By Simon Johnson
In the wake of recent equity market declines, the clamor for bailouts of various kinds grows ever louder around the world. Influential voices call for “leadership” from the US and Western Europe, and for policymakers in those countries to “get ahead of the curve”. This is all code for a simple and familiar plea: Do something that will protect investors, particularly creditors who have lent a lot of money to banks and countries that now appear to be in serious difficulty.
But providing another round of unconditional creditor bailouts in this situation would be a mistake. What we need is a combination of transparent losses where bad loans were made, combined with a ring fencing approach that protects sound governments and firms. There is no sign yet that policymakers are willing to make that distinction clear.
The situation around the world is undeniably bad. As Peter Boone and I argued in a Peterson Institute policy paper released a couple of weeks ago, Europe is most definitely “On the Brink” of a serious economic crisis that could involve widespread defaults or significant inflation or both. At the same time, Bank of America shares this week fell to their lowest in 2 years; with other large banks under pressure, there is a legitimate fear of rerunning the parts of the financial crisis of 2008-09. Continue reading
Mr. Hoenig Goes to Washington
By Simon Johnson
To fix a broken financial system – and to oversee its proper functioning in the future – you need experts. Finance is complex and the people in charge need to know what they are doing. One common problem, which is also manifest in the United States today, is that many of the leading experts still believe in some version of business-as-usual.
At the height of the Great Depression, Marriner S. Eccles was summoned to Washington from Utah – where he was a regional banker. He helped remodel the Federal Reserve through the Banking Act of 1935 and then became its first independent chairman – the Fed board had previously been chaired by the Treasury Secretary. Eccles was not a fan of big Wall Street firms and their speculative stock market operations; rather he understood and identified with smaller banks that lent to real businesses. Eccles was the right kind of expert for the moment. Who has the expertise to play this kind of role in our immediate future?
Tom Hoenig, formerly president of the Kansas City Fed, has long been a strong voice for financial sector reform along sensible lines. Within the official sector, he has spoken loudest and clearest on the most important defining issue: Too Big To Fail is simply too big. And last week he took a major step towards a more prominent role, when he was announced as the administration’s nominee to become vice-chair at the Federal Deposit Insurance Corporation (FDIC). Continue reading →
89 Comments
Posted in Commentary
Tagged FDIC, Tom Hoenig