Body
The campaign to convince people that Treasury is serious about banking reform—led sometimes by President Obama—suffered a major blow Thursday on Capitol Hill. In testimony to the Congressional Oversight Panel, Assistant Secretary for Financial Stability and "Counselor to the Secretary" Herb Allison said, "There is no too big to fail guarantee on the part of the US government."
This statement is so extraordinarily at odds with the facts that it takes your breath away.
Should we laugh at the misrepresentation of what this administration has done (and the Bush team did)—or just dig out Too Big To Fail by Andrew Ross Sorkin and go through all the gruesome details again? Should we cry for what this implies about Secretary Geithner's commitment to real reform—if there is no issue with "too big to fail," then why do you need any new laws that try to address this issue (e.g., such as the Volcker Rules, sent to Congress this week)?
The temptation is to shrug and ignore repeated such insults to our intelligence and implied injury to our pocketbooks. But this would be a mistake.
I want an answer to this question: Who authorized Mr. Allison to make this statement, and what were they thinking?
If Mr. Allison was freelancing, we should discuss the consequences. If Mr. Allison was sticking to his talking points, as seems likely, let us find out exactly who is responsible for sharing arrant and self-defeating nonsense with Congress. The disrespect for our legislature and cynicism for mainstream opinion here is beyond what is tolerable or responsible.
The Obama administration has dealt itself another formidable blow.
Also posted on Simon Johnson's blog, Baseline Scenario. Following were previously posted:
The Need for International Financial Regulation
March 2, 2010
As we fast approach the unveiling of the Dodd-Corker financial reform proposals for the Senate, it is only fair and reasonable to ask: Does any of this really matter? To be sure, some parts of what the Senate banking committee (and likely the full Senate) will consider are not inconsequential for relatively small players in the US market. For example, putting consumer protection inside the Fed—which has an awful and embarrassing reputation in terms of protecting users of financial products—would tell you a lot about where we are going.
But our big banks are global and nothing in the current legislation would really rein them in—no wonder they and their allies sneer, in a nasty fashion, at Senator Dodd as a lame duck who "does not matter."
For example, the resolution authority/modified bankruptcy procedure under discussion would do nothing to make it easier to manage the failure of a financial institution with large cross-border assets and liabilities. For this, you would need a "cross-border resolution authority," determining who is in charge of winding up what—and using which cash—when a global bank fails.
To be sure, such a cross-border authority could be developed under the auspices of the G-20, but there are not even baby steps in that direction. Why?
Part of the answer, of course, is that big cross-border banks know how to play governments against each other—dropping heavy hints that "international competitiveness" is at stake. These are empty threats—if the United States, the United Kingdom, and the eurozone cooperated on a resolution regime, this would get serious attention. If they went further and truly integrated their regulations—including communications and practices (and inspections) across regulators/supervisors—this could have major impact.
But national governments like to run their banks in their own way. In part, this may be sensible public policy—who, after all, really wants the United States to be in charge of deciding how a bank failure (in another country) is handled? (The United States and the United Kingdom had a major row in the weeks after Lehman failed.) Even within the eurozone, there is a long-standing refusal to specify in advance who is responsible for saving what part of which bank—motivated in part by the desire to protect the bureaucratic turf of national central banks, which ceded power over monetary policy to the European Central Bank.
In part, no doubt, this also reflects varying degrees of "capture" in different places—sometimes by bankers, but sometimes it's the politicians who do the capturing. As examples, see the work of Asim Khwaja and Atif Mian or Mara Faccio on how political connections really work in and around financial systems.
In any case, hoping that we can constrain banks through some form of international governmental cooperation is a complete illusion. The IMF and the WTO have no mandate on this issue. The Financial Stability Board is a paper tiger—really just a talking shop between regulators (and the same goes for the Bank for International Settlements more generally).
The big global banks know all this—and have known it for years.
You will never stop the international banks at the international level. You need to curtail them at the national level. And you can't afford to wait for other countries; you have to do it for your own country as a matter of pressing national priority.
Unfortunately, the Dodd-Corker proposals seem most unlikely to move us forward along this dimension.
An Underfunded Program for Greece
with Peter Boone
March 1, 2010
The European Union, led by France and Germany, appears to have some sort of financing package in the works for Greece (probably still without a major role for the IMF). But the main goal seems to be to buy time—hoping for better global outcomes—rather than dealing with the issues at any more fundamental level.
Greece needs 30 to 35 billion euros to cover its funding needs for the rest of this year. But under their current fiscal plan, we are looking at something like 60 billion euros in refinancing per year over the next several years—taking their debt level to 150 percent of GDP; hardly a sustainable medium-term fiscal framework.
A fully credible package would need around 200 billion euros to cover three years. But the moral hazard involved in such a deal would be immense—there is no way the German government can sell that to voters (or find that much money through an off-government balance sheet operation).
