Self-Motivation
David Goggins
Former Navy Seal
Career Development
Bryan Cranston
Actor
Critical Thinking
Liv Boeree
International Poker Champion
Emotional Intelligence
Amaryllis Fox
Former CIA Clandestine Operative
Management
Chris Hadfield
Retired Canadian Astronaut & Author
Learn
from the world's big
thinkers
Start Learning

The Government Saves the Banks—Without Conditions

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

Simon Johnson: I was the chief \r\neconomist at the International Monetary Fund through August of 2008 and \r\nwhen the crisis broke really intensely in September, James Kwak and I \r\nset up a blog, Baseline Scenario, where we follow the crisis, we wrote \r\nabout what was happening, we made policy proposals. We did the kind of \r\nthing that I had done at the IMF, but in a completely open source, \r\nprivate sector way for free over the web. And as we wrote and as we were\r\n engaged in this analysis we were quite horrified by how well the banks \r\nwere being treated and the bankers were being treated despite the fact \r\nthat they had messed up so massively. And it really came together for us\r\n in this meeting of 13 bankers at the White House in March of 2009. We \r\nfelt that that meeting represented a lot of what had gone wrong with \r\npolicy towards banks and more broadly, in this country and we wrote the \r\nbook really to try and urge people in Washington and more broadly to \r\nreconsider and to change that policy. 

This was a key moment, \r\nobviously. The Obama Administration had come in. They'd made some \r\ninitial announcements about how they would deal with the financial \r\nsector, but nothing had really come together very clearly. Nothing was \r\nreally believed in very much by the markets. They pulled these bankers \r\ninto the White House and they had, at that point, the government, the \r\nadministration, had the upper hand. They have, remember, the resources. \r\nThey’re the only people with the resources to save the day in that kind \r\nof financial crisis. They can dictate the terms, completely. 

Now,\r\n you can argue that perhaps you shouldn’t be too heavy-handed in this \r\nsituation, but they erred completely on the other side. They said, “You \r\nwill get to keep your banks, complete, as they currently exist,” and \r\neverything about your belief system and your incentive system—I mean, \r\neverything that got us into trouble remember, everything that caused \r\nthis massive financial crisis—will remained undisturbed, at least for \r\nthe time being. That’s extraordinary. That is, I think actually, almost \r\nunprecedented in the history of financial crises. For a government to \r\nsave the day so decisively without conditions, without changing anything\r\n about the problems and the structures that have created the crisis. It \r\ndidn’t make sense then, it doesn’t make sense now, and has created many \r\nproblems that we have to deal with going forward. 

Question:\r\n Why did the government act in that way? 

Simon Johnson:\r\n What they say is "We were scared of what would happen if we acted \r\notherwise." What we point out in the book in chapter two is these very \r\nsame people, these highly experienced, very well-qualified policy makers\r\n in the U.S. had, in the 1990’s, advised other countries who got into \r\ncrisis to do something quite different. They were always on the side of \r\nsaying, “No, as you seize the moment to turn around the economy and to \r\nprevent the crisis from getting worse, you must deal with some of the \r\nunderlying structural problems. If you don’t then all your efforts of \r\nrecovery will fail or all short-term benefits will prove illusory. You \r\nwill have more difficulty again.” It’s a very hard message to deliver, \r\nbut they delivered it repeatedly to other countries. They just couldn’t \r\napply it to the United States. 

Question: Why is the \r\nderegulation of banks responsible for what we’re dealing with now? 

Simon\r\n Johnson: Well, it is all about the deregulations, some which \r\nstarted, I would say, in the 1970’s, but the Reagan revolution was \r\nreally a big push for this. Reagan, himself, did not make that much \r\nprogress, partly because the Congress was in democratic hands. The big \r\nmove, though, came in the 1990’s when the Democrats had the White House \r\nand the spirit of Congress, both in its more Democratic and it’s more \r\nRepublican phases, was very pro-finance. 

So, there are many \r\nmoments you can point to, particularly around the failure to regulate \r\nover-the-counter derivatives, which was a key decision made in 1998 and \r\n1999 and 2000 there was some legislation. That really tipped the whole \r\nthing over. But, this process and this change has been building up for a\r\n considerable period of time and that of course is one of the things \r\nthat makes it hard to address quickly and to really deal with fast, \r\nbecause we’re dealing with a problem that’s built up over 30 years. 

