Year: 2010

AFL-CIO: Stronger Financial Reform Would Have Saved Jobs

By Simon Johnson

The Brown-Kaufman SAFE Banking Amendment proposed a hard size cap on our largest banks, limiting their assets to a very small fraction of the size of our economy. The premise was simple – and could fit on a bumper sticker (or in a campaign flyer for November) – “too big to fail” is too big to exist.

But this proposal to modify the Dodd-Frank financial reform bill failed in the Senate in early May, by a vote of 33-61, with 27 Democrats voting against the idea. Since that time, Democratic supporters have been asking their representatives the obvious question: Why did you vote against Brown-Kaufman?

Interestingly, no senators yet have replied – at least on the record – that the power of the megabanks was too great to be overcome. Instead, there are three main arguments going the rounds. Continue reading “AFL-CIO: Stronger Financial Reform Would Have Saved Jobs” →

More Telecom Hell

By James Kwak

So, I wanted to transfer phone and DSL from one house to another. I went to Verizon’s web site, clicked on the promisingly named “Moving to a New Home” link, and walked through the step-by-step wizard. It said I could have unlimited domestic calling and 3 MB DSL for $55 per month, which was a better deal than I was currently getting, so I signed up. The only issue was that the scheduling calendar only allowed install dates in the next month and I wanted a date six weeks out, but the live chat representative said I could just call in later and change the install date.

A few days later I went online to check on the order status in their online system and saw that my DSL order was nowhere to be found. So I called up and, after much misunderstanding and aggravation, I figured out that my order had been canceled by their back-end system. Even though the front-end (web) system knew that I was an existing customer (remember, I clicked on “Moving to a New Home”) and offered me a discounted bundle, the back-end (probably mainframe system) didn’t want to give discounts to existing customers and wouldn’t allow the order to be processed.* After a little arguing, the representative said that she would manually book the order at the higher price and then go in and give me the originally promised discount.

The next time I checked my order status I saw that I had three different DSL orders in their system, which made me nervous, but there was nothing to do but wait.

Continue reading “More Telecom Hell” →

Monopoly and Taxes

By James Kwak

A couple of weeks ago, Planet Money did a podcast based on a game of Monopoly. One of the participants was Russell Roberts, who professes to hate monopoly because it teaches the wrong lessons about business and the economy. At one point, Roberts said he would prefer the game if it had a progressive income tax with transfer payments to poor players. “As a result of that, you could get kids to resent taxes at an even earlier age.”

But Daniel Hamermesh, who likes Monopoly, called him on it. Hamermesh pointed out that if you had a transparent system of taxing the rich and transferring the money to the poor, players in the aggregate would be neutral, and might even understand the whole point of taxes and government spending.

Continue reading “Monopoly and Taxes” →

Why Won’t “Fiscal Hawks” Discuss The Real Issues?

By Simon Johnson and James Kwak

During this hot summer of fitful economic growth, high unemployment and an oil slick visible from space, Washington is obsessed with…deficits. The resurgence of this periodic fascination is not entirely surprising, given our historically large current deficits. According to the Congressional Budget Office, the 2010 deficit will come in at $1.3 trillion, almost 10 percent of our gross domestic product and, along with the deficit of 2009, the highest level since World War II.

Imminent fiscal collapse has even become a theme for literary novelists – in Gary Shteyngart’s “Super Sad True Love Story,” American fiscal policy has become a bad joke and the Chinese threaten to stop buying our government debt. And the overextension of government is again a big theme; sales of Ayn Rand’s “Atlas Shrugged” are up sharply, although the book was first published more than 50 years ago (it is in and out of the Top 100 list on Amazon).

Deficit fears do have a real foundation. But it is not, as some assume, simply that government spending is out of control. Our current deficits result from the recent financial crisis and recession, and they will recede as the economy recovers. But the federal government also faces a long-term, structural gap between its revenues and its spending commitments – a gap due to policies established decades ago. Continue reading “Why Won’t “Fiscal Hawks” Discuss The Real Issues?” →

It’s Hard To Take The Fiscal Hawks Seriously: Testimony To The Senate Budget Committee

By Simon Johnson

Most of the discussion of federal budget issues today is misdirected. The shorter run issues are dominated by the likelihood of another financial crisis – and the implications that would have for the budget deficit – but no “fiscal hawks” even want to acknowledge the issue. It is very hard to take anyone seriously if they refuse to look at these (uncontroversial) numbers. Medium term, we obviously need tax reform. The good news, in a sense, is that the US has an antiquated and inefficient tax system; it would not be hard to improve how this operates, raising revenue and actually reducing distortion. Longer term, Medicare is obviously a tough problem with no easy solutions yet in sight. But the argument “just cut entitlements” cannot be taken seriously.

