When the IMF thinks you're in trouble, better pay attention
Josh has some telling graphs on display today that vividly illustrate the supersizing of the banking and securities industry since 1980. He also links to their source article at the Atlantic, a searing indictment of our profligate oligarchy and its emerging-market ways by Simon Johnson, former chief economist of the IMF, that really puts the metastasizing of the financial services industry in a clear, convincing, finally unnerving global and macroeconomic perspective.
I have to admit, before I read "The Quiet Coup" I was concerned comparisons of our situation to that of Russia and Argentina in the 1990's might be too alarmist, and neglected the history of economic debacles (and their solution) in our own country. Now, however, I'm a true believer in the pungency and timeliness of the comparison.
Another fine blogger, Glenn Greenwald, has also called attention to the parallels between the dynamics and root causes of failing third-world economies and our own. Glenn links to a Washington Post article by Desmond Lachman, another former IMF official, that makes many of the same points as Mr. Johnson's.
When the acknowledged experts in international economic catastrophe tell you you're sick, you'd better at least listen to their diagnosis and consider their recommended treatments.
Thanks for the links. The Johnson article is a must-read. Take what he is saying as the polite, I-don't-want-you-to-crap-your-pants-and-cry-like-a-baby version of truth-telling.
March 28, 2009 3:48 PM | Reply | Permalink
The problem started with companies being run by people who knew nothing about the company or the products and could give a wet slap about anything but quarterly profits. Idiots with Ivy League degrees. When money for it's own sake became the by word of the day. Bush sad to say was the very epitome of the system.
Willy Lomans with an MBA. This was not always the case.
C
March 28, 2009 6:24 PM | Reply | Permalink
So we are now paying heed to the same IMF which coerced Argentina to privatize strategic national resources so that Enron and US interests could take hold of them and charge the population dollarized prices to enjoy them? Or to the same IMF whose policies in 1990 brought so much hunger and hardship to the Venezuelan population that there were colossal riots and then subsequent coups disrupting what was one of the few Latin American democracies?
I especially enjoyed how the article sought to blame countries for the failures brought about by their extreme neo-liberal, hunger and auterity-imposing, pro-globalization policies imposed upon the population with the complicity of corrupt politicians such as Menem, Fujimori and Carlos Andres Perez. By the way, his use of the condescending term Banana Republic is not shocking coming from an IMFer or anyone from an organization responsible for Enron getting control of Argentina's water supply. When you go about de-stabilizing nations and sowing misery among their population as the IMF has done, all in the interest of US corporations, you do not get respect, except, of course, from David Kurtz.
March 28, 2009 6:48 PM | Reply | Permalink
Well, Simon Johnson was at the IMF from March '07 to Sept. '08, but if you feel compelled to blame him for Argentina's woes and everything that came before his tenure, I guess we won't stand in your way.
March 28, 2009 7:10 PM | Reply | Permalink
His article, which refers to Argentina as a Banana Republic, "time and again", does not smack of remorse for his organization's role. He may not have participated, but he now shamelessly blames the victims of his organization's past pro-US-corporatist looting of nations he now refers to pejoratively.
The first rule of developmental economics is not to refer to the nations in development as "banana republics." Perhaps it's an Anglo-American thing and he just does realize his insensitive tone, or perhaps he's more from the world of finance rather than economics and does not grasp these subtleties.
His article cites the longstanding expertise of the IMF and blames failure of any of their programs on oligarchs, not on the upheaval and chaos the organization's policies have "time and again" created in these countries. He's just another asshole from up North who does not get why the natives become restless.
I seldom use expletives online, but Johnson with his tone deserves it. In his revisionistic history, he's akin to the doctor who iatrogenically kills his patient and then blames the illness.
March 28, 2009 8:09 PM | Reply | Permalink
First of all, AA, I totally agree with you about using a disparaging term like "banana republic"!
Here's the exact quote you're referring to (from the first page of the article):
Throughout the article, Johnson repeatedly uses the academic term "emerging market," not "banana republic."
Unfortunately, an editor for The Atlantic titled that section "Becoming a Banana Republic."
