The Baseline Scenario Wed 2010-09-08 10:36 EDT

Irish Worries For The Global Economy

Peter Boone and Simon Johnson

...Ireland's difficulties arose because of a massive property boom financed by cheap credit from Irish banks. Ireland's three main banks built up loans and investments by 2008 that were three times the size of the national economy; these big banks (relative to the economy) pushed the frontier in terms of reckless lending. The banks got the upside, and then came the global crash...Today roughly one-third of the loans on the balance sheets of major banks are nonperforming...The government responded to this with what are currently regarded as ``standard'' policies in Europe and America. It guaranteed all the liabilities of banks and began injecting government funds to keep these financial institutions afloat. It bought the most worthless assets from banks, paying them government bonds in return. Ministers have promised to recapitalize banks that need more capital. Despite or perhaps because of this therapy, financial markets are beginning to see Ireland as Europe's next Greece...Until very recently, Ireland was seen as Europe's poster child of prudent reforms...The ultimate result of Ireland's bank bailout exercise is obvious: one way or another, the government will have converted the liabilities of private banks into debts of the sovereign (that is, Irish taxpayers), yet the nation probably cannot afford these debts...The idea that Ireland, Greece or Portugal can cut spending and grow out of overvalued exchange rates with still large budget deficits, while servicing all their debts and building more debt, is proving -- not surprisingly -- wrong...

Baseline Scenario; global economy; Irish worries.

Mon 2010-08-16 13:54 EDT

Could The US Become Another Ireland? >> The Baseline Scenario

Peter Boone and Simon Johnson

As Greece acts in an intransigent manner, refusing to act decisively despite deep fiscal difficulties, the financial markets look on Ireland all the more favorably. Ireland is seen as the poster child for prudent fiscal adjustment among the weaker eurozone countries...Ireland's perceived ``success'' is partly due to its draconian fiscal cuts...Ireland's difficulties arose because of a massive property boom financed by cheap credit from Irish banks...Today roughly 1/3 of the loans on the balance sheets of banks are non-performing or ``under surveillance''...The government...guaranteed all the liabilities of banks and then began injecting government funds...it is planning to buy the most worthless assets from banks and pay them government bonds in return. Ministers have also promised to recapitalize banks than need more capital. The ultimate result of this exercise is obvious: one way or another, the government will have converted the liabilities of private banks into debts of the sovereign (i.e., Irish taxpayers)...The government is gambling that GDP growth will recover to over 4% per year starting 2012 -- and they still plan further major expenditure cutting and revenue increasing measures each year until 2013...The latest round of bank bailouts (swapping bad debts for government bonds) dramatically exacerbates the fiscal problem...

Baseline Scenario; Becomes; Ireland.

naked capitalism Sun 2010-07-25 16:13 EDT

The bailouts continue: The Economic Populist

Garrett Johnson

Most people [wrongly] think that the Wall Street bailouts ended at least a year ago...Increased housing commitments swelled U.S. taxpayers' total support for the financial system by $700 billion in the past year to around $3.7 trillion...the current outstanding balance of overall Federal support for the nation's financial system...has actually increased more than 23% over the past year, from approximately $3.0 trillion to $3.7 trillion -- the equivalent of a fully deployed TARP program -- largely without congressional action, even as the banking crisis has, by most measures, abated from its most acute phases, the TARP inspector general, Neil Barofsky, wrote in the report...Congress nearly comes to a standstill over $33 Billion for unemployment extensions, but there isn't even a debate over $700 Billion for Wall Street.

bailout continued; economic populist; naked capitalism.

naked capitalism Fri 2010-07-16 16:15 EDT

What is Simon Johnson Smoking?

Simon Johnson...incorrectly celebrates a toothless provision in the Dodd-Frank bill as being tantamount to an anti-trust act for too big to fail banks...If we believed this bill was meaningful, action be taken against these banks immediately upon signing. Odds of that happening? Zero...The problem is it not merely the size of these firms, but the fact that they control infrastructure that is deemed critical to modern commerce. I'll get into specifics in short order, but in some cases the firm owns critical plumbing outright; in other cases, it is so tightly networked to other firms that mucking with it very much runs the risk of taking down the rest of the grid...Citi runs a big corporate cash management/reporting system called GTS...And no one is going to dare tamper with JP Morgan's clearing business...The problem is that it would take a radical restructuring of the very biggest banks, the critically placed dealer firms, and the most important payment and clearing operations to make a real dent in systemic risk. The officialdom the political lacked the will to do so at the peak of the crisis, and there is no basis for fantasizing that it will suddenly develop more nerve now.

naked capitalism; Simon Johnson Smoking.

