Archive for April, 2009
Testimony before the Joint Economic Committee of the US Congress hearing, “Too Big to Fail or Too Big to Save? Examining the Systemic Threats of Large Financial Institutions” April 21, 2009
The depth and suddenness of the US economic and financial crisis today are strikingly and shockingly reminiscent of experiences we have seen recently only in emerging markets: Korea in 1997, Malaysia in 1998, and even Russia and Argentina, repeatedly.1
The common factor in those emerging-market crises was a moment when global investors suddenly became afraid that the country in question wouldn’t be able to pay off its debts and stopped lending money overnight. In each case, the fear became self-fulfilling, as banks unable to roll over their debt did, in fact, become unable to pay off all their creditors.
This is precisely what drove Lehman Brothers into bankruptcy on September 15, and the result was that, overnight, all sources of funding to the US financial sector dried up. From that point on, the functioning of the banking sector has depended on the Federal Reserve to provide or guarantee the necessary funding. And, just like in emerging-markets crises, the weakness in the banking system has quickly rippled out into the real economy, causing a severe economic contraction and hardship for millions of people.
This testimony examines how the United States became more like an emerging market, the politics of a financial sector with banks that are now “too big to fail,” and what this implies for policy, particularly the pressing need to apply existing antitrust laws to big finance.
I hope it works. The financial stability plan presented on March 23 by Treasury Secretary Timothy Geithner could be a part of the solution because it would remove some of the bad assets from the banks’ balance sheets and put some capital into the banks. The Treasury is clearly trying clever tactics to avoid going to Congress for more upfront on-budget expenditures to fix the banks.
Even in the best case, though, I worry that the avoidance of upfont costs makes it penny-wise, pound-foolish, for the US taxpayer. The private sector investors get a subsidy from the government in terms of both leverage and insurance against asset declines, and the current bank shareholders get higher prices for their assets via these subsidies. It may well thus cost the taxpayer more on net, between these subsidies and the lost upside gains, than if the government had stepped in more aggressively to take full ownership and pay low prices for these assets, even if it costs less upfront.
Global news editors’ eyes glaze over when you pitch them on a story about the International Monetary Fund (IMF). Somehow, nothing sounds as deeply uninteresting as an international organization dealing with the intricacies of the global financial system. To make matters even less interesting, no employee of the IMF can be called to testify before Congress, so the organization hasn’t had any high-tension TV moments that might familiarize people with the work it does.
But at this week’s G-20 summit, at long last, the IMF will step out into the limelight. Indeed, what the member countries choose to do with the IMF is absolutely critical to the success of the summit, and, more broadly, to the chances of a global economic recovery.
China made headlines across the globe with its call for the establishment of a new currency to replace the dollar as the world’s reserve currency. The impeccable timing, just prior to the London G-20 summit, has allowed China to articulate the concern as a systemic one.
There may well be problems with the current dollar standard that underpins the world’s financial system. The dollar standard may also have had a role to play in the current crisis. But China’s real reasons are national: It fears the loss in the value of its reserves of $2 trillion from a sharp dollar decline. And that threat of dollar decline has suddenly become more immediate because of the dramatically increased vulnerability of the US government’s balance sheet.
But is China trying to have it both ways? It is seeing itself as the victim of the dollar standard when it has been, for a long time, a beneficiary and promoter of this standard.
Zhou Xiaochuan, governor of China’s central bank, has suggested creating a “super-sovereign reserve currency” to replace the dollar over the long run. He would sharply enhance the global role of special drawing rights (SDRs), the international asset created by the International Monetary Fund (IMF) in the late 1960s and just given an enormous boost by the decision of the Group of 20 to expand its issuance by $250 billion (€189 billion, £171 billion). These are the first big proposals for international monetary reform from China or indeed any emerging-market economy and deserve to be taken seriously for that reason alone.
Several other Asian countries, Brazil, and Russia have expressed support for Mr. Zhou’s ideas. The United States and several other governments, however, have been quick to reject them, reaffirming their confidence in the central global role of the dollar. They apparently fear that serious discussion of this issue could shake confidence in the dollar, driving down its value and prompting a sharp rise in the euro and other currencies. Such instability and consequent rise in global interest rates would severely complicate US, European, and global recovery from the crisis.
by Simon Johnson, Peterson Institute for International Economics Revised version of speech prepared for the Presidential Address to the Association for Comparative Economics, San Francisco, January 4, 2009 January 7, 2009 © Peterson Institute for International Economics printer-friendly email page send comments The Economic Crisis The global financial crisis of fall 2008 was unexpected. A […]
Op-ed originally posted at TNR.com March 30, 2009 Even before the G-20 summit begins (with dinner on April Fool’s Day), world leaders have decided not to address most of the major questions of the day: how to adjust monetary policy around the world, how to save Europe from itself (difficult but still doable), and how […]
The Leaders’ statement from the London summit of April 2 is an improvement over the usual communiqués from international meetings by being much more concrete, readable, and substantial. It provides clear policy principles and specifies its agenda in sufficient detail.
For Central and Eastern Europe, this statement is likely to be particularly important, because it commits sufficient financial resources to the International Monetary Fund (IMF) and other international financial institutions so that these institutions can provide Central and Eastern European countries with the necessary funding to stabilize their international finance.
Whenever reform of health care is discussed in America, the argument that “America rejects socialized medicine” is heard in many quarters.
Superficially, the facts suggest that the private sector has always accounted for the majority of healthcare expenditure in the United States (approximately 55 percent of total expenditures since the early 1990s1) and that private individuals’ costs of health care has risen rapidly in real dollar terms in recent years. These facts lend credence to the view that the United States retains a private-sector oriented healthcare system.
It is so much harder when the financial crisis is in your own country. Timothy Geithner, Larry Summers, and a host of other economists—myself among them—spent the late 1990s yelling at Japanese and other Asian officials to clean up their banking crises. A typical conversation would end with the American adviser bursting with frustration: “Don’t […]