Category: Commentary

What Is Spencer Bachus’s Game?

By Simon Johnson

Representative Spencer Bachus, Republican chair of the House Financial Services Committee, famously remarked in December,

“in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”

With regard to the Consumer Financial Protection Bureau (CFPB), this apparently now implies that Mr. Bachus will use any means possible to change the topic away from substance – how banks treat their customers – to imagined procedural issues.

Specifically, Mr. Bachus is wrongly accusing Elizabeth Warren of misleading Congress with regard to the role of the CFPB in the negotiations over how to settle allegations that mortgage foreclosure practices have been abusive (see also this news coverage). Continue reading “What Is Spencer Bachus’s Game?” →

Not with a Bang

By James Kwak

In the Times, Neil Barofsky, Special Inspector General for TARP, performed the admirable feat of fitting a clear, comprehensive, sober critique of how TARP was implemented and what its long-term impact will be in fewer than 1,000 words. It’s a perspective I mainly agree with,* and it highlights the different priorities that the administration put on aid to large banks and aid to homeowners, even though both were goals of the bill.

Back in late 2008 and early 2009, there was a lot of talk about how a true solution for the problems of the banking system would require a solution for the problems of homeowners, since the banks’ losses were largely the result of mortgage defaults. One of the major technical achievements of the administration was showing that it was possible to stabilize the financial system and restore the banks to short-term profitability without doing much for homeowners. As Barofsky says, and as the Times reports in yet another article today, the administration’s programs to help homeowners obtain loan modifications had little impact on the behavior of the banks that service mortgages and foreclosures continue unabated. Real housing prices have fallen below the previous lows of 2009 and now look likely to overcorrect on the downside.**

Housing modifications are admittedly more difficult than bailing out banks. It’s administratively easier to write a few $25 billion checks and create unlimited low-interest credit lines for a few of the Federal Reserve’s existing customers than to intervene in millions of mortgages. But the financial crisis was a time of bold action on other fronts. Treasury and the Federal Reserve were willing to push the limits of the law, for example in J.P. Morgan’s takeover of Bear Stearns. (See the chapter in Steven Davidoff’s book Gods at War for the details.) Henry Paulson threatened to declare the nation’s largest banks insolvent if they didn’t agree to sell preferred stock to the government. By contrast, as law professor Katherine Porter says in the Times article, “The banks were so despised, and TARP was so front and center, you could have actually done something. In the midst of real boldness in bailing out the banks, we get this timid, soft, voluntary conditional program.”

The lesson we learned learned is that homeowners were only a priority insofar as their health mattered to the banks’ health. When those two things became unmoored, the administration was willing to declare victory.

* The main thing I don’t agree with is Barofsky’s implied criticism of the Bush administration for using TARP money to buy preferred stock from banks rather than buying mortgage-backed securities directly. While I have often criticized various aspects of the preferred stock purchases, I think it was a more direct way to stop the panic of September-October 2008, and at that point a program to purchase MBS would probably have been an even more blatant transfer to the banks.

** I’m all for prices falling from bubble levels, but the policy goal should have been preventing them from falling through the long-term trend.

Convenient Arguments

By James Kwak

Here’s my solution to our national debt. We have a one-time, 100 percent tax on all wealth (net worth) of all United States residents, with a $10 million per-person exemption. With household wealth at around $60 trillion, that should be plenty to pay off the accumulated debt and shore up Social Security and Medicare for the next century.* The government promises never to do it again. Since we only care about future behavior, a one-time wealth tax should have no impact on people’s incentives to work, and hence no distorting effect on the economy.

Don’t like that idea? How about this one. The Federal Reserve creates $20 trillion in money but, instead of crediting it to large banks’ accounts at the Fed, it credits it to Treasury’s account. Again, no more debt. Again, the Fed promises never to do it again.

Continue reading “Convenient Arguments” →

Dividend Lost

By Simon Johnson

Four types of people were directly affected by the Federal Reserve’s decision at the end of last week to allow major banks to increase their dividends and to buy back shares. Three of these groups – bankers, bank shareholders, and government officials – were somewhere between happy and delighted. The four group, US taxpayers, should be much more worried (see also this cautionary letter to the Financial Times by top finance academics).

