U.S. Becoming a Banana Republic?

March 27, 2009 6:20 PM

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets)says Simon Johnson, a professor of entrepreneurship at MIT’s Sloan School of Management, in the next issue of The Atlantic. He was previously Economic Counsellor and Director of the Research Department at the IMF from March 2007-August 2008.

In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

posted by Rafaelloello (48 comments total)

Reading thus far, it seems to be mostly about how elites struggle to manipulate their position in line on the Titanic.

If his point is that banking in the US is akin to running a small country, I agree. Emerging market countries are usually fairly young governments, and to a large degree are subject to market confidence. Neither have the backing of the US government or FDIC to insure banking. Short term debt rollover is a , whether you're Lehman or Russia.
posted by pwnguin at 6:58 PM on March 27

Oh hell.

Short term debt rollover is a confidence game, whether you're Lehman or Russia.
posted by pwnguin at 7:05 PM on March 27

Interesting reading, thanks for sharing.
posted by acro at 7:27 PM on March 27

Previous post on Johnson.
posted by homunculus at 7:30 PM on March 27

NWO, bitches!
posted by ryoshu at 7:54 PM on March 27

Goddamn it will you folks at The Atlantic (and many others) (I'm looking at you NEJM and JAMA) let your actual subscribers (the ones who pay in advance for your rag and help bump up ad rates) read the content first? No wonder people are writing off print media.

The article sounds well-written and interesting, but I will appreciate it more if I read it in ink and paper format.
posted by TedW at 7:56 PM on March 27 [4 favorites]

I was wondering when this would get posted. Krugman's Column today is also great. If by great I mean extreemly worrisome.
posted by delmoi at 8:11 PM on March 27 [1 favorite]

TedW: they're just not that into you.
posted by unSane at 8:20 PM on March 27

Reading thus far, it seems to be mostly about how elites struggle to manipulate their position in line on the Titanic.

If his point is that banking in the US is akin to running a small country, I agree. Emerging market countries are usually fairly young governments, and to a large degree are subject to market confidence. Neither have the backing of the US government or FDIC to insure banking. Short term debt rollover is a , whether you're Lehman or Russia.

First of all the many emerging markets have something like the FDIC, in fact people are upset in Russia these days because their bank insurance isn't paying out. And all countries have governments that often try (wrongly) to back their banks and guarantee their debt.

He actually says we're in worse shape because there's no outside force that compel us to do anything, because the U.S. is so powerful and rich. No one can step in and tell us what we need to do. He actually says either the situation will get much worse (due to European bank failure) or we'll end up muddling along like the Japanese.
posted by delmoi at 8:23 PM on March 27

What we need is a good war. I say we annex mexico first.
posted by empath at 8:25 PM on March 27

Delmoi's link to Krugman is worth reading again.

Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.

Sooner or later, things were bound to go wrong, and eventually they did. Bear Stearns failed; Lehman failed; but most of all, securitization failed.
posted by Brian B. at 8:38 PM on March 27 [1 favorite]

Banks used securitization to increase their risk, not reduce it

Or as Alan Kohler summed it up, a bit like a dog eating its own vomit
posted by Rafaelloello at 8:52 PM on March 27

Banks used securitization to increase their risk, not reduce it

Or as Alan Kohler summed it up, a bit like a dog eating its own vomit

Except in this case, the dog sold his own poop with a triple-A rating.
posted by jonp72 at 9:01 PM on March 27 [2 favorites]

Oh, and for a tripple helping of outrage check out this Post from Matt Yglesias on a speech in two thousand and six by our sensational fed chair Ben Bernanke. The bit he quotes:

The ongoing work on this framework has already led large, complex banking organizations to improve their systems for identifying, measuring, and managing their risks. Indeed, banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks. The banking agencies will continue to promote supervisory approaches that complement and support banks’ own efforts to enhance their risk-management capabilities.

And let's not forget this classic from Larry "the chin" Summers back in '99

“Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. “This historic legislation will better enable American companies to compete in the new economy.” […]

It's a good thing these people are in charge! They really know what they're doing.
posted by delmoi at 9:19 PM on March 27 [5 favorites]

Except in this case, the dog sold his own poop with a triple-A rating.

As we all remember from the hit classic "two bankers, one bond"
posted by delmoi at 9:20 PM on March 27 [2 favorites]

This is a terrific article, thanks. I'm glad the author mentioned how many times this sort of thing has happened before. We're not in new and uncharted territories here. It's frustrating that no one could see this sort of thing coming and even more furstrating that history tells us that recovery will not be quick and easy.
posted by battlebison at 9:32 PM on March 27

What we need is a good war. I say we annex mexico first.

Let's start with Canada. We can liberate them from their right-wing masters.
posted by Blazecock Pileon at 9:34 PM on March 27 [6 favorites]

It's a good thing these people are in charge!

