Simon Johnson is the co-author of 13 Bankers, out in paperback on Monday.
Bill Daley, President Obama's newly appointed chief of staff, is an experienced business executive. By all accounts, he is decisive, well-organized, and a skilled negotiator. His appointment, combined with other elements of the White House reshuffle, provides insight into how the president understands our economy -- and what is likely to happen over the next couple of years. This is a serious problem.
This is not a critique from the left or from the right. The Bill Daley Problem is completely bipartisan -- it shows us the White House fails to understand that, at the heart of our economy, we have a huge time bomb.
Until this week, Bill Daley was on the top operating committee at JP Morgan Chase. His bank -- along with the other largest U.S. banks -- have far too little equity and far too much debt relative to that thin level of equity; this makes them highly dangerous from a social point of view. These banks have captured the hearts and minds of top regulators and most of the political class (across the spectrum), most recently with completely specious arguments about why banks cannot be compelled to operate more safely. Top bankers, like Mr. Daley's former colleagues, are intent of becoming more global -- despite the fact that (or perhaps because) we cannot handle the failure of massive global banks.
The system that led to the crisis of 2008, and the recession that has so severely damaged so many Americans, encouraged excessive risk-taking by major private sector financial institutions and, yes, Fannie Mae, Freddie Mac, and other Government Sponsored Enterprises (although these were most definitely not the major drivers of the crisis -- see 13 Bankers).
Today's most dangerous government sponsored enterprises are the largest six bank holding companies: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley. They are undoubtedly too big to fail -- if they were on the brink of failure, they would be rescued by the government, in the sense that their creditors would be protected 100 percent. The market knows this and, as a result, these large institutions can borrow more cheaply than their smaller competitors. This lets them stay big and -- amazingly -- get bigger.
In the latest available data (Q3 of 2010), the big 6 had assets worth 64 percent of GDP. This is up from before the crisis -- assets in the big six at the end of 2006 were only about 55 percent of GDP. And this is up massively from 1995, when these same banks (some of which had different names back then) were only 17 percent of GDP.
No one can show significant social benefits from the increase in bank size, leverage, and overall riskiness over the past 15 years. The social costs of these banks -- and their complete capture of the regulatory apparatus -- are apparent in the worst recession and slowest recovery since the 1930s.
Paul Volcker gets it; no wonder he has resigned. Mervyn King, governor of the Bank of England, gets it. Tom Hoenig, president of the Kansas City Fed, gets it. Elizabeth Warren, the tireless champion of consumer rights, gets it. Gene Fama, father of the efficient financial markets view, gets it better than anyone.
I discussed the issue in public for two hours at the American Financial Association (AFA) meetings in Denver on Friday with two presidents of the AFA (Raghu Rajan and John Cochrane) and a Nobel Prize winner (Myron Scholes). This is not a left-wing or marginal group -- there must have been at least 500 people in the audience (video will be available). The top minds in academic finance understand the problem vividly and are articulate about it -- there is no rebuttal to the points being made by Anat Admati and her distinguished colleagues.
This is not a left-right issue -- again, look at the list of people who co-signed Professor Admati's recent letter to the Financial Times. This is a question of technical competence. Do the people running the country -- including both the executive branch and the legislature -- understand economics and finance or not?
If the country's most distinguished nuclear scientists told you, clearly and very publicly, that they now realize a leading reactor design is very dangerous, would you and your politicians stop to listen? Yet our political leadership brush aside concerns about the way big banks operate. Why?
Top bankers, including Bill Daley, have pulled off a complete snow job -- including since the crisis broke in fall 2008. They have put forward their special interests while claiming to represent the general interest. Business and other groups, of course, do this all the time. But the difference here is the scale of the too big to subsidy -- measured in terms of its likely future impact on our citizenship and our fiscal solvency, this will be devastating.
Most smart people in the nonfinancial world understand that the big banks have become profoundly damaging to the rest of the private sector. The idea that the president needed to bring a top banker into his inner circle in order to build bridges with business is beyond ludicrous.
Bill Daley now controls how information is presented to and decisions are made by the president. Daley's former boss, Jamie Dimon, is the most dangerous banker in America -- presumably he now gets even greater access to the Oval Office. Daley is on the record as opposing strong consumer protection for financial products; Elizabeth Warren faces an even steeper uphill battle. Important regulatory appointments, such as the succession to Sheila Bair at the FDIC, are less likely to go to sensible people. And in all our interactions with other countries, for example around the G20 but also on a bilateral basis, we will pursue the resolutely pro-big finance views of the second Clinton administration.
Top executives at big U.S. banks want to be left alone during relatively good times -- allowed to take whatever excessive risks they want, to juice their return on equity through massive leverage, to thus boost their pay and enhance their status around the world. But at a moment of severe financial crisis, they also want someone in the White House who will whisper at just the right moment: "Mr. President, if you let this bank fail, it will trigger a worldwide financial panic and another Great Depression. This will be worse than what happened after Lehman Brothers failed."
Let's be honest. With the appointment of Bill Daley, the big banks have won completely this round of boom-bust-bailout. The risk inherent to our financial system is now higher than it was in the early/mid-2000s. We are set up for another illusory financial expansion and another debilitating crisis.
