Simon Johnson’s Clarion Call

27 03 2009

Just like IMF interventions in Russia, Thailand & Indonesia a decade ago, genuine financial reform in the USA requires standing down the oligarchs.

While there has been much good critique of the bank bailout by leading American economists (see this recent Financial Times article for a summary of Krugman, Stiglitz, Sachs and Reich), I’ve been following Simon Johnson, an economist at MIT and formerly Chief Economist at the IMF. He has a wonderful blog on the bail out.  And just now he has pre-released a full article on his prognosis that will appear in Atlantic Magazine. The article is long, but if you want one of the better insights into what we are up against, read this: http://www.theatlantic.com/doc/print/200905/imf-advice 

Here is a veteran economist with real experience in being lender of last resort to governments and central banks. He has had experience standing down Russian, Thai, Indonesian governments and their private-sector cronies who’ve gotten over their heads with financial excess.

Johnson lays out not only the technical issues of what needs to be done here in the US (including an FDIC-style reorganization and a break up so that no institution ever gets ‘too big to fail’). But he also addresses the bigger more difficult issue of dealing with the oligarchs who are in bed with the government regulators and in the end pose the biggest challenge to genuine reform. Wall Street and Washington have grown into a cliquish, club of elites. If this doesn’t get cleaned out, we are in deep do do.

Both of his two possible scenarios for how the crisis resolves, spelled out in the last couple of paragraphs, are dismal and sad. Either we muddle along making ineffective deal-by-deal reforms as we’ve been doing, and like Japan, go into prolonged stagnation where the US treasury/American taxpayer gets looted by the oligarchs. Or, we have a global collapse that’s worse than the Depression, and the US economy falls on both knees, rest of the world destitute.

Johnson prefers that latter scenario as he believes this will concentrate minds and force people to make the right, albeit, difficult decisions that ultimately will clean up the mess.

Not pretty, but real, even if depressing and depressed.

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