Sun 2010-05-09 09:18 EDT

Why Do Senators Corker And Dodd Really Think We Need Big Banks? >> The Baseline Scenario

Simon Johnson

On Friday, Senator Bob Corker (R, TN) took to the Senate floor to rebut critics of big banks. His language was not entirely senatorial: ``I hope we'll all come to our senses'', while listing the reasons we need big banks. And Senator Chris Dodd (D, CT) rose to agree that (in Corker's words) reducing the size of our largest banks would be ``cutting our nose off to spite our face'' and that by taking on Wall Street, ``we may be taking on the heartland.'' Unfortunately, all of their arguments in favor of our largest banks remaining at or near (or above) their current scale are completely at odds with the facts (e.g., as documented in our book, 13 Bankers). ...As for why exactly Senators Corker and Dodd really support big banks, it seems increasingly likely that this is all about campaign contributions.

Baseline Scenario; Dodd Really Think; Needs Big Banks; Senator Corker.

Sat 2010-04-24 08:59 EDT

Rent-A-Front: New Group Wages Stealth Battle Against Wall Street Reform | TPMMuckraker

TPM Media

...every indication is that Stop Too Big To Fail is an astroturf operation funded by corporate interests to give the appearance of grassroots opposition to reform..."These guys made the KGB look like amateurs, and I used to work in Russia quite a lot," says Simon Johnson, a former chief economist at the IMF, now at MIT, who is a prominent advocate of breaking up the big banks...the group pays lip service to the idea of breaking up the big banks while at the same time adopting "bailout fund" rhetoric used by Republicans, all the while devoting its resources to trying to kill financial reform altogether...Stop Too Big To Fail co-founder Bob Johnson...is president of Consumers for Competitive Choice (C4CC), which runs Stop Too Big To Fail...Before C4CC was Consumers for Competitive Choice it was Consumers for Cable Choice. That group was funded by big telecoms like Verizon and fought to deregulate the cable industry...the man who reached out to economist Simon Johnson about joining the Stop Too Big To Fail call was Oliver Wolf, a director with the DCI Group. DCI is the Washington public affairs firm that specializes in astroturf efforts and has worked for everyone from the Burmese junta to the tobacco industry.

front; New Group Wages Stealth Battle; renting; TPMmuckraker; Wall Street reforms.

naked capitalism Wed 2010-04-21 12:20 EDT

Guest Post: Dodd Financial Reform Bill Is All Holes and No Cheese

George Washington

In a letter to Senate majority leader Harry Reid and minority leader Mitch McConnell, luminaries including former SEC Chief Accountant Lynn Turner, former Labor Secretary Robert Reich, hedge fund owner Jim Chanos, former Lehman Brothers Vice Chair Peter Solomon, former S&L investigator Bill Black, former Senate Banking Committee Chief Economist Rob Johnson, economists Dean Baker, Barry Eichengreen and others pointed out that Dodd's proposed financial reform legislation wouldn't have prevented the current crisis ... and won't prevent the next crisis...

cheese; Dodd Financial reform Bill; Guest Post; holes; naked capitalism.

naked capitalism Sun 2010-02-28 13:08 EST

Martin Wolf is Very Gloomy, and With Good Reason

Martin Wolf, the Financial Times' highly respected chief economics editor, weighs in with a pretty pessimistic piece tonight. This makes for a companion to Peter Boone and Simon Johnson's Doomsday cycle post from yesterday...With the private sector debt overhang as great as it is, I doubt there is a way out of our mess that does not involve a period of debt restructuring and writeoffs. That process, no matter how adeptly handled, results in dislocation and has a chilling effect on bystanders...Swedish Lex interestingly sees another possible brake that may become operative prior to another bubble/bust cycle. He believes that the EU has much less tolerance for underwriting zombie banks than the US. The EuroBanks have written off less in the way of losses than their US peers, are also exposed to any EU sovereign debt defaults, and yet the biggest are still crucial parts of the international capital markets infrastructure (and therefore still tightly coupled to the very biggest US/UK firms). While any EU sovereign debt defaults could morph into a full blown crisis, the EU responses to the joint sovereign/bank debt overhang could lead to more radical changes in EU banking rules and practices that could blow back to the very biggest US banks in unexpected ways.

gloomy; good reason; Martin Wolf; naked capitalism.

