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Simon Johnson
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February 13, 2009

On Tuesday, February 10, 2009 Treasury Secretary Timothy Geithner unveiled the Obama administration's plan to address the crisis in the financial sector. The strategy he outlined calls for the largest Federal intervention in banks and finance since the Great Depression, flooding as much as $2.5 trillion into the system. Given its size and scope — the bill's lack of detail drew a widely negative response from analysts and economists.

Although he thinks the details are important, Simon Johnson, Professor of Economics at MIT, worries more that Geithner and the Obama administration won't address a big underlying problem and be tough enough on the politically powerful banking lobby.

Too Big To Fail?
Johnson explains to Bill Moyers on the JOURNAL that the U.S. financial system reminds him more of the embattled emerging markets he encountered in his time with the International Monetary Fund than that of a developed nation. As such, Johnson believes that the U.S. financial system needs a "reboot," breaking up the biggest banks, in some cases firing management and wiping out shareholder value. Johnson tells Bill Moyers that such a move wouldn't be popular with the powerful banking lobby: "I think it's quite straightforward, in technical or economic terms. At the same time I recognize it's very hard politically."

Without drastic action, Johnson argues, taxpayers are merely subsidizing a wealthy powerful industry without forcing necessary systemic changes: "Taxpayer money is ensuring their bonuses. We're making sure that banks survive. And eventually, of course, the economy will turn around. Things will get better. The banks will be worth a lot of money. And they will cash out. And we will be paying higher taxes, we and our children, will be paying higher taxes so those people could have those bonuses. That's not fair. It's not acceptable. It's not even good economics."

Johnson expands these arguments on his blog, THE BASELINE SCENARIO:

"[W]eakening the big banks and their bosses should not be seen as an unfortunate side effect of beneficial medicine. It is exactly what we need to do under these circumstances. Unless and until these banks' economic and political influence declines, we are stuck with too many people who know exactly what they can get away with because their organizations are "too big to fail."

And weakening these banks (or actually having some of them go out of business and be broken up) as part of a comprehensive system reboot - with asset revaluations at market prices and a complete recapitalization program - will help return the credit system to normal.

Simon Johnson
Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at MIT's Sloan School of Management, a position he has held since 2004. He is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C., and co-founder of a website on the global economic and financial crisis, THE BASELINE SCENARIO. He is co-director of the NBER project on Africa and President of the Association for Comparative Economic Studies (term of office 2008-09).

From March 2007 through the end of August 2008, Professor Johnson was the International Monetary Fund's Economic Counsellor (chief economist) and Director of its Research Department. At the IMF, Professor Johnson led the global economic outlook team, helped formulate innovative responses to worldwide financial turmoil, and was among the earliest to propose new forms of engagement for sovereign wealth funds. He was also the first IMF chief economist to have a blog.

In 2000-2001 Professor Johnson was a member of the US Securities and Exchange Commissions Advisory Committee on Market Information. His assessment of the need for continuing strong market regulation is published as part of the final report from that committee.

Johnson is an expert on financial and economic crises. As an academic, in policy roles, and with the private sector, over the past 20 years he has worked on crisis prevention, amelioration, and recovery around the world, in both relatively rich and relatively poor countries. His work focuses on how policymakers can limit the impact of negative shocks and manage the risks faced by their countries.

Johnson has worked with most of the leading research organizations focused on global economic stability. He remains a Research Associate at the NBER, a CEPR Research Fellow, a BREAD affiliate, a member of the Advisory Group at the Center for Global Development (CGD) in Washington D.C., a member of the International Advisory Board of CASE in Warsaw, and a non-resident Research Fellow at the Asian Institute for Corporate Governance of Korea University. In 2006-07, he was a Visiting Fellow at the Peterson Institute for International Economics in Washington D.C.

Recent papers have appeared or are forthcoming in THE AMERICAN ECONOMIC REVIEW, THE JOURNAL OF POLITICAL ECONOMY, THE QUARTERLY JOURNAL OF ECONOMICS, THE JOURNAL OF FINANCIAL ECONOMICS, and THE JOURNAL OF FINANCE. He is on the editorial board of THE JOURNAL OF FINANCIAL ECONOMICS, THE REVIEW OF ECONOMICS AND STATISTICS, THE JOURNAL OF COMPARATIVE ECONOMICS, and CLIOMETRICA (a new Journal of Historical Economics and Econometric History).

His PhD is in economics from MIT, while his MA is from the University of Manchester and his BA is from the University of Oxford. Published February 13, 2009.

Guest photo by Robin Holland.

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References and Reading:

"Geithner Said to Have Prevailed on the Bailout"
By Stephen Labaton and Edmund L. Andrews, NEW YORK TIMES, February 9, 2009.

"Bank Test May Expand U.S. Regulators' Role "
By Eric Dash, NEW YORK TIMES, February 11, 2009

"Bailout Plan: $2.5 Trillion and a Strong U.S. Hand"
By Edmund L. Andrews and Stephen Labaton, NEW YORK TIMES, February 10, 2009.

"Congressmen Hear from TARP Recipients Who Funded Their Campaigns"
by Lindsay Renick Mayer, CAPITAL EYE, February 10, 2009.

"So what is the plan?"
By Mark Thoma, THE ECONOMISTS VIEW, February 10, 2009.

"Special Report: A World of Trouble"
Get up-to-date international news and perspective from GlobalPost.

Simon Johnson

"Axelrod And Emanuel Were Right (On The American Bank Oligarchs)"
By Simon Johnson, THE BASELINE SCENARIO, February 10, 2009.

"High Noon: Geithner versus the American Oligarchs"
By Simon Johnson, THE BASELINE SCENARIO, February 8, 2009.

"Baseline Scenario for 2/9/2009 (11pm edition, February 8)"
By Peter Boone, Simon Johnson, and James Kwak, THE BASELINE SCENARIO, February 9, 2009.

"Global Economic Outlook (Senate Testimony)"
By Simon Johnson, THE BASELINE SCENARIO, January 29, 2009.

Published February 6, 2009.

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