Author: Simon Johnson

All About Optics (Predicting Stress Test Outcomes)

The bank stress tests are beginning to create a perception problem, but not – as you might think – for banks.  Rather the issue is top level Administration officials’ own optics (spin jargon for how we think about our rulers).

At one level, the government’s approach to banks – delay doing anything until the economy stabilizes – is working out nicely.  This is the counterpart of the macroeconomic Summers Strategy and in principle it is brilliant. “Don’t just do something, stand there,” is great advice in any crisis – eventually everything bottoms out and you can take the credit, justified or not (unless an election catches up with you first; check with Herbert Hoover.)

But American bankers apparently just cannot cooperate by lying low, keeping their mouths shut, and refraining from anything that looks like picking other people’s pockets. Continue reading “All About Optics (Predicting Stress Test Outcomes)” →

Ponzi Schemes Of The Caribbean (A Weekend Comment Competition)

The IMF has just released a new working paper, with more detail than you likely ever wanted to know about how Ponzi schemes work – particularly in and around the Caribbean.

Ponzi schemes are everywhere and, at least in some environments, new versions arrive frequently.  But why are they so hard to prevent and shut down once they appear?  The paper contains some strong hints, albeit couched in very diplomatic language.

The comment competition is: what, if anything, does the failure of governments to shut down blatant Ponzi schemes imply about the prospects for a potential “macro-prudential” system/market-stability regulator implementing cycle-proof rules in the United States?  Is there a better way to prevent the kind of behavior that led to our current financial crisis?

Zombie Oligarchs

At this stage in any economic stabilization process, the state-sponsored lifeboat for oligarchs starts to get a little crowded.  Governments don’t have enough resources to save everyone, and not all major borrowers can have their debts rolled over.  In emerging markets, it’s usually the shortage of foreign exchange that sets a limit on government largesse (see the start of our Atlantic article for more detail on this cycle); in the US and other industrial countries, it’s more complicated – mostly about constraints around bailout politics (Lorenzo Bini Smaghi made this point effectively in the fall).

The survival-failure decision is taken at the highest level.  In April 2008, after the failure of Bear Stearns, Dick Fuld had dinner with Hank Paulson and reportedly concluded, “We [Lehman] have a huge brand with Treasury.” As the broader problems within the financial system worsened, this proved worth less than he thought.

Fuld is still in shock, and seething. How could Paulson let Lehman go? “Until the day they put me in the ground, I will wonder [why we weren’t saved],” he told Congress.

This week, Daniel Bouton resigned from running SocGen, in the face of what he called “incessant” verbal attacks – a reference presumably to lack of support from Mr. Sarkozy; it’s not good when the President of France calls your proposed pay package “a scandal”.  And Ken Lewis may take a further battering – due in part to not being the best-connected with top people in Washington. Continue reading “Zombie Oligarchs” →

The People v. The Flu

In Plagues and Peoples, published in 1976, William McNeill argued that human history can be thought of as the co-evolution of our societies and the “microparasites” to which we are prone.  The emergence of settled agriculture, major historial movements of people, and industrialization all brought with them new or more intense diseases.  Eventually, most societies figured out how to survive – but of course some didn’t (see Jared Diamond‘s work for details) and many people died young along the way.

You don’t need to buy McNeill’s full view in order to take away the following point.  We have to invest and innovate to stay ahead of disease – there is no sense in which these are likely to be completely “conquered” – because they change as we do.  Investments are needed not just in the relevant science, but also in how it is used to combat potential epidemics – as well as more general endemic disease.

As I argue this morning on the NYT’s Economix, regarding the current swine H1N1 flu outbreak, global public health officials are doing much better than our friends who watch over financial systems.  In terms of reaction speed, communications, and the legitimacy of response agencies, economics has much to learn from the people who fight against epidemics. Continue reading “The People v. The Flu” →

Larry Summers’ New Model

Larry Summers spoke on Friday afternoon at the InterAmerican Development Bank in Washington DC.  As he was addressing a group with  much experience living through and dealing professionally as economists with major crises, he spoke the “language of economics” (as he called it) and largely cut to the analytical chase.

