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Simon Johnson: “The Worst is Yet To Come”

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I must say, it’s quite amusing to watch Simon Johnson. He has an unabashedly bearish message…for 2010! And he delivers it in a sunny, enthusiastic tone. His hosts are not too keen about it, but the fact that he is so bloody upbeat about his gloomsterism leaves them a bit flummoxed.

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34 comments

  1. Ina Pickle

    One has to imagine that he said he would be happy to come on the show in that tone of voice, and they thought that his message would match his tone! They repeatedly seem to bash him for having a negative message that somehow slipped onto their airwaves.

    But I agree with him: the clouds are definitely not parting, they are building. They didn’t just push the problem down the road, but like a snow plow, they built it up into a higher pile that effectively blocks off other paths for the purpose of clearing one main one. That path is an exit for the banksters, and the ones left without an exit, digging franticly, are we the people.

  2. JKH

    “His hosts are not too keen about it, but the fact that he is so bloody upbeat about his gloomsterism leave them a bit flummoxed.”

    Flummoxed in my view more because of the superficiality of his commentary.

    On a comparative basis, the CNBC analysts were uncharacteristically insightful. Comparatively, it wasn’t hard.

    1. DownSouth

      JKH,

      Do you have any information whatsoever to share with us to justify your smug dismissal of Johnson?

      Here’s what Johnson said: “We’re looking at emerging markets, and I think this is the next frontier for the crisis.”

      And granted, Johnson talks mostly about China, which I know nothing about. But since I live in Mexico, which I believe qualifies as an “emerging market,” I do try to keep tabs of what is going on here.

      And the Ponzi scheme the banks ran in the US with residential lending looks like Sunday school class in comparison to the Ponzi schemes the banks they are running in Mexico. Take this one for instance:

      It used to be very difficult to obtain a credit card in Mexico. Then, like street hustlers hawking passes to strip shows, young “promoters” working for the banks appeared on the streets virtually handing out credit cards. From 2001 to 2008, the number of credit cards circulating in Mexico soared from 6.1 million to 26.1 million, according to Condusef. Maintaining offices in Los Angeles and New York, Banamex USA even offered a cross-border credit card program aimed at clients with friends or relatives in Mexico.

      (In 2008, Banamex inaugurated a branch in Calexico, California.)

      Eligible income levels were dropped to unheard of lows of about $300 monthly, only slightly above official definitions of “poverty wages,” and certainly not enough to establish any stability or cushion.

      […]

      Javier Taja, president of the Guerrero state branch of the El Barzon organization, a national debtors’ advocacy group, estimates that of 200,000 credit card holders in Acapulco alone, some 85,000 people are in arrears. Taja says he knows people who earn less than $800 a month but have credit card balances exceeding $23,000.

      http://www.corpwatch.org/article.php?id=15356

      Citi owns Banamex, and claims to have invested $30 billion usd in Mexico. Now if the credit card situation implodes (and if you read the article I cited there is mounting evidence to this possibility), and Citi can’t get the Mexican government to bail it out, what do you believe Citi’s $30 billion investment in Mexico is going to be worth?

      Of course maybe your smug and cavalier dismissal of Johnson from the fact that you are looking at the situation from the perspective of the banks:

      In response to criticism that bad credit card accounts and other bad debts will precipitate a new financial crisis in Mexico, the banks and their government allies were not publicly worried in the days before the H1N1 (swine) flu epidemic hit. New lines of credit available from the International Monetary Fund and the U.S. Federal Reserve totaling $77 billion shored up Mexico’s potential foreign reserves to more than $150 billion this month, permitting the Calderon administration to announce it will support new economic investments. Oddly enough, the possible infusion of cash – which could prop up the shaky peso and serve as an emergency, hog-sized piggy bank for the financial institutions – was announced on April Fool’s Day in the United States.

    2. Cullpepper

      Well, be a little fair, a well researched & presented argument would require extensive sourcing, a thick ream of technical data and reciting long strings of numbers.

      A show like that is built around snappy soundbites that fit between commercials, not analysis.

      I liked him anyways.

