Robert Johnson

Roosevelt Institute Senior Fellow and Director of the Project on Global Finance
Roosevelt Institute Profile

Recent Posts by Robert Johnson

  • Kakutani's Kowardice

    Jan 21, 2010Robert Johnson

    robert-johnsonAt the Daily Howler, Bob Somerby decodes the snotty condescension that substitutes for a real review of the book. Looking down her nose, Michiko Kakutani just cannot stick to the economics.

    robert-johnsonAt the Daily Howler, Bob Somerby decodes the snotty condescension that substitutes for a real review of the book. Looking down her nose, Michiko Kakutani just cannot stick to the economics. Is it "populist" to have a distaste for Too Big to Fail and the Lemon Socialism of Heads Big Banks Win and Tails the Taxpayer loses??? I do not know of one hedge fund manager or Ivy League educated policy official who will argue in favor of such an environment. Perhaps Kakutani stands alone above us all, financiers and scholars included, with our dirty and unwashed distaste for subsidies to the rich and powerful.

    Shame on you Kakutani. For such a mindless constellation of smears.

    WEDNESDAY, JANUARY 20, 2010

    From Kakutani's hive: In yesterday's New York Times, Michiko Kakutani reviewed Joseph Stiglitz's new book, Freefall. It seemed to us that she probably did a good job summarizing Stiglitz's views about (as expressed in the book's subtitle) "America, Free Markets, and the Sinking of the World Economy."

    That said, we were struck by the swarm of buzzwords which kept flying in from some mainstream press hive. This is how the review began. Why is that one buzz-word in there?

    KAKUTANI (1/19/10): In a November 2008 Op-Ed article for The New York Times, the Nobel Prize-winning economist Joseph E. Stiglitz wrote that a huge stimulus package -- as much as $1 trillion over two years -- was needed to turn the Great Recession into a robust recovery and that new regulations were needed to change the destructive behavior of Wall Street that had brought about the fiscal calamities in the first place.

    Some four months later, he wrote another Op-Ed piece for The Times in which he assailed the Obama administration's plans for dealing with ailing banks, arguing that it was "a win-win-lose proposal: the banks win, investors win-and taxpayers lose." He went on to characterize the administration's approach as "ersatz capitalism, the privatizing of gains and the socializing of losses."

    Mr. Stiglitz's new book, "Freefall: America, Free Markets, and the Sinking of the World Economy," expands these populist arguments further.

    Our question: Why did she stick the word "populist" in there? What was gained by that insertion? If you asked a hundred Times readers what the word means, you'd surely get two hundred answers. Why wouldn't a reviewer simply say that Stiglitz expanded these arguments further? Was Kakutani giving herself distance from Stiglitz's views? We couldn't help wondering.

    Was she staying a "Serious" person?

    We wondered that as we started to read -- but my, how the buzz-words continued to fly! As noted, Kakutani seemed to provide good summaries of Stiglitz's views. But soon, we started again:

    KAKUTANI: Before the deadly autumn of 2008, Mr. Stiglitz was one of the handful of economists who had been "expecting the U.S. economy to crash, with global consequences," and in this book his prescience lends credibility to his trenchant analysis of the causes of the fiscal meltdown, though it also leads, at times, to an I-told-you-so sanctimoniousness about both the recession and Washington's response.

    "I suspect that if the government adopted the simple proposals of this chapter, the foreclosure problem would be a thing of the past," he writes. "But regrettably, the Obama administration has followed the course of the Bush administration, directing most of its efforts at rescuing the banks."

    Was that quotation supposed to provide an example of Stiglitz's "I-told-you-so sanctimoniousness?" We can't imagine what would be gained by such an odd claim -- unless Kakutani gains a bit of eye-rolling distance from Stiglitz's plainly non-Serious views. Soon, she went there again:

    KAKUTANI: Like the Times columnist Paul Krugman, Mr. Stiglitz reminds the reader that America was spared major financial crises in the decades following World War II, when ''there were strong regulations that were effectively enforced.''

    As memories of the Great Depression receded, however, deregulation became increasingly fashionable -- not only under the Republican administrations of Ronald Reagan and the two Bushes, but also during the tenure of Bill Clinton. Mr. Stiglitz, a member of Mr. Clinton's Council of Economic Advisers and later chief economist for the World Bank, frequently criticized the Treasury secretary at the time, Robert E. Rubin, and his successor Lawrence H. Summers, for their deregulatory policies; in these pages, he questions President Obama's decision to make Mr. Summers his chief White House economic adviser and to name Timothy F. Geithner (who worked under Mr. Summers and Mr. Rubin in the Clinton administration) treasury secretary.

