Year: 2010

The New Antitrust – For Banks

Just over a hundred years ago, the United States led the world in terms of rethinking how big business worked – and when the power of such firms should be constrained. In retrospect, the breakthrough legislation – not just for the US, but also internationally – was the Sherman Antitrust Act of 1890.

The Dodd-Frank Financial Reform Bill, which is about to pass the US Senate, does something similar – and long overdue – for banking.

[To read the rest of this post, click here – which takes you to Project Syndicate’s site; no fees or advertizing involved]

David Axelrod’s Talking Points

By Simon Johnson

David Axelrod was on the Diane Rehm show this morning – a great opportunity to connect with listeners who will actually stop what they are doing and pay attention, at least for a short while. He was awful.

He had even the most basic facts wrong – it’s not “8 million people have lost their jobs” but rather “more than 8 million jobs have been lost” since December 2007. He rambled – it was hard to see his point, particularly in the introduction. But most of all, there was no narrative – why exactly did we have a recession, why has it been so bad, and why aren’t the jobs coming back?

Without a narrative, how can anyone make sense of the past 18 months? Continue reading “David Axelrod’s Talking Points” →

Why Agencies Get Things Terribly Wrong

By James Kwak

There has been a lot of criticism of regulatory agencies in the past couple of years, from the Office of Thrift Supervision and the Securities and Exchange Commission (Madoff who?) to the Minerals Management Service. But most of the people in these agencies are not evil; on the contrary, I believe (without a ton of evidence in support at the moment) that a majority are conscientious, hard-working, and civic-minded, and a significant minority are actually quite good at what they do. So why do they get things so wrong?

A few days ago, Leslie Kaufman of The New York Times wrote an article describing how the Fish and Wildlife Service “signed off on the Minerals Management Service’s conclusion that deepwater drilling for oil in the Gulf of Mexico posed no significant risk to wildlife.” This sounds like classic incompetence, or corruption, or both.

But the report itself, it seems, was not so far off, at least in its details. The report assessed spills of up to 15,000 barrels of oil. As Kaufman paraphrases,

“In its 71-page biological assessment, the Minerals Management Service concluded that the chances of oil from a spill larger than 1,000 barrels reaching critical habitat within 10 days could be more than 1 in 4 for the piping plover and the bald eagle, as high as 1 in 6 for the brown pelican and almost 1 in 10 for the Kemp’s ridley sea turtle. When the model was extended to 30 days, the assessment predicted even higher likelihoods of habitat pollution. . . .

“‘Heavily oiled birds are likely to be killed,’ the assessment said.”

Fifty-one days after the well explosion, the amount of oil spilled is probably somewhere between one and three million barrels.

Continue reading “Why Agencies Get Things Terribly Wrong” →

The Kanjorski Surprise – Now It Gets Interesting

By Simon Johnson

The bank lobbyists, it turns out, missed one. They and their congressional allies were able to gut the Volcker Rule, the Lincoln Amendment, and almost everything else that could have had a meaningful effect on the industry.

But, as I point out in a Bloomberg column today, they couldn’t get at (or didn’t sufficiently understand?) the Kanjorski Amendment. This Amendment was originally proposed by Congressman Paul Kanjorski (chair of an important House subcommittee on capital markets) during the fall. Against the odds, it survived in the final House bill and now – probably because it has stayed mostly below the radar – remains in the reconciled legislation.

Kanjorski gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a “grave risk” to the financial system. Continue reading “The Kanjorski Surprise – Now It Gets Interesting” →

One Paragraph on the Financial Reform Bill

By James Kwak

From Mike Konczal:

“Examples? Off the top of my head, ones with a paper trail: [Treasury] fought the Collins amendment for quality of bank capital, fought leverage requirements like a 15-to-1 cap, fought prefunding the resolution mechanism, fought Section 716 spinning out swap desks, removed foreign exchange swaps and introduced end user exemption from derivative language between the Obama white paper and the House Bill, believed they could have gotten the SAFE Banking Amendment to break up the banks but didn’t try, pushed against the full Audit the Fed and encouraged the Scott Brown deal.”

(By the way, if you’re missing your financial commentary fix during my self-imposed hiatus, I recommend Mike’s blog highly–not that that’s news to anyone anymore.)

