Salon

This interview of Simon Johnson by Andrew Leonard in Salon is worth a read. I have quoted Johnson many times here and his blog at Baseline Scenario is always worth a read.

The main point to emerge from this interview is that Johnson, an early and persistent advocate of ‘nationalization’, is now preferring to call it something like a government sponsored receivership.

OK. I get it. I see that nationalization is a dirty word in American politics, so we need to call the process something else. That’s fine with me. Just as long as we use the power of the government to intercede and clean out the directors and managers who brought the banks to their knees. Quickly. Getting lost in the nuances of nationalization versus receivership versus bankruptcy, while very important at the moment of execution, can distract us from the principle we need to absorb: at some point the government will need to be an active agent in cleaning up this mess. That means getting involved directly with the day to day activities of a bank until it can be packaged up and sold off back into private hands. If there is public money involved in bailing out these failed banks, then the payback should be something more than a warm and fuzzy feeling that we ‘did the right thing’. I don’t see any purpose in the government owning banks other than as a short term expediency. The action should be short and decisive. The current shareholders should be eliminated and new shareholders found: presumably the salutary lesson they will have learned is that they need to ensure the managers they hire don’t repeat the destruction the last lot did. But to get from here to that day requires more than a gentle nudge now and again. Hence my support for ‘nationalization’ or ‘receivership’, ‘conservatorship’ or any other term that implies government action. Call it what you will. Get it done.

Next: I think Johnson is correct in arguing that the current administration policy of avoiding irreversible actions, while it sounds conservative, is actually likely to raise the cost of the bailouts and delay the timing of an economic recovery. That’s why the administration is wrong and needs to told so.

Finally, Johnson is also right to argue that the banks are simply too large. I have been reading a lot lately arguments against this ‘size is a problem’ position. Those arguments usually simply focus on the economics of large banks, saying that size is not what brought down the system, incoherent or poor business models did. I agree that the big banks were executing bad business models. What I think is more dangerous is their ability to perpetuate themselves and distort the administration’s response because of the political power they are able to muster because of their size. Johnson uses the inflammatory word ‘oligarchs’ to draw attention to this issue. He is correct in trying to advocate solutions to it. In particular his ‘anti-trust’ attack on the banks is worth thinking through in more detail.

In any case I hope you read the article.