How do I know it wasn't Johnson? I wasn't there when it happened, but I'm a writer and an editor, and that's what magazine editors do: They come up with catchy display copy, like subheads and article titles and intro blurbs. Writers almost never see those editorial choices before an article gets published, and sometimes editors make supremely boneheaded choices. When they do, the author always catches hell for it, of course. The author's name is on the piece, after all.
I've been following Johnson for a while now; I found him on my own, not through TPM. He's usually proper and precise (that's why I chose the word "polite" in my first comment). I've never heard him use offensive terminology, and I wouldn't defend him if I ever had.
He's an academic and a researcher. He's British (I think), and maybe that cold combination is also something you are reacting to. The IMF is not "his" organization, btw, he works for MIT (scroll down for all the acronyms he's involved with). The Atlantic editors probably asked him to give some background info about the IMF to introduce this particular essay. That's how it reads from my perspective, anyway.
I think you are misreading him, AA, but I am always on the lookout for blind spots I might have. From everything I've read of his, however, Johnson strikes me as being consistently anti-elitist. That's why I like him.
But even though I like a writer or a thinker doesn't mean I stop being vigilant regarding their limitations. So in my future reading, I'll pay attention to what Johnson has to say about South and Central American economies in particular. And maybe you'll give him another read someday, just in case I'm interpreting him correctly.
March 28, 2009 10:58 PM | Reply | Permalink
Gasket, I'll do my best to set aside my dismissal of him as one of the shock doctrinaires and give his work a more open-minded read.
March 28, 2009 11:26 PM | Reply | Permalink
I'm really sorry but this article is just a better articulated version of what has already been discussed a million times:
- Wall Street is evil
- Wall Street has undue influence on DC
- Banks need to be nationalized
- Argentina and other banana republics been there done that
I would leave aside the question of IMF own policy consistency and the success rate of its presciptions - but Johnson admits IMF hasn't fixed anyone's problem because no banana republic bought the entire IMF package of "solutions". Maybe US will be the first.
That package, of course, includes an arbitrary limit on the size of a bank - fantastical and almost certainly unconstitutional idea which does exactly NOTHING to solve the problem of Wall Street's grip on DC.
March 29, 2009 12:12 PM | Reply | Permalink
No need to be sorry, Lalo. I am enjoying this exercise, even if no one else is.
My impression is that Johnson has noticed that plenty of Americans are clueless about what is happening right now. I got that impression after listening to Terry Gross's seeming cluelessness in this interview with him. He had to slow down considerably for her (or she made him do that for her audience, I'm not sure which).
So the primary thrust of the Atlantic article, called "The Quiet Coup," is to introduce the idea to Americans that the banking industry has control over this country because it has control over our elected politicians in Washington. (Then it goes on to say, Obama/Geithner aren't moving to break that stranglehold and inject discipline into the industry.)
Does the Constitution say that the financial sector should "govern" the elected politicians and hold the populace hostage to its agenda? I remember reading that the elected officials are supposed to serve us, not the bankers.
I don't think the purpose of the article is to spell out step-by-step solutions. I think it's to get people to wake up first. You are already awake, Lalo, so you don't necessarily need to read this article.
March 29, 2009 1:09 PM | Reply | Permalink
P.S.
I'd like to know where people can go for honest, thorough, and well-articulated reporting about the economic (global) meltdown. I'm looking for one-stop shopping.
It's certainly not being done here at TPM. And I haven't seen any honest reporting by the Wall Street Journal or the New York Times. Is it at Bloomberg? CNBC? The Financial Times? The Economist? CNN? President Obama?
Where can I go read about what's going on where I don't have to pay an exclusive registration fee? Where can I go if I don't have an economics or business degree? Where can I go if I don't know the fucking obfuscating jargon? Where can I go if I don't have enough extra cash to play the stock market?
Where has any of this been "discussed" a "million" times, Lalo?
March 29, 2009 1:29 PM | Reply | Permalink
Gasket: there hasn't been a one-stop shop where everyone stopped by to discuss it a million times. I've been looking for it myself, I promise to let you know if I find it...
