Question: Why did you focus your book on a 2009 meeting at the
Simon Johnson: I was the chief
economist at the International Monetary Fund through August of 2008 and
when the crisis broke really intensely in September, James Kwak and I
set up a blog, Baseline Scenario, where we follow the crisis, we wrote
about what was happening, we made policy proposals. We did the kind of
thing that I had done at the IMF, but in a completely open source,
private sector way for free over the web. And as we wrote and as we were
engaged in this analysis we were quite horrified by how well the banks
were being treated and the bankers were being treated despite the fact
that they had messed up so massively. And it really came together for us
in this meeting of 13 bankers at the White House in March of 2009. We
felt that that meeting represented a lot of what had gone wrong with
policy towards banks and more broadly, in this country and we wrote the
book really to try and urge people in Washington and more broadly to
reconsider and to change that policy.
This was a key moment,
obviously. The Obama Administration had come in. They'd made some
initial announcements about how they would deal with the financial
sector, but nothing had really come together very clearly. Nothing was
really believed in very much by the markets. They pulled these bankers
into the White House and they had, at that point, the government, the
administration, had the upper hand. They have, remember, the resources.
They’re the only people with the resources to save the day in that kind
of financial crisis. They can dictate the terms, completely.
you can argue that perhaps you shouldn’t be too heavy-handed in this
situation, but they erred completely on the other side. They said, “You
will get to keep your banks, complete, as they currently exist,” and
everything about your belief system and your incentive system—I mean,
everything that got us into trouble remember, everything that caused
this massive financial crisis—will remained undisturbed, at least for
the time being. That’s extraordinary. That is, I think actually, almost
unprecedented in the history of financial crises. For a government to
save the day so decisively without conditions, without changing anything
about the problems and the structures that have created the crisis. It
didn’t make sense then, it doesn’t make sense now, and has created many
problems that we have to deal with going forward.
Why did the government act in that way?
What they say is "We were scared of what would happen if we acted
otherwise." What we point out in the book in chapter two is these very
same people, these highly experienced, very well-qualified policy makers
in the U.S. had, in the 1990’s, advised other countries who got into
crisis to do something quite different. They were always on the side of
saying, “No, as you seize the moment to turn around the economy and to
prevent the crisis from getting worse, you must deal with some of the
underlying structural problems. If you don’t then all your efforts of
recovery will fail or all short-term benefits will prove illusory. You
will have more difficulty again.” It’s a very hard message to deliver,
but they delivered it repeatedly to other countries. They just couldn’t
apply it to the United States.
Question: Why is the
deregulation of banks responsible for what we’re dealing with now?
Johnson: Well, it is all about the deregulations, some which
started, I would say, in the 1970’s, but the Reagan revolution was
really a big push for this. Reagan, himself, did not make that much
progress, partly because the Congress was in democratic hands. The big
move, though, came in the 1990’s when the Democrats had the White House
and the spirit of Congress, both in its more Democratic and it’s more
Republican phases, was very pro-finance.
So, there are many
moments you can point to, particularly around the failure to regulate
over-the-counter derivatives, which was a key decision made in 1998 and
1999 and 2000 there was some legislation. That really tipped the whole
thing over. But, this process and this change has been building up for a
considerable period of time and that of course is one of the things
that makes it hard to address quickly and to really deal with fast,
because we’re dealing with a problem that’s built up over 30 years.
the 1930’s and the mid-1980’s the banks were fairly well controlled.
There were tight regulations. Glass-Steagall Act actually had some teeth
and some bite, so commercial banks could not go too much into
investment banking, more speculative activities and the same was true
with the reverse as well. That was a good 50 years; it broke down from
mid-1980’s. We need to go back to that post-World War II period when
banks were really held accountable.
Question: Can we
ramp up existing legislation or do we need to start from scratch?
Johnson: Well, there is, of course, reform legislation on the
table. We think that could have gone in a much better direction. We
think what is likely to happen will be largely meaningless in terms of
making the system less risky and addressing the too big to fail problem,
the fact that these banks are just out of control. So, it will take
legislation. This legislation almost certainly will not do it; we’re
just going to have to do it again.
Question: How much
regulation do you think is likely?
Well, I think we will see some better protection for consumers and
that’s a good thing and we support that, but in terms of constraining
the size, limiting the activities of these massive banks that are seen
by the markets as too big to fail and as a result, have this huge,
unfair competitive advantage. They can borrow, by some estimates, 75, 80
basis points, that’s 0.7, 0.8 of a percentage point, cheaper than other
banks can borrow—that’s a huge difference in today’s market. We think
there will be nothing at all or make a difference to that perceived (and
probably true) implicit government guarantee in backing those banks.
Recorded on March 31, 2010