Author: Simon Johnson

Is Tim Geithner Paying Attention To the Global Economy?

In an interview that will air Sunday on ABC, Treasury Secretary Tim Geithner says, “”We have much, much lower risk of [a double-dip recession] today than at any time over the last 12 months or so … We are in an economy that was growing at the rate of almost 6 percent of GDP in the fourth quarter of last year.  The most rapid rate in six years.  So we are beginning the process of healing.”

The timing of this statement is remarkable because, while the US is finally showing some signs of recovery, the global economy is bracing for another major shock – this time coming from the European Union.

The mounting debt and deficit problems in Greece might seem relatively small and faraway to the US Treasury – concerned as it is with China’s exchange rate and the ritual of G7 meetings, and likely distracted by the major snow storm now hitting Washington DC.

But the problems now spreading from Greece to Spain, Portugal, Ireland and even Italy portend serious trouble ahead for the US in the second half of this year – particularly because our banks remain in such weak shape. Continue reading “Is Tim Geithner Paying Attention To the Global Economy?” →

Goldman Sachs And The Republicans

I testified yesterday to the Senate Banking Committee hearing on the “Volcker Rules” (full pdf version; summary).  My view is that while the principles behind these proposed rules are exactly on target – limiting the size of our largest banks and preventing any financial institution backed by the government, implicitly or explicitly, from taking big risks – the specific rule changes would need to be much tougher if they are to have any effect.

Wall Street is strongly opposed to the Volcker Rules (link to the written testimony; webcast) and the discussion elicited some classic Goldman Sachs moments.  Gerry Corrigan, a senior executive at Goldman and former head of the New York Fed, suggested that Goldman Sachs has an impeccable approach to risk management and seemed to imply that the firm was not in trouble in fall 2008.  When pressed on why Goldman requested and was granted a banking license – and access to the Fed’s discount window – in September 2008, he fell back slightly, “There is no question whatsoever that when you look at totality of the steps that were taken by central banks and government, particularly in 2008, that Goldman Sachs was a beneficiary of this.”

The public record is clear – Goldman Sachs would have failed in September 2008, were it not for the support provided by the government. The fact that some of this support did not involve direct use of taxpayer money speaks to the ingenuity of the people involved, but it should not distract us from the substance.  Goldman Sachs was failing and it was saved.

Why is this so hard for Goldman to admit?

Continue reading “Goldman Sachs And The Republicans” →

Kevin Warsh: “No Firm Should Be Too Big To Fail”

The debate over Ben Bernanke’s reappointment, and his approach to the financial system, may after all have had some impact.  In a speech yesterday, Kevin Warsh – the Federal Reserve Board Governor who liaises between Ben Bernanke and financial markets – signaled a major change in Fed thinking regarding “too big to fail”.

Warsh was much blunter than we have heard from the Fed in a long while: “Moral hazard in the financial system is higher than any of us should countenance”; “eradicating the too-big-to-fail problem should be the predominant policy goal”; and “in the new regime, no firm should be too big to fail.”

At some level, Warsh and his colleagues are finally learning the main lesson of 2008-09.

“We need a system in which insolvent firms fail. Market discipline only works if governments can demonstrably and credibly commit to allow firms to fail. This system isn’t just about giving government officials better options on Sunday nights. It is about making sure that market discipline is operative in the prior months and years to avoid altogether the proverbial Sunday night judgments.”

But there is still a major problem in the Fed’s thinking. Continue reading “Kevin Warsh: “No Firm Should Be Too Big To Fail”” →

Tom Hoenig For Treasury

The White House is floating, ever so gently, the notion that they are open to nominations for the position of “Tim Geithner’s Successor.”

It’s not clear if they mean this job is likely to be advertised formally sometime in 2012 or 20 minutes after the November midterms.  Nor is it obvious if this is a real request for proposals – it could be just an effort to make critics “put up or shut up.”

Fortunately, there is an entirely plausible successor already in waiting, ready now or whenever the president finally realizes the need to fundamentally change banking policy. Continue reading “Tom Hoenig For Treasury” →

Move Your Politician’s Money

I talked Sunday about Move Your Money with Guy Raz of NPR’s Weekend All Things Considered (summary; audio from about 3:45).  We covered a lot of ground, from what’s in it for individuals to shift towards community banks and credit unions (better service and lower costs, in many cases) to how this could begin to reign in Too Big To Fail financial institutions (slowly, but surely).

Unfortunately, there wasn’t enough time to discuss what comes next – i.e., what happens when the location of political candidates’ own money starts to matter.  As early as this fall’s primaries, expect to hear people ask politicians in debates and through various kinds of interactions: (1) where do you, personally, keep and borrow money, and (2), in all relevant cases, where did you put public money when it was up to you?

