There Are No Fiscal Conservatives In The United States
By Simon Johnson
In most industrialized countries, attention now shifts to some form of “fiscal austerity” – meaning the need to bring budget deficits under control. In the UK, for example, there is an active debate between those on the right of the political spectrum (who want more cuts sooner) and those to the left (who would rather delay cuts as much as possible). There is a similar discussion across the European continent – although the precise terms of the debate depend on exactly which party was most profligate during the long boom of the 2000s.
The United States stands out as quite different. No one is yet seriously proposing to address our underlying budget issues. There are certainly people who claim to be “fiscal conservatives” – some of the right and some on the left – but none can yet be taken seriously. The implications are very bad for our fiscal future. Read the rest of this entry »
What Has Microsoft Come To?
By James Kwak
From The New York Times:
“Consumers will be able to integrate the new phones with a number of Microsoft products, including Zune music and video content, the Bing search engine, business products like Microsoft’s OneNote software and the Xbox gaming platform.”
Apart from possibly the Xbox, who cares? How can it be that the master of bundling now has nothing that anyone wants as part of a bundle?
Update: Sending Comments To The FSOC
By Simon Johnson
Update: the link for sending comments to the FSOC on the Volcker Rule is in my Bloomberg article last week. Some of you have asked for me to also post it on BaselineScenario – click here or cut and paste this address:
Will The Volcker Rule Really Be Enforced?
By Simon Johnson
The Financial Stability Oversight Council has put out a request for comments on the Volcker Rule – if you write to them soon, they may actually listen.
One big issue is whether there will be high frequency monitoring of trades by big banks – potentially enabling regulators to know if the “no proprietary trading” rule is being violated. The default approach is probably to have a hands-off, light touch – pretty much continuing our recent and not-so-distinguished traditions with regard to supervising banks.
I go through the issues in more detail – including who seems to be on what side within the government – in a Bloomberg column that appeared this evening.
Thoughts On The Macroeconomic Impact of Goldman Sachs
By Peter Boone and Simon Johnson
The influential Goldman Sachs economist Jan Hatzius has a new research note out (with Sven Jari Stehn), “Thoughts on the Macroeconomic Impact of Basel III,” arguing that the move to raise capital standards for banks will put a serious crimp in growth in the United States – knocking 1.5 to 2 percent off gross domestic product in the next few years. Their findings are questionable, but in any case we should broaden the discussion to consider exactly how banks like Goldman Sachs affect our macroeconomic dynamics going forward – particularly if they are able to effectively lobby against higher capital. Growth based on risky banking has a tendency to prove illusory.
There are three issues. First, what is the short-term impact of raising capital requirements? Second, how should capital be increased? And third, and perhaps most important, do we really need global banks like Goldman Sachs to operate in their recent “high risk – highly variable returns” mode?
In their note, which is not in the public domain, Mr. Hatzius and Mr. Stehn are willing to acknowledge that raising capital standards can help make banks safer and that this is good for sustained growth over a sufficiently long period of time (think a decade or more), as the Bank for International Settlements suggests. But they make the case that raising capital – at least in the form that this is likely to take place – can slow growth over the next several years. Read the rest of this entry »
The Government Does Have Something To Do with It
This guest post on the relationship of business and government comes to us from Lawrence B. Glickman, chair of the History Department at the University of South Carolina; the author, most recently, of Buying Power: A History of Consumer Activism in America; and an occasional contributor to this blog.
One of the most telling statements of our political era, made ten years ago this week by Dick Cheney during his Vice Presidential debate with Joe Lieberman on October 5, 2000, was actually a misstatement that went largely unnoticed. And therein lies an important lesson about the place of government in our political culture.
In response to the Democratic nominee Lieberman’s jibe that Cheney had profited handsomely from the job he had recently departed as CEO of the Haliburton Corporation, the Republican nominee replied, ”I can tell you, Joe, the government had absolutely nothing to do with it.” Amid the laughter and applause of the audience, Leiberman chuckled good-naturedly and joked about joining the private sector himself.
