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Simon Johnson On Bank Bailout Plan
TERRY GROSS, host:
From WHYY in Philadelphia, Iâm Terry Gross with FRESH AIR.
(Soundbite of music)
GROSS: On todayâs FRESH AIR, we look at the economic crisis with Simon
Johnson, who has worked on financial crisis prevention and recovery in
large and small countries around the world.
He is a former chief economist of the International Monetary Fund and a
professor at MITâs Sloan School of Management. Weâll talk about what we
can learn from other countriesâ financial crises and why Johnson thinks
our best solution might be a modified version of nationalizing zombie
banks, which would allow the government to briefly take them over and
then re-privatize them.
Also, rock critic Ken Tucker reviews âRay Guns are Not Just the Future,â
the second album by the duo, The Bird and the Bee. Thatâs all coming up
on FRESH AIR. First the news.
(Soundbite of music)
GROSS: This is FRESH AIR. Iâm Terry Gross. My guest, Simon Johnson, is
an expert on financial and economic crises. It used to be other
countries he focused on. Now, he is writing about the mess weâre in.
Johnson has worked on crisis prevention and recovery in countries around
the world. Heâs consulted to governments, the private sector and also
served as the International Monetary Fundâs chief economist. Heâs now a
professor at MITâs Sloan School of Management, a senior fellow with the
Peterson Institute for International Economics and co-founder of a Web
site on the global economic crisis called Baseline Scenario.
Simon Johnson, welcome to FRESH AIR. First of all, can we agree on a
name? Are we calling this the economic crisis, the downturn, the
impending depression? What should we call it during the course of this
Dr.Â SIMON JOHNSON (Professor of Entrepreneurship, Sloan School of
Management, Massachusetts Institute of Technology): I think we should
call it a crisis. Itâs big, itâs bad, and nobody remembers a crisis â a
situation like this in the U.S. I think crisis conveys that, and we
donât know where it ends up, either - how bad it ends up and for how
long. So I think crisis is about right.
GROSS: Okay, so weâll go with economic crisis?
Mr.Â JOHNSON: Well, thatâs a very subtle and important point. We used to
call it a financial crisis, back in oh, I donât know, summer of 2008,
summer 2007. Itâs clearly not just financial anymore. So I actually like
economic crisis. That conveys â itâs a broad, big deal for lots of
people around the world.
GROSS: Okay. Now, you say that if you showed old hands at the
International Monetary Fund, where you used to work, and itâs their job
to help countries recover from economic crises â if you showed them the
U.S. ledger books, but you hid the name United States so they didnât
know what countryâs books they were looking at, they would all say
nationalize the banking system. Thatâs the solution. What leads you to
that conclusion - that they would say that?
Mr.Â JOHNSON: Well, I worked with the IMF over the last 20 years. Most
recently, I was there. I was the chief economist for the last 18 months
prior to the end of August, 2008. So I was working on these crisis
issues. And before that, I worked there, and I worked with private
investors, and I worked with governments around the world on these
problems, and that is what the IMF says.
That is standard IMF advice, and Iâve checked this. Iâve talked to their
banking experts. Iâve talked to their leading finance macro people. Iâve
said, you know, what would you do if we just had this problem, and it
wasnât about the United States, and it wasnât the most powerful country
in the history of the world and also the IMFâs biggest shareholder? What
would you say?
And the answer is, you know, without reservation, without hesitation,
they say itâs quite straightforward. The banks have lost a lot of money.
You canât let them fail. That would be a catastrophe. That would be like
the 1930s again. Youâve got to come in, nationalize them, use an FDIC
Thatâs the terminology they would use. Nationalization is a slightly
politically loaded term. And then you immediately privatize them again.
You clean them up, you privatize them. And itâs not rocket science, as
they say. Itâs very straightforward.
GROSS: Now your implication is that although they believe â the IMF
people believe thatâs what the United States should do, they canât
actually say that. Why canât they say that?
Mr.Â JOHNSON: Well, I think thatâs pretty obvious. The IMF was set up
after World War II as part of the so-called Bretton Woods institution so
that the main partner, sister if you like, is the World Bank. They were
set up to help the U.S. rebuild the worldâs economy, and I think, you
know, broadly speaking, they did a good job.
They are located about two blocks from the White House. Now their
primary shareholder is the United States. And while they brought on
board a lot of other countries â IMF currently has 185 members â itâs
the U.S. that has the strongest voice. Not that the U.S. dictates
everything - not that this is a branch of the U.S. government - but that
the U.S. is the dominant, most powerful, most influential shareholder.
And you donât just turn around and start telling your major shareholder
what to do. That would be extremely uncomfortable for everyone at the
GROSS: Okay, so if we took what you say would be the IMFâs solution, and
itâs a solution you endorse, what exactly would the government be doing
with the failing banks?
Mr.Â JOHNSON: Well, I think the key thing to emphasize here: Itâs nothing
new, and itâs nothing we donât do all the time in the United States. In
fact, the FDIC - the standard FDIC process for taking over, liquidating,
repackaging and re-privatizing, if you like, failed banks is something
thatâs world class. People look at it to learn how itâs done.
The key point, of course, is that the FDIC typically does that - or
perhaps only does that - for small and medium-sized banks. Now, they do
it with some regularity - and of course, recently theyâve been doing up
to two a week - but the point is we just want to take that same process
and scale it up, make it bigger and make some adaptations so it can
handle, potentially, very large banks.
