What happened to the global economy and what we can do about it
with 20 comments
By Simon Johnson
In case you were wondering, Paul Volcker is still pressing hard for the Senate (and Congress, at the end of the day) to adopt some version of both "Volcker Rules". It's an uphill struggle "“ the proposed ban on proprietary trading (i.e., excessive risk-taking by government-backed banks) is holding on by its fingernails in the Dodd bill and the prospective cap on bank size is completely missing. But Mr. Volcker does not give up so easily "“ expect a firm yet polite diplomatic offensive from his side (although the extent of White House support remains unclear), including some hallmark tough public statements. It's all or nothing now for both Volcker and the rest of us.
But at the same time as the legislative prospects look bleak (although not impossible), we should recognize that Paul Volcker has already won important adherents to his general philosophy on big banks, including "“ most amazingly of late "“ Ben Bernanke, at least in part. In a speech Saturday, Bernanke was blunt,
"It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms. If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation [like fall 2008]."
You may dismiss this as empty rhetoric, but there is a definite shift in emphasis here for Bernanke "“ months of pressure from the outside, the clear drop in prestige of the Fed on Capitol Hill, and the pressure from Paul Volcker is definitely having an impact.
Bernanke finally understands the "doom loop" "“ in fact, he provides a nice succinct summary:
"The costs to all of us of having firms deemed too big to fail were stunningly evident during the days in which the financial system teetered near collapse. But the existence of too-big-to-fail firms also imposes heavy costs on our financial system even in more placid times. Perhaps most important, if a firm is publicly perceived as too big, or interconnected, or systemically critical for the authorities to permit its failure, its creditors and counterparties have less incentive to evaluate the quality of the firm’s business model, its management, and its risk-taking behavior. As a result, such firms face limited market discipline, allowing them to obtain funding on better terms than the quality or riskiness of their business would merit and giving them incentives to take on excessive risks."
He also expands on an important, related point "“ that the presence of "too big to fail" is simply unfair and really should be opposed by all clear thinking businesspeople who don't run massive banks (aside: someone kindly point this out to the Chamber of Commerce "“ they are undermining their people),
"Having institutions that are too big to fail also creates competitive inequities that may prevent our most productive and innovative firms from prospering. In an environment of fair competition, smaller firms should have a chance to outperform larger companies. By the same token, firms that do not make the grade should exit, freeing up resources for other uses"¦. In short, to have a competitive, vital, and innovative financial system in which market discipline encourages efficiency and controls risk, including risks to the system as a whole, we have to end the too-big-to-fail problem once and for all."
Bernanke now endorses the first Volcker Rule, "Some proposals have been made to limit the scope and activities of financial institutions, and I think a number of those ideas are worth careful consideration. Certainly, supervisors should be empowered to limit the involvement of firms in inappropriately risky activities."
But he is still hampered by the illusion that there is any evidence we need megabanks in their current form "“ let alone in their likely, much larger, future form. Let me be blunt here, as the legislative agenda presses itself upon us.
I've discussed this issue "“ in public where possible and in private when there was no other option – with top finance experts, leading lawyers, preeminent bankers (including from TBTF institutions), and our country's most prominent policymakers. And I have testified on this question before Congress, including to the Joint Economic Committee, the House Financial Services Committee, and "“ most recently "“ the Senate Banking Committee, where leading spokesmen for big banks were also present.
Mr. Bernanke, with all due respect: there is simply no evidence to support the assertion that, "our technologically sophisticated and globalized economy will still need large, complex, and internationally active financial firms to meet the needs of multinational firms, to facilitate international flows of goods and capital, and to take advantage of economies of scale and scope," at least if this implies "“ as it appeared to on Saturday "“ we need banks at or close to their current size.
We can settle this in a simple and professional manner. Ask your staff to contact me with the evidence "“ or, if you prefer, simply have a Fed governor provide the compelling facts in a speech and/or have a staff member put out the technical details in a working paper.
