Author: Simon Johnson

Will The United States Default?

By Simon Johnson

There are three views on whether the US will default on its government debts. The first is: Hopefully yes, and this August offers a good opportunity. The second is: Possibly yes, but this would be bad – so we need some form of fiscal austerity. The third is: Under no circumstances, and any talk of a need for austerity is a hoax.

The first view is mistaken. The second view hides a dangerous contradiction. And the third view borders on complacency. How can we find our way to fiscal responsibility? We need tax reform.

People in the first camp think that the US government has become too big and the only way to cut it down to size is to limit its ability to borrow. A constitutional amendment to limit the size of government relative to GDP or to require a balanced budget could work – but experience suggests there are always ways for a future Congress to escape any such constraint. Continue reading “Will The United States Default?” →

Italy And Systemic Risk In The United States

By Simon Johnson

In recent days, Greece’s parliament adopted new austerity measures and Europe’s finance ministers approved another round of Greek loans. So the European debt crisis is under control, right?

Probably not. One obvious reason is Standard & Poor’s July 4 threat to declare a default if banks roll over Greek government bonds coming due over the next year. That could force everyone back to the drawing board.

Less obvious, but no less worrisome, is Italy. With a precarious fiscal picture, it could be the next to come under pressure. And this time, U.S. banks are in the line of fire, with about $35 billion in loans to Italy and potentially more exposure to risk through derivatives markets.

U.S. regulators should call for a new round of stress tests that assume sovereign-debt restructurings in Europe and take a realistic view of counter-party risks in opaque markets such as foreign exchange swaps. Based on those tests, the biggest banks probably need to suspend dividends and raise more capital as a buffer against losses.

To read the rest of this post, click here (this link is to the full article on Bloomberg: http://www.bloomberg.com/news/2011-07-05/could-italy-be-next-european-domino-to-fall-commentary-by-simon-johnson.html)

Christine Lagarde And The Demand For Dollars

By Simon Johnson

After receiving US support at the critical moment, Christine Lagarde was named Tuesday as the next managing director of the International Monetary Fund. In campaigning for the job, Ms. Lagarde – the French finance minister – made various promises to emerging markets with regard to improving their relationships with the IMF. But such promises count for little and the main impact of her appointment will be to encourage countries such as South Korea, Brazil, India, and Russia to back away from the IMF and to further “self-insure” by accumulating larger stockpiles of foreign exchange reserves – the strategy that has been followed by China for most of the past decade.

Seen from an individual country perspective, having large amounts of dollar reserves held by your central bank or in a so-called sovereign wealth fund makes a great deal of sense; this is a rainy day fund in a global economy prone to serious financial floods. But from the perspective of the global economy, such actions represent a major risk going forward – because it will further push down US interest rates, feed a renewed build up in private sector dollar-denominated debt, and make it even harder to get policymakers focused on a genuine fix to our long-term budget problems. Continue reading “Christine Lagarde And The Demand For Dollars” →

Could The US Have An “Expansionary Fiscal Contraction”?

By Simon Johnson. My full written testimony to Tuesday’s hearing of the Joint Economic Committee of Congress is available here.

The US has a large budget deficit and a debt-to-GDP ratio that, in most projections, continues to rise over time. Some House and Senate Republicans are arguing strongly that this situation calls for large and immediate cuts to government spending, for example as part of any agreement to increase the federal government’s debt ceiling.

The Joint Economic Committee of Congress held a hearing on Tuesday to discuss whether such spending cuts would be “contractionary” or “expansionary” for the economy in the short-run. My assessment, after participating as a witness at the hearing, is that large immediate spending cuts would tend to slow the economy (a webcast of the hearing is here). Continue reading “Could The US Have An “Expansionary Fiscal Contraction”?” →

China and the Saving of Europe

By Simon Johnson

The Greek government owes more than it can afford to pay, now or in the near future, at market interest rates. There are two options: reduce the payments through some form of restructuring, or move the debt into the hands of people who are willing to charge below market rates for the foreseeable future.

In this decision, the International Monetary Fund has relatively little say – this is really a political decision to be made by the European Union, with discrete backing from the US and China. Continue reading “China and the Saving of Europe” →

Basel, Tomato, And Mozzarella

By Simon Johnson

The bank lobbyists have a problem. Last week, they lost a major battle on Capitol Hill with the failure to suspend implementation of the new cap on debit card fees. Despite the combined efforts of big and small banks, the Corker-Tester bill attracted only 54 votes in the Senate – when it needed 60.