Below is my testimony this week to the Senate Budget Committee on these issues. (This link is to a pdf version; also see this page for my testimony to congressional committees over the past 2 years). Continue reading “It’s Hard To Take The Fiscal Hawks Seriously: Testimony To The Senate Budget Committee” →

The Treasury Position – On The Volcker Rule

Former Secretary of State George Shultz famously quipped about Washington: “Nothing ever gets settled in this town. You have to keep fighting, every inch of the way.” This is proving just as true for banking reform as for other aspects of American government policy.

For example, Senators Carl Levin of Michigan and Jeff Merkley of Oregon, after considerable effort, were able to place strong language in the Dodd-Frank financial-sector legislation – enacting a version of the “Volcker Rule” that would require big banks to become significantly less risky. While this idea originated with Paul Volcker, the former Fed chairman and senior adviser to President Obama, and was announced with great fanfare by the president himself in January, it was clear – from the beginning and throughout the detailed negotiations this spring – that the Treasury Department was less than fully enthusiastic about this approach.

Treasury’s position – ranging from lukewarm support to outright opposition at times – created an uphill task for Senators Levin and Merkley. And now that they have reached the top of the Dodd-Frank hill, what do they see? Another even steeper climb awaits, because the Treasury Department is digging in publicly against the drafting of detailed regulatory rules that would actually make Volcker-Levin-Merkley effective. Continue reading “The Treasury Position – On The Volcker Rule” →

Health Care Non-Solutions

By James Kwak

Ezra Klein makes an important point about our nation’s health care problem: it’s not just a government deficit problem. The underlying problem is that health care costs are not only growing faster than prices (inflation), but also faster than GDP (economic growth), and as a result the amount of stuff we as a nation will be able to afford, other than health care, will start to go down at some point in the future. (Picture originally from Joseph Newhouse in Health Affairs.)

This means that proposals to solve the long-term budget deficit problem by cutting Medicare benefits are not solutions: they simply shift the problem from the government to individuals–which means they shift the problem from us as taxpayers to us as old people or us as family members of old people.* If, for example, we increase the eligibility age for Medicare from 65 to 67, the government saves money, but only because people who are 65 and 66 lose money–or, alternatively, all of us lose money because their employers now have to pay more for health care.

Continue reading “Health Care Non-Solutions” →

The Tilted Playing Field

By James Kwak

It’s been widely noted that financial reform is now entering a new phase as the action moves from Congress to the regulatory agencies that will write the hundreds of rules necessary to implement the reforms. During the congressional fight, the financial sector had a huge advantage in money and lobbyists, but we had one advantage: the fact that there was (from time to time) a lot of media coverage, and Congressmen care at least a little about public opinion.

In the rule-writing phase, the banks still have a huge advantage in money, lobbyists, and lawyers–and are hiring as many ex-regulators as they can to press their case. As our friend Jennifer Taub writes at The Pareto Commons:

What lies ahead, over the next year and beyond, will require far larger armies of lawyers, economists, finance experts and just plain able bodies and minds to monitor and influence the rulemaking process. Rumor has it that one bank alone plans to set up 100 teams of employees, tasked with particular rule makings. And that is just one bank.

Unfortunately, however, the pressure of the public spotlight is largely off, tilting the battlefield in favor of industry.

Continue reading “The Tilted Playing Field” →

Required Intellectual Capital

By Simon Johnson

At one level, the pursuit of higher and more robust capital requirements for banks is not going well. The US Treasury insisted, throughout the year-long financial reform debate, that capital should be the focus – increasing the loss-absorbing buffers that banks must carry – and that they (and other regulators) needed to negotiate this is through the Basel Committee process.

But Basel has some under great pressure from the banking lobby, which argues that any increase in capital requirements would limit lending and slow global growth (see this useful background by Doug Elliott). The Institute of International Finance (IIF) – a lobby group for big banks – issued an influential “report” along these lines and the European stress test results strongly suggest that Euroland politicians do not want to press more capital into their financial system – “just enough” would be fine with them.

However, at another level – in terms of the analytical consensus around these issues – there is a great deal of progress in the right direction. In particular, an important new paper by Samuel Hanson, Anil Kashyap, and Jeremy Stein, “A Macroprudential Approach to Financial Regulation” pulls together the best recent thinking and makes three essential points. (This is a nontechnical paper written for the Journal of Economic Perspectives – it’s a “must read” for anyone interested in financial sector issues but requires some effort and a little jargon does creep in.) Continue reading “Required Intellectual Capital” →

Yet Another Reason to Like Elizabeth Warren

By James Kwak

Bob Lawless points me to this 2006 blog post by Elizabeth Warren. Warren describes a first-year contracts class on the case that upheld a fine-print forum selection clause (a clause saying that if you want to sue us, you have to sue us in X jurisdiction–Florida, in this case) on the back of a cruise ship ticket.