Agency’s ’04 Rule Let Banks Pile Up New Debt

AFAICT it wasn't the Clinton modernization of the banking system, but the lax oversight, that was the Fatality here.

Not that I think the parallel-universe Gore Admin did a better job that the Bushies, but the proximate failure was clearly the SEC's allowing IBs to lever up like crazy.
posted by mrt at 9:36 PM on March 27

AFAICT it wasn't the Clinton modernization of the banking system, but the lax oversight, that was the Fatality here.

It was under Clinton that the regulation of credit default swaps was banned. Clinton also ended glass-stengal which allowed the merger of various types of banks, creating behemoths like citigroup.
posted by delmoi at 9:49 PM on March 27

Steagall

Stendhal

Stengal?
posted by unSane at 10:01 PM on March 27

From the Glass-Stengal Act:

most ball games are lost, not won.

and

Never make predictions, especially about the future.
posted by Rafaelloello at 10:15 PM on March 27 [1 favorite]

"If the plan falls flat, however, it is more likely to be because of a lack of sellers. Many banks are still holding assets, particularly whole loans, at values far above their market price because, under accrual accounting, losses can be booked over several years (see article). Even with government help, bids may not be high enough to tempt banks to deal, since any price below the carrying value would force them to take a write-down and deplete precious capital." - Economist.com on the "cash for trash" program.
posted by benzenedream at 11:28 PM on March 27 [1 favorite]

In a realpolitik sense, I think that the main difference between the U.S. and the kind of countries that come to the IMF hat-in-hand is that the U.S. has dozens upon dozens of rifle companies and hundreds of war machines deployed worldwide. I'm sure the realities of this are not lost on the rulers of so-called 'emerging market' IMF loan recipients.

To my mind the crucial questions are at what point will the 'moral sphere' of international cooperation be irrevocably broken? What is the point of the WTO and the G20 if the house of cards collapses? If the U.S. loses her grip on global finance, is a final worldwide war-to-the-knife then inevitable?
posted by ob1quixote at 12:39 AM on March 28

As a completely unqualified bystander, I agree with everything Mr. Johnson says. ;-) Seriously, he makes a lot of sense.

A savings and loan style nationalization seems like the quickest and most proven way to get credit moving. It's worked before, after all. And like he says, if you're looking at this crisis from a disinterested position (as the Martian IMF, say), that would even be the most conservative approach to take. But the current financal system is still alive and kicking, and it's not going to change in any substantive way until there's no other choice available.
posted by Kevin Street at 2:47 AM on March 28

Let's start with Canada.

You can try, Blazecock. But we will kill you with kindness. Muthafuckas.
posted by Turtles all the way down at 3:02 AM on March 28 [1 favorite]

Turtles is from the bad part of Canada, where they give you wrong directions and make fun of your shoes, but apologize right after.
posted by stavrogin at 4:24 AM on March 28 [3 favorites]

Turtles is from the bad part of Canada, where they give you wrong directions and make fun of your shoes, but apologize right after.

The only wrong directions in Canada are the ones that lead to the United States. All the other directions are to other places in Canada and therefore can't wrong.
posted by srboisvert at 4:43 AM on March 28 [4 favorites]

TedW: they're just not that into you.

That's not what those nice cards they send me every few weeks say.
posted by TedW at 4:50 AM on March 28

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit

If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future.

Is Simon Johnson still on the payroll at IMF?
posted by aetg at 6:22 AM on March 28

Great article, written by someone with an interesting take on things. Thanks for the linkage. I feel both more educated and more worried now. Yay?

So far, none of this economic meltdown has affected my life directly. And yet, it's affected virtually everyone I know. In trying to determine why that is, it finally occurred to me that it is because of my significant other. She's extremely conservative financially, and she manages the money (and I handle the hard in-hand investments). So, we lost nothing, and our income is secure as long as our government itself doesn't collapse. For years, I thought we were 'wasting money' by not investing more aggressively, and we argued a bit about that, but in hindsight, she was brilliant all along and I just didn't realize it at the time. (And now she never lets me forget that, of course.)

It appears that whatever happens, my household is going to be okay, unless we all end up savages slurping morsels out of the bottom of tuna cans in a trash heap. So I've turned my attention to helping family and friends weather the storm, but man, some of them did some stupid shit (which I probably would have done too, to be fair, if it weren't for the rabidly fiscally conservative nature of my significant other).