    "Obama chose this team," says Mr. Stiglitz, who writes with what sounds like a touch of sour grapes,"in spite of the fact that he must have known -- he certainly was advised to that effect -- that it would be important to have new faces at the table who had no vested interests in the past, either in the deregulatory movement that got us into the problem or in the faltering rescues that had marked 2008, from Bear Stearns through Lehman Brothers to A.I.G."

    What is gained by that highly subjective insertion? Why isn't Stiglitz simply asserting his (perfectly reasonable) view? By the way: We're always impressed when a writer's nose is so fine that it can detect just a touch of sour grapes, not a full dose of the fragrance.

    Kakutani goes on to offer a puzzling claim, seeming to say that Stiglitz's proposal for "more progressive taxation" "stray[s] far from the realm of practical policy recommendations that actually have a chance of winning broad public support or being enacted by Congress." As she closes, she warns that these impractical proposals "give ammunition to conservative critics who want to dismiss Mr. Stiglitz as a European-style liberal." Let a million buzz-words bloom!

    For the record, Stiglitz isn't just "a Keynesian." He writes "as a proud Keynesian, and his analysis of the recession of 2008 and its aftermath reflects his overall philosophy."

    In November 1999, Kakutani showcased her remarkable skill at forcing High Manhattan Conventional Wisdom, no matter how daft or irrelevant, into reviews of political books. (For part 1 of our four-part series, see THE DAILY HOWLER, 11/29/99). In this review, she seems to summarize Stiglitz well. But along the way, an army of buzz-words swarms from a hive. Is Kakutani letting us know that we should hold our distance from these non-Serious views?

    Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

    Read more

    Share This

  • FCIC hearings must shatter the 'sociopathic nature' of Wall Street

    Jan 13, 2010Robert Johnson

    robert-johnsonReporting live from the hearings, Rob Johnson argues that the FCIC hearings must challenge Wall Street to reexamine its role in society.

    robert-johnsonReporting live from the hearings, Rob Johnson argues that the FCIC hearings must challenge Wall Street to reexamine its role in society.

    The Hearings of the Financial Crisis Inquiry Commission began belatedly this morning. Carrying a structure of decision making that appears to be designed to make it hard to get things done, Chairman Phil Angelides has a gargantuan task before him. The first session, which is a beginning, did have moments of import. Angelides acquitted himself well when he reminded Goldman Sachs CEO Lloyd Blankfein of the fact that there were people on the other side of the losses, particularly police pension funds, when Goldman appears to have sold the "sophisticated investors" representing them some toxic mortgage paper.

    What I find important about that moment is that Angelides' questions serve to restore some humanity to this process that hides behind complexity, mathematics and screens while denying of human consequences. The sociopathic nature of Wall Street--a culture in which people see their actions as disassociated from the rest of the economy and society -- has to be shattered. These financial professionals have failed as experts and custodians of the well being and future of the nation.

    Another noteworthy element of the theatre was the relative absence of Jamie Dimon. He was hardly questioned or pressed. Lloyd Blankfein has been cast as the feisty defender of Wall Street practice.

    The example of Goldman Sachs's conflict of interest between the proprietary account of the firm and well being of customers is certainly not unique to the firm. It would serve us all if the FCIC were to dig deeper into how that conflict operates.

    The other highlight was Blankfien's declaration that he was never asked to take less than 100 cents on the dollar on AIG settlements.

    Most assuredly, future hearings will delve into the interface between private firms and the government authorities at the Federal Reserve and the Treasury Department. One only hopes that the FCIC can get to the bottom of this relationship before we pass financial reform legislation in the Congress in the coming year.

    Senior fellow Robert Johnson is Director of Financial Reform at the Roosevelt Institute and a former managing director at Soros Fund Management. He has recently been pegged to lead George Soros' $50 million effort to create an Institute for New Economic Thinking  which will promote free market skeptics and encourage a new economic paradigm.

    Read more

    Share This

  • Reviving Confidence in the American Economy - China, Investment and the Deficit Hawks

    Dec 31, 2009Robert Johnson

    CB013130Rob Johnson explains how the U.S. can regain competitiveness and revitalize its economy.

