We Must Break Up Big Banks and End Too-Big-to-Fail, Says Simon Johnson

Now that healthcare reform has been passed, Washington's attention has turned (once again) to financial reform.  Unfortunately the bill currently under consideration won't really fix anything, says Simon Johnson.

Johnson is a former chief economist of the International Monetary Fund, a professor at the MIT Sloan School of Management, a fellow at the Peterson Institute for International Economics, and a member of the CBO’s Panel of Economic Advisers.  He is also a co-founder of The Baseline Scenario and a book called 13 Bankers, which describes the extent to which, in Johnson's view, Wall Street has come to control and define the government's agenda.

To truly reform Wall Street and make the financial system safer and more stable, Johnson says, we need to eliminate the "Too Big To Fail" policy by breaking up the big banks.  Only once the banks are small enough to fail without taking the economy down will bankers be subjected to the normal market forces that shape most free-market behavior.  Specifically, the knowledge that, if the banks screw up, no one will come rushing to their aid.

Until you eliminate the "moral hazard" of Too Big To Fail, Johnson says, we'll just move from one crisis to the next.  Risk-taking has returned with a vengeance to Wall Street, and the government has made clear through recent actions that the big banks have an implicit government guarantee. As a result, in many ways, we're worse off than we were before the crisis.

Johnson doesn't think the necessary financial reform will be achieved in this current legislative session.  But he hasn't given up hope.  Many of the major financial reforms of history were achieved over a period of years, and that's what Johnson's hoping will happen again this time.