Summers made five points that reveal a great deal about his personal thinking – and the structure of thought that lies behind most of what the Administration is doing vis-a-vis the crisis.  Some of this we knew or guessed at before, but it was still the clearest articulation I have seen. Continue reading “Larry Summers’ New Model” →

The Next Big Hearing? (Bill Moyers Tonight)

Bill Moyers asked me to join his conversation this week with Michael Perino – a law professor and expert on securities law – who is working on a detailed history of the 1932-33 “Pecora Hearings,” which uncovered wrongdoing on Wall Street and laid the foundation for major legislation that reformed banking and the stock market.

My role was to talk about potential parallels betweeen the situation in the early 1930s and today, and together we argued out whether the Pecora Hearings could or should be considered a model for today.

Bill has a great sense of timing.  On Wednesday night the Senate passed, by a vote of 92-4, a measure that would create an independent commission to investigate the causes of our current economic crisis; we taped our discussion on Thursday morning.  In the usual format of Bill’s show, a segment of this kind would be 20+ minutes, but I believe that tonight our conversation will occupy the full hour (airs at 9pm in most markets; available on the web from about 10pm). Continue reading “The Next Big Hearing? (Bill Moyers Tonight)” →

Irreversible Errors

The Administration’s top thinkers on banking regard themselves as avoiding “irreversible errors” – meaning precipitate moves on banking.  They argue that “wait and see” may work out and, if it doesn’t, they can always take more dramatic action later (e.g., of the Hoenig variety).

Writing in the NYT.com’s Economix today, Peter Boone and I argue that this line of reasoning makes sense, but needs to be taken to its logical conclusion.  Specifically, we should recognize that delay in banking crises almost always and pretty much everywhere leads to lower growth and higher fiscal costs – the price of eventual bailouts increases and the amount of fiscal stimulus required goes up.  The jobs lost, the longer recovery, and the higher national debt are all costs that must be weighed in the balance.  And that balance, in our view, indicates moving faster and in a more comprehensive manner in the direction suggested by Thomas Hoenig – a senior Federal Reserve official who has a great deal of experience dealing with insolvent banks. Continue reading “Irreversible Errors” →

The Missing Witness

Yesterday’s JEC Hearing on Too Big To Fail did not include any financial industry representatives.  This surprised me – surely they want to go public with their views on the future structure of the financial system?  Obviously, they have great behind-the-doors access on Capitol Hill, but surely it is not in their interest to have right, left, and center piling on with regard to breaking up Big Finance?  Yesterday, Thomas Hoenig, Joseph Stiglitz, and I were in complete agreement on this point, and my idea of using antitrust measures against major banks seemed to gain traction during and after the hearing.

Apparently, the committee invited a number of leading people from the industry (i.e., individuals who generally articulate the case for big banks) and they were all too busy to attend (Update: this statement is incorrect; the potential witnesses who were unable to attend are academics).  This is a curious coincidence, because someone else – in an unrelated initiative – has been trying to set up a discussion involving me and people from the Financial Services Roundtable and/or the American Bankers Association, to be held at the National Press Club, but their calendars are completely full (i.e., there is literally no day that works for them, ever). Continue reading “The Missing Witness” →

Two Hearings On Banks Today

This morning, by coincidence, there are parallel hearings on Capitol Hill dealing with the nature of our banking system and attempts to stabilize it.  In the Cannon House Office Building, starting at 9:30am, the Joint Economic Committee will hear from Thomas Hoenig, Joseph Stiglitz, and me, on whether Big Finance is too big to save (see yesterday’s preview for details).

