Six trillion dollars.
That’s what the global financial crisis cost the U.S. government, according to Simon Johnson, the ex-chief economist of the International Monetary Fund.
Johnson, described by economics Prof. Mark Witte in an e-mail as “the Simon Cowell of economics,” lambasted bankers, regulators and politicians in his lecture at Owen L. Coon Auditorium on Thursday evening.
Johnson estimated that U.S. government debt doubled from 40 percent to 80 percent of gross domestic product “directly as a result of the actions of big banks” and added the debt burden will eventually fall upon taxpayers.
“How is it that we could build a financial sector that could melt down, but not fix it?” Johnson said.
The Massachusetts Institute of Technology professor blamed the financial crash on inadequate regulation, which he said became more lax since the passing of deregulation bills beginning in the early 1980s.
“This is not a conspiracy,” Johnson said. “The heart of what we built is an ideology: ‘Finance is good, unregulated finance is better.'”
Even as the banks escaped the restraints placed on them by government regulation, Johnson said they held on to the implicit government guarantee of their debts because they were ‘too big to fail.’ As a result, “these banks have every incentive to take risks.”
“They have the upside of bigger profits and paychecks, and the downside belongs to you, the taxpayer,” he said.
Johnson paraphrased JPMorgan Chase & Co. CEO Jamie Dimon as saying 2009 was the banking giant’s best year ever. However, Johnson contested that claim and said though 2009 was a record year on Wall Street for compensation, the banks did not have their best year.
“They were saved by the taxpayer,” Johnson said. “They were saved by you.”
Johnson called himself a “moderate” in contrast to those demanding even more stringent regulations and those calling for no reform at all. He proposed limits on the size of the largest banks and controls on their leverage, two themes that struck a chord with Dick Dooley, an Evanston resident.
“He nailed it by saying ‘break up these institutions that are too big to fail,'” Dooley said.
Even as he fired away harsh criticisms at banks, Johnson also drew laughs from the audience with lines such as, “I like bankers. No wait, I take that back,” and his description of the “3-6-3” banking that dominated the industry between the Great Depression and the wave of financial deregulation in the 1980s.
“You pay depositors 3 percent, you lend at 6 percent, and you leave at 3 p.m. to go play golf,” Johnson said.
In contrast, today’s deregulated banks provide much more opportunity for profit and incentive to dodge the rules, Johnson said.
Dooley said he thought regulations are important because “the largest element that complicates today’s problems is greed,” an affliction that’s “as old as time.”
Weinberg junior Joe Spanier said though he plans to become a hedge fund manager, he thought Johnson was correct in pushing for greater regulation.
“At the end of the day, I feel like (hedge fund managers are) clearly there to take other people’s money,” he said. “In that sense I favor regulation so you put your money where your mouth is. … If you’re an honest hedge fund manager, I don’t see how regulations are going to hurt you.”
Though Johnson railed on deregulation, he did admit that Republicans, who have often fought for deregulation, have been correct about at least one thing.
“I say to some of my Republican friends-and I still have a few of those-that they were right about Fannie Mae and Freddie Mac,” Johnson said, referring to the two government-backed mortgage giants that were taken over by the government in 2008. Johnson warned that Goldman Sachs, JPMorgan Chase & Co. and other big banks are now the new receivers of implicit government backing and ended his speech with a lesson from one of America’s founding fathers.
“Thomas Jefferson warned at the beginning of the American republic about the dangers of a financial aristocracy,” Johnson said. “He was right.”
