Category Archives: Commentary

“Some Of These Institutions Have Become Too Large”

Posted on March 7, 2013 by | 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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Lessons of the Sequester

Posted on March 4, 2013 by | 26 Comments

By James Kwak

The automatic sequester—the across-the-board cuts to discretionary programs that President Obama said “will not happen”—happened. The reason is simple and predictable: Republicans insist that the sequester be replaced entirely by spending cuts, while Democrats insist that tax increases must be part of the bargain.

One of the more controversial positions that I have taken, on several occasions over the past two years, was that the Bush tax cuts should have been allowed to expire completely. Now we see why.

In White House Burning, Simon and I calculated that the Bush tax cuts would be worth 2.5 percent of GDP in the long term. In other words, extending the tax cuts would mean that, in order to stabilize the debt-to-GDP ratio in the long term, we would have to come up with other tax increases or spending cuts equivalent to 2.5 percent of GDP—in today’s terms, about $400 billion per year.

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Maybe It Was Apple

Posted on February 25, 2013 by | 28 Comments

By James Kwak

A little over a year ago, iconic but fading department store J.C. Penney hired Ron Johnson as CEO. Johnson was head of retail operations at Apple—which, in case you didn’t know it, is just about the most successful retailer in the world by a bevy of metrics.

According  to today’s Wall Street Journal article, Johnson quickly eliminated coupons and most sales at J.C. Penney.

“Johnson bristled when a colleague suggested that he test his new no-discounts strategy at a few stores. . . . ‘We didn’t test at Apple,’ the executive recalled Mr. Johnson . . . saying.”

Well, yeah. Apple doesn’t discount because they sell stuff that people really, really want and that they can’t get anyplace else. And they don’t test because Steve Jobs refused to. At Penney? Sales have fallen by about 30 percent.

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The Importance of Excel

Posted on February 9, 2013 by | 164 Comments

By James Kwak

I spent the past two days at a financial regulation conference in Washington (where I saw more BlackBerries than I have seen in years—can’t lawyers and lobbyists afford decent phones?). In his remarks on the final panel, Frank Partnoy mentioned something I missed when it came out a few weeks ago: the role of Microsoft Excel in the “London Whale” trading debacle.

The issue is described in the appendix to JPMorgan’s internal investigative task force’s report. To summarize: JPMorgan’s Chief Investment Office needed a new value-at-risk (VaR) model for the synthetic credit portfolio (the one that blew up) and assigned a quantitative whiz (“a London-based quantitative expert, mathematician and model developer” who previously worked at a company that built analytical models) to create it. The new model “operated through a series of Excel spreadsheets, which had to be completed manually, by a process of copying and pasting data from one spreadsheet to another.” The internal Model Review Group identified this problem as well as a few others, but approved the model, while saying that it should be automated and another significant flaw should be fixed.** After the London Whale trade blew up, the Model Review Group discovered that the model had not been automated and found several other errors. Most spectacularly,

“After subtracting the old rate from the new rate, the spreadsheet divided by their sum instead of their average, as the modeler had intended. This error likely had the effect of muting volatility by a factor of two and of lowering the VaR . . .”

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A Growing Split Within Republicans On Too Big To Fail Banks

Posted on February 7, 2013 by | 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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What Is Social Insurance?

Posted on January 24, 2013 by | 30 Comments

By James Kwak

“We do not believe that in this country, freedom is reserved for the lucky, or happiness for the few. We recognize that no matter how responsibly we live our lives, any one of us, at any time, may face a job loss, or a sudden illness, or a home swept away in a terrible storm. The commitments we make to each other – through Medicare, and Medicaid, and Social Security – these things do not sap our initiative; they strengthen us. They do not make us a nation of takers; they free us to take the risks that make this country great.”

Many liberals have been heartened by these words, spoken by President Obama during Monday’s inaugural address. Indeed, they represent one of the few times when anyone, including the president, has even attempted to defend our major social insurance and safety net programs. The usual posture among the type of centrist Democrats who make it into the administration is some combination of (a) simply attacking, as self-evidently evil, anyone who proposes benefit cuts and (b) saying in serious tones that we will have to cut spending one way or another.

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The Debt Ceiling Confrontation Is Playing With Fire

Posted on January 24, 2013 by | 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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More Bad Software

Posted on January 16, 2013 by | 27 Comments

By James Kwak

Last week BATS admitted that its software suffered from systematic problems for four years, failing to obtain the best execution price for about 250 customers and costing them about $400,000. That should be a giveaway: no self-respecting company would break the law just to steal $400,000 from its customers. This was a programming error, pure and simple.

Also last week, a RAND study revealed that, despite billions of dollars of investment, electronic medical records have done little to reduce costs for healthcare providers. This is more complicated than a simple programming error. The issue here is that projected savings of this kind are typically based on some model of how operations will be done in the future, and that model depends on perfectly-designed software functioning perfectly. Medical records systems apparently fall far short of this ideal: as the Times summarized, “The recent analysis was sharply critical of the commercial systems now in place, many of which are hard to use and do not allow doctors and patients to share medical information across systems.”

