Author: Simon Johnson

Is The New York Fed Making A Serious Mistake On Bank Dividends?

By Simon Johnson

An uncomfortable dissonance is beginning to develop within the Federal Reserve. On the one hand, senior current and former officials now generally agree with the propositions put forward by Professor Anat Admati and her distinguished colleagues – our leading banks need more capital, i.e., more equity financing relative to what they borrow.

The language these officials use is vaguer than would be ideal and they refuse to be drawn on the precise numbers they have in mind. The Swiss National Bank, holding out for 19 percent capital, and the Bank of England, pushing for at least 20 percent capital, seem to be further ahead and much more confident intellectually on this issue.

But an important split appears to be emerging within the Federal Reserve system, with the Board of Governors and most regional Feds tending to want higher capital levels from today’s levels, while the New York Fed is – incredibly – pushing hard to enable big banks actually to reduce their capital ratios (in the first instance by allowing them to pay increased dividends). Continue reading “Is The New York Fed Making A Serious Mistake On Bank Dividends?” →

Disinformation About The Consumer Financial Protection Bureau

By Simon Johnson

In Washington, before lobbyists try hard to destroy something, they first spread a great deal of disinformation about it. Thus the “End Users’ Coalition” (a front for the derivatives dealers) promotes its lobbying points as fake research. And “fiscal conservatives” attempt to distract from the fact that our largest banks brought us to the brink of budget disaster – this is their preparation for demolishing all vestiges of financial reform.

On a closely related front, there is now a concerted effort to undermine the newly formed Consumer Financial Protection Bureau (CFPB), mostly by spreading disinformation about its supposed lack of accountability.

This disinformation approach contains the standard elements of exaggeration, misdirection, and distraction (all quotes are via Fred Barnes):

Slogans: “If you like TSA at the airport, you’ll love these guys” (Congressman Spencer Bachus).
This is a major step towards dictatorship. “Its powers are very, very vast…. Who in the world would consider it appropriate to have one person appointed—one person!—to set the rules for the entire financial industry. It’s a tremendous overreach. It’s incredible to think about” (Senator Bob Corker)
And it would be a one-person dictatorship. “”It would be dangerous to the American economy if Elizabeth Warren were put in that job by a recess appointment, thwarting the will of Congress…. [She would be] accountable to no one” (Senator Richard Shelby)

Naturally, none of this is remotely close to the facts – an important principle of disinformation is that it should create an alternative reality which, through repetition by apparently disparate and supposedly credible people, becomes regarded as containing an element of truth. Continue reading “Disinformation About The Consumer Financial Protection Bureau” →

Geithner’s Gamble

By Simon Johnson. This post comprises the first few paragraphs of a column now running at Project Syndicate: http://www.project-syndicate.org/commentary/johnson17/English

In a recent interview, United States Treasury Secretary Tim Geithner laid out his view of the nature of world economic growth and the role of the US financial sector. It is a deeply disturbing vision, one that amounts to a huge, uninformed gamble with the future of the American economy – and that suggests that Geithner remains the senior public official worldwide who is most in thrall to the self-serving ideology of big banks.

Geithner argues that the world will now experience a major “financial deepening,” owing to growing demand in emerging markets for financial products and services. He is thinking, of course, of “middle-income” countries like India, China, and Brazil. And he is right to emphasize that all have made terrific progress and now offer great opportunities for the rising middle class, which wants to accumulate savings, borrow more easily (for productive investment, home purchases, education, etc), and, more generally, smooth out consumption.

But then Geithner takes a leap. He wants US banks to take the lead in these countries’ financial development….(column continues at Project Syndicate.)

Does The U.S. Really Have A Fiscal Crisis?

By Simon Johnson

The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis. Overindebted countries typically have a hard time financing themselves when the world becomes riskier – yet turmoil in the Middle East is pushing down the interest rates on US government debt. We are still seen as a safe haven.

Yet leading commentators and politicians today repeat the line “we’re broke” and argue there is no alternative other than immediate spending cuts at the national and state level.

Which view is correct? And what does this tell us about where our political system is heading? Continue reading “Does The U.S. Really Have A Fiscal Crisis?” →

Derivatives Industry Report Collapses

By Simon Johnson

The credibility of a major report commissioned by the “Derivative End Users Coalition” – run by big banks against implementing the Dodd-Frank reforms – just collapsed.

As Andrew Ross Sorkin reports in the New York Times, the report has no meaningful substance – it is destroyed by the critique of Joe Stiglitz – and the consulting company (Keybridge Research) behind the report sought misleading credibility through falsely claiming affiliations with substantive academics.

