In new book, Simon Johnson warns of next financial meltdown
In 13 Bankers, the MIT Sloan professor and former IMF chief economist calls for breakup of nation’s biggest banksCAMBRIDGE, Mass. — Channeling Thomas Jefferson and Theodore Roosevelt, MIT Sloan School of Management Professor Simon Johnson warns in a book being released tomorrow that a “new financial oligarchy” threatens not only the nation’s economy, but its political core. In 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon), Johnson, a professor of entrepreneurship and management, says the book provides “the back story” for the 2008 financial crisis “and for all the issues being raised now around financial reform. We hope the book helps people have a badly needed conversation about what we must do to push back against dangerous, narrow interest groups that now threaten our economic well-being.”
In 13 Bankers, Johnson, a former chief economist for the International Monetary Fund, and co-author James Kwak cite historical precedents and offer financial analysis to conclude that a second financial shock is inevitable unless the financial and political stranglehold held on Washington by the nation’s biggest banks is broken. “The best defense against a massive financial crisis is a popular consensus that too big to fail is too big to exist,” the authors write. “This is at its heart a question of politics, not of economics or of regulatory technicalities.”
The book points out that the current concentration of financial and political power is not unlike other moments in American history. President Theodore Roosevelt, for example, challenged the monopoly powers of banker and industrialist J.P. Morgan. “No one thought he could win,” Johnson says in an interview, “but he did succeed in the first prosecution of a corporation under the Sherman Antitrust Act.” Roosevelt, he said, began a process that helped people understand the need to rein in the power of corporate giants, such as John D. Rockefeller’s Standard Oil, “which was arguably more important as a single company in 1910 than J.P. Morgan was then or J.P. Morgan Chase is now,” says Johnson.
Similar leadership is needed from the Obama administration and Congress now, according to 13 Bankers, which concludes that regulatory changes and other responses to date have been vastly inadequate. Johnson supports the administration’s proposed consumer protection measures, but overall, “You can’t just tweak a few rules and expect to rein in these big institutions.” Instead, the book calls for the six biggest banks to be broken up and for hard limits to be imposed so that banks cannot rebuild themselves into political and financial powerhouses. “Saying that we cannot break up our largest banks is saying that our economic futures depend on these six companies,” notes 13 Bankers. “That thought should frighten us into action.”
Johnson knows that such bold action may seem unlikely in the face of today’s polarized politics and powerful lobbyists. “But the debate is just beginning,” he says. “We must first cast a lot of sunshine on the bankrupt ideology and entrenched corporate interests” that caused the last financial crisis and will trigger the next one, which Johnson cautions will trigger even greater economic aftershocks than those associated with the 2008-2009 crisis. “Losing 8 million jobs was awful enough, but unless we act, the economic consequences of the next financial crisis will be cataclysmic. Do we really want to wait for another Great Depression?”
Johnson hopes his book will lead to further discussions about current and future policies. “The broad, mainstream consensus on what is good finance and bad finance is shifting, as is the recognition of the dangers of too much power in the hands of a few banks,” says Johnson. “A lot of very serious people at MIT Sloan and elsewhere are largely on our side on this. Far from crazy radicals, we are the middle.”
Johnson hopes that 13 Bankers, already in its second printing due to demand, ends up being seen as a timely guide, identifying basic issues that must be fixed. “There are lots of incredibly difficult problems in the world, such as poverty,” he says. “What we discuss in the book is an open and shut case on the merits. We know what we need to do. And we know that terrible damage will follow if we don’t.” Johnson is also co-founder of BaselineScenario.com, a widely cited web site on the global economy.