First Posted: 01- 7-10 11:20 AM | Updated: 01- 7-10 03:59 PM
Simon Johnson, the MIT professor and economist who's long been a strident critic of "too big to fail" institutions, appeared on CNBC this morning and predicted that the next phase of the financial crisis could be precipitated by banks exploiting emerging markets like China.
"We now have a financial system that is completely based on moral hazard," Johnson said. "Crazy things happen when you have a financial system like that."
Johnson rebutted the recent sunny predictions of new Bank Of America CEO Brian Moniyhan, who said the bank's economists are predicting U.S. GDP will grow at a 3 percent pace next year.
Here's Johnson:
The emerging markets are the next phase of the crisis, Johnson predicted, as large banks look to unload risk on frothy foreign investments. The banks' risk-taking, Johnson argues, is fueled by their belief that the government has shown it will bail out huge financial institutions.
Here's more from Johnson:
WATCH:
Ann Pettifor: A Tale of Two Presidents
Robert Kuttner: New Year's Resolution: Clean House
The Baseline Scenario
The Quiet Coup - The Atlantic (May 2009)
Simon Johnson - Faculty Directory - About MIT Sloan
Investing in Independent Financial Regulators
Simon Johnson: Politics vs. Finance Will Decide Economy's Path
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An ok article by David Barboza in NYTimes called, 'Contrarian Investor Sees Economic Crash in China,' alludes to Simon Johnson's premise: if China Inc. collapses God help us all...
The TARP was invested in c.hina...that`s why Timmy won`t tell us where it went....
Timmeh!
The American people aren't being heard, except for the lunatic fringe, who have nothing to offer but fear and anger and think they can gain points by outshouting everyone. Republicans fear the loss of their base and the blue dog democrats and Lieberman are more concerned about getting re-elected than doing what's right for the country. Obama had and has a plan, unfortunately his goals are much more populist in nature than the money handlers can tolerate, and his own party can't rally to his cause. The CEO class, the minority of wealthy people who control the stock market, politicians who equate political power and international influence by the strength of the corporate bottom line, are our antagonists. In a more perfect democracy what is good for the majority of American people, those of us who comrpise the backbone of this country, who pay their fair share of taxes, who look out for the welfare of all Americans, who fight our wars, would have the greatest influence over our elected officials. Too many of us are confused by our religious affiliations, worship wordsmiths who lead us astray for personal gain and succumb to divisiveness and alienation. Until we get our own house in order and deliver a stronger and more coherent message to our elected leadership, we will be increasingly impacted by the corporate structure that is profiteering from the recession and joblessness they manufactured.
Party & greed first. We retain the right to type away on our keyboards our disdain for this corrupted political system. Bleak is the word that comes to mind.
Split them up. Any corporation that's too big to fail is too much of a risk to the economy. Oh, and shouldn't a capitalist system have (foster???) competition?
(foster???) competition? yeah, in theory (or better in the propaganded economic thought). in the real world the capitalists trive to monopoly, like in state-capitalists countries like china or the UdSSR!
I also disagree..... this guy is selling his book and is an opportunistic alarmist.....CNBC's Faber came right back at him after his comment that banks are "continuing to lever up and taking large risk"...challenging this point. All indications are that they are deleveraging....in a still somewhat tumultuous financial environment. Faber pointed out that balance sheets are shrinking, and banks are being criticized for NOT taking risk and making loans to businesses. It can't be both ways, and this guy's response was ..."uhh.. uhh.." and then on to some other non-sensical sound bite. There is still lots of unwinding to do and the Obama administration and Fed should be given credit for somewhat successfully stopping the bleeding as another poster here analogized. Now is the time to review constructively what went wrong and what needs to be fixed. Skindoggy
They are insolvent and about to ask for more taxpayer money. They aren't loaning money to create businesses. They are leveraging their money on the derivatives market. "Over the Christmas holiday a nasty thing happened: Tim Geithner's Treasury Department decided to lift the cap on aid to the Government-Sponsored Entities, Fannie Mae and Freddie Mac, apparently in response to Obama administration fears that the two agencies would become insolvent. The cap was raised from $200 billion on each and government backstopping of the mortgage market will apparently now extend into infinity for at least three years, through 2012. Fannie and Freddie routinely mismarked subprime or Alt-A (a sort of purgatory class of nonprime risky mortgage, resting between subprime and prime) mortgages as prime. The Wall Street Journal explains: In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008." http://trueslant.com/matttaibbi/2010/01/04/fannie-freddie-and-the-new-red-and-blue/#more-1245
Last I read, several of the banks had repaid TARP money JP Morgan, US Bank etc.... and Bank of America was in the process of issuing additional equity to pay back the government aid upon completion(as others are contemplating as well). The govt has reviewed, and I am assuming concluded, that these banks and others are in a position to pull out of the crisis now that the panic is over, and is allowing them to do it....since ultimately, they have the final say. Regarding the cap on Fannie Mae and Freddy Mac, raising the cap is a non-issue, as these ill-coceived GSEs already are assumed to have the backing of the full faith of the US Government anyway. This action does nothing, but help stabilize the housing market to help create a floor for the market for a more orderly winding down of these distressed housing assets. The federal government can afford to wait out the market conditions until prices rise, and this is not unprecedented...as I believe a similar tactic was used during the Great Depression. Skindoggy
He said the crises is just beginning-- IF. If the banks, which are too big to fail, are allowed to take big risks in foreign markets. Obviously the answer in preventing another major crisis is REGULATION. The first step should be to repeal the Gramm-Leach-Bliley Act which allows commercial banks, investment banks, securities firms and insurance companies to consolidate; and reinstate the Glass"“Steagall Act. If you want to be a bank then be a bank. If you want to be an investment house, that's fine too. But you can't be both.
