Author: Simon Johnson

Jeb Hensarling, George Orwell

The debate over re-regulation of the financial sector has finally, and irreversibly, turned partisan. This helps define issues in ways that may be more familiar and thus easier to understand.

In the blue corner we have Treasury Secretary Tim Geithner. Secretary Geithner’s overall banking policy continues to be problematic, and his broader re-regulation effort is hampered by all the free passes he gave to bank CEOs earlier this year. But on consumer protection he has the right message and he delivered it forcefully to Congress last week: we need a Consumer Financial Protection Agency (CFPA) and we need it now.

In the red corner, Representative Jeb Hensarling is rapidly emerging as a leader. A member of the Congressional Oversight Panel and the senior republican on the House Financial Services subcommittee on Financial Institutions and Consumer Credit, he wrote last week in the Washington Timesthat the CFPA is “Orwellian”, because it would strip consumers of their rightful choices.

Mr. Hensarling seems dangerously close to slipping into double think. Continue reading “Jeb Hensarling, George Orwell” →

Secretary Geithner’s China Strategy: A Viewer’s Guide

On Monday and Tuesday of this week, Treasury Secretary Geithner – and Secretary of State Clinton – meet with a high-level Chinese delegation. (Could someone please update the Treasury’s schedule of events? At 7am on Monday it still shows last week’s agenda; update, 9am, this is now fixed – thanks).

According to official previews (i.e., the apparent contents of background briefings given to wire services), the economic topics are China’s concerns about the value of the dollar (i.e., their investments in the U.S.) and the amount of debt that the U.S. will issue this year.

This is absurd. Continue reading “Secretary Geithner’s China Strategy: A Viewer’s Guide” →

After Peak Finance: Larry Summers’ Bubble

There are three kinds of “bubbles” – a term often used loosely when asset prices rise a great deal and then fall sharply, without an obvious corresponding shift in “fundamentals“.

A short-run bubble. Think about 17th century Dutch Tulip Mania: spectacular, probably disruptive, but not a major reason for the decline of the Netherlands as a global power.
A distorting bubble. In this case, the increase in asset prices contributes to a reallocation of resources across sectors. Think of the Dot-com Bubble: fortunes were made and lost, the collapse was scary to many, and – at the end of the day – you’ve built the Internet and some good companies.
A political bubble. Here rising asset prices generate resources that can be fed into the political process, through bribes, building politicians’ careers, and lobbying of all kinds. Bubbles in Emerging Markets often generate resources that impact the political process, sometimes in good ways – but most often in bad ways, which eventually contribute to a collapse.

Larry Summers seems to think we are dealing with the consequences of bubble type #1. In his speech last week, “the bubble” is a modern deus ex machina – it explains why we have a crisis, but there is no explanation of where this bubble came from, what exactly was bubbling, and what changes this bubble brought to the real economy or to our politics. Continue reading “After Peak Finance: Larry Summers’ Bubble” →

Bernanke And The Lobbies: Confidence Illusion

Ben Bernanke is opposed to the creation of a new Consumer Financial Protection Agency. Disregarding his organization’s disappointing track record in this regard, he claims that the Fed can handle this issue perfectly well going forward.

He thus adds his voice to the cacophony of financial sector lobbyists favoring the status quo.

At the same time, Bernanke and the lobbyists talk about the importance of consumer confidence for the recovery. But how can you expect anyone to have confidence enough to spend and borrow when so many people have been so badly treated by the financial sector in recent years? Continue reading “Bernanke And The Lobbies: Confidence Illusion” →

What Are You (Or Barney Frank) Going To Do About It?

At a hearing of the House Financial Services Committee yesterday, Barney Frank nicely summarized where we are with regard to re-regulation of our largest financial institutions: some of them are definitely “too big to fail”, with the potential to present the authorities with what Larry Summers calls the “collapse or bailout” choice, but what exactly should be done about it?

On a five-person panel, I had the middle seat (as usual) and found myself agreeing with points made both to my left and to my right. Alice Rivlin is correct that we need to control leverage as well as increase capital requirements, and the Fed’s tools vis-à-vis leverage need modernization – your grandparents’ margin requirements would not suffice. Peter Wallison, a member of the new financial crisis investigation commission, stresses that capital requirements should be higher for larger banks. Paul Mahoney wants to change the bankruptcy code, to make it easier for courts to handle large financial firms in quick time; recent CIT Group events suggest this is a good idea.

