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Institute of International Finance Wins Two Nobel Prizes

Tuesday, 05 April 2011 08:19 By Simon Johnson, The Baseline Scenario | Report

In a surprise announcement early this morning, the 2011 Nobel Peace Prize and the Nobel Prize for Economics (strictly speaking: “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”) were simultaneously awarded to the Institute of International Finance (IIF), the world’s only global association of financial institutions”.

This is the first time the Economics Prize has been awarded to an organization – although the Peace Prize has been received by various institutions (including the Intergovernmental Panel on Climate Change, the International Atomic Energy Agency, and Lord Boyd Orr – in part for his work with the Food and Agriculture Organization).

In its citation for the economics prize, the Royal Swedish Academy of Sciences said the IIF won for its work on capital requirements for banks, which proved that requiring banks to fund themselves with positive equity – and therefore have any kind of buffer against insolvency – would limit credit, be very bad for economic growth, and generally make all consumers less happy.  Based on this single remarkable paper, the IIF earned the prize for its:

"achievements in the fields of consumption analysis, monetary history and for its demonstration of the complexity of stabilization policy."

Put more simply, the IIF’s results showed that basic economics, modern finance, and pretty much all contemporary econometrics are completely wrong.  (See also this comment by Paul Pfleiderer of Stanford University.)

The Norwegian Nobel Committee, awarders of the peace prize, mentioned more broadly the IIF’s

extraordinary efforts to strengthen international banking and cooperation between regulators and those they are supposed to be regulating".

Reaction to the prize was mixed, with the IIF itself seeming to feel that the financial sector was again under threat.  Charles Dallara, managing director of the Institute, immediately wrote to the G20 that he “sees no merit in the idea that any levy on the [Nobel Prize] should be paid into general revenue” (see “A Fair and Substantial Contribution by the Financial Sector: Preliminary Industry Comment,” on the IIF website.)

Josef Ackermann, CEO of Deutsche Bank and chair of the IIF’s board, is – by way of celebration – reported to be revising his group’s return-on-equity goal up significantly (from 20-25 percent where it currently stands for the corporate and investment banking division).  Presumably the return on zero equity will be substantial, at least in good years.

And Douglas Flint, Group Chairman of HSBC and also an Institute board member, is being even more assertive – pushing immediately for negative capital requirements for systemically important financial institutions.  If these are not granted at once in London, he is apparently threatening to move his bank to Sweden.

The U.S. Treasury will no doubt welcome the clarity provided by these prizes for the department’s own internal debates. Secretary Tim Geithner has done very little about seriously raising capital requirements, while endorsing higher capital in general terms – including in his testimony to Congress in early 2009.

“Sec. GEITHNER: The most simple way to frame it is capital, capital, capital. Capital sets the amount of risk you can take overall. Capital assures you have big enough cushions to absorb extreme shocks. You want capital requirements to be designed so that, given how uncertain we are about the future of the world, given how much ignorance we fundamentally have about some elements of risk that, there is a much greater cushion to absorb loss and to save us from the consequences of mistaken judgment and uncertainty in the world.”

Now the banks have been proved right, the Treasury Department’s lack of effort on really making the financial sector safer seems more justified.  As a senior offical told John Heilemann of New York magazine,

 “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.”

Simon Johnson

Simon Johnson, former chief economist of the International Monetary Fund, is a professor at the MIT Sloan School of Management, a senior fellow at the Peterson Institute for International Economics, and a member of the CBO’s Panel of Economic Advisers. He is a co-founder of The Baseline Scenario.


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Institute of International Finance Wins Two Nobel Prizes

Tuesday, 05 April 2011 08:19 By Simon Johnson, The Baseline Scenario | Report

In a surprise announcement early this morning, the 2011 Nobel Peace Prize and the Nobel Prize for Economics (strictly speaking: “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”) were simultaneously awarded to the Institute of International Finance (IIF), the world’s only global association of financial institutions”.

This is the first time the Economics Prize has been awarded to an organization – although the Peace Prize has been received by various institutions (including the Intergovernmental Panel on Climate Change, the International Atomic Energy Agency, and Lord Boyd Orr – in part for his work with the Food and Agriculture Organization).

In its citation for the economics prize, the Royal Swedish Academy of Sciences said the IIF won for its work on capital requirements for banks, which proved that requiring banks to fund themselves with positive equity – and therefore have any kind of buffer against insolvency – would limit credit, be very bad for economic growth, and generally make all consumers less happy.  Based on this single remarkable paper, the IIF earned the prize for its:

"achievements in the fields of consumption analysis, monetary history and for its demonstration of the complexity of stabilization policy."

Put more simply, the IIF’s results showed that basic economics, modern finance, and pretty much all contemporary econometrics are completely wrong.  (See also this comment by Paul Pfleiderer of Stanford University.)

The Norwegian Nobel Committee, awarders of the peace prize, mentioned more broadly the IIF’s

extraordinary efforts to strengthen international banking and cooperation between regulators and those they are supposed to be regulating".

Reaction to the prize was mixed, with the IIF itself seeming to feel that the financial sector was again under threat.  Charles Dallara, managing director of the Institute, immediately wrote to the G20 that he “sees no merit in the idea that any levy on the [Nobel Prize] should be paid into general revenue” (see “A Fair and Substantial Contribution by the Financial Sector: Preliminary Industry Comment,” on the IIF website.)

Josef Ackermann, CEO of Deutsche Bank and chair of the IIF’s board, is – by way of celebration – reported to be revising his group’s return-on-equity goal up significantly (from 20-25 percent where it currently stands for the corporate and investment banking division).  Presumably the return on zero equity will be substantial, at least in good years.

And Douglas Flint, Group Chairman of HSBC and also an Institute board member, is being even more assertive – pushing immediately for negative capital requirements for systemically important financial institutions.  If these are not granted at once in London, he is apparently threatening to move his bank to Sweden.

The U.S. Treasury will no doubt welcome the clarity provided by these prizes for the department’s own internal debates. Secretary Tim Geithner has done very little about seriously raising capital requirements, while endorsing higher capital in general terms – including in his testimony to Congress in early 2009.

“Sec. GEITHNER: The most simple way to frame it is capital, capital, capital. Capital sets the amount of risk you can take overall. Capital assures you have big enough cushions to absorb extreme shocks. You want capital requirements to be designed so that, given how uncertain we are about the future of the world, given how much ignorance we fundamentally have about some elements of risk that, there is a much greater cushion to absorb loss and to save us from the consequences of mistaken judgment and uncertainty in the world.”

Now the banks have been proved right, the Treasury Department’s lack of effort on really making the financial sector safer seems more justified.  As a senior offical told John Heilemann of New York magazine,

 “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.”

Simon Johnson

Simon Johnson, former chief economist of the International Monetary Fund, is a professor at the MIT Sloan School of Management, a senior fellow at the Peterson Institute for International Economics, and a member of the CBO’s Panel of Economic Advisers. He is a co-founder of The Baseline Scenario.


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