Following the debate, media analysts focused on what the New York Times called Cheneys avuncular self-confidence but, like his opponent, they largely passed over the fact that his statement was a whopping lie. Despite his denial and his antigovernment rhetoric, the company Cheney ran depended on billions of dollars of government contracts and loan guarantees. It would not be an exaggeration to say that government was Haliburton’s primary source of support.
Why China Is Unwilling to Revalue the Yuan
The following guest post was contributed by Ian Lamont, an MIT Sloan Fellow. He was previously the managing editor of the Industry Standard, and has also researched China’s state-run media and communications policies.
For years, China has been subject to enormous external pressure to increase the value of its currency, or let it float on the open market. While doing so might relieve pressure on foreign economies by boosting their exports and reducing trade deficits, it runs counter to Beijing’s domestic priorities, which involve doing everything it can to preserve economic growth and domestic stability, and by extension, its hold on political power.
All countries exploit the dynamics between their political and economic systems. But China’s situation is exceptional. For three decades, the government of the People’s Republic of China has perpetuated a grand political dream, claiming a single-party political mandate from the Communist ideals espoused by Mao Zedong, while simultaneously drawing power from the capitalist canon. Beijing has been able to pull it off, largely through the promise of spreading wealth and opportunities to even the poorest of villages and maintaining benefits for cadres and workers in state-owned enterprises which cannot easily be absorbed into the capitalist system. A high rate of GDP growth is required year after year to maintain this state of affairs.
A sudden change in the value of the Yuan could have the effect of throwing a wrench into the works, potentially setting off a chain reaction of factory closures and layoffs across the interconnected networks that drive China’s export-oriented economy. In the short term, China might be able manipulate legislation, the banking sector, and welfare levers to prop up key industries or regions. But in the long term, it is uncertain if these steps would be enough to preserve social stability or continued loyalty to the Communist Party. Read the rest of this entry »
TARP Is Gone – But May Soon Be Back
The Troubled Asset Relief Program, or TARP, is over – more specifically, its legal authority expires on Sunday, so it cannot be used for new “bailout” activities (although legacy programs, with money already disbursed, could last 5 to 10 years.)
The first draft of its history, looking back over the past two years, may be this: TARP was an essential piece of a necessary evil – that is, it saved the American financial system from collapse — but it was implemented in a way that was excessively favorable to the very bankers who had presided over the collapse. And this sets up exactly the wrong incentives as we head into the next credit cycle. Read the rest of this entry »
President Obama Can Bounce Back
By Simon Johnson
Conventional wisdom is now that the parlous state of the economy will seriously damage President Obama’s reelection chances in 2012. Perhaps, but this view misses what we should expect in terms of global financial dynamics – and how this is likely to affect the US economy over the next two years.
Details are in my Bloomberg column this morning.
Americans Want to Live in Sweden
By James Kwak
The chart below is from a short paper by Michael Norton and Dan Ariely (author of Predictably Irrational) (hat tip Huffington Post). The top line is the actual U.S.wealth distribution. The second is what Americans think the wealth distribution is. The bottom line is what Americans think the wealth distribution should be.
Bad Arguments Against Tax “Increases”
By James Kwak
Last week, a professor making more than $250,000 per year (with his wife’s income) put up a blog post (since taken down) criticizing President Obama for wanting to “raise” his taxes.* The post basically said, after all of their basic expenses, “we are just getting by despite seeming to be rich.” If his taxes go up, he says he will have to cut back on spending, which will depress the economy, or perhaps even sell his house or cars, which will depress those asset markets. The problem, he argues, is that the tax “increases” won’t affect the true super-rich, because they use tax dodges to avoid paying taxes; instead, they will just hurt the economy.
This post has been the target of some howitzers on the Internet, mainly focused on the professor’s income and expenses, but I wanted to raise a few more general policy points.
First, it’s just not true that the rich will reduce their spending dollar-for-dollar as their taxes go up. The reason that tax cuts are a lousy form of stimulus applies in reverse: just as extra cash leads to more saving, less cash leads to less saving. And this is especially true for the rich, who have more slack in their budgets. There might be individual rich households that will reduce their spending dollar-for-dollar, but in aggregate it just won’t happen.