GROSS: As large as, say, Citibank? Citigroup, I should say.
Mr.Â JOHNSON: Yes, I donât like to name specific banks that definitely
need intervention until Iâve seen the numbers. And, obviously, thereâs
lots of speculation around Citigroup, and thereâs lots of concern. And I
think, you know, Secretary Geithner has the right approach, the treasury
secretary said we need to do a proper, rigorous stress test on the
My concern is the stress test, as designed, as announced, is not a
serious stress test at all. Itâs rather like going to the doctor to have
your heart checked, and he says get on the treadmill. Weâll do a stress
test on your heart, but do please sit in this chair during the whole
test. So itâs not a serious test.
But anyway, if you did a proper test and you figured out the banks that
needed the capital, Citigroup might be a bank thatâs insolvent. I donât
know. Thatâs something you need to figure out properly and that you
probably shouldnât speculate about too much in advance.
GROSS: Now you say it would be a really big mistake to nationalize the
banks and keep them nationalized.
(Soundbite of laughter)
Mr.Â JOHNSON: Yes. Well, the way I always persuade this - make this point
to people is I say: How much do you enjoy going to get your driverâs
license renewed, going to the DMV or, even worse, moving to a new state
and having to get a new driverâs license?
And of course, everyone recoils in horror as soon as you make that
analogy. And I think the basic one is, at least in this country, we
donât think the government does a very good job of managing things as
simple as a driverâs license, and certainly something as complicated as
a bank would almost certainly not go well at all.
But thereâs no need for the government to run it. Weâre very comfortable
with private management of assets that have big, public implications.
And thatâs what this bank would be, or privatized bank would be.
Now, you want to structure that so the taxpayer keeps a lot of upside:
As the bank gets better, the value of the public investment goes up. And
you also want, I think very importantly moving forward, to put in place
some new â letâs call them antitrust laws or a big modification or
modernization of antitrust - precisely so that the new owners donât
inherit or take over a bank thatâs too big to fail and, therefore, they
get a lot of economic and political power out of that and perhaps repeat
the same mistakes as the last set of people.
GROSS: Okay, do me a favor. Compare what the U.S. government has done so
far in propping up really large banks to how it would work with the
system that youâre talking about.
Mr.Â JOHNSON: I think the key difference, Terry, is that everything the
U.S. has done so far - and I mean under Secretary Paulson and now under
Secretary Geithner - has been deal by deal. And every deal has been
You know, what they did for Lehman or AIG or Washington Mutual - WaMu,
or Citigroup â I think weâre on the third or fourth round with Citigroup
â itâs always different, and theyâre always moving the (unintelligible)
around. You donât know what the rules are.
And what Iâm proposing - and what the IMF would propose if it were in a
position to speak publicly about this - is that you do it once and for
all. You do it systematically. You have very clear rules that are pre-
announced. And any bank that is found to be deficient in capital after a
tough stress test has a certain amount of time - a short period of time,
one or two months - to raise capital privately, and then if it canât
raise that capital privately, it needs to receive capital from the
government. And the government, in return, will get a large ownership
This is, for example, what the Swedes did in the early 1990s. And itâs
really quite straightforward. Itâs easy to explain to people, and
everyone knows where they stand while youâre doing this. And during the
whole process, you have a temporary â I stress temporary â government
guarantee on all the liabilities of the banking system so that people
feel sure that whatever happens, itâs not going to be shocking, and it
gets, you know, all kinds of strange ways for bondholders or other
creditors of the banks - odd ways in which theyâll lose money.
GROSS: Well, whatâs been happening now, for instance with Citigroup, is
that the government loans them billions of dollars. They come back and
say we need more. We loan them more billions of dollars, and they come
back and say we need more.
So if it was like a nationalizing kind of system, what would be
Mr.Â JOHNSON: Well, itâs once and for all. You donât do this iterative
process thatâs kind of a mess, and people are very confused. And itâs
the same deal for everyone.
So the deal that Citi got was close to but different from the deal that
Bank of America got in mid-January, for example. And itâs probably
different, seems likely to be different, in fact itâs been announced it
will be different, from deals that other banks are going to get going
Although, then again, Citi got their deal after that announcement. So
does that mean we have to revise the announcement? Itâs complete chaos
and confusion, Terry. And this is exactly the situation in which you,
you know, so-called asset-stripping, or sometimes people call it
tunneling - tunneling of value out of these kinds of banks occur.
There was a very good finance minister in Russia in the mid-1990s, a
very honest, honorable man who tried really hard to make Russia better,
Boris Fedorov. He died recently. And he liked to say, and he liked to
emphasize, that periods of chaos and confusion are perfect for people
who want to make off with valuable assets because no one knows what the
heck is going on, and all kinds of things are going to disappear. And
Iâm afraid thatâs exactly the situation weâre in right now with the
GROSS: What do you mean by that, people making off with assets?
(Soundbite of laughter)
GROSS: Things disappear. Money disappears. A valuable property, perhaps,
seems to be no longer quite so valuable - and these are enormous,
complex holdings of interconnected pieces. And you know, when peopleâs
time horizons get short, and when theyâre under a great deal of
pressure, and when they feel that theyâve been â you know, itâs every
man or woman for himself or herself - then honestly, all kinds of
strange and inappropriate things happen.