These questions strike to the heart of democratic responses against overly concentrated financial power throughout US history – a topic we take up in Chapter 1 of 13 Bankers. Continue reading “Move Your Politician’s Money” →

“Populism”

Amidst otherwise strong coverage of the growing debate around the nature of finance and the power of big banks, a surprisingly high number of journalists continue to misuse the word “populism”.

For example, in an article on criticism of bankers at Davos, the Wall Street on Saturday morning reported that President Sarkozy of France delivered a “populist broadside” when he said,

“That those who create jobs and wealth may earn a lot of money is not shocking.  But that those who contribute to destroying jobs and wealth also earn a lot of money is morally indefensible.”

The implication, of course, is that some politicians are pandering to “the people” vs. “the elites” – part of a long-standing theme in some interpretations of democratic political conflict.  While elites invest and engage in productive activities, the argument goes, plebians from time to time demand excessive income redistribution or punitive taxation or other measures that would undermine productivity and prosperity.

Or, as President Obama said in March 2009, “My administration is the only thing between you and the pitchforks.”

Such language reveals a complete misunderstanding of our current situation.  (Matt Taibbi has this right, but doesn’t go far enough.) Continue reading ““Populism”” →

A Colossal Failure Of Governance: The Reappointment of Ben Bernanke

When representatives of American power encounter officials in less rich countries, they are prone to suggest that any failure to reach the highest standards of living is due in part to weak political governance in general and the failure of effective oversight in particular.   Current and former US Treasury officials frequently remark this or that government “lacks the political will” to exercise responsible economic policy or even replace a powerful official who has clearly become a problem.

There is much to be said for this view.  When a minister or even the head of a strong government agency is no longer acting in the best interests of any country – but is still backed by powerful special interests — who has the authority, the opportunity, and the fortitude to stand up and be counted?

Fortunately, our constitution grants the Senate the power to approve or disapprove key government appointments, and over the past 200 plus years this has served many times as an effective check on both executive authority and overly strong lobbies – who usually want their own, unsuitable, person to be kept on the job.

Unfortunately, two massive failures of governance at the level of the Senate also spring to mind: first, the strange case of Alan Greenspan, which stretched over nearly two decades; second, Ben Bernanke, reappointed today (Thursday). Continue reading “A Colossal Failure Of Governance: The Reappointment of Ben Bernanke” →

The Next Subpoena For Goldman Sachs

Yesterday’s release of detailed information regarding with whom AIG settled in full on credit default swaps (CDS) at the end of 2008 was helpful.  We learned a great deal about the precise nature of transactions and the exact composition of counterparties involved.

We already knew, of course, that this “close out” at full price was partly about Goldman Sachs – and that SocGen was involved.  There was also, it turns out, some Merrill Lynch exposure (affecting Bank of America, which was in the process of buying Merrill).  Still, it’s striking that no other major banks had apparently much of this kind of insurance from AIG against their losses – Citi, Morgan Stanley, and JPMorgan, for example, are not on the list.

This information is useful because it will help the House Oversight and Government Reform Committee structure a follow up subpeona to be served on Goldman Sachs with the following purpose: Continue reading “The Next Subpoena For Goldman Sachs” →

Is The “Volcker Rule” More Than A Marketing Slogan?

At the broadest level, Thursday’s announcement from the White House was encouraging – for the first time, the president endorsed potential new constraints on the scale and scope of our largest banks, and said he was ready for “a fight”.  After a long tough argument, Paul Volcker appeared to have finally persuaded President Obama that the unconditional bailouts of 2008-2009 planted the seeds for another major economic crisis.

But how deep does this conversion go?  On the “deep” side is the signal implicit in the fact that Volcker stood behind the president while Tim Geithner was further from the podium than any Treasury Secretary in living memory.  Where you stand at major White House announcements is never an accident.

Increasingly, however, there are very real indications that the conversion is either superficial (on the economic side of the White House) or entirely a marketing ploy (on the political side).  Here are the five top reasons to worry. Continue reading “Is The “Volcker Rule” More Than A Marketing Slogan?” →

Paul Krugman For The Fed

The case for Ben Bernanke’s reappointment was weak to start with, weakened with his hearings, and is now held together by string and some phone calls from the White House.  Bernanke is an airline pilot who pulled off a miraculous landing, but didn’t do his preflight checks and doesn’t show any sign of being more careful in the future – thank him if you want, but why would you fly with him again (or the airline that keeps him on)?

The support for Bernanke in the Senate hangs by a thread – with Harry Reid providing a message of support, albeit lukewarm, after the markets close.  The White House is telling people that if Bernanke is not reconfirmed there will be chaos in the markets and the economic recovery will be derailed.  This is incorrect.