And Mark Zandi was persuasive on the point that households had no idea what they were signing up to with option ARMs – even he has trouble with those spreadsheets. Effective consumer protection – including a new consumer safety commission – would definitely contribute to financial system stability.

What will Barney Frank and his committee do? There will be no “Tier 1 Holding Company” category of firms, if Frank has anything to do with it; this is too much like creating an implicit government guarantee. Frank is clearly drawn towards higher capital requirements or more insurance payments from firms that pose more system risk. I suggested total assets of 1% of GDP as a threshold, but we agree this should be essentially a progressive drag on profits – creating the strong market-based incentive for the biggest firms to downsize.

Other than that, watch this space.

My written testimony submitted to the committee is below. Continue reading “What Are You (Or Barney Frank) Going To Do About It?” →

Three Myths about the Consumer Financial Product Agency

This guest post was contributed by Elizabeth Warren, chair of the Congressional Oversight Panel and the Leo Gottlieb Professor of Law at Harvard University. (Update: more on the case for a CFPA in her YouTube video, released yesterday.)

I’ve written a lot about the creation of a new Consumer Protection Financial Agency (CFPA), starting with an article I wrote in the Democracy Journal in the summer of 2007. My writing has helped me work through the idea and has advanced a conversation about what kind of changes in financial products would be most effective. A couple of weeks ago, I testified before the House Financial Services Committee about why I think a new consumer agency is so important, and I’ve argued the case many times.

Today, though, I’d like to post specifically about some of the push back that has developed on this issue. In particular, I’d like to focus on three big myths – myths designed to protect the same status quo that triggered the economic crisis. Continue reading “Three Myths about the Consumer Financial Product Agency” →

Jamie Dimon v. Larry Summers

Jamie Dimon has won big. JP Morgan Chase now stands alone, both in financial position and political clout – including special access to the White House and, as explained in today’s NYT, Rahm Emanuel’s likely attendance at his next board meeting tomorrow.

Dimon’s semiotics have been brilliant throughout the crisis – it wasn’t his fault, he was forced to take TARP money, and – in phrasing that will make the history books – bankers should not be “vilified”. But now he has a problem.

Larry Summers forcefully stated Friday that high recent profit levels for big banks (i.e., JPMorgan and Goldman) are based on the support they received and still receive from the government (listen to his answer to the second question, from about the 6:10 to 10:30 mark). At that level of generality, in a period of financial stabilization and consequent reduction in executive branch discretion, this statement does not threaten Dimon or anyone else.

And Summers’ statement on the dangers of “too big to fail” was “too vague to succeed”. Dimon saw this one coming and is very much aligned with Tim Geithner on the technocratic fixes that will supposedly take care of this – the mythical “resolution authority”, which will not actually achieve anything because it has no cross-border component, so the next time a major multinational bank (e.g., JP Morgan) fails, the choice again will be “collapse or bailout” (as Summers put it in the same Q&A Friday). Yes, I know the G20 is supposedly working on this; no, I don’t think they are making progress.

But Summers also drew a line in the sand on consumer protection. Continue reading “Jamie Dimon v. Larry Summers” →

Who Nationalized Whom?

Hank Paulson’s testimony yesterday was informative, if only because it illustrated that he himself still understands little about the origins and nature of the global crisis over which he presided. Perhaps his book, out this fall, will redeem his reputation.

A fundamental principle in any emerging market crisis is that not all of the oligarchs can be saved. There is an adding up constraint – the state cannot access enough resources to bail out all the big players.

The people who control the state can decide who is out of business and who stays in, but this is never an overnight decision written on a single piece of paper. Instead, there is a process – and a struggle by competing oligarchs – to influence, persuade, or in some way push the “policymakers” towards the view:

My private firm must be saved, for the good of the country.
It must remain private, otherwise this will prevent an economic recovery.
I should be allowed to acquire other assets, opportunities, or simply market share, as a way to speed recovery for the nation.

Who won this argument in the US and on what basis? And have the winners perhaps done a bit too well – thinking just about their own political futures?

Continue reading “Who Nationalized Whom?” →

CIT Down

At the end of the day, CIT had nothing. Their asset quality was poor, their systemic risk implications seemed limited, Sheila Bair dug in her heels, and Jeffrey Peek (CEO) didn’t have sufficiently strong connections to get her overruled.