What I'm doing is reading and contrasting reporting from all the sources that you cite and more, so I can form my own opinion - and I recognize that I'm always captive to the opinions of people who have degree in economics, job experience or just superb writing skills to influence me. Nevertheless, these sources typically have archives going back years, so there's plenty to research from.
But to back up to the points above - I understand that Johnson is introducing the idea of cozy Wall Street to the american public. The core of this idea is ideological in nature (and I have no problem with that).
My issue with his article is that he is using this "coziness" as the main reason for the current crisis. To be completely frank - I find this irresponsible because the implied solution consists of ideology-driven action, which is almost always ineffective.
On top of that - vast majority of public policy in this country is formulated in close relationship with industries it will affect. And since the right to petition/lobby is constitutionally guaranteed - how do you draw a line between undue influence and "just enough" influence?
My own view is that the current crisis is different from the dotcom bubble only in its location and size.
The economic reform should be focused on isolating the issues that cause bubbles to appear and creating mechanisms to prevent them from popping up elsewhere.
Otherwise, we will be forever running behind putting out fires every few years and these fires will keep coming back in places where we don't expect them.
March 29, 2009 2:44 PM | Reply | Permalink
I agree with this wholeheartedly, and it's also how I read Johnson.
Maybe I am misreading him, but I see him as recommending the following: bank managers need to be fired, shareholders need to take a loss, decks need to be cleared, the government needs to step in temporarily to isolate and clean up like a Superfund site, and regulation needs to be built into a new operating model. He's saying certain steps need to be taken first, or things are going to collapse worse than they already have. There won't be another bubble to worry about, there will be a global depression to contend with. But no one (Obama, Geithner, Bernanke, et al, like the G20) is honestly admitting that the existing system has failed. They seem to be propping it up on toothpicks. Isn't that Krugman's concern too?
Johnson is not a journalist or an elected official or a businessman. He's an academic. A researcher.
Yet because our press has so spectacularly failed us, you and I must forage for information, sifting through bits and pieces of spin to discern the truth. Even Josh Marshall has failed utterly in his job of reporting on this epic global story in any kind of timely fashion. Journalists are playing catch-up, and therefore, so is the American public.
Well, I feel a pressing urgency to catch up more quickly than Josh and his reporters seem to feel.
I'm not promoting Johnson as one-stop shopping. But I have found him to be more knowledgeable, frank, and forthcoming than any of the journalists I've read.
Thanks for continuing this conversation, Lalo. I always like reading what you have to say.
March 29, 2009 3:40 PM | Reply | Permalink
P.S.
Josh is ruminating over the fucking graphs, not the meat of the article. Typical.
March 29, 2009 3:44 PM | Reply | Permalink
Thank you for that. I think there is a subtle difference in how we are thinking about the bank crisis.
I think several factors collieded to create conditions for the bubble to occur. The banking industry hasn't been doing anything differently than any other industry - lobbying to protect their interests and exploiting opportunities for profit when they see them. They are victims of the catastrophy just as everyone else. Those who committed crimes should be prosecuted, of course, but it's silly to punish an industry simply for the fact the bubble happened on their territory. It could have been construction, coal mining, fishing and publishing in their place.
I also think that Obama administration should create a round table of top economists with different view and charge them to isolate what causes a bubble. This has to be ideology-free, bi-partisan and comprehensive. Then regulatory action is needed to address this specific conditions.
I don't care for being even more unpopular than I am already, but I honestly think the proposed regulation to allow Geithner to takeover companies is more about government control than building a lasting healthy economic foundation in this country.
BTW - I like what you have to say too (as I said before) and I actually seek out your comments.
March 29, 2009 4:15 PM | Reply | Permalink
Thanks for clarifying, L, and please know I seek out your comments too. I just haven't been around these parts very much lately, so your clarifications really help.
