Baseline Scenario

The Baseline Scenario
President Obama’s Regulatory Reforms Announcement: A Viewer’s Guide
Posted: 16 Jun 2009 06:01 AM PDT
At 12:30pm on Wednesday at the White House (someone: please update the Treasury’s schedule of events), President Obama is due to “unveil” his proposals for reforming the functioning of our financial system. The content has already been foreshadowed in some detail, most notably by the Geithner-Summers op ed in the Washington Post on Monday, but what the President himself stresses is still important – everyone who matters for the reform of financial regulation will be in attendance and his remarks (and perhaps those of Secretary Geithner) can absolutely set the tone of the debate.
In particular, the implicit story the President tells will frame our collective discussions going forward and – on some points – could even help tip the balance against established lobbies.
There are at least 10 important questions the President may address or shy away from tomorrow. Add your own suggestions below.

Does President Obama buy the idea that what happened to our financial system was a “rare accident,” or does he think that something more systematic has gone wrong?

Does he think that the crisis itself will take care of many problems – for example by chastening the remaining bankers to behave well indefinitely or somehow making their organizations less stupid? Or does the crisis serve just as a wake-up call to all of us: Unless and until we fix the system, we will be vulnerable to further damaging crises?

Does the President realize and stress sufficiently the damage that has been done by bankers, for example as seen in the increase in our national debt that arises directly from their malfeasance – from around 40% of GDP to 70% (administration estimate) or 75% (IMF yesterday) or above 80% (my view). He needs to say clearly: This cannot happen again – we simply can’t afford another financial calamity on this scale.

Does he state plainly and unequivocally that the way the financial system has been run – and continues to be run – has damaged the national interest of the United States and pushed millions of people, both here and around the world, closer to poverty?
Most important, does the President stress the need to protect consumers from the financial industry going forward, specifically with a strong Financial Products Safety Commission. Messrs. Geithner and Summers seem, at best, lukewarm to this idea – in fact, we have no clear indication that they buy into the idea of consumer protection at all. The President’s position on this issue will be decisive.
If a bank or other financial institution is “too big to fail,” how exactly does the President plan to deal with it in the future? Even if a wind-down can be managed by Treasury, with its new resolution authority (if granted), what will be the expected cost to the taxpayer? If “too big to fail” is not in the President’s view “too big to exist,” kindly explain why not.

Can the President bring himself to state in public the obvious: The extent of political influence in the hands of our financial system – large banks in particular, but small banks also in some instances – is out of control and dangerous? Where is the administration’s reform agenda on this crucial point? To those of us who frequent Capitol Hill, it looks very much like business as usual, albeit with higher political market share for the big banks that remain in business.
Has the President really been briefed on the supposed benefits of having large financial institutions with great economic power and pervasive political influence? Don’t just claim that these are a good thing – tell us, in detail and preferably with numbers, what we the public gain from the presence of these behemoths among us. Keep in mind that “everyone has them” is no kind of argument – something so manifestly dangerous is not to be blindly copied.

Why was executive and other compensation so notably absent from the latest Geithner-Summers joint statement of our problems and likely solutions? Does the President really expect us to believe that any set of reforms will work if they do not directly constrain the amounts that can be earned from misunderstanding risk today and hoping that the consequences do not appear on your watch? Does he have any idea of how the people who run big financial firms will game whatever controls try to limit their risk-taking?

Can President Obama finally talk about the much broader break down of corporate governance in this country, with boards of directors serving no discernible purpose in terms of limiting the excesses of corporate executives in the financial sector but also more broadly? Surely, without a reform package that includes measures to address this core issue, we will get exactly nowhere.
Update: Also see my latest video blog on the topic at The New Republic.
Update: Typo fixed in point #6; thanks “oliver” for catching this in your comment.
By Simon Johnson

Recovery – or Not – in Pictures
Posted: 15 Jun 2009 08:19 PM PDT
Simon’s weekend summary included this sentence on the macroeconomic situation: “The real economy begins to bottom out, although unemployment will not peak for a while and could stay high for several years.”
We are now in that phase of the crisis when there is a lot of arguing about whether things are going well or poorly, and that largely comes down to whether the current slowdown in the rate at which things are getting worse (that’s all it is so far) will be followed by a healthy recovery, a prolonged period of stagnation, or an accelerated contraction brought on by higher oil prices, a new bank panic caused by defaults in credit cards and commercial mortgage-backed securities, or one of any number of other factors. I discussed this topic somewhat impressionistically a month ago; this time I’m going to highlight some analyses done by other people around the Internet.
Last time I cited James Hamilton and Calculated Risk, both of whom thought that a peak in the four-week moving average of new unemployment claims was a good predictor of the end of a recession. Hamilton in particular has been following this closely, and while we may have passed the peak, the number isn’t falling like it should. Here’s Hamilton’s picture from last week’s post:

Look at the smooth line in each chart and note how it falls in 1991 and 2001 but doesn’t fall in 2009. The original post also has charts for the three previous recessions.
Paul Krugman looks at the same data and estimates that even though new claims are down from their recent peak, as long as the number remains above 400,000 aggregate employment is still going down, not up.
If charts are your thing, Paul Swartz of the Council on Foreign Relations has eight pages of them (hat tip Brad Setser), comparing the current recession to all postwar recessions (it’s the worst on most measures) or to all postwar recessions and the Great Depression. Here’s one striking example:

Fascinating late-night reading.
By James Kwak

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