GROSS: So in the kind of modified nationalization that youâre proposing,
where we â the government would take over the bank very quickly and then
immediately re-privatize it, kind of using the FDIC, like an enhanced
version of the FDIC model, what happens to stockholders? What happens to
the executives at the bank? What happens to the boards of directors?
Mr.Â JOHNSON: Well, the board of directors need to be changed. In fact,
itâs rather strange to me that the board of directors of these major
banks havenât resigned already. I guess one or two of them have taken
that honorable course, but given what theyâve overseen and the scale of
the disaster and the complete breakdown of governance and risk
management and inappropriate behavior in these banks, I wouldâve thought
they would resign by themselves.
But anyway, they can be forced out. You know, the governmentâs going to
be a big shareholder. And itâs also, by the way, a big lender to these
Somehow, these people missed this point. But weâve kept these banks
going pretty much completely since at least September of last year. So
in a sense, weâre â we put a lot of money, we supported the banks
nationally. We didnât exercise change of control, and we kept the board
of directors in. Well, that was pretty much a disaster, keeping those
Time to change board of directors. New board of directors can, of
course, appoint the CEO. That is not for the government to choose. I
think that that would be an inappropriate level of meddling. The
shareholders appoint the board of directors, the board of directors
decide who runs the company. And theyâve got to manage, of course, this
transition to new controlling shareholders. Thatâs the re-privatization
process. So this is all mixed up in there.
But I would stress, you know, the extraordinary moment weâre in right
now is sort of represented by the fact that last week, the U.S.
Treasury, when they announced the third or fourth bailout of Citigroup,
said that Vikram Pandit, the CEO of Citigroup, would be staying on, even
though the board of directors will change.
Now thatâs an extraordinary statement because that means we already â
for the government to have the right to appoint the CEO is not just
nationalization. Thatâs going beyond sensible nationalization into
micro-meddling in the affairs of the company. Weâre really going down a
very dangerous, dark, blind alley here.
GROSS: Youâre saying that itâs the government who decided that the CEO
would be staying on?
Mr.Â JOHNSON: That is what the New York Times reported. And I called up a
friend of mine who works at the New York Times, and I said are you
really sure thatâs what the Treasury said to you, specifically,
Mr.Â Pandit will stay on? And my contact there said yes, that is what
they told us, I believe on Thursday evening. I mean, that just knocked
me out of my chair, hearing that. This is an absolutely extraordinary
moment in American history.
GROSS: My guest is Simon Johnson, and heâs an economist who served as
the chief economist for the International Monetary Fund. Heâs a
professor of entrepreneurship at MITâs Sloan School of Management and is
a senior fellow at the Peterson Institute for International Economics.
Letâs take a short break here, and then weâll talk some more. This is
(Soundbite of music)
GROSS: Weâre talking about the global economic crisis. My guest is Simon
Johnson. He is the former chief economist at the International Monetary
Fund. Heâs helped countries who have financial crises get healthy again.
Heâs worked both with countries, with the private sector and with the
IMF. Heâs currently a senior fellow at the Peterson Institute for
International Economics and a professor at MITâs Sloan School of
I think one of the big obstacles to doing anything that looks like
nationalization - or thatâs called nationalization - is that a lot of
people consider that an offense to capitalism, a crime against the
The word socialism is being used a lot to discredit President Obama. So
what do you think? Is a temporary, however brief, takeover of banks and
then their re-privatization, a temporary nationalism, an offense against
the capitalist system?
(Soundbite of laughter)
Mr.Â JOHNSON: Thatâs a good question. And, obviously, control over the
message and the terminology has been lost by the administration,
unfortunately. And thatâs part of their problem.
My view is the offense against American capitalism was committed by the
big banks who brought us to this point: Their mismanagement, their
compensation schemes, their, I think, attitude towards the public.
(Unintelligible) the arrogance - the arrogance in asking for massive
bonuses at the end of last year, after theyâd had a disastrous
performance, and of course all of them got those bonuses, which is
So a huge number of offenses have been committed against American
citizens in the broad sense youâre talking about, although perhaps
nothing criminal whatsoever, which perhaps tells us part of the problem.
You know, this socialism discussion is a complete red herring. I see in
the newspaper on Monday morning James Baker, the former Republican -
letâs see, treasury secretary and secretary of state under presidents
Reagan and Bush â calling for, essentially, a form of nationalization or
takeover of the banking system.
Now, I think my scheme is a little bit different from his. But I think
that tells you where weâve come to. That even â that everyone who is not
involved directly in these big banks or running Treasury department,
everyone else has had enough and thinks itâs time to wipe the slate
clean and move on with a private banking system.
I donât want the government to run the banking system. I want private
controlling shareholders to run the bank system. I also want to break up
the big banks so that next time around, we donât have this, you know,
too big â Iâm too big to fail, and Iâm about to fail unless you give me
a trillion dollars kind of attitude.
GROSS: Since there havenât been a lot of strings attached to the
billions of dollars that taxpayers are giving banks in the bailout, how
much at risk does it leave the U.S. government and we taxpayers?
Mr.Â JOHNSON: Oh, weâre massively at risk. Weâre at risk not just in
terms of money sneaking out or disappearing from these banks, either in
bonuses, or I guess sometimes they call them â they call them awards now
so theyâre not bonuses, retention awards, whatever.
