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I talked Sunday about Move Your Money with Guy Raz of NPR's Weekend All Things Considered (summary; audio). We covered a lot of ground, from what's in it for individuals to shift towards community banks and credit unions (better service and lower costs, in many cases) to how this could begin to reign in Too Big To Fail financial institutions (slowly, but surely).
Unfortunately, there wasn't enough time to discuss what comes next—i.e., what happens when the location of political candidates' own money starts to matter. As early as this fall's primaries, expect to hear people ask politicians in debates and through various kinds of interactions: (1) where do you, personally, keep and borrow money, and (2), in all relevant cases, where did you put public money when it was up to you?
These questions strike to the heart of democratic responses against overly concentrated financial power throughout US history—a topic we take up in Chapter 1 of 13 Bankers.
In the 1830s showdown between elected officials and big banks, President Andrew Jackson went toe-to-toe with Nicolas Biddle of the Second Bank of the United States. Both sides won several rounds and finally it came down to this—could Jackson really move the money of the US government away from the Second Bank? He could and did. And despite being threatened—by bankers, naturally—with dire consequences, the United States had a very good 19th century.
The essence of the second confrontation was neatly captured by the title of Louis Brandeis's 1914 book, Other People's Money—and How the Bankers Use It. Brandeis, a future Supreme Court Justice, saw clearly through the nature of the "Money Trust"—recognizing that its power was based, essentially, on its access to and control over funds deposited by regular people.
In effect, the industrial revolution had spread wealth and disposable income, but—through the rise of powerful investment banks—actually concentrated economic and political power.
Reformers struggled for several decades with how to constrain the biggest banks without choking economic growth and while protecting individual depositors in this new economy. The solution, reached after much difficulty and finally in response to popular demand, was the regulations of the 1930s.
From that time, until the early 1980s, financial empires based on retail deposits were greatly constrained in terms of the risks they could take—and without retail deposits, it was hard to become big enough to do serious damage to the economy.
After 30 years of deregulation and financial "innovation," our problem today is rather different. The idea of banks being so big they can extract enormous resources from the state would have been incomprehensible to Jackson and ludicrous even to FDR—in their day the federal government did not have anywhere near enough resources to "save" massive failing banks as we have done in the past few years.
The essence of our current difficulties is that so many people—both in power and from all walks of life—still actually think our biggest banks are good for their customers and for society as a whole, so we must hold our noses and live with them. This view must be challenged, directly and repeatedly.
In this context, moving your own money is more than an important gesture, and if enough people get on board, it will make a difference. More likely, thinking hard—and talking with others—about your various monetary transactions also begins to change the rules of the political game. How can politicians claim to be against Too Big To Fail banks when they actually have an account or a credit card or a mortgage at one such offender? Shouldn't state officials be held accountable for where they park the taxpayers' funds? Which governor wants to risk reelection while heavily dependent on big banks? Who got what kind of commission last time a government body issued bonds?
This set of litmus tests can be seized on by left or right—both, in fact, can reasonably claim some inheritance from Jackson and Brandeis. Expect competition from all sides to prove their candidates are less beholden to the dangerous and debunked ideology of Reckless Finance.
Move your politicians.
Also posted on Simon Johnson's blog, Baseline Scenario. Previously posted:
Populism (January 30)
Amidst otherwise strong coverage of the growing debate around the nature of finance and the power of big banks, a surprisingly high number of journalists continue to misuse the word "populism."
For example, in an article on criticism of bankers at Davos, the Wall Street Journal on Saturday morning reported that President Sarkozy of France delivered a "populist broadside" when he said,
"That those who create jobs and wealth may earn a lot of money is not shocking. But that those who contribute to destroying jobs and wealth also earn a lot of money is morally indefensible."
The implication, of course, is that some politicians are pandering to "the people" vs. "the elites"—part of a long-standing theme in some interpretations of democratic political conflict. While elites invest and engage in productive activities, the argument goes, plebians from time to time demand excessive income redistribution or punitive taxation or other measures that would undermine productivity and prosperity.
