Author: Simon Johnson

Is The G20 Summit Worth Holding?

We know already much of what the G20 will produce: a communique that looks very much like the last one (dubious reassurances about the great progress being made along vague dimensions), no progress on fiscal stimulus (as we have been projecting for some time), and promises to clamp down on regulation for hedge funds and the like (fine, but how relevant is this to either what caused the crisis or what can sustain a recovery?)

Almost all the important issues are kept off the table by anachronistic diplomatic niceties: monetary policy around the world, Europe’s impending crisis, and how to escape the overweening power of major banks in almost all industrial countries.  The G20 summit has substantially failed even before it begins. Continue reading “Is The G20 Summit Worth Holding?” →

Watch Sternly

Writing in the FT yesterday, Nick Stern made the case for a new international organization to monitor global risks. Drawing on a decade of dealing with governments as board members of such organizations, he is blunt – keep them out of day-to-day oversight, by giving the institution an endowment and a leader appointed for 7 years without possible recall.

Lord Stern is right to be cynical about governments in this context, but his solution feels a bit too much mid-20th century. If the organization got off the ground, governments would compete madly to appoint the leader – trying for someone over whom they have a hold (it has happened). And if the organization really were independent, who would pony up the endowment or be comfortable with the (low) implied level of democratic accountability – it’s hard to see Senate Foreign Relations or Banking (both of which have jurisdiction over the IMF) getting excited about this arrangement.  Without the US there can be no meaningful deal.

And, thinking more about 21st century formats, don’t we already have – albeit in still emergent form – exactly what Professor Stern wants? Continue reading “Watch Sternly” →

Room For Debate At The NYT

The NYT is ran an online discussion of the new Geithner Plan yesterday.  The worry I expressed there is whether the Plan is scalable – i.e., it could work at a modest level, but to really have impact it needs to be huge.  And, as it gets larger, I think we’ll see a political backlash.

Looking back over the comments of the day, my position put me closer to Paul Krugman but not too far also from Mark Thoma (look at his response to me, further down the discussion).  Brad DeLong came across as the most positive, but even he is doubtful that the planned purchases are large enough – he makes the point that the Administration couldn’t get Congress to agree on any additional money for this purpose, but this puzzles me. 

The Administration (1) has not really made this case on Capitol Hill (my contacts there tell me), (2) is asking for lots of money to do other things (their strategy was overweight fiscal from the start), (3) hasn’t communicated well a more general sense of priority or urgency – if we don’t fix our banking system how many other good things are possible over the next decade? 

By Simon Johnson

Breaking The Bank

My problem with Monday’s expected announcement from Mr Geithner doesn’t have much to do with the details of the public-private partnership.  I doubt this will work, because I don’t see the incentive for banks to sell assets at less than the value currently on their books.  Right now, they have the government right where they want it – look at the body language and words of leading CEOs.

The government feels that it cannot take over large banks, there is no bankruptcy-type procedure that would work, and only deference to the CEOs of major financial institutions can get us out of this mess.  This is a conscious strategy decision from the very highest levels.

I’d like to say: OK, but this is absolutely the last time we will try for a solution to our banking problems involving a private sector-led approach.  Of course this would not be credible and bank CEOs know this.  Instead, I propose the following. Continue reading “Breaking The Bank” →

CEO Semiotics And The Economics Of Vilification

CEOs of major banks have started to push back against the critics – their primary job, after all, is lobbying (rather than, say, risk management).  As such, they are typically sophisticated communicators who use a wide range of symbols, words, and modes of communication to get their points across.

Not everything they say, of course, should be overinterpreted.  For example, calling the hand that feeds the banks “asinine” (Richard Kovacevich, chair of Wells Fargo) seems more like an outburst than a promising way to enhance shareholder value – even if he is correct about whether today’s stress tests are actually meaningful.

Lloyd Blankfein’s February FT op ed famously made the case that we need banks as a “catalyst of risk.” But this argument raises awkward questions.  What does Goldman Sachs know about risk, and when did it learn this (presumably recently, after they settled up with AIG)?  My risk-taking entrepreneurial contacts feel their catalysts should be somewhat smaller relative to the economy – so these banks/securities underwriters can, from time to time, go bankrupt without threatening the rest of the private sector (and everyone else) with ruin.  Still, the main point of this FT article was the symbolism of the timing, appearing on the morning of what was scheduled to be Secretary Geithner’s first big speech; we were supposed to read Mr. Blankfein’s conceptual script, then look up and see the Secretary on TV.

Vikram Pandit’s recent letter to Citi employees was a nicely timed communication to his broader social and political audience.  His upbeat note was plausible because he put down some very specific markers, e.g., “best quarter-to-date since 1997”; the danger is that these come back to haunt him.  And as a document making the case for big banks more generally, it was weak.

The banking industry’s thought leader right now is definitely Jamie Dimon.  His point about vilification is straightforward. Continue reading “CEO Semiotics And The Economics Of Vilification” →

Parallel Bankers

AIG is arguing that its people are uniquely qualified to clean up the mess they made and therefore need big retention payments. 

Of course, there are many things that are different and complex about this crisis in general and credit default swaps in particular.  But in every crisis I’ve ever seen, the (banking/corporate/government) insiders responsible for major problems always want to stay on – arguing that they have unique skills and can sort things out better than anyone else.  Countless times around the world I’ve heard some version of, “it’s very complex, no one else can figure it out, and you’ll lose a lot more money unless you keep us on.”

