Author: Simon Johnson

Real Time With Bill Maher, Tomorrow

Tomorrow evening I’m on Bill Maher’s HBO show, as part of a three person panel with Muhammad Yunus and Jon Meacham.  Bill runs a wide-ranging discussion covering pretty much anything that’s been in the news over the past week or so.  With Muhammad and Jon there, I’m sure we’ll get into issues of ethics and values – including whether we have let “the profit motive” become too central in our society.

In terms of other topics related to economics, my guess is we’ll talk about: Continue reading “Real Time With Bill Maher, Tomorrow” →

Consumer Protection When All Else Fails (Written Testimony)

I took three points away from yesterday’s hearing in the House of Representatives.

  1. We need layers of protection against financial excess.  Think about the financial system as a nuclear power plant, in which you need independent, redundant back-up systems – so if one “super-regulator” fails we don’t incur another 20-40 percentage points in government debt through direct and indirect bailouts.  A consumer financial products protection agency should definitely be part of the package.  Update: The Washington Post reports that such an agency is now in the works; this is a big win for Elizabeth Warren, Brad Miller and others (add appropriate names below).
  2. Congress will work on this.  The intensity of feeling with regard to the need to re-regulate is striking, and there is much that resonates across the political spectrum.
  3. In the end, much of banking is likely to become boring again.  Special interests are convinced that they can fend off the regulatory challenge, but I find this increasingly unlikely.  Enough people have seen through what they did, how they did it, and what they keep on doing.  No doubt the outcomes will be messy and less than optimal, but at this point “less than optimal” is much preferable to “systemic meltdown”.

There is still much to argue about and, no doubt, there will be setbacks.  We’ll get a better or a worse system, depending on how the debate goes.  And if the external scrutiny slips away, so will point #3 above.  But this was still by far the most encouraging hearing I’ve so far attended.

The main points from my written testimony to the subcommittee are below.

Continue reading “Consumer Protection When All Else Fails (Written Testimony)” →

Insolvency And Consumer Protection (House Testimony Today)

Congressman Brad Miller has some interesting ideas about how to respond to the financial crisis; not exactly on the same page as Treasury.  He’s called a hearing for this morning to talk about, in the first instance, how to assess insolvency in the banking system – and what to do about it (he chairs the Investigations and Oversight subcommittee of the House Committee on Science and Technology.)  But my guess is that the conversation will cover considerably more ground, including his idea that we establish a Financial Products Safety Commission.  (A full preview is now available at our joint venture with the Washington Post.)

The basic notion behind this commission is that consumers were taken advantage of by unscrupulous lenders.  Of course, you could also say that consumers fooled themselves, but if that is pervasive and has systemic implications then we need to take it on.  In his recent testimony before the Joint Economic Committee, Joe Stiglitz emphasized the need for more consumer protection, and this idea is also strongly advocated by Elizabeth Warren – against the odds, she continues to make some progress. Continue reading “Insolvency And Consumer Protection (House Testimony Today)” →

Remember Chuck Prince!

This week the administration begins a serious behind-the-scenes charm offensive on its regulatory reform plans.  The argument seems to be: we are where we are on banks’ solvency/recapitalization, so let’s not argue about that; it’s time to strengthen financial regulation in line with our G20 commitments. 

But there is a serious dilemma lurking behind the foreshadowing, the rhetoric, and the talking points.  (Aside to Treasury: please find somone other than big financial players to endorse your next 100 days report; many taxpayers will find p.5 of your first report particularly annoying – if you don’t understand this point, you are too close to the big banks.) 

Here’s the problem.

Continue reading “Remember Chuck Prince!” →

Guest Post: Interpreting The Indian Election

This guest post was contributed by Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics.  He notes two surprises in the outcome of India’s recently concluded election and suggests that India offers an alternative model of development for much of the world.

The results from the Indian elections point to a victory for the incumbent Congress party and its allies.  Congress was led de jure by the economist-turned-politician Dr. Manmohan Singh and de facto by the Italian-born Sonia Gandhi, who is part of the Nehru family, which has been a force in Indian politics since the late 1800s and provided three Prime Ministers.

