The Former IMF Chief Economist Talks About the Financial Collapse, the Bank Lobby, and What It Will Take to Fix Finance
Even if you’re not among the millions who have lost their jobs or homes in the wake of the financial crisis, there hasn’t been a day in the last couple of years that you’ve been able to avoid thinking or hearing about it. Whether it’s around the dinner table, at the water cooler, or on any piece of nightly news coverage or headline RSS feed, The Great Recession has dominated news cycles and shows no sign of stopping any time soon. Since the world’s economy went to the dogs in late 2008, there’s been no escape from the facts of the crisis, and for every fact it seems like there are a dozen or so opinions, courtesy of talking heads, finance gurus, and columnists of every stripe weighing in on what went wrong and what’s to be done about it. The saturation of voices speaking on the matter hasn’t exactly served it’s coverage – with so many voices speaking so loudly, it’s hard to know where to go for the real deal in smart analysis of the situation that you don’t need a PhD to digest.
But since the outset of the crisis, economist and policy expert Simon Johnson, alongside collaborator James Kwak, has been providing commentary that cuts through the daily dross and with incisive commentary on how things went so wrong and a bold, clear vision of how to fix it on their blog, Baseline Scenario. Blending top-tier financial wonkery with spoonfuls of sugar like statistical analysis of concepts like clutch players in the NBA, Baseline Scenario has earned its reputation as one of the most valuable and readable takes on the economic news of the day, week or year.
“I had just left the IMF [International Monetary Fund] at the end of August,” Johnson says of the inception of Baseline Scenario. “I was the chief economist there and responsible for the view of the organization on the global economy and a lot of the risks.” The plan for the blog, Johnson explains, was to bring that degree of informed conversation out of boardrooms and classrooms and present it to a broader audience without the strictures imposed by organizations like the IMF. “I felt that James and I should do something very similar, with a focus on explaining to people what was happening and talking about the various policy options and making recommendations, much like the IMF does. We’re able to speak more frankly and more clearly because of the format.”
Johnson and Kwak have recently fleshed out many of the ideas presented on the blog in a book, 13 Bankers, which dissects the lead up to the crisis and offers pragmatic plans for how to avoid the next one. PopMatters spoke with Dr. Johnson about the plan he and his co-author present for heading off the next financial sector meltdown. It’s a program that ranges from common sense notions like regulating risky derivative trading to more drastic steps like limiting the size of banking institutions, standing by the idea that in today’s globally connected banking sector, any institution that is ‘too big too fail’ is simply too big,
For a tome taking on such a dire, often gloomy subject – it’s not for nothing that economics is known as the dismal science, and when it breaks down in the grand fashion it recently did, there are few things uglier or more technically daunting than laying out the gory details - reaction to the book has been “very positive,” Johnson says. Touring behind 13 Bankers and getting the opportunity to hear different opinions on the problems the economic system faces from audiences around the country has been enlightening for Johnson as well, especially when he hears the near-universal appetite for reform, no matter what audience he’s speaking to. “You get into some debate about whether the particular policy proposals are right or wrong, and what the alternatives are, but as to the assessment that the big banks became too powerful, there’s a lot of support for that.”
It’s a brisk exchange of ideas that let’s Johnson bring a little bit of Baseline Scenario with him wherever he goes. “Of course we did discuss these things every day on the blog, and that’s the point of having a blog, that people can comment, and you can see where that discussion goes, and a lot of ideas we discuss in the book came from the blog.” But getting out of the “Washington bubble” is important to him as well. “I do talk all the time in Boston and DC about these issues,” Johnson says. “It’s good to get away from the east coast and see what people think about these points in the rest of the country. It’s encouraging, because people get what the situation is and know that it needs to be fixed.”
So how does Johnson propose to fix it? “I think we need to put constraints on the size of our largest banks, we need to force them to hold a lot more capital, we need to properly regulate derivatives. Those are the big items, as far as we’re concerned.” Sounds simple, right? But it is, of course, easier said than done. And the odds of the legislation that looks likely to pass later this month being the legislation we need are “slim,” says Johnson. “They’re not zero, and people are working very hard every day to push the legislation in the right direction. I have not given up. The corporate lobbies are vast and powerful and spending crazy amounts of money, but there are sensible people pushing for reasonable reform.” And is the Obama administration, which has made financial reform a keystone of its first term policy, among those sensible agents? Kind of, says Johnson. “I wish that the White House was pushing harder and faster, but…they are taking steps in the right direction.”
But in spite of the difficulty of passing meaningful reforms and the resistance of both lobbyists and lawmakers, Johnsons remains hopeful that legislation with teeth will get passed – at some point. “I think ultimately, we’ll get this fixed,” Johnson says, taking a long view of the problems at hand. “It may take five years, it may take ten years, I don’t think it’s only about this legislative cycle. I think we should get as much reform as we can right now, and then come back for more.”
Coming back for more legislation may, in the end, be what’s needed to prevent banks from coming back for more bailouts like TARP in the future. And that impetus should be enough to keep lawmakers working towards a solution, as Johnson points out that the debt incurred as a result of the bank bailout carries as many policy costs as it does fiscal ones. “Just look at the Tarp calculus – you have to consider all this extra debt that the government has had to issue to finance programs that were undertaken directly because of the financial crisis. Even if you confine it to the fiscal cost in terms of increased debt – leave aside eight million jobs lost, leave aside everything the federal reserve had to do, just look at the increase in net government debt held by the private sector – that’s about 40 percent of GDP, and that’s a doubling of our national debt from about 40 to 80 percent. That’s huge. We’re not going to make that back.” All the more reason, then, to do everything in our power to keep it from happening again.
With that in mind, one has to ask why it hasn’t been easier for legislators to set the agenda for financial reform. How, after months of hue and cry, do banks somehow remain in the driver’s seat? To Johnson, it seems a problem of not having seized an opportunity for real change when the bankers arrived in Washington with hats in hand. “The banks are very powerful, they spend a lot of money on lobbying, and they’re activities were not at all curtailed by the bailout,” points out Johnson. “The administration made a mistake in being overly generous to these banks and not breaking their political power and firing management when they rescued them,” Trusting that the big banks would demonstrate some gratitude looks in retrospect like a grave miscalculation. “I think they were hoping that the banks would be grateful and just behave themselves better going forward.” But memories for the bad times are short on Wall Street, especially when record profits buoyed by TARP assistance start rolling in.
Is there any good news to take from the current financial situation, in Johnson’s view? Some, perhaps. Though there may be a long slow climb ahead of us, he’s optimistic that the worst of the recession is finally in our rearview. “The odds of a double dip recession are not that great. I think the global economy is turning around. I think the jobs will come back, if slowly,” Johnson says. But while we may be out of the woods for now - or at least traveling on the right path again – Johnson holds a wary view of the world’s economic future. “This will qualify as a long and painful recession. But in terms of going forward, I think we have not addressed the problems, and we’re going to face serious financial risks in the future.”
- Johnson and Kwak's Blog Baseline Scenario