Author: Simon Johnson

That Worked (?)

At last, our long wait to learn the Administration’s policy on banking is over.  The policy is: wait. 

This message comes from Bernanke, Geithner, and other officials over the past few days.  And, in this season of attempted policy message convergence within the G7 (it happens or tries to happen twice a year, ahead of the IMF/World Bank ministerial meetings), it is what we are starting to hear on all sides (e.g., from Trichet, head of the European Central Bank): we’ve done a lot, our economies might recover, and we don’t want to overdo it.  So we’ll wait.

Looking just at the US economy or just at the Eurozone, this might make sense.  But recognizing at what is heading our way from Eastern Europe and other rapidly slowing parts of the global economy, “the risks are weighted to the downside” (an official euphemism that you will hear frequently in the coming weeks).  And the market is not so easily convinced that all is now well or even significantly better. Continue reading “That Worked (?)” →

The World Bank And The Stress Test For U.S. Banks

Forecasters at international organizations often find themselves in a delicate position.  On the one hand, they have unparalleled access to hard data and intelligence about what is happening in every corner of the world economy.  On the other hand, their main shareholders – the US and larger European countries – do not want to hear predictions that are inconsistent with their own preferred baseline.

And, in the case of the US today, nothing could be more sensitive: it’s a relatively optimistic baseline, with a quick bounceback next year, that underpins the mild “stress scenario” being used for banks.  So if the World Bank or the IMF said that the world economy is going down and not coming back any time soon, that would raise major issues.

The World Bank clearly wants to speak truth to authority on this occasion, but can’t quite get the job done. Continue reading “The World Bank And The Stress Test For U.S. Banks” →

President Obama’s Implied Future For Derivatives

If you’ve worked on economic policy formulation – or in any large bureaucracy – you know how to get your boss to make the decision you want.  The key is to frame the options in such a way that he or she feels that your preferred course of action is the only plausible direction.  Alternatives need to be undermined or discredited.

Smart bosses know this, of course, and they seek out sources of information or analysis that are not managed by their subordinates.  The problem is that, traditionally, most such sources are not sufficiently well informed, at a detailed level, to be really helpful in the decision-making process.  The format of most mainstream media – 800 words for the general reader, 4 minute stories, etc – does not allow engagement at the technical level; and, to be honest, technocrats are very good at manipulating the information flow to even the best journalist (who is usually a generalist).  And while there are always outside technical domain experts, research papers appear with a lag and op eds usually have a broad brush (again, a format constraint).

Seen in this context, President Obama – on the face of it – has the role of blogs exactly backwards.  But perhaps he is instead telling us something more profound. Continue reading “President Obama’s Implied Future For Derivatives” →

The FDIC Approach

We have been arguing, here and elsewhere, for a banking approach centered around scaling up FDIC-interventions. Part of the pushback is (1) Congress won’t provide any more money, (2) there is no point in even going to ask, and (3) if you did go ask, that could be destabilizing.

In that context, I’m encouraged by the moves in and around the Senate at the end of last week to increase the resources available to the FDIC (for details, see my assessment on The New Republic’s site this morning).  The Administration seems to be taking the lead and key senators are coming on board.

There are still a lot of pieces that can go wrong: the vaunted “stress test” looks weak, the signals on banks from the Fed and Treasury are mixed at best, and the banking lobby is digging in for a long struggle.  And the world economy is going to put severe pressure on any approach.

But eventually we will turn a corner and, at that point, the FDIC will likely play a central role.

Whatever Did The CDS Market Mean By That?

The credit default swap market is a modern Delphic Oracle.  It speaks loudly and profoundly – these days at regular intervals – albeit using somewhat arcane terminology.  And after major statements such as yesterday (or perhaps this week in general), it’s worth pausing to reflect on, and argue about, what it really means.

Thursday’s statement, to me, was about US banks (graph).

