Obama Against The Odds

The G20 summit is headed for disaster.  The Europeans have circled their wagons and determined that no sensible policy proposal shall pass.  The background briefings indicate (a) the US has given up on global fiscal stimulus (“declare victory and retreat” springs to mind), (b) and the manifest failures of financial regulators will be addressed through, well, a manifest of failed regulators.

None of the important issues are on the table or even allowed in the building: changing the European Central Bank’s monetary policy, persuading European politicians to acknowledge they were and largely still are asleep at the wheel, and the future of big banks everywhere.

The summit will begin with dinner on April Fool’s Day.  The organizers have clearly not thought much about the symbolism.

Yet, there is still a slim chance that President Obama can snatch victory from the teeth of West Europeans.  He has to stare them down on substance, pushing hard the line that the US is doing everything it can, while Europe is largely standing idly by.

It’s an uphill struggle to force Europe to save itself, but with the discussion around the IMF, the President has a chance to move things in the right direction — and to back Secretary Geithner with actions as well as words (for more on this, see TNR online from March 28).  The Europeans do not respond to sweet talk; only tough pressure will bring results.

As I suggest in my latest piece (this morning) in The New Republic online, the Europeans have left themselves open to effective confrontation on a key point; if the President can seize the day and really push the Europeans hard on this dimension – and tell me if you see other ways he can make European complacency painfully evident – we might actually make some progress.

By Simon Johnson

44 thoughts on “Obama Against The Odds

  1. Is there an opportunity at this G20 meeting to take serious steps to recognize the emergence of the developing countries and officially start the process to amend the governance of the IMF and World Bank to better represent the developing countries like China, India and Brazil? Would this not be a positive step to enhancing both global cooperation and these multilateral organizations? Can Europe and the US agree in principle if not in detail to change the governance of the IMF and WB to encourage the participation of the large developing countries?

  2. Simon, I disagree with you on this: The term “fiscal stimulus” means nothing less than printing whatever amount of money it takes to get the economy back on track. I think the major reason for the Europeans (read “The Germans”) for being unwilling to co-operate to this folly is their experience of several hyperinflations in their history. Will there be a hyperinflation in the US? Who knows, with all the deflationary processes being in place. Rest assured, it’s very hard to tell what amount of printing money will be labeled “too much” by future generations. I assume, the Europeans take a stand of wait-and-see rather than following the US into the money abyss, because they feel that they could start the printing press in no time, but halting it might prove a much more difficult task. Just my 2 cents.

  3. If Europeans continue to read things like this..
    “Many European leaders are still in denial”

    “But these days foreign leaders are in no mood to be lectured by American officials, even when — as in this case — the Americans are right”

    Forget about cooperation…

    Prof. Krugman and you here should stop this nonsense and tone, for which you not have supporting evidence or exit strategy.

    The only ones still in denial phase are the American leaders and managers…In Europe we have never felt the need to be lectured (Prof. Krugman and you here are too academic…) and I really do not see in what the Americans would be now right or are giving examples to be followed. Force Europe to save itself? What a language and international economic diplomacy…

  4. Why are (a) and (b) linked?

    If Europe’s position is that its existing social welfare programs are adequate to weather the storm, why try to persuade them differently? If/when they face huge structural problems (eg Spain/Ireland/Greece start grumbling about leaving the Euro or defaulting on their debts instead of contracting in the face of brutal recession) the issue will be unavoidable.

    Meantime, we should take the steps in our domestic economy to ensure that our money is spent with as high a multiplier as possible. Less tax cuts and housing intervention, more infrastructure updating (energy grid, rail, etc).

    On the regulatory front, the summit participants are unanimous in their desire to lie. We Americans want to pretend our housing assets are worth what we say they are, the Europeans want to pretend their Eastern European assets are worth what they say they are, and the developing world wants to pretend it still has an inflow of cash.

    Why would Obama stare anyone down; he is as invested in seeing no evil and speaking no evil as anyone else there. More, perhaps, because he and his administration see the entire meltdown as a distraction to his core goals (eg healthcare) and would like it ignored as quickly and completely as possible:

    More here:

  5. Simon, I fully agree with M.G. I do not understand why is this fiscal stimulus (read printing money) being posed as THE plan. Has it worked in the US? No. Will ‘Buy American’ clause in the fiscal stimulus solve any problem or create new problems?
    I guess the only reason for American economists – who failed to predict this tsunami – to advocate this plan is the realization that the fiscal stimulus was a wrong step and there is no way to retract, then why not force the world to join in and then it would not be only one country’s misstep.