Between\r\n the 1930’s and the mid-1980’s the banks were fairly well controlled. \r\nThere were tight regulations. Glass-Steagall Act actually had some teeth\r\n and some bite, so commercial banks could not go too much into \r\ninvestment banking, more speculative activities and the same was true \r\nwith the reverse as well. That was a good 50 years; it broke down from \r\nmid-1980’s. We need to go back to that post-World War II period when \r\nbanks were really held accountable. 

Question: Can we \r\nramp up existing legislation or do we need to start from scratch? 

Simon\r\n Johnson: Well, there is, of course, reform legislation on the \r\ntable. We think that could have gone in a much better direction. We \r\nthink what is likely to happen will be largely meaningless in terms of \r\nmaking the system less risky and addressing the too big to fail problem,\r\n the fact that these banks are just out of control. So, it will take \r\nlegislation. This legislation almost certainly will not do it; we’re \r\njust going to have to do it again. 

Question: How much \r\nregulation do you think is likely? 

Simon Johnson: \r\nWell, I think we will see some better protection for consumers and \r\nthat’s a good thing and we support that, but in terms of constraining \r\nthe size, limiting the activities of these massive banks that are seen \r\nby the markets as too big to fail and as a result, have this huge, \r\nunfair competitive advantage. They can borrow, by some estimates, 75, 80\r\n basis points, that’s 0.7, 0.8 of a percentage point, cheaper than other\r\n banks can borrow—that’s a huge difference in today’s market. We think \r\nthere will be nothing at all or make a difference to that perceived (and\r\n probably true) implicit government guarantee in backing those banks. 

Recorded on March 31, 2010

At a White House gathering in early 2009, the administration bailed out the banking system without addressing the problems on Wall Street that caused the financial meltdown.

Live on Tuesday | Personal finance in the COVID-19 era

Sallie Krawcheck and Bob Kulhan will be talking money, jobs, and how the pandemic will disproportionally affect women's finances.

Women who go to church have more kids—and more help

Want help raising your kids? Spend more time at church, says new study.

Pixabay
Culture & Religion
  • Religious people tend to have more children than secular people, but why remains unknown.
  • A new study suggests that the social circles provided by regular church going make raising kids easier.
  • Conversely, having a large secular social group made women less likely to have children.
Keep reading Show less

Bubonic plague case reported in China

Health officials in China reported that a man was infected with bubonic plague, the infectious disease that caused the Black Death.

(Photo by Centers for Disease Control and Prevention/Getty Images)
Coronavirus
  • The case was reported in the city of Bayannur, which has issued a level-three plague prevention warning.
  • Modern antibiotics can effectively treat bubonic plague, which spreads mainly by fleas.
  • Chinese health officials are also monitoring a newly discovered type of swine flu that has the potential to develop into a pandemic virus.
Keep reading Show less

Leonardo da Vinci could visually flip between dimensions, neuroscientist claims

A neuroscientist argues that da Vinci shared a disorder with Picasso and Rembrandt.

Christopher Tyler
Mind & Brain
  • A neuroscientist at the City University of London proposes that Leonardo da Vinci may have had exotropia, allowing him to see the world with impaired depth perception.
  • If true, it means that Da Vinci would have been able to see the images he wanted to paint as they would have appeared on a flat surface.
  • The finding reminds us that sometimes looking at the world in a different way can have fantastic results.
Keep reading Show less

Education vs. learning: How semantics can trigger a mind shift

The word "learning" opens up space for more people, places, and ideas.

Future of Learning
  • The terms 'education' and 'learning' are often used interchangeably, but there is a cultural connotation to the former that can be limiting. Education naturally links to schooling, which is only one form of learning.
  • Gregg Behr, founder and co-chair of Remake Learning, believes that this small word shift opens up the possibilities in terms of how and where learning can happen. It also becomes a more inclusive practice, welcoming in a larger, more diverse group of thinkers.
  • Post-COVID, the way we think about what learning looks like will inevitably change, so it's crucial to adjust and begin building the necessary support systems today.
Keep reading Show less
Quantcast