What happened to the global economy and what we can do about it
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“A Healthy Financial System Cannot Be Built On The
Expectation Of Bailouts”
By Simon Johnson. Testimony submitted to the Congressional Oversight Panel, “
Hearing on the TARP’s Impact on
,” Friday, March 4, 2011
1) The financial crisis is not over, in the sense that its impact persists and even continues to
spread. Employment remains more than 5 percent below its pre-crisis peak, millions of
homeowners are still underwater on their mortgages, and the negative fiscal consequences – at
national, state, and local level – remain profound.
2) To the extent that a full evaluation is possible today, the financial crisis produced a pattern
of rapid economic decline and slow employment recovery quite unlike any post-war recession –
it looks much more like a mini-depression of the kind the US economy used to experience in the
century. In addition, the fiscal costs of the disaster in our banking system so far amount to
roughly a 40 percentage point increase in net federal government debt held by the private sector,
i.e., roughly a doubling of outstanding debt.
3) In this context, TARP played a significant role preventing the mini-depression from
becoming a full-blown Great Depression, primarily by providing capital to financial institutions
that were close to insolvency or otherwise under market pressure.
4) But part of the cost is to distort further incentives at the heart of Wall Street. Neil
Barofsky, the Special Inspector General for the Troubled Assets Relief Program put it well in his
latest quarterly report
, which appeared in late January, emphasizing: “perhaps TARP’s most
significant legacy, the moral hazard and potentially disastrous consequences associated with the
continued existence of financial institutions that are ‘too big to fail.’”
5) Adjustments to our regulatory framework, including the Dodd-Frank financial reform
legislation, have not fixed the core problems that brought us to the brink of complete catastrophe
in fall 2008. Powerful people at the heart of our financial system still have the incentive and
ability to take on large amounts of reckless risk – through borrowing large amounts relative to
their equity. When things go well, a few CEOs and a small number of others get huge upside.
6) When things go badly, society, ordinary citizens, and taxpayers get the downside. This is a
classic recipe for financial instability.
7) Our six largest bank holding companies currently have assets valued at just over 63 percent