jueves, 3 de febrero de 2011

The Ruinous Fiscal Impact of Big Banks

Jamie Dimon of JPMorgan Chase at the World Economic Forum in Davos.Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

The newly standard line from big global banks has two components – as seen clearly in the statements of Jamie Dimon of JPMorgan Chase and Robert E. Diamond Jr. of the British bank Barclays at Davos last weekend.  First, if you regulate us, we’ll move to other countries. And second, the public policy priority should not be banks but rather the spending cuts needed to get budget deficits under control in the United States, Britain and other industrialized countries.

This rhetoric is misleading at best. At worst it represents a blatant attempt to shake down the public purse.

On Tuesday, in testimony to the Senate Budget Committee, I had an opportunity to confront this myth-making by the banks and to suggest that the bankers’ logic is completely backward.

Start with the bankers’ point about budget deficits and spending cuts. Public deficits and debt relative to gross domestic product have ballooned in the last three years for one simple reason – the big banks at the heart of our financial system blew themselves up. On this point, the conclusions of the Financial Crisis Inquiry Commission, which appeared last week, are very clear and utterly compelling.

No one forced the banks to take on so much risk. Top bankers lobbied long and hard for the rules that allowed them to behave recklessly. And these same people effectively captured the hearts, minds and, some would say, pocketbooks of the regulators – in the sense that a well-regarded regulator can and often does go work for a bank afterward.

The mega-recession, which is starting to look more like a mini-depression in terms of employment terms for the United States (which lost 6 percent of employment and is still down 5 percent from the pre-crisis peak), caused a big decline in tax revenues. Falling taxes under such circumstances are part of what is known technically as the “automatic stabilizers” of the economy, meaning they help offset the contractionary effect of the financial shock without the government having to take any discretionary action.

Whatever you think about the effectiveness of the additional fiscal stimulus packages provided to the economy in early 2008 (under President Bush) or starting in early 2009 (under President Obama), remember that the impact of these on the deficit was small relative to the decline in tax revenues.

The total fiscal impact of this cycle of regulatory co-option, as reflected, for example, in the Congressional Budget Office baseline debt forecast (which compares what this was pre-crisis and what this is now) – is about a 40-percentage-point increase in net federal government debt held by the private sector.

As we discussed at length during the Senate hearing, it is therefore not possible to discuss bringing the budget deficit under control in the foreseeable future without measuring and confronting the risks still posed by our financial system.

Neil Barofsky, the special inspector general for the Troubled Assets Relief Program, put it well in his latest quarterly report, which appeared last week: perhaps TARP’s most significant legacy is “the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail.’ ”

Next up for the United States economic outlook is not necessarily another too-big-to-fail boom-bust-bailout cycle. It may well move on to too big to save, which is what Ireland is now experiencing. When reckless banks get big enough, their self-destruction ruins the fiscal balance sheet of an entire country.

In this context, the idea that megabanks would move to other countries is simply ludicrous. These behemoths need a public balance sheet to back them up, or they will not be able to borrow anywhere near their current amounts.

Whatever you think of places like Grand Cayman, the Bahamas or San Marino as offshore financial centers, there is no way that a JPMorgan Chase or a Barclays could consider moving there. Poorly run casinos with completely messed-up incentives, these megabanks need a deep-pocketed and somewhat dumb sovereign to back them.

The latest credit rating methodology from Standard & Poor’s says essentially just this – henceforth, it will evaluate banks not just on their standalone creditworthiness, but also in terms of their ability to attract generous support from a creditworthy government in the event of a crisis.

New York-based banks might move to London, and vice versa. But the Bank of England is far ahead of the Federal Reserve in its thinking about how to rein in banks – see, for example, the new paper by David Miles (a member of the Monetary Policy Committee in Britain) on the need for much more equity financing in banks than specified in the Basel III agreement.

Officials outside the United States are increasingly beginning to understand the point being made by Anat Admati and her colleagues – bank capital is not expensive in any social sense (for example, look at Switzerland, where the biggest banks are now required to have about double the Basel III levels of equity funding). The United States needs its financial system, particularly its largest banks, to be financed much more with equity than is currently the case.

The intellectual right in the United States understands all this and, broadly speaking, agrees. Officials in other countries begin to see the light. Unfortunately, officials in the United States and those of the political right who seek public office – as well as much of the political left – still appear greatly in thrall to the big banks.