Who’s To Blame for the Financial Crisis?

The system of beliefs and incentives caused the financial crisis, says Simon Johnson.
  • Transcript


Question: Does anyone in particular deserve blame for the financial crisis? 

Simon Johnson: It’s not a conspiracy. It’s not an individual financial firm, for example. It’s a system. It’s a system of beliefs and a system of incentives that caused a lot of trouble before and it now remains in place and I would say it’s an ideology. I live in Washington. I interact with them every day. I argue this out. We have the blog where this goes on all the time and the book is just really meant to reinforce and push these points further. But, these people—these very, very powerful people believe that finance is good; unregulated finance is better and huge financial firms essentially unfettered in what they do around the world are the best. 

This is wrong. This is incorrect. I’m not a radical of left or right. I’m a centrist. I’m an IMF technocrat if you like. I’m a professor and we bring a lot of people with us on this point. We have a lot of blurbs in the book from people across the political spectrum. The structure we have right now is wrong, it is dangerous, it must be stopped. 

Question: Is there any value in large banks being as big as they are? 

Simon Johnson: There is no value to the banks of their current size. There is no evidence, and we go through this in the book and we’ve debated this with all the leading people on the other side. There is no evidence that banks over $100 billion in scale confer benefits on society. Now, we’re looking at banks that are $2 trillion, $2.5 trillion, which is the case of Citigroup before the crisis. Of course, there's bigger bonuses for the guys who work there and the guys who run it, but all society is getting is this big, downside risk, these massive crises. Push them back to a couple hundred billion dollars. That’s our point. And then you get plenty of benefits from the scale and less danger. 

Question: Was the financial meltdown the result of a conspiracy? 

Simon Johnson: No, there's no conspiracy. Conspiracies, honestly, would be relatively easy to root out and expose and fight against. This is not a conspiracy. This is a system of beliefs. This is the way people think. This is what they have come to convince themselves of because Wall Street did so well, because they made so much money, became very prestigious and a lot of people drank the Kool-Aid, if you like. The belief is this is the way it’s got to be and that’s what we’re fighting against. This book is a counter on the ideological, on the belief system and we have the evidence, we have the facts, we have a lot of people on our side. 

Question: Have Washington’s actions so far made another meltdown more or less likely? 

Simon Johnson: Oh, they made it more likely. I mean, that’s the point of keeping the bankers in place and keeping their entire incentives in place. Look, they weren't even embarrassed by what happened. Okay, maybe there were 20 minutes that it was a little bit awkward, but that’s it and these people, I can assure you, have no remorse. And, as far as they're concerned, it was a great trade. They made a lot of money. That’s what they care about, the bottom line. They did well out of this. Make no mistake, they’ll do it again.

Recorded on March 31, 2010