Author: Simon Johnson

Ransom Note Interview

Following my post Thursday morning regarding a potential massive financial/macroeconomic heist – let’s call it the ransom note (“give us all your money, and you can have your economy back”) – Adam Davidson had the great idea of interviewing the author.

We did so Thursday afternoon as part of a NPR Planet Money podcast that we co-hosted and, if all goes well, you can hear the results Friday afternoon.  I tried to convey the tone (and in one case, the precise content) of your comments in the discussion.  And the author …  well, listen for yourselves and tell me what you think – you can post comments here or at Planet Money.

Robbery Note – From The Banking Oligarchs This Morning

The modern bank robber calmly hands a note to the teller, asking for money and making a moderately specific scary threat.  The robber, of course, expects the teller to hand over unmarked bills without a fuss.

This morning’s “research” note from a major international bank is entitled, “Falling Short: The government needs to buy toxic assets,” and the heart of their one page argument is, with the emphasis as in the original, Continue reading “Robbery Note – From The Banking Oligarchs This Morning” →

Rahm Emanuel’s and David Axelrod’s New Dilemma

The President’s top political counselors face the following dilemma.  They want to be tough on banks because that makes sense politically and, presumably, because it fits how they – with considerable relevant experience – would like to address the deeper underlying problems in the financial system.

But at least some prominent economic counselors to the President strongly disagree.  The Treasury Secretary, in particular, articulates the view that being tough on the banks and top bankers would further worsen credit markets and thus deepen/prolong the recession.  Mr Geithner wants to try other routes, and while he does not rule out imposing policies that banks would not like, it is not in his Plan A or likely a feature of his Plan B.

The President has evidently sided with Treasury, either because he decided they have superior technical competence, or because Emanuel and Axelrod themselves gave way when the experts stared them down.

The dilemma is this.  Continue reading “Rahm Emanuel’s and David Axelrod’s New Dilemma” →

Secretary Geithner’s Speech: A Viewer’s Guide

At 11am this morning, from the Cash Room at the Treasury, Secretary Geithner will lay out his vision (and hopefully some convincing details) regarding how to get the US financial system back on its feet.  What should we listen for as indications that this is heading in the right direction? Continue reading “Secretary Geithner’s Speech: A Viewer’s Guide” →

Baseline Scenario, 2/9/09

Baseline Scenario for 2/9/2009 (11pm edition, February 8): link to pdf version

Peter Boone, Simon Johnson, and James Kwak, copyright of the authors.

Summary

1) The world is heading into a severe slump, with declining output in the near term and no clear turnaround in sight. We forecast a contraction of minus 1 percent in the world economy in 2009 (on a Q4-to-Q4 basis), making this by far the worst year for the global economy since the Great Depression. We further project no recovery on the horizon, so worldwide 2010 will be “flat” relative to 2009. Continue reading “Baseline Scenario, 2/9/09” →

High Noon: Geithner v. The American Oligarchs

There comes a time in every economic crisis or, more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that – they say – will deliver you back to growth.  The person has political support, a strong track record, and every incentive to enter the history books.  But one nagging question remains. Continue reading “High Noon: Geithner v. The American Oligarchs” →

Ten Questions For Secretary Geithner

Next week, Tim Geithner will have an opportunity to explain his plans for the financial system (Cash Room of the Treasury, Monday, 12:30pm), and defend these plans in front of the Senate Banking Committee (Tuesday, starting at 10am) and Senate Budget Committee (Wednesday, also from 10am). 

Here are the questions (in bold) we would ask him.  And, just in case any of you are involved in preparing the Secretary’s briefing book, we also suggest some answers. Continue reading “Ten Questions For Secretary Geithner” →

The G20 Has A New Website: HM Treasury

I’ve been calling for the G20 to modernize its communications strategy, including by updating their website from time to time.

I know the British (incoming chairs) are working on this, but there are still glitches.  At the time of posting, if you click on www.g20.org, you get http://www.hm-treasury.gov.uk/, which is not exactly the same thing.  And the link at the top of that page (next to the signature red phone box) doesn’t work… 

I suggest you try this instead: http://www.londonsummit.gov.uk/en/, and write up your reviews (on substance, process, or technology in and around the summit) as comments here – I will bring them to the attention of the appropriate authorities.

