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Why we need hedge funds to make financial reform work

Sun, 20 Jun 2010 00:00:00 EDT

You can't blame Congress for wanting to squeeze risk out of the big Wall Street firms. In 2008, mishandled risk cratered the economy, triggering a sharp expansion of the national-debt burden and leaving at least one in 10 Americans without work. But if the big guys take less risk, what other institutions will shoulder it? Once you ask this question, the financial reform emerging from Congress acquires a new complexion. Some controversial measures seem surprisingly attractive. Some uncontroversial ones appear absurd.

Leaving the euro behind?

Fri, 30 Apr 2010 00:00:00 EDT

Two months ago, his back against the wall, the finance minister of Greece chose a strangely honest metaphor to describe his country's prospects: "We are basically trying to change the course of the Titanic." Since that remark, this modern Greek tragedy has played out much as its anti-hero prophesied: Investors understand that Greece has borrowed more than it is likely to repay, so they have driven up interest rates on Greek bonds, setting off a death spiral. At moments, the tragedy has been tinged with farce. After the government promised to collect more tax revenue and keep paying its debts, Greek civil servants went on strike -- including some tax collectors.

In SEC vs. Goldman, who's really at fault?

Wed, 21 Apr 2010 00:00:00 EDT

Let's stipulate that there's a problem with the power of Goldman Sachs. The firm takes vast risks and earns vast profits; then, when it gets into trouble, as it did after the Lehman Brothers failure, it turns to the government for a bailout. But the case the Securities and Exchange Commission has brought against Goldman also involves a problem. Unless the SEC is sitting on more evidence than it has laid out so far, the charge sheet looks flimsy. If Goldman has become a poster child for excessive power on Wall Street, the SEC might become a poster child for government power run amok.

Media Files:

Let traders call the next bubble

Fri, 09 Apr 2010 00:00:00 EDT

So here's a paradox to ponder: By now everyone has heard about traders who saw the housing crash coming -- and made millions betting on it. Yet most economists agree that central bankers won't prevent the next bubble from inflating. One group sides with Alan Greenspan, who argues that regulators can't know when a strong market has crossed into bubble territory. Another sides with Paul Krugman, who thinks that regulators can know -- but that they may choose to shirk their duty. Either way, what's up? Why can't regulators preempt bubbles if the hedge-fund crowd is smart enough to short them?

For rising China, an identity crisis

Fri, 26 Mar 2010 00:00:00 EDT

In the early 1990s, when I lived in Japan, its people embarked on a search for their identity. The country had become an economic superpower, but its politics had not caught up; it did not know what to do with its weight in the world.

Currency spat reveals a nervous Chinese autocracy

Fri, 19 Mar 2010 00:00:00 EDT


Obama's bank solution goes too far -- and not far enough

Fri, 22 Jan 2010 00:00:00 EST

Last week and again Thursday, President Obama took aim at the central challenge in financial regulation: The top Wall Street behemoths have grown too big to fail. But despite two runs at the problem, Obama has yet to propose the correct solution. Last week he was too timid. Yesterday he went too far.

Brazil's China headache

Mon, 14 Dec 2009 00:00:00 EST


Dubai World bankruptcy portends more financial woes

Fri, 04 Dec 2009 00:00:00 EST

No other country built a ski resort in a desert. No other country constructed an archipelago of 300 artificial islands, complete with a man-made reef colonized by parrot fish. But even if Dubai is a gaudy outlier -- a sort of Donald Trump of a nation -- the bankruptcy of its flagship investment company, Dubai World, holds a warning for others. The nonchalance with which global financial markets have reacted is not reassuring in the least. The lack of alarm is alarming.

China's Dollar Problem

Tue, 26 May 2009 00:00:00 EDT

With extraordinary speed, China has morphed from a diffident player in international finance into an impatient table-banger. Six months ago, one could muse about whether the Chinese were interested in a larger role within the International Monetary Fund or in helping to rebuild the crisis-battered global system. Now, the Chinese are pumping almost $40 billion into a new East Asian version of the IMF, browbeating trading partners into using the yuan, and floating fantastical ideas about a new international reserve currency. Visiting Beijing last week, Brazilian President Luiz Inácio Lula da Silva picked up on his hosts' changed mood. Calling for a "new economic order," he suggested that it was time to stop denominating trade in dollars.

