The Crisis This Time

This morning at the American Economic Association (AEA) meeting in Atlanta, I was on a panel, “Global Financial Crises: Past, Present, and Future,” with Allen Sinai (the organizer), Mike Intriligator, and Joe Stiglitz.

The Wall Street Journal’s RealTime ran a summary of my main points: growth in 2010 may be faster or slower – depending on how lucky we get- but, either way, the most serious problem we face is that 6 banks in the U.S. are now undeniably (in their own minds) Too Big To Fail. 

Reckless and mismanaged risk-taking is the sure outcome.  But don’t take my word for it – read Larry Summers’s 2000 Ely Lecture to the AEA.  The best line is on p.13, “[I]t is certain that a healthy financial system cannot be built on the expectation of bailouts” (American Economic Review, vol. 90, no. 2; access through your library).

A number of participants asked for a copy of my slides – please use this version (in addition there was some other material that will appear shortly in 13 Bankers, so we’re not putting it on the web yet).

By Simon Johnson

19 responses to “The Crisis This Time

  1. So has Summers changed his mind, or did he never believe his own words?

    Serious question.

  2. Ya, actually a public library or college library is the best place to pick up those journals. I used to occasionally read the old fashioned print journals when I was in University. I’m guessing you would access those on computer now, but you should be able to get them for free at a library.

    Rubbing elbows with Stiglitz has to be cool. I would be the goofy rube asking him for his autograph.

  3. Summers: “[I]t is certain that a healthy financial system cannot be built on the expectation of bailouts”

    Bailouts are hardly new. I guess that means that we have had an unhealthy financial system for at least 100 years.

  4. He believed in imposing every kind of austerity upon any country small enough to bully who was in the position America is in now.

    But now that it’s America in that same position, he advocates doing the exact opposite of every thing he ever demanded for the weak.

    He’s just a gutter bully, plain and simple, and a perfect example of how the powerful demand that those less powerful live up to practices and “ethics” they themselves don’t live up to and never intend to live up to.

    So he hasn’t changed his mind, it’s just that what he advocates is directly proportionate to the power of the recipient.

    If America somehow “recovered” and we got back to business as usual, and a few years down the road a smaller country got into this kind of difficulty, he’d be right back imperiously demanding the harshest structural adjustments.

  5. maynardGkeynes

    Might not the difference be that the US is not similarly situated in this regard? A country with the world’s largest economy, the reserve currency, and debt instruments that sell at negative interest rates in times of crisis, is not exactly in the same position as say, Mexico.

  6. Congress just needs to cap future bailouts, no dollars beyond Foodstamps-For-Bankers, should take care of the problem.

  7. We got the framing of this all wrong. I used to argue for nationalization, but now I realize we should have urged Congress to ‘privatize’ the TBTF banks. They need to get off our support systems and stand on their own two feet. Privatize is a word they like. Maybe they’d go for it.

  8. D. Christopher Leonard

    Do as I say, not as I do. Why should it come as a surprise that a hegemonic power prescribes for others what it has no intention of doing itself? The big surprise is that so many (readers of this blog inclusive) seem to think that there are ‘technical’ policy answers to political-economic problems that have to do with elites and the state.

  9. Please! There is and was absolutely no reason to bail out any financial institutions. It’s all about grift and graft and the regulators and legislators aiding and abetting the robbery of the citizenry by the banksters.

    The government could have become the lender of last resort sooner rather than later, as spared us all the “highway robbery” and moral hazard of pumping insane amounts of money into TBTFs. I mean, come on, the Geithner stealth move on Christmas eve is essentially the last step to the complete nationalization of the mortgage market. Mmm…so tell me why we needed to pump money into the financial sector? Oh yeah, so they could pump the market and give themselves monstrous sized bonuses!

