The banks made a lot of headlines recently with disappointing earnings and also when most of them had their “living wills” rejected by regulators. This article argues that the post-crisis reforms in the U.S. has been inadequate and that U.S. banks still are a major risk to the economy and taxpayers. Better and stronger actions have been taken by some other countries.
The British regulators were less generous to banks during their rescues than ours were. Banks that received bailouts were barred from paying directors bonuses, subject to restrictions on executive pay, and required to continue lending to consumers and small businesses and in particular to help “people struggling with mortgage payments to stay in their homes.” The only similar measure in the US was minor restrictions on executive pay for TARP recipients.
The Bank of England and the FSA also pushed for more radical reforms than their U.S. counterparts did. They advocated strenuously for a breakup of banks along Glass-Steagall lines, separating retail banking and banking to small- and medium-size businesses from “wholesale” banking and investment banking.
John Taylor of Stanford has been a leading critic of the Fed’s role in creating the financial crisis and its actions afterward. In this blog post he summarizes the arguments against the Fed, including links to important research from others that pin a lot of responsibility on the Fed’s loose money before 2007.
Of course Ben Bernanke is not the only central banker who disagrees with this research. In an article “Alan Greenspan: What Went Wrong” in the Wall Street Journal Alexandra Wolfe reported that Greenspan told her that he disagreed with my 2007 paper, though she also reported that I stood by the paper and said that “Other economists have corroborated the findings” and “the results are quite robust.”
Several years ago in comments on a paper I gave at the Bank for International Settlements, Ken Rogoff said (pp. 29-31) that “John Taylor’s critiques of post-2000 ultra-loose monetary policies are well known and have been widely discussed. His ideas are a subject of ongoing research, with no firm conclusion as yet.” When you add what has been done since Ken spoke to what was done before–amounting to about a decade of research, I’d say there’s a very firm conclusion now.
It’s common to complain that regulators and many professional investors missed the problems that led to the financial crisis. But the financial media also were missing in action. In fact, many were helping to create the crisis by hyping the very activities that would lead to the collapse. This post is an interview with a researcher who is examining how and why the financial media failed in the years leading up to the crisis.
What changed between these early investigations of proto-subprime practices and the failure of financial media to spot similar frauds that took place on Wall Street and across America in the years prior to the crash? The answer Starkman offers is complex. It consists of a toxic mix between regulatory failure, a complete collapse of the business model of journalism, and the enormous growth of financial institutions. A lot of it, though, has to do with the conflict between two different strains of journalism—access reporting and accountability reporting—and the latter’s growing prevalence in recent years. “Access reporting tells readers what powerful actors say, while accountability reporting tells readers what they do,” Starkman explains in his book.
Business journalism, at its root, emphasizes access. In the years prior to the financial crisis, according to Starkman, access became its be-all and end-all. Since then, he adds, little has changed.
Many people complain that no executives went to prison after the financial crisis. In past financial crises, a number of executives would spend time in jail. The new blog of the Stigler Center at the University of Chicago Booth School of Business has a series of pieces examining the decline in prosecutions of businesses and their executives. This post is an interview with award-winning reporter Jesse Eisenberg, who is writing a book on the topic. It’s a much better take than what you’ll hear from politicians or read in the media.
Over the last 15 years or so, prosecutors have lost a lot of tools that they used to combat corporate crime. For instance, one of the things they had was a charge they used to convict Jeffrey Skilling and Ken Lay—the two top corporate executives from Enron—called “honest services fraud.” The Supreme Court overturned that and threw out the charge, and as a result, a lot of prosecutions of top corporate executives got thrown out as well.
That’s a small example of the kind of tools that prosecutors were losing. Nothing was particularly cataclysmic, but there was a slow erosion. There were resource shifts as well: the FBI, which is charged with investigating these kind of cases, shifted away from white collar crime to domestic and international terrorism, and that affected the skill set.
Two new books seek to explain why economic growth has been so low since the financial crisis and is likely to remain low. This post reviews both books. In one book, economist Robert Gordon explains how productivity has declined in recent years and isn’t likely to increase, which lowers growth. In the other book, Mohammed El-Erian talks about policymakers have abdicated their duties, leaving only monetary policy to propel growth and prevent recessions.
The central thesis of El-Erian’s new book is that in a world where debt-financed fiscal policy has nearly hit its limit in the major developed economies for political or economic reasons, monetary policy has become “the only game in town” as a policy measure used to stimulate economic growth which has several short-run benefits for the economy and but long-term costs to financial stability.
In El-Erian’s judgment, unconventional monetary policy measures such as quantitative easing long-term asset purchases have been a helpful tool to reduce unemployment when ailing economies were at their bottom, but many of the world developed economies have since turned a corner. The point is that economic policymakers should have a balanced, coordinated policy response, something absent up to this point.
