remember. but if i just said what did you say about so and so, it was a dead end. but it's a really good question, it's deserving of a lot more time and effort than i gave it. it was kind of a dead end for me and i didn't pursue it as well as i should have. anything else? do you want to -- shall i say -- >> are you all set? >> awesome. >> thank you very much. [applause] >> jack censer is george mason's dean of the university of new hampshire's humanities and literature. >> this past week, the u.s. senate took up the issue of financial regulation reform. become tv presents a block of tv >> a formerly chief economist with the international monetary fund talks about the power of wall street banks since the 2008 financial collapse. simon johnson argues that these banks, which are still too big to fail, continue to take excessive risks and could lead us to another collapse. the center for strategic and international studies in washington, d.c. hosts the hour and 20 minute e >> my name is heidi, and on behalf of the board and member of the world affairs council washington, d.c., i welcome you here this evening. we are pleased to host simon johnson, who with his co-author, james crack, has just published a book, 13 banks, the wall street takeover and the next financial meltdown. the world affairs council brings to these events authors, diplomats, journalists, academics, government officials, and yes, sometimes even bankers. to discuss with our audiences the main international issues of the time. over the course of the last two years, we come back again and again to what is now being referred to as the great recession and to the financial crisis that led to it, and have heard from and will continue to present speakers who will help us understand what happened and why, and what the implications and indications are for america's position in the world, as a result. for u.s. relations with others, one can think obviously of the u.s.-china relations here, and implications for america's long-term capabilities to protect power and influence global events. the world affairs council's other upcoming programs this month include fred pierce, next tuesday evening, he will be speaking about his new book, the coming population crash an our planet's surprising future, an on april 27, we will host paul collier for a look at his new book, the plundered planet, published by oxford university press. i hope you'll all be able to join us for those two events as well. tonight, we host professor simon johnson. he is a fellow -- a senior temperature low at the peterson institute for international economics here in washington, d.c. he is co-founder of baseline scenario.com, focusing on the world economy, and is a member of the congressional budget offices 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 for the international monetary fund, he received his ph.d. from m.i.t., 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 ask you to wait for the microphone that will be brought around to you in order that the video equipment will be able to pick up the question. now, please join me in welcoming professor simon johnson. [applause] >> thank you very much, everyone. thank you for taking time on this beautiful summer evening in early april to come and listen to a talk indoors. i'd like to talk to you obviously about the financial system, and the situation that we find ourselves in today, and i think this is a very good day and a very good moment to have this conversation. i have just came from capitol hill, from one of many briefings, i'm sure, that are going on right now, but people are grappling with the question of what legislation should we pass or not pass, that will try and prevent a major financial meltdown from happening again. we face in september 2008, as you know, an enormous economic and financial calamity, and it seems only reasonable and completely consistent with nature of american democracy, that we would fix this. i mean, something bad happened, we can argue about the details, again, that's very democratic of us, we have an administration that is packed with experienced professionals. we have a political process that has had a good track record over 200 years of taking on and facing down major problems. so where are we? on fixing the system that got us into so much trouble? well, i would say quite honestly, quite bluntly and hopefully we'll discuss this as we go through the evening, i'd say we're nowhere. i'd say we're at square zero. ok. the legislation before congress does not fix, in my view, the essence of the problem, the heart of the matter in september 2008, in the month that followed, and in march 2009. with 13 bankers came to the white house to be saved. the essence of that problem is known as, and accurately known as too big to fail. those 13 banks and the 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 i take them very seriously, and i don't know why -- i don't know if they take me seriously, but they do talk to me, they say they had to save those 13 bankers. they had to save the financial system. i agree with that. they did have to save the financial system. our competent cannot function without credit, i think 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 of staff, their empires, their attitude. they couldn't ruffle a feather on their backs, they don't say feather on their backs, but you get the general idea. they couldn't disturb a hair on their head without causing a deep are recession and increasing the probability of a major financial calamity. now i don't actually think that's true and in the book we go through in some detail why we think the government, this administration had other options in march of last year. but just assume that it's true. just assume for a moment that they're right and that is an accurate statement of fact p. that's extraordinary. that's incredibly dangerous. that means we have a small amount of financial institutions, a small number of people who essentially have the ability to extort money and various kinds of other support from the state. : >> the largest six banks have a balance sheet, the size of the bank, which is 63% of the gdp. that's pretty big. what were they before the crisis? 2005, 2006, 2007, there were smaller, 56, 58% of gdp. what were they in 1995, same banks? 