SOC371- Johnson- Economic Evaluation

SOC371- Johnson- Economic Evaluation - 1...

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View Full Document Right Arrow Icon What happened to the global economy and what we can do about it downloaded 17 april 11 “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 Financial Stability ,” Friday, March 4, 2011 . I. Summary 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 19 th 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
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This note was uploaded on 08/31/2011 for the course SOC 3710 taught by Professor Staff during the Spring '11 term at Cornell University (Engineering School).

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SOC371- Johnson- Economic Evaluation - 1...

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