Bill Daley will get it done.
madoff was just the tip of the "financially engineered" iceberg and acceptable collateral damage
geithner and goldman need to be INVESTIGATED, PROSECUTED, and CLAWED BACK for financial terrorism along with blankfein, fuld, rubin, summers, bernanke, greenspam, dimon, speyer, stephen friedman, prince, weill, immelt, chais, merkin, picower... They all KNEW the public would forget their crimes due to the sunami of cascading information that no common person can process...
after all they finance the major media outlets.
most are NY Fed alumni.
their unmitigated GREED destroyed middle class mortgages, 401Ks, health care, schools, and the middle class.
This was the greatest REDISTRIBUTION of wealth in history; UPWARD to the wealthiest few.
by appointing geither, summers, having rubin in a key advisory role, minions of goldman sachs throughout his administration, and reconfirming bernanke, Obama is complicit and has facilitated this pillaging of America.
all US citizens are paying while the banksters get bailed out after creating all the toxic assets and resulting zombie banks, are the only ones left standing with Trillions in cash, won't lend to small business, is begged by the government to buy back assets at guaranteed no risk for pennies on the dollar, invest in China and India, hide all of their wealth in offshore tax free UBS accounts, and Daley, a jamie dimon lackey, is appointed Chief of Staff.
welcome to serfdom.
'If handled properly, the transition to much higher equity requirements could be implemented quickly and would not have adverse effects on the economy. Temporarily restricting bank dividends is an obvious place to start.
Many bankers oppose increased equity requirements, possibly because of a vested interest in the current systems of subsidies and compensation. But the policy goal must be a healthier banking system, rather than high returns for banks’ shareholders and managers, with taxpayers picking up losses and economies suffering the fall-out.'
The TBTF banks are in this game for the high stake winnings (when they do rake it in on the upsurge of each bubble) and say 'screw you' to the rest of society while dangling tempting bits of the Casino in front of us. We are being played as the stooges-to stand around and pick up the pieces with our tax dollars when the bubble collapses-again.
These large banks (the primary dealers) cheat. They can't help themselves. They know what their brokergae clients are buying and selling, they know what their investment banking clients are considering in terms of financings, restructurings and mergers. And then they are allowed to take that information and engage in proprietary trading. "Proprietary" is the right term because they are trading on proprietary information.
The playing field is tilted. And with the market not being truly free as a result, capital will neither be efficiently or fairly allocated. These large banks, the "primary dealers" are a threat to capitalsm. Left to their own devices, they will take our capitalist system down.
Bush promised a kinder, gentler nation and no new taxes, and was voted out after 1 term b/c of a recession and increase in taxes.
Carter was so hell-bent on global human rights that he forgot the rights of his fellow citizens and the economy, and hence votied out after 1 term.
Although, Obama isn't responsible for our current recession, but on the BIG TICKET items of his campagin promises, he has waffled on the issues and imo it will cost him his second term in office; maybe even his party nomination. He's only hope is for Palin or someone as uninformed and unqualified as Palin to challenge him.
Would there was something I could do from Australia!
"Let's be honest. With the appointment of Bill Daley, the big banks have won completely this round of boom-bust-bailout."
The source of these comments is one of the top economists IN THE WORLD who has worked with other top economics people internationally and domestically in the world for over 20 years. Thus he is not warped by the American system, but sees the entire world crisis in its reality.
So I can sensibly draw one major conclusion: Obama has screwed us big-time yet again.
1. Decisive
2. Well-organized
3. Skilled negotiator
4. A serious problem
5. Fails to understand we have a huge time bomb with the BANKSTERS
6. US banks have far too little equity and far too much debt
7. Banks are Highly Dangerous to out Society
8. Banks captured NOT JUST the hearts and minds of top regulators and political class
9. Bankers, like Daley, are intent on becoming global controllers
10. Propagates same system that led to crisis of 2008 severely damaging so many
11. Propagates today's most dangerous enterprises: Largest 6 bank holding companies
12. JPM, BofA, CitiG, Wells, Goldman, Morgan - Too big to fail (64% of GDP-1995 17%)
13. The market knows they will be bailed out and so they can borrow cheap
14. No significant social benefits from these banks but massive social RISKS of LOSS
15. Complete capture of the regulatory apparatus
16. Volcker gets it so he resigned - Tom Hoenig, Pres of Kansas City Fed, gets it.
17. Elizabeth Warren, gets it. Many Economists and Accountants get it
18. Not a left-right issue it is Honesty trying to win over dishonesty
19. Do the people running the country understand economics and finance?
20. Our top political leadership brushes aside concerns about big banks. Why?
21. Top bankers, like Daley, pulled off a complete snow job serving special interests
22. Claim to represent the general public risking our fiscal solvency and destroy USA
24. Bringing another banker to Obama’s inner circle building bridges to WSt is wrong
25. Daley now controls information flow and decisions made by the president for Dimon
26. Daley opposing strong consumer protection and Elizabeth Warren
27. He may block Sheila Bair at FDIC pursuing pro-big finance views of Clinton
28. Excessive risks without regulations is what WSt wants and Daley will deliver
29. By juicing WSt leveraged return Daley helps boost WSt pay
30. “Mr. President, if you let this bank fail, it will trigger a worldwide Great Depression.
Appointment of Daley means Big banks won completely this boom-bust-bailout Cycle
We are set up for another FAKED financial BUBBLE+another FAKED debilitating crisis.
http://www.marketwatch.com/story/americas-10-worst-years-start-right-now-2011-01-04?pagenumber=1
Brilliant, simply brilliant!