Category: Interviews

Simon on NPR Planet Money Today (10/8)

Simon Johnson will be on NPR’s Planet Money podcast today. Planet Money is a new, daily podcast focusing on the financial crisis, and is one of the best places for friendly, accessible reporting on daily events. You can find the podcast feed on the NPR web site, or you can look for Top Podcasts in iTunes. (Planet Money is currently #1, which means it has displaced my favorite radio show, This American Life.) Today’s episode will be available after 5 pm U.S. Eastern time. Once it’s up, I’ll put a direct link on this post.

Update: The podcast is up, and you can listen to it here. Simon is about 12 minutes in, but he is preceded by Amir Sufi, who does a good job describing the relationship between the credit crunch and the ongoing slowdown in the real economy.

Wake Up and Smell the European Coffee

At a Brookings panel today and even more so on a LA-based NPR radio show (“To the Point,” KCRW) just now, the impact on the “real economy,” i.e., people and businesses outside the financial sector, was the issue of the day. And people are beginning to understand the serious consequences of our financial system problems, with or without the Paulson Plan becoming law this week.

Here’s what I suggested at Brookings this morning, for the US, which is pretty close to what is in our Baseline Scenario, First Edition:

  1. Tell everyone that their deposits are safe. Explain that no one has ever lost a penny when the FDIC has been involved and, de facto, they always pay all depositors, even those with over $100,000. I recommend removing the deposit insurance cap. In other words, do what it takes to stop the run.
  2. Then work on bank recapitalization, right away (I think you can see the consensus moving in this direction already this week; I’ll try to post on the emergent schemes tomorrow)
  3. And deal directly with the underlying troubled mortgages (again, I hear ideas emerging fast; give that a couple more days before I do a survey)
  4. And get ready to provide a substantial fiscal stimulus. But don’t even think about this unless you have done 1, and much of 2 is in place, and the programs to deal with 3 are on their way.

Perhaps the overlooked issue of the week was the speed with which the crisis is clearly going global, with now a long list of European countries having banks in trouble. Europe also needs to stop the run on their banks before it gets out of hand.

One sensible way to do this would be with a large Europe-wide fund to inject capital and receive preferred equity in banks, on terms advantageous to taxpayers. Yes, this is point 2 above, on steroids. Of course, they have to deal with underlying domestic mortgages in Ireland, the UK and Spain (but not yet in other countries). The danger in Europe is that they don’t have as much fiscal space as the US (so point 4 is an issue) and their central bank is stuck with a mandate (i.e., just worry about inflation) that would have been nice to have in the 1970s, but may not be quite so appropriate today.

The severity of the global recession is going to depend, in large part, on the speed with which governments in Europe can organize swift, comprehensive and decisive support for their banking systems.  And, following that, it will depend on exactly how the process of deleveraging (this is jargon essentially, meaning reduced lending by the financial sector) is handled.

The latest news from Europe (timely, thanks to the Financial Times): there will not be an immediate systematic rescue.  It’s the French who seem to have understood what is really going on.  Unfortunately, as of now, their European partners have not yet woken up to the new realities.  In particular, Germany and perhaps the UK seem to stand in the way of a more systematic approach.  This has dangerous implications for the US.

Days to the election: 34

Henry’s Ark

In case you missed it, Simon (my co-author) was interviewed by Scott Simon this morning on Weekend Edition. One point he made, that I don’t believe has gotten a lot of attention in general, was about the global implications of the bailout plan. One way of putting this is that the plan creates a “Noah’s Ark” for financial institutions to escape the storm, but the next question is who will get a ticket onto the ark. The original legislative proposal would only have authorized Treasury to buy assets from “any financial institution having its headquarters in the United States.” While there was talk over last weekend about possibly including foreign banks, or their subsidiaries in the U.S., that was not mentioned in Thursday’s bullet-point agreement between the Executive Department and Congress (the one that was blocked by the House Republican caucus). Indeed, it seems hard to believe that Congress or the American public would be able to stomach a bailout of foreign banks. But if the reason to save financial institutions is the risk of cascading disruption to their counterparties – and that was the reason cited for both Bear Stearns and AIG – we have to be aware of the risk presented by global banks such as UBS that would have similar counterparty effects. While I’m not suggesting that the U.S. bail out every major non-U.S. bank, someone may have to, and right now there is a distinct lack of a coordinated global response.

Update: 9:20pm, Saturday, September 27th, the Financial Times on-line edition is reporting that Bradford and Bingley, a UK mortgage lender, will be nationalized tomorrow.  Sounds like Gordon’s Ark just got a bit bigger.

There Is No Alternative. Really?

This morning (September 25, 10am) I was on the Diane Rehm show, on WAMU.  The guest host, Frank Sesno, did a great job of moving the conversation from today’s White House Summit on the bailout plan to the likely impact on the global economy, with relevant stops along the way.  We spent a great deal of time on alternatives.

It turns out, of course, that there are alternatives to the current bailout plan — even if you agree that there is a serious problem and we need to move fast.  In fact, perhaps the one thing all three guests could agree on is the availability of workable alternatives.

I was really struck by Ken Rogoff’s points about the need to take over and close down many banks.  I think he puts more weight on that part of any sensible approach than I do at present, but I’m definitely taking his points on board.

The more I talk with people, the more I hear agreement that we really need to address the problems of homeowners who are having trouble with their mortgages.  It’s actual and expected defaults that got us into this mess, and attacking that issue directly is the best way to make sure we really get out.

Think of it like this.  The Treasury wants to use its balance sheet (i.e., it’s ability to borrow at low interest rates) to help the banking system get back on its feet.  If a substantial amount of taxpayer money is on the table, which it apparently is, let’s talk more about how to use the Treasury balance sheet to help homeowners get back on their feet.