Not only that, Terry, but I think itâs much, much worse and much
broader, which is it doesnât matter, really, what you do with the fiscal
stimulus or with monetary policy or with other kinds of â or housing
policy, other kinds of attempts to turn the economy around. Unless and
until you fix the banking system and really clean it up and really make
it, you know, more or less sensibly functional again, you wonât get a
All the countries that have tried â so Japan in the 1990s, of course, is
the classic case. Japan in the 1990s did a lot of things but never fixed
the banks. And you turn around, you look at Japan, they looked at
themselves, and they realized they lost 10 years of growth - 10 years
So itâs not a recession of â you know, are we in a recession lasting 18
months or 24 months. Itâs we could lose a decade. And you know,
President Obama actually said that in his first press conference, about
two weeks ago now. He said we could lose a decade. And I thought that
was an absolutely brilliant statement of the problem and amazing because
most American presidents obviously choke on the word recession, let
alone talk about the possibility of a lost decade.
And then he said Secretary Geithner will tell you tomorrow how weâre
going to solve the banking piece of this. And so we were all, you know,
waiting with eager anticipation for that, realizing, feeling that he had
identified the key issue, and Secretary Geithner was going to speak to
it. And then, of course, Secretary Geithnerâs speech was a
disappointment, to put it mildly.
Mr.Â JOHNSON: It was vague. He didnât have a clear plan. It seemed like
it was more of this resuscitation by deal-making over the weekend. And
then thatâs what weâve seen: AIG, which was just announced in the last
couple of days, the Citigroup deal at the end of last week. Itâs
business as usual, meaning business as it was usual under Mr.Â Paulson,
which did not go very well.
GROSS: When you say that Japan failed to fix the banks, and thatâs why
it had a lost decade, what do you mean when you say fix the banks?
Mr.Â JOHNSON: Well, somebody invented this great expression with regard
to the Japanese banking system, which was zombie, zombie banks. And the
idea is that the banks were not, you know, cleaned up, killed off,
cleaned up, restarted, whatever you want to say â (unintelligible) a
right, sort of, popular term for that.
They were allowed to keep on functioning, even though they had massive
bad debts, even though they were very much impaired by these non-
performing loans that they had. And as a result, they, you know, didnât
make sensible loans. They didnât support, you know, sort of business
development or transactions around the economy in the normal fashion.
And you know, they were a problem.
They were zombies who were, you know, haunting or holding back the
Japanese economy. It wasnât the only problem that Japan had. Their
consumers were also in shock because theyâd had a massive property boom
that had bust. And the firms were also trying to be extremely cautious
and pay down their debts. Now all of that sounds very familiar to us in
the United States, also.
GROSS: So what would it have meant to fix the banks?
Mr.Â JOHNSON: Well, I think fixing the banks in Japan - and this was the
advice of the IMF and, funnily enough, the advice of the U.S. Treasury
at the time, and of course, the U.S. Treasury at that time was run by
some of the same people who are running the treasury and broader
economic policy in the United States today.
Their advice was exactly the standard advice in these situations, which
is take over the banks, break them into a good, functional part of the
bank that you can immediately re-privatize. And parts of the assets or
holdings of the banks that are, you know, in really deep trouble - for
which thereâs no clear value and youâll probably have trouble finding a
buyer - put them in an asset-management company, bring in some
professional people to run them, and try and minimize your losses on
that, which of course is â was also in turn building on the lessons of
the Resolution Trust Corporation in the United States that was set up
after the savings and loan debacle - the 1980s.
So this is standard stuff. And they told the Japanese to do it early,
and they kept on them. And I think the IMF and the U.S. Treasury
position, vis-a-vis Japan, looks good in retrospect. And the Japanese
didnât do it. The Japanese ignored that advice, and consequently, they
lost a decade.
GROSS: Simon Johnson will be back in the second half of the show. Heâs a
professor at MITâs Sloan School of Management and co-founder of a Web
site on the global economic crisis called Baseline Scenario. Iâm Terry
Gross, and this is FRESH AIR.
(Soundbite of music)
GROSS: This is FRESH AIR. Iâm Terry Gross, back with the economist Simon
Johnson. He has worked on financial crisis prevention and recovery in
countries around the world. He has consulted to governments as well as
the private sector and served as the International Monetary Fundâs chief
economist. Heâs now a professor at MITâs Sloan School of Management, a
senior fellow at the Peterson Institute for International Economics and
co-founder of a web site on the global economic crisis called Baseline
Scenario. When we left off, we were talking about lessons learned from
other countriesâ financial crises. So, talk about the Swedish approach -
when Sweden had its economic crisis - and this was in the â90s, right?
Dr. JOHNSON: Early â90s, yes.
GROSS: Yeah. So, what do you think we can learn from the Swedes?
Dr. JOHNSON: So, the interesting thing about the Swedes - and I talked
to, you know, lots of Swedish colleagues and I worked for some of them
at the IMF because obviously the IMF wanted to hire them because they
had this rather positive experience. The key point there was you have to
face down the bankers. And thereâs a story told to me by one person who
was involved - and weâll leave the names out of it - but he said, you
know, there was a key moment when basically he sat down across the table
with a very powerful business family in Sweden.
And they wanted, you know, to keep the bank, they wanted subsidies, they
wanted the government to basically provide them with unlimited financial
support. And it was his job to say no - and to say no, you lose the
bank, you lose this amount of money, and you know, thatâs a deal. Now
these were really powerful people. They were good people. They were
people who, no doubt, had done great things for the Swedish economy over
many years, but they were big part of the problem and they had brought
the economy and the banking system to that point.