As for the banks, I just have trouble looking at the insolvency part without getting really pissed off. An admitted emotional hurdle for me, I realize. I always come back to: What is a bank's job? Is it just like any other business? (I say no.) What about those unregulated financial products? If I'm supposed to be consumer-savvy about my purchases (including real estate), shouldn't banks be savvy about theirs? In brief, I have trouble seeing the banks that spun off loans as victims. I see them as super-stupid gamblers. But wait. I'm now back to: What is a bank's job? If you have any suggestions for how I can get out of that loop, I'd appreciate it.
With Geithner, I have trust issues. There needs to be a check on his power, of course. The abuse of unchecked power is the lesson we were supposed to have learned from the last administration. Well, count me in as having passed that class a long time ago!
I like your idea of bringing more cranky people to the discussion table (and I don't mean cranky bankers or politicians). If I were in charge of the invite list, Roubini would be on it.
March 29, 2009 5:19 PM | Reply | Permalink
I agree that it's very difficult to separate the anger from how we think. My 401k lost two thirds in value, and I went through panic, anger, depression, resignation, anger and it's still going on. Unless stock prices rise dramatically and consistently, I will never get it back and this is of course the retirement money.
So I'm VERY interested in seeing the stock prices of the banks to go up, because some of the mutual funds I have held bank stocks. But every time the Treasury changes its plans (4 and counting, because each version fails), I get scared because Citi stock price goes below $1.
You make a great point about unregulated financial products. I think in western economy any industry will innovate faster than regulations can keep up. That's why I think regulations should address the causes and conditions of things, rather than regulate ALL finance or specific products - because we will end up chasing events instead of shaping them.
When I say banks are victims, I don't mean it in the emotional sense. I mean that banking is just another economic sector that got caught up in a bubble. In Holland it happened with tulips, as you know, and history is full of examples. Still -I know a few people who work in Wall Street and I find some of them arrogant, shallow and insincere.
On Geithner - I have trust issues with him too (maybe for different reasons). But I was brought up with the idea that any kind of power corrupts, so my instinct is to distrust any elected official, including Obama himself. We live in a two-party system which turns everything into a direct competition for power. There was another post today that listed the amounts of contributions some of these banks paid to Dodd - I'm sure there's more to be found.
As for the roundtable - I'm sure this what Hillay would have done. She might have said so during the campaign, but I don't remember. Call it a special advisory panel or whatever and charge with identifying issues and proposing policy action to address them from happening again - in ANY industry.
March 29, 2009 5:56 PM | Reply | Permalink
Aint a bad idea to check in with guys like Greenwald and Josh for almost any issue.
March 29, 2009 3:17 PM | Reply | Permalink
Adabsurdum - I don't think the sins of the IMF fatally corrupt the observations Johnson and Lachman have to make - they are clearly sensitive to the way the poor majority ends up footing the bill for economic reform. (A great book on the biases of the IMF and the limitations of their approach is Bad Samaritans by Ha-Joon Chang.)
Lalo -
Ah, lalo, lalo, lalo.
The banking industry hasn't been doing anything differently than any other industry - lobbying to protect their interests and exploiting opportunities for profit when they see them. They are victims of the catastrophy just as everyone else. Those who committed crimes should be prosecuted, of course, but it's silly to punish an industry simply for the fact the bubble happened on their territory. It could have been construction, coal mining, fishing and publishing in their place.
Lalo,I'm going to have to ask you to back up what you're saying here about industry equivalence.
What is the "fishing" or "publishing" equivalent of credit default swaps? 30 to 1 leverage? Specially tailored legislative reduction of oversight and regulation? (Do you worry about the fish at Ralphs being fresh because the salmon lobby did away with expiration dates?) Treasury and taxpayer bailouts? Credit market seizures? Does Starkist Tuna or Vanity Fair have the kind of proprietary investment in a cabinet-level post that Goldman does at Treasury?
You keep missing what's unique about the banking and securities industry - it controls the allocation of the vast majority of capital in this country. This means that 1) its actions disproportionately affect the availability of the economy's lifeblood to all industries (not to mention to everybody else from countries to individuals) and 2) its recklessness leads to systemic, not just localized contagion. Do you have more to offer on this point than to just keep repeating "everybody does it", as if that's the magic "get out of jail free" card? It would be nice to hear something in the way of an argument.