  3. DownSouth

    Simon Johnson, in talking of the massive risk US banks are now taking on with their “get out of jail free card” from the US government, says:

    Where would you take the risk? Well, it could be commodities. It could be crazy things in the United States. I think that mostly it’s going to be where everyone is sure prices can only go up. And that’s China, that’s other emerging markets.

    This ties in with an article in today’s NY Times about James Canos, who has become very bearish on China:

    As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

    Warrant Buffet, Wilbur Ross and Jim Rogers pooh-pooh the idea:

    “I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”
    http://www.nytimes.com/2010/01/08/business/global/08chanos.html?hpw

    But here’s the situation Johnson is lamenting. If Rogers is correct and China continues to grow, the US banks win big. On the other hand, if Chanos is correct and China implodes, the banks don’t lose. Instead, they just pass their losses on to the American taxpayer.

    Oh well, it sounds like great work if you can get it.

  4. BDBlue

    My favorite part was one of the hosts lamenting that so many people come on there with bad news. Well, gee, why do you think that is? Although I’m sure they’ll very quickly go find a bankster to tell them everything is wonderful again.

  5. SB

    The CNBC commentator that questioned Johnson on bank balance sheets (of the 6 majors) was correct. Except for MS, everyone else has shrunk (primarily due to loan runoff, and absence of new lending). What Johnson MAY have referred to is off-balance sheet vehicles, but I’m not so sure about that. What I think Johnson is talking about is the major banks are deep diving into purchasing financial securities, not hard loans,while letting loans run off. That’s a very dangerous game.

    1. Cullpepper

      “What I think Johnson is talking about is the major banks are deep diving into purchasing financial securities,”

      I wasn’t clear on that bit either. Was he suggesting the big 6 are getting wrapped up in currency trading? Or something more obscure? (Can you purchase Brazilian drug-smuggling derivatives or whatnot?)

      Anyone have any expertise in this? What do big banks invest in when they do it overseas?

      1. wally

        “What do big banks invest in when they do it overseas?”

        Invest? These are banks… they should loan. But there is the heart of what Simon is talking about. These 6 are now risz-taking entities at a massive scale and they have a proven record of herd-following.

  6. MD

    @SB

    Why loan money to chumps like us when you can make 1000x as much by investing in derivatives.

    I often wonder why places like BOA bother to have bank branches and deal with the hoi polloi.

    CNBC is full of a**clowns. Full stop.

  7. JamesD

    In a world with more bubbles than a Lawrence Welk show there is plenty to be very concerned about. For instance the liquidity driven carry trade. (Not to mention sovereign debt traps, corporate and government cooked books, private & government pension fund meltdown, US state and city bankruptcy, sudden major war outbreak, growing civil unrest, the dubious trajectory of the EU; hey – nominate your favorite bubble)

    Nouriel Roubini: Mother of All Carry Trades faces inevitable bust

    http://www.youtube.com/watch?v=xIEoa3F5o0M

    Or take Andy Xie a real expert on, among other things, China:

    http://seekingalpha.com/article/176124-andy-xie-s-china-outlook

  8. JamesD

    I would like to add, if I may, that both the CNBC interview and some of the comments here show what is a ubiquitous tendency now-a-days, that rather than deal with the message, people shoot the messenger.

  9. kievite

    I agree that emerging markets are very much like a time bomb that can explode any month from now.

    Eastern Europe is a basket case economically: they lost all thier markets, were royally raped economically (assets were bought for pennies on the dollar by Western companies) and now have the level of debt, poverty, crime (including narco traffic from Afghanistan and woman trafficking), and inequality that makes the region close analog of Latin America.

    I think Ukraine has chances to be a surprise of 2010. And then other dominoes (probably in Baltic states) can follow.

    1. Vinny G.

      Kievite,

      You have to be more specific than just “Eastern Europe”, as there are many nations in that region, most are EU members, and not all are doing badly in this crisis.

      As an American who spends a great deal of time in Eastern Europe, I will say this: there are far less homeless people, there are far less foreclosures, unemployment is far lower, and there are far lower levels of debt in places like Poland, Romania, Bulgaria, than there is in the once “mighty” and now bankrupt United States.