    CB013130Rob Johnson explains how the U.S. can regain competitiveness and revitalize its economy.

    Since the early 1980s, rises in the living standard of middle class United States citizens have not kept up with the gains in labor productivity. Wages in the middle class have been close to flat. At the same time, consumer spending continued to grow abetted by innovations in consumer finance that supported ever-higher levels of consumption for any level of income. The credit crisis of 2008-9 has ended and unmasked the contradictions inherent in this unstable system and also in the international commercial system that has relied upon U.S. consumers as the buyers of last resort since the Second World War. American consumers cannot be both under downward pressure from outsourcing competition and relied upon to be the locomotive of worldwide economic growth.

    The retrenchment of the American consumer, as housing wealth evaporates and unemployment rises, blows a chill wind over the sentiments of consumers and business investment. Only the Obama Administration's fiscal stimulus resists the decline of demand.

    Declining fortunes associated the crisis are surely accelerating the retrenchment of American living standards. Yet the pain of adjustment is more easily borne if it is seen as transient rather than without end. The Obama Administration, despite the oratory brilliance of the President, has yet to articulate a credible vision and plan of how a broad base of Americans, and not just a few financiers, will recover and return to a vital medium term outlook. What challenges stand in the way of a credible plan that must hinge upon restoring sustainable living standards in this country? I see two. 1) Significantly lower costs of production in developing countries; 2) and deficit hawks.

    The top management of American corporations has been able to see plainly for years that social costs of labor inputs and the costs of energy inputs (polluters do not pay) are much lower in the developing world than they are in the United States. Economists look at measure called relative unit labor cost of production and can see that China, and several other developing countries, have much lower labor costs per unit of output than in the United States.

    Right now that gap is closing slowly. Investment is depressed in the United States and much more vibrant in China. Wage growth is higher in China than in the USA, albeit from a much lower level, but Chinese wage rises are somewhat dampened by the sheer scale of labor supply that can move from rural life to the factories. At the same time investment and productivity growth in China is also much higher than in the USA where investment is depressed. So the relative unit labor cost gap is not closing rapidly. In fact it may be decades before the relative unit labor cost gap ceases to be a major incentive to outsourcing, absent a large change in the exchange rate. The sheer size of China and India make this a major challenge to the United States and the industrial world.

    This is not a static situation. The U.S. can regain competitiveness in several ways. First, through an exchange rate appreciation of the currencies of China and the developing countries relative to the dollar, which will diminish the cost imbalance. That is a necessary change in the near to medium term. Secondly, labor rights agreements and environmental standards in the developing world may also be helpful by raising the floor of costs rather than driving us to the lowest common denominator. Third, rising living standards in the developing world may increase demand for products made in the industrial world over time. These recommendations of a shift to environmentally sound consumer led growth in China, however, often leaves Chinese officials confused. They hear U.S. corporate top management with substantial foreign direct investments in China resisting policies of wage growth or environmental cost increases while leading officials in Washington talk as though it is a necessary component of restoring macroeconomic balance.

    Finally, rising productivity in the United States both in absolute and relative to productivity growth rates in the developing countries would improve the competitiveness of our workforce. What would that entail? Investment in the human capital of the American workforce, business fixed investment on the U.S. mainland, and infrastructure investment by the U.S. government to augment and complement, and therefore inspire, business investment in the USA.

    Resistance to public spending along these lines may be formidable. In an era when money-driven American politics has shown itself so much more responsive to special interests than to general interests it may be difficult if not impossible to create a consensus for efforts to enhance broad based productivity growth. Much of multinational corporate top management does not need a vital and healthy American workforce to thrive. Yet they do need a strong foreign military presence. Many high-income earners who finance politics see little benefit from paying more taxes to support public spending when they do not trust that their dollars will be efficiently used. As is evident in the news media today, the deficit hawks are on the warpath now when it comes to nonmilitary spending.

    Despite their silence when tax cuts for the wealthy were enacted while we fought in Afghanistan and Iraq and despite their silence when losses from reckless financial institutions were transferred from the creditors of those Too Big to Fail firms to the public balance sheet, the deficit hawks will now vehemently resist efforts to rebuild the public infrastructure that would complement and augment the productivity of the productive plant of the mainland United States. That is the productivity that constitutes the promise to the American people that this crisis will be only transient.

