Author Archives: Simon Johnson

Who Built That?

Posted on September 10, 2012 | 25 Comments

By Simon Johnson

Perhaps the biggest issue of this presidential election is the relationship between government and private business. President Obama recently offended some people by appearing to imply that private entrepreneurs did not build their companies without the help of others (although there is some debate about what he was really saying).

Mitt Romney’s choice of Paul D. Ryan as vice presidential running mate is widely interpreted as signaling the further rise of the Tea Party movement within the Republican Party – with the implication that the private sector may soon be pushing back even more against the role of government.

For most of the last 200 years, national economic prosperity has been about creating and sustaining a symbiotic relationship between government and private business, including entrepreneurs who build businesses from scratch. This symbiosis was long a great strength of the United States, something it got right while other nations failed to do so, in various ways.

Is the partnership between government and business now really on the rocks? What would be the implications for longer-run economic growth of any such traumatic divorce? Continue reading →

→ 25 Comments

Posted in Commentary

Tagged ,

One Man Against The Wall Street Lobby

Posted on August 25, 2012 | 52 Comments

By Simon Johnson

Two diametrically opposed views of Wall Street and the dangers posed by global megabanks came more clearly into focus last week.  On the one hand, William B. Harrison, Jr. – former chairman of JP Morgan Chase – argued in the New York Times that today’s massive banks are an essential part of a well-functioning market economy, and not at all helped by implicit government subsidies.

On the other hand, there is a new powerful voice who knows how big banks really work and who is willing to tell the truth in great and convincing detail.  Jeff Connaughton – a former senior political adviser who has worked both for and against powerful Wall Street interests over the years – has just published a page-turning memoir that is also a damning critique of how Wall Street operates, the political capture of Washington, and our collective failure to reform finance in the past four years.  “The Payoff: Why Wall Street Always Wins,” is the perfect antidote to disinformation put about by global megabanks and their friends.

Specifically, Mr. Harrison makes six related arguments regarding why we should not break up our largest banks.  Each of these is clearly and directly refuted by Mr. Connaughton’s experience and the evidence he presents. Continue reading →

→ 52 Comments

Posted in Commentary

Tagged , ,

Why Does Wall Street Always Win?

Posted on August 23, 2012 | 40 Comments

By Simon Johnson

After a long summer of high-profile scandals – JPMorgan Chase trading, Barclays rate-fixing, HSBC money-laundering and more – the debate about the financial sector is becoming livelier.

Why has it has become so excessively dominated by relatively few very large companies? What damage can it do to the rest of us? What reasonable policy changes could bring global megabanks more nearly under control? And why is this unlikely to happen?

If any of these questions interest you – or keep you awake at night – you should take another look at the last time we had this debate at the national level, and reflect on the work of Ted Kaufman, the former Democratic senator from Delaware, who was far ahead of almost everyone in recognizing the problem and thinking about what to do.

Senator Kaufman represented Delaware in 2009 and 2010, and Jeff Connaughton – his chief of staff – has a new book that puts you in the room. In “The Payoff: Why Wall Street Always Wins,” we see Senator Kaufman as chairman of oversight hearings on the Justice Department and the F.B.I.’s pursuit of financial fraud, pushing the Securities and Exchange Commission on the dangerous rise of computerized trading and working with Senator Sherrod Brown, Democratic of Ohio, on the legislative fight to impose a hard cap on the size and debts of our largest banks. (I wrote many pieces supporting the work of Senator Kaufman at the time, including in this space, but I never worked for him.) Continue reading →

→ 40 Comments

Posted in Commentary

Tagged ,

Mitt Romney And Extreme Fiscal Policy

Posted on August 22, 2012 | 21 Comments

By Simon Johnson

As the presumptive Republican vice presidential candidate, Representative Paul D. Ryan of Wisconsin and his plans for the federal budget are drawing increasing interest. Mr. Ryan has been chairman of the House Budget Committee since the Republicans took control of the House of Representatives in the 2010 midterm elections and has articulated a vision for federal public finances that is quite different from what other prominent Republicans have been advocating – including Mitt Romney.

