Author: Simon Johnson

They Saved the Big Banks But Kind Of Lost The Economy Doing It

By Simon Johnson

It would be easy to take relatively cheap shots at the portrayal of Tim Geithner — “we saved the economy but kind of lost the public doing it” — in the New Yorker, out today.

Mr. Geithner is quoted as saying, “Some on the left have fallen into a trap set by the Republicans, allowing voters to mistakenly think that the biggest part of the bank bailout had come under Obama rather Bush.” Mr. Geithner should know – as he spearheaded the saving of banks and other financial institutions under both Bush and Obama. In fact, it’s the continuation of George Bush’s policies by other means that really has erstwhile Obama supporters upset.
“I think there are some in the Democratic Party that think Tim and Larry are too conservative for them and that the President is too receptive to our advice.” Probably this is linked to the fact that Tim Geithner is not a Democrat.
Geithner also suggests that his critics compare government spending on different kinds of programs under President Obama: “By any measure, the Main Street stuff dwarfs the Wall Street stuff.” This insults our intelligence. Wall Street created a massive crisis and we consequently lost 8 million jobs; any responsible government would have tried hard to offset this level of damage with all available means. This includes fiscal measures that will end up increasing out privately held government debt, as a percent of GDP, by around 40 percentage points. It’s not the fiscal stimulus, broadly defined, that is Mr. Geithner’s problem – it’s the lack of accountability for the bankers and politicians who got us into this mess.

But the Geithner issues reflected here run much deeper. The New Yorker’s John Cassidy alludes to these but he may be too subtle. Here’s the less subtle version. Continue reading “They Saved the Big Banks But Kind Of Lost The Economy Doing It” →

European Monetary Fund, Arriving Soon

By Simon Johnson

American officials are annoyed and deeply skeptical – not thinking that this will amount to anything. But the future has finally arrived – or perhaps its arrival has just been announced – in the form of the European Monetary Fund.

Such an institution would represent a major reshaping of global financial architecture, undermining the traditional basis of power for the United States – which would prefer to keep the International Monetary Fund (IMF) paramount. This is a good thing for the world, but also for the IMF and – believe it or not – for the US. Continue reading “European Monetary Fund, Arriving Soon” →

Does The Obama Administration Even Want To Win In November?

By Simon Johnson

Increasingly, senior administration officials shrug when you mention the November mid-term elections. “We did all we could,” and “it’s not our fault” is the line; their point being that if jobs (miraculously at this point) come back quickly, the Democrats have a fighting chance – but not otherwise.

It may be true, at this point, that there is little fiscal policy can do that would have effects fast enough; and monetary policy is out of the administration’s hands.

But ever so quietly, you get the impression the Obama team itself is not so very unhappy – they know the jobs will come back by 2012, they feel that Republican control of the House will just energize the Democratic base, and no one will be able to blame the White House for getting nothing done from 2010 on.

When you push them on this issue, they snap back, “Well, what do you want us to do? What’s the policy proposal that we are not pursuing?” But this is exactly the wrong way to think about the issue.

Continue reading “Does The Obama Administration Even Want To Win In November?” →

Disastrous Performance By Treasury On Capitol Hill

By Simon Johnson

The campaign to convince people that Treasury is serious about banking reform – led sometimes by President Obama – suffered a major blow today on Capitol Hill. In testimony to the Congressional Oversight Panel, Assistant Secretary for Financial Stability “and Counselor to the Secretary” Herb Allison said, “There is no too big to fail guarantee on the part of the U.S. government.”

This statement is so extraordinarily at odds with the facts that it takes your breath away.

Should we laugh at the barefaced misrepresentation of what this administration has done (and the Bush team did) – or just dig out “Too Big To Fail” by Andrew Ross Sorkin and go through all the gruesome details again? Should we cry for what this implies about Secretary Geithner’s commitment to real reform – if there is no issue with “too big to fail”, then why do you need any new laws that try to address this issue (e.g., such as the Volcker Rules, sent to Congress this week)?

The temptation is to shrug and ignore repeated such insults to our intelligence and implied injury to our pocketbooks. But this would be a mistake. Continue reading “Disastrous Performance By Treasury On Capitol Hill” →

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?” →

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” →

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?” →

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” →

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?” →

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?” →

The IMF Cannot Help Greece

This guest post is by Carlo Bastasin, a visiting fellow at the Peterson Institute for International Economics. An economist and a journalist, Carlo is a leading commentator for the Italian daily Il Sole-24 Ore and for German newspapers. He reacts here to recent proposals that Greece should bring in the IMF.

The Greek crisis has at least two different dimensions. One is a fiscal deficit, aggravated by Athens’ mismanagement and deception; the other is the protracted loss of competitiveness, especially within the Eurozone, leading to a large current account deficit.

The IMF can be very effective in tackling the problems of solvency and liquidity arising from the fiscal emergency – and it has probably more expertise than the European Union (EU) or the European Central Bank (ECB) in this regard. But the Fund is much less able to address the problem of restoring equilibrium in current account balances within the Eurozone. Continue reading “The IMF Cannot Help Greece” →

Volcker Rules?

By Simon Johnson

Bloomberg reports this morning that Treasury is gently letting the Volcker Rule (limiting proprietary trading for big banks) slip – Secretary Geithner would grant greater discretion to regulators which, in today’s context, most likely means not make the restriction effective.

This step is consistent with the broader assessment of the Volcker Rules that Peter Boone and I have in The New Republic (print and on-line): the underlying principles are sound, but the Rules have not been well-designed, and top people in the administration show little sign of wanting to make them effective. This dimension of financial reform does not appear to be headed anywhere meaningful – and the main issues (bank size, capital, and derivatives) are not yet seriously on the table. Continue reading “Volcker Rules?” →

Prospects For Financial Reform

By Simon Johnson

The best opportunity for immediate reform of our financial sector was missed at the start of the Obama administration. As Larry Summers and Tim Geithner know very well – e.g., from their extensive experience around the world during the 1990s (see Summers’s 2000 Ely lecture) – when a financial system is in deep crisis, you have an opportunity to fix the most egregious problems. Major financial sector players are always good at blocking reform – except when they are on the ropes. (Look again at Paul Blustein’s The Chastening for more detail on what Geithner-Summers, with David Lipton and others, got right when they sided with reformers in Korea.)

Congratulations to the Treasury PR people for placing such a warm and fuzzy article about Secretary Geithner in Vogue (not available on-line, but definitely worth finding; nice photos). But what exactly was the point – unless Mr. Geithner is planning to run for the Senate in Massachusetts? Mr. Geithner comes through as someone who, against much advice, decided to stick with exactly the financial sector that got us into such deep trouble – despite the fact that this is exactly what he and his colleagues (at Treasury, at the IMF, and at the NY Fed) have always, and with good reason, strongly urged other countries not to do. Continue reading “Prospects For Financial Reform” →