Year: 2010

Monopolies Everywhere

By James Kwak

Thomas Frank has a review in the Wall Street Journal (behind a paywall, but Mark Thoma has an excerpt) of Barry Lynn’s new book Cornered, which apparently documents the prevalence and power of monopolies and oligopolies in lots and lots of industries, not just finance. (I guess one response would be that we have been too harsh on the banks, since everyone’s doing it; but I still think banks are special for all sorts of reasons I won’t go into here.)

The problem, as Frank says, is that “the antimonopoly tradition is a museum piece today, and antitrust enforcement has been largely moribund since federal officials during the Reagan Revolution lost interest in this most brutal form of economic intervention.” Antitrust enforcement became a question of measuring predicted changes in consumer welfare, which meant that it became the province of models. More importantly, we are now in at least our fifth consecutive administration that sees big, profitable companies as inherently good, without stopping to question how they extract those profits.

The solution is already there to hand — go back to enforcing the existing antitrust laws. And appoint Supreme Court justices who are interested in enforcing them. But that assumes that the administration cares about the issue. Do they?

(For one thing, I applied for an internship in the DOJ’s antitrust division for this coming summer . . . and I was turned down.)

Questions For Mr. Pandit

By Simon Johnson

Today, perhaps following our earlier recommendation, Mr. Vikram Pandit – CEO of Citigroup – will appear before the congressional oversight panel for TARP. (Official website, with streamed hearing from 10am).

This is an important opportunity because, if you want to expose the hubris, mismanagement, and executive incompetence – let’s face it – Citi is the low hanging fruit.

Citibank (and its successors) has been at the center of every major episode of irresponsible exuberance since the 1970s and essentially failed – i.e., became insolvent by any reasonable definition and had to be saved – at least four times in the past 30 years (1982, 1989-91, 1998, and 2008-09).

In the last iteration, Citi was guided by Robert Rubin – self-styled guru of the markets and sage of Washington, a man who likes to exude “expect the unexpected” mystique – directly onto the iceberg at full speed.

Mr. Pandit was brought in by Mr. Rubin to refloat the wreckage, despite the fact that he had no prior experience managing a major global bank. Mr. Pandit’s hedge fund was acquired by Citi and then promptly shut. And Mr. Pandit’s big plan for restructuring the most consistently unsuccessful bank – from society’s point of view – in the history of global finance: Reduce the headcount from around 375,000 to 300,000.

Here are five questions the FCIC should ask. This line of enquiry may seem a bit personal, but it is time to talk directly about the people, procedures, and philosophy behind such awful enterprises. Continue reading “Questions For Mr. Pandit” →

Why Exactly Are Big Banks Bad?

By Simon Johnson

Just over 100 years ago, as the nineteenth century drew to a close, big business in America was synonymous with productivity, quality, and success. “Economies of scale” meant that big railroads and big oil companies could move cargo and supply energy cheaper than their smaller competitors and, consequently, became even larger.

But there also proved to be a dark side to size and in the first decade of the 20^th century mainstream opinion turned sharply against big business for three reasons.

First, the economic advantages of bigness were not as great as claimed. In many cases big firms did well because they used unfair tactics to crush their competition. John D. Rockefeller became the poster child for these problems.

Second, even well-run businesses became immensely powerful politically as they grew. J.P. Morgan was without doubt the greatest financier of his day. But when he put together Northern Securities – a vast railroad monopoly – he became a menace to public welfare, and more generally his grip on corporations throughout the land was, by 1910, widely considered excessive. Continue reading “Why Exactly Are Big Banks Bad?” →

Dallas Fed President: Break Up Big Banks

By James Kwak

We’ve cited Thomas Hoenig, president of the Kansas City Fed, a number of times on this blog for his calls to be tougher on rescued banks and to break up banks that are too big to fail. This has been a bit unfair to Richard Fisher, president of the Dallas Fed, who has been equally outspoken on the TBTF issue (although we do cite him a couple of times in our book).

Bloomberg reports that Fisher recently called for an international agreement to break up banks that are too big to fail. Here are some quotations, taken from the Bloomberg article (the full speech is here):

“The disagreeable but sound thing to do” for firms regarded as “too big to fail” would be to “dismantle them over time into institutions that can be prudently managed and regulated across borders.”

