Author Archives: Simon Johnson

An Elizabeth Warren for New York

By Simon Johnson

These days, almost everyone likes to complain about institutional corruption – and various forms of intellectual capture of government orchestrated by big corporate interests. But very few people are willing to do anything meaningful about it.

Zephyr Teachout is an exception. Not only has she written about the history of political corruption in the United States, both in long form (her recent book) and in many shorter versions (e.g., see this paper), she is competing for the Democratic nomination to become governor of New York.

In many countries, Ms. Teachout would sweep to victory. She has smart ideas about many dimensions of public policy (here are her economic policies), she has assembled a strong team, and – most of all – she represents exactly the kind of responsible reform that we need at this stage of our republic.

Elizabeth Warren offered exactly the same sort of promise to the people of Massachusetts in 2012 – real reform through pragmatic and effective politics. She has delivered on this promise and there is every indication that her influence will only grow in the years to come. Continue reading

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