Category: Commentary

Investment Banks and the World Cup

By James Kwak

A reader alerted me to the World Cup forecasting competition, which includes links to the predictions made by several major investment banks’ models, and some data you can use if you want to give it a shot. The predictions:

JPMorgan Chase: England
UBS: Brazil (UBS also has South Africa as the team most likely to make the second round, which seems surprising.)
Goldman: Brazil
Danske Bank: Brazil

I typically root for France, because I started following soccer while living in France back in the early 1990s, but I don’t think I can this time because (a) they don’t deserve to be in the World Cup Finals, having beaten Ireland on an obvious hand ball and (b) I can’t stand their coach, who has managed to transform an incredibly talented group of players into a mediocre team.

As for who will win, I would go with Nate Silver (who recently signed with the Times for three years) if he made a prediction, but I don’t think he has.

Enjoy.

Richard Fisher (Federal Reserve Bank Of Dallas): Larry Summers, The G20, And Financial Dementia

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

Richard Fisher, president of the Dallas Fed, has long been a proponent of serious financial sector reform. As a former commercial banker, he sees quite clearly that the legislation now headed into “reconciliation” between House and Senate versions amounts to very little. He also knows that pounding away repeatedly on this theme is the best way to influence his colleagues within the Fed and across the policy community more broadly.

He is now taking his game to a new, higher level. Couched in the diplomatic language of senior officials, his speech on June 3 to the SW Graduate School of Banking was both a carefully calibrated assault on the administration’s general “softly, softly” approach to the big banks and a direct refutation of arguments put forward by Larry Summers in particular.

As the title of Mr. Fisher’s speech implies, if the legislation is not real financial reform (and it is not, according to him), then our current policy trajectory amounts to facilitating further rounds of financial dementia. Continue reading “Richard Fisher (Federal Reserve Bank Of Dallas): Larry Summers, The G20, And Financial Dementia” →

French Connection: The Eurozone Crisis Worsens Sharply

By Peter Boone and Simon Johnson

The big news is France. With sentiment worsening across Europe, France has lost its relative safe haven status – credit default swap spreads on French government debt were up sharply today.

The trigger – oddly enough – was Hungary’s announcement that its budget is worse than expected (blaming the previous government; this is starting to become the European pattern) and in the current fragile environment discussed yesterday, this relatively small piece of news spooked investors. But these developments only reinforced a trend that was already in place. Continue reading “French Connection: The Eurozone Crisis Worsens Sharply” →

The Maginot Line Illusion

By Peter Boone and Simon Johnson

Many commentators suggest Spain is now the euro zone’s Maginot line. The argument is clear: Spain, with GDP over $1.3 trillion (8^th largest in the world; 5^th largest in Europe) and its large outstanding bank and public debt, is simply too big to fail without causing irreparable harm to the euro zone financial system. If we dig in here, the reasoning goes, eurozone market upheavals can be stopped.

Just as Germany did in 1940, in past weeks global market forces circumvented this new Maginot line without serious resistance. The events that shook equity markets were not just in Spain; they were everywhere in the world. The cost of protecting against default on India’s largest private bank rose 79BP, or 44%, and the cost of protecting against major Korean banks’ default similarly rose 45%. Oil prices collapsed and emerging markets found their access to credit markets dried up. The interest rate for lending between banks in US dollars (LIBOR) shot up, and investors piled funds into their currently perceived “safe-havens” driving down the yields of German, French, and US bonds.

This pattern reflects the core problem facing world markets today. Investors have already begun to extrapolate from eurozone problems to understand that the world remains a highly dangerous place. The latent dangers include our overreliance on rapid Asian growth that might falter, the pressure for sharp fiscal tightening in nations with high deficits (other than in the world’s “safe havens”), and highly leveraged banks that continue to own toxic real estate, weak sovereign debt, and other assets. If world financial markets once again decide their risk appetite is again low, there are many unsustainable leveraged institutions and governments that are in for a tough ride. Continue reading “The Maginot Line Illusion” →

Eugene Fama: “Too Big To Fail” Perverts Activities and Incentives

By Simon Johnson, co-author of 13 Bankers

In our continuing financial debate, one of the central myths – put about by big banks and also not seriously disputed by the administration – is that reining in “too big to fail” banks is in some sense an “anti-market” approach.

Speaking on CNBC at the end last week, Gene Fama – probably one of the most pro-market economists left standing – pointed out that this view is nonsense. (The clip is here, and also on Greg Mankiw’s blog; TBTF is the focus from about the 5:50 minute mark.)

Having banks that are Too Big To Fail, according to Fama, is “perverting activities and incentives” in financial markets – giving big financial firms,

“a license to increase risk; where the taxpayers will bear the downside and firms will bear the upside.” Continue reading “Eugene Fama: “Too Big To Fail” Perverts Activities and Incentives” →

The Future of Personal Computing, Part 2

By James Kwak

(This is Part 2 of 2; Part 1 covers the shift in personal computing from the age of the standalone PC to the age of cloud computing.)