The bankers’ reaction is obvious. They are officially released from the financial hospital ward that was set up for them in 2008. No matter that this was a very comfortable place with few conditions relative to any other bailout in recent US or world history – there were still restrictions on what banks could do and, naturally, bank executives chafed at these constraints.

In particular, banks were required to build up the equity in their business – insolvency is avoided, after all, while there is positive equity in a business. When shareholder equity is exhausted, creditors face losses. Continue reading “Dividend Lost” →

Incentives Don’t Work

By James Kwak

Driving home from school today, I listened to a Fresh Air interview from two months ago with Atul Gawande, by now perhaps the most famous doctor in the policy intelligentsia. The interview was based on a New Yorker article discussing how some doctors and even some health care payor organizations are trying to reduce health care costs for the most expensive people while improving outcomes. In Camden, New Jersey, one doctor found that one percent of people generate thirty percent of health care costs.

One refrain you heard incessantly during the health care reform debate was that we have high health care costs because of overconsumption and we have overconsumption because people don’t bear a high enough share of their marginal health care costs, so the solution is to increase copays and deductibles. This is what Economics 101 would tell you: people respond to incentives. But Gawande discussed one large company that tried this year after year, but only saw their costs going up. The problem was that while most members responded to the higher copays and kept their costs more or less steady, the 5 percent of members who generated 60 percent of the costs behaved differently. Or, rather, they also reduced consumption (of doctor’s visits and prescription medications), but as a result they often had catastrophic outcomes. These were people with heart disease on cholesterol-lowering medications, and when they went off their medications they ended up in the hospital with heart attacks and then with congestive heart failure.

Continue reading “Incentives Don’t Work” →

Two Cakes

By James Kwak

Eric Dash of DealBook reports on the latest stress tests conducted by the Federal Reserve, which apparently went swimmingly, at least for some of the healthier banks. I have no independent basis on which to assess the accuracy of those test results, so I won’t.

What I did notice is that JPMorgan Chase and Wells Fargo are using the green light from the Fed to start buying back stock: $15 billion for JPMorgan, 200 million shares (about $6 billion) for Wells. Does something seem wrong with this picture to you? Me, too.

Continue reading “Two Cakes” →

Who’s Afraid Of Elizabeth Warren?

By Simon Johnson

The next big political battle in Washington – after the budget debate is declared “over” – will likely feature the Consumer Financial Protection Bureau, in particular the fight to determine whether Elizabeth Warren can become as the agency’s first official head.

But will this fight feature a classic left vs. right set-piece confirmation showdown in the Senate? Or it will it be resolved with cloaks and daggers closer to the White House – with Treasury Secretary Tim Geithner managing to prevent Professor Warren’s nomination?

There is much to commend the left vs. right scenario. The Republicans, after all, want to argue that regulation is excessive in general and regulation of financial products is somewhere between unnecessary and dangerous for economic growth in particular. This theme came up during the Dodd-Frank legislative debate on financial reform last year but it was largely lost in the larger conversation.

Now Spencer Bachus, Republican chair of the House Financial Services Committee, has Elizabeth Warren firmly in his sights – with the mortgage settlement negotiations as the flashpoint. Continue reading “Who’s Afraid Of Elizabeth Warren?” →

Not Clear on the Concept

By James Kwak

From Congressman Spencer Bachus’s Media Center (these are the actual titles of four consecutive press releases):

Enough

By James Kwak

A friend passed on this article in The Motley Fool by Morgan Housel. It begins this way:

“Enough.

“That’s the title of Vanguard founder John Bogle’s fantastic book about measuring what counts in life.

“The title, as Bogle explains, comes from a conversation between Kurt Vonnegut and novelist Joseph Heller, who are enjoying a party hosted by a billionaire hedge fund manager. Vonnegut points out that their wealthy host had made more money in one day than Heller ever made from his novelCatch-22. Heller responds: ‘Yes, but I have something he will never have: enough.'”

