Author: Simon Johnson

Old Whine in New Bottles: Commercial Real Estate Lobbies For Bailout

The commercial real estate industry would like a bailout – see my preview/links to testimony before the JEC today.  This is not a surprise – even some of the most libertarian people I meet think the government should help them personally when times are bad.  Is there a case treating commercial real estate as special?

The sector is definitely taking a beating, but who is not?  This lobby’s most sophisticated advocates are arguing that various Fed facilities can be extended to support commercial real estate financing, i.e., so there is no cost to the government’s budget or your future taxes.

This is illusory. Continue reading “Old Whine in New Bottles: Commercial Real Estate Lobbies For Bailout” →

The G7/G8: Why Bother? (A Viewer’s Guide)

The G7 was originally conceived as a form of steering committee for the world economy (antecedents).  Existing formal governance mechanisms, around the IMF and the UN, seemed too cumbersome (and too inclusive) during the 1970s, with the breakdown of fixed exchange rates, assorted oil shocks, and the broader shift of economic initiative towards Western Europe and Japan.

And the G7 had some significant moments, particularly with regard to moving exchange rates in the 1980s.  More broadly, behind the scenes, it served as a communication mechanism between the world’s largest economies (“coordination” is a dirty word in G7 policymaking circles).  And it was probably a good thing in the 1990s that Russia wanted to join the G7 – hence the G8 once a year, although many of the most important technical meetings are just the G7.

But today, honestly, what’s the point? Continue reading “The G7/G8: Why Bother? (A Viewer’s Guide)” →

The Fed Makes A Bid

Policymakers like to make particular kinds of statements at a “low attention” moment, e.g., right before a holiday weekend.  This gets items onto the public record but ensures they do not get too much attention. And if you are asked about these substantive issues down the road, you can always say, “we told you this already, so it’s not now news” – usually this keeps things off the front page.

Released on July 3rd (a federal holiday), and buried inside the Washington Post on Saturday (p.A12): An important speech (from June 26th) by the New York Fed’s controversial President, William C. Dudley. Continue reading “The Fed Makes A Bid” →

The Jones Doctrine: Economic Development For Afghanistan

The administration is signaling a new strategy for Afghanistan: “economic development and governance”.  On the front page of the Washington Post last week, President Obama’s national security adviser, James L. Jones, told Bob Woodward:

“The piece of the strategy that has to work in the next year is economic development. If that is not done right, there are not enough troops in the world to succeed.”

This is an appealing statement.  But does it make any sense?

Continue reading “The Jones Doctrine: Economic Development For Afghanistan” →

How To Buy Friends And Alienate People

The banking industry is exceeding all expectations.  The biggest players are raking in profits and planning much higher compensation so far this year, on the back of increased market share (wouldn’t you like two of your major competitors to go out of business?).  And banks in general are managing to project widely a completely negative attitude towards all attempts to protect consumers.

This is a dangerous combination for the industry, yet it is not being handled well.  Just look at the current strategy of the American Bankers’ Association. Continue reading “How To Buy Friends And Alienate People” →

This Is Their Reform Strategy For Big Banks?

Anil Kashyap is one of our leading researchers on banks.  His book with Takeo Hoshi on the evolution of the Japanese corporate finance is a must read on the twists and turns that built a great economy and then laid it low.  And he has many other papers and relevant recent commentary.

Professor Kashyap has a sharp perspective the administration’s financial sector reform thinking, in part because he has long worked alongside key people now at the National Economic Council (the NEC, by the way, has disappointingly little transparency; even Treasury is more open).

So we should take him seriously, writing Tuesday in the Financial Times, on the importance of the proposed new “funeral plans” for banks. Continue reading “This Is Their Reform Strategy For Big Banks?” →

No Way Out: Treasury And The Price Of TARP Warrants

Buried in the late wire news on Friday – and therefore barely registering in the newspapers over the weekend – Treasury announced the rules for pricing its option to buy shares in banks that participated in TARP.

The Treasury Department said the banks will make the first offer for the warrants. Treasury will then decide to sell at that price or make a counteroffer. If the government and a bank cannot agree on a fair price for the warrants, the two sides will have the right to use private appraisers.

This is a mistake.  Continue reading “No Way Out: Treasury And The Price Of TARP Warrants” →

Hedge Funds Make A Political Mistake

The political flavor of the month is to push back against even the Obama adminstration’s mildly reformist inclinations on finance (e.g., Peter Weinberg in today’s FT is a nice example).  And, of course, once you hire a lobbyist, he or she tells you that “winning” means stirring up Congress in favor of the status quo.  Measured in these terms, the hedge fund industry has had a string of notable recent victories effectively preventing tighter regulation.

