strategy. (The hearing can be viewed on C-SPAN’s Web site; see the playlist on the right.) Continue reading →

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Mary Miller vs. Neil Barofsky For The S.E.C

Posted on November 22, 2012 | 19 Comments

By Simon Johnson

The Obama administration is floating the idea that Mary J. Miller, under secretary for domestic finance at the Treasury Department, could become its nominee to lead the Securities and Exchange Commission. Ms. Miller, a longtime executive in the mutual funds industry, has served in the Treasury under Timothy Geithner since February 2010.

Ms. Miller represents the financial sector’s preferred approach to financial reform – some rhetoric but very little by way of serious effort. She has no time for people who are serious about making the financial system safer. And there is no willingness to really face down powerful people on Wall Street.

Her potential candidacy faces three major obstacles: Neil Barofsky, money market funds and the new momentum for reform. Continue reading →

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Neil Barofsky For The S.E.C.

Posted on November 17, 2012 | 91 Comments

By Simon Johnson

There are two fundamentally different views regarding modern Wall Street. The first is that the financial sector has been terribly and unjustly put upon in recent years – regulated into the ground and treated with repeated disrespect, including by the White House.

There was, for example, an impressive amount of whining this week when no one from a big bank was invited to a high-profile meeting with the president on fiscal issues. As the people holding strongly to this view run large financial institutions and have effective public relations teams, this has become an important part of the conventional or establishment wisdom, repeated without question in some parts of the media.

The second view is that the powerful people who run global megabanks have lost all sense of perspective – including failing to realize that they have more access to people at the top of our political power structures than any other sector has ever had. Anyone who doubts this view – or wonders exactly how the revolving door among politics, lobbying and banking works – should read Jeff Connaughton’s account, “The Payoff: Why Wall Street Always Wins” (which I have written about in more detail before). Mr. Connaughton is most gripping when he describes the failure of law enforcement around securities issues, including issues with both the Department of Justice and the Securities and Exchange Commission. Continue reading →

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The Importance Of Elizabeth Warren

Posted on November 8, 2012 | 49 Comments

By Simon Johnson

One of the most important results on Tuesday was the election of Elizabeth Warren as United States senator for Massachusetts. Her victory matters not only because it helps the Democrats keep control of the Senate but because Ms. Warren has a proven track record of speaking truth to authority on financial issues – both to officials in Washington and to powerful people on Wall Street.

During the campaign, Ms. Warren’s opponent and his allies made repeated attempts to portray her as antibusiness. In the most bizarre episode, Karl Rove’s Crossroads GPS ran an ad that contended that she favored bailing out large Wall Street banks. All of this was misdirection and disinformation.

Ms. Warren has long stood for transparency and accountability. She has insisted that consumers need protection relative to financial products – when the customer cannot understand what is really on offer, this encourages bad behavior by some companies. If this behavior spreads sufficiently, the entire market can become contaminated – damaging the entire macroeconomy, exactly as we have seen in the last decade. Continue reading →

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Too Big To Fail Remains Very Real

Posted on November 3, 2012 | 5 Comments

By Simon Johnson

Prominent voices within the financial sector are increasingly insisting on one point: We have ended “too big to fail.” The idea is simple: through a combination of legislation (the Dodd-Frank legislation of 2010) and supportive regulation (particularly regarding how big banks would be handled in the event of “liquidation”), very large financial institutions are no longer perceived by investors to be too big to fail.

Unfortunately, while tempting, this idea is completely at odds with the facts. The market perception that some financial institutions are “too big to fail” is alive and well. If you want to remove that perception, you need to break up our biggest banks. Continue reading →

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Bipartisan Trouble Ahead

Posted on October 25, 2012 | 15 Comments

By Simon Johnson

In Washington today, “bipartisan” is a loaded term. The traditional usage of bipartisan is an agreement across the usual political divide – sometimes a good idea and in many cases the only way to get things done. But a darker meaning applies all too frequently – a group in which the members, irrespective of party affiliation, are very close to special interests and work to advance an agenda that helps a few powerful people while hurting the rest of us.

Financial deregulation in the 1980s and 1990s was pushed by both Democrats and Republicans. It reached its apogee when Alan Greenspan, a Republican, was chairman of the Federal Reserve and Robert Rubin, a Democrat, was Treasury secretary. Bill Clinton was president; Newt Gingrich was speaker of the House.

This is probably why President Obama and Mitt Romney shied away this fall from the issue of who was responsible for the financial crisis that brought us the deep recession and slow recovery of the last five years. Both political parties share culpability for allowing parts of the financial sector to take excessive risk while financing themselves with a great deal of debt and relatively little equity.

