Paul Krugman isn’t playing ball with the administration. Again.
This time, instead of advocating restructuring the banks, he is arguing for a more aggressive response to China’s currency manipulation–import tariffs:
Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.
…In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.
I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.
I imagine that this strident view is causing headaches at the White House, the Treasury, and the Fed. Obama has recently angered the Chinese party several times, and I doubt he wants another confrontation. Treasury appears to be captured by a free market ideology, and may slightly fear retribution in the bond market. And the Fed probably fears the impact of higher domestic inflation on inflation expectations, and, ultimately, the need to raise rates prematurely.
Looks like Mr. Krugman is going to get another roast beef dinner at the White House! Speaking of dinner, David, when are you back in Boston?
Life is back to normal on Wall Street, and the prospects for meaningful reform are dim. And the financial innovators are already gearing up for the next round of excitement. The New York Times reports on securitizing life insurance policies, and Reuters reports that Markit has launched indices for the up-and-coming sovereign debt CDS market, so speculators can bet on whole countries going under. Skeptics may point out that trading life insurance policies is an unproductive zero-sum game, and rampant CDS speculation helped bring the world economy to its knees. But why let such quibbles get in the way of profits?
msnbc has posted an article about senior executive compensation at the bailed out banks titled “Options windfall likely for bailed-out bankers“. From the article:
The top five executives at 10 financial institutions that took some of the biggest taxpayer bailouts have seen a combined increase in the value of their stock options of nearly $90 million, the report by the Washington-based Institute for Policy Studies said.
So the bailed out banks took advantage of the crash to award big option packages to their executives, probably justified by the argument that the options would give the executives incentives to restore the companies to health. When the government saved the day with generously helpings of taxpayer dollars, stock prices recovered nicely–and the executives got rich(er). Moral hazard, anyone? Needless to say, if the government had wiped out the shareholders and linked executive compensation to more meaningful metrics, this wouldn’t be happening.
The Guardian is reporting “Goldman to make record bonus payout“. Apparently the financial crisis has a silver lining, at least for Goldman. From the article:
Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year … A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.
Judging from the astronomical profits racked up in recent years by investment banking firms, it seems clear that price competition in the sector wasn’t too intense. Crisis-driven consolidation probably gives the top firms substantially more market power, and this at a time when firms and governments are desperate to raise money. The article quotes an investment banking analyst:
David Williams, an investment banking analyst at Fox Pitt Kelton, said: “This year is shaping up to be the best year ever for investment banks, or at least those that have emerged relatively unscathed from the credit crisis. … These banks are intermediaries in the bond markets where governments and companies are raising billions of pounds of new money. There is also a lack of competition that means they can charge huge sums for doing business.”
The article says that the bank set aside GBP600MM in the first quarter to reward its 28,000 employees. If profits hold at similar levels for the rest of the year, employees can expect over GBP80,000 on average from a compensation pool of about GBP2.4B. Certainly a lot of money, but nevertheless a far cry from the $18.8B compensation pool (about $600,000 on average for 30,000 employees) in 2007.
Apparently a significant fraction of the profits come from selling government bonds:
Last week, the firm predicted that President Barack Obama’s government could issue $3.25tn of debt before September, almost four times last year’s sum. Goldman, a prime broker of US government bonds, is expected to make hundreds of millions of dollars in profits from selling and dealing in the bonds.
Those concerned about financial oligarchy in the U.S. may want to ponder the relationship between Goldman’s handsome profits, the AIG bailout that paid $12.9B to Goldman, and “The Guys From ‘Government Sachs‘”.
On the other hand, for those who were concerned that widespread condemnation of warped incentives in the financial sector might lead to substantive reform, this should be reassuring. It appears that society will continue to shower riches on well-capitalized, politically-connected financiers, while bearing the cost of any associated negative externalities.
Simon Johnson, former chief economist of the IMF, writes that the US has developed a serious case of financial oligarchy, a disease more often associated with crony capitalism in developing nations. Unfortunately, he seems to be right. The Wall Street Journal has a lengthy article today about the ties between the New York Federal Reserve and Goldman Sachs. The New York Times describes the clubby relationship between former NY Fed president Geithner, now Treasury Secretary, and big Wall Street banks. We have a hedge fund millionaire chairing the Council of Economic Advisors. With oligarchs and their allies installed in key positions of the government and the Federal Reserve, the reluctance of the administration to nationalize the banks or get serious about regulating speculative finance is depressingly easy to understand. As is the billions of taxpayer dollars funneled to Goldman Sachs via AIG, contributing to impressive returns for Goldman shareholders. Our prognosis doesn’t look good.