Tuesday, April 21, 2009

Simon Johnson on Yahoo Tech Ticker

Simon Johnson, is a former IMF economist who co-runs a quite interesting economic blog I just discovered about a month ago (thanks to a reader email), The Baseline Scenario. Once I get through my typical daily readings from normal "news" type of sources, I have little time to read other people's blogs nowadays - but this is one I wish I had more time to read. We appear to have very similar thought processes from what little I have read. As I have been saying, anything that is "too big to fail" is simply too big. That is common sense. And instead of making things smaller we've adopted the "too bigger to fail" model - making the power players even more immense - while eliminating or consolidating much of their main competition. Why Citigroup (C) even exists in current form is beyond me... why common shares trade for an entity that only exists due to the peasants taxdollars is beyond the pale. Ah that's right "nationalization" is a bad word that only those socialists overseas use. We could never take if over in broad daylight and then chop it into small pieces to re-sell. Nope - instead we'll go the corporate socialism route. We are above nationalization here - plus it would embarrass former Secretary Treasury Robert Rubin, considering he was a Director at CitiDisaster. As for Rubin? 8 years, $126 Million. A good day's work for guiding perhaps the 2nd worst financial institution in America. Clawbacks? Surely, you jest.

The EXACT same problem of 'concentration of power' existed with Fannie and Freddie; which should of been 10-15 mini companies completely free of government IMPLICIT backstop and instead, in cut throat competition with each other. We saw how great the Fannie/Freddie duopoly turned out (by the way Fannie was the largest political donor for years).... as well as how great this "top heavy" financial system we have now works (6000+ financial institutions but the top handful have 90%+ of the assets - now that's "competition!") So the great irony here folks, is many of the players who caused a great portion of this disaster, will be consolidating power from the solutions (including the asleep at the wheel Fed) and indeed profit from it. How's that for punishment?

About a month ago I pointed out two fantastic articles that highlighted what exactly was going on in this country under the surface - one in Rolling Stone (re: AIG) and one in The Atlantic. [Weekend Reading: 2 Stories Only] Simon Johnson was the author of the piece in The Atlantic - if you are a newer reader since that time and/or did not take time to read the articles, please - it is worth your investment of time. Send it to your neighbors as well - you will be amazed at how the U.S. behavior at the top is really no different than most 3rd world countries we "scoff" at.

The Atlantic: The Quiet Coup (link here)

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

Now I just saw this story on Yahoo Finance moments ago, that was SO perfect in timing for this blog entry and SO perfect to describe what Johnson was writing about - how "the well connected financiers" (mostly of the HUGE New York variety - not the mom and pop community bank type) have literally become the oligarchs of our society .... get this: Fed Tests Harder on Regional Banks
  • The government's "stress tests" of 19 large U.S. banks take a harsher view of loans than of other troubled assets, according to a Federal Reserve document obtained by The Associated Press. That approach favors a few Wall Street banks while potentially threatening major regional players.

You cannot make this stuff up ... are we surprised anymore? No. Of course not - if you read The Atlantic piece you'd in fact expect this action. Just follow the money kids .... Cramerica - he who pays for political campaigns gets his way. Just like any ole Banana Republic.

Simon Johnson has a series of videos today on Yahoo's Tech Ticker so I thought I'd post them; I have not yet had time to view them myself but I am sure it will contain a lot of sense that the "powers that be" ignore as they build their power coalition with their friends in NYC high finance. While talking a good game to the peasants.

Leading Economist Decries Power of Wall Street "Oligarchs"

In a fascinating piece in the latest issue of The Atlantic, Simon Johnson, former chief economist at the International Monetary Fund, outlines what he sees as the alarming influence of Wall Street firms over the American economy. He expounds on his thesis in our interview, making several points:

America’s Crisis Resembles that of Emerging Markets: While at the IMF, Johnson saw so many financial crises that the core problem became old hat: In the free-wheeling growth years of an economic boom, the politicians and oligarchs of an emerging market like Russia or Argentina would get so close that eventually they would meld into a politico-industrial complex. As long as the boom lasted, this cozy relationship never bothered anyone--because everyone was getting rich. Fast forward to the latest market crisis--the one in the United States. The pattern is exactly the same, Simon Johnson says, with a mutually beneficial money-and-power corridor now running between Washington and the modern oligarchs Wall Street.

But There Are Key Differences: In the emerging markets, eventually, the bubble would burst. The banks and corporations would collapse, and suddenly it would be up to the government to seize and restructure the insolvent banks. In America, though, there will be no such defining collapse, nor a quick recovery, he argues. Instead, we face a “painful” L-shaped recovery, drawn out over 3-5 years.

Wall Street: “It’s Too Big, Too Powerful. It’s Dangerous.” Simon argues that the U.S. should invoke anti-trust laws to break up Wall Street, whose power poses a material threat to the American economy.

Simon Johnson is a senior fellow at the Peterson Institute and a professor at MIT’s Sloan School of Management. He is a co-founder of the popular economics blog, BaselineScenario.

Want to End Crisis? Seize Banks and Chop Them Up

The Obama administration wants to fix the banks the same way the Bush administration did: by handing them hundreds of billions of dollars of taxpayer money and hoping they eventually nurse themselves back to health.

Dozens of economists have blasted this policy, arguing that it is both ineffective and unfair. The banks will only acknowledge their losses a little bit at a time under this plan, their argument goes, so the taxpayer's commitment is bottomless. Also, because the banks have every incentive to try to work their way through the crisis (on the taxpayer's dime), the resolution will take years.

There's a better way, says Simon Johnson, a senior fellow at the Peterson Institute for International Economics:

Seize the banks, write down the value of their assets, and then re-privatize the core operations.

The Obama administration refuses to consider this option, arguing that it will be too expensive. This is bunk, says Johnson. The real reason is that the Wall Street firms have too much influence in Washington.

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