Bob Cropf

Posts Tagged ‘banks’

Did Obama’s team incorrectly diagnose the economic crisis?

In Keynesianism, Obama, stimulus on May 4, 2009 at 1:34 PM

In the April/May issue of the liberal-leaning Washington Monthly, James K. Galbraith writes that the team behind Obama’s economic recovery plans all share the same background and creed (you can find the article online here.). The problem with that, according to Galbraith, is that this leads to severe limitations in their vision of the possibilities of the economy.

Geithner, Summers, Romer, Orszag, et al. all share the underlying belief that the economy will right itself. The chief difference between Obama’s economic team and conservatives, however, is that Obama’s advisers believe that the economy needs a little help from the government to get back whereas economic conservatives assert that such help would actually do more harm than good. Galbraith argues that this could lead to a weak approach to fixing the current mess:

“If recovery is not built into the genes of the system, then the forecast will be too optimistic, and the stimulus based on it will be too small.”

Interesting point: The article claims that the hopes for a quick recovery are based on the assumption that this recession will be no worse than the 1981-82 downturn, the worst in recent history. However, if this is not the case, then the models that have been used to predict a rapid turnaround would be wrong.

If we discard as “normal,” postwar economic experience, then there might not be a near-term recovery at all. A strong argument could be made that the situation we now find ourselves in is vastly different from the postwar economic regime that we are familiar with.

Galbraith argues that Geithner, Summers, et al. are primarily concerned with restoring the pre-crash economic order, which was built on the predominance of private banks. Galbraith quotes the Treasury Secretary, Geithner as telling CNBC:

“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

In the past, economic downturns were shallow enough to permit a bank-led recovery. However, this time things are radically different, according to Galbraith. Millions of families have lost a huge proportion of their wealth. As a dire consequence, for many Americans, Social Security and Medicare represent their chief source of wealth.On top of that, the nation’s largest banks are bankrupt or nearly so. Thus, any attempt to restore the pre-crisis regime is automatically doomed to failure.

The article goes on to say much more. Galbraith is a respected economist, who holds a prestigious chair in Government/Business Relations at LBJ School of Public Affairs, University of Texas at Austin, so he is someone whose words count for something in Washington, DC.

I bring it to the class’ attention because while much of the mainstream media focuses on the conservative attacks on the Obama economic plan, there is also a liberal critique that has not received quite as much attention. Galbraith is a good example of the “loyal opposition” within the left.


European Banks & Bailouts

In 1 on April 8, 2009 at 7:39 AM

As unpopular as bailing banks out is in the US, at least we can bail them out. Europe may be pushing for tighter regulation of the financial markets, but they have bank issues that are much more problematic than ours if you make the assumption that regulation might prevent or mitigate most crises, but it is never 100% insurance against any crisis.

We have banks that have a balance sheet of 10-15% of GDP. The biggest banks total somewhere near 50% of GDP if I have my figure straight. There are individual European banks with balance sheets 200-600% GDP of their respective country. Iceland’s banks had balance sheets totaling over 1000% of GDP – it is no wonder the country went bankrupt.

The Financial Times has very interesting graphic.


Bailing out bankers rather than banks

In economics on March 18, 2009 at 10:41 AM

David Leonhardt in today’s NY Times, writes a good article pointing out the fallacies in A.I.G’s claims that the bonuses the company paid out to its employees for “retention purposes.” He systematically discredits this argument on several grounds:
1) They’re totally unnecessary. He points out that almost no executive has left one company for a similar position at another company.
2) For jobs below that of CEO, it is not necessarily a bad thing for turnover to happen. After all, isn’t the case that the Financial Product division is the one most responsible for getting the company into its current mess?
Leonhardt also dismisses A.I.G chief, Edward Liddy’s claim that the bonuses are needed to keep top talent in the firm by pointing out that a) it hasn’t worked–52 employees receiving bonuses still left and b) none of the employees are truly
indispensable; all could without a great deal of trouble be replaced. The whole situation points to the need for increased government oversight of the industry, which should have been in place years before, so that the situation we now find ourselves in would probably never have happened. This is what occurs when you leave the asylum to be run by its inmates. How could anyone expect things to turn out differently?

