Author: Simon Johnson

Snowball: Strategies For Banking Reform

I was on a Capitol Hill panel yesterday morning, organized by the National Community Reinvestment Coalition, with Jim Carr and Mike Lux; Nancy Cleeland was the moderator. We had a wide-ranging discussion about the origins of our current economic crisis (the banks, their regulators, their lack of regulation), progress to date with financial sector reform (not much), and what should be the legislative agenda (a long list, ranging from protecting individuals to better safeguarding the system; if you can get any sensible measure past the lobbies, take it).

I was particularly struck by one point made by Mike Lux. Sometimes it seems the administration talks in terms of having limited political capital and of needing to decide where to spend it – perhaps, for example, it has all been stored up to address health care. Mike’s model is somewhat different – once you defeat one powerful industrial lobby, it becomes easier to defeat others; success can snowball. Drawing on the experience of FDR, in particular, Mike stressed that early success (e.g., initial recovery measures that were opposed by industry) laid the political foundations and generated the kind of public support necessary for further achievement (e.g., the introduction of social security).

What does that mean in today’s context? Continue reading “Snowball: Strategies For Banking Reform” →

The G8 Meeting This Weekend (A Viewer’s Guide)

If you’d like to attend the G8 Ministers of Finance meeting this weekend, the Italian Ministry of Finance has put out a handy travel guide.

Alternatively, take a look at my preview on The New Republic’s website. Our leadership appears to be resting on its laurels after the April G20 summit – or perhaps they think the next G20 summit in September is the place for real discussion. Regulatory reform still needs (a) to happen in a meaningful sense for the financial sectors in all industrial countries, and (b) to be closely coordinated across countries – if your bank is too big to fail in my country, whose problem is that and whose taxpayers are on the hook? But gone completely from the G7/G8 ministerial level is any sense of urgency; all we’ll hear is self-congratulation.

And in terms of macroeconomic policy, discussed in a piece with Peter Boone on the NYT’s Economix this morning, current global early warning signs (higher oil and other commodity prices; rising long-term yields) are being interpreted by policymakers as indicators of success and return to “normalcy”. It reminds me of official discussions in early 2007 – no matter what weakness you could point out in US housing and European banking, leading G7 policymakers were completely in denial, with articulate arguments about why they were right.

Incrementalism is the preferred policymaking culture of G7 ministries of finance and central banks, and they are very much back in that mode. But if you put incrementalism together with refusing to really change the rules for banks and huge, unconditional support for credit that is hard to withdraw, what do you get?

By Simon Johnson

Small Bank Big Trouble?

One of the more interesting counter-arguments against the idea that big banks should be broken up comes from people who play close attention to the behavior of small banks. They point out that small banks are a powerful political lobby, a point nicely illustrated by the NYT’s explanation of how changes to bankruptcy law were recently derailed.

The big banks, in this view, are no more oligarchic in their tendencies than small banks.

It is definitely the case that small banks can get together and demand political favors. You need transparency and a strong open debate to offset that – and, according to leading congressional figures, you also need the Obama administration to show up, help out, and resist capture: Continue reading “Small Bank Big Trouble?” →

Global Crisis And Reform: Starting A Long Journey

I spoke Friday afternoon to MIT Sloan graduates (Reunion Weekend; slides attached), arguing that while we are likely done with a panic or “free fall” phase, we have only just begun to deal with the deeper problems revealed by the global financial crisis.

Think of it this way. The United States has done well over the past 200 years or so because it was founded with strong institutions – rules and laws that mean we’re protected against government or powerful elites becoming too powerful – and over time these have generally improved, or at least not collapsed under pressure. Yes, you can complain about (and aim to improve) many aspects of our society, but where would you prefer to set up a technology-based business or make any kind of productive investment or build your own human capital?

Call this the rule of law, or protection against being expropriated, or sufficient constraints on executive power, but it adds up to roughly the same thing. We strongly limited the power of the most powerful in our society – and this is in striking contrast to what happens in much of the rest of the world.

But over the past 20-30 years, we took our eye off this ball. Continue reading “Global Crisis And Reform: Starting A Long Journey” →

Latvia: Should You Care?

In the current field of grand economic strategy, against crisis and for recovery, Latvia looms small. This is a country with just two million residents, best known recently for a huge current account deficit – the excess of imports over exports peaked out around 25 percent of GDP. Ordinarily, there is nothing here that should move the world economy.

Yet, there are some intriguing and somewhat disconcerting signs that point towards our common future – much like a close study of Iceland, back in October 2008, told us a great deal about what was to come.

Continue reading “Latvia: Should You Care?” →

Bernanke Didn’t Go Far Enough

Ben Bernanke gave a good speech yesterday, warning about the dangers associated with not putting the federal budget immediately on a path to credible fiscal consolidation. But he didn’t push his points hard enough – see my column, joint with Peter Boone, on the NYT’s Economix this morning.

U.S fiscal policies helped break the recent panic by showing that the government will support aggregate spending, irrespective of what the private sector fears. But once households and firms calm down, you need to demonstrate that the national debt is not on an explosive path.

Mr. Geithner’s speech in China this week, trying to make this claim, was not convincing. Mr. Bernanke, politely but firmly, pointed this out yesterday.

We should also worry about the Fed, of course, because there is no indication that they are ready, willing or able to curtail their quantitative easing if the real economy definitely turns more positive. David Wessel’s column in the WSJ today (page A2) has a sensible discussion.

By Simon Johnson

Stimulus Watch: Your Input Solicited

The folks who run US Budget Watch are interested in your thoughts about how best to redesign their page that watches over the fiscal (and other) stimulus. Post your comments here.

