Category: Commentary

Standing At Thermopylae

By Peter Boone and Simon Johnson

No one in official Washington is seriously worried about Greece. It’s far away, relatively small, and – anyway – “we already sent the IMF”. Under current circumstances, this is very much like saying 2,500 years ago: We sent 300 Spartans to stand against a horde of Persians, so what’s the problem?

The Greek economic situation is worsening fast – with government bond yields rising rapidly today (currently the 10-year rate is around 7.5 percent). Unless there is rapid action by the international community, this has the potential to get out of control.

There are three scenarios to consider: the nightmare, the “savior”, and the decision. Continue reading “Standing At Thermopylae” →

Greenspan: Love Him, Hate Him

By James Kwak

Alan Greenspan is just as maddening in his retirement as he was during his nineteen-year reign over the global economy. Today in his appearance before the Financial Crisis Inquiry Commission (extensive coverage by Shahien Nasiripour and Ryan McCarthy here), Greenspan seems primarily concerned with passing the buck and preserving the remaining shreds of his legacy, a pathetic quest epitomized in his “I was right 70 percent of the time” remark. At the same time, however, he does make some very blunt statements about the financial industry and financial regulation that policymakers should ignore at their peril. (I’m not saying that because Greenspan was wrong before, he must be right now; I’m saying that when the most ardent defender of free financial markets reverses course, that should increase your skepticism toward free financial markets.)

Greenspan’s prepared testimony begins with a massive attempt to pass the buck. The first two pages of his account of the financial crisis have to do with rapid economic development overseas and the accumulation of the fabled global glut of savings. But he reaches even farther back to . . . the fall of the Berlin Wall and the discrediting of communism.

Continue reading “Greenspan: Love Him, Hate Him” →

Greece And The Fatal Flaw In An IMF Rescue

By Peter Boone and Simon Johnson. This is a long post, about 3,500 words.

In 2003 the International Monetary Fund published yet another internal review with an impressively dull title “The IMF and Argentina, 1991-2001”. But hidden in that text is explosive language and great clarity of thought – in essence, the IMF staff belatedly recognized that their decision to repeatedly bailout Argentina from the mid-1990s through 2002 was wrong:

“The IMF should refrain from entering or maintaining a program relationship with a member country when there is no immediate balance of payments need and there are serious political obstacles to needed policy adjustment or structural reform” (p.7, recommendation 4).

If Mr. Trichet (head of the European Central Bank), Ms. Merkel (German Chancellor), and Mr. Sarkozy (French President) have not reviewed this document yet, they should skim it immediately. Because one day soon Greece will be calling on the IMF for a loan, and it seems mostly likely that the mistakes made in Argentina will be repeated. Continue reading “Greece And The Fatal Flaw In An IMF Rescue” →

Financial Regulation and Fools

By James Kwak

Last week I disagreed with Paul Krugman’s dichotomy between limiting banks’ scale and scope and restricting banks’ risky behavior. Today Krugman has another op-ed, this time criticizing the current Senate bill for not being sufficiently “fool-resistant.” This time, I basically agree with him.

The problem with the Dodd bill, in Krugman’s words, is that “everything is left at the discretion of the Financial Stability Oversight Council, a sort of interagency task force including the chairman of the Federal Reserve, the Treasury secretary, the comptroller of the currency and the heads of five other federal agencies.” Citing Mike Konczal,* Krugman points out, “just consider who would have been on that council in 2005, which was probably the peak year for irresponsible lending” — Alan Greenspan, John Snow, and John Dugan. (If you’re following the logic of Krugman’s argument, those would be “fools.”)

Continue reading “Financial Regulation and Fools” →

The Fourteenth Banker

By James Kwak

I wanted to bring your attention to a new blog that could turn out to be very important. It’s called The Fourteenth Banker (here’s why) and it’s hosted and written by a current banker who wants to see real change in the industry. This is from the About page:

“Despite being with a big bank, I support reform legislation ending TBTF, separation of Commercial and Investment banking, an independent consumer protection agency and other meaningful reforms. Why? I have seen first hand the perversions that happen because of some who believe that the an institution exists for them and the stockholders primarily. Countless others have been hypnotized by this illusion as well. Free market idealism is conveniently permissive of unbridled self interest. I believe in the free market. In fact, this blog is a free market of ideas and is meant to lead to a free market in banking where institutions self police as a matter of competitiveness. I have hopes of a free market where being in community in a responsible and consistent way is the path to prosperity, a free market where we recognize that if we take care of the community, the community will take care of us. It takes a sort of faith. Or does it? Is not all successful business enterprise based on providing more value than is consumed?

“That is why we are here. I invite other bankers to engage in discussion about issues and excesses in our industry and possible solutions.”

Continue reading “The Fourteenth Banker” →

Larry Summers: “Senator Kaufman is exactly right”

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

Senator Ted Kaufman (D., DE) has given three blistering speeches recently, individually and collectively cutting to the heart of the financial reform matter: the deregulation of finance has gone too far and big banks now need to be reined in; the continued prevalence of fraud among Wall Street’s biggest bankers; and why the administration’s proposed “resolution authority” would do nothing at all to end the problems associated with Too Big To Fail financial institutions.