CIT had friends, but not enough – and maybe this tells us something about the shifting political sands. The Financial Services Roundtable (top financial CEOs) came out in force, the House Committee on Small Business reportedly made worried noises, and Barney Frank sounded supportive. But the American Bankers Association (the broader mass of bankers) publicly stood on the sidelines and Senate Banking – and prominent senators – seemed otherwise engaged. Continue reading “CIT Down” →

CIT Battlelines

The issue of the day is obviously CIT. It’s hard to sort out the real news from clever PR/planted stories in this situation, but it looks like the FDIC is coming out strongly against being involved in a rescue package. Given Sheila Bair’s successful political positioning and strong popular appeal, it’s hard to see how – once dug in – the FDIC can be moved.

The lobbying frenzy has concentrated on CIT’s role in financing small and medium-sized business; “the recession will be deeper if CIT fails” is the refrain. This is a weak argument – it would be straightforward to refinance this part of CIT’s business without bailing out CIT’s creditors, and definitely without keeping top CIT executives in place; this is the essence of “negotiated conservatorship,” which is a proven model in the US.

More plausible is the concern that given Treasury’s generous handouts to date for financial firms, if they are now tough on CIT’s creditors, this will send a new signal about how they may treat other firms – and maybe raise fears of Hank Paulson-like flipflopping. Citigroup’s CDS spread is still at worrying levels, and Treasury/National Economic Council watches this closely – for both organizational and personal reasons. Continue reading “CIT Battlelines” →

Will CIT Go Bankrupt?

CIT Group is apparently in trouble and now negotiating with Treasury, the Fed, and the FDIC for some sort of “bailout”, e.g., in the form of a guarantee for its debt.

Traditionally, CIT provided vanilla loans to small and medium-sized business. “But under its current chief executive, Jeffrey M. Peek, a well-liked Wall Street veteran who lost out several years ago in a race to run Merrill Lynch, CIT made an ill-timed expansion into sub-prime mortgage and student lending” (NYT today).

What happens to CIT will help define exactly where we are with regard to “too big to fail.” Continue reading “Will CIT Go Bankrupt?” →

Waiting For The Big Push: Selling The Consumer Protection Agency For Financial Products

In mid-March, the administration proposed that toxic assets could and would be safely removed from banks balance sheets. We were skeptical, and the the PPIP now seems to have slipped into irrelevance (loans; securities). But the administration still put an impressive effort into persuading independent analysts, and broader public opinion, that they should do something clearly beneficial for banks. This was “all hands on deck,” and it definitely had an impact on the debate, at least for a while.

Now, the administration’s major remaining initiative is its version of a Financial Product Safety Commission – something that would be clearly beneficial for the public. And the skepticism – and outright opposition – comes from the banking sector.

How does the administration’s effort compare, then vs. now? Continue reading “Waiting For The Big Push: Selling The Consumer Protection Agency For Financial Products” →

Who Is Upton Sinclair? (Weekend Comment Competition)

By 1906, it was obvious to many people that the industrialization of food production in the United States had brought with it some unpleasant and even unsafe practices. Consumers were definitely not getting exactly what they thought they were getting.

But efforts to reform the industry – and to protect consumers – were mired in the power of this lobby (with strong political power based on its great economic power), the resilience of laissez-faire ideas, and the intransigence of powerful individuals in the Senate. There were legislative proposals, but the overall reform agenda was not really going anywhere fast.

Then Upton Sinclair published The Jungle. No one could look at meat packing or its products in the same way again, and this directly and immediately helped produce stronger federal legislation regulating the industry.

So who is our Upton Sinclair and when will they write the definitive piece that captures imaginations and changes the terms of the debate? Is it about how consumers were mistreated, politicians captured, or the public treasury ransacked? Will it be a novel or nonfiction?

Or perhaps it is a movie, with all the modern Hollywood marketing techniques and tie-ins?

By Simon Johnson

Larry Summers’ New Model: Details, Contradictions, And Odd Assumptions

Larry Summers had “lunch with the FT” (p.3 in the Life and Arts section today) – although unfortunately the paper does not report when this happened; a week or two makes quite a difference these days.

Putting this next to his April speech to the IDB, Summers’ view of the way forward has a few problems. Continue reading “Larry Summers’ New Model: Details, Contradictions, And Odd Assumptions” →

Speculators ‘R’ Us: The G8 And Energy Prices

The G8 summit was obviously disappointing, even for those with low expectations. Usually, the substance is lacking but the public relations are well managed. This year even the messaging was messed up – they said some new things on climate change but not what we were told they could say, the food aid/development package was lamer than advertized, etc. So the whole thing looks like an expensive flop.

But actually it was much worse. Continue reading “Speculators ‘R’ Us: The G8 And Energy Prices” →