Category: Commentary

Foreign Money, National Security, And The Midterm Elections

By Simon Johnson

Campaign contributions by non-citizens are a huge issue lurking behind the midterm elections; they will be even more important in 2012.  Think about the economic dynamics:

  1. Americans have a long-standing and well-founded aversion to foreign involvement in their politics, and it is well-established that this can happen in part through corporate “commercial” structures.  Thomas Jefferson objected to Alexander Hamilton’s plan for a national bank in part because he feared this would become a stalking horse for the British in some form (see Chapter 2 of 13 Bankers for the context).  Dubai Ports World was not allowed to invest in the United States – for reasons of perceived national security.  You may or may not think that case was handled well, but we have the CFIUS process to vet foreign direct investment for good reason.
  2. The Supreme Court has determined that corporations can make political contributions virtually without limit, apparently not understanding or not caring that (a) management has a fiduciary responsibility to shareholders, (b) globalization means more foreign shareholders on average (for privately held companies and funds, as well as publicly traded companies), and (c) at the margin, key strategic shareholders – the people who provide extra capital when the chips are down – increasingly tend to be foreign.  Think about the role of Sovereign Wealth Funds in providing funds to our banking system in 2007-08, or the fact that Citigroup goes cap-in-hand to Saudi Arabia every decade or so.
  3. During the Reagan years and again, even more, under the Second President Bush, the US ran a large current account deficit – reaching 6 percent of GDP before the 2008 crisis (and still around 3 percent of GDP).  You may think this a technical detail that is largely irrelevant to the political process, but you would be wrong.  We finance our current account deficit with capital inflows from abroad or, to put that more plainly: Foreigners buy and hold financial assets in the United States.  Some of those assets are US government obligations but traditionally and increasingly non-US people have also acquired claims on corporate entities – including common or preferred stock. Continue reading “Foreign Money, National Security, And The Midterm Elections” →

Telecom Tech Support

By James Kwak

I’ve recently been making you suffer through my struggles with the telecom industry. To show that I appreciate your patience, I wanted to recommend to you a brilliant cartoon on telecom tech support, from the inimitable XKCD. I would reproduce it here, but that seems like it would violate fair use, so you’ll have to go over there.

Don’t forget to check out the mouseover (place your pointer over the cartoon and wait for a few seconds).

Who’s In Charge Here? Not The G20

By Simon Johnson

Most accounts of the ministerial meeting last weekend of the Group of 20 — 19 nations plus the European Union that represent the world’s wealthiest economies —implied that it continued to perform sterling service – heading off currency wars, keeping explicit protectionism under control and deftly managing the process of reforming governance at the International Monetary Fund.

Post-financial crisis, middle-income countries continue to rise in economic importance, and the recent shift in global leadership from the Group of 7 (the United States, Canada, Britain, Italy, France, Germany and Japan) to the G-20 is commonly supposed to accommodate the growing claims of “emerging markets” on the world stage.

This interpretation is correct as far as it goes, but it also misses the main story, which is that emerging markets have two primary goals that are increasingly at odds with each other. These goals – to hold large stocks of American dollars and to stave off a flow of capital from abroad – add up to wanting to retain the emerging markets’ recently achieved status of collective net creditors (i.e., being owed more than they owe). Unfortunately, this contributes to the serious vulnerability of the world economy as we head into the next credit cycle. Continue reading “Who’s In Charge Here? Not The G20” →

Beyond Crazy

By James Kwak

Daniel Hamermesh points out a Wall Street Journal article on how colleges and universities are trying to increase accountability and productivity by measuring costs and benefits quantitatively. The “star” example is Texas A&M, which created a report showing a profit-and-loss summary for each professor or lecturer, where revenues are defined as external grants plus a share of tuition (if you teach one hundred students, you are credited with ten times as much revenues as someone who teaches ten students).

Let’s not argue about whether our colleges and universities are doing a good job. Let’s not even argue about whether we need more transparency and accountability in higher education. Assuming we do, this is just about the most idiotic way of doing it that I could imagine. No, wait; there’s no way I could have imagined something this stupid.

Continue reading “Beyond Crazy” →

Shape-Shifting Deficit Hawks

By James Kwak

We appear to be a week way from an election that, while really about persistent high unemployment, on the talking-point level is largely about deficits, with the Republicans continuing their usual posturing about cutting deficits without raising taxes or explaining what spending programs they are going to cut. Robert Pollin has contributed an analysis of the deficit hawks’ argument that is valuable for pointing out that there actually four deficit hawk arguments. In his words:

“1. The traditional view. Large fiscal deficits will cause high interest rates, large government debts, and inflation.