Advocates have a point, of course, when they argue that big banks rather than hedge funds were primarily responsible for crisis.  But this misses where we are in the long-cycle of regulation/deregulation.  Look at this picture (source: WSJ; more on Ariell Reshef’s webpage). Continue reading “Hedge Funds Make A Political Mistake” →

It Takes A Citi

Washington-based policy tinkerers  seem increasingly drawn to the idea that greater reliance on market information can forestall future problems – e.g., providing input into an early warning system that can be acted upon by a “macroprudential system regulator”.  And while leading critics of the administration’s proposed approach to rating agencies make some good points, they also seem to think that the market tells us when big trouble is brewing.

The history of Citigroup’s credit default swap (CDS) spread is not so encouraging. Continue reading “It Takes A Citi” →

What Next For The Global Crisis?

Slides for speech to World Bank conference (Lessons from East Asia and the Global Financial Crisis), Tuesday in Seoul (1pm local time), are attached.  This post summarizes my main points.

There are two views of the global financial crisis and – more importantly – of what comes next.  The first is shared by almost all officials and underpins government thinking in the United States, the remainder of the G7, Western Europe, and beyond.  The second is quite unofficial – no government official has yet been found anywhere near this position.  Yet versions of this unofficial view have a great deal of support and may even be gaining traction over time as events unfold. Continue reading “What Next For The Global Crisis?” →

Too Big To Fail, Politically

What is the essence of the problem with our financial system – what brought us into deep crisis, what scared us most in September/October of last year, and what was the toughest problem in the early days of the Obama administration?

The issue was definitely not that banks and nonbanks could fail in general.  We’re good at handling some kinds of financial failure.  The problem was: a relatively small number of troubled banks were so large that their failure could imperil both our financial system and the world economy.  And – at least in the view of Treasury – these banks were so large that they couldn’t be taken over in a normal FDIC-type receivership.  (The notion that the government lacked legal authority to act is smokescreen; please tell me which statute authorized the removal of Rick Waggoner from GM.) 

But instead of defining this core problem, explaining its origins, emphasizing the dangers, and addressing it directly, what do we get in yesterday’s 101 pages of regulatory reform proposals? Continue reading “Too Big To Fail, Politically” →

Regulatory Reform For Finance: Three Views

There are three views on who exactly is behind financial regulatory reform package that will be officially presented Wednesday lunchtime (update: NYT.com has the draft).  Each view has distinct implications for political dynamics going forward.

The first view is that Tim Geithner and Larry Summers have genuinely become radical reformers.  They see the error of the ways they pursued during the 1990s – both in terms of financial deregulation for the United States and in their advice to other countries, particularly through the capital market liberalization policies urged upon the IMF.  They now seek to put globalized finance back in its box and will pursue any sensible means possible to this end.

This view is not widely held. Continue reading “Regulatory Reform For Finance: Three Views” →

President Obama’s Regulatory Reforms Announcement: A Viewer’s Guide

At 12:30pm on Wednesday at the White House (someone: please update the Treasury’s schedule of events), President Obama is due to “unveil” his proposals for reforming the functioning of our financial system.  The content has already been foreshadowed in some detail, most notably by the Geithner-Summers op ed in the Washington Post on Monday, but what the President himself stresses is still important – everyone who matters for the reform of financial regulation will be in attendance and his remarks (and perhaps those of Secretary Geithner) can absolutely set the tone of the debate.

In particular, the implicit story the President tells will frame our collective discussions going forward and – on some points – could even help tip the balance against established lobbies.

There are at least 10 important questions the President may address or shy away from tomorrow.  Add your own suggestions below. Continue reading “President Obama’s Regulatory Reforms Announcement: A Viewer’s Guide” →

Today’s Foundation, Tomorrow’s Crisis: The Geithner-Summers Proposals

Writing in the Washington Post this morning, Tim Geithner and Larry Summers outline a five point plan for dealing with the underlying problems in our financial system, entitled A New Financial Foundation. 

The authors are not completely clear on what they think caused the current crisis, but you can back out some points from their reasoning – and the implicit view seems quite at odds with reality.

  1. Their view: Regulation is overly focused on safety and soundness of individual banks.  Reality: There was a complete failure of safety and soundness supervision.  This must be fundamental to any financial system – without this, you’ll get mush every time. Continue reading “Today’s Foundation, Tomorrow’s Crisis: The Geithner-Summers Proposals” →

Where Are We Now? Five Point Summary

1. Financial markets have stabilized – largely because people believe that the government will not allow Citigroup to fail.  We have effectively nationalized any banking system losses, but we’ll let bank executives enjoy the full benefits of the upside.  How much shareholders participate remains to be seen; there will be no effective reining in of insider compensation (my version; Joe Nocera’s view).  For more on how we got here, see the Frontline documentary that airs on Tuesday and Paul Solman’s explainer wrap up.

2. The real economy begins to bottom out, although unemployment will not peak for a while and could stay high for several years.  Longer term growth prospects remain uncertain – has consumer behavior really changed; if finance doesn’t drive growth, what will; is the budget deficit under control or not (note: most of the guarantees extended to banks and other financial institutions are not scored in the budget)? Continue reading “Where Are We Now? Five Point Summary” →