The rest of the article discusses the cases of Rajat Gupta and Bernie Madoff, the former accused (but not criminally) and the latter convicted of illegal activity done after they had already been enormously successful, professionally and financially.

Housel asks, why do people push on — legally or illegally — when they have more of everything than anyone could possibly need? He summarizes the happiness research as follows:

“Money isn’t the key to happiness. What really gives people meaning and happiness is a combination of four things: Control over what they’re doing, progress in what they’re pursuing, being connected with others, and being part of something they enjoy that’s bigger than themselves.”

Continue reading “Enough” →

How Dumb?

By James Kwak

In his latest column, “Dumbing Deficits Down,” Paul Krugman has harsh words for Republican nonsense about the budget deficit:

Today’s Republicans just aren’t into rationality. They claim to care deeply about deficits — but they’ve spent the past two years putting cynical, demagogic attacks on any attempt to actually deal with long-run deficits at the heart of their campaign strategy.

But he’s only slightly less harsh toward President Obama:

The president and his aides know that the G.O.P. approach to the budget is wrongheaded and destructive. But they’ve stopped making the case for an alternative approach; instead, they’ve positioned themselves as know-nothings lite, accepting the notion that spending must be slashed immediately — just not as much as Republicans want. . . .

the White House is aiding and abetting the dumbing down of our deficit debate.

In this context, this concluding passage from the book I just read seems appropriate:

U.S. political leaders now seem determined to follow Nero’s reputed example when setting budget policy. They dicker with trivial deficit reduction packages, and then on a regular basis stoke the fire by passing much larger tax cuts, while the long-term budget picture keeps getting worse. They know what is happening, as do the voters.

Continue reading “How Dumb?” →

Battle Of The Banking Policy Heavyweights

By Simon Johnson

Just when it seemed that the debate over banking was winding down – with overwhelming victories on almost all dimensions for the people who run the world’s largest cross-border financial institutions – two of the biggest name policy heavyweights have entered the arena. Both voices are typically listened to most carefully within official circles and yet their messages today are diametrically opposed.

Which one is right?

Speaking on the side of greater reform for the biggest banks, Mervyn King – governor of the Bank of England – gave a forceful interview to the British newspaper The Telegraph at the end of last week.

“Why do banks in general want to pay bonuses? It’s because they live in a ‘too big to fail’ world in which the state will bail them out on the downside.”

In Mr. King’s view, casino-type banking caused the crisis of 2007-08.

“Financial services don’t like the word ‘casino’, but instruments were created and traded only within the financial community. It was a zero sum game. No one knew which ones were winners when the crisis hit. Everyone became a suspect. Hence, no one would provide liquidity to any of those institutions.”

“We allowed a [banking] system to build up which contained the seeds of its own destruction.”

And “reform” efforts so far do not amount to much.

“We’ve not yet solved the ‘too big to fail’ or, as I prefer to call it, the ‘too important to fail’ problem. The concept of being too important to fail should have no place in a market economy.” Continue reading “Battle Of The Banking Policy Heavyweights” →

“A Healthy Financial System Cannot Be Built On The Expectation Of Bailouts”

By Simon Johnson. Testimony submitted to the Congressional Oversight Panel, “Hearing on the TARP’s Impact on Financial Stability,” Friday, March 4, 2011.

I. Summary

1) The financial crisis is not over, in the sense that its impact persists and even continues to spread. Employment remains more than 5 percent below its pre-crisis peak, millions of homeowners are still underwater on their mortgages, and the negative fiscal consequences – at national, state, and local level – remain profound.

2) To the extent that a full evaluation is possible today, the financial crisis produced a pattern of rapid economic decline and slow employment recovery quite unlike any post-war recession – it looks much more like a mini-depression of the kind the US economy used to experience in the 19^th century. In addition, the fiscal costs of the disaster in our banking system so far amount to roughly a 40 percentage point increase in net federal government debt held by the private sector, i.e., roughly a doubling of outstanding debt.

