The End Of The Euro
By Peter Boone and Simon Johnson – this post is the first two paragraphs of a column that appears this morning on Bloomberg.com
Investors sent Europe’s politicians a painful message last week when Germany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.
Since the global financial crisis of 2008, investors have focused on credit risk and rewarded Germany with low interest rates for its perceived frugality. But now markets will focus on currency risk. Inflation will accelerate and the euro may break up in a way that calls into question all euro-denominated obligations. This is the beginning of the end for the euro zone.
To read the rest of this column, please use this link: http://www.bloomberg.com/news/2011-11-28/the-euro-area-is-coming-to-an-end-peter-boone-and-simon-johnson.html
1994 vs. 2011
By James Kwak
I’m sorry that I’ve been too busy for the past two weeks to blog much, but I did manage to write a column for The Atlantic yesterday. It looks at how far the conservative revolution has come in less than a generation and wonders why they can’t just declare victory and go home.
Why Not Break-Up Citigroup?
By Simon Johnson
Earlier this week, Richard Fisher – President of the Dallas Federal Reserve Bank – captured the growing political mood with regard to very large banks: “I believe that too-big-to-fail banks are too-dangerous-to-permit.” Market-forces don’t work with the biggest banks at their current sizes; they have great political power and receive almost unlimited implicit subsidies in the form of protection against downside risks – particularly in situations like now, with the European financial situation looking precarious.
“Downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. Then, creative destruction can work its wonders in the financial sector, just as it does elsewhere in our economy.”
Mr. Fisher is an experienced public official – and also someone with a great deal of experience in financial markets, including running his own funds-management firm. I increasingly meet leading figures in the financial sector who share Mr. Fisher’s views, at least in private.
What then is the case in favor of keeping mega-banks at their current scale? Vague claims are sometimes made, but there is very little hard evidence and often a lack of candor on that side of the argument. So it is refreshing to see Vikram Pandit, CEO of Citigroup, go on the record with The Banker magazine to at least explain how his bank will generate shareholder value. (The interview is behind a paywall, unfortunately). Read the rest of this entry »
Wall Street v. Elizabeth Warren
By Simon Johnson
Karl Rove’s Crossroads GPS group has launched the first attack ad against Elizabeth Warren, presumably because she is now running hard for the Senate in Massachusetts. This ad is not a big surprise, but the line that Mr. Rove takes could well backfire.
The ad states, “we need jobs, not radical theories and protests,” so we can break the argument down into three separate parts.
First, who destroyed more than 8 million jobs in the United States – and plunged us into the deepest and longest lasting recession since the 1930s? Surely this was not Ms. Warren, who was just a law school professor, in the run-up to 2008.
Mr. Rove is opening the blame game and this is going to go badly for his presumed supporters – the largest banks on Wall Street that took excessive risks, paid their top people well, and then blew themselves up at great cost to the American taxpayer. By all means, let us have a conversation about jobs and the history of job losses in the United States; “too big to fail” banks do not look good in this context. Read the rest of this entry »
Is Europe On The Verge Of Another Great Depression – Or A Great Inflation?
By Simon Johnson
The news from Europe, particularly from within the eurozone, seems all bad. Interest rates on Italian government debt continue to rise. Attempts to put together a “rescue package” at the pan-European level repeatedly fall behind events. And the lack of leadership from Germany and France is palpable – where is the vision or the clarity of thought we would have had from Charles de Gaulle or Konrad Adenauer?
In addition, the pessimists argue, because the troubled countries are locked into the euro, there are no good options. Gentle or even dramatic depreciation of the exchange rate for Greece or Portugal or Italy is not in the cards. As a result, it is hard to lower real wages so as to restore competitiveness and boost trade. This means that the debt burdens for these countries are likely to seem insurmountable for a long time. Hence there will likely be default and resulting global financial chaos.
According to the September 2011 edition of the IMF’s Fiscal Monitor, 44.4 percent of Italian general government debt is held by nonresidents, i.e., presumably foreigners (Statistical Table 9). The equivalent number for Greece is 57.4 percent, while for Portugal it is 60.5 percent. And if you want to get really negative and think the problems could spread from Italy to France, keep in mind that 62.5 percent of French government debt is held by nonresidents. If Europe has a serious meltdown of sovereign debt values, there is no way that the problems will be confined just to that continent.