      Honestly, you really need to get on a plane and do a little traveling before you start passing judgments on nations you clearly know nothing about. While America has been drunken with self-infatuation, stampeding to buy Chinese plastic on credit, the nations in Eastern Europe have been building their infrastructure, have been saving, and have been absorbing much of the offshoring industries from the West, and at this point have largely surpassed the US.

      Additionally, I recommend you start disbelieving the news you’re getting out of the Western media outlets, because you won’t hear much truth on the lying CNN, CNBC, or BBC nowadays.

      Food for thought, my friend…

      Vinny

    2. Vinny G.

      Kievite,

      I just noticed that you also mentioned crime in your post. You certainly are not saying that crime in Eastern Europe is higher than crime in the United States, now, aren’t you? Because if you are, then you are completely uninformed about the facts. When I am in places like Poland or Romania I don’t lock my car at night, I leave my engine running with the door unlocked when I go grocery shopping, and I never worry about any violent crime, simply because there is practically none.

      This is not the case with the the United States, which is by far, the most violent and most brutal nation on Earth. Crime rate in all American cities large and small has reached unbelievable levels. The gangs are running large areas of the country, as well as its prison system. The American public system is also ran by gangs. People live in fear, locking and loading, and still falling prey to a crime tsunami that has become America’s way of life.

      Crime, my friend, is America’s way of life. Please don’t try to pass that on other nations (especially European nations), because it is not the case.

      So please, please, before you start passing judgments on other nations, just get on a plane and see for yourself. But by all means, leave your 38 Special at home, not only because guns are illegal in Eastern Europe, but also because people there don’t live in fear and feel compelled to pack heat to protect themselves as is the case in the US.

      Vinny

      1. Peter T

        Crime is actually down in the US, contrary to the expectation for a recession. The most violent and brutal nation is certainly not the US, certain sub-saharan African states or simply northern Mexiko are more dangerous. That said, the East European states in the EU are not states close to failure, many citizens and businesses are overindebted, sure, some in Swiss franc of all currencies, but they are relatively stable politically. Ukraine and Georgia are outside the EU.

      2. John Kooms

        I would agree Vinny but have you ever lived in Russia ? Good news , there is still at least one country that has us beat in the crime and violence department , trust me .

  10. Groundhogday

    Downsouth hit the nail on the head: Emerging markets may or may not be giving us a big head fake. But if they are for real, the banks win and if they collapse the taxpayers lose.

    If you follow Johnson’s blog, his comments made perfect sense. He is talking about the proprietary trading desks at the big banks, the “casino banks” not the lending operations. That could involve all sorts of derivatives and securities.

  11. Ina Pickle

    The way that bank balance sheets increase substantially when the loans are running off is that they are carrying a bunch of complete manure at book. If you never write down anything to its market value, while taking on cash like it was water on the Titanic and lending out absolutely nothing — YES. Your balance sheet grows. A lot of it is just optics, but it grows.

    Now, if you are a bankster and you aren’t lending, what do you do with all that free, no-risk money? Hmmm . . . . .productive enterprises take so long to pay out, and I need to turn some profits NOW. Afterall, I need a bonus, and furthermore – what productive economy? Let’s speculate like crazy. Afterall, the hole in the balance sheet is almost bottomless: we either fill it or die. So not only has the down-side risk been removed by enormous moral hazard, but these guys didn’t have much to lose anyway because of the condition that the bank balance sheets are in. They need to go all in to win, as far as they are concerned.

    I can very readily believe that what Mr. Johnson is saying is absolutely correct.

  12. lark

    What I don’t understand is how Chinese limits to foreign control or influence impacts these matters.

    My impression is that Chinese banks could collapse and no foreign interests would be taken down, because foreign investment in Chinese banks is not allowed. But that is just an impression.

    I would like some real information on this, if anyone knows. What are foreigners allowed to invest in?

    Also, I was interested in Johnson’s comments on currencies. I wonder what he was thinking about when he said currency movements could get ‘interesting’ in the event of an emerging market fall / failure. Seems the moderators missed a follow up question there.

  13. tompain

    People should be clear about where exactly the moral hazard lies. It’s insufficient to say that “the banks” have a get out of jail free card. What do you mean by “banks”? The equity holders of the banks were crushed by both dilution and loan losses as a result of the risks the banks took.. A lot (but not all) of the senior managers of the institutions that got in trouble lost their jobs – see BAC, Bear, LEH, MER, GSEs, WAMU, WFC etc. GS is now subject to Fed regulation and leverage restrictions.