Former Treasury Secretary and President of the New York Fed, Timothy Geithner, has a two-part course on the financial crisis on Coursera. This link is a summary and review of the part of the course on housing. While the author says he has new and increased respect for Geithner after reviewing the courses, he also remains critical of the government’s actions before and during the crisis.
Unlike with the financial institutions, it seems the goal here was to punish homeowners even if it made the banks worse off by increasing the number of foreclosures and thereby lowering home prices even more.
It seemed, for whatever reason, that what I’ll call the Geithner Rule, ‘Ya gotta bail out everybody to save the world’ wasn’t applied much in housing.
And remember, many of the mortgages the banks foreclosed on were guaranteed. The foreclosing banks didn’t absorb the majority of those losses.
Too bad their weren’t guarantee programs for homeowners as well as for bankers.
One of the vigorous discussions regarding the problems in China is whether or not the people running China are competent. Everyone knows they are autocratic and anticapitalist. But many people believe China has a bright economic future because its leaders are competent. Unlike the messy processes in democracies, China’s leaders can decide what needs to be done and do it. They don’t have to convince anyone else, compromise, or make deals. The problems over the last year, especially regarding the stock markets and currency, are denting the aura of Chinese competence and causing some to say it always was a myth. Here’s an article that looks into the question in detail.
The other systemic cause of incompetence is the well-known ill of progressive degeneration of talent in an autocratic regime. Government service in an autocracy often carries high moral costs for talented individuals: It leads to the loss of personal dignity in a political hierarchy where the only thing that matters is the status of an official (that is why Chinese officials have business cards with minute details of their official ranks and status that Western businessmen would find totally incomprehensible). Junior or subordinate officials in this system are routinely humiliated and mistreated by their superiors. With the private sector offering better opportunities and psychological well-being, most talented individuals would prefer to seek their fortune outside the government.
Consequently, government service tends to attract not only less talented but also more opportunistic individuals who otherwise cannot compete in the marketplace. Such individuals can reap outsized rewards if they are willing to toil inside the Chinese bureaucracy and endure the daily indignities inflicted on them by their bosses.
Here’s an interesting article profiling some of the people who are forecasting a financial and societal collapse in the near future. They explain why and some of their recommended coping strategies, including having sufficient gold coins and bullion in hand.
“Goldbugs” is the term used against them, because they believe rare metals will be the only thing left standing when the system drives itself off the cliff for the last time. Buy gold. Buy silver. You will need them to barter with local trappers and foragers in the Manhattan of 2020.
The End doesn’t have to happen one way, Rubino points out. Any number of events could trigger it—the coming Chinese slowdown, the Eurozone starting to break apart. Even just a dramatic fall in the value of the yen. The system is now so inherently unbalanced that the trigger could be anything that had big knock-on effects, that could cause enough uncertainty to breed into contagion. In that scenario, as bankers lost faith in the system, America’s colossal need to finance its national debt through borrowing in the bond markets would mean paying higher and higher interest rates to finance that debt, leading the world’s largest economy into the exact same death spiral of unaffordable repayments as the Greeks.
William White is an economist not to be ignored. He currently is with the OECD and previously was chief economist at the Bank for International Settlements. In that previous position he issued early warnings about the emerging financial bubbles and financial crisis to come. Now, he is saying that quantitative easing only made things worse and that there are many bankruptcies and other problems to come. He made his case in a recent presentation at the Davos conference, and this article summarizes his talk. He blames the situation on central banks and traces it back to 1987.
Mr White, who also chief author of G30′s recent report on the post-crisis future of central banking, said it is impossible know what the trigger will be for the next crisis since the global system has lost its anchor and is inherently prone to breakdown.
A Chinese devaluation clearly has the potential to metastasize. “Every major country is engaged in currency wars even though they insist that QE has nothing to do with competitive depreciation. They have all been playing the game except for China – so far – and it is a zero-sum game. China could really up the ante.”
Mr White said QE and easy money policies by the US Federal Reserve and its peers have had the effect of bringing spending forward from the future in what is known as “inter-temporal smoothing”. It becomes a toxic addiction over time and ultimately loses traction. In the end, the future catches up with you. “By definition, this means you cannot spend the money tomorrow,” he said.
This post is based on a recent speech by a U.S. financial regulator. His point is that, like most reform laws, the Dodd-Frank Financial Regulation law focused on “fighting the last war.” The same sequence of events isn’t likely to happen again, but there are potential problems out there that could cause very large negative effects. Regulators can’t focus on them, because they’re required to follow the Dodd-Frank law.
The hue and cry of the ongoing financial market reforms under Dodd-Frank and the FSB leaves market regulators and participants with very little available bandwidth to assess and prepare for the next financial crisis – a crisis that will certainly be unlike the last one.
Just as “peacetime generals are always fighting the last war” and “economists fight the last depression,” so too do financial regulators outlaw past market abuses that are not a looming threat to our financial markets and economies. The Dodd-Frank Act and its unceasing implementation are uniquely positioned to ensure U.S. market regulators stay focused on the past.