At 10am over on the Senate side (Dirksen Senate Office Building), Secretary Geithner will appear before the TARP Congressional Oversight Panel.  We preview that event this morning on The Hearing, with a discussion of the context, the latest numbers, and our forecast of the ideas that will be expressed; it’s a viewer’s guide – but one that you can talk to by sending in comments (and, most important, your questions for the Secretary). Continue reading “Two Hearings On Banks Today” →

Your Hearing: New Blog at WashingtonPost.com

Some readers have emphasized how the current economic and financial situation leaves them feeling powerless.  Others complain that it’s hard for outsiders even to understand the process through which ideas are debated and become policies – how Capitol Hill really works is a fascinating mystery at many levels.

This morning we’re extending our efforts to address these issues with the launch of The Hearing, a new blog at the Washington Post.  James and I are the moderators and we’ll focus the discussion around Congressional hearings – including the broader debates in which these are situated.

The Post has great impact in Washington and it’s our hope that The Hearing will allow you to express ideas in ways and at a time that can have real effects on policies.  For this reason, we’ll preview public events and provide ways for you to suggest questions that need to be heard.  At the very least, we can all learn more about what is happening and exactly why.

We’re open to suggestion regarding the exact format, guest contributors, and generally how to make The Hearing more effective.  We will, of course, keep BaselineScenario as our primary outlet for opinions and analysis – The Hearing is intended to be complementary, by bringing your voices into the specifics of idea flow through Congress.  We’ll tell you here when you should consider going to look there.

My first post deals with tomorrow’s JEC hearing on “Is Big Finance Too Big To Save”?  I preview what Joe Stiglitz and Thomas Hoenig are likely to say (based on their racing form), and I anticipate where the discussion will go – or at least where I will try to push it, as I’m on the panel also. 

If you have points or questions you want raised, please post them here or on the Post’s site.  There’s no guarantee your issues will be taken up, of course, but my guess is that this new forum will help sensible requests – of the kind often seen here – gain broader traction.

By Simon Johnson

Who Had This Good Idea First? (A Weekend Comment Competition)

In early February, James proposed that bankers’ bonuses be paid out in “toxic assets” – after all, the industry was arguing that these would definitely rebound (“it’s just a liquidity problem”) and that their “true” value was substantially above current market value.  The idea was well received by our readers but not so much by the banking or insurance industry.

Someone quickly pointed out that – back in December – Bloomberg reported Credit Suisse would actually use a version of the same idea.  And, in the whirlwind of the fall, I now vaguely remember this same point coming up even earlier in some bigger discussion.

So in the spirit of proper attribution (also because a reader asked and I’d like to know the answer), here is our first ever weekend “comment competition”.

Who really originated this (very good) idea, either in private discourse or – easier to document – in a public comment, blog post, corporate document, or the like?  We’d also welcome updates on where any form of this idea is being used in practice.

By Simon Johnson

The Department Of Justice Is On Line Two

I don’t generally overreact to news (from the NYT this morning, on the AIG-Goldman connection that runs through Edward Liddy’s stock ownership), but this has gone far enough. 

Have we completely lost of sense of what is and is not a conflict of interest?  Have we really built a system in which greed fully overshadows responsibility?  Is it not time for a complete rethink of what constitutes acceptable executive behavior?

One of our country’s leading corporate attorneys made a telling point to me on Wednesday night, “the only way to control executive behavior is to criminalize it,” i.e., civil penalties do not change behavior – the prospect of jail time has to be on the table.  His broader point was that antitrust action can make a difference in today’s world, but only if this includes potential criminal charges. Continue reading “The Department Of Justice Is On Line Two” →

Forecasting The Official Forecasts, Spring 2009 Edition

Our forecast of official growth forecasts back in the fall turned out to be fairly accurate.  My update of this assessment – for the new IMF numbers due out next week – is now online at NYT.com.

Many officials seem to have bought into some version of the “it’s a V!” take on the global recession.  To me, this looks like wishful thinking.  Whether or not you support the “V” view fully, officials should surely be spending more time preparing for worse scenarios. 

Just in case – why not prepare properly for the cross-border resolution issues that would arise from the failure of a major global bank?  Why did the G20 decline to take on this issue properly?  Even the IMF’s baseline, I expect, will suggest potentially serious problems ahead.