Political Will: Bernanke on the True Cost of Banking

By Simon Johnson

Stabilization programs in emerging markets often come down to this: the government needs to do something unpopular, e.g., reduce some subsidies, privatize an industry, or eliminate the crazy credit that goes to oligarchs (no one likes oligarchs, but their factories employ a lot of people). There is naturally resistance - pushback from legislators, riots in the streets, or oligarchs calling their friends in the US foreign policy establishment. The question becomes: does the government have the ”political will” to get the job done?

In fall 1997, a key issue for Indonesia’s IMF program was whether the government could close the banking operations belonging to one of President Suharto’s sons. There was an epic and fascinating struggle and, in the end, the government did not have sufficient political will or power. The subsequent loss of US support, and further currency and economic collapse is (messy and painful for many) history.

It is striking that Ben Bernanke now asks whether the United States today has sufficient political will.

How did we get to the point where the U.S., with a strong balance sheet relative to the size of problem banks, is regarded - by the markets and more broadly - as less likely to resolve the problems in its financial system than say the British (with big banks relative to a weak fiscal position) or the Germans (who talk all the time about how they are not going to bail anyone out)?

You can point the finger at Congress. The parliamentary system in Britain and Germany means that the government can implement and innovate a bailout policy without worrying about being able to legislate enough financial support. The Obama Administration has much to worry about in this regard.

The problem surely goes deeper - at least back to the bailouts of the fall. Poor communication, particularly by Hank Paulson, undermined popular and congressional support. And the lack of a consistent strategy exacerbated initially negative perceptions.

But the underlying issues are deeper still and laid bare by this week’s latest round with AIG. We have moved far beyond financial policy and into the kind of scandal that really gets taxpayers’ backs up. The greed of bankers slaps you in the face while the hubris of their leadership remains unchecked.

There is no sense of responsibility, no feeling of shame, no acknowledgment of any kind of mistake: read Lloyd Blankfein’s FT article again - or print it out and tape it to your wall. Because we now know, from the newly disclosed AIG counterparties list, that the wealth of Goldman Sachs insiders remains high solely because we saved their sorry bank, their failed risk management strategy, and their pretense of wisdom with our cash in mid-September.

This resentment against bankers pervades Congress, and even the Administration begins to get the message. Being called “asinine” yesterday by Richard Kovacevich, the Chairman of Wells Fargo, may have helped underline to Treasury how deeply the bankers appreciate the help they have received.

There can be no resolution and no moving on until there has been a proper congressional investigation, with full subpoena powers, into exactly what did and did not happen around AIG. This will take months and may well slow down the economy (Jamie Dimon’s clever point: if you vilify us, you will lose), but it is now inescapable. And, if channeled productively, this kind of hearing may lead to a better regulatory system (and smaller big banks) than the current anemic proposals on the table. As last weekend indicated, the G20 process is currently worse than useless on this issue.

Ben Bernanke knows all this, at the same time as he sees our economy worsening and global storm clouds still gathering. So where will he take us, starting with the Federal Open Market Committee meeting this week?

The British experiment with quantitative easing is pushing down the yield on long government debt. It’s risky - inflation, once started, is not so easy to control. And it may not work so well in the US (where the dollar tends to appreciate as the world becomes more scary) as in the UK (where they can successfully push for depreciation, particularly vis-a-vis the hidebound eurozone).

Inflation breaks the political and social logjam around banking. With some luck, it helps growth - at least in the short-term. And of course the surviving bankers win big.

Comments

[Tony Petroski]

"This resentment against bankers pervades Congress..." Yes. And resentment against oil companies, and resentment against coal-powered utilities, and resentment against big pharma, and resentment against SUV producers and resentment against insurance companies and resentment upon resentment upon resentment. Does the "political will" Bernanke spoke of consist of squashing freedom and bringing all the "wreckers" to heel?

2009 Mar 17 09:45 PM

[John Lounsbury]

I am usually dispassionate and analyitical when viewing political-economic issues, but the article aroused anger - passionate, seething, consuming anger.

Instead of perceiving our troubled financial sector institutions as needy, this article makes me see them as defiant, demanding, and feeling entitled. The citations for Jamie Dimon and Richard Kovachevich are the sparks that lit the flame and the wind that fanned them.

This is then topped off with the implication that a major beneficiary of the AIG bailout was Goldman Sachs. I understand that Paulson's personal wealth is composed mainly of GS stock. The appearance is that Paulson bailed himself out.

I am angry and getting angrier.

2009 Mar 18 10:47 AM

[Marc Freeman]

You make it seem as if these poor mom and pop multinational corporations just can't seem to catch a break. Let the "little guy" be free to follow his dreams. Well, where I come from I see these businesses as huge socialized enterprises that in most cases have not produced products that are useful and in many cases dangerous. Drug companies are now notorious non producers. Aside from me to "penis" drugs, the major drug companies are left with gouging the consumer as they ran to Washington for price protection. The major autos have been a thirty year mess. The "American oil companies" are doing a terrific job but why after all these years are we still arguing over our addiction to Saudi Oil? Some of them have already moved out of the U.S. for residence in other countries. I have been hearing all of this since I was a young man! Oh, and the national electrical grid. That's right the one that suffered an 80 million home blackout because of a bird? Please. How about the medical indusry? I could go on and on.

Come on now. The issues are not Government vs. freedom as you suggest. The major companies that are so crucial to our lives and especially the so called banking industry are no longer innovating, they don't have the interests of our own country at heart anymore and the people managing these huge socialized enterprises obviously care more for their pay packages than run sound businesses.

We need local innovation in all fields. More great breakthroughs came from garages and labs than all the great American Corporations. There is no reason whatever to feel protective of them. All I know is that the Chinese produce hundreds of thousands of PHDs in math and science every year.

Resentment? I feel we are way beyond resentment at this point.


On Mar 17 09:45 PM Tony Petroski wrote:

> "This resentment against bankers pervades Congress..." Yes. And
> resentment against oil companies, and resentment against coal-powered
> utilities, and resentment against big pharma, and resentment against
> SUV producers and resentment against insurance companies and resentment
> upon resentment upon resentment. Does the "political will" Bernanke
> spoke of consist of squashing freedom and bringing all the "wreckers"
> to heel?

2009 Mar 18 06:43 PM

[SeekingTruth]

Everyone knows the old quip by John Dillenger when he was asked, why do you rob banks?
His answer, "Because that's where the money is."

Now , ol' John would be out of style, because the banks are now robbed from the INSIDE, and it is accomplished with the strokes of pens, not with machine guns. And when they are caught, they are treated with mink lined kid gloves, and provided with all the ample public funds necessary to sustain them until they can have another go at it.

And how many times have you heard the phrase "The Insurance rackets " applied to describe that industry?

Anyone fighting against the application of subpoena power to these entities should come clean enough to reveal who is paying their salaries and what financial ties of all types they have to any and all of the suspect organizations.
Only then could their positions be judged objectively.

Until then, let's get on with those subpoena's. Time is of the essence.

2009 Mar 19 07:03 PM