Continue reading “Dallas Fed President: Break Up Big Banks” →

After The Hamilton Project

By Simon Johnson

In 2006 Robert Rubin and his allies created the Hamilton Project, housed at the Brookings Institution, to think about what a future Democratic administration would do. (Senator Obama attended the opening.)

From a tactical standpoint, this was a brilliant move. It developed people, including Peter Orszag and Jason Furman (directors of the project), trained a team, and created an agenda.

Unfortunately, financial reform was not – and perhaps still is not – on this agenda. The financial crisis more than blindsided them; it overturned their entire way of thinking about the world. At least in part, this explains their slow, partial, and unsatisfactory response. In any case, it hasn’t worked out for them – or for us.

Wednesday morning there is a potential step in another direction. (Alternative link.) There are many questions. Continue reading “After The Hamilton Project” →

The Importance of Donald Kohn*

By James Kwak

Donald Kohn recently announced that he is resigning as vice chair of the Federal Reserve Board of Governors, after forty years in the Federal Reserve system, most of it in Washington. Articles about Kohn have generally been positive, like this one in The Wall Street Journal. The picture you get is of a dedicated, competent civil servant who has been a crucial player, primarily behind the scenes, in the operation of the Fed.

It’s a bit interesting that Kohn is generally getting the soft touch given that he was the right-hand man of both Alan Greenspan and Ben Bernanke. Here are some passages from the WSJ article:

“‘Don was my first mentor at the Fed,’ Mr. Greenspan says. Mr. Kohn told Mr. Greenspan how to run his first Federal Open Market Committee meeting, the forum at which the Fed sets interest rates. He became one of Mr. Greenspan’s closest advisers and defender of Mr. Greenspan’s policies.”

“Mr. Kohn has spent the past 18 months helping to remake the central bank on the fly as Chairman Ben Bernanke’s loyal No. 2 and primary troubleshooter.”

Continue reading “The Importance of Donald Kohn*” →

Why No International Financial Regulation?

By Simon Johnson

As we fast approach the unveiling of the Dodd-Corker financial reform proposals for the Senate, it is only fair and reasonable to ask: Does any of this really matter? To be sure, some parts of what the Senate Banking committee (and likely the full Senate) will consider are not inconsequential for relatively small players in the US market. For example, putting consumer protection inside the Fed – which has an awful and embarrassing reputation in terms of protecting users of financial products – would tell you a lot about where we are going.

But our big banks are global and nothing in the current legislation would really rein them in – no wonder they and their allies sneer, in a nasty fashion, at Senator Dodd as a lame duck who “does not matter”.

For example, the resolution authority/modified bankruptcy procedure under discussion would do nothing to make it easier to manage the failure of a financial institution with large cross-border assets and liabilities. For this, you would need a “cross-border resolution authority,” determining who is in charge of winding up what – and using which cash – when a global bank fails.

To be sure, such a cross-border authority could be developed under the auspices of the G20, but there are not even baby steps in that direction. Why? Continue reading “Why No International Financial Regulation?” →

Krugman: No Bill Is Better Than a Weak Bill

By James Kwak

Paul Krugman begins this morning’s column this way:

“So here’s the situation. We’ve been through the second-worst financial crisis in the history of the world, and we’ve barely begun to recover: 29 million Americans either can’t find jobs or can’t find full-time work. Yet all momentum for serious banking reform has been lost. The question now seems to be whether we’ll get a watered-down bill or no bill at all. And I hate to say this, but the second option is starting to look preferable.”

Krugman says he would be satisfied with the House bill, but that the need to bring moderate Democrats and at least one Republican on board in the Senate could lead to a severely watered-down bill, in particular one without a Consumer Financial Protection Agency. Instead of accepting such a deal, he says:

“In summary, then, it’s time to draw a line in the sand. No reform, coupled with a campaign to name and shame the people responsible, is better than a cosmetic reform that just covers up failure to act.”

Continue reading “Krugman: No Bill Is Better Than a Weak Bill” →

An Underfunded Program For Greece

By Peter Boone and Simon Johnson

The EU, led by France and Germany, appears to have some sort of financing package in the works for Greece (probably still without a major role for the IMF). But the main goal seems to be to buy time – hoping for better global outcomes – rather than dealing with the issues at any more fundamental level.