    Deficit hawks prefer, it appears, to rely upon private sector solutions. Yet business fixed investment in the U.S.A. is likely to be lackluster without a public jump start as consumption wanes and the temptation toward outsourcing continues. The Obama Administration is faced with an increasingly angry populist energy and 2010 is none too soon to implement a plan for the economic revitalization of the nonfinancial economy.

    Robert Johnson is Director of the Project on Global Finance at the Roosevelt Institute and a former managing director at Soros Fund Management.

    Read more

    Share This

  • Robert Johnson testifies before Senate Agricultural Committee, reveals 4 major flaws in financial sector

    Nov 19, 2009Robert Johnson

    man-on-money-150Robert Johnson, Director of Financial Reform at the Roosevelt Institute, testified before the Senate Agricultural Committee yesterday on what he sees as dangerous flaws in the financial sector during the committee's hearing on regulatory reform.

    man-on-money-150Robert Johnson, Director of Financial Reform at the Roosevelt Institute, testified before the Senate Agricultural Committee yesterday on what he sees as dangerous flaws in the financial sector during the committee's hearing on regulatory reform. Below is his oral testimony, along with a link to the full written text. As you may recall from these pages, Johnson presented hard-hitting testimony on the derivatives bill before the House Financial Services on Oct. 7, which was cut off after 5 minutes. The subsequent kerfuffle over our attempts to get his written testimony published on the House website was reported by Ken Silverstein of Harper's.

    "Chairman Lincoln, Ranking Member Chambliss, and Members of the Committee, thank you for inviting me to testify before you today.

    The American people clearly sense that there is something deeply flawed in the current structure of our financial markets. The financial sector's calamity has spilled over and done great harm to the lives of many Americans and people throughout the world.

    When they are properly designed, financial markets play a fundamental role in the resource allocation for our society. Financial markets serve to aggregate savings and allocate them to productive use and to transfer risk to entities that bear it most comfortably. The system we had in place in recent years, and the one that is still in place as we meet today, has revealed itself to be profoundly flawed.

    Efforts to repair these market structures in light of the crisis should address and seek to rectify 4 core problems:

    1) Excessive leverage

    2) Opacity and complexity rather than transparency and simplicity

    3) The ability to buy insurance without an insurable risk

    4) A misalignment of incentives where the private incentive to take risk exceeds the social desire to bear risk.

    Certain types of derivative structures have contributed to all of these problems. It is time for a thorough redesign of these market systems to fortify the real potential of derivative instruments and repair the obvious flaws in structure have caused so much harm.

    I must admit that I am very surprised by the intense focus on "End Users" of derivative instruments. They are at present, by their own claims, a relatively small part of the market. That focus does appear to me to have substantially misdirected energy away from the essential task of financial reform before the United States Congress that centers on the the regulation of the large financial institutions who threaten our economic system. This diversion to focus on end users is not independent of that quest and is a dangerous exercise for at least two reasons.

    First , efforts to legislate what types of institutions are exempt from the restrictions of healthy market practice runs the risk of creating loopholes large enough to fly a jet aircraft through. End user exemptions that are drawn too broadly would allow anyone and everyone to claim them, especially the large and too big to fail financial institutions that stand next to the public treasury and are the dominant actors in the opaque OTC market. That would directly undermine the need to bring these markets out of the dark. It would enable the largest market participants to remain in the shadows where they earn extraordinary profits but put society and the public treasury in peril.

    In addition, end user exemptions may inadvertently spawn large speculative organizations or divisions of those organizations. The incentive to create Enron-like entities is the risk implicit in creating legislative that confers special advantage for certain types of market participants.

    The second danger is that the exemption of certain classes of financial products such as foreign exchange forwards and swaps, or any products that are traded on foreign platforms, will surely serve to drive more activity offshore, perhaps to locations where the underpinning market structures are themselves unsound.

    Foreign exemptions will also likely divert creative energy into the creation of complex "foreign exchange"-based products to qualify for that exemption and thereby avoid the scrutiny and structures complex products do require for systemic safety.

    There has been a great deal of recent testimony that goes to some length to justify end user exemptions. This body of testimony tries to illuminate the consequences for end users of requiring them to trade upon exchanges or submit their transactions to clearinghouses.

    While I do agree that some increase in cost will be borne by these end user institutions if the current market structures are replaced by more robust and healthy market structures, I believe the magnitudes of the costs they report they would incur pale in comparison to costs that this crisis has inflicted on society, and even on their own firms.

