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Who’s To Blame for the Financial Crisis?

Question: Does anyone in particular deserve blame for the \r\nfinancial crisis? 

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

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

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

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

Question: Was the financial meltdown the \r\nresult of a conspiracy? 

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

Question:\r\n Have Washington’s actions so far made another meltdown more or less \r\nlikely? 

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

Recorded on March 31, 2010

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

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