A War Over Exchange Rates Could Undermine Recovery

Sun, 17 May 2009 00:00:00 EDT

Those who are ignorant of history will be condemned to repeat it, as a teacher no doubt told you long ago. But the urgent question today is actually the opposite one: Can a team that is positively steeped in history -- particularly the history of the 1930s -- avoid the mistakes of that era and engineer a quick recovery from a Depression-size shock? Christina Romer, the chair of the White House Council of Economic Advisers and an authority on the 1930s, recently gave a hopeful answer to this question at the Council on Foreign Relations. But there was one gap in her argument, and therein lies a threat to the "green shoots" of recovery.

Make the Stress Tests Permanent

Fri, 08 May 2009 00:00:00 EDT

Stress-testing top banks has turned out to be a terrific stress reducer. Like a medical patient who takes off on a euphoric binge after the biopsy comes back negative, bank stocks have staged a heady rally, driving a broad recovery in the markets and talk that the end of the recession may be nigh. But the real significance of the stress tests goes deeper. They answer the perplexing long-range question: When the financial system emerges from this crisis, how can it be prevented from blowing up again?

Tim Geithner and the Taming of Wall Street's Risks

Fri, 27 Mar 2009 00:00:00 EDT

In his stunningly ambitious House testimony yesterday, Treasury Secretary Tim Geithner laid out three ways to fix finance. Large players -- be they banks, insurers or hedge funds -- must take less risk. A rejuvenated regulatory machinery must monitor the risks they do take, reining them in when they go too far. And if the first two measures do not prevent the failure of a major institution, the government must have the power to manage its collapse in an orderly fashion.

A Risky 'Systemic' Watchdog

Mon, 02 Mar 2009 00:00:00 EST

Barney Frank, the thoughtful chairman of the House Financial Services Committee, wants to create a new "systemic risk regulator." This general concept has been endorsed by some extremely distinguished economists. Nevertheless, the Frank proposal is dubious.

An OPEC Lesson for China

Sun, 25 Jan 2009 00:00:00 EST

At his confirmation hearings last week, Tim Geithner branded China a currency manipulator. This is a designation that the Bush Treasury Department never formally affixed to the Chinese. It may signal a nerve-racking shift in how the United States manages its most pivotal relationship.

The Madoff Scandal and the Future of Hedge Funds

Thu, 18 Dec 2008 00:00:00 EST

For sheer toe-curling embarrassment, it may be a while before Wall Street does better than the Bernard Madoff scandal. Here was a rogue who practically telegraphed his unreliability by hiring a tiny, no-name audit firm, by reporting monthly investment results that never fluctuated and by claiming a trading strategy that could not possibly have been implemented given the billions of dollars he managed. And yet, despite these warnings, the rich, the famous and the supposedly sophisticated entrusted their money to Madoff, who defrauded them with the most laughably crude of methods -- an old-fashioned Ponzi scam.

Capitalism: The Remix

Thu, 04 Dec 2008 00:00:00 EST

The nastier this recession gets, the more people will talk about the discrediting of markets and the failure of deregulation. So the next time the Dow dives off a cliff, splash your face with ice water and remember two things: This end-of-capitalism talk is bunk, and it distracts us from the debate we should be having. The real question is how to manage the necessary shift in the balance of our mixed economy. Outlandish though it may sound now, red-blooded capitalism must be part of the answer.

Sebastian Mallaby on Team Obama and the Economic Crisis

Mon, 24 Nov 2008 00:00:00 EST

Not a moment too soon, Barack Obama's economic team is taking shape. After a horrendous week on Wall Street, the leaked news of Tim Geithner's nomination as Treasury secretary sparked a wild rally on Friday; the weekend brought word that Larry Summers would take the top economic job at the White House, while Obama devoted his Saturday radio address to the promise of a large stimulus. But the new team needs to keep forging ahead. The financial hurricane has done the impossible and grown worse. Geithner and Summers cannot wait until January to come up with further remedies: Obama is in danger of seeing his presidency wrecked before he even takes office.