On debit cards, the retail lobby proved a surprisingly effective counterweight to the financial sector. On the next big issue, the bankers have a different problem: it’s highly technical, more within the purview of regulators than legislators, and often perceived as boring. Or, as one bank executive put it to Reuters, speaking of the capital requirements agreed between countries in the so-called Basel III framework,

“When you do mention Basel, your average member of Congress thinks ‘that pairs well with tomato and mozzarella.’” Continue reading “Basel, Tomato, And Mozzarella” →

Jamie Dimon’s New Math

By Simon Johnson

On Tuesday, June 7, Jamie Dimon (CEO of JPMorgan Chase) pressed Fed Chair Ben Bernanke on the costs of bank regulation after the financial crisis of 2008. Could this be what is slowing the economic recovery? Bernanke was very polite in his response, but the question – as posed – made no sense at all. (The full tape of his question is here,)

Most of what Jamie Dimon lists under the heading of changes are just symptoms of the crisis itself, e.g., badly run firms and crazy products disappeared. His substantive issue appears – from his question – to be just about capital requirements.

But the implication of Dimon’s question – that higher capital requirements will slow growth – is simply wrong. I explain this in a column now running on Bloomberg. Here’s the link: http://www.bloomberg.com/news/2011-06-09/the-missing-math-in-dimon-s-economic-argument-simon-johnson.html.

The Banking Emperor Has No Clothes

By Simon Johnson

In a major speech earlier this week to an American Bankers Association conference, Treasury Secretary Tim Geithner laid out his view of what went wrong in the financial sector prior to 2008, how the crisis was handled 2008-10, and what is now needed with regard to implementation of reforms. As chair of the Financial Stability Oversight Council and the only senior member of President Obama’s original economic team remaining in place, Mr. Geithner’s influence with regard to the banking system is second to none.

Unfortunately, there are three major mistakes in Mr. Geithner’s speech: his history is completely wrong; his logic is deeply flawed; and his interpretation of the Dodd-Frank reform does not mesh with the legal facts regarding how the failure of a global megabank could be handled. Added together, this suggests one of our most powerful policymakers is headed very much in the wrong direction. Continue reading “The Banking Emperor Has No Clothes” →

Eurozone On The Brink, As Usual

By Simon Johnson; this post comprises the first three paragraphs of a column now running at Bloomberg View.

Jean-Claude Trichet, president of the European Central Bank until October, last week floated two proposals aimed at dealing with Greece and related eurozone public-debt problems.

The first idea would allow European Union authorities to override the policy decisions of member governments that can’t come up with sustainable budgets, implying the creation of an external control board for the likes of Greece. This approach has been used in the past for very weak countries (as well as for the cities of New York and Washington in recent decades). In Europe today, it would have no political legitimacy and would be completely unworkable — imagine the street protests it would spark.

The second idea would, down the road, create a finance ministry for the European Union. It would issue debt and have responsibility for a unified financial sector. This is just as brilliant as Alexander Hamilton’s fiscal and financial integration proposals for the young American Republic and, if implemented properly, would fix the deep problems caused by the original design of the eurozone.

To read the rest of this column, please follow this link to Bloomberg View: http://www.bloomberg.com/news/2011-06-06/europe-needs-trichet-s-unified-finance-ministry-simon-johnson.html

Why Are the French So Determined To Run The IMF – And What Will It Cost You?

By Simon Johnson

Just a few years ago, eurozone countries were at the forefront of those saying that the International Monetary Fund had lost its relevance and should be downsized. The organization was regarded by the French authorities as so marginal that President Nicolas Sarkozy was happy to put forward the name of a potential rival, Dominique Strauss-Kahn, to become managing director in fall 2007.

Today the French government is working overtime to make sure that a Sarkozy loyalist and the leader of his economic team – Finance Minister Christine Lagarde – becomes the next managing director. Why do they and other eurozone countries now care so much about who runs the IMF? Continue reading “Why Are the French So Determined To Run The IMF – And What Will It Cost You?” →

The Problem With Christine Lagarde

By Simon Johnson

Ms. Christine Lagarde, French finance minister, is the nominee of the European Union for the recently vacant position of managing director at the International Monetary Fund. The EU has just over 30 percent of the votes in this quasi-election; the US has another 16.8 percent and seems willing to keep a European at the fund if an American can remain head of the World Bank. It should be easy for Ms. Lagarde to now travel round the world engaging in some old-fashioned horse trading, along the lines of: Support me now, and I or the French government will get you something suitable in return, either at the IMF or elsewhere.