All of this is a serious possibility – and the lack of understanding at top European levels is a serious concern. No one has listened to the warnings of the past three years. Almost all the time since the collapse of Lehman Brothers has been wasted, in the sense that nothing was done to put government finances on a more sustainable footing.
But perhaps the pendulum of sentiment has swung too far, for one simple and perhaps not very comfortable reason. Read the rest of this entry »
Our Health Care System, Compared
By James Kwak
I was looking at OECD health care data for something else I’ve been working on and wanted to share some of it. It’s well known that the United States spends a lot more per person on health care than comparable countries and that our actual health outcomes are anywhere from average to bad. See, for example, this chart from a 2008 paper by Gerard Anderson and Bianca Frogner.
That chart shows how each country’s spending and life expectancy differ from what you would expect based solely on how rich they are (per capita GDP). As you can see, we spend a lot more and live a lot less. (That paper also considers a number of other outcome measures; we do well on some, poorly on others.)
Besides where we are today, though, the other thing we should be interested in is where we are going. Our health care system is the product of a number of historical factors that we can’t make go away with a snap of our fingers. So even if we have a bad, expensive health care system, maybe it is getting relatively better and relatively less expensive.
Nope.
What Could the US Achieve at the G20 in Cannes?
By Simon Johnson
The April 2009 London summit of the G20 is widely regarded as having been a great success. The world’s largest economies agreed on an immediate coordinated approach to the global financial crisis then raging and promised to work together on banking reforms that would support growth. At the time, President Obama got high marks for his constructive engagement.
The G20 heads of government have met twice a year since London and in Cannes this week they meet again (November 3-4). Could this summit also help stabilize the world economy? And can President Obama again play a leading role? The answer to both questions is likely the same: No. Read the rest of this entry »
Who Wants Tax Cuts?
By James Kwak
Yesterday I wrote an Atlantic column about Republican presidential candidates’ fondness for tax plans that transfer massive amounts of money from the poor to the rich. The main question, to my mind, is why people like Herman Cain and Rick Perry talk about transferring massive amounts of money to the rich when polls show that even a majority of Republicans think the rich should pay more in taxes.
Many of the readers here could probably have written that column themselves, but it does have a wonderful picture of Cain and Perry in all their well-dressed glory.
Are They Really That Good?
By James Kwak
The instinctive defense from Wall Street bankers is that they deserve the money they make: they’re just that good. By that logic, Jon Corzine was the best of the best: he was the head of Goldman, after all (although in his days, if I recall correctly, Goldman and Morgan Stanley were roughly tied in prestige). The failure of MF Global may have had many causes, but it does make one wonder: Are the people at Goldman really that good individually, or is it the firm (and its reputation, and its information flow) that makes them so good?
Andrew Ross Sorkin speculates that MF Global got Goldman-style risk-taking without Goldman-style compliance and risk management. I would just add: they also got it without a Goldman-style too-big-to-fail government guarantee.
What’s Wrong with Groupon?
By James Kwak
Groupon plans to go public later this week. According to the latest leaks, things are going well: the IPO valuation, scaled back from $30 billion to about $12 billion, may be raised because of a successful road show. Apparently even after the company conceded that the amount they pay to a merchant does not count as revenue, investors have decided they like what they see.
But there is still something fishy about Groupon’s business model.
Mr. Hoenig Goes to Washington
By Simon Johnson
To fix a broken financial system – and to oversee its proper functioning in the future – you need experts. Finance is complex and the people in charge need to know what they are doing. One common problem, which is also manifest in the United States today, is that many of the leading experts still believe in some version of business-as-usual.
At the height of the Great Depression, Marriner S. Eccles was summoned to Washington from Utah – where he was a regional banker. He helped remodel the Federal Reserve through the Banking Act of 1935 and then became its first independent chairman – the Fed board had previously been chaired by the Treasury Secretary. Eccles was not a fan of big Wall Street firms and their speculative stock market operations; rather he understood and identified with smaller banks that lent to real businesses. Eccles was the right kind of expert for the moment. Who has the expertise to play this kind of role in our immediate future?
Tom Hoenig, formerly president of the Kansas City Fed, has long been a strong voice for financial sector reform along sensible lines. Within the official sector, he has spoken loudest and clearest on the most important defining issue: Too Big To Fail is simply too big. And last week he took a major step towards a more prominent role, when he was announced as the administration’s nominee to become vice-chair at the Federal Deposit Insurance Corporation (FDIC). Read the rest of this entry »
European Debt: The Big Picture
By Simon Johnson
For everyone struggling to get their arms around the debt crisis in Europe, Bill Marsh in today’s New York Times offers literally a compelling picture, with graphic illustration for the key issues.