And my friend, my former colleague, had to face them down. And of course
he had to feel that he had political support to do that, and he did. The
technicians were very good in Sweden. And the politicians built enough
firewalls around them, so the bankers who push back - I mean bankers are
always going to push back in this situation - they couldnât undermine
the program sufficiently. And they were actually able to get through a
big FDIC-type intervention and clean up.
GROSS: One of your concerns is that a lot of the people who are behind
the structure of the bail out are people who have connections to the
banking industry. Give us a couple of examples of people who are in that
Dr. JOHNSON: Well, itâs hard to find people who are not in that position
actually. I would say that the key point person is, of course, Secretary
Geithner. Secretary Geithner was president of the New York Fed until
recently, in fact throughout this entire - as this crisis developedâ¦
GROSS: But thatâs a regulatory agency.
Dr. JOHNSON: Right, but the president of New York Fedâs job is to be the
eyes and ears of the Federal Reserve and the broader U.S. government,
with regard to Wall Street. And so this person has to be close to those
people on his board - for example, back in the spring was Jamie Diamond,
whoâs the head of J.P. Morgan. And of course the way in which Bear
Sterns was rescued back in the spring, was being sold at what many
people thought was a very low price â they sold the assets, the valuable
assets including the headquarters, to J.P. Morgan.
And itâs just a very, itâs a very strange world in which you can sell,
over a weekend, such a valuable asset to someone who is on new board of
directors. And nobody even raised an eyebrow about that. Nobody
questions the degree of connections and the degree of interwoveness
GROSS: Well, one of the questions in the United States has been: Should
the U.S. government buy the troubled assets? Those toxic assets, those
bundled mortgages that are worth very little, but itâs hard to estimate
the exact value of them, which would make them hard for the government
to buy. So have you advised a country that actually did that plan of
buying troubled assets?
Dr. JOHNSON: No. I donât think anyone has ever bought troubled assets
like that. Thatâs a terrible idea by the way. If you look at what Sweden
did and talk to the people who manage the bank interventions and
takeovers in Sweden, they will tell you â and they write this in various
reports that are available - that it was very hard to value the main
assets held by the banks. They were real estate, okay? And a real estate
always does what it is doing now in the United States.
It becomes very illiquid and itâs very hard to know what is the market
price, and thatâs part of the problem. So we think thereâs a uniqueness
in that somehow this is part of how Mr. Paulson and Mr. Bernanke
presented this back in September: Oh my goodness, weâve never seen this
The markets have suddenly dried up. Itâs - itâs crazy, temporary and it
will go away if only we would pay top dollar for these assets. Well,
thatâs not true. I mean, this is what happens all the time in financial
crisis. You always get a liquidity, you always get assets, the value of
assets becoming questionable in this same fashion. And what you do is
the takeover and the nationalization and the re-privatization of banks.
And while youâre doing that, you take the really bad assets off the
bankâs balance sheets and you create an asset management company,
recently people calling that a bad bank in United States.
I guess they stopped using that terminology because it was confusing,
you have so many bad things after all. But the idea is youâd to set up
these - put this money, these troubled assets, in a separate entity
where they do loss minimization. And that was done by the people who ran
the Resolution Trust Corporation at the end of the 1980s. They did a
great job by the way. They were again state-of-the-art and best practice
in the world in terms of minimizing the losses.
You know, generally getting 40, 50 cents in a dollar on a lot of that
commercial real estate that was the real problem back then. And I would
like to stress, while I think itâs pretty straight forward in economic
terms, I do realize itâs hard in political terms. I do realize that
these banks are very powerful politically. They make a lot of campaign
contributions. Theyâre very interwoven with the economic policy elite -
not just of this administration, but all of recent administrations. And
itâs very hard to face them down.
GROSS: Two of the banks in crisis are Bank of America and Citigroup. And
theyâre both â theyâre mega banks, theyâre huge. And they both come
under that category of too big to fail. One of the things youâve said is
that we canât allow banks so big that they are too big to fail. They
need to be broken up. Why do you say that?
Dr. JOHNSON: Well, if you are too big to fail and youâre smart - and
these people are very, very smart. You know that you can take a lot of
risk and if things go well, you pay yourself massive bonuses - you can
check that box. And if things go badly, itâs not your problem or not
just your problem. The government has to come and save you because banks
are really fundamentally different from any other activity in the
economy. If the banks get into trouble and if the banks fail, then
thereâs going to be no credit and without credit, the economy doesnât
So you have this power to have the government come in and save you - to
be negotiated, details no doubt to be negotiated but thatâs why you make
big campaign contributions. And you just canât afford to have anybody
with that kind of power over your economy.
GROSS: Gazillions of dollars have been lost in the global economic
crisis, and itâs hard to understand, like, what happened to them. Like,
how can a world lose that much money? Itâs not like, well another
country has it all, like one country lost it and another country got it.
Where does the money go in a global financial crisis like this? Does it
just disappear into the ether?