Or, as President Obama said in March 2009, "My administration is the only thing between you and the pitchforks."
Such language reveals a complete misunderstanding of our current situation. (Matt Taibbi has this right, but doesn't go far enough.)
The problem we face is not that the broader population wants pointless or destructive revenge on a financial elite that has done well. Nor is it the case that, if left largely to its own devices, our major banks will guide us back along the path to sustainable growth.
The consensus technocratic assessment is simple: We are smack in the middle of a doomsday cycle of repeated boom-bust-bailout (our version; the Bank of England's take). The core issue—banks considered "too big to fail"—was not resolved in or after the crisis of 2008-09; if anything, as these banks have increased in size, the problem is now worse. We are therefore doomed to run headlong into another crisis.
This view is increasingly the developing consensus of most economists, many people active in financial markets (e.g., judging by reactions to this piece), top policy analysts from right and left, clear thinking central bankers, and pretty much anyone else who follows the news. Elites are deeply split along pro- and anti-big bank lines. Most people who do not have a conflict of interest—i.e., don't work for big banks or the administration—want to see the most dangerous parts of our financial sector reined in and made safer.
Even leaders of the global nonfinancial business elite begin to understand what has happened and what comes next.
The fact that dramatic banking reforms would be popular does not make them populist. It merely means that a broad cross-section of our population has woken up to part of our appalling reality. Sure, they are angry—but with good reason, and the remedies they seek are entirely appropriate. Most of our elites are on the side of the broader population on this issue; only the diseased heart of Wall Street holds out.
Unfortunately, for whatever reason, the Obama administration remains convinced that merely tweaking our existing regulations is the only responsible way forward. Even their new "Volcker Rule" increasingly looks like superficial rebranding without new substance.
This will go nowhere—except to sad, unnecessary, and complete defeat in the November midterm elections.
The Reappointment of Ben Bernanke: A Colossal Failure of Governance (January 28)
When representatives of American power encounter officials in less rich countries, they are prone to suggest that any failure to reach the highest standards of living is due in part to weak political governance in general and the failure of effective oversight in particular. Current and former US Treasury officials frequently remark this or that government "lacks the political will" to exercise responsible economic policy or even replace a powerful official who has clearly become a problem.
There is much to be said for this view. When a minister or even the head of a strong government agency is no longer acting in the best interests of any country but is still backed by powerful special interests, who has the authority, the opportunity, and the fortitude to stand up and be counted?
Fortunately, our constitution grants the Senate the power to approve or disapprove key government appointments, and over the past 200 plus years this has served many times as an effective check on both executive authority and overly strong lobbies—who usually want their own unsuitable person to be kept on the job.
Unfortunately, two massive failures of governance at the level of the Senate also spring to mind: first, the strange case of Alan Greenspan, which stretched over nearly two decades; and second, Ben Bernanke, confirmed by the Senate today (Thursday).
Greenspan, as you recall, was worshiped as some sort of economic magician. Even his most asinine comments were seized upon by a legion of acolytes. Instead of providing meaningful periodic oversight, every Senate hearing was essentially a recoronation.
And now we can look back over 20 years and be honest with ourselves: Alan Greenspan contends for the title of most disastrous economic policymaker in the recent history of the world.
Some on Wall Street, of course, would disagree—arguing that the financial sector growth he fostered is not completely illusory, that we have indeed reached a new economic paradigm due to the Greenspan tonic of deregulation, neglect, and refusal to enforce the law. Prove the ill-effects, they cry.
What part of 8 million net jobs lost since December 2007 do you still not understand?
And now the same Greenspanians and their fellow travelers rally to the support of Ben Bernanke's troubled renomination. Certainly, they concede that Bernanke was complicit in and continued many of Greenspan's mistakes through September 2008. But, they argue, he ran a helluva bailout strategy after that point. And, in any case, if the Senate had refused to reconfirm him—financial sector representatives insist—there would have been chaos in the markets.