  6. Somehow the expectations on the meeting are becoming difficult to manage. Maybe we are too much fond of a magic wand. The best thing is that they are talking and continue to do so. Perhaps, they should formaly set-up a comittee like body in the IMF to monitor and continue the debate and the governments can coordinate, as much as possible, their policies.

  7. It’s a ONE DAY SUMMIT. Of more than 20 world leaders, all with their own egos. Nobody is going to convince anybody of anything. Nothing will be announced that hasn’t already been settled. Neither President Obama, nor anybody else, has any kind of an “opportunity” to achieve anything at the G20 Summit itself. It’s a purely symbolic event, aimed at reassuring investors that the economy is being kept Some Place Safe and investigated by Top Men.

  8. “It’s an uphill struggle to force Europe to save itself, but with the discussion around the IMF, the President has a chance to move things in the right direction.”

    I am a neophyte here, but doesn’t centering the discussion around the IMF mean the same thing as let the US, Japan, England, and Canada fix the problems of Eurozone countries like Spain, Ireland etc.? Exactly how does Obama turn this “plan” on its head to get the G20 to face the issues?

  9. I too am a neophyte here, desperately trying to find a loose end on this big messy ball of string I can tug on.

    Burning question: why is everyone piling on the Europeans? I keep reading that the only successful prescription for saving anything out of the present crisis that has ever worked in similar circumstances is the Swedish ‘temporary nationalization’ of their banking system in 1994. It worked!

    But because we Americans can’t stomach the idea of nationalising anything, because oh so socialist, the rhetoric and the analysis swings around the very unconvincing Geithner Plan. Is it too much? some ask. Is it too little? Is it a load of crap?

    And since we don’t have a clue, let’s pull up the old saw of timid Eurocrats who love to wait until it’s too late.

    Sorry, I don’t believe a word of it.

    Expat American in France

  10. Simon, I strongly disagree with your view of the European authorities not taking the appropriate steps to fight the crisis.
    In Europe, there are plenty of automatic stabilizers, that work automatically as soon as economic crisis start to come out.
    You just have to see the public accounts of Spain. The Spanish government seems to be in denial of the magnitude of the crisis, however, public accounts have rapidly gone from surplus to a severe deficit.
    In my opinion public expenditure mechanisms in Europe will be felt much faster in Europe than in the USA where expenditure plans have still to be draft and implemented. In Europe the fiscal expansionary infrastructure is up and working.

  11. Amen, brother! The US Government is blasting trillions of dollars into confetti on idiocies and the Euros don’t want to join in. Good for them!

    We Americans are going to suffer a drop in our standard of living and there’s nothing youc an do about that except push the day of reckoning off and make it much bigger. Which we are now doing. That no one else wants to do this with us isn’t a sign of intrasigence, but a sign of sobriety.

  12. Well, maybe, but at least we have a decent health-care system, not like “les Anglo-Saxons”… Generalizations regarding Europeans’ positions and attitudes are not particularly useful. There are fairly substantive differences between the solutions advocated in Italy and Sweden. One notion that many seem to have in common is that capitalism can become more “moral” (as Sarkozy would say), suggesting that the problem is one of greed, and that if only greed could be reduced or eliminated, all would be rosy. The silver lining here is that there is probably far more consensus within individual European countries than in Europe as a whole (or in the US) and that a sense of ethics has a vague chance of emerging, even in the financial spheres.

  13. I wonder if the author of this post sees some consistency in what he writes in his article “The Quiet Coup” at http://www.theatlantic.com/doc/200905/imf-advice/2 and what he writes here. It could well be that Europeans do not consider a priority any crass Keynesianism or fiscal stimulus as the problem is mainly and most likely only a credit and financial market one. If that being the case Europeans and the large majority of US taxpayers are just waiting US bold “action on the banking system and a breaking of the old elite”. Fix the banks and its system first. If the flow of money does not restart then ask countries to do more on the aggregate demand and supply sides.

  14. >Amen, brother! The US Government is blasting trillions of dollars into confetti on idiocies

    Unless when you’re talking about “blasting trillions” you’re referring to the 1.8 trillion left over from Bush and the multiple irresponsible tax cuts that contributed to making the rich richer and building mountains of debt, then I’d agree with your comment. Otherwise, this is the costs of irresponsible politicians and an oligarchy of rich folk along with people borrowing and buying irresponsibly in their own personal finance for decades.

