Stabilization programs in emerging markets often come down to this: the government needs to do something unpopular, e.g., reduce some subsidies, privatize an industry, or eliminate the crazy credit that goes to oligarchs – no one likes oligarchs, but their factories employ a lot of people. There is naturally resistance – pushback from legislators, riots in the streets, or oligarchs calling their friends in the US foreign policy establishment. The question becomes: does the government have the “political will” to get the job done?
In fall 1997, a key issue for Indonesia’s IMF program was whether the government could close the banking operations belonging to one of President Suharto’s sons. There was an epic and fascinating struggle and, in the end, the government did not have sufficient political will or power. The subsequent loss of US support, and further currency and economic collapse is (messy and painful for many) history.
How did we get to the point where the U.S., with a strong balance sheet relative to the size of problem banks, is regarded – by the markets and more broadly – as less likely to resolve the problems in its financial system than say the British (with big banks relative to a weak fiscal position) or the Germans (who talk all the time about how they are not going to bail anyone out)?
You can point the finger at Congress. The parliamentary system in Britain and Germany means that the government can implement and innovate a bailout policy without worrying about being able to legislate enough financial support. The Obama Administration has much to worry about in this regard.
The problem surely goes deeper – at least back to the bailouts of the fall. Poor communication, particularly by Hank Paulson, undermined popular and congressional support. And the lack of a consistent strategy exacerbated initially negative perceptions.
But the underlying issues are deeper still and laid bare by this week’s latest round with AIG. We have moved far beyond financial policy and into the kind of scandal that really gets taxpayers’ backs up. The greed of bankers slaps you in the face while the hubris of their leadership remains unchecked.
There is no sense of responsibility, no feeling of shame, no acknowledgment of any kind of mistake: read Lloyd Blankfein’s FT article again – or print it out and tape it to your wall. Because we now know, from the newly disclosed AIG counterparties list, that the wealth of Goldman Sachs insiders remains high solely because we saved their sorry bank, their failed risk management strategy, and their pretence of wisdom with our cash in mid-September.
This resentment against bankers pervades Congress, and even the Administration begins to get the message – being called “asinine” yesterday by Richard Kovacevich, the Chairman of Wells Fargo, may have helped underline to Treasury how deeply the bankers appreciate the help they have received. There can be no resolution and no moving on until there has been a proper congressional investigation, with full subpoena powers, into exactly what did and did not happen around AIG. This will take months and may well slow down the economy (Jamie Dimon’s clever point: if you vilify us, you will lose), but it is now inescapable. And, if channeled productively, this kind of hearing may lead to a better regulatory system (and smaller big banks) than the current anemic proposals on the table – as last weekend indicated, the G20 process is currently worse than useless on this issue.
Ben Bernanke knows all this, at the same time as he sees our economy worsening and global storm clouds still gathering. So where will he take us, starting with the Federal Open Market Committee meeting this week? The British experiment with quantitative easing is pushing down the yield on long government debt. It’s risky – inflation, once started, is not so easy to control. And it may not work so well in the US (where the dollar tends to appreciate as the world becomes more scary) as in the UK (where they can successfully push for depreciation, particularly vis-a-vis the hidebound eurozone).
Inflation breaks the political and social logjam around banking. With some luck, it helps growth – at least in the short-term. And of course the surviving bankers win big.