The contrast between Mr. Romney and Mr. Ryan tells us a great deal about the competition among fiscal ideas within the Republican Party. It also highlights the challenge Mr. Romney will face in November, if he is shifting rightward toward Mr. Ryan’s approach to budget policy, away from independents in the center of the political spectrum. Continue reading →

→ 21 Comments

Posted in Commentary

Tagged , ,

Bipartisan Push For More Equity In Big Banks

Posted on August 12, 2012 | 9 Comments

By Simon Johnson

Proponents of the status quo in the financial sector just cannot catch a break.  Early August is supposed to be a time when regulators and markets slow down, or perhaps even take a break, but this year the news continues to be dominated by mismanagement or worse inside complex financial institutions.

It’s time for a new approach to bank capital.  As proposed by two U.S. Senators, this is not a panacea, but it would have a dramatic effect on big banks and how they operate.

Earlier this week, Standard Chartered, a large global bank (about $600 billion in total assets) based in the UK, was accused of breaking US law in its dealings with Iran and other countries with financial sanctions imposed by the US.  The complaint, lodged by New York’s Department of Financial Services, suggests that the bank’s executives deliberately intended to deceive regulators.  Continue reading →

→ 9 Comments

Posted in Commentary

Tagged

Who Wants To Break Up The Big Banks?

Posted on August 6, 2012 | 48 Comments

By Simon Johnson

Correction: The American Banker slideshow on “Who Else Wants to Break Up the Big Banks“, to which I referred last week, is not behind a paywall.

Thanks to American Banker for making this content freely available.

(If you prefer to see an address before clicking on it: http://www.americanbanker.com/gallery/too-big-too-fail-breaking-up-big-banks-1048735-1.html)

→ 48 Comments

Posted in Commentary

Tagged

Big Banks Fall Back On Three Myths

Posted on August 3, 2012 | 26 Comments

By Simon Johnson

Global megabanks have had a tough summer.  Jamie Dimon, vociferous opponent of restrictions on reckless risk-taking by big banks, presided over large losses due to exactly such behavior in the London office of JP Morgan Chase.  HSBC, which prided itself on running a uniquely decentralized management model, was found to have violated – massively, over many years, and in a uniquely decentralized manner – US money laundering and other laws; the head of global compliance resigned while on the witness stand during a Senate hearing in July.  And Barclays – which had bulked up on the strength of its capital market activities – conceded that traders from that part of the company had conspired to rig Libor, a key benchmark for global interest rates; in the ensuing public outcry, the top two executives were forced out.

And last week Sandy Weill, who amassed a vast fortune building Citigroup and pushing to dismantle the constraints on such megabanks’ activities, concedes that the entire exercise was a mistake.

“I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable,..”

According to American Banker, former top executives calling for the biggest banks to be broken up now include Phil Purcell, former chief executive of Morgan Stanley; John Reed, former chairman of Citigroup; and David Komansky, former chief executive of Merrill Lynch.  (I am asking American Banker to bring their slide show on this issue out from behind their paywall.)

Backed into a corner, representatives of these Too Big To Fail banks and their allies are forced to fall back on perpetuating three myths. Continue reading →

→ 26 Comments

Posted in Commentary

Tagged

Fed Governor Speaks Out For Stronger Rules

Posted on July 28, 2012 | 14 Comments

By Simon Johnson

A powerful new voice for financial reform emerged this week – Sarah Bloom Raskin, a governor of the Federal Reserve System. In a speech on Tuesday, she laid out a clear and compelling vision for why the financial system should focus on providing old-fashioned but essential intermediation between savers and borrowers in the nonfinancial sector.

Sadly, she also explained that she is a dissenting voice within the Board of Governors on an essential piece of financial reform, the Volcker Rule. Her colleagues, according to Ms. Raskin, supported a proposed rule that is weaker, i.e., more favorable to the banks; she voted against it in October.

At least on this dimension, financial reform is not fully on track. Continue reading →

→ 14 Comments

Posted in Commentary

Tagged ,

The Federal Reserve And The Libor Scandal

Posted on July 19, 2012 | 58 Comments

By Simon Johnson

On June 1, 2008, Timothy F. Geithner – then president of the Federal Reserve Bank of New York – sent an e-mail to Mervyn A. King and Paul Tucker, then respectively governor and executive director of markets at the Bank of England. In his note, Mr. Geithner transmitted recommendations (dated May 27, 2008) from the New York Fed’s “Markets and Research and Statistics Groups” regarding “Recommendations for Enhancing the Credibility of Libor,” the London Interbank Offered Rate.