At the end of Sorkin’s article is a remarkable admission by Mr. Wescott, the president of Keybridge, conceding these facts. Continue reading “Derivatives Industry Report Collapses” →

Misleading “Research” From The Chamber Of Commerce

By Simon Johnson

On behalf of key financial sector players, Keybridge Research has just published a report that claims the Dodd-Frank reforms for over the counter derivatives market “could cost 130,000” jobs. My MIT colleague, John Parsons, deftly takes this apart on his blog today – pointing out that the technical basis of this report is very weak (or nonexistent).

John is an expert on these issues and spends a great of time with nonfinancial companies that use derivatives in a sensible and responsible manner. His critique should carry weight – including with the relevant congressional hearings scheduled for this week.

But I would go further. Continue reading “Misleading “Research” From The Chamber Of Commerce” →

What Did Bank CEOs Know And When Did They Know It?

By Simon Johnson

One view of executives at our largest banks in the run-up to the crisis of 2008 is that they were hapless fools. Not aware of how financial innovation had created toxic products and made the system fundamentally unstable, they blithely piled on more debt and inadvertently took on greater risks.

The alternative view is that these people were more knaves than fools. They understood to a large degree what they and their firms were doing, and they kept at it up to the last minute – and in some cases beyond – because of the incentives they faced.

New evidence in favor of the second interpretation has just become available, thanks to the efforts of Sanjai Bhagat and Brian Bolton. These researchers went carefully through the compensation structure of executives at the top 14 US financial institutions during 2000-2008. Continue reading “What Did Bank CEOs Know And When Did They Know It?” →

“To Blame Wall Street For the Financial Meltdown Is Absurd”

By Simon Johnson

At the heart of the Treasury Department’s strategy for refloating our largest financial institutions is an important assumption – decision-makers at our largest institutions have “learnt their lesson” and will be more careful going forward.

The latest string of pronouncements from the top of Wall Street suggests that this assumption is badly flawed.

In a column now running on Bloomberg, I review the recent statements of Robert Benmosche (AIG) and Bob Diamond (Barclays). Their views are not encouraging. They want to run bigger, more global and extremely complex financial institutions. They also appear to favor a great deal of leverage (high debt relative to equity) wherever possible.

Steve Eckhaus – a top Wall Street compensation lawyer (he will get you your bonus) – articulated the underlying view with great clarity to Saturday’s Wall Street Journal, “To blame Wall Street for the financial meltdown is absurd.” (p.B13 of Feb.5-6 print edition).

The absurdity here is that we have created Too Big To Fail banks (and insurance companies) and that we are allowing them to become Too Big To Save – while our political elite blithely looks the other way.

Direct link to Bloomberg column: http://www.bloomberg.com/news/2011-02-07/wall-street-knows-meltdown-was-just-bad-dream-commentary-by-simon-johnson.html

The Ruinous Fiscal Impact Of Big Banks

By Simon Johnson

The newly standard line from big global banks has two components – as seen clearly, for example, in the statements of Jamie Dimon (JP Morgan Chase) and Bob Diamond (Barclays in the UK) at Davos last weekend. First, if you regulate us, we’ll move to other countries. And second, the public policy priority should not be banks, but rather the spending cuts needed to get budget deficits under control in the US, UK, and other industrialized countries.

This rhetoric is misleading at best. At worst it represents a blatant attempt to effectively shakedown the public purse.

On Tuesday morning, in testimony to the Senate Budget Committee, I had an opportunity to confront this myth- making by the banks head-on and to suggest that the bankers’ logic is completely backwards. Continue reading “The Ruinous Fiscal Impact Of Big Banks” →

Davos: Two Worlds, Ready Or Not

By Simon Johnson

On the fringes of the World Economic Forum meeting in Davos this week, there was plenty of substantive discussion – including about the dangers posed by our “too big to fail”/”too big to save” banks, the consequences of widening inequality (reinforced by persistent unemployment in some countries), and why the jobs picture in the U.S. looks so bad.

But in the core keynote events and more generally around any kind of CEO-related interaction, such themes completely failed to resonate. There is, of course, variation in views across CEOs and the people work intellectual agendas on their behalf, but still the mood among this group was uniformly positive – it was hard to detect any note of serious concern.

Many of the people who control the world’s largest corporations are quite comfortable with the status quo post-financial crisis. This makes sense for them – and poses a major problem for the rest of us. Continue reading “Davos: Two Worlds, Ready Or Not” →

President Obama and Big Business Get On Well – But When Will That Produce Jobs?

By Simon Johnson

President Obama is embarked on a major charm offensive with regard to the business sector, as seen for example in the appointments of Bill Daley (ex-JP Morgan; now White House chief of staff) and Jeff Immelt (still head of GE, now also the president’s top outside economic adviser). This should not be an uphill struggle – much of the corporate sector, particularly bigger and more global businesses, is doing well in terms of profits and presumably C-suite remuneration.