New Deal 2.0 Sat 2010-02-27 22:55 EST

GSE Losses As Shadow Bailout

Roosevelt Institute Fellow Mike Konczal

...As the private sector started to dump housing and housing bonds quickly in 2007 and 2008, government officials made sure that the GSEs would be capable of absorbing these bad loans...This constitutes one part of many ``shadow bailouts'' according to Roosevelt Institute senior fellows Rob Johnson and Tom Ferguson; this argument, and the graph above, is from their Too Big to Bail: The `Paulson Put,' Presidential Politics, and the Global Financial Meltdown Part II paper. (In Part I, they argue that the Federal Home Loan Bank System was also used in a similar manner.) Astute readers will notice that the action of government officials using public funding sources to provide makeshift backstops for losses of the banking sector to clear the balance sheets of toxic assets to ``unlock the frozen credit market'', without having to go to Congress for funding, was also a central feature of Geithner's PPIP plan, with FDIC stepping up to the plate once the GSEs went bust...

0; GSE losses; new dealing 2; Shadow Bailout.

Fri 2010-02-26 16:26 EST

Risk taking, regulatory capture and bailouts: The doomsday cycle | vox - Research-based policy analysis and commentary from leading economists

Peter Boone and Simon Johnson

Over the last three decades, the US financial system has tripled in size, as measured by total credit relative to GDP (see Figure 1). Each time the system runs into problems, the Federal Reserve quickly lowers interest rates to revive it. These crises appear to be getting worse and worse -- and their impact is increasingly global. Not only are interest rates near zero around the world, but many countries are on fiscal trajectories that require major changes to avoid eventual financial collapse. What will happen when the next shock hits? We believe we may be nearing the stage where the answer will be -- just as it was in the Great Depression -- a calamitous global collapse. The root problem is that we have let a `doomsday cycle' infiltrate our economic system...

Bailout; commentary; doomsday cycle; leading economists; regulatory capture; research-based policy analysis; risk take; Vox.

Tue 2010-01-12 23:31 EST

Here Comes the Screw Job

Garrett Johnson

...Like America, Argentina sold off its public enterprises for pennies on the dollar in privatization schemes. Like America, Argentina had an artificially inflated currency which crushed its industrial base and led to an over-sized trade deficit. Like America, Argentina tried to disguise these problems by borrowing from foreign creditors. In the end, the Argentine government seized the retirements savings of their own citizens in order to continue to function after foreign creditors abandoned them. They shoved that savings into treasury-like bonds and then massively devalued their currency. In so doing, 70% of the retirement savings of the Argentinian people was wiped out overnight...

comes; screw job.

Harper's Magazine Thu 2009-11-19 10:20 EST

An Object Lesson in Governmental Failure: Derivatives reform

KEN SILVERSTEIN

If you want to understand why Congress seems completely incapable of checking the power of Wall Street, look back to a hearing on the Hill last October 7, and the subsequent events surrounding it...he House Financial Services Committee hosted a panel on reform of the market for derivatives,...the committee, headed by Congressman Barney Frank (D-Wall Street), invited a panel of eight guests who were distinguished by their uniformly pro-industry positions...In response to complaints from Americans for Financial Reform, which represents hundreds of consumer groups and labor unions, the committee issued an invitation--the night before the hearing was held -- to Rob Johnson of the Roosevelt Institute. For the committee, the last minute inclusion of Johnson -- a former managing director at Bankers Trust Company and former economist at the Senate Banking Committee and Senate Budget Committee -- apparently constituted sufficient balance...About five days later Johnson submitted his full testimony to the committee, to be included on its website along with the statements of the other eight panelists...the committee's general counsel would not allow posting of the testimony because Johnson had not submitted it during the hearing. (Of course, since Johnson had been invited at the last minute it was impossible for him to fulfill this pointless requirement.)

