The Deficit Problem Is a Political Problem

By James Kwak

By which I do not mean to say it is not a problem. As Paul Krugman reminds us,

“If bond investors start to lose confidence in a country’s eventual willingness to run even the small primary surpluses needed to service a large debt, they’ll demand higher rates, which requires much larger primary surpluses, and you can go into a death spiral.

“So what determines confidence? The actual level of debt has some influence — but it’s not as if there’s a red line, where you cross 90 or 100 percent of GDP and kablooie . . . Instead, it has a lot to do with the perceived responsibility of the political elite.

“What this means is that if you’re worried about the US fiscal position, you should not be focused on this year’s deficit, let alone the 0.07% of GDP in unemployment benefits Bunning tried to stop. You should, instead, worry about when investors will lose confidence in a country where one party insists both that raising taxes is anathema and that trying to rein in Medicare spending means creating death panels.”

The implication is that our deficits really are a serious problem. But what’s making them a serious problem is not just that they are big and getting bigger; it is that our political system seems incapable of dealing with them. So, ironically, deficit peacocks are right that the deficit is a problem, but only because they refuse to do anything about rising health care costs — since the long-term deficit problem is a health care cost problem.

More Bank Marketing

By James Kwak

I’ve already criticized Citigroup CEO Vikram Pandit’s testimony before the TARP Congressional Oversight Panel on Thursday, but there’s one thing I left out. Citigroup, like other banks not named Goldman Sachs, is attempting to cloak itself in a mantle of goodness. Pandit’s testimony included several bullet points discussing all the wonderful things that Citigroup is doing for ordinary Americans. For example: “In 2009, we provided $439.8 billion of new credit in the U.S., including approximately $80.5 billion in new mortgages and $80.1 billion in new credit card lending.”

Continue reading “More Bank Marketing” →

Uncontrolled Lending to Consumers Spawned the Financial Crisis

This guest post was contributed by Norman I. Silber, a Professor of Law at Hofstra Law School, and Jeff Sovern , a Professor of Law at St. John’s University. They were principal drafters of a statement signed by more than eighty-five professors who teach in fields related to banking and consumer law, supporting H. 3126, which would create an independent Consumer Financial Protection Agency. Some of the research on which this essay is based is drawn from an article by Professor Sovern.

Did under-regulated lending to consumers play a big part in destabilizing the financial system? Many knowledgeable people say yes, but Professor Todd Zywicki disagrees. (“Complex Loans Didn’t Cause the Financial Crisis,” Wall Street Journal, February 19, 2010). He claims that the present troubles resulted from the “rational behavior of borrowers and lenders responding to misaligned incentives, not fraud or borrower stupidity.”

Professor Zywicki’s argument enjoys, at least, the modest virtue of technical accuracy, because many objectionable misleading sales practices and agreements that lenders used were, and continue to be, unfortunately, quite legal. Lending practices may have been regularly misleading and confusing and reckless-but fraudulent? Well, no, usually not unlawful by the remarkably low standards of the day. But that in itself is an argument for saying consumer protection laws failed.

Continue reading “Uncontrolled Lending to Consumers Spawned the Financial Crisis” →

Does The Obama Administration Even Want To Win In November?

By Simon Johnson

Increasingly, senior administration officials shrug when you mention the November mid-term elections. “We did all we could,” and “it’s not our fault” is the line; their point being that if jobs (miraculously at this point) come back quickly, the Democrats have a fighting chance – but not otherwise.

It may be true, at this point, that there is little fiscal policy can do that would have effects fast enough; and monetary policy is out of the administration’s hands.

But ever so quietly, you get the impression the Obama team itself is not so very unhappy – they know the jobs will come back by 2012, they feel that Republican control of the House will just energize the Democratic base, and no one will be able to blame the White House for getting nothing done from 2010 on.

When you push them on this issue, they snap back, “Well, what do you want us to do? What’s the policy proposal that we are not pursuing?” But this is exactly the wrong way to think about the issue.

Continue reading “Does The Obama Administration Even Want To Win In November?” →

Toxic Finance

By James Kwak

The first generation of financial crisis books was largely blow-by-blow, behind-the-scenes accounts, like David Wessel’s In Fed We Trust and Andrew Ross Sorkin’s Too Big to Fail — long on characters, events, and dramatic suspense (or at least as much dramatic suspense as you can have when writing about something that unfolded on the front pages of the newspaper), but relatively short on analysis. There were also more analytical books, like Justin Fox’s The Myth of the Rational Market and John Cassidy’s How Markets Fail, which seem like books about free market economics that later turned out to be about the crisis. But one thing this crop had in common is that, for the most part, they ended with the near-collapse of the financial system.

The current generation of books is not just about the crisis and what caused it, but also about the response to the crisis, and what went wrong — that is, why the large banks are bigger, more powerful, and more concentrated than ever before and why the unemployment rate is still languishing around 10%. Joseph Stiglitz’s Freefall (which I haven’t finished reading) falls into this category, focusing more on the governmental responses of 2008-2009 than on the causes of the crisis. So does Yves Smith’s ECONned, which just came out this week. (I have the early version that the publisher sent to Simon a while back.)