Supersize the IMF

Thu, 13 Nov 2008 00:00:00 EST

Saturday's financial summit in Washington will be a good thing in itself: After years of "G-7" and "G-8" meetings, the new "G-20" format will give most of the key emerging economies seats at the world's top table. The summit could be even better if it spurs governments to pass stimulus packages: Already, China has announced a gargantuan infrastructure spending program that should soften a global recession. But the tricky challenge for the summit is to make global finance safer. To understand how headway could be made on that, it helps to think about finance as you might think about car insurance.

Rocky Market Horror Show

Sun, 26 Oct 2008 00:00:00 EDT

Like the plot of some blockbuster horror movie, the financial crisis shifts from scene to scene with terrifying speed. It opened with a real estate crunch, which hit homeowners and mortgage lenders but left much of the economy unscathed. It continued to a broader banking crunch, in which car loans, business loans and all manner of lending unconnected to real estate suddenly became impossible to obtain. Now, simultaneously, come three new phases of the turmoil in split-screen Technicolor. The non-financial, or "real," economy is collapsing. Once-solid emerging markets are imploding. And trading strategies predicated on the robustness of those emerging markets are being dumped hastily, driving brutal volatility in markets around the world.

Bretton Woods, The Sequel?

Mon, 20 Oct 2008 00:00:00 EDT

The financial crisis is by no means over, but the urge to extract lessons from it already is irresistible. The Europeans have pressed successfully for a new Bretton Woods summit, modeled after the 1944 gathering that inoculated the world against a repeat of the Great Depression. Although the original Bretton Woods took place years after the Depression, Britain and France are bent on staging the new version within weeks. "Europe wants it. Europe demands it. Europe will get it," French President Nicolas Sarkozy said before jetting off to Camp David, where President Bush meekly gave in to him.

Main Street's Rescue

Fri, 10 Oct 2008 00:00:00 EDT

The most stunning graphic of the past few days shows the stock market's reaction to government attempts to rescue the financial system. Between Monday and Wednesday, the Federal Reserve unveiled five initiatives to unfreeze credit, and stocks slumped after each announcement. Meanwhile, in Europe, the story is the same: The series of deposit guarantees, bank rescues, partial bank nationalizations and interest rate cuts has yet to calm investors. To the contrary, market panic and apparent government panic have fed on each other. In Washington, the Treasury went from ad hoc bailouts to demanding $700 billion without saying how it would be spent. In Europe, rival governments tripped over themselves as they rolled out uncoordinated measures.

Blaming Deregulation

Mon, 06 Oct 2008 00:00:00 EDT

The financial turmoil has pushed the Obama campaign into the lead, and this is mostly justified. Barack Obama is more thoughtful on the economy than his opponent, and his bench of advisers is superior. But there's a troubling side to the Democratic advance. The claim that the financial crisis reflects Bush-McCain deregulation is not only nonsense. It is the sort of nonsense that could matter.

How to Spend That $700 Billion

Fri, 26 Sep 2008 00:00:00 EDT

Even if congressional leaders can close a deal on the bank rescue, the real debate is just beginning. The key questions about the plan are not the ones that Congress debated: how much it would cost and whether it would impose symbolic pay caps for bosses whose wealth has already been hammered. Rather, the key question lies in the execution of the bailout.

Media Files:

A Bad Bank Rescue

Sun, 21 Sep 2008 00:00:00 EDT

With truly extraordinary speed, opinion has swung behind the radical idea that the government should commit hundreds of billions in taxpayer money to purchasing dud loans from banks that aren't actually insolvent. As recently as a week ago, no public official had even mentioned this option. Now the Treasury, the Fed and congressional leaders are promising its enactment within days. The scheme has gone from invisibility to inevitability in the blink of an eye. This is extremely dangerous.

Paulson's Moment Of Truth

Tue, 16 Sep 2008 00:00:00 EDT

In taking the top job at Treasury two years ago, Hank Paulson said he wouldn't be content to keep the seat warm. He was running Goldman Sachs, the preeminent investment bank, and he had no need to come to Washington if he wasn't going to make an impact. Until Sunday, it was pretty hard to see where Paulson's impact lay. His environmental interests had not caused a sprouting of green policies. His strong contacts in China had fostered a bilateral talkfest but no tangible breakthroughs. And his efforts to manage the financial crisis had been conventional and tentative -- until his bold gamble on Lehman Brothers.