But when exactly will this approach deliver jobs and reduce unemployment? And it store up risks for the future?

Republican rhetoric over the past two years was relentless on one point – that the Obama administration was anti-business. Supposedly this White House attitude undermined private sector confidence and limited investment.

In reality, the opposite was the case. Continue reading “President Obama and Big Business Get On Well – But When Will That Produce Jobs?” →

There Are Still No Fiscal Conservatives In The United States

By Simon Johnson

Following President Obama’s State of the Union address, there is a great deal of discussion about whether we might now be edging our way towards fiscal responsibility.

Unfortunately, most of our political elite – both left and right – is still living in a land of illusions. They cannot even seriously discuss what would be required to bring our true fiscal position under control – remember that most of the recent damage to our collective balance sheet was done by big banks blowing themselves up. No one who refuses to confront the power of those banks can be taken seriously as a fiscal conservative.

Even those interest groups that prominently espouse fiscal responsibility refuse to confront this reality. There are no fiscal conservatives in the United States; at this stage it is all pretence.

Pretence is apparently all we are likely to get, as long as the money keeps rolling in (see Argentina for details).

“Fannie Mae Made Me Do It”

By Simon Johnson. This post is the first few paragraphs of a column now available at Project Syndicate.

The United States continues to be riven by heated debate about the causes of the 2007-2009 financial crisis. Is government to blame for what went wrong, and, if so, in what sense?

In December, the Republican minority on the Financial Crisis Inquiry Commission (FCIC), weighed in with a preemptive dissenting narrative. According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many people into taking out subprime mortgages that they could not afford.

This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election. But, while the FCIC Republicans write eloquently, do they have any evidence to back up their assertions? Are poor people in the US responsible for causing the most severe global crisis in more than a generation?

Not according to Daron Acemoglu of MIT (and a co-author of mine on other topics), who presented his findings at the American Finance Association’s annual meeting in early January. (The slides are on his MIT website.)

To read the rest of this column, please click here or cut and paste this address: http://www.project-syndicate.org/commentary/johnson16/English.

The Financial Stability Oversight Council Defers To Big Banks

By Simon Johnson

As required by Section 123 of the Dodd-Frank financial reform legislation, Treasury Secretary Tim Geithner, as chair of the Financial Stability Oversight Council (FSOC), has released an assessment on the costs and benefits of potentially limiting the size of banks and other financial institutions. This report, four-and-a-half pages in a longer “Study of the Effects of Size and Complexity of Financial Institutions on Capital Market Efficiency and Economic Growth”, is represented as a survey of the relevant evidence that should guide policy thinking on this issue.

Mr. Geithner’s team conclude rather vaguely “there are both costs and benefits to limiting bank size”, and consequently “This study will not make recommendations regarding limits on the maximum size of banks, bank holding companies, and other large financial institutions.”

This is an analytically weak report that presents a skewed and incomplete assessment of the evidence. Given that the paper was prepared by some of the country’s top experts, who are well aware of the facts, the only reasonable inference is that our leading relevant officials prefer not to take the Dodd-Frank Act seriously with regard to reducing systemic risk. Instead, on all major points, the Financial Stability Oversight Council is allowing the big banks to prevail – and to pursue whatever global expansion plans they see fit.

Given Treasury’s attitude during the financial reform debate of 2009-10, this is not entirely surprising. Still there are three major issues with the substance report that should be considered particularly embarrassing to Mr. Geithner and his colleagues. Continue reading “The Financial Stability Oversight Council Defers To Big Banks” →

Tim Geithner: Never Again, Until The Next Time

By Simon Johnson

In a column now running on Bloomberg, I review the new Inspector General report on what exactly happened during the “Citi Bailout Weekend” of late November 2008.

The big question lurking in the background is how acutely we face a problem of Too Big To Fail (TBTF) today, i.e., the perception in the credit markets that very big banks will be supported in a crisis, therefore enabling these banks to borrow more cheaply during a boom – and thus enabling them to become larger and increasing their debt relative to equity (leverage).

According to the report, Treasury Secretary Tim Geithner now completely backs away from claims that the Dodd-Frank reform legislation ended TBTF.

Standard and Poor’s appears to be on the right track with their latest revised Bank Ratings methodology – presuming that “potential government support” is, going forward, always available to megabanks. This is exactly the conclusion of 13 Bankers. We should worry greatly about the implications.

To read the full column, click here, or cut and paste this address: http://www.bloomberg.com/news/2011-01-18/-citi-weekend-shows-too-big-to-fail-endures-commentary-by-simon-johnson.html