Continue reading “Toxic Finance” →

Is Vikram Pandit in Favor of Real Reform?

Testifying today before the TARP Congressional Oversight Panel, Citigroup CEO Vikram Pandit took pains to strike the right notes. Near the beginning of his prepared testimony, he said, “First, however, I want to thank our Government for providing Citi with TARP funds. For Citi, as for many other institutions, this investment built a bridge over the crisis to a sound footing on the other side, and it came from the American people.” Saying “thank you” may not satisfy many people, but it is a step in the right direction.

More importantly, Pandit said that Citigroup is on the side of the angels — in this case, the side of real financial reform:

“Citi supports prudent and effective reform of the financial regulatory system. America – and our trading partners – need smart, common-sense government regulation to reduce the risk of more bank failures, mortgage foreclosures, lost GDP and taxpayer bailouts. Citi embraces effective, efficient and fair regulation as an essential element in continued economic stability.”

When it comes to the substance, though, I’m not sure how much Pandit had to say that was new, although he took care to say it in the nicest way possible.

Continue reading “Is Vikram Pandit in Favor of Real Reform?” →

“No One Made People Buy These Cars . . .”

By James Kwak

The Center for Responsible Lending has a great comic strip titled “If Anti-CFPA Folks Ran Toyota Today?” with classic lines like “Fixing these cars will raise the price of cars in the future, and hurt deserving drivers.” I’m pretty sure it was directly inspired by one of my favorite posts, “If Wall Street Ran the Airlines . . .,” but that’s perfectly fine by me. We have to keep saying the same things over and over because they’re true.

Disastrous Performance By Treasury On Capitol Hill

By Simon Johnson

The campaign to convince people that Treasury is serious about banking reform – led sometimes by President Obama – suffered a major blow today on Capitol Hill. In testimony to the Congressional Oversight Panel, Assistant Secretary for Financial Stability “and Counselor to the Secretary” Herb Allison said, “There is no too big to fail guarantee on the part of the U.S. government.”

This statement is so extraordinarily at odds with the facts that it takes your breath away.

Should we laugh at the barefaced misrepresentation of what this administration has done (and the Bush team did) – or just dig out “Too Big To Fail” by Andrew Ross Sorkin and go through all the gruesome details again? Should we cry for what this implies about Secretary Geithner’s commitment to real reform – if there is no issue with “too big to fail”, then why do you need any new laws that try to address this issue (e.g., such as the Volcker Rules, sent to Congress this week)?

The temptation is to shrug and ignore repeated such insults to our intelligence and implied injury to our pocketbooks. But this would be a mistake. Continue reading “Disastrous Performance By Treasury On Capitol Hill” →

Monopolies Everywhere

By James Kwak

Thomas Frank has a review in the Wall Street Journal (behind a paywall, but Mark Thoma has an excerpt) of Barry Lynn’s new book Cornered, which apparently documents the prevalence and power of monopolies and oligopolies in lots and lots of industries, not just finance. (I guess one response would be that we have been too harsh on the banks, since everyone’s doing it; but I still think banks are special for all sorts of reasons I won’t go into here.)

The problem, as Frank says, is that “the antimonopoly tradition is a museum piece today, and antitrust enforcement has been largely moribund since federal officials during the Reagan Revolution lost interest in this most brutal form of economic intervention.” Antitrust enforcement became a question of measuring predicted changes in consumer welfare, which meant that it became the province of models. More importantly, we are now in at least our fifth consecutive administration that sees big, profitable companies as inherently good, without stopping to question how they extract those profits.

The solution is already there to hand — go back to enforcing the existing antitrust laws. And appoint Supreme Court justices who are interested in enforcing them. But that assumes that the administration cares about the issue. Do they?

(For one thing, I applied for an internship in the DOJ’s antitrust division for this coming summer . . . and I was turned down.)

Questions For Mr. Pandit

By Simon Johnson

Today, perhaps following our earlier recommendation, Mr. Vikram Pandit – CEO of Citigroup – will appear before the congressional oversight panel for TARP. (Official website, with streamed hearing from 10am).

This is an important opportunity because, if you want to expose the hubris, mismanagement, and executive incompetence – let’s face it – Citi is the low hanging fruit.

Citibank (and its successors) has been at the center of every major episode of irresponsible exuberance since the 1970s and essentially failed – i.e., became insolvent by any reasonable definition and had to be saved – at least four times in the past 30 years (1982, 1989-91, 1998, and 2008-09).

In the last iteration, Citi was guided by Robert Rubin – self-styled guru of the markets and sage of Washington, a man who likes to exude “expect the unexpected” mystique – directly onto the iceberg at full speed.

Mr. Pandit was brought in by Mr. Rubin to refloat the wreckage, despite the fact that he had no prior experience managing a major global bank. Mr. Pandit’s hedge fund was acquired by Citi and then promptly shut. And Mr. Pandit’s big plan for restructuring the most consistently unsuccessful bank – from society’s point of view – in the history of global finance: Reduce the headcount from around 375,000 to 300,000.

