MIT economist Simon Johnson explains that the policies embraced by key members of Obama’s economic team are opposite those they supported during the Asian financial crisis of the 1990s. This charge applies in particular to Lawrence Summers, in charge of the White House National Economic Council, Treasury Secretary Timothy F. Geithner, and David A. Lipton, who is now at the National Economic Council and the National Security Council. All three were heavily involved in preparing a US response to the Asian financial crisis.
In the 1990s, they were opposed to unconditional bailouts — providing money to troubled financial institutions with no strings attached. …. The Treasury philosophy was clear and tough: “a healthy financial system cannot be built on the expectation of bailouts,” Mr. Summers said in his American Economic Association speech in 2000. …
In the 1990s, the United States — working closely with the I.M.F. — insisted that crisis countries fundamentally restructure their financial systems, which involved forcing out top bank executives. In the United States during 2009, we not only kept our largest and most troubled banks intact (while on life support) but allowed the biggest six financial conglomerates to become larger, both in absolute terms and relative to the economy. ….Presumably this time, the Summers-Geithner-Lipton group will argue that the only way to restore confidence was through the kind of unconditional and implicit bailout guarantees they opposed in the 1990s.
If true, this has a terrible implication. The structure of our financial system has not changed in any way that will reduce reckless risk-taking by banks that are large enough to cause significant damage when they threaten to fail.
Simon Johnson, “Lessons Learned but Not Applied”, Economix, 31 December 2009.
Prospect Magazine named Simon Johnson as the “clear winner” out of 25 economists who have made notable contributions to “public conversation” during the current financial crisis:
His ideas are well grounded in theory, but he has also done more than any academic to popularise his case: writing articles, a must-read blog, and appearing tirelessly on television. As the FT’s Martin Wolf told Prospect: “Johnson’s significance is that he is a member of the establishment—a former IMF chief economist, no less—who has emphasised the capture of the state by big finance, for the latter’s own ends. An expert on crises in emerging countries and in transition from communism, he has called what he has seen: crony capitalism at the heart of the financial system.”
Jonathan Ford, “Public intellectuals and the financial crisis”, Prospect Magazine, 16 December 2009.
Martin Wolf made Prospect’s short list of 25, along with NY Times columnist Paul Krugman and Columbia University economist Joseph Stiglitz.
Tags: Larry Summers, Paul Krugman