(Soundbite of laughter)
Dr. JOHNSON: Yes, it does. And itâs not - you know, money is not
disappearing in the sense that paper money is not being ripped up or
anything. What youâre alluding to â and, of course, what is absolutely
on everyoneâs minds - is this big loss of wealth. So we had stocks that
are now worth 50 percent or less of what they were worth. We owned
houses that in many parts of the - this country and other countries -
have fallen in value substantially. The value of our cars is probably
going down as well. And you, sort of, go down the list of all the
various assets that we owned. The value of those things is less than
what it was before. Now, you can say, well, perhaps it was exaggerated
before. Perhaps it wasnât really worth that much. That may be right, I
mean, these prices move up and down all the time.
The point is people were banking â if I can excuse the pun - they were
banking on these assets having certain value. And that had implications
for how much they were willing to consume and if they were firms how
much they are willing to invest. And everyone now is revising down their
views of what is a safe level of spending and also what is a safe level,
a reasonable level of debt to carry. And that is happening everywhere in
the world at the same time. This is why we have a big global slow down.
GROSS: So, youâre saying itâs not that, like, paper money has been lost
or that, you know, gold has disappeared. Itâs just that the things we
estimated were of one value are not anymore. Itâs all, itâs all, like,
values of things as opposed to actual cash.
Dr. JOHNSON: Absolutely. And so if you could â the thing about Harvardâs
endowment, as an example - this is all in the public domains and very
much written about in the newspapers - so, their endowment took a very
big hit. I think they were in somewhere around the $30 billion mark and
they probably lost something like $10 billion. Itâs a big amount of
money. Now, you know, you could say, well look thatâs just, you know, it
was on paper, that was the notional value of these investments, but you
wouldnât trying to turn them all into cash anytime soon.
And, you know, how much should you really, should - I mean, Harvard,
obviously, the brand name is not affected, the franchise value is not
affected, they still have the same loyal alumni - how much should they
really change their behavior? And the answer is, at least in the case of
Harvard, they think, or their view, is they should change it a lot. They
say, you know, weâve lost a lot of value. We donât have a lot of
liquidity in our portfolio right now.
We need to scale back on many of our investment plans. They had a big
science campus they were planning to build in part of Boston and theyâre
going to slow that down a lot. And I believe theyâve got to freeze on
hiring, at least in some parts of the university. And I believe also
theyâre encouraging people to take early retirements. So, I donât think
theyâre laying people off - Iâm not sure itâs going to come to that.
But my point is that you, you know, they had run-up in the value of
these things - perhaps that run-up was illusory, but affected their
behavior as it increased and now as itâs come down so sharply, itâs also
affecting their behavior. Perhaps they should do something different.
Perhaps they should lean against the wind. Perhaps they should draw down
the endowment, but thatâs not their rules. Thatâs not how they run
things, thatâs not how they see the world. And, you know, Harvard is a
very well-financed, deep-pocketed entity compared to most of rest of us
GROSS: That is like a real problem as opposed to an abstract problem -
if you lose one third of your endowment. Universities, non-profits -
they run in part on the dividends or the interest of the endowment. And
so the dividends or interest has been cut by a third too. So, thatâs a
practical amount of cash that youâre losing.
Dr. JOHNSON: Thatâs right, and thatâs exactly how they see it. Thereâs a
payout from the endowment. There are rules about the payout, but you
could say, but thereâs a big crisis. And perhaps itâs a big opportunity
for a university because buildings become cheaper. It becomes much -
land becomes cheaper, it becomes cheaper to put up buildings. Labs are
cheaper to build and faculty are probably easier to hire away from other
universities or companies that are in trouble. So, you could say this is
a great opportunity to expand and to dip into the endowment to use up
some of the capital that you wouldnât ordinarily use. And, you know,
catapult yourselves forward.
GROSS: My guest is Simon Johnson, an expert on economic crises. Heâs a
professor at MIT and a former chief economist at the International
Monetary Fund. More after a break, this is FRESH AIR.
GROSS: If youâre just joining us, my guest is Simon Johnson and heâs a
former chief economist for the International Monetary Fund. Heâs
currently a professor of entrepreneurship at MIT's Sloan School of
Management. And he is also a senior fellow at the Peterson Institute for
The United States is going to be loaning the mega-insurance company AIG
another $30 billion. And this was just after AIG announced that itâs had
the biggest quarterly loss in history - $62 billion. So, in of all the
money that the U.S. is giving as part of the bailout, where is the money
coming from? Because the United States is already deep in debt.
Dr. JOHNSON: Where is the money coming from. Well, thatâs a very
interesting question.Of course we have this great feature of the
American system, which is really not available to anyone else, you might
say ever, in the history of crises, which is, we can borrow a lot of
money. In fact, the U.S. government â U.S. Treasury and Securities in
particular - are the last safe heaven for everyone around the world.
When things really get bad on terrible, terrible days, when people are
afraid of all kinds of bad things happening, they move their money into
U.S. Treasurys. So the good news is we havenât lost that ability. I
donât think we will lose that ability to borrow. And you can borrow from
You can borrow from foreign citizens because foreigners want to lend to
you. And you can borrow today at relatively cheap interest rates. So the
U.S. government has a lot of financial and fiscal capacity. It comes
from the fact that we donât have a lot of debt. People are very
confident the U.S. will pay back its debts. And we can use that, we will
use that and we are using that.
And I think that, you know, that was part of the thinking behind the
fiscal stimulus, which while the stimulus didnât come out - Iâm sure -
perfectly for everyone, it was a remarkable achievement given the way
our political system operates. So it does work, it can work, it can be
applied and thatâs what â itâs really the application of that that can
get us through the banking mess, also.