    The money in stimulus spending is needed for people who are long term out of work, (after all, whose hiring?), and to begin to put money back into our crumbling infrastructure after 28 years of republican rule, (I actually consider Clinton a republican).

    And yes, bank nationalization is desperately needed, big banks need to be small regional banks and all this artificial securities market needs to just go away.

  15. Restoring the world’s financial order, as opposed to radically restructuring it, is the wrong goal, both nationally and internationally.

    The one form of coordinated public spending I could see at the international level would not be in the name of stimulus, but under the rubric of investment in a public good and insurance against a global catastrophe is spending against climate change, which, while still narrower than deep ecologists would like, is a first step.

    Since we’re prepared to throw 10% of GDP at reinflating whatever is to be our latest and last bubble, let’s spend it instead on direct government lending/investment/tax redistribution in support of the continuation of vertebrate life-forms in the “natural economy”.

  16. Agreed that the Western Europeans are likely to let Obama accomplish anything during the summit. I think the G20 is still a good chance for Obama to use his charisma to try to get the Europeans to do something about the global crisis. Anything we d in the US to stimulate doesn’t get very far if there isn’t global change. Saw a good video about Obama at the G20 here, http://www.newsy.com/videos/obama_faces_battle_at_g20/

  17. The fact that this is a 1 day gig in the middle of a global meltdown leads me to believe it’s not much more than a photo-op, and all the handwringing over what Obama will or will not accomplish is mostly a waste of time.

  18. It srikes me that we are all neophytes, not only here, but there and everywhere. Well, maybe not Paul Krugman and some others like our two hosts.

  19. Simon writes in his most recent New Republic article:

    “Why is the G20 neglecting fundamentals? We can mainly attribute it to a failure of leadership, particularly at the European level. President Obama has an all-star team of policymakers with international economic experience (there is no shortage of talent due to nomination issues on this dimension), but they came late to the G20 process–through no fault of their own–and are still scrambling to catch up.”

    Who are the key individuals in this “all-star” team, and why should they be trusted more than the current team of domestic financial/economic policymakers? I hope it’s not the same team, since I would hesitate to call the latter “all-stars”!

    As more and more is revealed about the Obama adminsistration’s attempts to re-inflate the asset bubble (as opposed to reducinging debt) at tremendous cost to present and future American taxpayers, why should Europeans follow the US in it’s deficit spending stimulus theories?

    And who will benefit from beefed-up IMF funding? I’ve read some pretty string criticisms of that institution. In its original conception it was a desirable, even necessary institution to regulate international capital markets. But as in many cases the gap between conception and implementation is apparently pretty wide. One critic said “The International Monetary Fund has been around for more than half a century. In all that time it has not learned to put people ahead of markets.” When Simon writes:

    “Secretary Geithner argues that the world should put up $500 billion in total–and this is a task now taken on by President Obama. He should be able to bring Congress along for a U.S. contribution of $50 billion, particularly as the funding would come as a line of credit to the IMF, for which the budget cost is (honestly) nearly zero.”

    My question is: WHO is going to benefit from this added money controlled by the IMF. Will it be the average citizen of countries in risk of default? Or will it be foreign investors urgently demanding behind the scenes that they be permitted to salvage something of their investments in these countries? Does the United States still wield enough voting rites in the IMF to have an effective veto power over its decisions? If this is still true it would make me (as a European) suspicious of US proposals.

    A lot of people no longer trust Mr. Geithner, and probably the Europeans are among them. There seems to be a growing amount of evidence he is looking out first for the banking industry, not for the citizens of the country his boss helps govern, much less citizens of the world. But even if these suspicions are wrong and Geithner is working selflessly for the good of the “global economy” (a very high-order abstraction!), what evidence is there that his proposals for the IMF and other international measures will have a beneficial effect? The jury is certainly still out on his early performance in response to the US experience of the global financial crisis.

    [If Simon has discussed his views on the role of the IMF, past, present and future, in greater detail than in the article cited above, I missed it. If such a discussion exists, would someone please direct me to it? Thanks.]

  20. There have been several comments comparing the current European crisis to hyperinflation in Germany. These comparisons are utterly inappropriate for one major reason:

    Hyperinflation in Weimar Germany (and most other countries where hyperinflation occurred) was largely driven by external debt obligations that were denominated in foreign currency.