(Update: they fixed the links within a few hours; now they could edit their FAQ so they make more sense, or just use a spellchecker, e.g., ”The G20 is carrying out the parpartory work for the Leaders summit in London on 2nd April”)

Insuring Bankers’ Bonuses

Here’s what we know so far about the plans for the US banking system that Tim Geithner will unveil next week.

  1. The heart of the scheme will, most likely, be an insurance arrangement, in which the government (part Treasury and mostly Fed) insures a big part of large banks’ portfolio of toxic assets against further loss.  The devil is in the pricing of this insurance and how transparent that is – and we will put out more on this shortly – but the clear signal so far is that this will be a veiled major recapitalization of banks at taxpayer expense.
  2. As announced yesterday, the government will set restrictions on the pay of executives in banks that participate.  But note that, under these rules, bonuses are not restricted.  Instead, they are just deferred and paid in shares.  In other words, if there is cheap recapitalization through government-provided insurance, these executives are getting an incredibly good deal. Continue reading “Insuring Bankers’ Bonuses” →

Framing the Geithner Bank Plan

What are your expectations for the impending Geithner Bank Plan?  Listening carefully to the messaging from the top, you are probably hoping for an increase in bank lending.  In fact, over the past few weeks, Congressional leaders (e.g., at the Senate Budget Committee hearing last week) and the President (e.g., see the penultimate paragraph of last week’s TV address) have repeatedly insisted that, going forward, banks that receive government support should increase their lending.

And you’ve probably seen matching statements from the banks recently, either (a) explaining why the fall in lending was not their fault, or (b) celebrating the fact that, against all odds, they did manage to increase loans in the last quarter. 

So the perception has been created that the new Bank Plan will succeed if it raises bank lending, and that it can be judged by this metric.

But this is the wrong framing of the problem.  Or, perhaps it was the right framing for last October, when credit supply was severely disrupted, but it is an out-of-date and perhaps dangerous way to think about what is now needed. Continue reading “Framing the Geithner Bank Plan” →

The IMF Sends A Message

The IMF communicates its view of the world economy in two ways.  The first is quite explicit, in the form of a World Economic Outlook with specific growth forecasts.  The latest update to the Outlook, published last week, recognized that world growth is slowing down, but anticipated a V-shaped recovery (there is a reassuring V in their Figure 1, or you can look at the Q4 on Q4 numbers for 2009 in the pdf version – the US does not contract during the coming year, according to this view.)

According to the forecast – which factors in only actual policies in place; no assumed miracles allowed – this is not much of a global crisis, particularly for emerging markets (e.g., emerging market growth dips to 3.3% for 2009 and then pops back up to 5% for 2010 in the annual average data; China’s growth will accelerate from now through end of 2010, etc.)  Given that, among other things, the IMF is the point organization for emerging market troubles, the message seems to be a soothing one.

But the IMF also communicates with both its lending to countries in difficulties, and with statements on and around this lending.  Here the news is in striking contrast to the forecast.  Continue reading “The IMF Sends A Message” →

Rahm’s Doctrine And Breaking Up The Banks

According to David Leonhardt, writing in today’s New York Times magazine,

TWO WEEKS AFTER THE ELECTION, Rahm Emanuel, Obama’s chief of staff, appeared before an audience of business executives and laid out an idea that Lawrence H. Summers, Obama’s top economic adviser, later described to me as Rahm’s Doctrine. “You never want a serious crisis to go to waste,” Emanuel said. “What I mean by that is that it’s an opportunity to do things you could not do before.” (Links in the quote are from the on-line original.)

Leonhardt explains how this Doctrine can be applied to issues ranging from health care costs to education, and some of this is already apparent in the fiscal stimulus details currently before Congress. 

Can the same approach also guide actions regarding our deeply broken and broke financial system?  There are three possible answers. Continue reading “Rahm’s Doctrine And Breaking Up The Banks” →

Transparency And Power

Put this morning’s articles on Bank Rescue Plans in the Financial Times and the Washington Post next to each other, and you can see where we are heading.  (Remember: policy announcements need to be bigger than what is leaked, so expect headline numbers larger than floated here – the FT suggests “total buying power” of the initiative will be $1trn; I expect closer to $2trn.)

The foreclosure mitigation steps seem reasonable, although on the small side – with perhaps $80bn of the available $320bn from TARP II being committed here.  The heart of the matter is the banks’ balance sheets, including their toxic assets and presumably deficient capital.  The principles at work seem to be: Continue reading “Transparency And Power” →