GROSS: I guess, I donât mean to sound, you know, like, downbeat, or a
pessimist or may be just ignorant, but since the United States is having
such a profound economic crisis why are people still confident that
Treasury bonds are safe?
(Soundbite of laughter)
Dr. JOHNSON: Well, I think what it comes down to is our record as a
country. So Alexander Hamilton faced this issue. He was the first
secretary of the Treasury. And there was an issue of debts that were
owed to â that had been incurred during the war of independence. And,
you know, people say, well may be we should just renege on those, that
was quite long time ago. And a lot of the soldiers who received IOUs,
for example, sold them onto other people. So weâre not actually the
bondholders, if you like, and not the people who really deserved it and
who really did the work initially. And Hamilton took a very strong
position, I think, that stayed with us and itâs really served the
country well which is, he said no.
These are debts that were really incurred by the United States and by
the forerunner of the United States and they must be honored. And thatâs
a very important principle, which may sound somewhat abstract but itâs
really fundamental to the functioning of any economy. There are many,
many countries around the world that are defaulted on their debts from
time to time. And they exist, they function as countries. But theyâre
not a country like this one. And they donât have the kinds of
opportunities that we have. And they havenât been able to build the kind
of position we built in the world. And I donât think weâre going to give
that way ever.
I donât think that â you know, it may be called into question, there may
be debate about it. I think ultimately people will realize that this
200-year tradition is really absolutely essential to what this country
is about. And we can afford it. We can afford to payoff - it may be
painful, but we can do it.
GROSS: Between the stimulus and the bailout, the U.S. government is
putting out an amount of money thatâs difficult for most of us to
comprehend because the numbers are so high. So how much of risk do you
think weâre taking as a nation, to be spending so much on the stimulus
and a bailout at the same time?
Dr. JOHNSON: I donât think weâre taking much risk as a nation, to put in
those terms. I think thatâs an important point to be clear on. I just
want us to get better value for our taxpayer dollars. So, the way you
think about debt is how big it is relative to your economy. And right
now the amount of debt the government has outstanding - debt held by the
private sector, not held by other parts of government - is around 41
percent of GDP. These numbers come from the Congressional Budget Office,
which is very authoritative and nonpartisan on these issues.
They estimate that debt - or using their numbers you can estimate that
U.S. Government debt as a percent of the economy at the end of 2010,
given the policies that weâre seeing put in place now will be around 62
to 64 percent of GDP. Okay? Thatâs still a moderate level of
indebtedness, thatâs actually below the level of debt that many
European, many rich European countries have. But unfortunately that
wonât be the end of the story. On top of that, weâll have to do a bank
clean-up which I think could cost 10 percent of GDP, if itâs done
properly and quickly and well.
If itâs done the expensive way, which is what I think the treasury is
heading towards then itâll cost you 30 percent of GDP. So that puts you
up in the â under my proposal â say, mid 70 to 75 percent of GDP, and
under that proposal closer to 100 percent of GDP. Then, of course, the
key issue is, are you growing again. Do you get growth back at this
point, letâs say sometime in 2011, in which case that you can bring the
debt back down. If you donât get debt back - and I think, again, this is
the danger of the treasury scheme - then youâre looking at a weak
performance and a lot of trouble restarting the economy with debt to GDP
close to 100 percent. And this is how Japan lost its decade.
This is how you lost a decade. Japanâs debt to GDP ended up close to 180
percent. Thatâs a problem.
GROSS: What is the Obama administration up against now in trying to fix
the banking problem? And what I mean is, what are they up against
Dr. JOHNSON: Well, I think, itâs all about the politics. And I think
itâs about brining Congress with you - obviously the banking industry is
incredibly powerful in Congress. I think theyâve given money to, my
understanding is pretty much everyone whoâs involved in an oversight
role and perhaps almost everyone who youâd have to engage with in order
to persuade them that youâre going to â that these kinds of changes need
to make, make sense. And, you know, thereâs, I think, a philosophy or
perhaps itâs a culture and a way of thinking about banks and the role of
banks and the role of big banks in our economy thatâs pervasive and is
very much, you know, itâs not a corrupt thing.
Itâs not paid advertising that youâve got to worry about. Itâs the fact
that you know these big banks and everyone who works with them and
around them and consult with them, and so on and so forth, has persuaded
themselves that you need these kinds of banks to operate as they are
under more or less current management in order for us to have an
economic recovery. Now, see, that to me seems to be completely at odds
with the historical record from crises elsewhere. And it doesnât really
mesh with what I think are the issues are in the bank system. And I
think a lot of people outside of these Washington-Wall Street pockets
agrees with me.
But you know the administration has got a very broad political-cultural
issue they are going to get over on this point.
GROSS: Simon Johnson thank you so much for talking with us.
Dr. JOHNSON: My pleasure.
GROSS: Simon Johnson is a professor at MITâs Sloan School of management,
a senior fellow at The Peterson Institute for International Economics
and cofounder of a Web site on the global economic crisis called
Baseline Scenario. Coming up Ken Tucker reviews the new CD by the duo
The Bird and The Bee. This is FRESH AIR.