Continue reading “One Paragraph on the Financial Reform Bill” →

Bad Software

By James Kwak

Planet Money did a story this week on the problems with medical billing. This is something I’ve been vaguely interested in for a long time; nine years ago, we seriously thought about it as a business opportunity for our company.

The Planet Money team said that there is $7 billion in waste in the medical billing process per year, which sounds like a lot until you realize that it isn’t. (Total healthcare costs in the United States are on the order of $2 trillion, I believe.) But the story had a great example of the problems with enterprise software that I’ve written about before.

Continue reading “Bad Software” →

State Banking, Globally

By Simon Johnson

A standard refrain from U.S. banking industry lobbyists is “you cannot put us at a disadvantage relative to our overseas competitors.” The Obama administration has largely bought into this line and cites it in public and private as one reason for opposing size caps on our largest banks and preventing Congress from raising capital requirements.

The US Treasury puts its faith instead in the Basel Committee on Banking Supervision process, a somewhat murky convocation of bank regulators from various countries that has a weak track record in terms of setting sufficient prudential standards (also the assessment of Dan Tarullo, now an influential Federal Reserve governor; disclosure, I have a part-time position at the Peterson Institute, which published his book). But, the official US reasoning goes, the crisis of 2007-08 was so traumatic, our European counterparts will now want to be more careful. Continue reading “State Banking, Globally” →

The G20’s China Bet

By Simon Johnson

The G20 communiqué, released after the Toronto summit on Sunday, made it quite clear that most industrialized countries now have budget deficit reduction fever (see this version, with line-by-line comments by me, Marc Chandler and Arvind Subramanian). The US resisted the pressure to cut government spending and/or raise taxes in a precipitate manner, but the sense of the meeting was clear – cut now to some extent and cut more tomorrow.

This makes some sense if you think that the global economy is in robust health and likely to grow at a rapid clip – say close to 5 percent per annum – for the foreseeable future. With high global growth, it will matter less that governments are cutting back and unemployment will come down regardless. Taking this into account, the IMF is actually predicting (as cited prominently by the G20) that budget “consolidation” actually raise growth over a five-year horizon.

There is no question that some weaker European countries, such as Greece, Portugal, and Ireland, had budget deficits that were out of control. Particularly if they are to pay back all their foreign borrowing – a controversial idea that remains the conventional wisdom – these countries need some austerity. But what about those larger countries, which remain creditworthy, such as Germany, France, the UK, and the US? If these economies all decide to reduce their budget deficits, what will drive global growth? Continue reading “The G20’s China Bet” →

The Private Sector Fallacy

By James Kwak

Felix Salmon highlights an important point to bear in mind when it comes to banks and short sales. Actually, it’s an important to bear in mind when you’re thinking about any big private sector company, be in Citigroup or British Petroleum. Yes, companies do things in their own self-interest that hurt other people and may not be net benefits to society. But they also do things that are not in their own self-interest all the time, because companies just aren’t all that efficient.

Felix’s post is largely about two factors. One is that big company executives are prone to exactly the same sort of cognitive fallacies as ordinary people, and hence make stupid decisions routinely. The second is that the incentives of individual people who make decisions (or provide information to people who make decisions) are only tangentially related to the interests of the company as a whole, and certainly not when you think of those interests over the long term.

A third factor is simply that companies are big, dumb, poorly designed institutions. There’s lots of talk about how individual human beings do not resemble the rational actors of textbook economic theory. The same is at least as true of big companies, of which I have seen many, from various perspectives.

Yet the belief that the private sector is the answer to all our problems remains deeply rooted. One might even call it an ideology. I would hope that the financial crisis (and the BP disaster) might cause people to question that ideology, at least a little bit.

What Is Goldman Sachs Thinking?

By Simon Johnson

The next financial boom seems likely to be centered on lending to emerging markets. Sam Finkelstein, head of emerging markets debt at Goldman Sachs Asset Management, summed up the prevailing market view – and no doubt talked up his own positions – with a prominent quote in Monday’s Financial Times (p.13, front of the Companies and Markets section):

“Debt-to-GDP ratios in the developed world are about double those in emerging markets and they’re growing. This makes emerging markets interesting because you’re pick up incremental spread [higher interest rates compared with developed world rates], and in return you’re actually taking less macroeconomic risk.”