In this context, the new Financial Regulatory Reform Initiative of the Bipartisan Policy Center seems eerily familiar. Continue reading →

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Read This Book, Win The Election

Posted on October 11, 2012 | 12 Comments

By Simon Johnson

With the presidential election looming and both sides looking for a knockout blow in the vice-presidential debate on Thursday evening, now is a good time for both Democrats and Republicans to look for one more defining issue. The new book by Sheila Bair, “Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself,” offers exactly that – to whichever party is smart enough and fast enough to take up the opportunity.

Ms. Bair lays out a compelling vision for both financial-sector reform and for dealing with the continuing mess around mortgages. Neither presidential campaign is likely to endorse her ideas in all their specifics. But if a candidate signaled that he had read and understood the main messages in this book, this would have great appeal both with undecided centrist votes and – importantly – with their respective bases. Continue reading →

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Fiscal Confrontation And The Declining Influence Of The United States

Posted on October 3, 2012 | 26 Comments

By Simon Johnson

It is axiomatic among most of our Washington elite that the United States cannot lose its preeminent global role, at least not in the foreseeable future. This assumption is implicit in all our economic policy discussions, including how politicians on both sides regard the leading international role of the United States dollar. In this view, the United States is likely to remain the world’s financial safe haven for international investors, irrespective of what we say and do.

Expressing concerns about the trajectory of our federal government debt has of course become fashionable during this election cycle; this is a signature item for both the Tea Party movement in general and vice presidential candidate Paul D. Ryan in particular.

But the tactics of fiscal confrontation – primarily from the right of the political spectrum – only makes sense if the relevant politicians, advisers and donors firmly believe that the American financial position in the world is unassailable. Continue reading →

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Scott Brown: ATM For The Big Banks

Posted on September 30, 2012 | 32 Comments

By Simon Johnson

During the Dodd-Frank financial reform debate in early 2010, newly elected Senator Scott Brown of Massachusetts was referred to as an ATM for the bankers – meaning that whenever they needed some more cash, they would stop by his office.  It was not paper money he was handing out, of course, it was something much more valuable – rule changes that conferred a greater ability to take on reckless risk, damage consumers, and impose higher future costs on the taxpayer.

Mr. Brown had this ability because he represented the final vote needed to pass Dodd-Frank through the Senate.  He could have asked for many things – including greater consumer protection, a more thorough investigation into mortgage practices, and reforms that would have cleaned up unscrupulous lenders.  He asked for none of those changes – or anything else that would have made the financial system safer and fairer.

Instead, Senator Brown’s requests were designed to undermine the Volcker Rule – i.e., he was opposing sensible attempts to limit the ability of big banks to place highly dangerous bets (and to blow themselves up at great cost to the rest of us).  Mr. Brown seems to have been particularly keen to allow big banks to invest in hedge funds of various kinds – and the Boston Globe reported recently that he has continued to push in this direction behind the scenes.  Continue reading →

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Restoring The Legitimacy Of The Federal Reserve

Posted on September 20, 2012 | 57 Comments

By Simon Johnson

The Federal Reserve has a legitimacy problem. Fortunately, a potential policy shift is available that offers both the right thing for the Fed to do and a way to please sensible people on both sides of the political spectrum: raise capital requirements for megabanks.

As the election season progresses, Republican politicians are increasingly criticizing the monetary policy of Ben Bernanke and his colleagues on the grounds that they are exceeding their authority, particularly by buying assets and trying to lower interest rates in what is known as “quantitative easing.”

There is growing concern in Republican circles that the Fed is tipping the election toward President Obama, and Mitt Romney repeated unambiguously in August that he would not reappoint Mr. Bernanke (a Republican originally appointed by President George W. Bush).

At the same time, a significant number of people on the left of American politics are concerned about how the Fed acted in the period leading up to the crisis of 2008 – blaming it for a significant failure of regulation and supervision – and about how much support it currently provides to big banks. Continue reading →

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Introducing The Latin Euro

Posted on September 13, 2012 | 20 Comments

By Peter Boone and Simon Johnson

The verdict is now in:  traditional German values lost and the Latin perspective won.  Germany fought hard over many years to include “no bailout” clauses in the Maastricht Treaty (the founding document of the euro currency area), and to limit the rights of the European Central Bank (ECB) to lend directly to national governments.  Last week, the ECB governing council – over German objections – authorized purchasing unlimited quantities of short-term national debts and effectively erased any traditional Germanic restrictions on its operations.  (The finding this week by the German Constitutional Court — that intra-European financial rescue funds are consistent with German law — is just icing on this cake, as far as those who support bailouts are concerned.)

With this critical defeat at the ECB, Germany is forced to concede two points.  First, without the possibility of large-scale central bank purchases of government debt for countries such as Spain and Italy, the euro area was set to collapse.  And second, that “one nation, one vote” really does rule at the ECB; Germany has around ¼ of the population of the euro area (81 million out of a total around 333 million), but only one vote out of 17 on the ECB governing council – and apparently no veto.  The balance of power and decision-making has shifted towards the troubled periphery of Europe.  The “soft money” wing of the euro area is in the ascendancy. Continue reading →

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