Simon Johnson on Bernanke and a Second Crisis
MITs Simon Johnson

MIT's Simon Johnson

A new U.S. financial crisis looms, and the seeds of it are in the Federal Reserve itself. That’s the view of MIT’s Simon Johnson, former chief economist at the International Monetary Fund, who is arguing that Federal Reserve Chairman Ben Bernanke should not get a second term.

Johnson told Tom Ashbrook today that Bernanke did a good job addressing the crisis last year, but going forward he still has not tackled the “too big to fail” issue — the notion that big banks will be bailed out if their failure represents systemic risk.

A Senate committee moved forward with Bernanke’s re-nomination in December, and the full Senate is expected to consider his candidacy later in January when it comes back in session. President Obama gave him a strong endorsement.

Wall Street banks, Johnson said, remain convinced that Bernanke might help bail them out again, despite his plans to avoid such scenarios and his assurances that we are not headed in that direction. 

SIMON JOHNSON: Well, they certainly don’t believe it…The technical place to look at this is what’s called credit default swap spreads. This is where the market bets on probability of default for various kinds of financial instruments. Look at what these credit default swap spreads tell you the market believes after the Bernanke [December Senate committee] testimony about what will happen to Bank of America or Citigroup or any of the other big, troubled financial institutions. The market is very clearly saying that they think there is going to be another bailout, more bailouts, unlimited bailouts, as necessary. And those expectations of course are self-fulfilling. If people believe that, they will put money in, they will lend money to these massive institutions. They will get bigger. They will become even more dangerous. They will behave in a reckless fashion. This has to stop. And the Federal Reserve is not addressing this.

Political observers say Bernanke will likely be re-confirmed, but “no” votes from both the political left and right might mean the final tally will reflect more opposition than that of previous Fed chairs.

Johnson said a good candidate to replace Bernanke would be Thomas Hoenig, president of the Federal Reserve Bank of Kansas City.

You can listen to Johnson’s remarks on Bernanke (the clip includes some audio from Bernanke’s recent address to the American Economic Association meeting in Atlanta):

You can listen here to our full interview with Johnson on today’s show.

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