Simon Johnson, Big Banks, and the Populist Moment
The six biggest banks in America?
Bank of America.
JP Morgan Chase.
Together, they control assets equal to about 65 of GDP.
Twenty years ago, that number was about 15 percent of GDP.
Simon Johnson is the former chief economist at the International Monetary Fund.
He’s a Professor of Economics at MIT’s Sloan School of Management.
And he’s co-author of the book 13 Bankers.
He says that these six banks are too big to fail.
Soon, they might be too big to save.
As in Ireland.
Government rushes in to save it.
Johnson has a solution.
Break up the big banks.
And impose a hard cap on their size.
No bank should have assets of more than four percent of GDP.
Johnson has conservative support for this idea of breaking up the big banks.
Most notably, Alan Greenspan.
During the financial crisis, Greenspan defended the idea of breaking up the big banks.
“In 1911, we broke up Standard Oil,” Greenspan said. “So what happened? The individual parts became more valuable than the whole. Maybe that’s what we need.”
The hard cap on banks has lukewarm support in Congress.
During the debate over financial reform, the measure garnered 33 votes in the Senate (it was called the Brown-Kaufman amendment.)
Johnson doesn’t know whether we are approaching a populist moment similar to 100 years ago when Teddy Roosevelt led a charge against large industrial organizations – a charge that led to the break up of Standard Oil.
But don’t try to put the populist label on Johnson.
He rejects it.
“I’m not a populist of left or right,” Johnson told Corporate Crime Reporter in an interview last week. “I’m a centrist. I’m a technocrat. I’m a person who works on crises. And that’s been my work for 20 years. And the way in which the banks were treated in the last crisis was not best practice. It was very far from best practice. We set ourselves up for further trouble because we bailed them out so completely and protected all of the powerful people. So, my point is not a populist one at all. It’s a reformist point.”
“Roosevelt is the tradition we are trying to tap into here,” Johnson said. “Roosevelt had a populist element to him. But he was also a very mainstream character. What he really did was shift the mainstream view. In 1901, most mainstream business people and lawyers thought that big business was good business – more efficient and so on.”
“By 1911, when it came to break up Standard Oil, most people thought that big business could easily become too big for the social good. And in general, it needed to be broken up.”
“So, Roosevelt picked up some ideas from the populists, but he also mainstreamed them.”
Does Johnson see any evidence that we are approaching a populist moment in America?
“There is a lot of reaction to inequality in American society,” Johnson said. “Inequality has gotten worse over the last 25 to 30 years. Part of that is about finance. Part of it is not. There is a similar disquiet about what is happening, with various reactions – some coherent, some incoherent – just like was seen in the 1890s.”
“And that movement by the way never directly elected anyone. William Jennings Bryan got the Democratic nomination, but he repeatedly failed to become President.”
“But that movement did have a big effect on broader mainstream thinking.”
“So, we’ll see what happens. It’s still early. And people only now are waking up to the fact that America – as it has become less equal – has also become more dangerous to ordinary people – in terms of their livelihoods and their lives. And many people are very uncomfortable with that.”
Johnson says that had we not bailed out the big banks, there would have been world economic catastrophe.
“You come to the moment when they could fail – let’s say September or October 2008 – that’s my assessment,” Johnson said. “We followed these things very closely. We have a web site called baselinescenario.com – where we track these kinds of events day to day. If you had allowed those banks to fail at that moment, there would have been a global economic catastrophe.”
“But the point is to prevent such a moment from happening again. To create a situation where large financial institutions are small enough to fail.”