The danger here is uncertainty – the markets fear a prolonged policy vacuum.  Fortunately, there is a way to address this.  Ben Bernanke should withdraw and the president should nominate Paul Krugman to take his place. Continue reading “Paul Krugman For The Fed” →

Secretary Geithner Needs To Get With The Program

The details of the new White House banking policy are somewhat vague and in places borderline incoherent – e.g., what exactly does “The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms…” mean (from point 2 in yesterday’s short and poorly edited statement)?

And the size restrictions currently in pencil on the back on an envelope near the president’s desk are almost certainly too lenient; the goal should not be a return to the status quo of 2007 or thereabouts – the clock must be rolled back much further and “too big to fail” completely removed from the financial map.

But the general principle behind our “Volcker Rule” is clear.  Here’s what President Obama said, “Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.”

Whatever you think of that notion or the exact wording, this clearly implies that banks will get smaller.  Secretary Geithner apparently does not get this (transcript). Continue reading “Secretary Geithner Needs To Get With The Program” →

Questions That Ben Bernanke Must Now Answer

Update: the Senate needs to hold a new hearing for Ben Bernanke – here’s the full proposal.

Ben Bernanke’s reconfirmation as chair of the Federal Reserve is in disarray.  With President Obama having launched, on Thursday morning, a major new initiative to rein in the power of – and danger posed by – our leading banks, key Senators rightly begin to wonder: Where does Ben Bernanke stand on the central issue of the day?

There are three specific questions that Bernanke must answer, in some convincing detail, if he is to shore up his weakening cause in the Senate.

  1. Does he support the President’s proposed emphasis on limiting the scope and scale of big banks?
  2. With regard to the key detail, is it his view that the size of big banks can be capped “as is” or – more reasonably – should we require these banks to contract or divest so as to return to the profile of system risk that prevailed say 15 or 20 years ago?
  3. If Congress cannot act in the short-term, because of opposition from Republicans and some Democrats, does he see the Fed’s role as taking the initiative in this arena – or will he wait passively for the legislature to act?

As running hard against the “too big to fail” banks is now a major theme of 2010 and beyond for the Democrats, how can any Democratic Senators feel comfortable voting for Ben Bernanke unless they know exactly what his position is on all of these points?

And given what we know about Bernanke’s record and positions relative to these questions, absent new information it is not a surprise to see his support dwindling.

By Simon Johnson

As Is?

The White House background briefing is that their proposals would freeze biggest bank size “as is” — this makes no sense at all.

Twenty years of reckless expansion, a massive crisis, and the most generous bailout in human history are not a recipe for “right” sized banks. There is a lot of work the administration hasn’t done on the details — this is a classic policy scramble, in which ducks have not been lined up. But we should treat this as the public comment phase for potentially sensible principles — and an opportunity to propose workable details.  The banks are already hard at work, pushing in the other direction.

It’s a big potential policy change, and my litmus test is simple – does it, at the end of the day, imply breaking Goldman Sachs up into 4 or 5 independent pieces?

By Simon Johnson

The White House Should Also Announce An Antitrust Investigation Into Major Banks

In the aftermath of Tuesday’s Massachusetts special election debacle, the White House today is set to announce a major change of strategy on financial reform, with the president to propose new legislation that will limit the size and complexity of banks.

Such legislation is unlikely to pass the Senate.  In fact, the approach to financial reform already in place, crafted by Senator Christopher J. Dodd with the blessing of the White House, was to trade away some parts of the House bill — including perhaps the potential new consumer protection agency for financial products — in return for sufficient Republican support to pass a bill in the next month or two.

But fresh from their success in the Democratic heartland, the Republicans will be less inclined than before to compromise in any meaningful way. They may keep negotiating, but the Senate Democratic choice will quickly become: pass a law with little sensible content, or don’t pass anything and look ineffectual.

Fortunately, there is an alternative — one laid out neatly by Krishna Guha of the Financial Times on Tuesday. Instead of pursuing the issue of those “too big to fail” financial institutions exclusively through legislation, the administration could launch instead one or more serious antitrust investigations into the behavior of our biggest banks. Continue reading “The White House Should Also Announce An Antitrust Investigation Into Major Banks” →

Paul Volcker Prevails

Paul Volcker, legendary central banker turned radical reformer of our financial system, has won an important round.  The WSJ is now reporting:

President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country’s biggest banks, marking the administration’s latest assault on Wall Street in what could mark a return — at least in spirit — to some of the curbs on finance put in place during the Great Depression.

This is an important change of course that, while still far from complete, represents a major victory for Volcker – who has been pushing firmly for exactly this.

Thursday’s announcement should be assessed on three issues. Continue reading “Paul Volcker Prevails” →