Two casualties of the election have been the Communists who resisted economic policy reform and opposed the nuclear agreement between India and the United States, and the Hindu nationalist party, the BJP.

Going forward, these results augur well for Indian economic policy reform. The Congress will be numerically strong enough not to have to rely on partners for political support and will be able to push through new policy initiatives.

Another likely consequence is that the Nehru family will probably provide India, not immediately but within the next couple of years, with its fourth Prime Minister—Rahul Gandhi, son of Rajiv Gandhi, grandson of Indira Gandhi, and great grandson of India’s first Prime Minister Jawaharlal Nehru. 

These results are surprising for two reasons.  Indian elections have traditionally been characterized by the phenomenon of anti-incumbency: ruling politicians get routinely thrown out of power.  This government is the first in over 40 years that has been re-elected after a full term in office. Continue reading “Guest Post: Interpreting The Indian Election” →

Peer Steinbrück’s Peers (Weekend Comment Competition)

Everyone has their favorite politician.  Mine is Peer Steinbrück, Germany’s Minister of Finance.  In terms of having inappropriate – but revealing – things to say at just the wrong moment, Mr. Steinbrück is world class.

This week he blasted the US bank stress tests as worthless.  Back in October 2008 he famously denied there was any problem in the European banking system, shortly before the G7/IMF weekend that culminated in European bank rescues.  And in early 2008 he and his subordinates castigated the IMF for suggesting that Germany and the eurozone could experience even a mild slowdown – have you seen the latest data?

This comment competition is straightforward.  Find the politician (or other leading public figure in any country) with the most untimely quote of the past 18 months.  We’re looking for hubris and denial, preferably 24 hours before an abrupt policy U-turn – so please indicate the precise context that makes the quote appealing.  If your choice is Peer Steinbruck, pick his most perfect moment.

By Simon Johnson

Is The Crisis Over Yet? The CBO Weighs In

Confidence is returning to most credit markets, consumer spending is likely to rebound for some items (autos and housing repair are leading contenders), and firms in the US are starting to sound more optimistic.  On NYT.com’s Economix yesterday, Peter Boone and I suggested that we are out of the panic phase of the crisis – in large part because the US fiscal stimulus has reassured people worldwide, but also because President Obama has had a broader calming effect.

Today, the Congressional Budget Office is pointing out that it would be premature to congratulate ourselves too much (disclosure: I’ve joined the CBO’s Panel of Economic Advisers, but none of the information here comes from them).  As you likely know, the administration is proposing to lend $100bn to the IMF, as part of that organization’s increase in resources following the G20 summit.  Peter Orszag, head of OMB, argued that there was zero probability of this money being lost, so $100bn should be “scored” for budget purposes as $0bn – which is how this kind of transaction has been handled in the past.  As the IMF likes to say, it is “the lender of last resort, but the first to be repaid.”

After considerable back and forth, the scoring issue was refered to the CBO.  The CBO has reportedly decided there is a 5 percent probability of default by the IMF.  This is an extraordinarily important statement.  Most informed people just assume that the risk of IMF default is zero, because that would essentially constitute a complete breakdown of the global economy and payments system.  But nothing is zero probability, particularly in a world of massive financial panics, incipient protectionism, and improvised global governance. Continue reading “Is The Crisis Over Yet? The CBO Weighs In” →

Can The US Save The World? (House Testimony)

Yesterday I testified to the House Subcommittee on International Monetary Policy and Trade (part of the House Financial Services Committee).  The hearing’s title was “Implications of the G-20 Leaders Summit for Low Income Countries and the Global Economy,” and the main topic was whether Congress should support an extra $100bn for the IMF that the Obama Administration agreed at the G20 summit in early April (witness list, webcast, and written testimony).

