What happened to the global economy and what we can do about it
At the request of several readers, I’ve printed entire months of blog posts to PDFs for download. There is also a “Download the Blog (PDF)” link in the sidebar under navigation. This might be useful for new readers who want to catch up on a plane, or something like that.
I did this in a very low-tech way (explained after that link) so if you have suggestions for how to do it faster or more elegantly please post them there.
By James Kwak
Simon and I wrote on op-ed in the New York Times today, trying to debunk the idea that, as we put it, “A.I.G.’s traders are the people that we must depend on to save the United States economy.” The AIG bonus fiasco, as I’ve written earlier, has been particularly useful in raising the political cost of the administration’s current bailout strategy. But, as I said then, “$165 million, of course, is less than one-tenth of one percent of the total amount of bailout money given to AIG in one form or another.” And as far as the cost to the taxpayer is concerned, the big bill is for bailing out AIG’s creditors. In his op-ed in the Wall Street Journal today, Lucian Bebchuk wants to know why.
Now, the government has not explicitly guaranteed AIG’s liabilities. But the main reason for bailing out AIG in the first place was the fear that an uncontrolled failure would have ripple effects that would take down many other financial institutions who were dependent in some way on AIG; most commonly, they had bought insurance, in the form of credit default swaps, from AIG and were counting on being paid. And a major usage of bailout money has been to make whole AIG’s counterparties holding those credit default swaps, primarily investment banks trading on their own account or on behalf of their hedge fund customers.
Occasionally we get personal finance questions. Actually, we’ve gotten fewer of those questions lately, perhaps because readers realize we don’t have much to offer on that score, and that we try to avoid anything that might sound like investment advice.
Zvi Bodie, whose name you may have seen here before, has thought a lot about personal investing, and agrees with some of the positions I’ve offered here: notably, that most information about personal finance available on the market is not worth listening to. Bodie recently posted a series of 3-minute webcasts to the Boston University School of Management website where he lays out some basic advice on saving for retirement, including some of the implications of the current economic crisis. I didn’t watch all of them, but I liked how accessible they were.
By James Kwak
AIG is arguing that its people are uniquely qualified to clean up the mess they made and therefore need big retention payments.
Of course, there are many things that are different and complex about this crisis in general and credit default swaps in particular. But in every crisis I’ve ever seen, the (banking/corporate/government) insiders responsible for major problems always want to stay on – arguing that they have unique skills and can sort things out better than anyone else. Countless times around the world I’ve heard some version of, “it’s very complex, no one else can figure it out, and you’ll lose a lot more money unless you keep us on.”
Yet, whenever possible, it’s better to clean house and bring in new talent at all levels to wind down bad business and more generally clean up/recapitalize/reprivatize the financial sector.
In the New York Times print edition (p.A25) this morning and online, James and I elaborate on why this is – drawing particular parallels with the Asian crisis of the late 1990s.
By Simon Johnson
Here is Ben Bernanke’s problem.
1. The financial sector is busy setting up arrangements in which employees are guaranteed high levels of compensation if they stay on through the difficult days ahead. These retention-type payments allow firms to survive in their existing form, pursue business-as-usual, and gamble for resurrection, i.e., make further risky investments.
2. But these same payment schemes, e.g., Goldman Sachs’ loans-for-employees deal, are a form of poison pill with regard to further bailouts – the Administration may want to help these firms down the road, but this kind of tunneling means Congress will put its foot down. Do you think that President Obama’s $750bn for bailouts (scored as $250bn) will survive the budget process? No New Bailout Money is a slogan reaching from here to the midterm congressional elections.
3. And the financial system is in big trouble. Unless the economy turns around, somewhat miraculously, we are in for a big slump. Or even for a Great Depression – watch closely the words and body language in Bernanke’s interview on 60 Minutes.
