Archive for January 19th, 2010

Simon Johnson says US resembles USSR now

January 19, 2010

Simon Johnson kickstarted the idea of financial oligarches (I have written numerous posts on financial oligarches) in this excellent piece in The Atlantic. He compared US economy to the crony capitalism seen in emerging economies:

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again).

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them

In a recent FT article co-written with Peter Boone he says US economy looks like USSR now.

The last few weeks of political developments around the American-European financial system make us feel like we are back in the USSR. During the final years of communism’s decline, Soviet bureaucrats argued for futile tweaks to laws that would crack down on speculators and close “loopholes” – all in the vain hope they could keep the unproductive system of incentives intact. The US, UK and key European countries are now making the same errors. Rather than recognising the dangerous systemic failures in our financial system, their leaders are proposing bandages that can – at best – only postpone another, possibly much larger, meltdown.

What did USSR do wrong?

When the Soviet Union fell apart, there were two competing views on what needed to be done: total change or tinkering. The establishment wanted tinkering – it felt much less threatening. This elite believed that if they could just get the rules right, the system would work well. But they completely missed the larger point – egregious loopholes in the rules were inherent to the system failing.

It took strong leaders like Yeltsin to undo the reforms for elitists.

However, we don’t see anything in US as of now. Bernanke recently argued that extremely low interest rates on his watch – and decades of similar bail-outs of the financial sector – did not play a role in the recent collapse.  Obama admin proposed a bank tax which will not lead to lesser risks as banks know they would be bailed out.

They sarcastically point that bankers appear more honest than policymakers. Both Jamie Dimon of JP Morgan and Lloyd Blankfein of Goldman Sachs said if there is somethint to exploit banks will go ahead.

Phil Angelides, chair of the Commission, nailed Lloyd Blankfein, head of Goldman Sachs, with a metaphor for the age: Wall Street is in effect selling cars with faulty brakes, and then taking out insurance on the buyers. Blankfein naturally retorted: “I do not think the behaviour is improper.” Here we go again.

However, there are some good guys around. From US- Paul Volcker, Thomas Hoenig, head of the Kansas City Fed, and Mr Angelides. From UK –  Lord Turner, Mr Haldane, and Mervyn King.

Time to do something urgent before next one kicks in. Going by Temin, Obama has lost the opportunity to pass any meaningful reform. There are strong pressures not to do anything as recession is nearly over everywhere.  Infact, Obama could just be readying himself for a legal battle with wall street!

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How US political cycle (elections) prevented another depression?

January 19, 2010

Peter Temin a noted economic historian from MIT writes a paper comparing this recession with great depression. Though many such papers have been written, we are going to get a lot more in future. I have pointed to a few as well.

The paper is NBER version. I couldn’t find the free version.

Temin (alongwith Barry Eichengreen) brought the role of gold standard in creating great depression. So, in this paper he uses the same analogies.

This paper discusses parallels between our current recession and the Great Depression for the intelligent general public. It stresses the role of economic models and ideas in public policy and argues that gold-standard mentality still holds sway today. The parallels are greatest in the generation of the crises, and they also illuminate the policy choices being made today. We have escaped a repeat of the Depression, but we appear to have lost the opportunity for significant financial reform.

He says if it was gold standard in 1930s which led policymakers to believe all is well, it was Washington Consensus of 1990s which led to the same belief in 1990s.

First some good quotes:

(more…)

Wall Street plans a legal battle against Obama’s bank tax!!

January 19, 2010

I hate to give these news bytes and would instead prefer to just focus on eco research. But the current events are just too interesting (and frustrating) to give it a miss.

This NYT article says: (HT: Paul Krugman)

Wall Street’s main lobbying arm has hired a top Supreme Court litigator to study a possible legal battle against a bank tax proposed by the Obama administration, on the theory that it would be unconstitutional, according to three industry officials briefed on the matter.

In an e-mail message sent last week to the heads of Wall Street legal departments, executives of the lobbying group, the Securities Industry and Financial Markets Association, wrote that a bank tax might be unconstitutional because it would unfairly single out and penalize big banks, according to these officials, who did not want to be identified to preserve relationships with the group’s members.

Can you beat that!! They plan to file a case against the Obama government as they think the newly proposed bank tax is unconstitutional ! Unfair to big banks.. give me a break!

It is precisely what Krugman says:

Ok this isn’t quite the classic definition of chutzpah, which is when you murder your parents, then plead for mercy because you’re an orphan. It’s more like being a drunk driver who, after killing a number of pedestrians, received life-saving treatment at a nearby hospital — and responds by suing the doctor.

How does one respond to that. Though Krugman adds at the end:

I’d say it was unbelievable, but it actually should have been predictable

I had pointed to this IMF Research bulletin which had Q&A of IMF econs who are studying political lobbying of financial firms. This one easily takes the cake. After such a huge crisis and all that govt support, they now plan to make a case against the govt for taxing them!!

It is all so frustrating as well. How can financial sector regulation/reform move ahead with such kinds of lobbying/ pressures? Obama has a huge task at hand.

Interviews of Paul Romer

January 19, 2010

Getting to read a lot of interviews these days. Just posted about Raghu Rajan interview a couple of days back, completed the list of Chicago Econs interviews (which also has a Raghuram Rajan interview).

There are nice interviews of Paul Romer of chartercities.org who is explaining his concept of charter cities.

Romer has become a missionary and is really promoting the idea big time.


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