I agree but a lot of that TARP money supplied by the middle class taxpayer is paying the lobbyists that are writing the legislation that gets passed. The cesspool is a lot deeper than people realize because we are still focusing on the blame game rather than pressing for solutions. Matt Taibbi of Rolling Stone magazine has termed it "crackonomics". The Wall Street bubbles are merely legalized pyramid schemes.
True, so *we* the people have to do our part by voting (and raising money) for those who will push this regulation through and voting out those who will not. And frankly, that means more progressives--and less republicans and blue dog democrats.
Everyone had a hand in the bubble, from the congressmen who killed regulatory initiatives to the regulators who snoozed at the wheel to the GSEs to the Fed to the banks to the ratings agencies to the lenders. I don't think it's really controversial to say that, but it does seem like there's an argument brewing about what that across-the-board complicity means. This GSE story is a big one, but if it gets used as a path back to a "The Market Reacted Rationally" version of history, we're screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise"¦ the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible. http://trueslant.com/matttaibbi/2010/01/04/fannie-freddie-and-the-new-red-and-blue/#more-1245
If we do use the excuse that "The Market Acted Rationally" we are screwed. Absolutely. This is true if those that are writing the rules for "regulation" are the criminals. But we call them Congress and those writing the rules are lobbyists.
It's a symbiotic relationship that allows each to exist under the ever increasing pressure to produce quarterly profits for the share holder. Everyone at the top of the pyramid scheme knows it is unsustainable, they just have to make sure they skim all the cream before it goes sour.
It's time to start over. I was on a website the other day talking about this shift that is taking place. Time I think to go with the shift as the walls are about to come down. spiritnewsdaily.comm) I hope not, but perhaps when the whole world is bankrupted by the banks, people will start over. don
If we do fail, we can take one of two roads. We have the choice of revolution and class warfare or we may have to adapt to a European styled social Democracy and create a new manufacturing and financial base out of the ashes out of our old system of government.
I think we may end up the route of Iceland and Argentina. The difference being Argentina pulled out when the unemployed took over the abandoned factories as cooperatives and began producing and selling products. Then of course oligarchy came back trying to take control of the productive factories, only this time they were ready to defend their work both legally and physically. Iceland is past the implosion struggling to build something out of the ashes. How that will turn out will take another decade of implementing some solutions. If they don't take a structured deal from the IMF that forces them into bankruptcy again they might have a chance. We haven't failed yet. The stress fractures are springing bigger leaks with every news cycle and there is no leadership strong enough in the country to openly speak what all Americans already fundamentally know. We do not want to hear that the "American Dream" was a fairy tale. We are a nation of blind believers afraid that our faith is incapable of withstanding scrutiny.
So the banks are taking too much risk or not making enough loans? Which is correct? We need just to pass the proper legislation across the globe on equity requirements and the like. Congress? Beuller?
Why is it the conservatives aren't clamoring for the banks to be - well, conservative? When manufacturing was still happening, and tech was just heating up, the banks just plain got jealous - they saw a lot of money being made fast, and wanted in. Now, everyone knows banks always did make a lot of money - a LOT - but they didn't make it fast - compound interest doesn't work that way. So they threw a lot of money around and got the regs thrown out the window - and whoosh! - they were making a lot of (turned out to be mostly imaginary) money really FAST! Turns out they didn't know what they were doing - unless you call pounding trillions down the rathole so you could pocket billions when Uncle Sugar had to pay your pawn ticket a good business model - and now they don't want to go back to what always made a ton of money before - but didn't make it fast. Now our socialistic-universal-health-care-shifty-neighbors to the north never loosened up their banking regs, and guess what - their banking system is in the pink of health and their housing market didn't tank. Maybe shifty socialists can be secret conservatives, eh?
I disagree with this alarmism. The beginning of the resolution of the crisis began when "trench-fighting" political activists began resisting the original source of problem back when Bush and Cheney first were awarded the White House in 2000. The fight really flared up then, and it accelerated a great deal more after 9/11. All the years of struggle since then to block the Iraq invasion, and then to extract our personnel from Iraq, to end foreign occupations, and to resist the anti-American Bush regime - that was the biggest part of the struggle. Ever since then Senator Barack Obama threw his hat into the ring, things have been getting better. But when you have a big infected wound hiding just beneath the skin, the extent of the problem is not known until the doctor begins to operate. The first thing is to open the wound, drain it, cleanse it. The financial collapse was because we finally had an honest broker in charge, so we finally got the bill for the prior 8 years of wild abandon from fiscal responsibility. Now President Obama has stitched the country back together, forces are steadily being extracted from Iraq and a new level of vigilance is protecting the American economy after the messy emergency measures (blood transfusion) of the bail out.