There is no compelling case for today's massive banks, yet the downside to having institutions with their current incentives and beliefs is clear and awful. Think hard: what has so far changed for the better in the system that brought us to the brink of global collapse in September 2008? In this context, Mr. Bernanke's three part proposal for dealing with these huge banks should leave us all quite queasy:
Mr. Bernanke needs to face some unpleasant realities. Because of the various actions "“ some unavoidable and some not – it took in saving Too Big To Fail financial institutions during 2008-09, the Federal Reserve is now looked up with grave suspicion by a growing number of people on Capitol Hill.
The cherished independence of the Fed is now called into question "“ and losing this could end up being a huge consequence of the irresponsible behavior and effective blackmail exercised by megabanks "“ who still say, implicitly, "bail us all out, personally and generously, or the world economy will suffer".
Mr. Volcker sees all this and wants to move preemptively to cap the size of our largest banks. Mr. Bernanke has one last window in which to follow suit (e.g., lobbying Barney Frank could still be effective). In a month it could be too late "“ the legislative cards are now being dealt.
Mr. Bernanke is a brilliant academic and, at this stage, a most experienced policymaker. What is holding him back?
Written by Simon Johnson
March 22, 2010 at 6:03 am
Posted in Commentary
Tagged with Ben Bernanke, Paul Volcker
Funny how Chris Dodd seems to be a new man now.He sounds like the life lock guy now a days:
http://americaspeaksink.com/2010/03/mike-was-right-todd/
joedee1969
March 22, 2010 at 6:36 am
It’s not just that government backed banks are taking too much risks. And can take too much risks because they are government backed.
Those banks actually create the money everybody uses. Such is the fractional reserve system with a high multiplier we have now. But, of course the big bankers create that money first for themselves, their friends, their servants, and their own dark purposes.
Once they have created most of the world’s capital, the big bankers divert it towards the derivative universe, 800 trillion dollars strong, or so. Nothing much is left for the real universe, and the real economy. This allows them to claim big (imaginary) profits, and thus all too real bonuses (a gigantic 145 billion dollars in 2009 alone, in the USA alone; basically all this money was stolen from the taxpayers, because the banks would have stopped existing without the taxpayers.)
Thus what are these big bankers, except the biggest, most corrupt “civil servants” who ever were? It would not be the first time that civil “servants” would have become the masters, because people were looking somewhere else.
A partial solution: put a 95% tax on the property of all big bankers, their families and associates. It goes without saying that most derivatives ought to be outlawed, to force capital back in the real universe.
PA
Patrice Ayme
March 22, 2010 at 8:32 am
“Chris Dodd’s wife and derivatives trading March 19, 2010 | 2:14 pm In the middle of a blog item about credit default swaps, Felix Salmon of Reuters drops the following nugget about Sen. Chris Dodd and the CME Group, which owns the Chicago Mercantile Exchange and the New York Mercantile Exchange.
“Dodd's wife, Jackie Clegg, is a director of the CME, which paid her $153,219 in 2009; she also owns shares in the company worth about $235,000. (The CME makes no mention of her husband on its website or in its SEC filings, despite the fact that he's surely a big part of the reason why she has the position.)”
http://latimesblogs.latimes.com/money_co/2010/03/chris-dodds-wife-and-her-strange-entanglement-with-derivatives-trading-.html
ella
March 22, 2010 at 9:20 am
All that means is that he feels enough pressure that he feels the need to talk a better game.
Weeks before Obama called the banksters “savvy businessmen” he called them “fat cats”. His actions prove which one really reflects his loyalties.
Aren’t we finally, irrevocably past the point where we would ever believe anything anyone says?
Where we would ever believe in anything but actions?
Russ
March 22, 2010 at 9:27 am
All that means is that he feels enough pressure that he feels the need to talk a better game.
But his re-appointment already got confirmed, so he is all set for the next four years.
Read Full Article »