I’ve already given them some ideas on how to organize and prioritize the data, as well as suggestions about background material that would help reach a broader readership. More thoughts on style or substance would be greatly appreciated. They’re on a deadline, so don’t delay.

By Simon Johnson

What Would Gorbachev Say? On The US, China, And Saudi Arabia

President Obama is on his way to Saudi Arabia, and Secretary Geithner is done with his major initiative in China. In part, this is just the US normalizing its relations with the rest of the world and rebuilding some basic diplomatic niceness. But it’s also about reshaping – or not – the way the world’s economy works after the crisis.

From all appearances, President Obama will ask the Saudis to continue their efforts to stabilize the oil market, including by bringing new production on stream, and the Saudis will offer – to the best of the abilities – to play exactly this role within OPEC. Of course Secretary Geithner just asked the Chinese to continue their efforts to stabilize the market for long Treasuries, including by investing their current account surplus in US secruties, and the Chinese have agreed – with some pretend grumbling – to play this role.

It looks like adding up to a big mistake – just ask Mikhail Gorbachev. Continue reading “What Would Gorbachev Say? On The US, China, And Saudi Arabia” →

China Pushes Hard

On his China visit, Secretary Geithner is immediately on the defensive. The language he is using on the Chinese policy of exchange rate undervaluation-through-intervention is the mildest available. And the commitment he is making, in terms of bringing down the US deficit – which we all favor – is an extraordinary thing to put numbers on in a foreign capital. Such commitments are of course unenforceable, but still the wording indicates – and is understood by China – great US weakness.

Not surprisingly, China seems likely to push for more. Their main idea is that some part of their US dollar holdings be transfered to a claim on the International Monetary Fund, which would shift it from being in dollars to being in Special Drawing Rights – and therefore a claim against (a) the IMF’s whole membership, and (b) presumably, the IMF’s gold reserves.

This is a bad idea. Continue reading “China Pushes Hard” →

Mr. Geithner Goes to China

At his confirmation hearing in January, Tim Geithner nailed the China Question. China prevents its exchange rate from appreciating through intervention (buying foreign currency), and this allows it to sustain a large current account surplus. Geithner said, as plainly as you can expect from a senior official: this is not in accordance with international rules and should stop.

Not only is this sensible economics and correct on the rules, it is also good politics. If you want to head off the considerable inclination towards protectionism in Congress, it would help greatly for the Chinese renminbi to rise in value (e.g., review the discussion at this House hearing).

But almost as soon as Geithner spoke on this issue, there was slippage. By late February, Hillary Clinton was asking the Chinese nicely to continue holding US Treasury securities and, it now seems, punting the exchange rate issue. Above all else, China wants to be left alone on the renminbi – variously arguing that any appreciation would jeopardize jobs, derail growth, and plunge the country into chaos.

So what should we expect from Geithner’s upcoming China trip? Continue reading “Mr. Geithner Goes to China” →

The Risk Of Deflation In The Eurozone

In January, Lucas Papademos, Vice-President of the European Central Bank ECB), strongly suggested that inflation would not fall much below 2% in the eurozone (see the end of this post). Translated from the language of central bankers, he implied that the risk of deflation in the eurozone was virtually nil.

Now Jean-Claude Trichet, head of the ECB, with reference to the latest eurozone (0%) inflation rate, says that we should disregard the data because a recovery is just around the corner.

Alternatively, we are close to the baseline eurozone view laid out in my January presentation (part of a panel discussion with Mr Papademos). You can break this down into three specifics. Continue reading “The Risk Of Deflation In The Eurozone” →

Brazen Tunneling and Inflation

In most societies it is traditional to be somewhat sneaky in squeezing your shareholders or the government. You might set up a complicated transfer pricing scheme or perhaps you arrange for a family-owned firm to acquire assets on the cheap from the publicly traded corporation that you control. Or you could always arrange for the Kremlin to provide foreign exchange at a “special” price.

In the New United States, life is much simpler and bank tunneling considerably more brazen. Continue reading “Brazen Tunneling and Inflation” →

The Crisis Is Over, And We Wasted It

Rahm Emanuel reportedly has a doctrine: Never let a serious crisis go to waste. His point is a good one – vested interests usually block change across a wide range of important issues in the US, and a major financial/economic crisis provides an opportunity to bypass or breakthrough those interests in order to introduce meaningful and substantial change. Emanuel listed (from the 1:40 minute mark) five priority areas for change: health care (cost control and expansion of coverage), energy (independence and alternatives), taxes (fairness and simplicity), education (fundamental changes to effectively train the workforce), and financial regulation (transparency and accountability).

The financial crisis is abating – although the economic costs continue to mount and new problems may still appear (ask California or Ukraine). At least among the people I talk with on Capitol Hill, there is a very real sense that business is returning to usual; certainly, the lobbyists are out in force, they want what they always want, and it’s hard to see many of them as seriously weakened. How much progress have we made on any of Emanuel’s priority areas or, for that matter, along any other public policy dimension that was previously stuck? Continue reading “The Crisis Is Over, And We Wasted It” →

Design A Country Rescue Package Here (Comment Competition)

Here’s your Memorial Day assignment. You have been called to the table for top-level policy discussions in a large monetary union. One of the bigger countries in this union has a serious problem. Their exports are down slightly and there are some longer-run structural issues, but the immediate issue is (1) a housing bubble just burst, resulting in a big fall in tax revenue, (2) the political system seems paralysed, i.e., cannot raise other revenues or cut spending in any sensible fashion, and (3) the market for this government’s debt appears likely to turn very sour. Sounds like a classic fiscal crisis.

Here are your possible recommendations: Continue reading “Design A Country Rescue Package Here (Comment Competition)” →