You might think no one listens to Senate floor speeches, but you’d be wrong. Yesterday, on “This Week” (ABC), Jake Tapper asked Larry Summers – head of the White House National Economic Council and key strategist on financial reform – point blank about one of Senator Kaufman’s most important points.

Summers started this part of the interview with a fiery anti-finance industry moment, citing their lobbying spending against financial reform (“$1 million per congressman”) and arguing that the legislation currently before Congress will provide basic consumer protection, more effective regulation, and the ability to handle the failure of large financial firms. “How can anyone take the position … that we don’t need comprehensive financial reform?”

To which, Jake Tapper responded,

“TAPPER: Some Democrats say it doesn’t go far enough. Here’s Delaware Democrat Ted Kaufman talking about the Dodd bill.”

Continue reading “Larry Summers: “Senator Kaufman is exactly right”” →

Now We Are “Ill-Informed and Under-Educated”

By James Kwak

A couple of weeks ago, Max Abelson got some investment bankers who used to work at Lehman to say what they really think about ordinary people:

“[Lehman]’s just not that big of an event. But that’s not what people want it to be, so they’ll make it not that way if they can. They just want to be mad and don’t know what they’re talking about and want to be outraged.”

“When I read this, I giggle a little bit. Because $50 billion is a s—load of money, but in the grand scheme of things, $50 billion is a drop in the ocean.”

“Yappers who don’t know anything.”

Well, the commercial bankers are not taking this lying down. They are out trying to prove that they can be just as offensive.

Continue reading “Now We Are “Ill-Informed and Under-Educated”” →

Krugman on Financial Regulation

By James Kwak

Several people have asked us to comment on Paul Krugman’s op-ed yesterday (both by email and in our bookstore event yesterday), in which he contrasts the Paul Volcker school (“limiting the size and scope of the biggest banks”) with the other school (“the important thing is to regulate what banks do, not how big they get”). Krugman says he is in the latter group. But Mike Konczal* beat me to it:

“For me, it’s not an either/or but a both/and question. I think we should do both (a) and (b), impose a hard size cap of $400 billion to $500 billion and then expand regulation over all the broken-up shadow banks. If you look at the conclusion of 13 Bankers, I think Simon Johnson and James Kwak are in a similar boat.”

Continue reading “Krugman on Financial Regulation” →

The Most Dangerous Man in America: Jamie Dimon

By Simon Johnson

There are two kinds of bankers to fear. The first is incompetent and runs a big bank. This includes such people as Chuck Prince (formerly of Citigroup) and Ken Lewis (Bank of America). These people run their banks onto the rocks – and end up costing the taxpayer a great deal of money. But, on the other hand, you can see them coming and, if we ever get the politics of bank regulation straightened out again, work hard to contain the problems they present.

The second type of banker is much more dangerous. This person understands how to control risk within a massive organization, manage political relationships across the political spectrum, and generate the right kind of public relations. When all is said and done, this banker runs a big bank and – here’s the danger – makes it even bigger.

Jamie Dimon is by far the most dangerous American banker of this or any other recent generation. Continue reading “The Most Dangerous Man in America: Jamie Dimon” →

Contradicting Secretary Geithner

By Simon Johnson

Speaking Thursday morning on the Today show, Treasury Secretary Tim Geithner insisted on two points:

1. If the bank rescue of 2008-09 had been handled in any other way – for example, being tougher on bankers – the costs to the real economy would have been substantially higher.

“again, what was the choice the president had to make? He had to decide whether he was gonna act to fix [the banking system] or stand back because it might be more popular not to have to do that kind of stuff, and that would have been calamitous for the American economy, much, much worse than what we went through already.”

2. The reform legislation currently before Congress would end all concerns regarding Too Big To Fail in the future.

“The president’s not gonna sign a bill that doesn’t have strong enough teeth.”

In 13 Bankers, we disagree strongly with point #1 (see this excerpt) and find point #2 so at odds with reality that it is scary. Friday morning, also on the Today Show, I have a brief opportunity to suggest a different narrative. Continue reading “Contradicting Secretary Geithner” →

“Break Up the Banks” – in the National Review

By James Kwak

“Big banks are bad for free markets,” economist Arnold Kling (who usually blogs at EconLog) begins in the conservative flagship National Review, and it only gets better from there. “There is a free-market case for breaking up large financial institutions: that our big banks are the product, not of economics, but of politics.”

Like other conservative economists, Kling uses Fannie Mae and Freddie Mac as an example of financial institutions that grew too large through a combination of lobbying expertise and government guarantees . . . and frankly I agree with him. But he is equally unsparing of other large banks that were supposedly “pure” private actors but turned out to have their own government guarantees.