I do agree with the cautionary tone of this, but I disagree with the level of drama with which the anxiety is addressed. These problems have been festering for longer than I've been alive. Finally people are getting serious about facing them. After having been born and raised under a cloud of nuclear paranoia, the shadow of looming ecological disaster, the moral bankruptcy of free market fundamentalism, finally everyone appears to be on the same page of the same chapter I was born on almost 35 years ago. I'm more optimistic than I've ever been in living memory.
You do make a good point. But the fact is, for many parts of the country, the economy is either stagnant or getting worse. The biggest problem we have is we can't afford to fight a war in the Mid East and we can't continue bailing out big businesses such as AIG and the financial banking system. If the stock market fails again, we will be much worse off than we are now. Main Street is still suffering and retail and service industries are still floundering. Many economists have the impression that Wall Street is on a fake high and may soon fall again because of the unregulated mortgage and derivative markets. Many of these problems have been swept under the rug and we can't forget the failing commercial real estate market as we see many retail establishments shut down. If Wall Street fails again, many investors will be out on the street along with us out here on Main Street. Taxpayer money can't sustain corporate welfare. Besides, the people of America should come first or we become a third world nation. If we do go into a deep depression, we'll eventually come out of it, but it may take a couple of generations before our economy is sound again.
So, the only reason you disagree with Johnson, who's been right before, by the way, is that you
I know that things seem awfully bleak out there but there is some good news - no, I didn't save money by switching to Geico - Obama can blame this on Bush also.
I don't know what's on the horizon, but he's 100 percent right that we made the banks bigger and created a frankenstein. How could have it been good to enable big banks to gobble up smaller ones and get even more market share? And what about these investment banks, they're not even real banks in the traditional sense, and yet they are are posting record profits because of our bailout. It's clear that we should have broken up the banks, not saved them. We at the very least should have used the small window of the awareness of this crisis to pass massive regulation on these institutions, but that didn't happen either. What happened instead is that they said the meltdown was caused not by corruption, not by outright criminal behavior on the part of the banks, with no transparency or regulation at all, but somehow cause by some families wanting a house with a mortgage they couldn't afford. IF YOU CAN'T SEE THE PROBLEM YOU CAN'T FIX THE PROBLEM.
I also believe Mr. Johnson. Here in the mountains of NC, we're seeing many businesses closing down at the start of the new year. Local malls are seeing a downturn and chain stores are having "going out of business" sales from lackluster Christmas sales. In my county alone, unemployment has risen from 14% to 16% since October. In my town, three businesses closed their stores this week, one being a chain restaurant and bar. Many other local businesses are barely hanging on as people are saving their unemployment instead of spending it because it's uncertain if another extension is in the works. I paid a visit to my local job bank last week and was told that there were only five jobs available in this county of over 80,000 people. I was told of a graphic arts position in Raleigh, NC that had received over 8,000 resumes including resumes from neighboring states. Now, we're starting to see homelessness and crime increase as people become more desperate to shelter their families this winter. The charities are just about played out and we've heard rumors of homeless families camping in the local mountains. We haven't seen anything yet.
Service industry alone will never be an economy. We need manufacturing of things the world needs Oh I forgot!! it is all gone to China so our beloved corporate crooks and banks can continue merrily hiding taxes and screwing us over and over vote GOP and dem see what you get :worse and worser. What a choice!
There is no choice. I'm relatively new to NC and came down here from PA to care for my aging father. I had no idea how bad it was until about April of this year - about a month after I arrived. This area used to be the furniture manufacturing mecca of the nation. In 2006, unemployment here was around 7%. In three years, the numbers have more than doubled. All of the manufacturers shipped every job to China or India. It wasn't because of unions, but because low wages and slave labor bring more profits to these companies and people here were paid eight to ten dollars an hour. Managers brought in about twelve to fifteen dollars an hour. Now we have many empty manufacturing plants throughout the area. The retail sector wasn't really affected until this past year when businesses began closing down. I believe three out of six people are now on food stamps and the county administrators are having difficulties in bringing in new businesses to locate here. I would leave if I could. I've already told my father that I may have to eventually relocate back to PA and he may have to go with me. But we're sitting it out for now because I'm planning on using this down time to update my skills at a local community college and Dad's house is paid for, so expenses are kept at a minimum.
There are tent cities sprouting up in Arizona and Washington state.
Hi Cavegal. Glad to see you here. I see you couldn't sleep tonight either! Your comments are always welcome, girl!
Let's hope things don't go from bad to worse...strong posts by the way!
Public relations cannot mask for long, the job losses that are continuing to mount in AMA the (Atlanta Metro Area), even if the TBTF banks are involved in overseeing or writing those monthly headline jobs data reports.
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