- Wall Street is evil
- Wall Street has undue influence on DC
- Banks need to be nationalized
- Argentina and other banana republics been there done that
Seriously, that all you got out of Johnson's detailed comparison of the dynamics at play in prior emerging market meltdowns and their unsettling parallels to our own? Where exactly does he mention the "evil" of Wall Street? The restructuring and temporary receivership he proposes is hardly "nationalization", though I know that's a popular scare-phrase now, so you couldn't resist throwing it in. He also points out that countries end up with various versions of a solution - they just all have to get serious about dealing with powerful, self-serving elites in order to do this.
That package, of course, includes an arbitrary limit on the size of a bank - fantastical and almost certainly unconstitutional idea which does exactly NOTHING to solve the problem of Wall Street's grip on DC.
Corporation are artificial creatures of the law. If you can find the article or amendment that would prevent restricting bank size - and the 100-year-plus existence of anti-trust legislation would argue to the contrary - please enlighten us.
I understand that Johnson is introducing the idea of cozy Wall Street to the american public. The core of this idea is ideological in nature (and I have no problem with that). My issue with his article is that he is using this "coziness" as the main reason for the current crisis. To be completely frank - I find this irresponsible because the implied solution consists of ideology-driven action, which is almost always ineffective.
I'm a little unclear - are you denying the obvious parallels that Johnson points out, or calling him irresponsible for pointing them out? And if his analysis is correct, are the actions they suggest "ideology-driven", or just appropriate and pragmatic?
You leaving me wondering: what ideology - what secret political agenda - are these former IMF officials pimping for? Are you saying these former ubercapitalist point men are biased against free market solutions and are now advocating action based on some covert conversion to (national) socialism?
Obviously courses of action proceed from points of view, and every point of view has some kind of intellectual underpinning. Accusing an opponent of being "ideological" just because they point out uncomfortable truths or you disagree with them suggests you're runing low on ammunition.
I also think that Obama administration should create a round table of top economists with different view and charge them to isolate what causes a bubble. This has to be ideology-free, bi-partisan and comprehensive. Then regulatory action is needed to address this specific conditions.
What exactly would an "ideology-free" round table or discussion be like, especially one that was "bi-partisan"? Doesn't partisan mean "favoring or advocating a particular position"? So wouldn't a "bipartisan" discussion necessarily include an ideological butting of heads? (Not to mention an unnecessarily limited dialog involving just two viewpoints.)
But why wait for Obama to get people together? There is a very free-wheeling discussion going on right now about the relative merits of PPIP and temporary receivership/restructuring. Johnson and Lachman add substantively to that ongoing debate.
Maybe you can, too. If you do "think several factors collieded to create conditions for the bubble to occur", I'd love to hear what you think they are and what solution your analysis points to.
March 29, 2009 7:24 PM | Reply | Permalink
You're picking apart my comments to prove me wrong, but you ignore the bigger picture i was trying to make.
"You keep missing what's unique about the banking and securities industry - it controls the allocation of the vast majority of capital in this country."
Of course it does. That's why it's called finance industry. It deals with generation and allocation of capital.
I don't find Johnson's point of view inconvenient or uncomfortable. I think it is an attempt to increase government control under the cover of fixing the crisis.
What I find strange in his article and your comments is the ease with which everybody dives into the POLITICS of the crisis and starts to pull the blanket one way or the other.
March 29, 2009 8:11 PM | Reply | Permalink
Lalo - I'm starting to wonder if you really do have a problem processing information that conflicts with your prior beliefs.
I'll try to restate my point for greater simplicity and clarity: because the finance industry does what it does - allocate capital - it is not like fishing or publishing. Its smooth functioning and proper management of risk is key to the wellbeing of the entire global economy. Precisely for that reason, its behavior needs to be closely monitored and regulated. The need for such constant vigilance isn't obvious when the market is thriving. These days, after all the revelations about blatant recklessness,violations of fiduciary duty, gross mismanagement, even outright fraud, it's beyond me how anyone can continue to defend a doctrinaire free market, anything goes approach to finance.