McCain's Convenient Untruth

Mon, 08 Sep 2008 00:00:00 EDT

When it comes to fighting wars, John McCain stands up and calls for sacrifice. "We never hide from history; we make history," he declared in his convention speech. But when it comes to taxes, McCain is unwilling to demand even a teensy bit of sacrifice. In a McCain administration, Americans would not have to surrender a dime more of their money to a cause larger than themselves.

A Moment For Fiscal Courage

Mon, 11 Aug 2008 00:00:00 EDT

One year ago, it seemed reasonable to hope that the mortgage crisis would be contained. Since then, just about everything that could go wrong has gone wrong. The crisis has spread through the financial system and is metastasizing into a global slowdown. It cries out for a bolder government response than we have seen so far. So here is a test for candidates McCain and Obama: Which of you would provide it?

Throwing Honesty Out the Window

Mon, 21 Jul 2008 00:00:00 EDT

Until just recently, policymakers were doing well in the financial crisis. Congress passed a timely and well-crafted stimulus. Bear Stearns was rescued, averting market chaos. The Fed cut interest rates aggressively, reasonably fearing a collapse of the economy more than a collapse of the dollar.

Nationalization: A Solution for Housing

Mon, 14 Jul 2008 00:00:00 EDT

Capitalism has triumphed everywhere, but it's time to dust off an old socialist slogan. When it comes to housing finance, the commanding heights of the economy must be nationalized. Last night's statement from Treasury Secretary Hank Paulson was designed to look statesmanlike and measured, but it misses an opportunity.

Nixonian Fallacy

Mon, 30 Jun 2008 00:00:00 EDT

A few years back, when "subprime" generally referred to beef, economists used to congratulate themselves on their progress since the 1970s. Central banks had learned to tame inflation. Politicians had learned to appreciate the folly of price controls. Thanks to the economics profession, policymakers had grown wiser.

Our Tarnished Titans

Mon, 16 Jun 2008 00:00:00 EDT

Ever since J. Pierpont Morgan was simultaneously reviled and celebrated a century ago, the titans of banking have enjoyed a special place in the popular imagination. Their economic clout, political influence and sheer wealth have inspired justified awe; the alumni of a single firm, Goldman Sachs, include the current Treasury secretary, the White House chief of staff, New Jersey's governor, the World Bank boss, the head of Italy's central bank and the Nature Conservancy's incoming president. Yet there are questions about what modern investment banks do -- and last week's ructions at Lehman Brothers only make these questions trickier.

The Audacity Of Growth

Mon, 02 Jun 2008 00:00:00 EDT

John McCain likes to say he is for economic growth. "End growth in America, and the lights go out all over the world," he has admonished. He offers a version of the narrative that Republicans have pitched for years: Their party stands for lower taxes, less regulation and freer trade; Democrats stand for tax-and-spend, government intrusion and trade protectionism. But this juxtaposition, at times reasonably persuasive, now rings hollow. The real pro-growth candidate in this campaign looks to be Barack Obama.

Rice and Baloney

Mon, 19 May 2008 00:00:00 EDT

We are now several months into the global food crisis, which is a much bigger deal than the subprime meltdown for most people in the world. Food prices have almost doubled in three years, threatening to push 100 million people into absolute poverty, undoing much of the development progress of the past few years. The new hunger has triggered riots from Haiti to Egypt to Ethiopia, threatening political stability; it has conjured up a raft of protectionist policies, threatening globalization. And yet the response to this crisis from governments the world over has been lackadaisical or worse.

Media Files:

Wright And Ridiculous

Mon, 05 May 2008 00:00:00 EDT

Of all the strange features of this presidential race, the tarnishing of Barack Obama has got to be the most ridiculous. First Obama was accused of anti-religious elitism. Then he was accused of identifying with the underclass anger of his spiritual mentor. Excuse me, but which is it? Am I supposed to believe that Obama is a supercilious elitist or a menacing ghetto radical? Is he contemptuous of religion or too close to a religious leader? Obama's critics don't bother to say. Meanwhile, real character issues go relatively unheeded.