Over the past 30 years Wall Street captured the thinking of official Washington, persuading policymakers on both sides of the aisle not to regulate (derivatives), to deregulate (Gramm-Leach-Bliley), not enforce existing safety and soundness regulations (VaR), and to stand idly by while millions of consumers were misled into life-ruining financial decisions (Alan Greenspan).

This was pervasive cultural capture or, to be blunter, mind control.  But when the crisis broke it was not enough.  Having powerful people generally on your side is not what you need when all hell breaks loose in financial markets.  Official decisions will be made fast, under great pressure, and by a small group of people standing up in the Oval Office. 

If you run a big troubled bank, you need a man on the inside – someone who will take your calls late at night and rely on you for on the ground knowledge.  Preferably, this person should have little first-hand experience of the markets (it was hard to deceive JP Morgan and Benjamin Strong when they were deciding whom to save in 1907) and only a limited range of other contacts who could dispute your account of what is really needed.

Goldman Sachs, JPMorgan, and Citigroup, we learn today, have such a person: Tim Geithner, Secretary of the Treasury. Continue reading “Too Politically Connected To Fail In Any Crisis” →

Recent weakness in the dollar is a stroke of luck for the administration, but they have also played their cards well at the international level.  This could really help the Democrats in the 2010 midterm elections, but it’s quite a gamble.  I discuss the details here.

Buried in the avalanche of meaningless press releases from Istanbul is a highly significant item.  Dominique Strauss-Kahn, Managing Director of the IMF,  “has proposed the appointment of Naoyuki Shinohara, to the position of Deputy Managing Director. Mr. Shinohara, a former Vice Minister of Finance for International Affairs of Japan, will succeed Takatoshi Kato.”

This is a disaster. Continue reading “Actions Vs. Words At The IMF” →

Sunday’s communique from the International Monetary and Financial Committee (of the Board of Governors of the International Monetary Fund) is incredibly bland, even by their usual standards.  The degree of self-congratulation and complacency is slightly less pronounced than what we saw from the G20 in Pittsburgh, whose final statement contained a classic moment of hubris when the entirety of paragraph 5 read: “It worked.”

Still, the IMFC (representing all IMF member countries) seems to be in the same cloud cuckoo land as the G20 leaders. Continue reading “Did Anything Happen In Istanbul?” →

At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve.  It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) – hence the brouhaha over Steven Friedman’s shareholdings.

Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People’s Daily; CNBC).  US banks or bank holding companies would not generally be allowed to undertake such transactions – in fact, it is annoyed bankers who have asked me to take this up. Continue reading “A Short Question For Senior Officials Of The New York Fed” →

Over on the Economist Roundtable, my colleague Daron Acemoglu makes several important points.

1. We now have some financial institutions (and perhaps nonfinancial firms also) that have such strong and deep political connections, they will not be allowed to go bankrupt.  This is a reality we must face.
2. Assuming that we can address such a deep political problem with a tweak of our regulatory arrangements is a dangerous illusion. Continue reading “Too Connected To Fail” →

The headline news from the G20 summit in Pittsburgh is that progress has been made on “IMF reform,” meaning increased voting power for emerging markets relative to rich countries – remember that West Europeans are greatly overrepresented at the IMF for historical reasons.  But further change in a sensible direction is being blocked by the UK and France – because they have figured out that this logic implies they would lose their individual seats on the IMF’s executive board.

The way to break this impasse is (1) for the European Union to consolidate into a single seat or membership, and (2) for the Union to assert its right to be the headquarters of the IMF (under the Articles of Agreement: “The principal office of the Fund shall be located in the territory of the member having the largest quota…”). Continue reading “The IMF Should Move To Europe” →

This op ed appeared in the New York Times yesterday (9/20/2009).

SPEAKING at the Brookings Institution last week, the chairman of the Federal Reserve, Ben Bernanke, remarked that the recession in the United States is “very likely over.” He’s surely right that a recovery is under way; in fact, the short-term bounce back may actually turn out to be faster than he thinks — rapid growth is not uncommon right after a severe financial crisis.

Mr. Bernanke commands great respect because of his impressive efforts to head off financial collapse, but his speech was deeply worrisome on the bigger questions: what caused the financial crisis, and how can we prevent another such calamity? Continue reading “The Fed, Regulation, And The Next Recession” →

According to the WSJ this morning (top of p.A1), the US is pushing hard for the G20 to adopt and implement a “Framework for Sustainable and Balanced Growth,” which would amount to the US saving more, China saving less, and Europe “making structural changes to boost business investment” (and presumably some homework for Japan and the oil exporters, although that is not stressed in the article).

This is pointless rhetoric, for three reasons. Continue reading “You Cannot Be Serious: US Strategy for the G20” →