    As it has been said, if an organization is too big to fail, it is too big to exist. These “banks” and their shareholders and creditors should have been left alone to crash or wither, and the government should have covered depositors and transitionally provided loans (well underwritten loans). Instead, the public coffers are stacked with massive debt, while the banksters laugh their a##es off as they take off in their Lear jets.

  10. “A number of participants asked for a copy of my slides – please use this version”

    For me slide # 10 tells it all. The early 1980s, when the microprocessor took control of data management. Any semblance of a proper book-keeping left with the non-book-keepers who took control of programing accounting data. The core problem here is bad book-keeping software.The government is supporting Ponzi Schemes in an effort to bring mismanaged finance under control. It’s not going to work.

    But you nedn’t take my word for it. The continued absurdity of badly programmed financial control systems will tell the next chapter of this story on its own, and quick enough with that sudden rise of that flat curve up until 1982.

  11. Richard Hoogesteger

    Excellent presentation though as I have mentioned before I agree with the view that bringing back Glass-Steagall is more important than the size of the banks.

  12. Summers, what a schmuck!! I knew that he had changed his tune, but I have come to the conclusion that what tune he sings has nothing to do with his beliefs. I think he sold out long ago, and now realizes, since he is in his present position of immense influence, that he needs to sing for his cronies and not for us. I am not certain that he has any actual beliefs, but I am sure that he needs to go, along with Tim and Ben.

  13. Might not the difference be that the US is not similarly situated in this regard?

    That’s what I said: America will automatically play the vicious, hypocritical bully to whatever extent it retains the power to do so.

    But don’t worry, the US is headed Mexico’s way. As Simon’s excellent article said, it’s a banana republic. It’s a zombie still staggering only on inertia by now.

    (I only used the example of a “recovered” US for the sake of argument.)

    Though perhaps some of the worst could have been averted if they had imposed austerity at the TOP where it belongs. But the reason cancerous oligopolies are doomed is because they cannot do such things. They’re structually maladaptive beyond redemption.

    Indeed America might have been better off if there had been someone to play some kind of disciplinarian role. It might have been forced to compromise with reality and, god forbid, morality, at least to some extent.

  14. excellent presentation

  15. maynardGkeynes

    @Russ, I also think that what they did with those countries was unfair. My only point was that imposing the same type of austerity on the US economy like they did with Korea, etc. would be an even bigger error, as it would cause a lot of harm not only in the US, but in poorer countries that trade with us. On the other hand, we can’t go on this way for much longer without bankrupting ourselves, and also I think that the system is seriously imbalanced in favor of the corporate state. Simon Johnson’s slide show alludes to the corporate over-grazing of the commons, which could lead to its own destruction. Can anything stop it before that? Reason to worry, because the political system is completely captured at this point.

  16. Everyone of these jags is a multi-millionaire. Do we really think they give a rat’s about the nation as they Naples-Switz-Aspen-it?

    As Pitino mocked, ‘Eisenhower, Roosevelt, and Roosevelt’ are not walking through that door”. No Hall of Famers left in this entire country?

  17. Summers is a member of the GS gang (and Tim too). Thats why Buffett did it exactly right.

    Bought at 70, sold at 160.

  18. “As it has been said, if an organization is too big to fail, it is too big to exist. ”

    I would say that applies to corporations.

    Democratic governments are different, which is why we have them do the things which *have* to be done by ‘too big to fail’ institutions.

    If a democracy fails, the idea is that we can elect a different crew of people to run it. Now, in the US, we have a sclerotic and broken system of “democracy” (proportional representation now, please, and a national holiday for Voting day, and abolition of the Senate and the Electoral College), so unfortunately this has not really worked right.

  19. Actually, Summers has a perfect history of being wrong about *everything* and then later admitting that he was wrong and changing his mind. Look at his pigheaded sexist remarks which got him sacked from Harvard. He eventually owned up to being wrong.

    The trouble is that this is his entire *career* — strongly advocating the wrong thing long after practically everyone who’s *really* studied it knows it’s wrong, and seeing the light very very late.