The common feature to these stories, however, is that big, complex, business software is really, really important—and a lot of it is bad. In many niches, it’s bad because there aren’t that many companies that serve that niche, it’s hard for customers to evaluate software that hasn’t been delivered and installed yet, and there are all sorts of legacy problems, particularly with integration to decades-old back-end systems. And most of the incentives favor closing the sale first rather than making sure the software works the way it should.

I don’t have much to add that I didn’t put in my Atlantic column on a similar topic last summer. Nothing has changed since then. So I’ll stop there.

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A Weak “Defense of the CEO”

Posted on January 14, 2013 by | 38 Comments

By James Kwak

I finally bit the bullet and read “In Defense of the CEO,” Ray Fisman and Tim Sullivan’s article on the cover of the “Review” section of Saturday’s WSJ. The inside continuation page is headlined “When CEOs Are Worth a Fortune.” In fact, I read it twice. But nowhere could I find any evidence or even an argument that any CEOs are worth a fortune—just a lot of implying, assuming, and asserting that they are.

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If Only

Posted on January 4, 2013 by | 136 Comments

By James Kwak

Paul Krugman describes the battle lines this way:

“Democrats want to preserve the legacy of the New Deal and the Great Society — Social Security, Medicare and Medicaid — and add to them what every other advanced country has: a more or less universal guarantee of essential health care. Republicans want to roll all of that back, making room for drastically lower taxes on the wealthy.”

I think he’s right about the Republicans. But I don’t think he’s right about the Democrats.

If you want to preserve Social Security, Medicare, and Medicaid, in a world where the population is aging and health care costs are going up, then it’s obvious that your top priority should be higher tax revenues. Without a reasonable level of federal tax revenues, there’s no way we’ll be able to pay for those programs in the future.

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It’s Not That Complicated

Posted on December 31, 2012 by | 14 Comments

By James Kwak

Of course the tax bill couldn’t have passed today, even if the two sides reached a compromise. Today it would have been a tax “increase.” Tomorrow it will be a tax “cut.” As my daughter would say, “Duh.”

Grover Norquist’s Taxpayer Protection Pledge will remain technically inviolate, which was not terribly hard to predict. And it will have done its most important work: making a small and obvious policy change—allowing moderately higher taxes for the rich—seem like an enormous, gut-wrenching concession by Republicans.

See you next year!

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Nationalization Works

Posted on December 11, 2012 by | 77 Comments

By James Kwak

The Treasury Department today announced that it has sold off the rest of its stake in A.I.G. Treasury will focus on the claim that taxpayers made a profit on the deal. As I’ve written before, the story is a bit more complicated.

But that’s a sideshow. The point of nationalizing A.I.G. (what else do you call it when the government buys 80% of a company?) wasn’t to make money; it was supposedly to save the global economy. In any case, things have worked out pretty well: the global economy is intact, though still not healthy, and A.I.G. is a private company again.

Which brings up what, to me, is the bigger question: Why were we so afraid of nationalizing Citigroup and Bank of America four years ago? And isn’t A.I.G. looking like a better company today than those two?

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Yet More CEO Hypocrisy

Posted on December 10, 2012 by | 14 Comments

By James Kwak

Several weeks ago, I wrote a column criticizing the “Fix the Debt” CEOs for saying that we should raise taxes while not mentioning the one tax break that means the most to them as individuals—the preferential rate for capital gains—and, in many cases, giving money to the presidential candidate who promised to protect that tax break for them.

A friend pointed out another glaring example of these CEOs’ hypocrisy. Of the CEOs in Fix the Debt, 71 lead public companies; of those, 41 have employee pension funds. Of those, only two pensions are fully funded; the other pensions are underfunded by an average of $2.5 billion, according to the Institute for Policy Studies.

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Entitlements Scare Tactics

Posted on December 3, 2012 by | 160 Comments

By James Kwak

A friend asked me about last week’s WSJ op-ed by Christopher Cox and Bill Archer claiming that the government’s true liabilities exceed $86 trillion—not the  $16 trillion national debt that people usually talk about. There’s something to it, but there’s also a huge scary story in there that’s purely meant to frighten people.

$16 trillion is the amount of Treasury debt outstanding at the moment. The more relevant figure is the amount of debt the federal government owes to people and institutions other than itself. If, for some reason, I lent money to my wife and she promised to pay it back to me, we wouldn’t count that as part of the debt owed by our household. The debt owed to the public is about $10 trillion these days.

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Social Security and the National Debt

Posted on November 28, 2012 by | 117 Comments

By James Kwak

In this season of fiscal brinksmanship, the topic of Social Security has once again come to the fore. Republicans are generally in favor of cutting benefits, although they are bit afraid to say so after the demise of George W. Bush’s privatization “plan”; Democrats are generally in favor of not cutting benefits. But many liberals have another argument: Social Security is irrelevant to the whole issue of deficits and the debt, since the program cannot have any impact on either.

I generally count myself as a liberal, but I think this is a misleading argument. This could take some time to explain, as I’ll try to go through it carefully.

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