The committee was mostly in favor of the US continuing to play a leading role in supporting the IMF, but pressed the witnesses to explain whether the IMF could lose this money (highly unlikely), how this would protect American jobs (definitely, but hard to quantify precisely), and if the broader package of IMF reform should also be supported (e.g., the proposed gold sales are being reassessed, to see they could generate more resources for aid to developing countries).

Politico is reporting that US funding for the IMF is likely to be attached to the war supplemental spending bill.  The subcommittee’s chairman, Gregory Meeks, seemed positive – as did all the Democrats who spoke, along with Gary Miller, the Ranking Member/Senior Republican.  But, based on remarks made by at least two Republican members of the subcommittee, there is likely to be a big public fight at some point.  My guess is that the Democratic side will press hard for President Obama to more publicly explain why supporting the IMF (and the G20) is very much in the US interest.

The main points from my written testimony are below.  While Treasury represents the US vis-a-vis the IMF and traditionally has considerable scope for action, the views of Congress on IMF details are very important as both guidance and constraints.  In our advice on the wide range of IMF-related issues below, both I and the other witnesses laid out broadly similar views with varying emphasis – there was actually much more disagreement among committee members than at the witness table. Continue reading “Can The US Save The World? (House Testimony)” →

Vote For (Or Against) The IMF

The Washington Post is widely read on Capitol Hill and the reception among key people to The Hearing blog (run by us and the Post) has been generally very positive.   Members of Congress and their staff want to get you more involved in their discussions around economic policy, and we’re experimenting with ways that will help your opinions – whatever they are – get across at a time and in a manner that increases their impact.

To that end, we’re developing on-line polls in which you can register your views on questions that are currently being debated – either in general terms or as specific legislation – on the Hill (of course, longer comments are also welcome; it’s a blog, after all).  Today’s question is about whether the United States should provide an additional $100bn to the IMF, as was agreed at and immediately after the recent G20 summit; this is for a hearing held by a subcommittee of House Financial Services, which starts at 10am. Continue reading “Vote For (Or Against) The IMF” →

Antitrust For Banks? Ask Carl Shapiro

The Department of Justice seems to thinking, at least in principle, about potential antitrust action in and around banking.  Assistant Attorney General Christine Varney spoke about this yesterday, but her exact wording is open to interpretation, “”I have to ask if too big to fail is a failure of antitrust enforcement.”  (The press release was uninformative on this point)

More encouraging was the background briefing given to the New York Times, as seen in this paragraph,

“Ms. Varney is expected to say that the Obama administration will be guided by the view that it was a major mistake during the outset of the Great Depression to relax antitrust enforcement, only to try to catch up and become more vigorous later. She will say the mistake enabled many large companies to engage in pricing, wage and collusive practices that harmed consumers and took years to reverse.”

The thinking among antitrust experts has been that there is not much market power, conventionally defined, in financial services.  But this thinking may change, for at least three reasons. Continue reading “Antitrust For Banks? Ask Carl Shapiro” →

Is Larry Summers The Next Gordon Brown?

Gordon Brown, the British Prime Minister, is in big trouble.  It turns out that a medium-sized industrialized democracy like the UK can be run in pretty much the same way as a traditional emerging market – fiscal irresponsibility (cyclically-adjusted general government deficit now forecast at 12.2 percent of GDP for 2010) gives you a boom for a while, but the eventual day of reckoning is economically painful and politically disastrous.  If you also need to deal with an oversized bubble finance sector, that makes the adjustment even more painful.

It is of course sensible to use fiscal stimulus to offset a fall in private demand, and to some extent this can be effective – with a lag.  But if you lose control over public spending and borrow too heavily (helped by the fact people like to hold your currency), it ends badly.

From the beginning, we’ve expressed concern here that the entire Summers Plan was overweight fiscal, i.e., not enough resources for recapitalizing banks and addressing housing directly (for the context of this assessment, see our full baseline view).  Back in December/January, this was a strategic choice worth arguing about; now it’s a done deal and following the (very) limited recapitalization outcome of the bank stress tests, it seems likely that household and firm spending will remain sluggish.  If that is the case, the Administration’s logic implies throwing another big fiscal stimulus into the mix – and the Summers’ team is already preparing the groundwork.