The recommendations accurately summarized the problems with procedures surrounding the construction of Libor – the most important reference interest rate in the world – and proposed some sensible alternative approaches.

This New York Fed memo stands out as a model of clear thinking about the deep governance problems that allowed Libor to become rigged.

At the same time, the timing and content of the memo raises troubling questions regarding the Fed’s own involvement in the Libor scandal – both then and now. Continue reading →

→ 58 Comments

Posted in Commentary

Tagged ,

The Market Has Spoken – And It Is Rigged

Posted on July 12, 2012 | 105 Comments

By Simon Johnson

In the aftermath of the Barclays rate-fixing scandal, the most surprising reaction has been from people in the financial sector who fully understand the awfulness of what has happened. Rather than seeing this as an issue of law and order, some well-informed people have been drawn toward arguments that excuse or justify the behavior of the Barclays employees.

This is a big mistake, in terms of both the economics at stake and the likely political impact.

The behavior at Barclays has all the hallmarks of fraud, pure and simple – intentional deception for personal gain, causing significant damage to others. Continue reading →

→ 105 Comments

Posted in Commentary

Tagged , ,

Lie-More As A Business Model

Posted on July 8, 2012 | 63 Comments

By Simon Johnson.  For more discussion of these issues, listen to NPR’s All Things Considered, July 7, 2012.

On Monday, Bob Diamond – the CEO of Barclays, one of the largest banks in the world – was supposedly the indispensable man, with his supporters claiming he was the only person who could see that global megabank through a growing scandal.  On Tuesday morning Mr. Diamond resigned and the stock market barely blinked – in fact, Barclays’ stock was up 0.3 percent.  As Charles de Gaulle supposedly remarked, “the cemeteries are full of indispensable men.”

Mr. Diamond’s fall was spectacular and complete.  It was also entirely appropriate.

Dennis Kelleher of Better Markets – a financial reform advocacy group – summarized the situation nicely in an interview with the BBC World Service on Tuesday.  The controversy that brought down Mr. Diamond had to do with deliberate and now acknowledged deception by Barclays’ staff with regard to the data they reported for Libor – the London Interbank Offered Rate (with the abbreviation pronounced Lie-Bore).  Mr. Kelleher was blunt: the issue in question is “Lie More” not Libor.  (See also this post on his blog, making the point that this impacts credit transactions with a face value of at least $800 trillion.) Continue reading →

→ 63 Comments

Posted in Commentary

Tagged , ,

Three More Governance Questions For The New York Fed

Posted on June 30, 2012 | 19 Comments

By Simon Johnson.  This is a long post, about 2500 words.

Over the last several weeks on this blog, I have expressed a broad set of concerns about governance arrangements at the Federal Reserve Bank of New York. I have made the specific case for Jamie Dimon, the chief executive of JPMorgan Chase, to step down from the New York Fed’s board because of the large, unexpected losses in his bank’s London proprietary trading operation – and the fact that these activities and their disclosure are now under investigation by the Fed.

On Monday I met with senior staff members of the Federal Reserve System to deliver and discuss a petition I created, signed by 38,000 people, requesting that Mr. Dimon resign or be removed from the New York Fed board. They were gracious in the time they afforded me.

More broadly, I see no grounds for optimism that Mr. Dimon will relinquish his Fed position any time soon. In addition, as a result of recent interactions with former officials and others who know the Fed intimately, I now have three additional substantive governance concerns for the New York Fed that merit further discussion. Let me pose them as straightforward questions that I hope the Fed – at the Board of Governors or New York Fed level – will answer publicly, and soon. Continue reading →

→ 19 Comments

Posted in Commentary

Tagged ,

The End Of The Euro: What’s Austerity Got To Do With It?

Posted on June 21, 2012 | 62 Comments

By Simon Johnson

Most of the current policy discussion concerning the euro area is about austerity.  Some people – particularly in German government circles – are pushing for tighter fiscal policies in troubled countries (i.e., higher taxes and lower government spending).  Others – including in the new French government — are more inclined to push for a more expansive fiscal policy where possible and to resist fiscal contraction elsewhere.