Can Someone Explain Facebook Credits to Me?
By James Kwak
The recent New York Times story on Facebook Credits was just one of a slew of articles that have been coming out recently on this topic. (Hint: When that happens, it’s usually because the company in question is putting on a PR campaign, which means they are pushing stories to the media in an attempt to build buzz.) According to the generally positive reporting, Credits are “a virtual currency system that some day could turn into a multibillion-dollar business.”
As far as I can make out,* Credits are points that you can buy with real money and that are stored with your Facebook account data on the mother ship in Palo Alto (just like your bank keeps track of the Dollars you have on account there). You can use Credits to pay for a variety of stuff in Facebook apps, and Facebook takes a cut (currently thirty percent) of the value of any transaction using Credits. The story is that in the long run, you may be able to use Credits to buy anything, not just stuff on Facebook, positioning Facebook as a potential leader in electronic payments.
Foreclosure Wave Hits Cash Buyers, Too
By James Kwak
Since most of you probably read Calculated Risk, you’ve probably seen the Sun Sentinel story of the man in Florida who paid cash for a house–and still lost it in a foreclosure. Not only that, but he bought the house in a short sale in December 2009, the foreclosure sale happened in July 2010, and only then did he learn about the foreclosure proceeding.
Even after that,
“Grodensky said he spent months trying to figure out what happened, but said his questions to Bank of America and to the law firm Florida Default Law Group that handled the foreclosure have not been answered. Florida Default Law Group could not be reached for comment, despite several attempts by phone and e-mail. . . .
“It wasn’t until last week, when Grodensky brought his problem to the attention of the Sun Sentinel, that it began to be resolved.”
Bank of America now says it will correct the error “at its own expense.” How gracious of them.
If the legal system simply allows Bank of America to correct errors, at cost and with ordinary damages, after they happen, this type of abuse will only get worse. There’s obviously no incentive for banks not to make mistakes, and as a result they will behave as aggressively as possible at every opportunity possible. Yes, this was probably incompetence, not malice, on the part of the bank. But if you don’t force companies to pay for the consequences of their incompetence, they will remain willfully incompetent, and the end result will be the same.
After The Recession: What Next For the Fed?
By Simon Johnson
The Federal Reserve was created in 1913 to help limit the impact of financial panics. It took a while for the Fed to achieve that goal, but after World War II – with a great deal of help from other parts of the federal government – the Fed hit its stride. Today the Fed has not only lost that touch but, given the way our political and financial system currently operates, its own policies exacerbate the cycle of overexuberance and incautious lending that will bring on the next major crisis (and presumably another severe recession).
Sudden loss of confidence in the financial system was not uncommon toward the end of the 19th century, and while the private sector was able to stave off complete disaster largely by itself, the tide turned in 1907. In that instance J.P. Morgan could stand firm only because, behind the scenes, his team received a large loan from the United States Treasury (on this formative episode, see The Panic of 1907: Lessons Learned From the Market’s Perfect Storm by Robert F. Bruner and Sean D. Carr). Leaders of the banking system realized they needed help moving forward, and there was general agreement that the widespread collapse of financial intermediaries was not in the broader social interest. The question of the day naturally became: How much government oversight would bankers have to accept in return for the creation of a modern central bank? Read the rest of this entry »
Elizabeth Warren: The Right Appointment At The Right Time
By Simon Johnson
The case for appointing Elizabeth Warren to set up the new Consumer Financial Protection Bureau (CFPB) was, at the end of the day, overwhelming. She had the original idea, she helped build political support, and her own credentials have been only strengthened by her work as head of the Congressional Oversight Panel for TARP. On Friday, the president will reportedly appoint Professor Warren as an assistant to the president and special adviser to the Treasury Secretary, with the task of setting up and initially running the CFPB.
Some of Ms. Warren’s supporters think this move is something of a half-measure – they would have preferred a conventional nomination, with all the fanfare of a classic confirmation battle in the Senate. There is something to be said for that, but the interim appointment route is by far the best way forward for three reasons. Read the rest of this entry »
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Written by James Kwak
June 7, 2010 at 9:11 am
Posted in Commentary