I don't know any of you personally, but nevertheless, I hope all of you make it through these trying times without feeling an excessive amount of pain. And if you should be hurting, don't be too proud to lean on others more fortunate either. If we pull together, and the fortunate stretch a bit to help the unfortunate, then I'm optimistic that things will be okay at the other end.
posted by jamstigator at 6:48 AM on March 28 [1 favorite]

TedW, The Atlantic is not the only periodical the publishes its content online for free prior to being sent to subscribers. Wired, New York Review of Books come to mind. It's utterly incomprehensible that paying subscribers get treated as an afterthought - subscribers should be treated with a premium - seeing the article first is worth paying for. It's insulting and maddening to see online discussions about major articles and you haven't even received your copy in the mail yet. I just don't get what they are thinking. With Wired, I used to read all the featured articles, now I see all the online discussions first, so when the magazine finally arrives I often don't bother reading them because I've already skimmed the online version and comments about it. Now my Wired's are starting to stack up and I wonder if I will keep the subscription alive - it's dead old news by the time it arrives.
posted by stbalbach at 8:03 AM on March 28 [3 favorites]

Except in this case, the dog sold his own poop with a triple-A rating.

You can't just claim one poop has a AAA rating. You need to take many poops and mix them together, first. It is just math.
posted by procrastination at 8:36 AM on March 28

You can't just claim one poop has a AAA rating You need to take many poops and mix them together, first. It is just math.

Actually, the real problem problem isn't the poop, you could just scoop that pretty easily. It's the synthetic poop that's cloned from reference poop. The synthetic poop probably outnumbers the real poop 15 to 1 or greater.
posted by Rafaelloello at 9:10 AM on March 28

sidetrack on why bother subscribing these days...

TedW, stbalbach: The Economist has the same problem too. They put up new articles on their website throughout the week, which get collated into the Friday print edition. I often don't get my subscription copy until the middle of the week after, well after I've read all the interesting bits online.

The extra that they offer to subscribers (and what allows me to justify the subscription) is an audio edition they let you download on the same day the print edition goes out. It's really nice to be able to listen to some of the articles while walking to work or exercising. I really wish more magazines would do something similar.
posted by tksh at 9:11 AM on March 28 [1 favorite]

Damn. Krugman nails it:

The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

That's ALL a financial sector should do. Everything else was an inflationary confidence game. Now that we all know that there isn't a pea under any of the coconut shells, let's not start up that game again.

How do we get back to simple banking, and a basic derivative-free stock market?
posted by Artful Codger at 9:14 AM on March 28 [1 favorite]

What we need is a good war. I say we annex mexico first.

Let's start with Canada. We can liberate them from their right-wing masters.

Anyone notice that the Canadian banks are solvent? Anyone in New York City notice the growing number of Toronto-Dominion Banks opening branches here?

Go to Canada? Canada come to you!
posted by A-Train at 9:16 AM on March 28 [1 favorite]

Anyone notice that the Canadian banks are solvent? Anyone in New York City notice the growing number of Toronto-Dominion Banks opening branches here?

Our politicians have been too busy fighting amonst themselves (either within the Liberal Party, or now in a series of minority governments) to have gotten around to jumping on the deregulation bandwagon.

-----------------

I feel like a bit of an alien right now - not a non-resident alien in the US (though I am), but an actual Martian alien. I grew up under Reagan, and I don't remember a time when I thought Reaganism was a good idea. Surely, there must be many people like me, who grew up on the wrong side of the 80s boom (we saw no boom, only factories shutting down and foreclosed houses after the interest rates jumped to 22%), and never believed in the Wall Street myths. I know that I conciously didn't take economics in university, because I wanted to study a subject based on serious research and data (history) and not someone's theories pulled out of an ideal but unreal imaginary world - as seemed to dominate economic thinking in the late 1990s. I have since learned that there is some excellent empiracal economic and economic history research happening - which research is undermining those theories that annoyed me so much (because I could see from the examples of the world arouond me that they were not based on reality).

But to hear people talk, we don't exist - the people who have been saying for the last several years that booms can't last. I'm not claiming any special insight - far from it: what I know about economics is better suited to understanding the incentives for maintaining multiple copyholds under a feudal system in the middle ages, and I'm lost entirely in the modern financial system. But I know that I have been reading and hearing about housing bubbles and precarious borrowing and trade imbalences for years, and have been just wondering why the shoe didn't drop earlier. And all through, just about anyone I know personally wouldn't trust a bank to regulate itself any more than we would trust a six year old to regulate his own diet (all raisons! all the time!).

Have I been living in some kind of parallel universe? Or is it just that I have been living among the informed but poor (academics, students) who have little sympathy with the elites, but whose voices are equally ignored by the same elites.