The recently concluded G20 summit is being interpreted as shifting the balance away from the “austerity now” group, at least to some extent.  But both sides of this debate are missing the important issue.  As a result, the euro area continues its slide towards deeper crisis and likely eventual disruptive break-up.

The underlying problem in the euro area is the exchange rate system itself – the fact that these European countries locked themselves into an initial exchange rate, i.e., the relative price of their currencies, and promised to never change that exchange rate.  This amounted to a very big bet that their economies would converge in productivity – that the Greeks (and others in what we now call the “periphery”) would in effect become more like the Germans.  Alternatively, if the economies did not converge, the implicit presumption was that people would move – i.e., Greek workers go to Germany and converge to German productivity levels by working in factories and offices there.

It’s hard to say which version of convergence was more unrealistic. Continue reading →

→ 62 Comments

Posted in Commentary

Tagged ,

An Institutional Flaw At The Heart Of The Federal Reserve

Posted on June 14, 2012 | 100 Comments

By Simon Johnson.  This is a long blog post, about 2,800 words.

On the “PBS NewsHour” in late May, Treasury Secretary Timothy Geithner indicated that the continued presence of Jamie Dimon, the chief executive of JPMorgan Chase, on the board on the Federal Reserve Bank of New York creates a perception problem that should be addressed. He used the diplomatic language favored by finance ministers, but the message was loud and clear: Mr. Dimon should resign from the board of the New York Fed.

Mr. Dimon has been an effective opponent of financial reform over the past four years. He remains an outspoken advocate of the view that global mega-banks can manage their own risks, and he has stated publicly that the new international and national rules on capital requirements are “Anti-American.”

Mr. Dimon now finds himself at the center of a number of official investigations into how his bank could have lost so much money so quickly in its London-based trading operation – including whether adverse material information was disclosed to regulators and to markets in a timely manner.

(The Wall Street Journal reported this week that serious concerns about the London trading operation had been raised – but not made public – two years ago; the New York Times has reported similar concerns. On Wednesday, the Senate Banking Committee interviewed Mr. Dimon; the event was inconclusive, perhaps because JPMorgan Chase is a major donor to some members of the committee.)

On Monday, Lee Bollinger, chairman of the board of the New York Federal Reserve Bank and president of Columbia University, weighed in to contradict Mr. Geithner in no uncertain terms. The Wall Street Journal reported Mr. Bollinger’s view: Mr. Dimon should stay on the New York Fed’s board, and critics attacking the Fed have a “false understanding” of how it works. (Please note the correction to the original Wall Street Journal story, with an important change to the reporting of what Mr. Bollinger said.) This is a remarkable statement in part because Mr. Geithner is himself a former president of the New York Fed, so it is hard to see how he would have a false understanding of how the Fed works. Continue reading →

→ 100 Comments

Posted in Commentary

Tagged , ,

Jamie Dimon And The Fall Of Nations

Posted on May 31, 2012 | 128 Comments

By Simon Johnson

“Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” by Daron Acemoglu and James Robinson, is a brilliant and sometimes breathtaking survey of country-level governance over history and around the world. Professors Acemoglu and Robinson discern a simple pattern – when elites are held in check, typically by effective legal mechanisms, everyone else in society does much better and sustained economic growth becomes possible. But powerful people – kings, barons, industrialists, bankers – work long and hard to relax the constraints on their actions. And when they succeed, the effects are not just redistribution toward themselves but also an undermining of economic growth and often a tearing at the fabric of society. (I’ve worked with the authors on related issues, but I was not involved in writing the book.)

The historical evidence is overwhelming. Many societies have done well for a while – until powerful people get out of hand. This is an easy pattern to see at a distance and in other cultures. It is typically much harder to recognize when your own society now has an elite less subject to effective constraints and more able to exert power in an abusive fashion. And given the long history of strong institutions in the United States, it appears particularly difficult for some people to acknowledge that we have serious governance issues that need to be addressed.

The governance issue of the season is Jamie Dimon’s seat on the board of the Federal Reserve Bank of New York. Mr. Dimon is the chief executive of JPMorgan Chase, currently the largest bank in the United States. This bank is “too big to fail” – meaning that if it were to get into difficulties, substantial financial support would be provided by the Federal Reserve System (and perhaps other parts of government) to prevent it from collapsing. Continue reading →

→ 128 Comments

Posted in Commentary

Tagged ,