“2. Declining business confidence is the real danger. Even if the current deficits have not caused high interest rates and inflation, they are eroding business confidence. When business confidence is low, the economy is highly vulnerable to small changes in conditions, what some economists call ‘non-linearities.’

“3. Fiscal stimulus policies never work. New Classical economists, Robert Barro most notably, have long argued that the multiplier for fiscal stimulus policies is zero or thereabouts.

“4. A long-term fiscal train-wreck is coming. Regardless of short-term considerations, we are courting disaster in the long-run with structural deficits that the recession has only worsened.

Pollin also has the grace to point out that, for the deficit hawks to be correct, only one of these arguments has to be correct.

Continue reading “Shape-Shifting Deficit Hawks” →

Food and Finance

By James Kwak

I just read Michael Pollan’s book, In Defense of Food, and what struck me was the parallels between the evolution of food and the evolution of finance since the 1970s. This will only confirm my critics’ belief that I see the same thing everywhere, but bear with me for a minute.

Pollan’s account, grossly simplified, goes something like this. The dominant ideology of food in the United States is nutritionism: the idea that food should be thought of in terms of its component nutrients. Food science is devoted to identifying the nutrients in food that make us healthy or unhealthy, and encouraging us to consume more of the former and less of the latter. This is good for nutritional “science,” since you can write papers about omega-3 fatty acids, while it’s very hard to write papers about broccoli.

Continue reading “Food and Finance” →

An Early Stress Test For The Financial Stability Oversight Council

By Simon Johnson

How much damage to the financial system should we expect from what is now commonly called the foreclosure morass, the still-developing scandal involving document robo-signing (and robo-dockets), completely messed up mortgage paperwork and high-profile inquiries into accusations of systematic and deliberate misbehavior by banks?

The damage to banks’ reputation is immeasurable. They have undermined property rights – the ability to establish clear title is a founding idea of the American republic. They have mistreated customers in a completely unacceptable manner. If anyone doubted the need for a new consumer protection agency dealing with financial products – and the importance of having a clear-thinking reformer like Elizabeth Warren at its head – they are presumably silenced by recent events. (If you need to get up to speed on the basics of this issue, see this series of posts by Mike Konczal.)

But what is the cost in terms of additional likely losses to big banks? The likely size and nature of these are leading to exactly the kind of systemic risks that the Financial Stability Oversight Council was recently established to anticipate and deal with. Continue reading “An Early Stress Test For The Financial Stability Oversight Council” →

Finance and the Housing Bubble

By James Kwak

Adam Levitin and Susan Wachter have written an excellent paper on the housing bubble with the somewhat immodest title, “Explaining the Housing Bubble” (which has been sitting in my inbox for a month). My main complaint with it is that it’s eighty-one pages long (single-spaced), which is most likely a function of law review traditions; had it been written for economics journals, it could have been one-third the length. I also have some quibbles with the seemingly obligatory paean to the importance of homeownership, which I think is an assumption that deserves to be contested. But overall it presents both a readable overview of the history and the issues, and a core argument I have a lot of sympathy for.

The argument is that the motive force behind the credit bubble was an oversupply of housing finance—in other words, the big, bad, banking industry. Levitin and Wachter’s key evidence is that the price of residential mortgage debt was falling in 2004-06 even as the volume of such debt was rising. As Brad DeLong’s parrot would say, that can only happen if the supply curve is shifting outward, not if the demand curve is shifting outward (which is what would happen if it were all the fault of greedy borrowers who wanted to flip houses).

Continue reading “Finance and the Housing Bubble” →

Once More into the Breach . . .

By James Kwak

I’ve been largely sitting out the foreclosure scandal/crisis. Partly I’ve just been too busy, and partly the coverage on other blogs has been great. Mike Konczal in particular has been providing the “beginners” posts–here’s part one of five–that were my niche during the earlier part of the financial crisis, basically putting me out of a job, and Yves Smith has also been all over the issue.

I want to ask one question, but for those who are not economics blogs junkies, let me get you up to speed. It first turned out that in their haste to foreclose on houses, the law firms filing for the foreclosures (in many states, you have to get a judgment from a court in order to foreclose) were cutting corners and sometimes filing fake documents. Then it turned out that sometimes they were filing fake documents because the real ones didn’t exist. In particular, it is possible that many of the trusts that issue mortgage-backed securities never had properly-endorsed copies of the notes that underlay those mortgages. (See this Yves Smith post. Highlight quote, from the CEO of a mortgage originator: “We never transferred the paper. No one in the industry transferred the paper.”)