Here are five questions the FCIC should ask. This line of enquiry may seem a bit personal, but it is time to talk directly about the people, procedures, and philosophy behind such awful enterprises. Continue reading “Questions For Mr. Pandit” →

Why Exactly Are Big Banks Bad?

By Simon Johnson

Just over 100 years ago, as the nineteenth century drew to a close, big business in America was synonymous with productivity, quality, and success. “Economies of scale” meant that big railroads and big oil companies could move cargo and supply energy cheaper than their smaller competitors and, consequently, became even larger.

But there also proved to be a dark side to size and in the first decade of the 20^th century mainstream opinion turned sharply against big business for three reasons.

First, the economic advantages of bigness were not as great as claimed. In many cases big firms did well because they used unfair tactics to crush their competition. John D. Rockefeller became the poster child for these problems.

Second, even well-run businesses became immensely powerful politically as they grew. J.P. Morgan was without doubt the greatest financier of his day. But when he put together Northern Securities – a vast railroad monopoly – he became a menace to public welfare, and more generally his grip on corporations throughout the land was, by 1910, widely considered excessive. Continue reading “Why Exactly Are Big Banks Bad?” →

Dallas Fed President: Break Up Big Banks

By James Kwak

We’ve cited Thomas Hoenig, president of the Kansas City Fed, a number of times on this blog for his calls to be tougher on rescued banks and to break up banks that are too big to fail. This has been a bit unfair to Richard Fisher, president of the Dallas Fed, who has been equally outspoken on the TBTF issue (although we do cite him a couple of times in our book).

Bloomberg reports that Fisher recently called for an international agreement to break up banks that are too big to fail. Here are some quotations, taken from the Bloomberg article (the full speech is here):

“The disagreeable but sound thing to do” for firms regarded as “too big to fail” would be to “dismantle them over time into institutions that can be prudently managed and regulated across borders.”

Continue reading “Dallas Fed President: Break Up Big Banks” →

After The Hamilton Project

By Simon Johnson

In 2006 Robert Rubin and his allies created the Hamilton Project, housed at the Brookings Institution, to think about what a future Democratic administration would do. (Senator Obama attended the opening.)

From a tactical standpoint, this was a brilliant move. It developed people, including Peter Orszag and Jason Furman (directors of the project), trained a team, and created an agenda.

Unfortunately, financial reform was not – and perhaps still is not – on this agenda. The financial crisis more than blindsided them; it overturned their entire way of thinking about the world. At least in part, this explains their slow, partial, and unsatisfactory response. In any case, it hasn’t worked out for them – or for us.

Wednesday morning there is a potential step in another direction. (Alternative link.) There are many questions. Continue reading “After The Hamilton Project” →

The Importance of Donald Kohn*

By James Kwak

Donald Kohn recently announced that he is resigning as vice chair of the Federal Reserve Board of Governors, after forty years in the Federal Reserve system, most of it in Washington. Articles about Kohn have generally been positive, like this one in The Wall Street Journal. The picture you get is of a dedicated, competent civil servant who has been a crucial player, primarily behind the scenes, in the operation of the Fed.

It’s a bit interesting that Kohn is generally getting the soft touch given that he was the right-hand man of both Alan Greenspan and Ben Bernanke. Here are some passages from the WSJ article:

“‘Don was my first mentor at the Fed,’ Mr. Greenspan says. Mr. Kohn told Mr. Greenspan how to run his first Federal Open Market Committee meeting, the forum at which the Fed sets interest rates. He became one of Mr. Greenspan’s closest advisers and defender of Mr. Greenspan’s policies.”

“Mr. Kohn has spent the past 18 months helping to remake the central bank on the fly as Chairman Ben Bernanke’s loyal No. 2 and primary troubleshooter.”

Continue reading “The Importance of Donald Kohn*” →

Why No International Financial Regulation?

By Simon Johnson

As we fast approach the unveiling of the Dodd-Corker financial reform proposals for the Senate, it is only fair and reasonable to ask: Does any of this really matter? To be sure, some parts of what the Senate Banking committee (and likely the full Senate) will consider are not inconsequential for relatively small players in the US market. For example, putting consumer protection inside the Fed – which has an awful and embarrassing reputation in terms of protecting users of financial products – would tell you a lot about where we are going.

But our big banks are global and nothing in the current legislation would really rein them in – no wonder they and their allies sneer, in a nasty fashion, at Senator Dodd as a lame duck who “does not matter”.

For example, the resolution authority/modified bankruptcy procedure under discussion would do nothing to make it easier to manage the failure of a financial institution with large cross-border assets and liabilities. For this, you would need a “cross-border resolution authority,” determining who is in charge of winding up what – and using which cash – when a global bank fails.

To be sure, such a cross-border authority could be developed under the auspices of the G20, but there are not even baby steps in that direction. Why? Continue reading “Why No International Financial Regulation?” →