Greece needs 30-35bn euros to cover its funding needs for the rest of this year. But under their current fiscal plan, we are looking at something like 60bn euros in refinancing per year over the next several years – taking their debt level to 150 percent of GDP; hardly a sustainable medium-term fiscal framework.

A fully credible package would need around 200bn euros, to cover three years. But the moral hazard involved in such a deal would be immense – there is no way the German government can sell that to voters (or find that much money through an off-government balance sheet operation). Continue reading “An Underfunded Program For Greece” →

“Every Moment Counts”

By James Kwak

No, it’s not a line from a pop song. It’s part of my hopeless, Luddite anti-smart phone campaign. This is from an interview with Tachi Yamada, president of the Bill & Melinda Gates Foundation’s Global Health Program.

“When you actually are with somebody, you’ve got to make that person feel like nobody else in the world matters. I think that’s critical.”So, for example, I don’t have a mobile phone turned on because I’m talking to you. I don’t want the outside world to impinge on the conversation we’re having. I don’t carry a BlackBerry. I do my e-mails regularly, but I do it when I have the time on a computer. I don’t want to be sitting here thinking that I’ve got an e-mail message coming here and I’d better look at that while I’m talking to you. Every moment counts, and that moment is lost if you’re not in that moment 100 percent.”

Yamada is just one person; because he feels this way doesn’t prove that you should, too. But I bet some of you will agree with him, and will start switching your BlackBerrys off when you are talking to other people. But over time, you will find yourself leaving it on, and then you will find yourself surreptitiously checking it under the table. It’s like chocolate ice cream; it’s too hard to say no to.

Financial Innovation, Again

By James Kwak

I’ve had Robert Litan’s recent paper defending most financial innovation (the web page doesn’t tell you much; you need to grab the PDF) on my to-do list for a while now. I wasn’t looking forward to writing about it, since I’m a bit tired of the subject, and I don’t think I have much more to say. So thankfully Mike Konczal beat me to it, in a two-part series. Part I is really brilliant, and has not one but two insights. The first (to simplify) is that we generally think of innovation in products as making them simply better on all dimensions. We don’t realize that, with most new financial products, we are just getting to a new point on the risk-reward spectrum that wasn’t there before. Now, it might be good for the economy as a whole for that new point to exist. But as consumers, we don’t realize that the good properties of a new financial product are almost invariably counterbalanced by some bad properties.

The second insight is that real, good financial innovation does not look like a new product; it looks like a new way of dealing with an existing product. Konczal’s example is TRACE, a recent system for increasing transparency in the market for corporate bonds (you’ll have to read his post for a more complete description). The effect has largely been to make pricing more transparent and reduce spreads, which is good for investors. More broadly, as Felix Salmon said somewhere (probably many times), financial innovation should show up as lower prices for all the bread-and-butter financial products–equity and debt underwriting, interest rate swaps, etc.–not has higher profit margins for dealers.

Konczal’s Part II asks some more general questions about Litan’s results. I have some different questions.

Continue reading “Financial Innovation, Again” →

What Will We Know And When Will We Know It?

By Simon Johnson

One of the most basic questions in economics is: Which countries are rich and which are relatively poor? Or, if you prefer a highly relevant question for today’s global situation, who recovers faster and sustains higher growth?

The simplest answer, of course, would be just to compare incomes – i.e., which country’s residents earn the most money, on average, at a point in time and how does that change over time?

But prices differ dramatically across countries, so $1,000 in the United States will generally buy fewer goods and services than would the same $1,000 in Guinea-Bissau (although this immediately raises issues regarding consumer’s preferences, the availability of goods, and the quality of goods in very different places.)

The standard approach developed by economists and statisticians, working with great care and attention to detail on a project over the past 40 years known as the “Penn World Tables”, is to calculate a set of “international prices” for goods – and then to use these to calculate measures of output and income in “purchasing power parity terms.” For countries with lower market prices for goods and services, this will increase their measured income relative to countries with higher market prices (with Gross Domestic Product, GDP, per capita being the standard precise definition, but components and variations are also calculated along the way).

Some of the limitations inherent in the Penn Tables are well known. But it turns out there are other, quite serious issues, that should have a big effect on how we handle these data – and how doubtful we are when anyone claims that a particular country has grown fast or slow relative to other countries.

Continue reading “What Will We Know And When Will We Know It?” →

Should China Fear Us?

