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Question: Why did you focus your book on a 2009 meeting at the White House? 

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. 

Now, 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. 

Question: Why did the government act in that way? 

Simon Johnson: 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? 

Simon 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. 

Between 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? 

Simon 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? 

Simon Johnson: 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

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