We left off with the idea that personal computing was inexorably, though slowly shifting toward a Web-based model in which our computers’ main purpose is to run browsers and we spend most of our time on the Internet. A decade ago when this idea became popular it was not particularly practical, because you simply couldn’t do very interesting things in a browser; it was originally designed, after all, for reading static web pages. But in the past decade, web sites have become much richer and interactive — think about something like Gmail, with its automatic refreshing and keyboard shortcuts, or Google Documents, which allows multiple people to edit a document at the same time — to the point where most of what people do most of the time can be done in a browser.

But then there was Apple.

Continue reading “The Future of Personal Computing, Part 2” →

Regulatory Capture Underground and At Sea

By James Kwak

First there was the financial crisis. Then there was the West Virginia mine explosion. Now we have the BP oil leak. In each case, we were treated to news stories about the cozy relationships between the industry and the regulators who were supposed to be regulating it. (Here’s the latest New York Times story on how the Minerals Management Service was captured by industry — a problem that has existed for a long time, but that the Obama administration apparently did little to fix.)

Occasionally people say that the story we tell in 13 Bankers is really the same in every industry. That would not surprise me. I do think that the financial sector is unusual for a couple of reasons. One is that the interconnections between the major financial institutions make each one too big to fail in a way that, say, Enron was not. Another is that modern finance is so complex that it makes it easier for industry lobbyists to run roughshod over congressional opponents. But the problem of regulatory capture is obviously not restricted to finance, and it is a problem that we are seeing all over.

I’ve been meaning to write about this, but I haven’t had and won’t have the time. Arianna Huffington wrote an article on the parallels between the financial crisis and the West Virginia mine disaster. Lawrence Baxter has two recent posts (on his new blog) on regulatory capture and the role of regulation. Obviously this problem is not easily solved, especially in the wake of the Citizens United decision, which gave corporations even more influence over our political life. But hopefully the BP oil leak will produce a wave of anger — and a demand for answers — similar to what the financial crisis gave rise to.

The Future of Personal Computing, Part 1

By James Kwak

This week, Apple passed Microsoft to become the most valuable technology company in the world (measured by the market value of its stock).* I’ve been wondering about Apple and, in particular, why “apps” — which at first glance struck me as a giant step backward in computing technology — have gotten so much buzz in the media. Then I bought an iPad, and while I understand apps a little better, I’m still perplexed. But since this isn’t a particularly technology-savvy audience, this is going to take some setting up. The background is here in Part 1; Part 2 will be coming shortly.

(Note that here I’m talking about personal computing, which is what people like you and I do on our own; enterprise computing is something very different that I’ve written about before, and still largely takes place on mainframe computers.)

A Little Background

Rather than recap the entire history of computing (hilarious synopsis here, hat tip Brad DeLong), I’ll start in the early 1990s. At this point, many people had personal computers, but for the most part they weren’t connected to anything except maybe a printer. (Actually, in the early 1980s my father brought home one of those primitive modems where you actually placed your phone receiver into a socket to communicate, so we could log into the mainframe at his university, but that was the exception.)

Continue reading “The Future of Personal Computing, Part 1” →

The Consensus On Big Banks Shifts, But Not At Treasury

By Simon Johnson, co-author 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

Attitudes towards big banks are changing around the world and across the political spectrum. In the UK, the new center-right government is looking for ways to break them up:

“We will take steps to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this will take time to get right, the commission will be given an initial time frame of one year to report.”

The European Commission, among others, signals that a bank tax is coming; presumably, as suggested by the IMF, this will have higher rates for bigger banks and for banks with less capital. And other European officials are increasingly worried by the lack of capital in German banks, by the recent reckless lending sprees in Ireland and Spain, and by the dangers posed by banks that are much bigger than their home countries (e.g., Switzerland).

Yet top Obama administration officials refuse to change their opinions in the slightest; they have dug in behind the idea that they represent the moderate center on banking policy. This is a weak position; it is simply a myth with no factual basis – the people who pushed effectively for more reform over the past few months were the center, not the left, of the Democratic party. Continue reading “The Consensus On Big Banks Shifts, But Not At Treasury” →

Is The SEC Still Working For Wall Street?

By Simon Johnson

The Securities and Exchange Commission (SEC) under Mary Shapiro is trying to escape a difficult legacy – over the past two decades, the once proud agency was effectively captured by the very Wall Street firms it was supposed to regulate.