17% of gdp. they are getting bigger. of course, they're getting bigger, they were bailed out, they were safe. they were encouraged by other banks. the cost of funding today in the credit markets is estimated, i think accurately to be between 75 and 80 basis points lower than for other banks. that is .8 percentage points. that's a big funding advantage. james dimon, the co of jpmorgan chase one of the most successful banks resell he said in a letter to shareholders just this week that if we get big, because we win, because we're 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 the free market. we have a too big to fail unfair advantage. if you run a massive bank, and i'm just assuming that none of you do because they usually don't come him he talks. but i would be happy to have a debate. if you have a massive bank, you have a tremendous unfair advantage. you are too big to fail. you will be saved and the credit market recognizes that. and, of course, you're going to get bigger. there is nothing in james dimon's job description as head of jpmorgan chase that says he is responsibresponsible for american or global financial stability. i haven't seen a job description but i'm confident in assuming that. his job description is to make money for his shareholders and for his colleagues at jpmorgan chase. we can discuss how well he does for his shareholders, but you've seen the latest figures i think. for 2009, total compensation almost was high that it has ever been. executive compensation was down a bit but the people for working this is out. the ceo of wells fargo just got a big, we have seen the details, a very big cash bailout for 2009. cash which is exactly what the administration as them not to do. in march 2009 president obama did say to the bank, please be careful going forward, please behave yourselves, please don't take reckless risks are and none of which they have done. johnstone got paid very big, cash salad which is exactly. the administration wants. when questioned about why he would get so much cash, a spokesperson for wells fargo said we had a very good year in 2009. it's difficult of a good year in 2009. they were saved by the american taxpayer, by the, i think, excessive generosity. certainly generosity of this administration. it's extraordinary. the attitude of these people. and nothing i say, nothing in the book is vindictive. nothing is intended to get back at these people. this is just forward looking. this talk about the future. we can argue actually we can have an interesting argument about the extent to which the big banks see themselves to be too big to fail before september 2008. that's an interesting discussion. but that's not my focus, not the focus in the book. the question is now do they think they're too big to fail. goldman sachs, a balance sheet fluctuates around $800 billion. if goldman sachs failed, if goldman sachs in iraq, and i don't know to what extent you follow this, on a daily basis, but considering today greece is in more trouble quicker than people are anticipating, who knows what kind of exposure any of these big banks have for example, through their derivatives off-balance-sheet transaction. i'm not saying anyone of them is in trouble but let's imagine goldman sachs gets a big rock today, tomorrow. could they fail? could they go bankrupt? no. absolutely not. they will be saved by the government. the consequences of the goldman sachs that would be far -- perceived as too dangerous. what about if his legislation in the form currently proposed, what if that passes or something close to that? within the goldman sachs fell? would go into bankruptcy? no. not in my assessment. i am fully aware this makes some of my friends on capitol hill quite upset when i say it. i used to work with the imf. the job at the imf as i missed it is today the harsh reality. the imf unfortunately can't articulate that with regard to the united states, so i will do it. [laughter] >> is a nasty truth that it is very unpleasant. i am sympathetic to people pushing for reform on capitol hill. we are not there yet. so where are we? how do we get here? and where should we go? moving forward. secretary geithner, treasury secretary geithner said we just had a 30 year, 40 year flood. very unusual, bad luck. we should do, take some actions in case of the next, for the next time. but for years is not too bad. hank paulson in his memoir, former treasury secretary paulson says major financial crisis occurs every 46 years. james dimon, says it's every five to seven years. larry summers says it's every four to eight years. you get the picture. something happens in the financial system with some regularity. how big will it be next time? that's the key question. geithner says these things are rare. but that is overlooking a random occurrences and we haven't changed our structure. i would say that the levees that protect against flood have been undermined over the past 30, 40 years. and we should worry about these more regular shocks, identify them, hitting us before have a chance to strengthen the levees. and we haven't had a chance to strengthen the levy, i think you know, because powerful players in the financial sector and their allies do not want reform. they see it as contrary to their interest. and it is. i think country to the interest of the people who run the biggest banks. it is not contrary to our interest. secretary geithner also said in this regard that we will not lose very much money. on the rescue package. we may actually make money on the top which is a program that injected capital into the biggest banks as you recall. if we lose money on that it will be because the car companies, because of aig. well, that's not the right mask. the right way to think about the cost of the crisis, a couple of ways to think about it, one is 8 million jobs lost since december 2007. that is traumatic, completely unnecessary and we're struggling. you can also worry about what the federal reserve has had to do and what that has done to the credibility of the federal reserve. going forward, that's interesting, very important discussion. but i would focus on the fiscal cost, on the balance sheet, what has happened to the balance sheet of the government. what is the