Okay - this has turned into an annoying "I saw it coming" comment - but it wasn't meant to be. I'm really quite serious - if I, with so little understanding of modern economics and little to none of modern finance (except what I've learned from Planet Money), was thinking a couple of years ago that "I'm not buying a house any time soon, because this is a total bubble and it will loose value" - why were the experts so deluded?
posted by jb at 9:43 AM on March 28 [2 favorites]

I grew up under Reagan, and I don't remember a time when I thought Reaganism was a good idea. Surely, there must be many people like me....if I, with so little understanding of modern economics and little to none of modern finance (except what I've learned from Planet Money), was thinking a couple of years ago that "I'm not buying a house any time soon, because this is a total bubble and it will loose value" - why were the experts so deluded?

We probably saw it the same way. I could never reconcile the fact that the anti-progressive religious right with their grinning self-righteous end-of-times rhetoric were always in charge. They easily employed political division and planted themselves in government as creationist, liberal-baiting, Euro-hating, global-warming-denying, Limbaugh-loving idiots the entire time. How so many people trusted them for so long is still a mystery to me, as if "garbage in, garbage out" axiom was suddenly outdated.
posted by Brian B. at 12:14 PM on March 28

Interesting - I wonder if the-US-as-emerging-market could be a meme at the IMF. Earlier this week, I read a piece in the Washington Post by a former IMF deputy director that was entitled, "Welcome to America, the World's Scariest Emerging Market".
posted by Doktor Zed at 1:28 PM on March 28

BofA's Lewis Against Reinstating Glass-Steagall Act
posted by homunculus at 3:43 PM on March 28 [1 favorite]

It was under Clinton that the regulation of credit default swaps was banned. Clinton also ended glass-stengal

Both laws sponsored by Phil Gramm. Funny how his name so rarely gets mentioned.
posted by dhartung at 9:41 PM on March 28

Phil Gramm looked like a probable candidate for Treasury Secretary if McCain had won the election. As much as I distrust Geithner and Summers, Gramm would have been much worse.
posted by homunculus at 10:13 PM on March 28

Interesting - I wonder if the-US-as-emerging-market could be a meme at the IMF.

Well, it makes sense that people at the IMF would see this financial crisis through the lens of other crises they've dealt with, where as people on wallstreet see this as a wallstreet issue that the street can fix through fancy financial engineering.
posted by delmoi at 10:32 PM on March 28

It was under Clinton that the regulation of credit default swaps was banned. Clinton also ended glass-stengal

Both laws sponsored by Phil Gramm. Funny how his name so rarely gets mentioned.

Complicity on both sides of the aisle, for sure. Recent news highlights the 1100 page bailout du jour that no one could have read. The CFMA was 2000 pages and never debated. Gramm is absolutely complicit, as are hundreds and perhaps thousands of others. Many assert, a culture of complicity .
posted by Rafaelloello at 1:33 PM on March 29

It was under Clinton that the regulation of credit default swaps was banned. Clinton also ended glass-stengal

You're thinking of the way separation of powers started working under Bush II. Clinton didn't end anything, because the executive branch doesn't (didn't?) have those powers.

Back in Clinton's day, congress was responsible for making and passing laws, and the president's only real power when working against an opposition party in congress was to exercise the veto. We hadn't launched our War on the Vague Feeling of Nameless Dread yet, so Clinton didn't enjoy the commander-in-chief of the world powers that Bush II did.

Still, it is true that Clinton failed to prevent the repeal of Glass-Steagall (or glass-stengal [sic], if you prefer), but then, he might have been a little distracted, what with being under near-constant congressional investigation for everything from claims that he watched "Girls Gone Wild" commercials a little too closely in the presence of White House interns to scratching his butt with the wrong hand. Oh, and then of course, he was impeached for perjury in a dispute with the Republican congress over the weighty question of whether a blow job constitutes "sexual relations."

Maybe he just thought the Republicans in congress would get off his back for a few minutes if he threw them a legislative bone or two.
posted by saulgoodman at 9:33 AM on March 31

You're thinking of the way separation of powers started working under Bush II.

FDR revaluing gold vs. dollar?

Nixon dropping out of Bretton-Woods & taking the dollar off the gold standard?
posted by morganw at 8:25 PM on March 31

morganw: thanks for mentioning those events. doing a little more digging on the topic, i ran across this on wikipedia:

In response to these events and to polls citing a 73% disapproval of his policies the year before an election,[1] on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window," making the dollar inconvertible to gold directly, except on the open market.

Could you imagine the public outcry and accusations of socialism coming from Wall Street and Republican quarters if Obama declared wage and price controls for three months! Talk about central management of the economy! Jesus, I had no idea Nixon threw his executive weight around so much.
posted by saulgoodman at 8:18 AM on April 1

Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window," making the dollar inconvertible to gold directly, except on the open market.


LOL. My Father-in-law made millions on this. Nixon announced this on a Friday and memos were still being slowly exchanged(typed by actual stenographers) at banks on Monday while CD rates remained unchanged for hours and hours and hours. Different world back then.
posted by Rafaelloello at 11:03 PM on April 4