Joseph Stiglitz weighs in on the Federal Reserve

Joseph Stiglitz is one of the greatest economists in the world. He's held professorships at Yale, Stanford, Duke, Princeton and Oxford Universities, and now teaches at Columbia University. He was the chair of the president's Council of Economic Advisors under Clinton. He served as Senior Vice President and Chief Economist at the World Bank from 1997 to 2000. He was awarded the Nobel Prize in Economics in 2001. There should be no disputing that he is eminently qualified in the field of economics, which is all the more reason for you to pay attention to what he says about the Federal Reserve. Speaking at a conference held by the Roosevelt Institute, he said that if a country had come to the World Bank under his tenure seeking aid, while maintaining a financial regulatory system like the Federal Reserve, it would have raised very big alarms:

"If we had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure," Stiglitz said during a conference on financial reform in New York. "It's time for us to reflect on our own structure today, and to say there are parts that can be improved."

Continue ReadingJoseph Stiglitz weighs in on the Federal Reserve

How big are the big banks?

At The New Republic, Simon Johnson and Peter Boone offer some eye-popping numbers to illustrate how big the big banks have gotten:

As a result of the crisis and various government rescue efforts, the largest six banks in our economy now have total assets in excess of 63 percent of GDP (based on the latest available data). This is a significant increase from even 2006, when the same banks’ assets were around 55 percent of GDP, and a complete transformation compared with the situation in the United States just 15 years ago, when the six largest banks had combined assets of only around 17 percent of GDP. If the status quo persists, we are set up for another round of the boom-bailout-bust cycle that the head of financial stability at the Bank of England now terms a “doom loop.”
From the same article, here's more numbers to illustrate how big is big:
The big four have half of the market for mortgages and two-thirds of the market for credit cards. Five banks have over 95 percent of the market for over-the-counter derivatives. Three U.S. banks have over 40 percent of the global market for stock underwriting. This degree of market power brings with it not just antitrust concerns, which this administration has declined to act on, and a huge amount of economic risk--but great political influence as well. The banks are going to use that power to block legislation containing any meaningful financial reform. And they are likely to succeed.
Can we simply regulate banks? More bad news:
The idea that we can simply regulate huge banks more effectively assumes that regulators will have the incentive to do so, despite everything we know about regulatory capture and political constraints on regulation.
In their conclusion, the authors are not optimistic that the Obama White House has the will to push meaningful reform.

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Going down?

Writing at the NYT, Bob Herbert thinks that the U.S. desperately needs to turn things around. His concern is "frantic, debt-driven consumption, speculative bubbles, exotic financial instruments . . ." He's not buying talk of our economic "recovery":

We don’t hear a lot that is serious about the sorry state of the nation’s infrastructure or the trade policies that crippled so many American industries or our inability (or unwillingness) to compete effectively with China when it comes to the new world of energy for the 21st century or our abject failure to provide a quality public education for the next generation of American workers, scientists, artists and entrepreneurs. Speaking at a conference here on Wednesday, Gov. Ed Rendell of Pennsylvania said that if we don’t act quickly in developing long-term solutions to these and other problems, the United States will be a second-rate economic power by the end of this decade. A failure to act boldly, he said, will result in the U.S. becoming “a cooked goose.”

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Time to stop scoffing at those who worry about the budget deficit

How bad is the U.S. budget deficit? It's so bad that I've lost sleep over it during the past year, even though the extent of the deficit rarely makes any local news. Here's how Brett Arends of the Wall Street Journal summarizes the situation:

The federal government is expected to borrow $1.6 trillion this year, or about $15,000 for every household in the country. Over the next 10 years it's expected to borrow a total of $8.5 trillion. And the government was already deeply in debt to begin with. . . Remarkably, the Treasury market has not yet panicked about the deficits: Yields have barely risen this week. Embedded in the market is a long-term inflation forecast of about 2.5 percent. I call that a dangerous complacency.
After giving the bad news, Arends gives some advice on how to protect your savings, though he doesn't sound optimistic.

Continue ReadingTime to stop scoffing at those who worry about the budget deficit

Simon Johnson finds tax-the-banks solution laughable

Barack Obama recently announced that the way to prevent future economic collapses is to put a new tax the big banks. For me, this was just one more in a long line of dreadful responses out of the White House. Who does he think is going to ultimately pay that tax? Further, how could a tax possibly keep big Wall Street banks from taking reckless gambles, and how is it that having a pool of tax money would mean that Washington DC wouldn't again jump in to "save the banks" with huge doses of tax dollars during the next cataclysmic crash? As long as there are banks that are "too big to fail," the federal government will jump in a most co-dependent of ways. I just read an FT.com article by economist Simon Johnson, who reassured me that my instincts were on target.

This week, the US Treasury pulled its latest rabbit out of the hat: a tax on the liabilities of large banks. The Obama administration argues that, by penalising large institutions with such taxes, we can limit their future risk-taking. This logic is deeply flawed. Why would higher funding costs mean you gamble less? If you know Tim Geithner is waiting to bail you out, you may gamble more heavily in order to pay the tax. The UK “reforms” look equally unpromising.
Johnson also spells out what IS needed:
First, we must sharply raise capital requirements at leveraged institutions, so shareholders rather than regulators play the leading role in making sure their money is used sensibly. This means tripling capital requirements so banks hold at least 20-25 per cent of assets in core capital. Second, we need to end the political need to bail out every institution that fails. This can be helped by putting strict limits on the size of institutions, and forcing our largest banks, including the likes of Goldman Sachs and Barclays, to become much smaller.
For reasons I truly don't understand, Obama is refusing to stand up and use his magnificent eloquence to make a case for meaningful financial reform. This has been a slow-motion train wreck for the past year, and he's about to allow the chance to create a CFPA slip away. He needs to join Elizabeth Warren in an almost constant assault on these highly monied amoral corporations (and their enablers in Congress) that it's time for real reform. As Warren (who IS out there fighting a good fight) says, "The problem is that a strong CFPA directly threatens the banks' ability to sell confusing, deceptive, fee-heavy financial products that generate huge profits, Warren said."

Continue ReadingSimon Johnson finds tax-the-banks solution laughable