Derivatives reform; Governmental Failure; Harper's Magazine; object lessons.

New Deal 2.0 Tue 2009-11-03 20:07 EST

Roosevelt Institute Director and Senior Fellow Rob Johnson will lead Soros' $50 Million Effort

Rob Johnson, Director of the Economic Policy Initiative of the Roosevelt Institute, has been pegged to lead financier George Soros' $50 million effort to create an ``Institute for New Economic Thinking'', which will fund research, convene symposiums, and establish a journal -- all in the name of promoting free market skeptics and creating a new economic paradigm. To this end Soros is gathering market-skeptics this week, including Roosevelt Institute Braintruster and Nobel Prize-winner Joseph Stiglitz, George Akerlof, Michael Spence, and Sir James Mirrlees to start the conversation. ``Economics has failed not only to predict and explain what happened but has also failed to protect society,'' said Johnson in an article in Newsweek. ``That's what the crisis revealed. The paradigm has failed. There is no guidance.''

0; 50; effort; lead Soros; new dealing 2; Roosevelt Institute Director; Senior Fellow Rob Johnson.

naked capitalism Fri 2009-10-23 09:50 EDT

Guest Post: The Ongoing Cover Up of the Truth Behind the Financial Crisis May Lead to Another Crash

George Washington of Washington's Blog

William K. Black -- professor of economics and law, and the senior regulator during the S & L crisis -- says that that the government's entire strategy now -- as during the S&L crisis -- is to cover up how bad things are (''the entire strategy is to keep people from getting the facts'')...PhD economist Dean Baker made a similar point, lambasting the Federal Reserve for blowing the bubble, and pointing out that those who caused the disaster are trying to shift the focus as fast as they can...Economist Thomas Palley says that Wall Street also has a vested interest in covering up how bad things are...The media has largely parroted what the White House and Wall Street were saying...One of the foremost experts on structured finance and derivatives -- Janet Tavakoli -- says that rampant fraud and Ponzi schemes caused the financial crisis. University of Texas economics professor James K. Galbraith agrees...Congress woman Marcy Kaptur says that there was rampant fraud leading up to the crash...Black and economist Simon Johnson also state that the banks committed fraud by making loans to people that they knew would default, to make huge profits during the boom, knowing that the taxpayers would bail them out when things went bust.

Crash; Financial Crisis; Guest Post; lead; naked capitalism; Ongoing Cover; truth.

The Big Picture Sun 2009-10-11 16:08 EDT

Kaptur & Johnson on Bill Moyers

Former International Monetary Fund chief economist Simon Johnson and US Rep. Marcy Kaptur (D-OH) report on the state of the economy... MARCY KAPTUR: Think about what these banks have done. They have taken very imprudent behavior, irresponsible. They have really gambled, all right? And in many cases, been involved in fraudulent activity. And then when they lost, they shifted their losses to the taxpayer. So, if you look at an instrumentality like the F.H.A., the Federal Housing Administration. They used to insure one of every 50 mortgages in the country. Now it's one out of four. MARCY KAPTUR: Because what they're doing is they're taking their mistakes and they're dumping them on the taxpayer. So, you and I, and the long term debt of our country and our children and grandchildren. It's all at risk because of their behavior. We aren't reigning them in. The laws of Congress passed last year in terms of housing, were hollow. ... SIMON JOHNSON: And Rahm Emanuel, the President's Chief of Staff has a saying. He's widely known for saying, `Never let a good crisis go to waste'. Well, the crisis is over, Bill. The crisis in the financial sector, not for people who own homes, but the crisis for the big banks is substantially over. And it was completely wasted. The Administration refused to break the power of the big banks, when they had the opportunity, earlier this year. And the regulatory reforms they are now pursuing will turn out to be, in my opinion, and I do follow this day to day, you know. These reforms will turn out to be essentially meaningless.

Big Picture; Bill Moyers; Johnson; Kaptur.

