What happened to the global economy and what we can do about it
with 12 comments
The flurry of interest this week around ways to tax Big Banks is important, because officials in the US are "“ for the first time "“ recognizing that reckless risk-taking in our banking system is dangerous and undesirable.
But the possibility of a tax on bonuses or on "excess profits" that are large relative to the financial system should not distract us from the more fundamental issues.
Mr. Bernanke and Mr. Geithner need to admit that the Federal Reserve and New York Fed played a key role in creating this problem through misguided policies. They were part of the regulatory failure, not independent of it. When you keep interest rates very low and let balance sheets explode under your watch, we’ve seen how things fall apart.
As long as Bernanke and Geithner do not concede this point, they send a clear message to banks throughout the US and around the world that they can load up on risk again, and hope to profit "“ personally and professionally "“ from Mr. Bernanke’s next great credit cycle.
Yes, a new tax on these profits will raise money. But it will not prevent a major collapse in the future. There is no use discussing tough regulation when the previous regulators are still in charge, and they refuse to admit they were part of a system which egregiously failed. Mr. Bernanke’s speech at the American Economic Association 10 days ago was a big step backwards for those "“ such as Tom Hoenig, head of the Kansas City Fed "“ who want to send a message that there is a new regime in place to stop future crises.
One view of regulation is that you can adjust the rules and make it better – with each crisis we learn more, so eventually we can make it perfect. This appears to be the current White House position "“ there is even mention of the US becoming "more like Canada", in the (mythical) sense that we'll just have four large banks and a quite life.
Another view is that the current complicated rules obfuscate and make it easier for the financial sector (sometimes with collusion of regulators) to game and hide risk. Successive failures of regulators at large cost over the last three decades make it clear that fine tuning the system is not likely to work; every time you hear the "Basel Committee [of bank standard setters] is meeting today to discuss the details", you should wince.
The ingredients for regulatory reform need to be simple and harsh.
By all means, implement a sensible tax system that creates a punitive disincentive to size in the banking system "“ if you can figure out how to make this work. Most likely, the big banks will game this, like they have gamed everything else over the past 30 years.
But don't think taxes are the answer. We need to go back to simple, transparent regulation, and much smaller banks.
By Peter Boone and Simon Johnson
An edited version of this post appeared this morning on the NYT’s Economix; it is used here with permission. If you would like to reproduce the entire text, please contact the New York Times for permission.
Written by Simon Johnson
January 14, 2010 at 8:15 am
Posted in Commentary
Tagged with new financial tax
Terrific column, Terrific 4 ingredients for regulatory reform. Go Tom Hoenig!!!
Ted K
January 14, 2010 at 8:32 am
You know, here is what it is like. It’s like you’ve got the swine flu, you’re running an extremely high fever, and someone says “Ok, let’s stock up on orange juice and chicken soup”. That’s what the tax is–it’s orange juice in the refrigerator and chicken soup in the cupboards after you got swine flu and your about to lose consciousness.
How about this: F#*K the tax, and use the 4 ingredients for regulatory reform Professor Johnson and Peter Boone mention above. That’s the freaking swine flu VACCINE.
If Larry Summers doesn’t have his head up his rear, maybe Obama will stump for these things in the near future.
Ted K
January 14, 2010 at 8:50 am
This is spot on and simple. The regulators have toied themselves in knots about what is glaringly simple. The remarks about Basel II are particularly apposite. Basel I was a crude tool to distinguish between inter bank lending or Sovereign lending(low capital weighting) and the private sector ( high capital weighting) it was so crude that lending to a multinational was not essentially distinguished from the credit risk of Joe Six Pack. If that was bad, it soon detriorted into a major consultithon trying to assign capital weightings to all major categories on the balance sheet. Utterly bogged down in often abstruse detail it came into force “dead on arrival”. The 10 years of consultation allowed just about everyone to work out how to game the system. In short this was useless. What is needed is principles based. This is the amount of capital that we think appropriate to your activities. If you deviate in your balance of risks underwritten, then the market as well as the regulators will act in defense of the system. Why cannot the G20 simply adopt this and stick to it. That is all that is asked of them.
Max W
January 14, 2010 at 9:44 am
Another (infrequent) post from “Alan One-Note”!
Mr Johnson is working on a theory of bank regulation: how, in an ideal world, should banks be regulated.
This is a good start. But we should go further: we should have a discussion about what a proper Financial Sector should look like. Do we have a vision of what a human-serving financial sector ideally should consist of? I haven’t seen it here, nor elsewhere.
Two clarifying points: 1. I’m not calling for a new Thomas More’s Utopia, or for a Bellamy’s “Looking Backward”. I’m asking: in the framework of standard capitalism, what should stock markets, banks, and insurance companies be doing, and what should they Not be doing. 2. I don’t hope that we’ll get what is desirable in a financial system this time around; the forces arrayed against us are much too powerful. But we are at the moment fixated on reacting; chipping away with our own private chisels at the monstrosity which exists. Cannot we work to construct our own edifice, so that we can say: “Here’s the way things _should_ be”?
I have suggested to Mr Kwak that he find a sequence of intelligent, non-bought experts to give their ideas of what a sociey-serving system would be like. One expert could talk about banks, another about insurance, another about government. Maybe others here could join my call . . .
Best wishes,
Alan McConnell, in Silver Spring MD
Alan McConnell
January 14, 2010 at 9:57 am
I agree with Alan’s “one note.” Our economy and indeed our society have become horribly distorted by excessive financialization. I noted how Mr. Blankfein from Goldman Sachs insisted that all the investors who bought the mortgaged based securities were professional investors. I don’t care how professional you are, if you do not receive accurate and honest information you cannnot make good decisions. This basic failure in disclosure is a basic failure in human relations. It is predatory and puts Goldman Sachs at the same moral level as a con-artist.
whess
January 14, 2010 at 12:04 pm
By the way, I agree taxation is the way to go as a way of inhibiting excessive growth.
whess
January 14, 2010 at 12:06 pm
Well said Alan. Rocks my boat.
Paul Handover
January 14, 2010 at 3:31 pm
Tax will only be passed on to the consumers and lower the value of the stock. The government created the initial catalist for the housing/credit bubble and the regulators didn’t even notice. TARP already has a provision for full repayment of all costs by 2013. Why do Fanny, Freddy or Insurance Cos. not have this tax? This is just another Obamanation.
Tim w
January 14, 2010 at 11:05 am
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