This is a dangerous view for three reasons. Continue reading “What Is Goldman Sachs Thinking?” →

JP Morgan Responds To Financial Reform: The Poison Pill Strategy

By Simon Johnson

While the financial reform negotiation process grinds to its meaningless conclusion, the real action lies elsewhere – in Jamie Dimon’s executive suite.

Dimon, the head of JP Morgan Chase, is apparently seeking to (a) become more global, (b) move further into emerging markets, and (c) become more like Citigroup.

This is terrific corporate strategy – and very dangerous for the rest of us. Continue reading “JP Morgan Responds To Financial Reform: The Poison Pill Strategy” →

Tim Geithner and Larry Summers Need Paul Krugman To Replace Peter Orszag

By Simon Johnson. Tim Geithner and Larry Summers are talking a good game on fiscal policy to the G20. But they are struggling with to establish traction for their “spend now, consolidate later” message. Fortunately, there is an easy and obvious opportunity to establish credibility on this issue: Bring Paul Krugman into government.

Earlier this week, Peter Orszag resigned from his cabinet position as director of the Office of Management and Budget. The Washington Post put out one of the first lists of candidates who could replacement him. Senator Byron Dorgan would be a smart pick and some of the Post’s other suggestions could make sense.

But surely the front runner is Jason Furman. The working assumption is that Treasury Secretary Tim Geithner and National Economic Council director Larry Summers are in positions of influence for the long haul – and they have a track record of preferring team players over people who could bring competing perspectives to the table.

The Hamilton Project, housed at the Brookings Institution, was designed as a government-in-waiting by Robert Rubin. Then-Senator Obama attended its inaugural public meeting, with Peter Orszag as head of the project. Appointing Furman, successor to Orszag at Hamilton and currently a deputy to Larry Summers at the NEC, or another person from the same wing of the Clinton administration would continue in this tradition.

This is unfortunate, because the brilliant choice would be Paul Krugman – completely taking the wind out of the Republicans’ sails on fiscal deficits. Krugman has scolded them, in real-time and to great effect, consistently with regard to ruining the budget. And he has an important point – the Bush administration inherited a fairly sound fiscal position from the Clinton administration but squandered it thoroughly over 8 years. Continue reading “Tim Geithner and Larry Summers Need Paul Krugman To Replace Peter Orszag” →

“Chuck Prince” Is Going To Run This Bank (Into The Ground)

By Simon Johnson

“Breaking up big banks would actually increase system risk” is a refrain heard from top administration officials, ever more vocal after they helped kill the Brown-Kaufman amendment (that would have limited the size and leverage of our largest banks) on the floor of the Senate.

But while Mr. Geithner and his colleagues are still taking their victory laps and congratulating themselves on retaining “business as usual” after the biggest crash-and-bailout in world financial history, educated opinion starts to feel increasingly uncomfortable.

People who worry seriously about system risk break the problem down into several distinct buckets, including the nature of shocks and the way these are propagated across the system. In this typology, the “Chuck Prince problem” is in a class of its own. Continue reading ““Chuck Prince” Is Going To Run This Bank (Into The Ground)” →

Paul Krugman For OMB

By Simon Johnson

The president should nominate Paul Krugman to replace Peter Orszag as director of the Office of Management and Budget (OMB). (Orszag resignation details are here.)

We have previously reviewed Krugman’s outstanding qualifications for this (or any other top level) job (link to details). The main reason Krugman himself has been reluctant in the past relates to a potentially difficult Senate confirmation hearing – for example, if Krugman had been put forward to replace Ben Bernanke.

But for the OMB position, the dynamic of a hearing would be terrific for the president’s specific agenda and broader messages. Krugman, of course, is the leading advocate for continued (or increased) fiscal stimulus. This is exactly President Obama’s message to the G20 this weekend. Continue reading “Paul Krugman For OMB” →

Dead On Arrival: Financial Reform Fails

By Simon Johnson

The House-Senate reconciliation process is still underway and some details will still change. But the broad contours of “financial reform” are already completely clear; there are no last minute miracles at this level of politics. The new consumer protection agency for financial products is a good idea and worth supporting – assuming someone sensible is appointed by the president to run it. Yet, at the end of the day, essentially nothing in the entire legislation will reduce the potential for massive system risk as we head into the next credit cycle.

Go, for example, through the summary of “comprehensive financial regulatory reform bills” in President Obama’s letter to the G20 last week. Continue reading “Dead On Arrival: Financial Reform Fails” →