What is the essence of the problem with our financial system--what brought us into deep crisis, what scared us most in September/October of last year, and what was the toughest problem in the early days of the Obama administration? The issue was definitely not that banks and non-banks could fail in general. We're good at handling some kinds of financial failure. The problem was: a relatively small number of troubled banks were so large that their failure could imperil both our financial system and the world economy. And--at least in the view of Treasury--these banks were so large that they cou
There are three views on who exactly is behind financial regulatory reform package that has just been presented. Each view has distinct implications for political dynamics going forward. The first view is that Tim Geithner and Larry Summers have genuinely become radical reformers. They see the error of the ways they pursued during the 1990s--both in terms of financial deregulation for the United States and in their advice to other countries, particularly through the capital market liberalization policies urged upon the IMF. They now seek to put globalized finance back in its box and will pursu
Writing in the Washington Post this morning, Tim Geithner and Larry Summers outline a five point plan for dealing with the underlying problems in our financial system, titled "A New Financial Foundation." The authors are not completely clear on what they think caused the current crisis, but you can back out some points from their reasoning--and the implicit view seems quite at odds with reality. Their view: Regulation is overly focused on safety and soundness of individual banks. Reality: There was a complete failure of safety and soundness supervision. This must be fundamental to any financ
It's that time again--the G8 ministers of finance get together for another face-to-face conversation, this time in Italy over the coming weekend. (Aside: the central organization at work is actually the G7, but the Russians get to join when the ministerial meeting is ahead of the annual G8 heads of government meeting). The G7, which first convened in the 1970s to guide the global economy after the breakup of the Bretton Woods fixed exchange rate system, seems increasingly irrelevant (and adding Russia, after the collapse of communism, added little).
If there's one political blemish on Barack Obama's first four months in office, it's that he's losing the budget debate. Democrats are openly worrying about the red ink. Republicans have taunted Obama as less fiscally responsible than his predecessor. (House Republican John Campbell compared George W. Bush's deficits to a "couple of drinks," and Obama's to "falling down, throwing up and wasted.") The administration's hasty budget-cut announcements (first $100 million, then $17 billion) show signs of panic. But Obama's budget is actually ... pretty responsible.
President Obama is on his way to Saudi Arabia, and Secretary Geithner is done with his major initiative in China. In part, this is just the U.S. normalizing its relations with the rest of the world and rebuilding some basic diplomatic niceness.
On his China visit, Secretary Geithner is immediately on the defensive. The language he is using on the Chinese policy of exchange rate undervaluation-through-intervention is the mildest available. And the commitment he is making, in terms of bringing down the U.S. deficit--which we all favor--is an extraordinary thing to put numbers on in a foreign capital. Such commitments are of course unenforceable, but still the wording indicates--and is understood by China--great U.S. weakness. Not surprisingly, China seems likely to push for more. Their main idea is that some part of their U.S.
This week the administration begins a serious behind-the-scenes charm offensive on its regulatory reform plans. The argument seems to be: we are where we are on banks' solvency/recapitalization, so let's not argue about that; it's time to strengthen financial regulation in line with our G20 commitments. But there is a serious dilemma lurking behind the foreshadowing, the rhetoric, and the talking points. (Aside to Treasury: please find somone other than big financial players to endorse your next 100 days report; many taxpayers will find p.5 of your first report particularly annoying--if you d