institute press international economics in washington d.c.. he is co-founder of the baseline scenario.com focusing on the world economy and is a member of the congressional budget office panel of economic advisers. in january of this year he joined the huffington post as contributing business editor. prior to joining the faculty of m.i.t. dr. johnson was the chief economist with the international monetary fund, received his ph.d. from mit, holds an m.a. from the university of manchester and a b.a. from oxford. following his remarks professor johnson will be taking questions from the audience so if you have a question i asked you to wait for the microphone that willoughby brought around to you in order the video equipment will be able to pick up the question. now, please join me in welcoming prof. simon johnson. [applause]

>> thank you very much everyone, i thank you for taking time on this beautiful summer evening in early april to come and listen to a talk indoors. the -- i would like to talk to you obviously about the financial system and the situation we find ourselves in today and i think this is a very good day and a very good moment to have this conversation. i just came from capitol hill from one of many briefings and sure are going on but people are grappling with the question of legislation should be passed or not passed that will try and prevent a major a financial meltdown from happening again. we faced in september 2008 as you know an enormous economic and financial calamity and it seems only reasonable and completely consistent with the

nature of american democracy that we would fix this. something bad happened, we can argue about the details and again that's a very democratic abbas, we have an administration that is packed with experienced professionals, we have a political process that has had a good reputation taking on and facing down major problems. so where are we on fixing the system that got us into such trouble? well, i would say quite honestly and bluntly and hopefully we will discuss this to the evening, i would say we are nowhere. i would say we're at square zero. the legislation before congress currently does not fix in my view the essence of the problem, the heart of the matter in

september 2008 the months that followed, and in march 2009 when 13 bankers came to the white house to be saved. the essence of that problem is known as an accurately known as too big to fail. those 13 banks and bankers who represented them were saved unconditionally by the obama administration and when you talk to senior people in the obama administration and i do talk to them and take them very seriously. i don't know they take me seriously but they do talk to me. they say they had to save those 13 bankers, they had to say that the financial system, i do agree -- our economy can't question without credit, i thank you all know that -- but they insist they had to save these 13

bankers, their jobs, their bonuses, their pensions, their perks, their boards of directors, their key starts, their empires, their attitudes. they couldn't ruffle a rather on their backs -- you get the general idea -- they couldn't disturb a hair on their head without causing a deeper recession and increasing the probability of a major and financial calamity. i don't actually think that's true and in the book we go in detail why we think the government -- this administration had other options in march last year, but just assume it's true. assume for a moment that there right and that is an accurate statement of fact. that's extraordinary. that's incredibly dangerous. that means we have a small number of financial institutions, small number of people who essentially have the ability to export to money in

various kinds of other support from the state. that's incredible. that's not without precedent perhaps in american history, we will talk about historical examples through the evening, but that's terrible. these banks are so big that you can't allow them to fail, that's pretty scary, but if you must save them without disturbing anything about their incentives or attitudes, you have an enormous problem. let me tell you one of my punchlines in the book and one of the key points i was trying to hammer home on capitol hill just out. our largest banks -- the largest six banks because it does come down to these -- the largest six banks have a balance sheet, total assets size of the bank which is 63% of gdp, that's

pretty big, what were they before the prices? 2005, 2007, they were smaller. they reduce export 58% of gdp. what were they in 1995? the same banks of predecessors -- 17 percent of gdp. there are getting bigger. of course, there are, they were bailed out and save and allowed and encouraged by other banks. the cost of running today in the credit markets is estimated i think accurately to be between 75 and 80 basis points lower than other banks, some -- .8 percentage points -- that's a big funding advantage. jaime diamond, the ceo of jpmorgan chase among one of the more successful banks recently said in a letter to his shareholders just this week that it would get big because we win because we are good we should be allowed to reach any size we want. that's the free market. well, that's not the

free-market. we do not have a free market -- we have a too big to fail on their advantage. if you run a massive bank and i'm just assuming that none of you do because they don't usually come in here talk. [laughter] i'd be happy to have a debate in anyone's here. if you have a massive bank to have a tremendous and their advantage right now. you are too big to fail, you will be saved in the credit market recognizing that. and, of course, you are going to get bigger. there's nothing in jaime diamonds job description as head of jpmorgan chase that says he's responsible for american or global financial stability. i haven't seen his job description but i'm confident in assuming that. in his job description is to make money for shareholders and colleagues said j.b. morning chase. we can discuss how well he does it for the shareholders but certainly the insiders have done well and you seen the latest figures.