The contest to run the IMF seems over before it has even really begun. But Ms. Lagarde has a serious problem that may still derail her candidacy, if there is ever any substantive, open, or transparent discussion of her merits. There is major design flaw in the eurozone and Ms. Lagarde is the last person that non-European governments should want to put in charge of helping sort that out. Continue reading “The Problem With Christine Lagarde” →

Would Another European Managing Director At The IMF Be The Answer For Greece?

By Simon Johnson; for more on related issues, see my new Bloomberg column on the IMF succession. For more background on the IMF, see Tuesday’s Planet Money Podcast.

Greece has no good options. Without question, Greece brought debt problems on itself – this is the consequence of politicians using irresponsible fiscal policy to win elections.

As the International Monetary Fund put it when Greece became the first eurozone country to borrow from the fund in May 2010, “Even with the lower deficits envisaged under the program, the debt as share of GDP will continue to peak at almost 150 percent of GDP in 2013 before declining thereafter.” The situation has not improved in recent months – even under the most optimistic scenario, the debt-GDP ratio will peak above this number.

The problem is that loose talk among European leadership of potentially “restructuring” or “reprofiling” Greek debt creates more problems than it solves. Financial markets fear another Lehman moment, in which authorities decide to let a significant borrower fail – without fully understanding the consequences. Continue reading “Would Another European Managing Director At The IMF Be The Answer For Greece?” →

O.C.C. Spells Trouble, Again

By Simon Johnson

The Office of the Comptroller of the Currency (OCC) is one the most important bank regulators in the United States – an independent agency within the Treasury Department that is responsible for “national banks” (for more on who regulates whom in the US, see this primer). Over the past decade the OCC repeatedly demonstrated that it was very much on the side of banks, for example with regard to fending off attempts to impose more consumer protection – James Kwak and I covered the history in our book, 13 Bankers; these details have not been disputed by the agency or anyone taking its side.

After suffering some serious and well-deserved loss of prestige during the financial crisis of 2008-09, the OCC survived the Dodd-Frank reform legislation and is now back to pushing the same agenda as before. In the view of this organization and its senior staff – including key people who remain from before the crisis – the “safety and soundness” of banks requires, above all, not a lot of protection for consumers. This is a mistaken, anachronistic, and dangerous belief. Continue reading “O.C.C. Spells Trouble, Again” →

The Race For The IMF

By Simon Johnson (this post comprises the first two paragraphs of a column now running on Bloomberg)

Even before the shocking events of the past few days, the international policy community had been contemplating a successor to Dominique Strauss-Kahn at the International Monetary Fund.

Strauss-Kahn, the IMF managing director, was expected to begin campaigning soon for the presidency of France. Now, whatever happens in the New York legal system as he defends himself against attempted rape allegations, it seems likely that the IMF will be searching for a new head sooner rather than later.

To read the rest of this column, please follow this link: http://www.bloomberg.com/news/2011-05-17/emerging-markets-might-name-strauss-kahn-heir-simon-johnson.html

Why Does The Independent Community Bankers of America (ICBA) Oppose Debit Card Reform?

By Simon Johnson

It’s not hard to understand why large banks oppose any attempt to reform the financial arrangements currently surrounding credit cards and debit cards – in the duopoly run through Visa and MasterCard, big banks earn fees that far exceed their costs. This excess profit gap for debit cards would be substantially reduced by a Federal Reserve proposed regulation now on the table, which would implement the Durbin Amendment from the Dodd-Frank 2010 financial reform act. Senator Jon Tester (D., Montana) has proposed legislation that would delay and effectively derail implementation of the Durbin Amendment; the big banks are very much in his camp.

It’s much harder to understand why Independent Community Bankers of America (ICBA), the lobby group for small banks, is also working so hard for the Tester bill – because community banks are explicitly exempted from having to lower their fees and individual executives from at least some small banks publicly support the Durbin Amendment (e.g., see Senator Durbin’s letter to the ICBA last year).

The most plausible explanation is that ICBA is also one of the country’s largest issuers of credit cards and debit cards – so the representative of small banks actually has, in this regard, the incentives of a big bank. This is a major conflict of interest that is undermining the interests of community bankers and distorting the political process. The ICBA needs to declare this conflict in a transparent manner and step back from its involvement in the Durbin-Tester debate. (UPDATE: The ICBA says that it derives no revenue from debit interchange, despite the fact that the leading industry sources list it as #20 for “Signature Debit Card Interchange” and #13 for “PIN Debit Card Interchange”; for a full explanation, see the note from Cam Fine that appears with the NYT.com version of this column.) It also needs to publish the full details of a “survey” that it uses to claim that most community bankers are against the Durbin Amendment.

Continue reading “Why Does The Independent Community Bankers of America (ICBA) Oppose Debit Card Reform?” →