CEO Semiotics And The Economics Of Vilification

CEOs of major banks have started to push back against the critics – their primary job, after all, is lobbying (rather than, say, risk management).  As such, they are typically sophisticated communicators who use a wide range of symbols, words, and modes of communication to get their points across.

Not everything they say, of course, should be overinterpreted.  For example, calling the hand that feeds the banks “asinine” (Richard Kovacevich, chair of Wells Fargo) seems more like an outburst than a promising way to enhance shareholder value – even if he is correct about whether today’s stress tests are actually meaningful.

Lloyd Blankfein’s February FT op ed famously made the case that we need banks as a “catalyst of risk.” But this argument raises awkward questions.  What does Goldman Sachs know about risk, and when did it learn this (presumably recently, after they settled up with AIG)?  My risk-taking entrepreneurial contacts feel their catalysts should be somewhat smaller relative to the economy – so these banks/securities underwriters can, from time to time, go bankrupt without threatening the rest of the private sector (and everyone else) with ruin.  Still, the main point of this FT article was the symbolism of the timing, appearing on the morning of what was scheduled to be Secretary Geithner’s first big speech; we were supposed to read Mr. Blankfein’s conceptual script, then look up and see the Secretary on TV.

Vikram Pandit’s recent letter to Citi employees was a nicely timed communication to his broader social and political audience.  His upbeat note was plausible because he put down some very specific markers, e.g., “best quarter-to-date since 1997″; the danger is that these come back to haunt him.  And as a document making the case for big banks more generally, it was weak.

The banking industry’s thought leader right now is definitely Jamie Dimon.  His point about vilification is straightforward.

Dimon gently points out that unless we stop vilifying corporate leaders (and presumably he would say the same of traders this week), we will not get an economic recovery.

And, at some level, he must be right.  If you create enough uncertainty around the future rewards for any activity, e.g., trading securities, setting up new companies, or fishing, you can easily get less investment of time and effort in that activity.  You may also, of course, get more speculative behavior as time horizons become shorter – i.e., “take the money and run” becomes more attractive relative to building up a reputation for good behavior.

“We are where we are,” is something I’ve heard (in other contexts) from people with authority who have screwed up very badly but who know that everyone wants and needs to move on.

But the reality in banking is somewhat more complicated, for three reasons.

1. We don’t know how much of banking profits in recent years were illusory and should not have been booked as GDP.  In fact, it would not be a big surprise if – eventually – we go back and mark down our true production of goods and services in 2007 by 2 or even 5 percent.  In this sense, we face a statistical situation similar to that of the Soviet Union at its demise – once they figured out that all their military production had no real value, they had to reduce measured GDP sharply.  It is not compelling to say we should necessarily go back to where we were in banking.

2. Clean-ups in banking and most other activities require bringing in new people.  But, as the AIG discussion over the past week has made clear, much of the finance industry has not yet reached the point where they see this as essential.  This is about good housekeeping, not vilification.

3. Going forward, Mr Dimon concedes that being Too Big To Fail is bad, but he does not apparently see the logical consequences.  Not all bankers made business-ending types of mistakes, but some did and under our current business-as-usual course, we will end up with fewer big players.  Mr Dimon proposes changing something (vague) about regulation and bankruptcy so that the taxpayer need not be afraid of the new behemoths failing.  But this cannot possibly be plausible, after all today’s problems are largely the result of weakly enforced regulation and politically powerful banks; in the future this imbalance will worsen.

There may well be short-run costs (i.e., in ways that really hurt: lower growth, more unemployment) to properly cleaning-up and restructuring the banking system.  The exact size of these costs is hard to know, but we should face reality on this point – there is a potential tradeoff between presumed costs of bank reform today and longer-run improvements in our sustainable growth potential.

But the real question is bigger.  Can we continue to live with the risks involved in having banks that are large relative to GDP and politically very powerful?  Banks of that size cannot commit not to screw up.  In fact, the people who work for them will know – based on what they have seen so far – that even if future bailouts do not ultimately save the business, one way or another, they will walk away with a lot of stuff.

Tell me if you perceive an alternative, but I can’t see any sensible way forward that does not involve breaking up large banks and making sure they stay much smaller relative to GDP.  This is surely not sufficient for stability and prosperity in the future, but right now it appears unavoidably necessary.

Originally published at The Baseline Scenario and reproduced here with the author’s permission.