    I do agree that end users were not the primary cause of the recent crisis and that they are not deserving of any particularl punishment. Yet punishment is different than adjustment to the removal of an unhealthy subsidy. I do not believe that their arguments should dissuade you from undertaking substantial financial reform, even reform that impacts their practices.

    First of all, as economists are fond of saying, there is no free lunch. Efforts to hedge market exposures by commercial users are primarily a transfer of risk, rather than a diminution of the underlying risk. An oil hedger is not reducing the volatility of oil prices, but merely transferring that risk to another party who will bear that oil price volatility risk for a price.

    When market structures are weak and unsound, they under-price that insurance and encourage the overuse of insurance. In the case of the OTC derivatives markets that are largely run by the handful of TBTF banks, the insurance offered to end users is often under-priced because the risk is in part borne by the public/taxpayers who underpin the safety net that backstops those banks.

    Removing that back room subsidy and the excessive use it inspires, something often called moral hazard, would lead to an increase in the cost of providing risk transfer insurance.

    Removing the subsidy would lead to a diminished profits for end users, and less use of insurance, and some more costs for the consumers of those services end users provide. Where I differ from many of the end user's claims is that I believe that this would be a good thing for the nation and the economy as a whole. Removing subsidies to the buyers of insurance does not make the world a more dangerous place. It merely redistributes who bears that risk away from those who had provided the subsidy.

    The American private sector, be it end users of financial products or financial institutions, does not need to clamor for subsidies from the taxpayer in order to thrive. That type of rent-seeking behavior is demoralizing for society and it is unproductive. It weakens the economy in the long run.

    Furthermore, government willingness to abide efforts to extract subsidies from the public fisc actually weaken the companies who receive them. The dependency on government subsidy allows the private sectors creative powers to atrophy.

    We would all do much better in the long term if they were shown tough love, were refused state welfare and forced to focus on new product development and innovations in the marketplace that would create a stronger more profitable productive future for the business sector and our nation.

    Reforming the financial structure of the U.S marketplace is essential to restore confidence in the United States. Transparent market structures, proper capitalization, regulation and restoration of market discipline to our largest financial institutions are the essential ingredients needed to restore that confidence.

    Those reforms are a public good that nourishes us all. The transition from subsidy based commerce to a proper realignment of incentives for the use of financial instruments is a painful but healthy transition.

    If done properly it will also greatly diminish the possibility that future financial bailouts will reemerge and crowd out the use of our public finances for much needed infrastructure, education spending and healthcare that make our society stronger and our lives more secure.

    I will submit the balance of my remarks for the record."

    Click here to read Robert Johnson's written testimony .

    Read more

    Share This

  • As Frank Zappa would say...

    Nov 12, 2009Robert Johnson

    "This is the crux of the biscuit"

    From Ryan Grim on HuffPo ("Wall Street Banks Tricking Little Guys Into Lobbying for Them")":

    Wall Street titans, recognizing that they have something of a credibility problem when it comes to opposing regulatory reform, are enlisting more sympathetic, everyday folks to lobby on their behalf on Capitol Hill.

    "This is the crux of the biscuit"

    From Ryan Grim on HuffPo ("Wall Street Banks Tricking Little Guys Into Lobbying for Them")":

    Wall Street titans, recognizing that they have something of a credibility problem when it comes to opposing regulatory reform, are enlisting more sympathetic, everyday folks to lobby on their behalf on Capitol Hill.

    Bankers, brokers and swaps dealers have been browbeating their clients -- farmers, fuel companies, airlines, municipal power companies -- who are the "end users" of financial derivatives: Lobby Congress against reform of the derivatives market, the bankers say, or the cost of your derivative deals will skyrocket.

    "There are many end users who just don't understand the issue, so they're heavily influenced by anybody who does," said Jim Collura of the New England Fuel Institute.

    "Many of these guys are influenced by one or both of the following: It's either someone from the financial community whom they've known or respected. It may be their broker, their financial adviser, their swap dealer, whoever. Or they're a member of a trade group and they're getting hammered constantly with: 'You're going to be put out of business; you're not going to be able to hedge; you're not going to be competitive anymore' -- including some of my members," Collura said.

    Senate Banking Committee Chairman Chris Dodd (D-Conn.) said he sees evidence of the bankers' influence when end users lobby him. "The end users have been basically used by the major investment banks," he told HuffPost Tuesday.

    Click here for full story.

    Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

     

    Read more

    Share This

Pages