THE STASH APRIL 20, 2009
Simon Johnson hit on an intriguing way to release stress-test results in this March interview with the Peterson Institute's Steve Weisman--which I took way, way too long to read:
I want a process to be put into place through which this information will be discovered. And I would stress, this is very important, that the information that is revealed be as public and as transparent as possible. Now, there may be some things that you can’t reveal to the public. Then I would advocate, I am advocating, closed-door hearings on Capitol Hill just like you have for intelligence briefings, where you can show key senators who are skeptical of this point exactly why, for example, all the banks have sufficient capital. And if you can persuade them, just like what happens with secret intelligence briefings, then you’re a long way down the road toward persuading the public.
Interestingly, Johnson seems a bit more circumspect here than he is in some of his more alarmist writings. For example:
The good news is the United States has plenty of capacity for issuing debt and I don’t think the credibility of the US government and the Treasury is going to be undermined by this. The bad news is, of course, that if you go the more expensive route then you and your children and your grandchildren will be paying for this a lot longer.
Johnson argued in his recent Atlantic piece that the United States resembled an emerging market in certain alarming ways. But that difference--the capacity for issuing debt--always struck me as a big problem for the analogy.
The more sober tone coincided with having a formidable sparring partner in his Peterson Institute colleague Bill Cline, who made this helpful point about the difficulty of nationalization, even if it's intended to be short-term:
There’s also a failure to come to terms, I think, with the fact that if you take over banks, you’re stuck for a decade with bureaucrats running these institutions. It’s so different from taking over little tiny banks. The classic way that you get rid of the bank that the government takes over is that it sells it to a bigger fish. Well, there’s no bigger fish, okay? So, then you somehow have to take over the two biggest banks, let’s say, and you cut them into tranches. You’re shopping around in a terrible market. How do you do that? So, you’re stuck with this for a long time.
Cline also hints at a principled case for "muddling through":
I would point out that in the 1980s, you could have made a more compelling case than today that the banks should have been nationalized. Because of the Latin American debt crisis, their debt at risk was well in excess of their capital. ...
[M]y experience would suggest—certainly with the Latin American debt crisis—that muddling through was the right way to go. Judging semester by semester, 1984 looked pretty good: The world was recovering, exports were going to go up, and we were working our way out of it. ... So, by the time you eventually got around to the Brady Plan, which was not that much of a haircut, 30 cents on the dollar, you had reestablished the strength of the financial system.
I am far, far less confident that he's wrong than I was a month ago--which, come to think of it, is when he said this stuff in the first place.