    Thus, to meet a foreign currency debt obligation, you must sell your own currency to buy more foreign currency. This creates an accelerating spiral.

    While 1970s style dollar inflation _may_ be possible (15%ish), reserve currencies are not vulnerable to hyperinflation unless domestic agents (firms, individuals) borrow in foreign currency.

    As a rule, borrowing in foreign currency (to obtain a lower interest rate) creates immense risks at the _national_ level, which is the equivalent of a negative externality. Govts have a right to restrict such borrowing (even though it is contrary to the free market). China has successfully done so (in spite of immense criticism). This is virtually identical to govt deciding where to allocate scarce resources (foreign capital).

    Perhaps the solution is for small countries to impose a tax on credit taken out in foreign currencies (e.g. an interest rate surcharge of ~2% a year for loans in non-local currency). I’m sure the Friedmanomicons would cry foul.

    As to Europe’s “wait-and-see” attitude, the problem is that their policy always lags economic data by 3+ months. By the time they think they’ve caught up, the ball has moved beyond them. In order to be effective, policy must lead the market, not lag it.

    I predict that Europe will come around when they see their export-led firms shrivel up and start to die. Their refusal to cooperate with monetary and fiscal stimulus will cause their complaints over “buy American” to fall on deaf ears.

  21. We Americans are going to suffer a drop in our standard of living because we’ve been borrowing to sustain excess consumption, and exporting jobs rathe than value. Not only can we not borrow more, but we’ll need to pay it back – thus, we will be consuming less.

    This can be done through income taxes, or inflation, or cutting programs, or all methods. The problem with cutting programs now is that the rest of the world is in a recession (depression?) too. All signs point to monetary stimulus. The awful part is that we have selected Banks as the tools for implementing that stimulus (it may “work”, but the distributional consequences are dramatically toxic). Still, it’s probably better than complete paralysis.

    BTW, fiscal stimulus is not the same as printing money. Monetary stimulus is printing money. Please keep the terms straight.

    Europe should do what Europe wants – the US cannot control Europe. The US does need a strategy that can succeed even if Europe strangles itself and its neighbors. That strategy is monetary stimulus, with fiscal stimulus focused on key US productive sectors (aka, a real national industrial/economic policy hopefully focused on domestic activity). With a depreciated US dollar driving US exports, Europe will need its own coping strategy. Let us wish them the best.

  22. Vishal, The american economists “failed to see it coming” because they are part of the “big fraud”. They too, are part of it. Have you ever watched CNBC? Their entire economy is a house of cards. Sell junk, nonsense investments to us all, and steal the money…thats what they do !!!!!!!

  23. Stats, not only will you be consuming less, you now have to back back the money you borrowed to consume what you already consumed…call it a double edged sword. Standard of living dropping? You should pray for the Americans…the bill has come due, and they don’t have it.

  24. Vishal: So…ask most decent economists if they saw this coming–they’d say yes–or lots of them at MIT would–but that they are notoriously bad at predicting the little events and their timing that trigger the avalanche–this seems reasonable to me. Economists are not God, afterall.

    Now, what are other ways Obama can make European complacency painfully evident? I would have thought Iceland would have been more of a coordinating device for Europe–but no. I’m not hopeful here, Simon. The inflation hawks are too strong.

  25. More mumbo jumbo from Stats Guy. Great. Tell me Stats, are you an American? you know…the idiots that created this massive theft and disruption to our lives? Stats, can you do me personally a favor? SEND ME BACK THE MONEY THE AMERICAN PUBLIC STOLE FROM OUR PENSION FUNDS…can ya do that Stats? I just LOVE all your fancy analogies you post in here all the time, but I can’t feed my wife and kids with that. Can you take ten minutes and use your massive financial intellect to figure out how I should now plan for my kids future, now that the American’s, collectively, stole everything we saved these past three decades?

  26. BW, A lot of people no longer trust Mr. Geithner. Do you mean, Tim “The Tax Man” Geithner?. The Americans are dreaming. I think this weeks G20 meeting will bring them back to reality. They created this problem, and they create MOST problems in the world these days. The good news is, hopefully the American People may wake up now and realize that they have to start paying more attention to what their government actually is involved in. If the American People, and I do respect the, for all their faults, realize how “F”d up their government is, they will make changes…..hopefully. I am prepared to give the American people a chance, they had no idea how much their indiferrence towards their own government has destroyed “the system”. I am prepared to give the Americans, one last chance….but I hope they don’t screw this up.

