What happened to the global economy and what we can do about it
with 183 comments
By Simon Johnson, co-author of 13 Bankers (out in paperback on Monday)
Bill Daley, President Obama's newly appointed chief of staff, is an experienced business executive. By all accounts, he is decisive, well-organized, and a skilled negotiator. His appointment, combined with other elements of the White House reshuffle, provides insight into how the president understands our economy "“ and what is likely to happen over the next couple of years. This is a serious problem.
This is not a critique from the left or from the right. The Bill Daley Problem is completely bipartisan "“ it shows us the White House fails to understand that, at the heart of our economy, we have a huge time bomb.
Until this week, Bill Daley was on the top operating committee at JP Morgan Chase. His bank "“ along with the other largest U.S. banks "“ have far too little equity and far too much debt relative to that thin level of equity; this makes them highly dangerous from a social point of view. These banks have captured the hearts and minds of top regulators and most of the political class (across the spectrum), most recently with completely specious arguments about why banks cannot be compelled to operate more safely. Top bankers, like Mr. Daley's former colleagues, are intent of becoming more global "“ despite the fact that (or perhaps because) we cannot handle the failure of massive global banks.
The system that led to the crisis of 2008, and the recession that has so severely damaged so many Americans, encouraged excessive risk-taking by major private sector financial institutions and, yes, Fannie Mae, Freddie Mac, and other Government Sponsored Enterprises (although these were most definitely not the major drivers of the crisis "“ see 13 Bankers).
Today's most dangerous government sponsored enterprises are the largest six bank holding companies: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley. They are undoubtedly too big to fail "“ if they were on the brink of failure, they would be rescued by the government, in the sense that their creditors would be protected 100 percent. The market knows this and, as a result, these large institutions can borrow more cheaply than their smaller competitors. This lets them stay big and "“ amazingly "“ get bigger.
In the latest available data (Q3 of 2010), the big 6 had assets worth 64 percent of GDP. This is up from before the crisis "“ assets in the big six at the end of 2006 were only about 55 percent of GDP. And this is up massively from 1995, when these same banks (some of which had different names back then) were only 17 percent of GDP.
No one can show significant social benefits from the increase in bank size, leverage, and overall riskiness over the past 15 years. The social costs of these banks "“ and their complete capture of the regulatory apparatus "“ are apparent in the worst recession and slowest recovery since the 1930s.
Paul Volcker gets it; no wonder he has resigned. Mervyn King, governor of the Bank of England, gets it. Tom Hoenig, president of the Kansas City Fed, gets it. Elizabeth Warren, the tireless champion of consumer rights, gets it. Gene Fama, father of the efficient financial markets view, gets it better than anyone.
I discussed the issue in public for two hours at the American Financial Association (AFA) meetings in Denver on Friday with two presidents of the AFA (Raghu Rajan and John Cochrane) and a Nobel Prize winner (Myron Scholes). This is not a left-wing or marginal group "“ there must have been at least 500 people in the audience (video will be available). The top minds in academic finance understand the problem vividly and are articulate about it "“ there is no rebuttal to the points being made by Anat Admati and her distinguished colleagues.
This is not a left-right issue "“ again, look at the list of people who co-signed Professor Admati's recent letter to the Financial Times. This is a question of technical competence. Do the people running the country "“ including both the executive branch and the legislature "“ understand economics and finance or not?
If the country's most distinguished nuclear scientists told you, clearly and very publicly, that they now realize a leading reactor design is very dangerous, would you and your politicians stop to listen? Yet our political leadership brush aside concerns about the way big banks operate. Why?
Top bankers, including Bill Daley, have pulled off a complete snow job "“ including since the crisis broke in fall 2008. They have put forward their special interests while claiming to represent the general interest. Business and other groups, of course, do this all the time. But the difference here is the scale of the too big to subsidy "“ measured in terms of its likely future impact on our citizenship and our fiscal solvency, this will be devastating.
Most smart people in the nonfinancial world understand that the big banks have become profoundly damaging to the rest of the private sector. The idea that the president needed to bring a top banker into his inner circle in order to build bridges with business is beyond ludicrous.