Continue reading ““Break Up the Banks” – in the National Review” →

Barney Frank Does the Right Thing

By James Kwak

The revolving door between business and government is something that Simon and I have criticized, most recently in a book you may have heard us mention once or twice. Ryan Grim of the Huffington Post reports that Barney Frank, chair of the House Financial Services Committee, has sent a message that he is serious about blocking the revolving door.

Peter Roberson was a lobbyist for the Bond Market Association (now part of SIFMA, a big securities industry lobbying organization) from 2000 to 2006 before becoming a staff member for Frank’s committee, where he was recently working on derivatives legislation. When Frank found out he was in discussions with ICE (presumably, the exchange), it sounds like Frank fired him and blocked him from lobbying the committee so long as he is chair:

“Several people have expressed criticism of the move by Peter Roberson from the staff of the Financial Services Committee to ICE, after he worked on the legislation relevant to derivatives. I completely agree with that criticism. When Mr. Roberson was hired, it never occurred to me that he would jump so quickly from the Committee staff to an industry that was being affected by the Committee’s legislation. When he called me to tell me that he was in conversations with them, I told him that I was disappointed and that I insisted that he take no further action as a member of the Committee staff. I then called the Staff Director and instructed her to remove him from the payroll and provide him only such compensation as is already owed.”

Now, it is well understood that one of the main reasons to work for a committee like Financial Services is precisely because it enables you to get better paying jobs in industry later. So I don’t know if it’s possible to block the revolving door completely. But this seems like a step in the right direction.

Capital Requirements Are Not Enough

By Simon Johnson and James Kwak, authors of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon, 2010).

The number of important people expressing serious concern about financial institutions that are too big or too complex to fail continues to increase. Since last fall, many leading central bankers including Mervyn King, Paul Volcker, Richard Fisher, and Thomas Hoenig have come out in favor of either breaking up large banks or constraining their activities in ways that reduce taxpayers’ exposure to potential failures. Senators Bernie Sanders and Ted Kaufman have also called for cutting large banks down to a size where they no longer pose a systemic threat to the financial system and the economy.

To its credit, the Obama administration recognizes the problem; according to Treasury Department officials, addressing “too big to fail” is one of the central pillars of financial reform, along with derivatives and consumer protection. However, the administration is placing its faith in technical regulatory fixes. And, as Andrew Ross Sorkin emphasizes in his recent Dealbook column, they see increased capital requirements as the principal weapon in their arsenal: “[Treasury Secretary Tim] Geithner insists that if there is one change that needs to be made to the banking system to protect it against another high-stakes bank run like the one that claimed the life of Lehman Brothers, increasing capital requirements is it.”

(Brief primer: Capital is money contributed by a bank’s owners–conceptually, their initial capital contributions plus reinvested profits–that does not have to be paid back. Therefore, it acts as a buffer to protect a financial institution from defaulting on its obligations as the value of its assets falls. The more capital, the less likely a bank is to fail. The more capital, however, the lower the institution’s leverage, and hence the lower its profits per dollar of capital invested–which is why banks always want lower capital requirements.)

Don’t get us wrong: we think that increased capital requirements are an important and valuable step toward ensuring a safer financial system. We just don’t think they are enough. Nor are they the central issue. Continue reading “Capital Requirements Are Not Enough” →

Lloyd Blankfein: Time Man Of The Year

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

In a surprise announcement earlier this morning, Time Magazine brought forward its annual “Man of the Year” award – and conferred this honor on Lloyd Blankfein, CEO of Goldman Sachs. April 1st apparently is at least 7 months earlier than anyone else has ever won this award, since it began in 1927.

As the award has previously been conferred on controversial figures (including Joseph Stalin in 1942 and Mrs. Simpson in 1936), Time also saw fit to issue a statement clarifying Mr. Blankfein’s merits,

“[Goldman is] very important. [They] help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle. [They] have a social purpose.”

A spokesperson for Goldman responded quickly,

“It was always clear to us that had [Lloyd not won], it would have been quite disruptive to the world’s financial markets. We would have had to spend money, other people would have had to replace transactions as well. Generally for us, volatility is good for our trading business, however it would not have been good for the financial markets as a whole, so it would not have been good for our business…We would not have been affected directly by our exposure to [him], but the world’s financial system would have been affected…there would have been no losses vis a vis our credit exposure.”

Now it seems the Nobel Peace Prize Committee feels pressed to follow suit. Their statement just released in Oslo begins, Continue reading “Lloyd Blankfein: Time Man Of The Year” →

“13 Bankers” In The Media

By Simon Johnson

I’ve already discussed the main points of 13 Bankers with more than a dozen interviewers across a wide range of formats; we’ll post links on the book’s site as they become available.

The Colbert Report and MSNBC aired interviews on Tuesday. Tom Keene talked to both James and me for his Bloomberg radio show – this ran about 40 minutes, so we covered a lot of ground (but I’m not sure if this is on the web). On WNYC I had an extended conversation with Mike Pesca. And here’s the Reuters coverage.

There are more discussions to come, including with Big Think (already taped) and on The Diane Rehm show tomorrow.