Author: Simon Johnson

Irish Worries For The Global Economy

By Peter Boone and Simon Johnson

Is the global economic recovery still on track? The mainstream view is: yes, without a doubt. But increasingly, there are reasons to fear another financial disruption – particularly given the latest developments in Ireland.

The consensus among officials and most of the international banking community is that the global economy has stabilized and is now well down the road to recovery. The speed of this recovery is proving disappointing – as seen in the revised second-quarter growth estimate for gross domestic product in the United States, with annualized growth down to 1.6 percent. But, according to this view, easy monetary policy and still-loose fiscal policy around the world will keep sufficient momentum going.

Never mind that Japan, the United States and most of Europe are running unsustainable fiscal policies, while the Federal Reserve chairman Ben Bernanke is fretting over how to prevent deflation with a limited toolbox, and Jean-Claude Trichet, president of the European Central Bank, is calling for more fiscal tightening. To enjoy this rosy global picture, we are also told to ignore the plight of heavily indebted peripheral euro-zone nations still suffering from uncompetitive wages and prices, and concerns over default, that strangle their credit markets and growth. Continue reading “Irish Worries For The Global Economy” →

Fiscal Austerity and “Third World America”

By Simon Johnson. My testimony to the Senate Budget Committee on these issues is available here: https://baselinescenario.com/2010/08/05/its-hard-to-take-the-fiscal-hawks-seriously/.

There are three main views of the financial crisis and recession of 2008-9. In the first two views, the debate over the fiscal deficit is quite separate from what happened in the crisis. But in the third view, the financial crisis and likelihood of fiscal austerity are closely linked.

The first is that something went wrong with the financial plumbing central to the world’s economy. Failed plumbing is a serious business, of course – great real estate can be ruined by a burst pipe. But it’s a technical issue; nothing deeper is at stake.

The Dodd-Frank financial reform legislation ended up addressing a myriad of technical issues. Clearly, “fix the plumbing” is Treasury Secretary Timothy Geithner’s interpretation of what we need to do – he insists that making the system safer just requires “capital, capital, capital.”

The second view is that the financial system is more deeply broken. Opinions vary in terms of the relative importance of various elements, including too-big-to-fail incentive problems that encourage banks to take on excessive risks – and to be supported by the credit markets when they do.

The first and second views are mutually exclusive – either our financial system is badly broken, or it is not and technical fixes will suffice. Both focus primarily on the nature of the financial system, somewhat in isolation from the rest of the economy. But a third view is increasingly emerging that implies both the first two views are too narrow. Continue reading “Fiscal Austerity and “Third World America”” →

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” →

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” →

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” →

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” →

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” →

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” →

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” →

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” →