2009 total conversation on wall street was higher than it's ever been. compensation was down but the conversation who work in the banks was shot. the ceo of wells fargo just got a big -- we've seen the details of a big cash bailout in 2009 cash which is exactly what the administration asked them not to do. in march 2009 president obama said, please be careful going for it and behavior cells and don't take reckless risks and we presume he said the please bring in the compensation, none of which they've done. john stump got paid a very big cash salary which is exactly contrary to what the administration asked inç compensation. when questioned about why he would get so much cash the spokesperson for wells fargo said we had a good year in 2009. they didn't have a good year, they were saved by the american

taxpayer, by the i think excessive generosity of this administration. it's extraordinary. the attitude of these people and nothing now i say, nothing in the book is vindictive, nothing is intended to get back to these people, this is just forward-looking. this talk about the future. we can argue actually and have an interesting argument about the extent to which the big banks perceive them to be too big to fail before september 2008, that's an interesting conversation. but that's not my focus of the book. the question is now do they think they're too big to whale. boardman sacks -- goldman sachs, if they have failed and had a rock and i don't know how you'd follow this on a daily basis by to greet bonds brands brings in

more trouble could then anticipated and who knows what kind of exposure these big banks have for example through their derivatives off balance sheets and transactions. i'm not saying in a once in trouble but let's imagine the goldman sachs it's a big rock today, tomorrow. could they fail? could they go bankrupt? no, absolutely not, they would be saved by the government. the consequently -- it is far too dramatic and dangerous. with a bill passes the legislation in the form currently proposed in the senate, what if that passes or something close to that? would they let: sex fail? would go into bankruptcy? no. not in my assessment and beacon discuss the details. and this makes some of my friends on capitol hill quite upset when i say it. i used to work at the imf.

the job at the imf i understand is to tell you the harsh reality, they unfortunately can't articulate that with regard to the united states though. i will do it. [laughter] it is a nasty truth. it's very unpleasant. i'm sympathetic to people pushing for reform, we are not there yet. so where are we? how do we get here? and where should we go perhaps moving forward. treasury secretary tim geithner says we just had a 30 year or 40 year flood, very unusual bad law, we should do some actions in case of the next time. 40 years doesn't sound too bad. it's an interesting thing here hank paulson in his memoir, former secretary paulson says major financial crisis in 46

years and jaime diamonds says it's every five to seven and larry summers said four to eight years, you get the picture. there's something happening in the financial system with some regularity. how big will it be next time? that's the key question. tim geithner says these things are rare, but that assumes looking at random occurrences and we haven't changed our structure. i would say the levees, the protecting against flood have been undermined over the past 30 to four years and we should worry about is more regular shocks, identified by mr. paulson and mr. summers, hitting us before it had a chance to strengthen the levees and we haven't strengthen them as i thank you know because powerful players in the financial sector and their allies to not want reform. they see it as contrary to their interests. and it is, i think to the people who run the biggest banks. is not contrary to our interests

and the interests of society. secretary tim geithner also says in this regard we won't lose much money. on the rescue package. we may actually make money on the top which is the program at injecting capital into the biggest banks as you recall. it will lose money on that it will be because of the car companies and aig. well, that's not the right math. right way to think about the cost of the crisis, one is a million jobs lost since december 2007, as dramatic, completely unnecessary and we're struggling with high unemployment going forward. you can also worry what the federal reserve has had to do and what that's done to the credibility of the federal reserve. going forward, that's an interesting very important discussion. but i would focus on the fiscal cost of on the balance sheet of the government what is the increase in and government debt to rebel lead -- militant to the

economy held by the private-sector. as a poor measure, what i would focus on of how much the government is in debt. this was about 40 percent of gdp before the crisis. and i am on a panel of economic advisers to the cbo when these numbers i will give you a ermine not theirs but i would say that their numbers are moving in my direction as advised, my estimate would double debt to gdp and 40 to 80% as a result of this crisis and all the measures that the government was forced to take in order to reduce the likelihood of a massive depression and make sure it turned out only to be a great recession. if a world recession. but i think it would have been worse without those counteracting measures. that's a big increase in debt. that's not enough to sink the country, that's not enough to

cause a crisis, it doesn't turn us into greece and goodness, but is completely unnecessary, unwarranted and the bigger picture and we haven't fixed the problem. we have not fixed the financialp company in september 2008 as a way to save it from collapse.

