The Wall Street takeover and the next financial meltdown

Review of a lecture by Simon Johnson John Hermann

Two years ago, MIT professor Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, made use of his inside knowledge and experience as a former IMF economist in a public presentation related to the subject of this book at University of California, Santa Barbara (a recorded version is available at <http://www.youtube.com/watch?v=M8HekexIUy8>. In this lecture Johnson described the rise of concentrated financial power and the threat it poses to economic well-being. He explained that over the past three decades, a handful of giant banks became spectacularly large and profitable and used their power and prestige to reshape the political landscape. He argued that the largest banks have become more powerful and more emphatically “too big to be allowed to fail,” with no incentive to change their behaviour in the future. Is this setting the stage for yet another financial crisis, another government bailout, and another increase in our national debt?

Johnson also took pains to emphasise that the implications further down the track are dire, namely, that at some future time the same institutions will have become not only too big to be allowed to fail but also too big to save. Meaning that their net worth will have grown to a size exceeding the GDP of any country on the planet. On their current trajectory of high risk taking, at some point one or more of them will collapse – and owing to their financial size there would no longer be any viable mechanism for bailing them out. At that point global markets would also collapse and the world would be plunged into a deep and protracted depression. And it is probably unnecessary to spell out the social and political implications of such a scenario.

A printed version of the introductory chapter to the original book by Simon Johnson and James Kwak 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (published in 2010) is available on the web (the link to this is  http://13bankers.com/excerpt/