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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):

http://audio.wbur.org/storage/2010/01/onpoint_010710_simon.mp3

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

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  • http://www.richardsnotes.org Richard

    This was a great show and interview with Simon Johnson who I’ve been a fan of for a while now.

    I sure wish someone with influence in the Obama administration would take notice of this guy and his ideas. They seem to also be ignoring Volker who’s supposedly got their ear.

    I am terribly disappointed in Obama. Just like the underpants bomber failure of intelligence, the buck stops with Obama on too big to fail as well.

    TSA heads should roll and so should Summers and Geithner (their heads should roll too).

    How many chances will Obama give people before he fires them? How about Rham, is he fireable?

  • MIchael

    great show to bad, we will have some blow hard on, most likely next week spewing the counter claims (your guest have plainly and validly pointed out) with the typical trust us and political spin.

    But was refreshing to hear him speak.

  • Mark A Casey

    Thank You, Mr Ashbrook, for such a great interview. Mr Johnson believes as my husband and I believe. It’s all about “Ideology” definition, “Greed”. The ultra-rich are brainwashed from one generation to the next. Their mantra is “I am above the law” no regulation, no guilt, no conscious…and wall street and deregulation served as their vehicle to Nirvana. What a High!! Another High… when we bailed them out. I took notes to share with my husband. He was so interested that at diner last night I turned on the laptop and listened to your interview with Mr Johnson. You may take any of this comment out. My husband is a “Brilliant Builder” and we lost it all. We have long discussions these days but last night it was more serious. When the alarm went off this morning he announced “He wants to run for the Senate”. He has a Platform… but no Money. Thank You, Mr Ashbrook and Mr Johnson.

  • James Newberry

    As long as the public allows today’s highly centralized corporate lobbying, which is subsidized by the public through business tax expensing (ie. we pay for it), then we will continue to degrade in corruption (such as financial) and globalized corporate “transfascism” resulting in the degradation of every American economic sector and every ecologic system.

    We are a plutocracy at best. The resulting destruction to economy and ecology is staggering and life threatening and certainly not “sustainable.” Do we have a constitutional crisis? Have money changers invaded the governance of public policy?

  • dslaby

    What is the relationship of the destruction of the Twin-Towers on 9/11 and the apparant lack of impact on the financial sector? Where the losses deferred until just before the 2009 election? What caused the capital drain in 2009? Was the loss of liquidity a transfer of funds to Swiss bank accounts? Was 2009 a big bank heist by bankers?

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