The big banks are essentially making themselves Too Politically Toxic To Rescue, and this has potentially bad macroeconomic consequences. So what will Bernanke do? Continue reading “Causes Of A Great Inflation: Tunneling For Resurrection”
We are going to start experimenting with Twitter. I’m not sure how we’re going to use it, but our handle is baselinescene and you can find it here. Simon and I are sharing one account and, if we remember, will put our initials at the end of updates so you can tell who is who. We will probably use it to announce new posts (but probably not all of them, since right now I don’t know how to do it automatically), link to articles we find interesting but don’t have time to blog about, and broadcast random thoughts about the economy. (Don’t expect to find what we ate for lunch – unless it’s really good.) If this doesn’t turn into something useful, we’ll stop using it.
I’m not going to explain what Twitter is and how to use it, because I don’t really know. If you don’t know and you’re curious, ask someone under the age of 30.
Update: Thanks to the reader who pointed out twitterfeed, our new blog posts are now automatically added to our Twitter updates.
Also, for those who may be worried: If you ignore Twitter, you won’t be losing out on anything important; there’s nothing we do on the blog today that we are moving to Twitter.
Email updates
Several people have pointed out that our automated email updates do not include the name of the author for each post. This is a problem with Feedburner (the service we use to generate and send these updates) and there is no known solution.* So we have decided to start manually adding our names at the end of posts from now on. Since this is manual, we may forget from time to time; you can always find out who the author is by visiting the post itself on the web.
* We can’t use FeedFlares because we use WordPress.com, which doesn’t allow Javascript.
By James Kwak
In the past, several of our readers have asked if we could help organize some sort of popular political movement to protest some of the policies that we have criticized. That isn’t anything we have any experience or expertise in, however.But in case you are interested, I wanted to let you know about a new group called A New Way Forward that is organizing rallies on April 11. Their platform is pretty straightforward:
NATIONALIZE: Experts agree — Insolvent banks that are too big to fail must incur a temporary FDIC intervention – no more blank check taxpayer handouts.
REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.
DECENTRALIZE: Banks must be broken up and sold back to the private market with new antitrust rules in place– new banks, managed by new people. Any bank that’s “too big to fail” means that it’s too big for a free market to function.
A New Way Forward is being organized by two people from the Participatory Politics Foundation, although the two groups are not officially related.
By James Kwak
A reader reports his firm has blocked Internet access to BaselineScenario.com, and his requests to change this policy have so far gone unheeded.
Access to our site has been blocked in the past by China – for reasons that should be obvious (if you want to pretend there is no global crisis). But what kind of firm would not want its employees to access our macroeconomic analysis, Financial Crisis for Beginners, or your continuing debate about how to handle the world’s myriad financial sector problems?
Oh, yes… Continue reading “Baseline Blocking”
The G20 needs a deal. It doesn’t make much sense to pull 20+ global leaders together on April 2nd unless you can announce an agreement with some bearing on the current worldwide slump. One more meaningless communique might not go down well with the markets. You can always trot out the same platitudes, but the world’s best journalists will be in attendance and it would be much better to have something concrete on display.
Time is running out for the deal makers. There appear to be no grounds for the US and Europe coming together in a meaningful way on fiscal policy: the US want everyone to commit to some (universal?) target; the Europeans either really don’t want that (Germany) or rightly feel they can’t afford it (most of the rest of the EU). Regulatory agendas intersect but only at the general level of, “we should do better” and ” it was your banks that got us here” – the AIG counterparties list make it clear that already-regulated large institutions in both the US and Europe are the problem. And the US Administration is waiting for Congress on regulation – this will take 6 months or more to sort out.
All of which leaves one main item around which there can be convergence: the IMF. And for this, China’s exchange rate is the issue. Continue reading “Chinese Dissonance”
$165 million, of course, is less than one-tenth of one percent of the total amount of bailout money given to AIG in one form or another. Yet it may turn out to be the $165 million that broke the camel’s back.
The AIG bonus saga neatly encapsulates many of the problems that we have identified with the financial system and with the bailout to date.