it has access to the fed discount window. in his private equity investments to well, i can assure you they will make out like bandits. to use a technical term. [laughter] if it goes badly, whose problem is that perhaps it is a bank. it is a bank with access to the fed discount window, we do not let them fail, we cannot let them fail. and goldman says if that's your attitude, simon, we will stop being a bank -- wait a minute, you became a bank in order to save you. your investment bank before, rather lose not entirely accurate term, but not regulated by the federal reserve. and it took a lot of risk and they were on the verge of failing. they say through no fault of their own. again in the book we beg to differ. if you let them out at this size with these characteristics with this relationship to the rest of the financial system and get into trouble again, you let them

become a bank and then -- you may promise of an down we won't do it honestly we promise. you can pass a law that and as many as to what. at the end of the day when faced by the financial calamity the government of this country will always have emergency powers to do what it takes to save the day. that's the nature of american power and executive power in the united states and if you don't like it you can sue them a ticket to the supreme court and good luck in that case. they blend goldman back in. but that's not the worst of it. too big to fail is bad and has these characteristics, but that's not the worst, that's not the worst. the worst is too big to fail. if you look at what's happened in europe and what they allow the big banks to do, look at the case of ireland with the case of the united kingdom, the united

kingdom royal bank of scotland became one bank. it became 1.5 balance sheet 1.5 times the u.k. economy. in ireland the biggest three banks together a balance sheets two times the size of the irish economy. in iceland -- well, iceland, how could we possibly become like iceland? they became between 11 and 13 times the size of the country. our biggest banks are getting bigger. the next time they'll there is nothing i can assure you in economics or law or physics that says the amount of offsetting the bids is you can provide to the economy through monetary policy or to fiscal policy will roughly match the negative shock you are getting from the collapse of the financial system. in 1930 if the federal government had wanted to do is

sensible what we now regard a sensible fiscal policy and fiscal stimulus because they're having a major problem among the historic news -- they said they could have done is go stimulus of 1 percent of gdp because the government was much smaller, that wouldn't have made a difference. we did 40 percent -- we increase over several years our debt to gdp 40%. the next time it will be 80. the next time we may not have that capacity to increase our debts. the federal reserve already cut interest rates to zero and engaged in all kinds of imaginative and i think probably successful forms of so-called quantitative using. next time are they going to -- will that make a difference? i have no idea. i don't know, no one can tell you. the idea that -- we had this offset with a thing broglie sensible government measures. that's roughly what happened. the next time we may not be able

to offset it to the same degree and we may not lose 8 million the 20 million jobs. easily. next time we may not go down and then come back, we may go down and stay down for a long time. that's the experience of other countries and experience of the u.s. in the 1930's. the big banks are becoming bigger, there are too big to pale mouth and will be too big to save. they have a massive funding advantage, their attitude is let's get bigger, the markets allow them to become big. this is not a market outcome, this is not a market economy in this regard. this is some people who captured the state. and a tradition we are john on this book is not particularly that of the left. we side thomas jefferson at length. you can argue whether he is left or right but the modern thinkers how much we draw on george

stickler of the university of chicago professor. prime much in the free market school who was worried about regulatory capital. absolutely right to worry about that but what we've seen in this country is not just regulatory capture but state captured. stickler got a nobel prize for this idea related work. it takes that further and think about the state to being taken over and twisted to the end of a particular interest group. how did we get here? how did we find ourselves in this incredibly awkward an unpleasant situation? i think the answer is actually pretty simple. i know there are many dimensions to what happened prior 22008 in me go through them in the book and our many causes and pieces that came together for the nature of that particular crisis but you need to go back further i think to release 1980 and perhaps the '70s and look at the