  27. HSG, are you still paying taxes that go towards murdering innocent civilians by your military? PS: hows everything in Boston? I just love that place….everybodys clueless. All very wrapped up in that whole “we are the educators that brought you Wall Street” thing. Wonderful stuff.

  28. I don’t know but it seems that the US is not in the greatest position to be applying pressure to anyone or staring anyone down. It sounds like we are the one that could be crying uncle at the end of the day. I mean didn’t we get caught with our hands in the cookie jar? It looks like the rest of the world is ready to give us what’s coming to us. So maybe seriously considering what they have to say would be a good start in the healing process. The reality is that no one has the proven path to recovery. If we can somehow all stand behind one idea, there will be no one to blame if it fails to deliver the desired result. Parallel testing of different theories is not an option. It will all work out in the end anyway one way or another.

  29. Simon, I agree with Tom J., “fiscal stimulus” is means printing money which will be folly on a global scale, without the controls that we have in the US, resulting in hyperinflation.

    The timing of the dinner on “April Fools Day” speaks volumes.

  30. If I may say. US print and borrow own money, they don’t borrow forein currency.
    Other countries e.g. Global stimulus do not, don’t they?
    Is not easier for US to print and borrow money?
    Maybe that’s why global stimulus is a bit cautious, right?

  31. Truer words were never spoken.

    Except that I doubt it’ll convince anybody, except of a further downfall.

  32. “On the regulatory front, the summit participants are unanimous in their desire to lie. We Americans want to pretend our housing assets are worth what we say they are, the Europeans want to pretend their Eastern European assets are worth what they say they are, and the developing world wants to pretend it still has an inflow of cash.”

    So true…sadly, so very true.

  33. Cheer up, Denny. The US is heading inexorably toward a Swedish type nationalization. It’s important not to rush too quickly at this stage.

    The valuing of legacy assets is key to a successful workout.

    1. Freeing the mortgage markets has been huge. If ARM resets are refinanced out, the rate of foreclosures (presently increasing) can subside. Foreclosures are the main source of supply into the housing market. Once foreclosures begin to drop, supply will decrease and a bottom can form more easily. That bottom is what will permit realistic valuation of legacy assets.

    2. Another impediment to valuation of legacy assets is the legal question of property rights. In the US an individual’s property cannot be condemned by any government without compensation at “fair market value.” The Geithner Plan (the PPIP)is a good faith gesture to arrive at a value. Paul Krugman may be correct. It might not work. However, going before any court it is always wise to have made a good faith effort. Additionally, when a plan for nationalization has been blessed by a court, the pattern of a public/private partnership exists to begin to dispose of the legacy assets in a manner that extricates the taxpayer with the best chance of being made whole.

    3. Pushing this process along are bank regulators watching solvency ratios closely. Perhaps the current “stress test” is a bit of a softball. Conditions will tell if it needs to be stiffened. The point being that financial institutions cannot sit on their legacy assets indefinitely.

    It’s hard peddling real estate in the pouring rain, agents up to their knees in flood water. Let’s talk again in four or five months and see how things are going then.

    Á bientôt

  34. Simon, you ask how can the President ‘…make European complacency painfully evident.”

    The ECB has a swap line with the Fed. As I understand it, that line is unlimited in its most recent reauthorization. Could you please explain how these lines work, under what circumstances they are drawn down and the extent to which they might play a role in the event of the collapse of the European banking system and default of member states?

    Is it protectionism writ large to threaten to revoke the authorization for these lines or is it a lever to force Europeans into a cooperative program of central bank reform, international bank regulation and responsible, collaborative use of “quantitative easing” and its inverse?

    Could you, as well, comment on quantitative easing in light of what might become an international “race for the bottom” if central banks do not act in concert? I have always understood that this is a powerful monetary tool but hard to control because it’s applied deep within the system rather than at the margins.


  35. KT,
    Now…..when you say the American’s are going to suffer a drop in their standard of living, exactly what does that mean anyway? For instance, does the Hollywood crowd have to give back all the implants and face lifts? Pathetic, but sad. I’m embarrassed to be the same species as these idiots

  36. Bill,
    Damn, I was hoping you had a #4 also: Give back all the money that was stolen from the pension funds overseas. Never guess that would cross your mind though….I forgot, your an American and doing what is right never enters into it. Silly me.

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