The risk of default for US banks, according to this market, is rising back towards levels not seen since mid-October.  That is striking enough – but remember what has changed since then: (1) the G7 promised not to let any more systemic banks fail, (2) Treasury has provided repeated recapitalization funds on generous terms, and (3) the Fed offers massive, nontransparent funding to anyone in distress.  How can it be that the credit market still or again feels the risk of default rising so sharply and to such high levels? Continue reading “Whatever Did The CDS Market Mean By That?” →

We Cannot Afford To Wait To Recapitalise US Banks (Letter To The FT)

(The following is now available in the on-line edition of the Financial Times; link to original Martin Wolf article added here)

Sir, Martin Wolf’s excellent article on the pros and cons of nationalisation suggested, quoting Nouriel Roubini, that we could wait six months to determine how solvent US banks are before making decisions (“To nationalise or not to nationalise is the question“, March 4). This is possible but surely risky. Continue reading “We Cannot Afford To Wait To Recapitalise US Banks (Letter To The FT)” →

Confusion, Tunneling, And Looting

Emerging market crises are marked by an increase in tunneling – i.e., borderline legal/illegal smuggling of value out of businesses.  As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.

Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt.  Confusion helps the powerful, he argued.  When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms.  The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.

This is the prospect now faced by the United States. Continue reading “Confusion, Tunneling, And Looting” →

Did Goldman Sachs Just Win Big?

On p.A4 of today’s WSJ, Deborah Solomon and Jon Hilsenrath report more detail on the Treasury’s “Bad Bank” funding plan.  On first (and third) read I’m not impressed, but we’ll go through all the available details and report back later.

For now, I just have one question.  Isn’t this essentially the same plan that Goldman Sachs has been shopping around for the past month or so?  There’s nothing necessarily wrong with that, of course.  But it would be a huge win for Goldman and Lloyd Blankfein – explaining, for example, the confidence displayed in his recent FT article. 

And, whatever the reality of lobbying, pressure, and idea exchange here, the optics (as they say in the message spinning business) don’t look great.

The Line: Not My Fault (Gordon Brown On NPR’s Morning Edition Today)

In an extraordinary interview just now on NPR’s morning edition (at the top of the hour; to be rebroadcast in 2 hours, just after 9am Eastern; audio recoding should be available at around that time also), Steve Inskeep pushed Gordon Brown hard.

My favorite part is when Steve asked the Prime Minister whether, during his stewardship of the British economy over the past 10 years, he had worried about “too much debt” being taken on by consumers and firms and excessively risky lending.  Brown’s response, “our corporates did not borrow too much.”  Not answering on the other dimensions of the runaway lending boom says it all – Britain had an unassisted, unsustainable property and financial sector bubble.  Continue reading “The Line: Not My Fault (Gordon Brown On NPR’s Morning Edition Today)” →

What Should President Obama And Prime Minister Brown Discuss?

I’d like to imagine that President Obama and Prime Minister Brown will this week discuss how the global economy is worsening, and why all official forecasts need to be revised down substantially, again – with immediate implications for stress tests in the US and realistic bank recapitalization in the UK. 

But this is a stretch.  On the US side, too much public effort over the past week has gone into repainting a rosy baseline – e.g., in Chairman Bernanke’s testimony last Tuesday and the budget documents unveiled on Thursday.  No leader can back away so quickly – even in private – from this kind of thinking, no matter how much they now begin to worry about the latest haphazard rounds with Citi/AIG or the worsening of financial markets around the world.  Both Obama and Brown are unfortunately stuck, for the time being, with Wait And See approaches.

So, over on Forbes.com, Peter Boone and I suggest some more plausible topics for their conversation.  Naturally, I would start with the eurozone…

The Smell Of Coffee

The late Rudi Dornbsuch of MIT had a way of cutting to the chase, preferably in public and with a minister of finance present.  He knew a huge amount about financial crisis, and could distill a lifetime of study and involvement in collapses succinctly: “it always takes longer than you think; but when it happens, it always happens faster than you can imagine.”

The latest credit default swap data for European banks bring Rudi’s perspective to mind – for the United States.  We’ve debated this week what to do about U.S. banks, arguing about which unappealing options are less bad.  In my view, the choice is not “nationalize vs. don’t nationalize,” but rather “keep our current partial nationalization/bottomless pit subsidy system vs. start down the road to reprivatization.”

But, honestly, this entire debate may be overtaken by events.  Continue reading “The Smell Of Coffee” →

Listening To The Secretary

Secretary Geithner spoke with NPR’s Adam Davidson today and the result, on the Planet Money podcast, is a helpful guide to official thinking.

The Secretary’s best line, at around the 18 minute mark is, “If you underestimate the problem; if you do too little, too late; if you don’t move aggressively enough; if you are not open and honest in trying to assess the true cost of this; then you will face a deeper long (sic) lasting crisis.”  Continue reading “Listening To The Secretary” →