Alternatively, of course, the Greeks could make much more dramatic cuts to their primary deficit—the government budget balance if you take out interest payments—in order to stabilize their debt-GDP ratio.
But with no significant resurgence of growth in the eurozone coming for a long time, that would really mean moving from last year's 7.7 percent GDP primary deficit to around a 6 percent GDP primary surplus (assuming they face a real interest rate of 5 percent, i.e., below what they are paying today).
The government won't (or can't?) do that. In 2009 Greek wages and pensions rose by 10.5 percent—an amazing spending spree. In the 2010 budget they are forecast to rise by 0.3 percent. Where is the austerity? No wonder the prime minister is popular—they aren't really cutting much.
The bailout package is really just an opportunity for European banks to get out of Greek debt. The Greeks can't really collapse until they lose access to funding, so the hope is that this prevents the problems from spreading—and the prospects of such a "rescue" will keep bond yields down for Portugal, Spain, and others.
Our baseline view is that Greece enters into quite a bad recession this year, their banks and corporates continue to have trouble raising financing—thus causing broader liquidity issues, and it all comes to a head again as we near the time the government needs to take ever harsher measures next year, when there is again no bilateral funding in place.
This is the new Greek cycle.
What Will We Know and When Will We Know It?
February 26, 2010
If you are interested in these issues more broadly, see the papers presented at the Measuring and Analyzing Economic Development conference at the University of Chicago today.
One of the most basic questions in economics is: Which countries are rich and which are relatively poor? Or, if you prefer a highly relevant question for today's global situation, who recovers faster and sustains higher growth?
The simplest answer, of course, would be just to compare incomes—i.e., which country's residents earn the most money, on average, at a point in time and how does that change over time?
But prices differ dramatically across countries, so $1,000 in the United States will generally buy fewer goods and services than would the same $1,000 in Guinea-Bissau (although this immediately raises issues regarding consumers' preferences, the availability of goods, and the quality of goods in very different places).
The standard approach developed by economists and statisticians, working with great care and attention to detail on a project over the past 40 years known as the "Penn World Tables," is to calculate a set of "international prices" for goods—and then to use these to calculate measures of output and income in "purchasing power parity terms." For countries with lower market prices for goods and services, this will increase their measured income relative to countries with higher market prices (with Gross Domestic Product, GDP, per capita being the standard precise definition, but components and variations are also calculated along the way).
Some of the limitations inherent in the Penn Tables are well known. But it turns out there are other, quite serious issues, that should have a big effect on how we handle these data—and how doubtful we are when anyone claims that a particular country has grown fast or slow relative to other countries.
The Penn Tables are based on collecting detailed price information—what it actually costs to buy all kinds of things in different places. But the basic problem is that the people running the tables do not have access to such data for all years and all countries—so they have to make a number of moderately heroic assumptions.
In Is Newer Better? we show that a particular technical issue—the extrapolation of estimated price levels backwards and forwards in time—has a big impact on estimated GDP. This in turn changes, dramatically in some cases, the calculated growth rates for particular countries; and these changes can be huge for smaller countries with less good data, particularly when the year in question is quite far from the moment when prices were actually "benchmarked" though direct observation.
Just to illustrate our point, in table 1 (Is Newer Better? p. 29 ) (we show that the ranking of growth rates—e.g., top 10 and worst 10 countries, in terms of growth performance—within Africa, from 1975 to 1999, is completely different if you use Penn World Tables version 6.1 or if you use version 6.2. Just speaking for ourselves, we were quite shocked by these differences—and consequently spent a long time digging through the details (see the appendices of the paper for much more than you wanted to know about how this kind of sausage is made). We've also tried to figure out exactly how much these issues matter both for how people have studied growth in the past (to do this, we replicated and checked the robustness of 13 influential and indicative papers), and for how to think about (and measure) economic success and failure moving forward.
Our bottom line is: while the Penn Tables are reasonably reliable for comparing changes in income level over long periods of time (e.g., 30 to 40 years), they are much less appealing—and results based on them will generally not be robust—as a source for annual data. You should regard claims based on such annual data with a great deal of skepticism.
We also suggest there is a different and—for some purposes—better way to use the information in the tables (see section 6 of our paper). In essence, we suggest combining estimated GDP levels directly from the tables, rather than using the standard (and problematic) extrapolation method.
Looking at annual growth rates from national statistics is fine—or at least raises different issues—for thinking about short-term growth dynamics (i.e., who is in crisis, who is recovering, who may be overheating). But for considering longer-run comparisons, say over 5 to 10 years or longer, you unfortunately cannot avoid worrying about comparable prices and some sort of purchasing power adjustment.
Whether or not you like our specific proposal, the main takeaway point is the same: do not rely on just one growth series. Check that your claims (or anyone else's) hold across different versions of the Penn World Tables, and—if you are focused on annual growth rates—look also at estimates from the World Bank's World Development Indicators.