Take that last statement at face value and think about it. Have we really reached the situation where the Senate as a body and individual Senators—accomplished men and women, who stand on the shoulders of giants—must bow down before financial markets and high-ranking executives who are really just talking their book?
Here's what markets really care about: credible fiscal policy, sufficiently tough monetary policy, and the extent to which big banks will be allowed to run amok—and then get bailed out again.
Reappointing Ben Bernanke solves none of our problems. In fact, given his stated intentions, a Bernanke reappointment implies larger bailouts in the future—thus compromising our budget further with contingent liabilities, i.e., huge payments that we'll have to make next time there is a crisis. What kind of fiscal responsibility strategy is this?
Rather than messing about with a meaningless (or damaging) freeze for part of discretionary spending, the White House should fix the financial system that—with too big to fail at its heart—has directly resulted in doubling our net government debt to GDP ratio from 40 percent (a moderate level) towards 80 percent (a high level) in a desperate attempt to ward off a Second Great Depression.
If you think we can sort out finance with Ben Bernanke at the helm, it was sensible to reappoint him. But when the time comes for members of the Senate themselves to be held accountable, do not be surprised if people point out that pushing Bernanke through—come what may—was the beginning of the end for any serious attempt at reform.
Ultimately, sensible democratic governance prevails in the United States. Sometimes it takes a while.
The Next Subpoena for Goldman Sachs (January 28)
Yesterday's release of detailed information regarding with whom AIG settled in full on credit default swaps (CDS) at the end of 2008 was helpful. We learned a great deal about the precise nature of transactions and the exact composition of counterparties involved.
We already knew, of course, that this "closeout" at full price was partly about Goldman Sachs—and that SocGen was involved. There was also, it turns out, some Merrill Lynch exposure (affecting Bank of America, which was in the process of buying Merrill). Still, it's striking that no other major banks had apparently much of this kind of insurance from AIG against their losses—Citi, Morgan Stanley, and JPMorgan, for example, are not on the list.
This information is useful because it will help the House Oversight and Government Reform Committee to structure a follow up subpeona to be served on Goldman Sachs with the following purpose:
- Did Goldman actually deliver the security that was insured? Ordinarily when you close out a contract of this nature—particularly at par—you turn over the insured security in return for the payment. The insurer pays in full but is left holding a security; if this recovers in price, the insurer recoups some of the loss. But if Goldman was using AIG as reinsurance, which is what some news reports suggest, it did not have any security to turn over. (Remember that with CDS—unlike cars—you can insure something that you don't own.)
- If Goldman did not turn over a security, then how was it determined that the security had essentially zero value—which was the rationale for the payment really being made at par? Was this assessment provided by Goldman or by some independent third party? These were highly illiquid markets, so there was generally no widely quoted price that could be used.
- How did this valuation process differ from standard practice among market participants—when closeout under such conditions is typically not at par? If the Fed effectively allowed Goldman unilaterally to declare a security worthless and to demand payment in full, we have a major problem.
- Secretary Geithner claimed yesterday that, if payment had not been made in full, the economic consequences would have been dramatic. To assess this claim, we need to see the value of these claims on Goldman's books prior to this bailout transaction. Best practice would suggest that Goldman was not carrying this asset at face value—as it is an articulate proponent of mark-to-market and there must have been a reasonable expectation that AIG would not pay off in full. Therefore the transaction represented a windfall gain for Goldman shareholders and insiders—rather than something that in any sense "saved the day" for the financial system.
- As the evidence stands currently, the entire AIG transaction therefore appears to have been structured in such a way as to benefit primarily Goldman—although, for fair comparisons, we should obtain parallel details from other counterparties. What was the entire timing and content of interactions between Goldman and the Fed on this matter? Who exactly designed the deal and with which advisers?
The House Oversight and Government Reform Committee has done an extraordinary job peeling back several layers of a potentially rotten onion. They need to follow the lead provided by this evidence and ask the next hard round of questions.
Some of these issues are rather technical, but evidence either way will speak directly to accusations of favoritism and unreasonable government behavior. It is time to fully get to the bottom of this matter.