By Simon Johnson

Writing partly in response to “Should We Fear China?“, Robert Salomon of NYU makes some good points – about how rapid appreciation of the renminbi could hurt China and argues:

Although I agree that it is in the best long-term interest of the U.S. and other countries throughout the globe for China to revalue its currency, it isn’t entirely clear to me that such a maneuver is in the near-term interests of China, …or maybe even the global economy.

Robert’s concerns are focused on the effects of a sudden revaluation – a movement in the exchange rate that would be disruptive to Chinese production and plunge that country into recession. But that scenario hardly seems likely. Continue reading “Should China Fear Us?” →

The Art of Selling

By James Kwak

This morning I was listening to an especially brilliant This American Life episode from 1999, titled “Sales.” I spent a lot of the past decade selling — first pitching my startup company to venture capitalists (not very well), then pitching software to potential customers (a bit better). The first segment — Sandra Tsing Loh listening in as a screenwriter pitches his story to two movie producers — absolutely nails the the staging of a sales call, including the forced casualness of pretending that huge amounts of money aren’t at stake, the small talk (is it good for there to be a lot of small talk?) and the water bottles, the seller talking uncomfortably fast when he doesn’t get feedback cues from the buyers, and the uncomfortable close and the confused debrief. (However, Loh and the screenwriter broke one of the cardinal rules we used to follow: don’t say a word about the meeting until you are safely out of the building, not even — especially not — in the bathroom.)

The third segment — in which a reporter reflects on his time as a radio advertising salesman — also perfectly illuminates the interpersonal dynamics and moral ambiguities of being a successful salesperson. Is it right to sell someone a product he doesn’t need and that isn’t actually good for him? Of course it’s legal, but is it right? If he buys it, is it his fault . . . or yours? What do you do when your skill at getting people to like you* causes your potential clients to open up to you in ways that are not in their interests?

Once someone came to our office to give me a sales pitch. By the end of the pitch, I had the feeling that we were good friends. Later, thinking about that, I felt used. How could this person manipulate me into thinking we were friends in just forty-five minutes? Then I realized this was the best salesperson I had ever seen. And we are friends now. (Or at least I think so.)

In between, the second segment is screamingly funny.

* A skill I don’t really have, by the way.

Update: I should say that I don’t actually have the negative opinion of sales and salespeople that some of the comments below seem to assume I have. As I said, I’ve spent a lot of my time selling, and I don’t think I’m a bad person. For one thing, sales is as critical to the economy as design and production. The rituals of sales — particularly high-touch selling of very expensive products, which is what I was involved in — were established before any of us got into the business, and all salespeople have to conform to them, more or less. Many if not most salespeople really believe that most of their customers will be better off if they buy their products. On the other hand, this is one way that salespeople justify pushing at the envelope of truth on occasion — it’s for the customer’s good, after all. (The other big reason for this behavior is that the market for certain products has settled into an equilibrium where all the competitors are exaggerating, and the customer assumes that you are exaggerating, too, and discounting everything you say, so if you don’t play the game you have no chance.)

Should We Fear China?

By Simon Johnson. This post is taken from testimony submitted to U.S.-China Economic & Security Review Commission hearing on “US Debt to China: Implications and Repercussions” – Panel I: China’s Lending Activities and the US Debt, Thursday, February 25, 2010. (Caution: this is a long post, around 1500 words; a summary of some key points will appear on the NYT’s Economix this morning.)

China is the largest holder of official foreign currency reserves in the world, currently estimated to be worth around $2.4 trillion – an increase of nearly $500 billion in the course of 2009 (on the back of a current account surplus of just under $300 billion, i.e., 5.8 percent of China’s GDP, and a capital account surplus of around $100 billion). These reserves are accumulated through arguably the largest ever sustained intervention in a foreign exchange market – i.e., through The People’s Bank of China buying dollars and selling renminbi, and thus keeping the renminbi-dollar exchange rate more depreciated than it would be otherwise.

China is also currently the second largest holder of US Treasury Securities – at the end of December 2009, it held $755.4 billion – just behind Japan (which had $768.8 billion).

The US Treasury data almost certainly understate Chinese holdings of our government debt because they do not reveal the ultimate country of ownership when instruments are held through an intermediary in another jurisdiction.

Continue reading “Should We Fear China?” →