Jamie Dimon Poll and Follow-Up

The poll results are in on whether Jamie Dimon will resign from the board of the New York Federal Reserve Bank. By a 53%-40% majority, with 7% unsure, readers thought that Dimon would not step down in the wake of the huge supervision failure at JP Morgan, which led to its $3 billion and counting loss.

Meanwhile, the pressure is building for him to resign. Simon Johnson, whose article I first cited on this issue, has written new articles calling for an investigation into JP Morgan, calling for Dimon's resignation, and taking on arguments defending Dimon. Johnson has also started an online petition calling for Dimon's resignation or ouster.

Johnson is hardly alone, however. In recent days, others who have called for Dimon's resignation include former Wall Street prosecutor and New York Governor Eliot Spitzer, Nobel Prize-winning economist Paul Krugman, Massachusetts Senatorial candidate Elizabeth Warren, and today, Kansas City Fed President Esther George said that Fed directors who don't meet high standards should resign, which Johnson tweeted was "huge."

I was one who voted "no" on the poll, but the recent activity makes me think the odds must be increasing. And yes, I signed Johnson's petition.

Kabuki Theater Probably Won't Shake Up NY Fed

Via @MarkThoma, Simon Johnson reports that Treasury Secretary Tim Geithner has called (very diplomatically, of course) for JP Morgan Chase CEO to resign from his position with the New York Federal Reserve Bank in the wake of risk control failures that have already led to $3 billion in losses for the bank.. Johnson comments:

Mr. Geithner’s call is a major and perhaps unprecedented development which can go in one of two ways.

If Mr. Dimon resigns, that is a major humiliation and recognition – at the highest levels of government – that even the country’s best connected banker has overstepped his limits.  This would be a major victory for democracy and a step towards reopening the debate on financial reform, including introducing more restrictions on what global megabanks can do.

Alternatively, Johnson says, if Dimon manages to stay on to the end of his term December 31, it will mean a defeat for democracy and a victory for the big banks. Of course, there would be nothing new about this: one of the striking developments since the 2008 financial meltdown is that not a single major bank executive in the United States has gone to jail for their wrecking of the global economy. Moreover, the five largest banks in the country have seen their assets increase from $6.1 trillion in 2008 to $8.5 trillion today. By contrast, in Iceland, 200 bank officials, including the CEOs of the country's three largest banks, are all facing criminal charges for their actions leading up to the crisis. To use Richard Fields' terms, Iceland followed the Swedish model (make the banks take charges against profits immediately: bad for the banks, good for the economy) while the U.S. has followed the Japanese model (good for the banks, bad for the economy).

While I have no special insight into the kabuki theater of high official pronouncements, I tend to agree with Johnson's assessment that Dimon will probably remain on the New York Fed board. I say this for no other reason than the fact that, as the NY Fed's website points out, commercial banks who are members of the Federal Reserve System appoint 2/3 of the Board members. Three are appointed by the banks to represent themselves; Dimon is one of these. Another three are appointed by the banks ostensibly to represent the public. The banks selected the co-founder of a technology investment company, the CEO of HealthNow New York, and the CEO of Macy's to represent "the public." Hmm. The final three members are selected by the Fed's Board of Governors to represent the public, but all are presidents of major institutions: Columbia University, the Metropolitan Museum of Art, and the Partnership for New York City. So, 2/3 of the Board is selected to represent the public, but I feel pretty safe in saying that all nine Board members are in the 1%.

Readers, what do you think? Will Jamie Dimon resign from the New York Fed? Take our poll and let us know.

Inflation is Neither as Boring Nor as Simple as it Seems

One nice thing about Dean Baker's new book, The End of Loser Liberalism, is that it puts the Federal Reserve Bank and inflation under the microscope. This is important and valuable, because too many people wrongly take it for granted that inflation is always a bad thing. To give an example, one graduate level textbook in international political economy that I use (Ravenhill, ed., Global Political Economy) has a chapter discussing theories of how different actors form their preferences about free trade (for or against), exchange rates (fixed or floating, high or low), etc. Notably missing is any discussion of why different people might favor higher or lower rates of inflation. The chapter author simply presumes that inflation is bad.

Yet once upon a time, average middle class people understood the significance of international monetary arrangements and inflation on their lives. These were the people to whom William Jennings Bryan's famous 1896 “Cross of Gold” speech was addressed. Farmers understood that the gold standard was harmful to their interests because it forced low inflation and even deflationary policies that made their debt burden worse. They wanted the dollar backed by both gold and silver (“bimetallism”) in order to have a larger money supply and higher inflation.

The first modern work of which I am aware that discusses who wins and who loses from inflation is William Greider's Secrets of the Temple. (For a fairly recent interview with Greider, see here.) The first level of the story is the easiest. It's hard to see how hyperinflation benefits anyone (though the historical memory of Germany's hyperinflation gave us the Bundesbank with its constitutional mandate to control inflation with no reference to unemployment and ultimately gave us a European Central Bank blindly following deflationary policies). Extremely rapid increases in the price level are so destructive that they outweigh the second factor, which holds in normal times: inflation benefits debtors, who get to pay their debts with cheaper dollars; and it conversely harms creditors, who receive those cheaper dollars.

But who are the debtors and creditors? In general, of course, lenders are wealthier than borrowers. Broadly speaking, older people lend to younger people. Thus, moderate levels of inflation transfer wealth from richer to poorer and older to younger. They make it easier for the middle class to build up assets like home ownership, and more generally for the economy to expand to full employment.

As Greider argued and Baker agrees, the decision to target a particular inflation rate is a highly political one with Fed decisions making it generally more difficult to reach full employment or the bargaining power full employment would give to workers. While the Federal Reserve Board officially has a dual mandate to promote both employment and price stability (in contrast with most central banks which, Baker points out, are responsible for price stability alone), in practice it has done little to promote employment even in the current jobs crisis, whereas it has frequently moved to raise interest rates when unemployment rates were quite high. Baker, as did Greider before him, argues that it is crucial to bring the Fed under more democratic control. Baker concedes that institutional reform of the Fed is a long way off, but argues that in the meantime progressives need to step up public pressure on the Fed to do something about unemployment, comparable in volume to the non-reality-based screams from the Right that what little the Fed was doing would set off massive inflation.

What was news to me, though, is that the Fed refunds to the U.S. Treasury the interest it earns on its assets (primarily “government bonds and mortgage-backed securities”), to the tune of $80 billion in fiscal year 2010. Baker suggests that if, instead of selling these assets off as planned over the next 10 years, the Fed holds on to them, the Treasury will save about $600 billion in interest payments over the period. This is almost equal to the revenue that will be gained by letting the Bush tax cuts for the wealthiest 2% of Americans expire.

Baker's main point is quite sound: progressives need to pay a lot more attention to the Fed than they have, and they have to amplify the voices of the few economists who have called for the Fed to announce that it wants a higher rate of inflation than 2%. The stakes are too high, and the general lack of knowledge means that there is quite a bit of room for organizing to make progress if the information gap is closed.