By Jana Juginovic - Monday, April 1, 2013 - 0 Comments
For the first time since the 2007 financial crisis, investors pushed the Standard & Poor’s 500 index into record territory before closing for the Easter weekend. U.S. stocks have rebounded despite vulnerabilities in Europe and the slow pace of the U.S. economic recovery. While investors are riding a wave, many are wondering why it is taking so long for economic output, consumer demand and employment to return to pre-recession levels.
According to Lawrence Summers, former director of President Barack Obama’s National Economic Council and former U.S. Treasury Secretary — he is also President Emeritus of Harvard University at the top of a shortlist of potential candidates to replace current chairman of the U.S. Federal Reserve Ben Bernanke — the events of the last few years have thrown into question much of what he learned and taught about coherent economic models.
Earlier this week, as Europe was in the throes of yet another crisis, this time centred in the tiny island of Cyprus, Summers told an audience at the London School of Economics that the thinking on how markets function and recover has changed. Summers was joined in the rare panel discussion by Fed Chairman Bernanke, Bank of England Governor Mervyn King and Axel Weber, former president of Germany’s central bank. Canada’s own central banker, Mark Carney was in the audience.
“The events of the last years suggest that the traditional breakdown between the structural and the cyclical that is central to economic thinking has become highly problematic. If there is anyone in this room that believes that a reasonable forecast for the U.S. or British economy at any future date would be represented by a trend line constructed through to 2007 from any previous point, I have a bridge I want to sell you,” Summers quipped.
Fourteen years ago, Summers was one in the trio of economists Time magazine anointed “The Committee to Save the World.” The other two members of the superhero league were then-Federal Chair Alan Greenspan, and U.S. Treasury Secretary Robert Rubin — Summers was deputy U.S. Treasury Secretary and became treasury secretary later that year. At the time, the troika was credited with saving the world’s financial markets from collapse and slowing the spread of the “Asian Contagion,” a wave of financial market panic that began with the rapid devaluation of Thailand’s currency and spread to other parts of Asia, Russia and Latin America, soon affecting the real economy as well. The U.S. appeared inoculated from the financial stresses afflicting other parts of the world, posting record GDP growth rates of five per cent.
Fast-forward to 2008, though, and the U.S. economy was teetering on the verge of the abyss. The committee no longer seemed so infallible — worst still, it looked guilty. As Bloomberg’s Ian Katz wrote, “their model of unfettered capitalism eventually invited disaster. The trio’s deregulatory approach encouraged banks to take risks that later threatened the U.S. financial system.”
For his part, Summers says the moniker bestowed on the three was unrealistic: “I think if anyone had the idea that somehow it was given to bankers or economists to make the world always be stable, that was a very bad idea.”
In conversation with Maclean’s, Summers spoke about lessons learned from the financial crisis, as well as Carney’s new job as Britain’s central bank governor and the Keystone XL.
By Charles Reinhardt - Wednesday, January 9, 2013 at 4:01 PM - 0 Comments
Neil Barofsky was the Special United States Treasury Department Inspector General for the Troubled Asset Relief Program, or TARP, the U.S. government’s $700bn program created in 2008 to shore up the U.S. financial system. He resigned in March 2011, criticizing “Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals” in a scathing New York Times op-ed. He is the author of Bailout. How Washington abandoned Main Street while rescuing Wall Street. Today Barofsky is an adjunct professor and senior research fellow at the New York University School of Law.
Listen to Charles Reinhardt in conversation with Neil Barofsky:*
*Please note: Both the podcast and the interview transcript have been edited for brevity.
In an article for Bloomberg you wrote in July 2012 you pointed out that the top U.S. banks are 23 per cent larger today than before the crisis and control fifty two percent of all industry assets. Is the U.S. financial system more vulnerable than it was in 2007, and, if so, what went wrong in your view?
A lot of the things that were broken in our financial system, that helped create the massive financial crisis from which we’re still recovering, are still in place, and in some ways have actually gotten more severe. We had a problem with banks that were too big to fail, and as you just noted, they are even bigger now than they were. They had too much political power, too much regulatory influence over their own regulation back then, and I think what we’ve seen with recent events is that that power too has expanded along with its size.
We see a level of deference from Washington that really, fundamentally, hasn’t changed all that much. There’s maybe a difference in some of the public and political rhetoric, but when it gets down to brass tacks, the banks are still calling a lot of their own shots.
Now on the flip side, the banks themselves are in better shape, thanks to the multi-trillion dollar nature of the bailouts, than they were on the eve of the financial crisis. They’re still under-capitalized but they have more capital than they did then, they’re out of some of the more risky parts of their business, at least for now, and they’ve gone through at least some of those troubled assets, though not nearly enough. So in another aspect, they are in better shape than they were in 2008 going into the crisis, but overall our system and the structures of our system are still very very vulnerable to a systemic shock and another financial crisis, and I think because they’re larger, and because the United States has used up so much of its fiscal gunpowder dealing with the past crisis and trying to pay for the recovery, we’ll have a lot fewer options when that next crisis strikes.
By Andrew Coyne - Tuesday, April 6, 2010 at 9:23 AM - 40 Comments
Andrew Coyne talks with Mark Carney
Born of the Great Depression, the Bank of Canada has found new relevance, 75 years later, in averting another. As Canada emerges, surprisingly strong, from what many had feared would be at least a Great Recession, the governor of the bank, Mark Carney, credits its interventions in large part for sparing us the worst of the financial crisis.
In an interview to celebrate the bank’s 75th birthday, Carney said one of the lessons of the near-collapse of global finance was the crucial part that central banks play in the smooth running of financial markets, especially in a panic. “The need for a lender of last resort, and not just a lender but a liquidity supplier of last resort, was made absolutely clear by the crisis.”
The corollary lesson: markets are not always self-correcting. Having worked in capital markets for many years at Goldman Sachs, Carney says he acquired “both a respect for [markets] and a skepticism of them. You know, I’m not a market fundamentalist. There are periods of excess in both directions in financial markets and it’s important to recognize that.”