5 Responses to "CEO Semiotics And The Economics Of Vilification"

  1. DrFrank   March 21, 2009 at 12:14 pm

    Simon Johnson on Breaking Up Big Banks. March 21, 2009Sometimes in a medical context, it makes sense to shrink the tumor before surgery. We need more prominent voices such as yours to stop forecasting doomsday scenarios and painful outcomes under the best of circumstances, so as to begin to address measures that will reduce the high concentration of bank assets in a handful of institutions and that will also reduce our reliance on securitization as a credit delivery mechanism. Treasury and the Fed, almost indistinguishable when it comes to crisis response now, need to stop supporting the system that has failed us and to start dispensing largess and other advantages to more diversified and easily regulated credit distribution operations. The US is unlike emerging country economies in a banking crises for many reasons, and one of the most prominent is the existence in the US of a viable regional and community banking industry. These are lenders who will make loans with additional capital and deposits, if there are good loans to make, meaning loans they are willing to keep. I don’t think it would be difficult for policy thinkers to devise programs to cause deposits and loans, especially home mortgages for refinance or new purchase (including repurchase at foreclosure sales), to migrate to old-fashioned banks. Back before the days of money market funds, mortgage backed securities, 401k’s and IRA’s, the public willingly accepted regulated deposit rates in exchange for the safety of a government guaranty and only member banks could access the Fed Discount Window as a way of securitizing, if you will, loan pools for liquidity. As regards regulation, an operational definition is what we need: a bank is a insured deposit-taking and lending enterprise that can be evaluated by a team of FDIC auditors in a month. A big bank might be a conglomerate of many such regulatory units, separately capitalized, none individually too big to fail. All the rest, unless subject to other forms of industry regulation such as insurance, are casinos that can only be regulated by market mechanisms and buyer/seller beware. Can we not map out a route from here to there? Otherwise, Blankfien, Diamond and Pandit & Company will continue to enjoy what looks more and more like the last messy stage in a victorious 40 year siege on sovereignty over the money supply.

    • serialsaver   March 22, 2009 at 6:35 am

      Those masters of the universe still claim dominance in an entrenched system of imbalances, incentives and rewards. Restoration of Glass-Steagall legislation which would effectively restructure banking to its former incentive reward system that you allude to. It is the structural backbone and competition within the banking system allowing rewards for savings, discipline and prudence over risk taking and debt. The outrage of providing those who risked our very economic sovereignty and holding of massive leverage/debt without a quid-pro-quo or consequences besides claw-backs of bonuses to those taking taxpayer funds will grow and become a loud chorus if not executed quickly. The cart is before the horse in supplying those who risked and failed. Why should I pay for their failed bets, I didn’t bet along with them and I will get nothing in return except perhaps more abusive behavior from them in market manipulations which punish me and my ability to supply my own needs.Promises of regulatory regimes will not soothe me or the public as former regimes failed miserably. Congress and regulatory agencies failed in their duty to protect and serve the public; rather they have become obstructionists and are slaves to those they enabled. Endless workaround and mechanisms to exclude these bandits will result as their power is ultimately clear as architects of this fine mess. Therefore, structures that were abandoned in the late ’80s and ’90s should be restored immediately and without compromise as the grand experiment of unfettered free market capitalism failed; it allowed the dark underbelly of capitalism to become the rule rather than the exception. This also means complete repeal of the CFMA and why the G-20 meeting is massively important as that will require international coordination in restructuring trading in currencies and commodity markets to exclude massive speculation/paper trades, manipulation and excluding those markets from those who have abused it. A credit based economy cannot endlessly expand on credit!! Let us choose our own level of risk and if we want to play in the same sandbox of those masters of the universe or not.They sought and very nearly succeeded in making a financial guru more important to an individuals well being than a physician, they surely get paid more a physician but they serve their own interests unlike physicians who serve in the interest of the patient.Its time to put them back in their own sandbox and get them out of mine as bullies of the playground who took everyones lunches for decades. Congress faces a crisis of confidence if they do not succeed in reigning them in and dispensing a clear, tangible quid-pro-quo for the use of taxpayers funds.

  2. Irini Fountoulaki   March 22, 2009 at 6:07 am

    Simon, you have a fine analytical mind; but the Beltway crowd – including President Obama – has their own political agenda and other priorities.They do not want to break eggs with large ‘lame-duck’ financial institutions. US policy makers prefer subsidizing them either directly through capital injections or indirectly through artificially low interest rates. On top of this, they have their own grandiose political schemes that requires even more debt and the low interest rates increase the moral hazard.Whatever the excesses of corporate America, their own excesses make this pale in comparision. The US is a society that has lost any rational sense of risk perception.The issue is whether pushing the problems around and pyramiding debt is sustainable. Higher inflation, decline in the US Dollar and rising commodities prices will likely bring this government financial engineering to an inglorious end one day soon.Living in Greece, which has been struggling for years with massive public debt (from 25 years of Socialist governments) that requires a large part of the national budget to service every year, I will take some ‘schadenfreude’ to see political Yuppies like Obama face the same music and see his credit card called.Politicians may take pleasure in kicking around the productive classes, but in the end there is limit to how much tax money they will ever be able to squeeze out of them, especially in a declining economy.The US is a dreadfully uncompetitive and undesireable place to invest and do business!

    • serialsaver   March 22, 2009 at 6:55 am

      So I suppose Asia and India, etc. are the best places to do business, eh? After all child labor and indentured servants is ultimately rewarding isn’t it and allows for massive profits from an ultra-cheap labor force and occlusive standards regime while pumping in products at below cost of production to overtake entire market sectors. Massive trade imbalances mean nothing do they, except that someone is getting fabulously wealthy.Macroeconomics is effectively politicized, the USA and other nations ignored basic economic rules of engagement for massive profiteering shunting wealth to fewer and fewer and exacerbating imbalances to a critical mass.

  3. john   August 10, 2012 at 11:39 am