nature of deregulation in this country. .. there was a so-called 363 banking which was pay 3%

deposits linda 6% and play golf by 3:00 in the afternoon also known as boring banking. now what wasn't a bad life style don't get me wrong there were not a lot of poor bankers but it wasn't sexy fast-moving fortunes being made like what began to happen in the 1980's. michael lewis is very much in the news with his interesting book the big short but we site at length and my favorite michael was book is still poker which is a mowing to become moment he captors as a more speculative side of finance starting to find its feet and become bigger but 1. i would stress and we make this point in the book is the people who worked with the brothers, that bond trading and speculating outfit by modern standards was tiny and john who was the legendary so-called king of wall street in the mid 1980's wouldn't even rank in the top

20. in fact the largest hedge fund we have in the country which i believe is approaching the headcount that the solomon brothers had at the time that michael solomon wrote his book. you've read michael lewis's book and recoil from the attitude and the culture i think, certainly now many of you would. but that was just the beginning. everything that came after scaled that up and the key thing -- and they pay a lot more money. the compensation went back to the private sector but it was before the reforms of the 1930's home. but fdr reined in speaking to the finance and ended up cutting of their pay. he didn't target the pay but that is what happens when you make banking boring. now, the nature of american democracy as you know is such that if you have money you can

be heard. you can make campaign contributions. i think you know about that. you can also impress people. you can become compelling and fascinating and central to the culture and that is what happened to finance. this idea greed is good which he intended in his original movie wall street as a cautionary tale and in a statement of excess actually the became the motto of the 1990's. and the huge irony it certainly feels like and i really looking back is that the ronald reagan revolution applied to finance, reached fruition during the clinton administration particularly when robert was the secretary of treasury and of course many of the same people who are now responsible for helping to clean up the financial mess hopefully worked

with mr. rubin and treasury during the 1990's. it is a great opportunity for them to make amends. still waiting to see progress on that. but we all did it together. the culture shifted. wall street became good. the percentage of graduates from the top universities for example went in to finance as far as we could figure from the data are around 1970 was 10% of the peak of the sub cspan: bohm it was 45%. it is money and power. its ideology. i spent a lot of time talking to people and washington. i live in washington. and i spent a lot of time talking to people in and around the official consensus regulators, officials, politicians, their staff and obviously the attitudes have begun to change. this is not i would say that level -- people's thinking is and what it was before some

timber 2008 but it's the keys to meet people who think finances good, unregulated finance is better and completely unfettered mega banks are the best. this idea is wrong. this idea is dangerous. this idea must be stopped. how are we going to do it? >> the biggest banks have to become smaller. people say to me well, simon, there's a lot going on, the finance sector is complicated. the size doesn't matter to which i respond really? let's talk about citigroup. citigroup when it failed, i'm sorry, ran into liquidity difficulties. i always forget. [laughter] in falcon, 2008 it was a 5.3 trillion other banks -- to

print 5 trillion. let me ask if citigroup had been a 5 trillion-dollar bank september, 2008 with the problems be better or worse? what if citigroup started to approach or jpmorgan chase by the we started to approach the size of scotland relative to the u.k. economy? what if we had a bank that was $10 trillion or $20 trillion? , and don't kid yourselves and don't say this couldn't happen, the increasing scale, and, it absolutely could happen. look at the school the last 15, 20 years and the advantages they have now. making our biggest banks smaller is not a sufficient condition for financial stability and avoiding major crisis in this country but it is necessary. and this is what i was arguing on the capitol hill. show me how you make goldman

sachs safe without making it smaller, a lot smaller. the financial institution we let failed last year in this country was the csat group that had a balance of about $80 billion, 80. goldman sachs balance sheet peaked at 1.1 trillion for the crisis around 800 billion now. the group stream that if they were allowed to go home, they were not rescued there would be corruption to the medium and small size business which was our special to read the was a lot of discussion in the administration whether to rescue them and to their credit the administration hoped i think by sheila bair, the fdic had it to the code stepped back and let them field. you cannot find the consequences of that in the data. they are bluffing. goldman sachs said 800 billion is not bluffing. if you let them fail would have a serious problem on their hands. at