increase in net government debt relative to gdp, relative to the economy held by the private sector? that's the core measure, one core measure and the measure our focus on how much the government is indebted. this was about 40% of gdp before the crisis you. and i'm on a panel of economic advisers to the congressional budget office, these numbers are my numbers, not their numbers but i would say that their names are moving in my direction. my estimate is we will double debt to gdp and go from 40 to about 80% as result of this crisis. all the measures that the government was forced to take in order to reduce the likelihood we would get a massive depression and make sure it turned out only to be a great recession, a horrible recession, but i think it would have been worse without the counter active measures. that's a big increase in debt. that's not enough to sink the country. that's not enough to cause a crisis per se. it doesn't turn us into greece, and thank goodness. but it's completely unnecessary. unwarranted, and we haven't fixed the problem. we have not fixed the financial system. and its ability to take on reckless risk and do well when things go when they're lucky and, and to show that risks onto us, onto society when things go badly. goldman sachs is a big backer of automotive in china, that just bought volvo from fort. i am a professor of economics at mit. i like the. there's a big driver of growth in the united states around the world. think about goldman sachs and the goldman sachs says. goldman sachs is event. became a bank holding company in september 2008 as a way to save it from collapse. it has access to the fed discount window. if it's private equity investments do well, i can or should you they will make out like bandits. to use a technical term. [laughter] >> if it goes badly, whose problem is that? is a bank. it's a bank with access to the fed discount window. we do not let these banks fail. we cannot let them fail. and goldmans is okay, if that's your attitude, they give a much, we are no longer a bank. you became a bank in order to save you. they were an investment bank before, a rather loose not entirely accurate term but they were not regulate 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 they get into trouble again, you let them become a bank again. you may say, you may promise up and a no, no, no. we won't do it. honestly, we promise. you can pass a law. you can pass as many laws that you want. at the end of the day when faced by financial calamity, the governor of this country will have the powers to do what it takes to save the day. that's the nature of executive power in the united states. if you don't like it you can sue them and take to the supreme court. good luck winning that case. they would let goldman backing. 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 happening in europe, look what they've allowed their big base to do, look at the case of ireland or the case of the united kingdom. the royal bank of scotland became one bank, became had a balance sheet 1.5 times the size of the u.k. economy. in ireland the biggest three banks together has balance sheet to times the size of the irish economy. in iceland, well, i slid, how could we possibly become like iceland? iceland, the banks began doing in lebanon and 13 times the size of the country. our biggest banks are getting bigger. next time they fail, there is nothing, i can assure you, in economics or law or physics that says the amount of offsetting impetus you can provide to the economy through monetary policy or through 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 a sensible what we now regard as sensible fiscally and fiscal sinners because they're having a major problem, the historians look, the federal government could have done a fiscal stiffness of 1% of gdp. the government was more, much more than a. that would make any difference. we did 40% -- we increase over several years out of debt to gdp 40%. next time it will go to 80. next up we may not have the capacity to increase our debt. the federal reserve already cut its rate down to zero and they gave all sorts of imaginative and i think probably this is successful forms of so-called quantitative easing. next time will that make some difference? i have no idea. i don't know. no one can tell you. the idea that -- we had -- we offset with i think broadly sensible government measures. that's roughly what happened. next time we may not be able to offset it to the same degree. next time we may lose 20 million jobs, easily. next up we may not go down and then come back, but struggle to come back. we may go down and stay down by longtime. that's the expense of other countries. that's the spirit of the united states 1930s. the big banks are becoming bigger. they are too big to fail now. they will become too big to fail. they have a massive funding advantage. their attitude is let's get bigger. the markets allow them to become bigger. this is not a market -- this is not a market outcome. this is not a market economy in this regard. this is the people who captured the state. the intellectual tradition is not particularly that of the left, we cite thomas jefferson at length. i would stress in terms of modern thinkers, how much we draw on george to become givers at chicago professor, very much in the free market school is very much worried about free captcha. absolutely right to worry about the. what we are seeing in this country, it is the state chapter. it's a stickler, he won a nobel prize. he takes that further and thanks to a state being taken over and the states been twisted to the end of a particular interest group. how did we get here? how did we find ourselves in this incredibly awkward and unpleasant situation? the answer is pretty simple. i mean, i know there are many things that happen, and we go to the book and their many proximate causes, many pieces that came together for the nature of that particular crisis. but you need to go back future. indigo backed i think to at least 1980, perhaps the 1970s and look at the nature of deregulation in this country. some forms of deregulation started under president harder and got a big impetus under president reagan. some parts of deregulation i think were sensible and some parts i would not