Simon Johnson on the political power of U.S.

banks

Simon Johnson is a leader in bringing competition issues in banking to the attention of the
American people. He argues to diverse audiences that banking is controlled by a small number
of banks that have outsized political influence. He would like to see big banks controlled by
aggressive antitrust enforcement as well as regulatory constraints.

Johnson has an impressive resume. Currently, he is a professor at the MIT Sloan School of
Management and a senior fellow at the Peterson Institute for International Economics. He is a
cofounder of the BaselineScenario.com, and a member of the FDIC’s Systemic Resolution
Advisory Committee. In 2012, he became a member of the private sector systemic risk council
founded by Sheila Bair. In July 2014, he joined the Financial Research Advisory Committee of
the US Treasury’s Office of Financial Research (OFR). Also, he served as member of the
Congressional Budget Office’s Panel of Economic Advisers from April 2009-April 2015.

Johnson was active in opposing the regulatory rollback that occurred in May, 2018, when
Congress rolled back some of the restraints imposed on banks after the 2007-2009 global
financial crisis. That included reducing federal oversight of banks with between $50 billion and
$250 billion in assets.

Johnson testified in opposition to regulatory rollback legislation. He said that $50 billion, as
earlier defined under the Dodd-Frank financial reform legislation, is a sensible threshold at
which the Federal Reserve should pay more attention to financial institutions.

Johnson’s recent testimony is illustrative of his broader concerns about the structure of our
financial system. As part of earlier testimony to Congress in 2016
[https://financialservices.house.gov/uploadedfiles/hhrg-114-ba19-wstate-sjohnson-
20161207.pdf] Johnson argued that the nature and structure of our financial system led to the
deep crisis of 2008 and 2009, and still poses real risks to our collective economic future. He
argued for overall strengthening rather than weakening financial regulation, with a particular
focus on capital requirements. He said:

We should be attempting to strengthen the safeguards in the Dodd-Frank financial reform

legislation. Repealing or rolling back that legislation poses a major fiscal risk. . . . [A]
financial system with dangerously low capital levels – hence prone to major collapses –
creates a nontransparent contingent liability for the federal budget in the United States.

Simon Johnson is author of several influential books concerning the power of bank and bankers
to coopt legislators and regulators, including, with co-author Jame Kwak, 13 Bankers – The
Wall Street Takeover and the Next Financial Meltdown.

The Johnson/Kwak book offers an excellent discussion of the run-up to the 2008 financial crisis
and government efforts to resolve it, emphasizing problems caused by banks that grew to be very
big.
The authors invoke the spirit of U.S. antitrust enforcement of the early 1900s, and urge
government regulatory policies that limit bank assets.

Johnson and Kwak argue in their book that U.S. government regulatory policy affecting financial
institutions has effectively been captured and controlled by people associated with large banks.
Government regulators are portrayed as enablers of the country’s 2008 financial crisis. “The
U.S. financial elite . . . constituted an oligarchy – a group that gained political power because of
its economic power. . . .[T]he major banks engineered a regulatory climate that allowed them to
embark on an orgy of product innovation and risk-taking that would create the largest bubble in
modern economic history . . . .”

Johnson and Kwak tell us in 13 Bankers that just a few very large banks dominate the U.S.
financial system – hence the book title. When CEOs of the largest U.S. banks were called to
Washington in March of 2009 to meet with President Obama and senior government officials to
discuss the financial meltdown, there were just thirteen. We learn that at the time of the meeting
Bank of America’s assets were 16.4 percent of gross domestic product; J.P. Morgan Chase had
14.7; Citigroup 12.9. As of the end of the third quarter of 2010 Johnson and Kwak believed there
were six banks that together have assets in excess of 64% of U.S. GDP.

The authors complain that in the dark days of 2008 and 2009 the government chose to rescue the
financial system “by extending a blank check to the largest, most powerful banks in their
moment of greatest need. The government chose not to impose conditions [on bail-outs] that
could reform the industry or even to replace the management of large failed banks.”

Much has happened since 2010, including passage of Dodd-Frank bank reform legislation –
elements of which have been under attack in 2018. It is clear, however, that Simon Johnson
continues to be concerned about the continuing great size and political power of U.S. Banks.

This article is posted by Don Allen Resnikoff, who takes full responsibility for its content