Yet, whenever possible, it’s better to clean house and bring in new talent at all levels to wind down bad business and more generally clean up/recapitalize/reprivatize the financial sector.

In the New York Times print edition (p.A25) this morning and online, James and I elaborate on why this is – drawing particular parallels with the Asian crisis of the late 1990s.

By Simon Johnson

Causes Of A Great Inflation: Tunneling For Resurrection

Here is Ben Bernanke’s problem.

1. The financial sector is busy setting up arrangements in which employees are guaranteed high levels of compensation if they stay on through the difficult days ahead.  These retention-type payments allow firms to survive in their existing form, pursue business-as-usual, and gamble for resurrection, i.e., make further risky investments.

2. But these same payment schemes, e.g., Goldman Sachs’ loans-for-employees deal, are a form of poison pill with regard to further bailouts – the Administration may want to help these firms down the road, but this kind of tunneling means Congress will put its foot down.  Do you think that President Obama’s $750bn for bailouts (scored as $250bn) will survive the budget process?  No New Bailout Money is a slogan reaching from here to the midterm congressional elections. 

3. And the financial system is in big trouble.  Unless the economy turns around, somewhat miraculously, we are in for a big slump.  Or even for a Great Depression – watch closely the words and body language in Bernanke’s interview on 60 Minutes. 

The big banks are essentially making themselves Too Politically Toxic To Rescue, and this has potentially bad macroeconomic consequences.  So what will Bernanke do? Continue reading “Causes Of A Great Inflation: Tunneling For Resurrection” →

Baseline Blocking

A reader reports his firm has blocked Internet access to BaselineScenario.com, and his requests to change this policy have so far gone unheeded.

Access to our site has been blocked in the past by China – for reasons that should be obvious (if you want to pretend there is no global crisis).  But what kind of firm would not want its employees to access our macroeconomic analysis, Financial Crisis for Beginners, or your continuing debate about how to handle the world’s myriad financial sector problems?

Oh, yes… Continue reading “Baseline Blocking” →

Chinese Dissonance

The G20 needs a deal. It doesn’t make much sense to pull 20+ global leaders together on April 2nd unless you can announce an agreement with some bearing on the current worldwide slump. One more meaningless communique might not go down well with the markets. You can always trot out the same platitudes, but the world’s best journalists will be in attendance and it would be much better to have something concrete on display.

Time is running out for the deal makers. There appear to be no grounds for the US and Europe coming together in a meaningful way on fiscal policy: the US want everyone to commit to some (universal?) target; the Europeans either really don’t want that (Germany) or rightly feel they can’t afford it (most of the rest of the EU). Regulatory agendas intersect but only at the general level of, “we should do better” and ” it was your banks that got us here” – the AIG counterparties list make it clear that already-regulated large institutions in both the US and Europe are the problem. And the US Administration is waiting for Congress on regulation – this will take 6 months or more to sort out.

All of which leaves one main item around which there can be convergence: the IMF. And for this, China’s exchange rate is the issue. Continue reading “Chinese Dissonance” →

Political Will: Bernanke On The True Cost Of Banking

Stabilization programs in emerging markets often come down to this: the government needs to do something unpopular, e.g., reduce some subsidies, privatize an industry, or eliminate the crazy credit that goes to oligarchs – no one likes oligarchs, but their factories employ a lot of people.  There is naturally resistance – pushback from legislators, riots in the streets, or oligarchs calling their friends in the US foreign policy establishment.  The question becomes: does the government have the “political will” to get the job done?

In fall 1997, a key issue for Indonesia’s IMF program was whether the government could close the banking operations belonging to one of President Suharto’s sons.  There was an epic and fascinating struggle and, in the end, the government did not have sufficient political will or power.  The subsequent loss of US support, and further currency and economic collapse is (messy and painful for many) history.

It is striking that Ben Bernanke now asks whether the United States today has sufficient political will. Continue reading “Political Will: Bernanke On The True Cost Of Banking” →

Much Worse Than You Think: International Economic Diplomacy

A fundamental principle that we all hold dear is: in industrialized countries, with relatively high income levels, the government can’t be completely out to lunch.  After all, we reason, there are democratic processes, watchdogs of various kinds, and we can safely delegate monitoring of government official actions to others (e.g., the media). 

This principle is, of course, now appropriately called into question both for government officials directly and increasingly for the media’s scrutiny of what the government (and business) is doing.  As a result, the level of public attention to various domestic policies – bailouts and the like – is surely at or close to all-time highs; the current reaction time and seriousness in public discussions of various initiatives for banks must set some sort of record.

Yet there remains at least one completely murky and unaccountable area of government action: international economic diplomacy. Continue reading “Much Worse Than You Think: International Economic Diplomacy” →

The G20 Lets Us Down

I’m continually amazed by how easy it is for government officials to hoodwink most of the news media.  All it takes is for a couple of leading finance ministers to get on roughly the same page, and we’re reading/hearing about “substantial progress” or “major steps forward.”  If someone provides an articulate background briefing to a leading newspaper on the supposed debate within a group of countries, this becomes the dominant news story.

Saturday’s G20 meeting of finance ministers and central bank governors is a leading example.  It was a disaster – we face what officials readily concede is the biggest financial and economic crisis since the 1930s, yet this conclave agreed precisely nothing that will make any difference.  If the G20 heads of government summit on April 2nd is a similar failure, we will be staring at the real possibility of a global catastrophe.  Yet the spinning storytellers of the G7 have still managed to get much of the press peering in entirely the wrong direction.

For more on what would the right direction, take a look at my piece in Britain’s Sunday Telegraph.