Tim Geithner’s Per Jacobsson Lecture

One of the events at the IMF annual meetings is a Per Jacobsson Lecture on issues involving finance, usually delivered by a prominent or current policymaker. The quality of these lectures varies; I have attended three, and one was particularly boring. (Information about the Per Jacobsson foundation can be found here, and a list of the lectures is here.)

This year former Treasury Secretary Tim Geithner gave the lecture. (Links: prepared text, slides, and video.) Previously, I had not been overly impressed with Geithner as a public speaker, but I was pleasantly surprised about how good this speech was, both substantively and as a performance.

The title was “Are We Safer? The Case for Updating Bagehot.” Geithner’s main point is that improved regulation has made a financial crisis less likely than before the crisis beginning in 2007, but that the emergency authorities for government officials in the U.S. to use if there is a crisis are more restricted than in the last crisis. If there is a major, financial crisis, officials would have to go to Congress to ask for more emergency authority.

One of the reasons for the restrictions on emergency authorities is to deal with the moral hazard problem. The thinking is that, if the government does not have the legal authority to bail out financial institutions, they will be more careful. Geithner recognizes that argument, but he argues that you have to rely on both regulation and a commitment to use the emergency authorities in the event of a systemic crisis. He argues that, just as you do not convene a meeting of the town council to decide whether to send fire trucks to a burning house, you should not have to go to the legislature to deal with a massive, fast moving financial crisis.

Geithner is correct, but he did not address some other issues.  For example, he did not address the too big to fail issue or whether resolution of a failing institution would work for a large, complex financial company with a global business. There is some question of how this would work with multiple regulators from different countries trying to protect their citizens and companies with business with the failing entity. Also, the insolvency regimes and commercial codes of different countries vary, which would pose challenges that might be difficult to resolve quickly.

As a last criticism, Geithner did not mention the problem of regulatory capture or regulatory structure. As readers of this blog know, I have been concerned about the issue of regulatory capture in the U.S., which is made worse by having too many regulators. This has caused each regulator to advocate for its regulatees. After all, the primary regulator’s significance and budget shrinks (with the exception of the Fed, which controls its own budget), if the business it regulates contracts. Also, the many contacts between the staff of a regulatory agency and the staff of the entities it regulates provides many opportunities for the regulated entities to convince regulatory staff of the correctness of their views. This does not imply that anything illegal or unethical is taking place; regulatory capture does not need that and regulatory capture is never total. Regulatory agencies and their staffs do try to do their assigned jobs, but partial capture did contribute to the last financial crisis. Regulatory agencies did have authorities that they did not use to curtail the recklessness that was taking place. They apparently did not see the magnitude of the risks that were piling up, and the regulated institutions, which to some extent may have been fooling themselves, probably played a role in convincing the regulators that everything was fine.

Nevertheless, Geithner’s speech is worth reading or viewing. I have not summarized everything he said. Clearly, he has given a lot of thought to the subject of financial crises, and what he has to say is worth paying attention to.

Unfortunately, while in his spoken lecture, he ends by saying “we can do better,” it is unlikely that any legislation will be enacted in the U.S. to deal with his legitimate concerns. This is not a top legislative priority, and legislation in this area is difficult to pass, given the diverse interest of various interest groups. It may take another crisis to make changes, and that is something none of us wants.

IMF Annual Meeting Seminars – Observations

Last week I attended seminars and other events sponsored by the IMF in conjunction with its annual meeting in Washington, DC. Here are some observations.

The IMF had fewer “open” events than in the past, and fewer big-name economists were present on panels, though they may have spoken at the conferences and events sponsored by banks and other private organizations that are put on in conjunction with the World Bank/IMF annual meetings. Nevertheless, it appears that the IMF organizers, probably including IMF managing director Christine Lagarde, had issues they wanted to highlight. Three main themes were preponderant: globalization, technology, and income inequality.

The IMF and its sister organizations, the World Bank and the World Trade Organization, are staunchly in favor of free trade. There is hand-wringing concerning that the case for free trade – that the benefits for countries outweigh the costs – is difficult to make on the public square in an economic environment of slow economic growth, growing economic inequality, visible job losses due to trade, and fear of change. While the great majority of economists across the political spectrum believe in free trade, the institutions implicitly recognized that this is not enough to convince the public. I do not remember hearing, though, any solutions except to be more forceful in presenting the economic arguments.

Regarding trade agreements, there was some, but not enough, discussion that some of the opposition to certain free trade agreements center on factors such as dispute resolution procedures, labor practices, and environmental concerns, rather than lowering of tariffs. Interestingly, one speaker (this may have been at a J.P. Morgan event) did say that the chances of U.S. ratification of the Transatlantic Trade and Investment Partnership (“TTIP”) are greater than ratification of the Trans-Pacific Partnership (“TTP”). The countries of the TTIP are more similar with respect to labor practices and environmental issues than the countries of the TPP, and U.S. workers are less fearful of job losses to many of the countries of the EU than they are to losses to Asian countries.

As to technology, the message was that the pace of change has been remarkable with profound effect on jobs. Technology facilitates globalization, making it easier to outsource jobs to other countries. It also eliminates existing jobs. This causes unease among certain sectors of developed nations’ populations about their economic prospects.

I am suspicious of arguments that technology make the goal of full employment unattainable. I remember that, when I was in grade school in the late 50s and early 60s, there was much concern about how automation would have these economic deleterious effects. It did not happen. I do recognize, though, that the changing nature of available work will create winners and losers, and that, if not handled right, can create political movements that are at core undemocratic.

I think the IMF is right to highlight this issue, though I was disappointed by many of the speakers on this subject. There was a tendency to make bold assertions, such as that more than half of the largest U.S. companies are going to disappear in the coming decade or that the U.S. educational system needs fixing. Absent was any analysis to convince one of the inevitable failure of companies or any analysis of what is wrong with U.S. education and how it should be fixed. That does not mean the speakers are wrong, but bold assertions without analysis is not that useful.

As for growing economic inequality, which to some extent may be exacerbated by technological change, and slow economic growth, this is indeed a problem that needs to be highlighted and is a major factor of populist movements in developed countries. Besides making some changes to tax codes and to government spending, I do not recall hearing any proposals on how to address this problem nor any analysis of why it is occurring. To be fair, though, it is a difficult issue to analyze and there does not appear to be any consensus about the cuases of economic inequality. The IMF’s highlighting of this issue is appropriate and it will hopefully spur more thinking and research on this topic by economists and others.

In short, while not conveying to attendees fear of a coming economic cataclysm, the overall message was decidedly not one of optimism. To be more positive, the IMF was warning that there are currently developments that could lead to creeping disasters if problems are not addressed. There is the hope that they will be.