    So when we talk about the get out of jail card, who are we really talking about? The only ones who really got bailed out are the bondholders and depositors. Most people will not quibble with depositor protection – it’s necessary to make the banking system work. But why did bondholder after bondholder get paid 100c on the dollar when in a liquidation scenario they’d get much less? To this day I don’t think we’ve received a good explanation.

    However, let’s say that you believe that you have reinforced the recklessness of the bondholders and that they will now assume they can lend any amount of money to the banks to do anything the banks want without fear of loss. Does it follow that the banks will therefore lend like drunken sailors, despite the fact that the shareholders are still licking their wounds? Despite the fact that regulators are imposing lower and lower leverage ratios on the banks? Despite all the whining about how there’s too little credit flowing? Despite the fact that any CEO who oversees a blowup can expect in public humiliation and legal exposure?

    I will be the first to admit that the government was far too generous with the bondholders, but it does not follow that we now therefore have a financial system that is even more precarious than it was before.

    1. Skippy

      I concur tompain, the bond holders are the shadow puppet masters and that is where the fight needs to be taken.

    2. Hernan El Perro

      Tompain, your questions and analysis are pertinent and basicaly correct, but the key primary issue that precedes and supersedes all the others you mention is the fact (too) that the big TBTF banks are not creating value at all for society as they are not performing their basic primary function of intermediation of moneys to fund PRODUCTIVE investment activities, rather they are engaged now in SPECULATIVE and inherently unstable unpredictable risky activities of purely financial nature, with no real value added to society – and the ultimate financiers of these risky activities are said bondholders that you allude to. This is a dangerous circular, fragile and vicious system that can break apart any minute because a system like that is based paradoxically on lack of transparency, no real competition, misinformation and distrust, qualities entirely opposite to the attributes that any sane, normal, well-functioning financial system and market-based capitalist system should have. It doesn’t take a genious to figure out how strong the foundation of a system like that really is, notwithstanding the appearances and propaganda spit out to the masses by crooked politicians, incompetente bureaucrats and sold-out incumbents. I believe this is the ultimate underlying message that Simon Johnson and a few others are trying to deliver to a sadly unsuspecting populace.

    3. Nathanael

      Correction: the senior managers didn’t lose anything significant.

      They are getting their $1 million a year or more, whether the companies succeed or fail. They don’t really need to care. Maybe success gives them an extra half billion, but once you’re a multibillionaire, it *doesn’t matter* much. They almost all got enough money out that their paper losses are irrelevant.

  14. Jerry

    Well…..since the big banks are investing….they won’t be using our money…..check out Move Your Money….since Fed wouldn’t listen, the people stopped speaking and instead are taking their money to their local banks and credit unions….we were forced to go to the wedding but were are not going to reception (sorry no present from us) leaving the Fed Treasury and Big Bank to honeymoon and survive on their own….OH but you say they will get us with taxes…Has anyone heard the word barter and self-employment????

  15. mrrunangun

    It pretty much stands to reason that when you have enough risk on that the government considers you too big to fail and regards itself as forced to assume your losses, then the proper thing to do is to get as big as you can, and take on as much risk as you can. Thus you have insured your own safety at the expense of the taxpayers. As long as the Chinese stock and property markets boom, you regard yourself as having earned a hefty bonus by your acumen and perspicacity. When the Chinese stock and property markets crash, voila! you are too big to be allowed to fail, so the taxpayers will bail you out again. QE will go on steroids so you can repeat the game again with Moscow property and oil futures. The rest of your countrymen will be beggars, but what the hell, they elected the people who made this game possible, didn’t they?

  16. Jon H.

    What I think Johnson is talking about is the major banks are deep diving into purchasing financial securities, not hard loans,while letting loans run off. That’s a very dangerous gam

    If you watch the clip again, I am pretty sure he said almost exactly that, pretty clearly.

    1. Fifi

      This is exactly what he sais ‘xcept the CNBC boobs would not listen and keep blabbering on falling lending…

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