The IMF is now warning against the risks of this approach, albeit using carefully worded language. Continue reading “Is Larry Summers The Next Gordon Brown?” →

“Nationalization” (A Weekend Comment Competition)

Writing in the Financial Times on January 27th, 2009, Peter Boone and I expressed our opposition to bank nationalization in no uncertain terms,

If you want to end up with the economy of Pakistan, the politics of Ukraine, and the inflation rate of Zimbabwe, bank nationalization is the way to go.

Most others who recently advocated a managed bankruptcy process – or FDIC-type intervention – for big banks (with or without the injection of new government capital) were careful, at least initially, to avoid using the word nationalization.  And many took pains to explain in detail why their proposals were quite different from nationalization.

But at some point this became a debate in which informed bystanders perceived the sides as being for or against “nationalization” – a semiotic transition that has obviously helped the big bankers, at least in the short term.

This weekend’s comment competition is in two parts.  Who first made “nationalization” the central word for the U.S. bank discussion?  And who was most influential in establishing that the national debate be defined in these terms?

The Other Stress Test (For Bankers)

There is nothing you can teach Wall Street titans regarding the timing of news flow.  Stephen Friedman, the former head of Goldman Sachs, resigned last night as chair of the New York Fed’s board, after committing essentially a rookie error.  In December/January, he traded the stock of a company (Goldman) overseen by the NY Fed, while helping to pick a new head of the Fed (formerly from Goldman), and presumably being aware of other potentially nonpublic information regarding bank rescues (benefiting Goldman both directly and indirectly).  The real error, given the Federal Reserve System’s incredibly lax rules on potential conflicts of interest at this level, was failing to disclose this information to the NY Fed – they learned it from WSJ reporters and that cannot have been a good moment. 

If you have to resign, pick your time of day carefully, and Friedman is obviously advised by the best people in the business.  I’m looking at the hard copies of four newspapers.  The news of his departure does not make the front page of the NYT (not even the small stuff at the bottom) or the front page of their Business Day section.  There is nothing on the front page of the FT or Washington Post.  Even the WSJ only manages three paragraphs on the front page, before sending you to look for p.A10.  (It was on cnn.com from 5:55pm last night, together with his resignation letter.)

I haven’t checked who first broke the news, but Friedman’s resignation was of course the major development of yesterday.  The bank stress test results were hard-baked a long time ago, and almost all the icing on that cake had already been leaked.  But the stress test for bankers is still underway. Continue reading “The Other Stress Test (For Bankers)” →

Is Everyone Confused Yet? (Bank Stress Tests)

The public relations campaign packaging the bank stress tests is kicking into high gear and our professional information managers are really hitting their stride.  They face, of course, a classic spin problem: you need to get the information out there, but you don’t want to be too definitive on the first day or soon after – if you’re easy on the banks, that looks bad; if you’re tough on the banks, that might be dangerous.

The best way to handle this is by jamming your own signal – which they are starting to do in brilliant fashion.  To the WSJ you leak that BoA needs to raise a great deal of capital ($35bn); they run this story on the front page, next to a great frown on the face of Ken Lewis.  But you tell the FT that Citi will need “to raise less than $10bn” (note that the on-line FT version of this story, as of 8:30am Eastern, seems to have been adjusted downwards relative to the print edition that arrived at my house 4 hours ago.)  The NYT yesterday sounded quite upbeat.

Of course, deliberately or inadvertently confusing people is made much easier by the fact that the experts are in sharp disagreement.  Goldman’s Jan Hatzius says that the worst is now behind us in terms of loss recognition and pre-provision earnings will be much higher in the US than they were in Japan during the 1990s – here he and others are taking on the IMF’s Global Financial Stability Report.  And he has two good points in this regard, Continue reading “Is Everyone Confused Yet? (Bank Stress Tests)” →