The question is this: Why, just weeks from an election in which Democrats are probably going to get clobbered, is the Obama administration sitting on its hands, writing this off as a bunch of technicalities, and opposing a foreclosure moratorium?

Continue reading “Once More into the Breach . . .” →

Free Books and Board Seats

By James Kwak

Here in the blogging world, some of us are very sensitive to the potential appearance of impropriety. A year ago, the FTC published new rules requiring bloggers to disclose cash and in-kind payments they receive for reviewing products. The upshot, for most of us, is simply that now, when we discuss a book, we say if we got a free copy of the book from the publisher. (Although it’s not clear that that disclosure is required, since getting a free copy is something that readers should expect; I don’t think the New York Times Book Review bothers pointing out that, for every book they review, they got a free copy, although they almost certainly did.)

All the more relevant, then, is Gerald Epstein’s post about conflicts of interest in the economics profession.

“Jessica Carrick-Hagenbarth and I did a study of 19 prominent academic financial economists who were members of two influential groups that have played a key role in the financial reform and regulation debate in the U.S. Of the 19 academic economists in these groups, 70% advised, owned significant stock in or were on the board of private financial institutions. But you wouldn’t know by looking at their self-identification in media appearances, policy work or academic papers.”

There are certainly economists who were talking up the housing market in the summer of 2008 without disclosing their financial ties to banks–who were desperately hoping that housing prices would not collapse.

C’mon, guys. I don’t even get very many free books (maybe one per month on average–I decline most of them), and I always disclose that. I know it’s not feasible to list every company that ever paid you to give a speech. But really, if you’re a paid director of a bank and you write about the banking industry, can’t you at least point that out?

Nice Economy You’ve Got There . . .

By James Kwak

That, I believe, was a line from Nemo in a comment long ago, on how the megabanks were holding the federal government hostage by threatening to collapse and take the financial system with them.

The coal industry seems to have learned something. Now that the EPA is recommending revoking a mountaintop mining permit (mountaintop mining is when, instead of drilling holes to get at coal underground, you simply blow the top off the mountain), the coal company in question has this to say:

“If the E.P.A. proceeds with its unlawful veto of the Spruce permit — as it appears determined to do — West Virginia’s economy and future tax base will suffer a serious blow.

“Beyond that, every business in the nation would be put on notice that any lawfully issued permit — Clean Water Act 404 or otherwise — can be revoked at any time according to the whims of the federal government. Clearly, such a development would have a chilling impact on future investment and job creation.”

Continue reading “Nice Economy You’ve Got There . . .” →

There Are No Fiscal Conservatives In The United States

By Simon Johnson

In most industrialized countries, attention now shifts to some form of “fiscal austerity” – meaning the need to bring budget deficits under control.  In the UK, for example, there is an active debate between those on the right of the political spectrum (who want more cuts sooner) and those to the left (who would rather delay cuts as much as possible).  There is a similar discussion across the European continent – although the precise terms of the debate depend on exactly which party was most profligate during the long boom of the 2000s.

The United States stands out as quite different.  No one is yet seriously proposing to address our underlying budget issues.  There are certainly people who claim to be “fiscal conservatives” – some of the right and some on the left – but none can yet be taken seriously.  The implications are very bad for our fiscal future. Continue reading “There Are No Fiscal Conservatives In The United States” →

What Has Microsoft Come To?

By James Kwak

From The New York Times:

“Consumers will be able to integrate the new phones with a number of Microsoft products, including Zune music and video content, the Bing search engine, business products like Microsoft’s OneNote software and the Xbox gaming platform.”

Apart from possibly the Xbox, who cares? How can it be that the master of bundling now has nothing that anyone wants as part of a bundle?

Will The Volcker Rule Really Be Enforced?

By Simon Johnson

The Financial Stability Oversight Council has put out a request for comments on the Volcker Rule – if you write to them soon, they may actually listen.

One big issue is whether there will be high frequency monitoring of trades by big banks – potentially enabling regulators to know if the “no proprietary trading” rule is being violated. The default approach is probably to have a hands-off, light touch – pretty much continuing our recent and not-so-distinguished traditions with regard to supervising banks.

I go through the issues in more detail – including who seems to be on what side within the government – in a Bloomberg column that appeared this evening.