In the years following the financial crisis many have wondered (with varying degrees of incredulity) why no senior banking executives were criminally prosecuted.
Instead, as John Cassidy writes in the New Yorker, there’s been a succession of monster settlements between financial institutions and the US Justice Dept.
“We seem to have stumbled into a new form of corporate regulation,” I noted at the time of the JPMorgan settlement [November 2013], “in which nobody in the executive suite is held personally accountable for wrongdoing lower down the ranks, but the corporation and its stockholders are periodically socked with huge fines for past abuses.”
To the extent explanations for the failure to prosecute have been offered, they usually come down to two things.
First, although foolishness and cupidity were ubiquitous in the years leading up to the crisis, proving intent to defraud can be a tricky business as the Justice Dept discovered in its attempt to prosecute two Bear Stearns bankers in 2009.
Second, there’s the “we might end up destroying a systemically important bank” excuse. In other words, the Justice Dept version of “too big to fail”. Continue reading “Why Didn’t Eric Holder Go After the Bankers? | The New Yorker”
If central banking were a stock, you’d go short.
Blue-chip mystique still clings to it but you can feel the reputational parabola slowly gathering momentum on the downside. Its projects are too large and diffuse, the resources to achieve them too crude and there are mounting signs of unhappiness and confusion at the top.
Given their long-standing rock star status, pity the central banker; the fall from grace may be vertiginous.
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The Governor of the Old Lady seems more attuned to this unfolding trend than most. On my reading, he metaphorically ran up the white flag in a recent speech. It was the oddest mixture of explanations, implicit apologies and rationalisations imaginable from such an august perch. Do have a look; it’s not long.
King finished with an amusing touch: “As for the MPC [Monetary Policy Committee], you can be sure we shall be looking for as much guidance as we can find, divine or otherwise. What better inspiration than the memory of those children on Rhossili beach singing Cwm Rhondda.”
Perhaps the South Wales Chamber of Commerce seemed a forgiving place to lay out some of central banking’s many puzzles.
Put simply, his message was: I know what we’re doing seems a bit crazy, and I know all the fundamental problems are still out there waiting to be solved, but what else can we do?
What’s even scarier is that I understand what he means. Continue reading “Pity the Central Banker”
Martin Wolf has usually managed to moderate his inner interventionist. No longer, it seems. In his most recent column, he casts caution aside:
“The time has come to employ this nuclear option [the printing press] on a grand scale.”
Not doing so, he says, would ensure a renewed recession with increased unemployment, falling house prices, reduced real business investment and so on. I think he’s right that these unhappy events are on the way. Question is, would employing his nuclear option make things any better?
To answer that we need to understand why we’re beset by all these difficulties. Wolf sees the root problem as feeble demand. Again, I think he’s right, but only in the sense that it’s the most visible, proximate cause. There’s a deeper question he doesn’t address; why is demand so weak? If the reasons are structural, throwing money at the problem is unlikely to help. Indeed, it could just as easily make matters worse by impeding the necessary adjustments.
The key question, then, is whether pre-GFC growth was sustainable. If instead it was a hothouse flower, then trying to revive it outside of the conditions that allowed it to flourish is not only impossible but foolish. Continue reading “What to do, what to do”
Markets, indeed economies as a whole, are complex adaptive systems. Like biological ecosystems, they continuously and spontaneously order themselves in response to unfolding influences, large and small, internal and external.
When it comes to nature, we’re both part of it and a profound external influence. We shape the world around us for ill and sometimes for good, not only through deliberate actions but also, of course, merely by being here. Some of our activities and their consequences in the natural world, were we only willing to listen, could teach us much about how to better manage man-made systems such as the markets and the economy.
Forestry management provides a striking example. Our natural inclination is to put fires out wherever we can, not only to safeguard valuable property but also to protect the forests themselves and their many wild occupants.
In pursuing this practice, however, subtle changes take place over time. Dead trees and fallen branches accumulate and the undergrowth becomes thicker and much more widespread. Finally a fire occurs that we’re unable to stop, one that feeds on all the detritus to produce firestorms so powerful they can at times fundamentally change a whole ecosystem.
The analogy to our economic management in recent decades is obvious, particularly when it comes to the financial system. There too, fires were continuously put out, all with the laudable goal of sidestepping the pain and distress of downturns. Continue reading “Macroeconomic Resilience”
Credit booms generate economic and financial imbalances. The longer a boom lasts, and the more extreme the expansion, the greater these will be.
The results show up in balance sheets and income statements. Whether it’s an individual household, economic sector or the external position of a country, that entity’s financial statements tell the tale.
In Australia’s case, sectoral debt figures show remarkably divergent trends in credit growth.
At 73.1%, non-financial business debt as a percentage of GDP is only 7% higher than in 1988. The high point in the intervening years was 85.6% in Sept 2007. General government debt (federal and state combined) actually declined, from 42.1% in 1988 to 22.7% now. Prior to the crisis, it hit a low of 13.4%.
The real action was in the household sector, where debt to GDP started at 42% in 1988 and is now 109.7%.
In international terms, Australia’s non-financial business debt is middle-of-the-pack, our government debt perhaps the lowest in the developed world but our households rank near the top. There are countries with higher levels (Switzerland, for example, at 118% in 2007), but there aren’t many of them. Continue reading “Australia’s Mixed Diagnosis”