3) In this context, TARP played a significant role preventing the mini-depression from becoming a full-blown Great Depression, primarily by providing capital to financial institutions that were close to insolvency or otherwise under market pressure.

4) But part of the cost is to distort further incentives at the heart of Wall Street. Neil Barofsky, the Special Inspector General for the Troubled Assets Relief Program put it well in his latest quarterly report, which appeared in late January, emphasizing: “perhaps TARP’s most significant legacy, the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail.’” Continue reading ““A Healthy Financial System Cannot Be Built On The Expectation Of Bailouts”” →

Is The New York Fed Making A Serious Mistake On Bank Dividends?

By Simon Johnson

An uncomfortable dissonance is beginning to develop within the Federal Reserve. On the one hand, senior current and former officials now generally agree with the propositions put forward by Professor Anat Admati and her distinguished colleagues – our leading banks need more capital, i.e., more equity financing relative to what they borrow.

The language these officials use is vaguer than would be ideal and they refuse to be drawn on the precise numbers they have in mind. The Swiss National Bank, holding out for 19 percent capital, and the Bank of England, pushing for at least 20 percent capital, seem to be further ahead and much more confident intellectually on this issue.

But an important split appears to be emerging within the Federal Reserve system, with the Board of Governors and most regional Feds tending to want higher capital levels from today’s levels, while the New York Fed is – incredibly – pushing hard to enable big banks actually to reduce their capital ratios (in the first instance by allowing them to pay increased dividends). Continue reading “Is The New York Fed Making A Serious Mistake On Bank Dividends?” →

Disinformation About The Consumer Financial Protection Bureau

By Simon Johnson

In Washington, before lobbyists try hard to destroy something, they first spread a great deal of disinformation about it. Thus the “End Users’ Coalition” (a front for the derivatives dealers) promotes its lobbying points as fake research. And “fiscal conservatives” attempt to distract from the fact that our largest banks brought us to the brink of budget disaster – this is their preparation for demolishing all vestiges of financial reform.

On a closely related front, there is now a concerted effort to undermine the newly formed Consumer Financial Protection Bureau (CFPB), mostly by spreading disinformation about its supposed lack of accountability.

This disinformation approach contains the standard elements of exaggeration, misdirection, and distraction (all quotes are via Fred Barnes):

Slogans: “If you like TSA at the airport, you’ll love these guys” (Congressman Spencer Bachus).
This is a major step towards dictatorship. “Its powers are very, very vast…. Who in the world would consider it appropriate to have one person appointed—one person!—to set the rules for the entire financial industry. It’s a tremendous overreach. It’s incredible to think about” (Senator Bob Corker)
And it would be a one-person dictatorship. “”It would be dangerous to the American economy if Elizabeth Warren were put in that job by a recess appointment, thwarting the will of Congress…. [She would be] accountable to no one” (Senator Richard Shelby)

Naturally, none of this is remotely close to the facts – an important principle of disinformation is that it should create an alternative reality which, through repetition by apparently disparate and supposedly credible people, becomes regarded as containing an element of truth. Continue reading “Disinformation About The Consumer Financial Protection Bureau” →

Geithner’s Gamble

By Simon Johnson. This post comprises the first few paragraphs of a column now running at Project Syndicate: http://www.project-syndicate.org/commentary/johnson17/English

In a recent interview, United States Treasury Secretary Tim Geithner laid out his view of the nature of world economic growth and the role of the US financial sector. It is a deeply disturbing vision, one that amounts to a huge, uninformed gamble with the future of the American economy – and that suggests that Geithner remains the senior public official worldwide who is most in thrall to the self-serving ideology of big banks.

Geithner argues that the world will now experience a major “financial deepening,” owing to growing demand in emerging markets for financial products and services. He is thinking, of course, of “middle-income” countries like India, China, and Brazil. And he is right to emphasize that all have made terrific progress and now offer great opportunities for the rising middle class, which wants to accumulate savings, borrow more easily (for productive investment, home purchases, education, etc), and, more generally, smooth out consumption.

But then Geithner takes a leap. He wants US banks to take the lead in these countries’ financial development….(column continues at Project Syndicate.)