Warren’s entire class (Harvard, let me say for the record) insists that, as a factual matter, this decision is good for consumers because . . . well, regular readers of this blog should be able to fill in stock Mickey Mouse economistic hand-waving as well as any first-year law school student. Of course! Forcing people to sue in Florida (or to accept binding arbitration in the forum of the company’s choice) deters frivolous lawsuits and lowers costs for the company, and it can pass those savings onto consumers. Why does it pass those savings onto consumers instead of putting them into shareholders’ (or managers’) pockets? Because in a perfect competitive market, if Alpha Cruise Lines doesn’t, then Beta Cruise Lines will, and Beta will underprice Alpha, . . . Consumers will read the fine print and can make an informed choice between the lower price with the forum selection clause and the higher price without the forum selection clause.

Continue reading “Yet Another Reason to Like Elizabeth Warren” →

Banking Under the Dodd-Frank Act

By Simon Johnson

President Obama’s signing of the financial reform bill yesterday does not end our intense debates over banking – rather it just moves them to a new sphere. Instead of arguing about legislation, the next arena is the action (and perhaps inaction) of regulators.

Those pushing for more effective regulation of the financial system are looking for progress along three potential dimensions. The first two – raising capital standards and appointing new regulators – are the most discussed, but powerful interests are blocking real change. The third – tougher and smarter congressional oversight – holds great promise. Continue reading “Banking Under the Dodd-Frank Act” →

Hope

By James Kwak

A number of people have asked me what I think about the financial reform bill that was finally passed by the Senate. I don’t think I have much to add to what I’ve said already, but here’s one more angle.

“We can’t legislate wisdom or passion. We can’t legislate competency. All we can do is create the structures and hope that good people will be appointed who will attract other good people.”

That’s what Christopher Dodd said about the bill, as quoted by The New York Times. It’s become a commonplace observation by now that the reform bill, instead of making structural changes to the financial sector, instead increases regulators’ discretionary powers to constrain — or not constrain — the behavior of the industry.

As a result, the success of reform, in the words of its supposed architect, depends on hoping that presidents will appoint good people and that that will be enough to attract people to being regulators.

Continue reading “Hope” →

Treasury Makes A Mistake – Claiming They Are Not Blocking Elizabeth Warren

By Simon Johnson

It’s one thing to block Elizabeth Warren from heading the new Consumer Financial Protection Bureau.

It’s quite another thing to deny in public, for the record, that any such blocking is going on (e.g., see this report; Michael Barr apparently said something quite similar today).

There is a strong groundswell of opinion on this issue from the left – see the BoldProgressives petition. But the center also feels strongly that, given everything Treasury has said and done over the past few months, it would be a complete travesty not to put the strongest possible regulator in change of protecting consumers. (See Ted Kaufman on the NYT’s DealBook, giving appropriate credit to the SEC, and apply the same points to broader customer issues going forward.)

This can now go only one of two ways. Continue reading “Treasury Makes A Mistake – Claiming They Are Not Blocking Elizabeth Warren” →

Tim Geithner’s Ninth Political Life

By Simon Johnson

In modern American life, Treasury Secretary Tim Geithner stands out as amazingly resilient and remarkably lucky – despite presiding over or being deeply involved in a series of political debacles, he has gone from strength to strength. After at least eight improbably bounce backs, he might seem unassailable. But his latest mistake – blocking Elizabeth Warren from heading the new Consumer Financial Protection Bureau – may well prove politically fatal.

Geithner was a junior but key member of the US Treasury team that badly mishandled the early days of the Asian financial crisis in 1997 and received widespread criticism (Life #1). He was promoted as a result and thereafter enjoyed a meteoric rise.

As President of the New York Federal Reserve from 2003, and de facto head of the government’s financial intelligence service, he completely failed to spot the problems developing in and around the country’s financial markets; nothing about this embarrassing track record has since stood in his way (Life #2). He subsequently became Hank Paulson’s Wall Street point person for one of the most comprehensively bungled bailouts of all time – the Troubled Asset Relief Program, TARP, which in fall 2008 first appalled Congress with its intentions and then wasn’t used at all as advertised (Life #3). Continue reading “Tim Geithner’s Ninth Political Life” →

The Future of Finance: International Edition

By Simon Johnson

Bankers and hedge fund managers are fond of saying, “if you place restrictions on our activities in New York, we’ll just move elsewhere – like London.” This makes attitudes towards the financial sector in other countries – particularly the UK – highly relevant for American public policy debate on this issue.

Is it the case that the new found skepticism about modern finance and its effects on the real economy is confined to the United States? Or is there a broader shift in thinking around the world, including in other leading financial centers?

A new book out this week from the London School of Economics, “The Future of Finance and The Theory That Underpins It”, suggests that a profound shift in the consensus is well underway. Continue reading “The Future of Finance: International Edition” →