Simon Johnson is less than impressed with the results of Saturday’s G20 meeting of central bankers and foreign ministers. He writes on the blog Baseline Scenario: “It was a disaster – we face what officials readily concede is the biggest financial and economic crisis since the 1930s, yet this conclave agreed precisely nothing that will make any difference”.  In a correlated article for the Telegraph, Johnson delves into the details. 

There are two schools of thought among the G20 leaders on how to deal with the crisis. America wants global stimulus packages; Europe wants more regulation. But Johnson calls both agendas “red herrings” and outlines the three largest problems the global economy faces. 

1. Neither of the agendas being touted by the governments is going to have much impact. The IMF suggested a global stimulus early last year and it wasn’t done. That time has come and gone because “the severe downturn that followed the onset of financial panic last September means that very few countries can now afford to spend more or tax less.” And the regulatory “college of supervisors” that is being proposed would have little to no effect on the bloated banking system. 

2. The aforementioned bloated banking system. Johnson address the need to “break this power and move resources into something more productive and less inherently unstable”. 

3. The “global economic crisis” certainly has its feet in America but its heart is in Europe. Johnson’s article discusses the economic future for Western Europe (bleak but clinging on) and Eastern Europe (on life support). You can read the article for some fleshing out of the issue but it is really an article in and of itself. 

I want to focus on #2- the bloated banks that have far too much power at the moment for any sort of real solution to take hold. The American banking industry, bailed out repeatedly, is still attempting power plays with our government. They’re under the impression that- if they haven’t won already- their side is at least on the brink of victory. 

Example 1, courtesy of Jamie Dimon, CEO of JP Morgan: 

“When I hear the constant vilification of corporate America, I personally don’t understand it,” Dimon said in his speech. “I would ask a lot of our folks in government to stop doing it because I think it’s hurting our country.”

To be fair, he did also speak in favor of regulations. He also said, about banks, that “[f]ailure is fine as long as it’s orderly, controlled, leads to resolution and doesn’t cause systemic failure”. Which seems to contradict his previous statements regarding nationalization: 

“I don’t think any bank should be nationalized,” he said, taking questions from reporters after a speech at the U.S. Chamber of Commerce. “It doesn’t work,” Dimon said. “It’s a mistake. Some (banks) need aid and help, but they should stay as private as possible.”

Example 2, AIG granting large bonuses after their fourth bailout and warnings from Tim Geithner: 

Despite being bailed out with more than $170 billion from the Treasury and Federal Reserve, the American International Group is preparing to pay about $100 million in bonuses to executives in the same business unit that brought the company to the brink of collapse last year.

An official in the Obama administration official said Saturday that Treasury Secretary Timothy F. Geithner had called A.I.G.’s government-appointed chairman, Edward M. Liddy, on Wednesday and asked that the company renegotiate the bonuses.

Administration officials said they had managed to reduce some of the bonuses but had allowed most of them to go forward after the company’s chief executive said A.I.G. was contractually obligated to pay them.

In a letter to Mr. Geithner, Mr. Liddy wrote: “Needless to say, in the current circumstances, I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them.”

Mr. Liddy did agree to Treasury’s request to scale back corporate bonuses for senior partners. But he said he had “grave concern about the long-term consequences of the actions we are taking today.

“On the one hand, all of us at A.I.G. recognize the environment in which we operate and the remonstrations of our President for a more restrained system of compensation for executives. On the other hand, we cannot attract and retain the best and brightest talent to lead and staff the AIG businesses — which are now being operated principally on behalf of the American taxpayers — if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”

Maybe if AIG had focused more on hiring the “best and brightest talent” a few years ago, their company wouldn’t have neared implosion.

It would be very difficult (if not impossible) to turn the economy around without some of these financial institutions paying the price in the form of nationalization or restructuring. This needs to be done to fix things; it really isn’t about punishing them for their errors. But it could have at least a short term benefit of making those in the financial sector more cautious. As things stand now, they have no reason to be trepidatious.  They plan to return to how things were before as soon as that big, mean government steps out of the way.