Two Hearings on Banks Today

By Simon Johnson

This morning, by coincidence, there are parallel hearings on Capitol Hill dealing with the nature of our banking system and attempts to stabilize it. In the Cannon House Office Building, starting at 9:30am, the Joint Economic Committee will hear from Thomas Hoenig, Joseph Stiglitz, and me, on whether Big Finance is too big to save (see yesterday’s preview for details).

At 10am over on the Senate side (Dirksen Senate Office Building), Secretary Geithner will appear before the TARP Congressional Oversight Panel. We preview that event this morning on The Hearing, with a discussion of the context, the latest numbers, and our forecast of the ideas that will be expressed; it’s a viewer’s guide - but one that you can talk to by sending in comments (and, most important, your questions for the Secretary).

My questions for Secretary Geithner remain about the same as they were on February 7th. As reflected in those questions, I continue to worry that the Administration’s “wait-and-see” strategy is just increasing the ultimate costs - in terms of financial losses and unemployment. No government ever likes to tackle a severe banking crisis head on (mostly because that would greatly upset the financial elite), but it’s almost always the right thing to do.

I remain unconvinced by the Treasury’s line that “there is no alternative” to their approach. Or perhaps they are shifting towards the line that: “based on information that only the government has (and can have), it is our assessment that all other approaches would be more damaging.”

If that is now their position, we have built a financial system that is immune to democracy - today’s complexity and lack of transparency mean that it is easier than even to become too big to fail. The major banks now know this and will behave accordingly.

Comments

[Speedspirit:]

We can only pray that you guys can talk some sense into that committe. Good Luck and Thank You.

Apr 21 07:34 AM

[aarc:]

The US needs those mega-banks in order for the US to compete in the global marketplace. Stop thinking of them as banks catering to US consumers only. They are mega-banks, they should primarily cater to international mega-investors not tiny home-owners.

They were forced to lend money in order to achieve "a house for every American" dream and in order for the Bush administration to be able to finance the Iraq and Afganistan wars. There was no other source of export income at that time since the Tech Sector was in meltdown mode and the Manufacturing Sector was being castrated by China and India during the 2001 to 2006 period.

Only the banking and finance and the retail sectors were able to provide the extra tax receipts for the government during that time to finance the two-pronged wars.

It has always been like that throughout history. The economy will have to pay for expensive wars.

And the US wars with Iraq and Afganistan have been nothing but extremely expensive with Aircraft Carriers, B2 Bombers, Stealth Fighters, Seek and Destroy Helicopters, Robocop Soldiers and like being deployed as if the US was fighting a full invasion from Mars. More bombs dropped into Iraq and Afganistan than that of WWII. The most expensive war machines and soldiers in the world were deployed to stretched limits trying to seek and destroy a handful of criminals.

That was then. The Bush Adminstration got it's trillions of extra tax receipts by spiking up US consumerism, the banks were forced to provide the money even to the jobless - and the banking sector and the American consumers will have to pay the bill.

Now, we have the reconing.

However, China is already on a torid economic revival mode with more than $600B economic stimulus since Oct 2008 - under the radar of most Americans.

$600B is equivalent to $1.8T for the US in GDP terms since the US GDP is 3x bigger than China.

What can $1.8T do for a US economic revival if Obama just matched that of China's?

Not only that. India, Taiwan, Hongkong, Korea and even the tiny Philippines have failed to keep going down since October 2008 while the US and Europe were digging fresh new grounds. Japan and Australia made double bottoms and are not following the US religiously by now.

International investors are starting to flock to China and the other developing countries.

Those mega-investors will be planning and executing multi-billion projects that will span several decades. They will need mega-banks such as C, BAC, JPM, WFC, UBS, DB, HBC, RBC, etc. in order to support their financing requirement throughout the time period of those mega-projects in China and the other developing countries. They are still developing. They will need lots of mega-infrastructure projects in the decades ahead for their billions of young population. Life for them won't stop even if the US and European baby boomer consumers start entering their twilight years.

They have more than 2.5 billion young and energetic population/consumers that will have to work and prepare for their own future. They need not necessarily depend on the US consumers for their own wealth creation.

That is the role mega-banks such as C, BAC, JPM, and WFC should be doing instead of doling out their trillions of cash holdings to defaulting home loan borrowers and stressed-out credit card consumers.

There are more than enough regional banks to do those jobs.

The US government will have to provide full support and backing to the mega-banks.

International investors are not going to rely on shaky banks with their mega-projects if those banks don't have enough expertice, credibility and stability to support their projects in the several decades ahead.

Apr 21 09:12 AM

[Acronym:]

I can't help but wonder what is being taught in business schools these days. Sadly I am comfortable with the fact that an MBA earned as recent as 3-5 years ago could be worthless due to the obliteration of many of the business models on wall street. I feel that we are now in a new age and that we must revamp the whole educational system. Let's face it there are no jobs in financial transparency. Finance is currently as much a mystery as alchemy. What is being taught in the classrooms? As for the talks, perhaps the only way out of this mess is to focus on the future.

Apr 21 09:31 AM

[John Lounsbury:]

aarc - - -

Not to diminish your fine comment with humor, but I must ask about a typo:

"Now, we have the reconing."

Is the missing letter a "k" or an "n"? Is it reckoning or reconning?

Apr 21 09:50 AM

[Allan Frain:]

"Or perhaps they are shifting towards the line that: “based on information that only the government has (and can have), it is our assessment that all other approaches would be more damaging.”"

This is elitism and what was used to drag us into Iraq. It is nothing new. Our electorate has lived with elitism so long that they hardly react to it. Unfortunately, electoral response may require a steep decline in America's standard of living coincident with the emergence of a viable alternative. Until then, expect more of the same.

Apr 21 10:22 AM

[jarco:]

Simon -
Can you comment here regards any consensus among elite economists such as yourself whether the Admin is on the right track? My sense suggests a 2:1 negative. Thoughts?

Apr 21 11:46 AM