Adam Davidson at Planet Money recently asked, “Who Do We Blame?” Which, I think, is a perfectly legitimate question. While the most important things are getting ourselves out of this crisis and reducing the chances of another one happening, asking who is at fault for this one is a reasonable exercise, for at least two reasons: first, it responds to our basic human curiosity; second, since many of the parties involved care only about their reputations (Bush, Clinton, Greenspan, Paulson, etc. have enough money for several lifetimes), going after people’s reputations is one of the few ways to create some measure of accountability. Politicians who inveigh against “pointing fingers” usually have something to hide.
I started writing a comment on the Planet Money thread, but they have a character limit on comments, and it’s hard for me to write anything in fewer than 1250 characters. So I emailed them my response and, what do you know, they put it up as a post on their blog. To save you any suspense, I think that if you are going to blame any individual (as opposed to, say, a whole category of activity, like “lax loan underwriting”), it should be Alan Greenspan, for reasons described further in that post.
Update: My friend Dave Sohigian blames an entire generation.
More extra-credit reading while on spring break: Sanjiv Gupta has an article at The Huffington Post about the relationship between the financial crisis, our banking sector, and democracy. The central question, as I see it, is an old one: how to ensure that a democratic political system is not undermined by a non-democratic economic system. Gupta suggests, as one possible step, a national credit union to compete with private-sector banks. To think about this in detail, we’d have to think about why we (most of us, including me) instinctively think that the following the profit motive is generally the right way to allocate capital. That’s something I hope to devote more space to later.
Stabilization programs in emerging markets often come down to this: the government needs to do something unpopular, e.g., reduce some subsidies, privatize an industry, or eliminate the crazy credit that goes to oligarchs – no one likes oligarchs, but their factories employ a lot of people. There is naturally resistance – pushback from legislators, riots in the streets, or oligarchs calling their friends in the US foreign policy establishment. The question becomes: does the government have the “political will” to get the job done?
In fall 1997, a key issue for Indonesia’s IMF program was whether the government could close the banking operations belonging to one of President Suharto’s sons. There was an epic and fascinating struggle and, in the end, the government did not have sufficient political will or power. The subsequent loss of US support, and further currency and economic collapse is (messy and painful for many) history.
It is striking that Ben Bernanke now asks whether the United States today has sufficient political will. Continue reading “Political Will: Bernanke On The True Cost Of Banking”
A fundamental principle that we all hold dear is: in industrialized countries, with relatively high income levels, the government can’t be completely out to lunch. After all, we reason, there are democratic processes, watchdogs of various kinds, and we can safely delegate monitoring of government official actions to others (e.g., the media).
This principle is, of course, now appropriately called into question both for government officials directly and increasingly for the media’s scrutiny of what the government (and business) is doing. As a result, the level of public attention to various domestic policies – bailouts and the like – is surely at or close to all-time highs; the current reaction time and seriousness in public discussions of various initiatives for banks must set some sort of record.
Yet there remains at least one completely murky and unaccountable area of government action: international economic diplomacy. Continue reading “Much Worse Than You Think: International Economic Diplomacy”
I’m continually amazed by how easy it is for government officials to hoodwink most of the news media. All it takes is for a couple of leading finance ministers to get on roughly the same page, and we’re reading/hearing about “substantial progress” or “major steps forward.” If someone provides an articulate background briefing to a leading newspaper on the supposed debate within a group of countries, this becomes the dominant news story.
Saturday’s G20 meeting of finance ministers and central bank governors is a leading example. It was a disaster – we face what officials readily concede is the biggest financial and economic crisis since the 1930s, yet this conclave agreed precisely nothing that will make any difference. If the G20 heads of government summit on April 2nd is a similar failure, we will be staring at the real possibility of a global catastrophe. Yet the spinning storytellers of the G7 have still managed to get much of the press peering in entirely the wrong direction.
For more on what would the right direction, take a look at my piece in Britain’s Sunday Telegraph.
The Baseline Scenario 