The Baseline Scenario Sat 2009-10-10 12:59 EDT

Too Politically Connected To Fail In Any Crisis

Simon Johnson

...If you run a big troubled bank, you need a man on the inside -- someone who will take your calls late at night and rely on you for on the ground knowledge. Preferably, this person should have little first-hand experience of the markets (it was hard to deceive JP Morgan and Benjamin Strong when they were deciding whom to save in 1907) and only a limited range of other contacts who could dispute your account of what is really needed. Goldman Sachs, JPMorgan, and Citigroup, we learn today, have such a person: Tim Geithner, Secretary of the Treasury...

Baseline Scenario; Crisis; fail; politically-connected.

Jesse's Café Américain Sat 2009-10-10 11:50 EDT

The Plan to De-dollarise the Oil Markets: Its Roots and Implications

Jesse

The breakdown of US dollar reserves being held overseas in the attached article of news is interesting, even though estimated. I am curious to see when Kevin Phillips and Chalmers Johnson start speaking to this as this sort of historic change is in their respective ballparks. Of course, there is always the option to listen to those in the American financial media who dismiss the internationally respected and well-connected Robert Fisk as a commie crank, a liberal web spinner, and a tinfoil conspiracty theorist.

De-dollarise; implications; Jesse's Café Américain; oil markets; plans; rooted.

Thu 2009-09-17 10:08 EDT

The Next Financial Crisis

Peter Boone, Simon Johnson

Our banks have gotten into the habit of needing to be rescued through repeated bailouts. During this crisis, Bernanke--while saving the financial system in the short term--has done nothing to break this long-term pattern; worse, he exacerbated it. As a result, unless real reform happens soon, we face the prospect of another bubble-bust-bailout cycle that will be even more dangerous than the one we've just been through. ...We have seen this spectacle--the Fed saving us from one crisis only to instigate another--many times before. And, over the past few decades, the problem has become significantly more dire. The fault, to be sure, doesn't lie entirely with the Fed. Bernanke is a prisoner of a financial system with serious built-in flaws. The decisions he made during the recent crisis weren't necessarily the wrong decisions; indeed, they were, in many respects, the decisions he had to make. But these decisions, however necessary in the moment, are almost guaranteed to hurt our economy in the long run--which, in turn, means that more necessary but harmful measures will be needed in the future. It is a debilitating, vicious cycle. And at the center of this cycle is the Fed.

Financial Crisis.

Jesse's Café Américain Mon 2009-09-14 12:03 EDT

Moral Hazard and Economic Donkeys

Jesse

Simon Johnson on moral hazard: the corruption of the capitalist system introduced by a Fed (the Economic Donkeys) that recklessly exercises a function as 'lender of last resort,' in conjunction with a political environment (less sophisticated Economic Donkeys) that can be politely described as being driven by 'regulatory capture' rather than the less euphemistic 'rampant corruption.'

Economic Donkeys; Jesse's Café Américain; moral hazard.

naked capitalism Sun 2009-09-13 12:26 EDT

Guest Post: Top Economists Say We Must Break Up the Insolvent Banks (Government Says Let's Make Them Bigger)

George Washington of Washington's Blog

The following top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion: Joseph Stiglitz, Ed Prescott, R. Glenn Hubbard, Simon Johnson, Thomas Hoenig, Neal S. Wolin, Sheila Bair, Anna Schwartz, William K. Black, et al...And yet, the top economic policy makers (Summer, Geithner and Bernanke)...don't want to break up the insolvent giants or even keep them from growing, don't want to reinstate Glass-Steagall, and want to let the banks keep using their same inaccurate models, overseen by the same spineless regulators.

bigger; break; Government Says Let's Make; Guest Post; insolvent banks; naked capitalism; Top economist says.

Fri 2009-07-24 00:00 EDT

Salon.com | "I would shut down the hedge fund industry"

Salon.com | "I would shut down the hedge fund industry" -- Simon Johnson and John Talbott on downsizing banks, reducing corporate pull in D.C. and getting pissed!

com; hedge fund industry; Salon; shut.

Fri 2009-07-24 00:00 EDT

Salon.com | Who caused the economic crisis?

Salon.com | Who caused the economic crisis? Economist Simon Johnson and "Obamanomics" author John Talbott say there's plenty of blame to go around

caused; com; Economic Crisis; Salon.