Simon Johnson was chief economist for the International Monetary Fund in 2007 and 2008. Now he is a professor at MIT, is a senior fellow at The Peterson Institute for International Economics, and blogs about the global economic crisis at The Baseline Scenario. For the last several months, he has been among the most vocal public economists warning that the US government's response to the crisis is far from enough. Now, in a new piece for the May issue of The Atlantic, Johnson warns that the very people who lead the way into the financial crisis--the management of America's biggest banks--are being given too much say in how to respond to the crisis.
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.
But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
Read The Quiet Coup from The Atlantic here.
Johnson has been making the rounds today to sound the warning in person. You can watch the five-minute version, from MSNBC:
Or for a more extensive, 50-minute version from On Point with Tom Ashbrook, download the podcast or listen here: