By Simon Johnson

A great deal of the popular anger directed at big banks is completely legitimate, as put nicely by John Cassidy at the end of his interview with Treasury Secretary Tim Geithner,

“The hardest part of his job, Geithner often says, is getting people to comprehend the inner logic of a financial-rescue operation, and the unpopular actions it entails. In fact, his problem may be not economic illiteracy but its opposite: Americans understand all too well what has happened. Financial crises have a way of revealing aspects of our economic system that otherwise remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms sometimes receive from the Fed and other government agencies, and the fact that the vast profits that firms like JPMorgan Chase and Goldman generate depend in part on an implicit guarantee from the taxpayer. When ordinary Americans are confronted with these realities, they get angry.”

Paul Volcker is also angry. Continue reading “Paul Volcker: Do The Right Economic Thing” →

By Simon Johnson: link to NPR radio interview (and book excerpt) on how 13 Bankers got their hands on so much political and economic power – and why this spells serious danger for the rest of us.

Against all the odds, a glimmer of hope for real financial reform begins to shine through.  It’s not that anything definite has happened – in fact most of the recent Senate details are not encouraging – but rather that the broader political calculus has shifted in the right direction.

Instead of seeing the big banks as inviolable, top people in Obama administration are beginning to see the advantage of taking them on – at least on the issue of consumer protection.  Even Tim Geithner derided the banks recently as,

“those who told us all they were the masters of noble financial innovation and sophisticated risk management.”

In part this is window dressing.  But in part it recognizes political opportunity – the big banks are unpopular because they remain completely unreformed and unrepentant.  And in part it responds to a very real danger – Senator Dodd’s bill is so obviously weak on “too big to fail” issues that it will be hard to paint its opponents as friends of big banks.

Senator Richard Shelby knows this and is taking the offensive.  The administration can convert an easy win into an own goal if it fails to toughen substantially Senator Dodd’s bill.

Fortunately, there is an easy way to address this issue. Continue reading “Who Will Tell The President? Paul Volcker” →

For most the past 12 months, Paul Volcker was sitting on the policy sidelines.  He had impressive sounding job titles – member of President Obama’s Transition Economic Advisory Board immediately after last November’s election, and quickly named to head the new Economic Recovery Board. 

But the Recovery Board, and Volcker himself, have seldom met with the President.  Economic and financial sector policy, by all accounts, has been made largely by Tim Geithner at Treasury and Larry Summers at the White House, with help from Peter Orszag at the Office of Management and Budget, and Christina Romer at the Council of Economic Advisers.

With characteristic wry humor, Volcker denied in late October that he had lost clout within the administration: “I did not have influence to start with.”

But that same front page interview in the New York Times contained a well placed shock to then prevailing policy consensus.  Continue reading “Paul Volcker Picks Up A Bat” →

The guiding myth underpinning the reconstruction of our dangerous banking system is: Financial innovation as-we-know-it is valuable and must be preserved.  Anyone opposed to this approach is a populist, with or without a pitchfork.

Single-handedly, Paul Volcker has exploded this myth.  Responding to a Wall Street insiders‘ Future of Finance “report“, he was quoted in the WSJ yesterday as saying: “Wake up gentlemen.  I can only say that your response is inadequate.”

Volcker has three  main points, with which we whole-heartedly agree:

1. “[Financial engineering] moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.”
2. “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy”

and most important: Continue reading ““Wake Up, Gentlemen”” →