The SEC’s case against Goldman Sachs may mark a return to a more effective role; certainly bringing a case against Goldman took some guts. But it is entirely possible that the Goldman matter is a one off that lacks broader implications. And in this context the SEC’s handling of concerns about “high frequency trading” (HFT) – following the May 6 “flash crash”, when the stock market essentially shut down or rebooted for 20 minutes – is most disconcerting. (See yesterday’s speech by Senator Ted Kaufman on this exact issue; short summary.) Continue reading “Is The SEC Still Working For Wall Street?” →

So Damn Little Money

By Simon Johnson

The financial reform legislation currently heading into a June Senate-House conference will, at best, do little to affect the incentives and beliefs at the heart of the largest banks on Wall Street. Serious attempts to strengthen the bill through amendment – such as Brown-Kaufman and Merkley-Levin – were either shot down on the floor of the Senate or, when their prospects seemed stronger, not allowed to come to a vote.

Senator Blanche Lincoln is holding the Alamo with regard to reining in the big broker-dealers in derivatives. But these same people are bringing to bear one of the most intensely focused lobbying campaigns of recent years, bent on killing her provisions (or weakening them beyond recognition). All the early indications are that the lobbyists, once again, will prevail.

At one level, Robert Kaiser nailed this topic in his recent book, “So Damn Much Money: The Triumph of Lobbying and the Corrosion of American Government.” Elections have become more expensive, with most of the funding provided by special interests. You can argue about which is the chicken and which is the egg, but the basic facts are inescapable. Continue reading “So Damn Little Money” →

Wall Street CEOs Are Nuts

By James Kwak

“Geithner’s team spent much of its time during the debate over the Senate bill helping Senate Banking Committee chair Chris Dodd kill off or modify amendments being offered by more-progressive Democrats. A good example was Bernie Sanders’s measure to audit the Fed, which the administration played a key role in getting the senator from Vermont to tone down. Another was the Brown-Kaufman Amendment, which became a cause célèbre among lefty reformers such as former IMF economist Simon Johnson. ‘If enacted, Brown-Kaufman would have broken up the six biggest banks in America,’ says the senior Treasury official. ‘If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.'”

Oh, well.

That’s one passage from John Heileman’s juicy article in New York Magazine. It provides a lot of background support for what many of us have been thinking for a while: the administration is happy with the financial reform bill roughly as it turned out, and it got there by taking up an anti-Wall Street tone (e.g., the Volcker Rule), riding a wave of populist anger to the point where the bill was sure of passing, and then quietly pruning back its most far-reaching components. If anything, that’s a testament to the political skill of the White House and, yes, Tim Geithner as well.

Continue reading “Wall Street CEOs Are Nuts” →

The Last Hold Out: Senator Blanche Lincoln Against 13 Bankers

By Simon Johnson

By now you have probably realized – correctly – that “financial reform” has turned into a victory lap for Wall Street.

When they saved the big banks, with massive unconditional support (both explicit and implicit) over a year ago, top administration officials promised they would be back later to fix the underlying problems. This they – and Congress – manifestly have failed to do.

Our banking structure remains unchanged, the rules will be tweaked at the margins, and the incentive and belief system that lies behind reckless risk-taking has only become more dangerous. (The back story, if you can still stomach it, is in 13 Bankers).

There is only one small chance for any sensible progress remaining – and you are about to see this crushed in conference by the supporters of unfettered big banks. Continue reading “The Last Hold Out: Senator Blanche Lincoln Against 13 Bankers” →

Regulation vs. Structural Change

By James Kwak

Robert Reich discusses a theme that I think I’ve discussed before (and first heard expressed by Ezra Klein):

“The most important thing to know about the 1,500 page financial reform bill passed by the Senate last week — now on he way to being reconciled with the House bill — is that it’s regulatory. It does nothing to change the structure of Wall Street.”

Continue reading “Regulation vs. Structural Change” →

Why Does Steve Ballmer Still Have a Job?

By James Kwak

So, after questioning the iPad, I bought one.* My primary motivation was that I wanted to be able to watch old TV episodes on the commute to and from my internship this summer, and I think an iPod Touch is just too small. I also bought an Android phone, because my three-year-old Motorola RAZR2 v9m (who comes up with these product names, anyway?) developed a crack in the hinge, and because I wanted the best camera I could get on a phone. (My #2 use for a phone is not email — it’s taking pictures and videos of my daughter.)

Anyway, catching up on the last three years of mobile technology has provided ample food for thought. I have a long post on the Apple-Google(-Microsoft) war rolling around in my head somewhere, which I will hopefully write down later this week. In the meantime, here’s John Gruber‘s verdict on Microsoft:

“Three years ago, just before the original iPhone shipped, here’s what Steve Ballmer said in an interview with USA Today’s David Lieberman:

‘There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60 percent or 70 percent or 80 percent of them, than I would to have 2 percent or 3 percent, which is what Apple might get.’

“Not only was he wrong about the iPhone, but he was even more wrong about Windows Mobile. Three years ago Ballmer was talking about 60, 70, 80 percent market share. This week, Gartner reported that Windows Mobile has dropped to 6.8 percent market share in worldwide smartphone sales, down dramatically from 10.2 percent a year ago.”

Continue reading “Why Does Steve Ballmer Still Have a Job?” →