*** TRANSCRIPTION COMPANY BOUNDARY ***
Bird And The Beeâs Second Album Takes Flight
TERRY GROSS, host:
Our rock critic, Ken Tucker, has the review of the second CD by the duo
The Bird And The Bee - which consists of singer Inara George and
keyboardist-producer Greg Kurstin. Performing on stage with just an
electric piano and drum machine, the two performers developed a strong
following around their home-base of Los Angeles. Their cover of the Bee
Gees âHow Deep is Your Loveâ is currently being used by VH1 for its
promotional spots. Hereâs Kenâs review of The Bird And The Beeâs new CD
âRay Guns Are Not Just the Futureâ.
(Soundbite of song, âMy Loveâ)
Ms. INARA GEORGE (Lead Singer, The Bird And The Bee): (Singing) My love,
let me go again, right back, back to the top of the slide, down sad
clown, oh, oh, oh, oh, oh. My clown, let me love you, whatâs that back
to the back of the rebound? Clown hang around, oh, oh, oh, ohâ¦
KEN TUCKER: The voice of The Bird And The Beeâs Inara George is a
slightly flat, delicate calming tone - a sound frequently devoid of
affect but not colder off-putting in any way. Instead, Georgeâs voice is
a perfect compliment to Greg Kurstinâs chilly instrumental accompaniment
as keyboards and drums collide politely. When Inara George sings about
being lonely, sheâs almost clinical about it. Talking here about how her
head feels empty and that her feeling of longing makes her want to take
you to her bed for a long period of time.
(Soundbite of song, âWhatâs In The Middleâ)
Ms. GEORGE: (Singing) Where is the middle, is the middle of your mind?
Is it the place where you stop, where you just stop trying? Call out the
dogs and let them have a sniff, they might catch a little scent before
you just forget it, losing your head is such a common theme, all your
brains are falling out, falling out the open seams, where is the heart,
is the heart of the matter, I must empty out my skull of all this
useless chatter, I want an empty headâ¦
TUCKER: Thereâs certainly an element of playfulness in this music. This
is definitely an LA based act. Inara George is the daughter of the late
Lowell George, leader of the influential Los Angeles cult rock â70s band
Little Feat. And that showbiz heritage occasionally creeps into The Bird
and The Beeâs songs, such as this one - a poker face tribute to, of all
people, David Lee Roth, lead singer of Van Halen.
(Soundbite of song, âDiamond Daveâ)
Ms. GEORGE: (Singing) When I was a child, you captured my devotion, I
spent so many hours, exploring mixed emotions, all of the ways you spoke
to me, all of the things you provoked in me, Iâll always love you,
TUCKER: I like the way The Bird And The Bee commence their salute to
Diamond David Lee Roth, by talking about how he captured there devotion
when they were children and then proceed to sort out, quote, âAll the
things you provoked in me.â Inara George and Greg Kurstin make music
like good postmodernist creators, analyzing their influences in public
and making art out of their very self-consciousness. They perform a
similar deconstruction on a different genre - hip-hop - in this wittily
prim, yet sinuous bit of music called âPolite Dance Song.â
(Soundbite of song, âPolite Dance Songâ)
Ms. GEORGE: (Singing) Give it up for me please, put your hands in the
air, if you know whatâs good for you, youâll wanna shake it like you
just donât care, would you please clap your hands? Now get up on your
feet, I beg of you to get up and dance, itâs such a crazy kick-ass beat,
TUCKER: Would you be nasty with me - Inara George sings in the same tone
of voice that would make her an excellent narrator for a Jane Austin
audio book. Do you like dancing with me - she demurely enquires. I think
we have a very nice quality - indeed they do. The Bird and The Bee also
have a way of turning their compliments and accusations back on
themselves. Take this jolly bit of put-down called âYouâre a Cadâ in
which a loverâs faults are listed only to have Inara admit - I should be
better, but Iâm worse.
(Soundbite of song, âYouâre a Cadâ)
Ms. GEORGE: (Singing) So now you want the whole world to notice that
youâve come around, now you expect weâll see how youâre really so much
better now, but I know the truth, I wonât waste my youth, on a cad and a
bounder, a dog and a cheat, all the lives that youâve had, all the
hearts you eat, youâre a rascal and a rogue, a villain and a crook,
still I tug at your line, Iâm a fish on your hook, I should be better,
but Iâm worseâ¦
TUCKER: As you may have gathered by now, thereâs an element of
cutesiness to The Bird and The Beeâs music. If youâre not on their
wavelength - fond of â70s dance music, â60s pop and a certain bossa nova
worldliness - you might find them precious. I did at first, but they won
me over. Thereâs a lot to be said for songs this meticulously crafted,
yet injected with real emotion. Above all, this twosome sound like the
sort of adults youâd like to sit down to dinner with, talk about music
and books and movies you might like in common. In general, they seem
like good company in the brainy, clever images they project.
GROSS: Ken Tucker is editor-at-large for Entertainment Weekly. He
reviewed The Bird and The Beeâs new CD âRay Guns Are Not Just The
Futureâ. You can download podcasts of our show on our Web site
freshair.npr.org. FRESH AIRâs executive producer is Danny Miller. Our
interviews and reviews are produced and edited by Amy Salit, Phyllis
Myers, Monique Nazareth, Ann Marie Baldonado, Joan Toohey-Wesman, Sam
Briger, Jonathan Menjivar, John Myers and John Sheehan. Iâm Terry Gross.
Transcripts are created on a rush deadline, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of Fresh Air interviews and reviews are the audio recordings of each segment.