Radical laissez faire philosophy dominated the economy in the last half of the 19th century. If monopolies and price-fixing, blatant insider dealing, outright purchase of legislators, and grotesque abuses of employees including minors is your idea of the way an economy should work, you're in a distinct minority.
As for your big picture, I am trying to bring it into focus, but to me it seems simplistic. I get you hate "government control" with a passion. But no one is seriously suggesting the government run the finance industry, so this is just a straw man.
What you really appear to be advocating is no role whatsoever for government in a modern economy. I share your distrust of government - elected and appointed officials need to be monitored, too. We have elections to keep them in check.
But I distrust power generally, not just its formal political embodiment. I really don't get why someone so skeptical about Washington seems to ignore all the evidence that Wall Street's upper echelon is also self-serving, abusive and dangerous if left to their own devices.
As for making this "political" - hell, if finance is the allocation of capital, politics is about the allocation of power. Both are incredibly important functions in a capitalist democracy. Both need checks and balances on abuses and corruption that impact everyone.
When it comes to finance, I see government as one of those checks. You'd rather trust to the market. That's a basic difference of opinion that neither one of us is likely to change anytime soon.
But if you can point to evidence suggesting the market will heal itself, or have a non-governmental solution that accomplishes the same goal as stringent federal oversight, I'm willing to think on it.
March 30, 2009 1:35 PM | Reply | Permalink
Thank you for your condescending comment and attitude - it wasn't really necessary.
I'm not opposed to regulation at all. I'm in favor of regulation. The difference is in what to regulate.
Johnson (and I assume you as well) proposes to regulate things that have nothing to do with the causes of the housing crisis that resulted in credit crisis (a crisis of confidence). I propose to regulate conditions that caused the crisis (asset bubbles).
I oppose regulation that Geithner is asking for because fo the most part they are not designed to prevent or solve problems. They are designed to give the government more control.
For example, I don't think it is right OR necessary to allow the Treasury to decide completely on its own which company is viable or not. I don't think government takeovers are necessary. That's what Chapter 11 is for. I don't think the finance industry needs to be artificially "downsized", because - again - it solves no problem.
So when it comes to the role of government in the economy it is precisely that - isolating conditions that cause a crisis or otherwise impede growth.
Johnson's whole premise is that the finance industry has an undue influence on DC. This is read meat left-wing populism, with a purpose, if there ever was one. He doesn't explain what the "appropriate" amount of influence is and he doesn't explain how to push the industry back to that leve.
The point about risk management is an interesting one. The finance companies spent millions of dollars on state of the art modelling software to predict and manage risks. Risk management as a discipline only appeared in the 1950s.
The only thing the government can do to manage risk is to impose capital requirements that reflect it.
You can continue to give me lectures. Or you can simply take a minute and think about what I'm saying. Because everytime you write a response it's clear that you're not thinking about the content of my words.
March 30, 2009 8:07 PM | Reply | Permalink
Lalo, again, I have to quibble with this statement:
I disagree that Johnson has an agenda as you have characterized it; he has a philosophy. There's a difference between having a philosophical point of view and having an agenda. Milton Friedman had a philosophical viewpoint, too.
There's nothing inherently good or bad about having a populist point of view or a unfettered free market point of view.
The Atlantic is who has the red-meat agenda. The Atlantic is who made the editorial decision to assign Johnson to write a somewhat provocative article for them. Johnson is not going to advance his career with this piece (in fact, he may set himself back a few steps, in some circles). But The Atlantic hopes to sell more magazines and attract more online hits from it. Higher newsstand sales and more traffic means more ad income.
I think it's as important to separate this out as it is to argue what should or should not be regulated.
RobertoW, the same goes for you, actually. Lalo is allowed to have a philosophical point of view. It would be nice if you tried to understand it first before trying to shut it down with comments like:
Totally uncalled for. Lalo's position may not be as far from yours as you think.
March 31, 2009 10:00 AM | Reply | Permalink