Bill Daley now controls how information is presented to and decisions are made by the president. Daley's former boss, Jamie Dimon, is the most dangerous banker in America "“ presumably he now gets even greater access to the Oval Office. Daley is on the record as opposing strong consumer protection for financial products; Elizabeth Warren faces an even steeper uphill battle. Important regulatory appointments, such as the succession to Sheila Bair at the FDIC, are less likely to go to sensible people. And in all our interactions with other countries, for example around the G20 but also on a bilateral basis, we will pursue the resolutely pro-big finance views of the second Clinton administration.
Top executives at big U.S. banks want to be left alone during relatively good times "“ allowed to take whatever excessive risks they want, to juice their return on equity through massive leverage, to thus boost their pay and enhance their status around the world. But at a moment of severe financial crisis, they also want someone in the White House who will whisper at just the right moment: "Mr. President, if you let this bank fail, it will trigger a worldwide financial panic and another Great Depression. This will be worse than what happened after Lehman Brothers failed."
Let's be honest. With the appointment of Bill Daley, the big banks have won completely this round of boom-bust-bailout. The risk inherent to our financial system is now higher than it was in the early/mid-2000s. We are set up for another illusory financial expansion and another debilitating crisis.
Bill Daley will get it done. Share this: Email Facebook Print Share Digg Reddit StumbleUpon
Written by Simon Johnson
January 9, 2011 at 7:43 am
Posted in Commentary
Tagged with Bill Daley, JP Morgan Chase
Does he wear tassled loafers as in the joke:
Why do bankers wear tassled loafers? Because they can't tie their own shoelaces.
from: http://www.nakedcapitalism.com/2011/01/us-trustee-sides-with-borrowers-in-foreclosures-with-questionable-assignments-mers.html
Tim Coldwell
January 9, 2011 at 8:41 am
Thats funny, but eventually one relizes that their no force known to the masses able to confront the problem before you. He was created to help her but instead decided to “take” over and do as he sees fit.
It will take time to gather the tools required to remove the problem and until then he has the rule of the roost. Disagree and your fired, I call this his way or the highway and he has been at it for a long time, gathering more fiat wealth and power. The only resistance comes in the form of higher commodity prices and affects people negatively, just not him. So I say let him burn himself out until the day he finds himself no longer needed and quits.
Herbert Wetherby
January 9, 2011 at 8:55 am
http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=6075
January 7, 2011 New Obama Chief of Staff a Message to Wall Street Glen Ford: President Obama is more concerned with pleasing Wall St than appeasing public opinion
THE PLOT THICKENS….
Bruce E. Woych
January 9, 2011 at 9:49 pm
Obama has no shame. No doubt the White House looks with scorn on so-called fringe bloggers and commenters. But the facts speak for themselves. Obama represents a massive betrayal of the people’s trust. In the words of another widely respected blogger:
“You put all this together and it's clear that this administration, beyond even the normal standard of corrupt government, is nothing but the hired thug arm of the bank rackets. This is the one and only priority. Bush was always rightly pegged as a childish warmonger who wanted to let big corporations loot the country. Obama was rightly questioned for running a vacuous campaign based on nothing but charisma and vaporous rhetoric. What would be the basis of an Obama presidency, and how would it represent Change from Bush? Now we see that Obama represents not change from but the refinement of Bush corporatism. The core of his policy is delivering the country to the Wall Street racketeers as a mine and a playground. The pretext is the crisis, the vehicle is the bailout. Every other policy flows from this.” Excerpt from ‘Bailout War’:
http://attempter.wordpress.com/tag/obama/
Cindi
January 11, 2011 at 11:19 pm
As I recall Steve had some of the exact same complaints. Why don’t consult him, he is rather experienced in the field.
Herbert Wetherby
January 12, 2011 at 7:48 am
but i thought maobamao was a socialist commie marxist.
ron
January 13, 2011 at 1:41 pm
Yes Simon, we know. But what can be done about it? If Obama said ‘ok I am breaking up these banks’ imagine the walls that would go up. First his close advisors would say no. Then his close friends in congress would say maybe. But then they would get shoveled truck loads of money. And opposite party persons would get shoveled twice that much money to resist. So someone like Scott brown could (with no political capital) say no in the senate and hold up any reform. The MSM would go ballistic about obama acting out of fear of the left and others who oppose successful people. And on and on. The system is rigged against change, especially when the change is a complete 180 from current course.
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