As a side note, there is a very interesting video of a lecture by Alan Blinder at Princeton’s Woodrow Wilson School, which was given in November 2008 and is well-worth watching. The lecture is entitled “The Origins of the Financial Mess.”

And the Banker Speaks…

In 1 on March 12, 2009 at 9:12 PM

Jamie Dimon, CEO of JP Morgan Chase, spoke to the US Chamber of Commerce on March 11. There are a couple of things that struck me listening to this:
(1) I wish I had listened to this before I turned in my paper; he answered the question, better than I did: we all caused the crisis by acting in our self interest by pulling our money out of bonds, etc. because we felt over exposed (whew, I thought it was all of us with too much debt, but he placed the fault squarely on the shoulders of people with money, how very populist, sort of, of him)
(2) He repeatedly says “we all know there are too many regulators” and then proceeds to suggest a new/strengthened/reinstatement of regulation.
(3) He sounds oddly confident, saying (of course) JPM will be fine, most banks will be fine and if not we can deal with that…
(4) He criticizes (albeit somewhat reservedly) compensation caps because, apparently European banks snapped up some of our “top talent” the day they were announced…
(5) He complains at some length at the unproductive, even harmful demonization of corporate America (particularly the banks) and he wants leaders and politicians (he distinction, not mine) to “stop it”, it is America’s business…
(6)Why again are we listening to the guys who were at the helm for the crash? Even if it was as unavoidable at the iceberg was for the Titanic, I don’t think NOW is the time for them to come out and tell we should have avoided the iceberg, especially after having thoroughly neglected their responsibility to provide and maintain life boats.

Where are the tar and feathers?

Nationalization For Beginners

In 1 on March 9, 2009 at 5:44 PM

James Kwak wrote a brief explanation of bank nationalization on Baseline Scenario. This blog is pretty useful, has a really good “for beginners” section and was founded by Simon Johnson, former IMF official — an organization that has long been in the business of forcing countries to nationalize (temporarily) financial systems with the imprimatur of the US government.


Blinder on Nationalization of Banks

In 1 on March 8, 2009 at 10:32 AM

Blinder commented on nationalization of banks in today’s New York Times. He is an opponent and offers some good arguments. There are some reasons that his qualms may not be entirely accurate. Krugman is not pleased.

First, he states we have 8,300 banks. True, a lot of those have already collapsed and had the FDIC take over (FDIC just got a $100b credit line to cover more and bigger bank failures). A lot will collapse in the future regardless of whether or not nationalization takes place. The point is that no one is advocating (to my knowledge) nationalizing ALL banks. Isn’t it a bit nonsensical to categorize Smalltown Bank in the same category as Citi, Bank of America, JP Morgan, and Wells Fargo?

Second, Citi, BoA, JPM, and WF account for 64% of commercial bank assets (check out pie chart).

– KC

TARP and Accountability

In 1 on February 18, 2009 at 6:49 PM

I came across a timely column in the NYT this evening that ties is closely with Okun. On page 60 & 61, Okun (1975) writes about the importance of the government making sure the public’s money is spent wisely even if it has to spend a great deal of additional money to do so “Because the government get its funds from taxpayers by mandatory, and not voluntary, decisions, there is no room for the principle of caveat emptor in the area of public services. The government must be accountable to the citizens, and accountability is as costly in resources as it is precious to the integrity of the political process. Bureaucratic red tape is neither an accident nor a reflection of bad rules or inept officials: it is the result of the obligation of political decision-makers to be cautious, to avoid capriciousness, to take account of the full range of interests and impacts of the course they adopt, and to guard against any misuse of taxpayers’ money,” (p. 60).