The picture is big, 18×21 inches. Either you need a very large computer screen or a hard copy of the paper (pp. 6-7 in the SundayReview section, “It’s All Connected: A Spectator’s Guide to the Euro Crisis).
The main debt linkages across borders for which we have data are all here – and the graphic pulls your eye appropriately to the centrality of Italy in whatever happens next. (On why eurozone policy towards Italy now matters so much – and what are the options – see my recent paper with Peter Boone, “Europe on the Brink”.)
But you might think also about what is not in the NYT graphic because we lack reliable information. For example, what is the exposure of US financial institutions to European debt, directly or indirectly, through derivatives transactions of any kind?
The opaqueness of derivative markets means that most investors can only guess at what could happen. Most of the relevant regulators and supervisors with whom I have talked seem also to be largely in the dark – remember the experience of AIG in 2008.
Cross-border bank exposures through loans and other holdings are publicly disclosed – data from the Bank for International Settlements are represented by the arrows in the NYT graphic. These data are surely not perfect, but they do convey the main points and they tell you where to focus attention.
Why do we not require publication of similar data, preferably by financial institution, for all derivative transactions – including both gross and supposedly net exposures across borders?
The Bush Tax Cuts and the 99 Percent
By James Kwak
I forgot to alert you to my latest Atlantic column, which went up on Monday. To my mind, Occupy Wall Street is a protest movement, and a valuable one, and the often-stated criticism that they should have concrete demands is kind of silly. (See Frank Pasquale’s response, point 5.) I have spent a fair amount of time reading the 99 Percent tumblr, however, and I think the kind of policies that would help the people who describe themselves there are pretty obvious. This is Mike Konczal’s summary:
“Upon reflection, it is very obvious where the problems are. There’s no universal health care to handle the randomness of poor health. There’s no free higher education to allow people to develop their skills outside the logic and relations of indentured servitude. Our bankruptcy code has been rewritten by the top 1% when instead, it needs to be a defense against their need to shove inequality-driven debt at populations. And finally, there’s no basic income guaranteed to each citizen to keep poverty and poor circumstances at bay.”
But in my opinion, the preliminary step to getting rich (and reasonably comfortable) people to pay for a better social safety net is to let the Bush tax cuts expire, as I argue in the column. Most importantly, it’s the only inequality-reducing policy I can think of that has any chance of happening in the next year—simply because it only requires doing nothing. How much would it reduce inequality? That’s just the reverse of what the tax cuts did in the first place. (If you can’t read the table, click on it for a larger version.)
The Huntsman Alternative
By Simon Johnson
The eurozone financial situation continues to worsen. The latest idea from the eurogroup of finance ministers is apparently to have the European Central Bank make a massive loan to the International Monetary Fund, which would then turn around and lend to countries like Italy. This is a bizarre notion. If the IMF takes the credit risk of a mega-loan to Italy – e.g., an amount around the $600 billion mark, greater than the fund’s current lending capacity – this would represent an unprecedented and unacceptable risk to the IMF’s shareholders, including U.S. taxpayers. If the IMF does not take this credit risk, what’s the point? The ECB should provide financial support directly to Italy, if that is the goal.
But that goal increasingly seems both to be the only idea of officials and the last failed notion of a fading era. More bailouts and the reinforcement of moral hazard – protecting bankers and other creditors against the downside of their mistakes – is the last thing that the world’s financial system needs. Yet this is also the main idea of the Obama administration. Treasury Secretary Tim Geithner told the Fiscal Times this week that European leaders “are going to have to move more quickly to put in place a strong firewall to help protect countries that are undertaking reforms,” meaning more bailouts. And this week we learned more about the underhand and undemocratic ways in which the Federal Reserve saved big banks last time around. (You should read Ron Suskind’s book, Confidence Men: Wall Street, Washington, and the Education of a President, to understand Mr. Geithner’s philosophy of unconditional bailouts; remember that he was president of the New York Fed before become treasury secretary.)
Is there really no alternative to pouring good money after bad?
In a policy statement released this week, Governor Jon Huntsman articulates a coherent alternative approach to the financial sector, which begins with a diagnosis of our current problem: Too Big To Fail banks, Read the rest of this entry »
Written by Simon Johnson
December 1, 2011 at 7:17 am
Posted in Commentary
Tagged with eurozone, Huntsman