Big Think Interview With Simon Johnson | Big Think

Big Think Interview With Simon Johnson

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A conversation with MIT professor and Peter Institute for International Economics senior fellow.

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Simon Johnson:

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 Monetary Fund. He is the co-author, with James Kwak, of "13 Bankers," a recent book that assesses the U.S. financial sector's role in the economic crisis.

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TRANSCRIPT:

uestion: 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.

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