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Thursday, April 23, 2009 Excerpts from: Simon Johnson says: "Break up the banks"Simon Johnson is the former chief economist of the International Monetary Fund and in recent months has emerged as one of the most cogent critics of how the Obama administration is addressing the banking crisis. On Tuesday, Johnson, Joseph Stiglitz and Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, testified before Congress' Joint Economic Committee on the topic of the day: "Too Big to Fail or Too Big to Save? Examining the Systemic Threats of Large Financial Institutions."It's time to get all Teddy Roosevelt on Wall Street, declares the former chief economist of the IMF. Bring out the big antitrust artillery and fire away. On Wednesday, Salon caught up with professor Johnson for the second time this month, and this time, managed to successfully record the interview. You have become famous for decrying the consolidation of power by a new financial oligarchy over the politics and economy of the United States. Since our last conversation I was intrigued to learn that this isn't necessarily an obsession of yours. In the soon-to-be-published paper "From Ancien Regime to Capitalism: The Spread of the French Revolution as a Natural Experiment," which you co-authored with Daren Acemoglu, you argue that after the French Revolution, Napoleon's armies contributed to future economic growth by breaking up local church and aristocratic oligarchies. Oh yes! So you know that I work on longer-term issues as well as shorter-term issues. You see, there are some recurring themes here. It's about power, and you have to see it all in that light.While you were testifying before the Joint Economic Committee, Geithner appeared before Elizabeth Warren's Congressional Oversight Panel. I was struck by the fact that while Warren was pushing Geithner on whether liquidating and restructuring the banks were "on the table" for the Obama administration, the Republicans on the panel, John Sununu and Jeb Hensarling, were extremely suspicious of anything that even smacked of partial nationalization. Some people seem to be upset that in his first 100 days Obama hasn't already completely broken the power of Wall Street, but there are plenty of politicians in Washington who think he's already gone too far. I do think "nationalization," the word, as a concept, is a red herring. I'm with Hoenig on this. What we need is a government-managed bankruptcy -- you can call it prepackaged bankruptcy, or you can call it conservatorship. The point is you don't throw banks into Chapter 11 because that is destructive. But you manage a bankruptcy process -- it's not nationalization, it's a government-run receivership. Technically what you do is appoint an official receiver who is either the government or is going to be an agent for the government, and that agent manages the split into a good bank and bad bank. You take the bad stuff off your balance sheet and you minimize your losses on that through some kind of Resolution Trust Corporation structure and the good bank you get back into business as soon as you can and you privatize it. I would advocate breaking it up into many competing private bits.Hensarling appeared to be worrying that the Obama administration's strategy is a kind of backing into nationalization. Well, I'm with him on that! That's exactly the point to make. We're stumbling into bad forms of nationalization. Joseph Stiglitz said this very well: The difference between ownership and control leads to big distortions. The government is going in with a massive amount of control, but either it's not going to have ownership or it's not going to exercise those ownership rights. My favorite line, which was in an Op-Ed we wrote for the Financial Times in January, was, "If you want to end up with the politics of Pakistan, the economy of Ukraine and the inflation rate of Zimbabwe, bank nationalization is the way to go." That's my feeling about nationalization. I want government-managed bankruptcy.Does the government currently have the authority to put a multinational institution as large as Citigroup or a B of A into receivership? Hoenig addressed that directly. He was asked that question. He's worked for the Fed for 30 years. He's managed a lot of bank winding downs and receiverships in his district, or he's been involved in them, and his answer to that question was yes. So, I'm no longer going to say take my word for it, I'm going to say call Mr. Hoenig. It was a striking statement. To my mind, he directly contradicted what Secretary Geithner said when he testified on the need for the resolution authority. The resolution authority would be helpful, it'll give you a better tool to use, but Hoenig definitely said it can be done, now, following the Continental Illinois model of a negotiated conservatorship. That was the most important thing said at the JEC hearing. Although I do support giving them the resolution authority.
What we have been arguing for consistently is recapitalization on the basis of a government takeover and government-managed process. So you wipe out the shareholders, and then, how much of a hit you put on the creditors depends on the political calculation. How much money can you raise, which creditors do you protect? Our priority is protect the payment system: You want to protect deposits and anything that is like a deposit. If you force people to take losses on the payments part of the system, then all hell is going to break loose. But if you protect that, then the rest of it is a calculation about how much do we want to guarantee creditors, and I think at this point, with the situation a little bit calmer than it was last fall, everyone agrees that creditors need to take some sort of hit in an organized fashion.http://www.salon.com/tech/htww/feature/2009/04/23/simon_johnson/ |
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