Simon Johnson is a Professor of Entrepreneurship at MIT Sloan School of Management. He is a co-founder of the economic blog BaselineScenario.com, and the former Chief Economist at the International[…]
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The system of beliefs and incentives caused the financial crisis, says Simon Johnson.
Question: Does anyone in particular deserve blame for the rnfinancial crisis?
Simon Johnson: It’s not a rnconspiracy. It’s not an individual financial firm, for example. It’s a rnsystem. It’s a system of beliefs and a system of incentives that caused arn lot of trouble before and it now remains in place and I would say it’s rnan ideology. I live in Washington. I interact with them every day. I rnargue this out. We have the blog where this goes on all the time and thern book is just really meant to reinforce and push these points further. rnBut, these people—these very, very powerful people believe that finance rnis good; unregulated finance is better and huge financial firms rnessentially unfettered in what they do around the world are the best.
Thisrn is wrong. This is incorrect. I’m not a radical of left or right. I’m a rncentrist. I’m an IMF technocrat if you like. I’m a professor and we rnbring a lot of people with us on this point. We have a lot of blurbs in rnthe book from people across the political spectrum. The structure we rnhave right now is wrong, it is dangerous, it must be stopped.
Question:rn Is there any value in large banks being as big as they are?
Simonrn Johnson: There is no value to the banks of their current size. rnThere is no evidence, and we go through this in the book and we’ve rndebated this with all the leading people on the other side. There is no rnevidence that banks over $100 billion in scale confer benefits on rnsociety. Now, we’re looking at banks that are $2 trillion, $2.5 rntrillion, which is the case of Citigroup before the crisis. Of course, rnthere's bigger bonuses for the guys who work there and the guys who run rnit, but all society is getting is this big, downside risk, these massivern crises. Push them back to a couple hundred billion dollars. That’s our rnpoint. And then you get plenty of benefits from the scale and less rndanger.
Question: Was the financial meltdown the rnresult of a conspiracy?
Simon Johnson: No, there's norn conspiracy. Conspiracies, honestly, would be relatively easy to root rnout and expose and fight against. This is not a conspiracy. This is a rnsystem of beliefs. This is the way people think. This is what they have rncome to convince themselves of because Wall Street did so well, because rnthey made so much money, became very prestigious and a lot of people rndrank the Kool-Aid, if you like. The belief is this is the way it’s got rnto be and that’s what we’re fighting against. This book is a counter on rnthe ideological, on the belief system and we have the evidence, we have rnthe facts, we have a lot of people on our side.
Question:rn Have Washington’s actions so far made another meltdown more or less rnlikely?
Simon Johnson: Oh, they made it more likely. Irn mean, that’s the point of keeping the bankers in place and keeping rntheir entire incentives in place. Look, they weren't even embarrassed byrn what happened. Okay, maybe there were 20 minutes that it was a little rnbit awkward, but that’s it and these people, I can assure you, have no rnremorse. And, as far as they're concerned, it was a great trade. They rnmade a lot of money. That’s what they care about, the bottom line. They rndid well out of this. Make no mistake, they’ll do it again.
Simon Johnson: It’s not a rnconspiracy. It’s not an individual financial firm, for example. It’s a rnsystem. It’s a system of beliefs and a system of incentives that caused arn lot of trouble before and it now remains in place and I would say it’s rnan ideology. I live in Washington. I interact with them every day. I rnargue this out. We have the blog where this goes on all the time and thern book is just really meant to reinforce and push these points further. rnBut, these people—these very, very powerful people believe that finance rnis good; unregulated finance is better and huge financial firms rnessentially unfettered in what they do around the world are the best.
Thisrn is wrong. This is incorrect. I’m not a radical of left or right. I’m a rncentrist. I’m an IMF technocrat if you like. I’m a professor and we rnbring a lot of people with us on this point. We have a lot of blurbs in rnthe book from people across the political spectrum. The structure we rnhave right now is wrong, it is dangerous, it must be stopped.
Question:rn Is there any value in large banks being as big as they are?
Simonrn Johnson: There is no value to the banks of their current size. rnThere is no evidence, and we go through this in the book and we’ve rndebated this with all the leading people on the other side. There is no rnevidence that banks over $100 billion in scale confer benefits on rnsociety. Now, we’re looking at banks that are $2 trillion, $2.5 rntrillion, which is the case of Citigroup before the crisis. Of course, rnthere's bigger bonuses for the guys who work there and the guys who run rnit, but all society is getting is this big, downside risk, these massivern crises. Push them back to a couple hundred billion dollars. That’s our rnpoint. And then you get plenty of benefits from the scale and less rndanger.
Question: Was the financial meltdown the rnresult of a conspiracy?
Simon Johnson: No, there's norn conspiracy. Conspiracies, honestly, would be relatively easy to root rnout and expose and fight against. This is not a conspiracy. This is a rnsystem of beliefs. This is the way people think. This is what they have rncome to convince themselves of because Wall Street did so well, because rnthey made so much money, became very prestigious and a lot of people rndrank the Kool-Aid, if you like. The belief is this is the way it’s got rnto be and that’s what we’re fighting against. This book is a counter on rnthe ideological, on the belief system and we have the evidence, we have rnthe facts, we have a lot of people on our side.
Question:rn Have Washington’s actions so far made another meltdown more or less rnlikely?
Simon Johnson: Oh, they made it more likely. Irn mean, that’s the point of keeping the bankers in place and keeping rntheir entire incentives in place. Look, they weren't even embarrassed byrn what happened. Okay, maybe there were 20 minutes that it was a little rnbit awkward, but that’s it and these people, I can assure you, have no rnremorse. And, as far as they're concerned, it was a great trade. They rnmade a lot of money. That’s what they care about, the bottom line. They rndid well out of this. Make no mistake, they’ll do it again.
Recorded on March 31, 2010
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