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February 15, 2009
David Warsh, Proprietor


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To See Ourselves As Others See Us

The power of the Web is such that, on a pressing issue, a blogger with a point of view can quickly become nearly as indispensable as such journalists as Martin Wolf of the Financial Times or Paul Krugman or Joe Nocera of The New York Times, as long as the author is sufficiently knowledgeable and determined.

 

A couple of years ago it was Nouriel Roubini, of New York University’s Stern School of Business, who vaulted to prominence by predicting the global solvency crisis early and often. Today it is Simon Johnson, 46, of the Massachusetts Institute of Technology’s Sloan School of Management, who has emerged as a disinterested critic of US attempts to cope with its ailing banking system.

 

Johnson’s site is BaselineScenario. He started it in September last year, barely a month after stepping down after sixteen months as chief economist of the International Monetary Fund. He was joined by his brother-in-law, James Kwak, 39, a successful software entrepreneur now retooling at Yale Law School; and long-time colleague Peter Boone, economist-turned-former-banker who now oversees a UK-based charity operating in India and Africa, Effective Intervention.

 

From a handful of timely op-ed pieces, the site has evolved into a series of full-scale work-ups of the global financial situation, issued roughly every six weeks, as well as a constant stream of blogging commentary on the latest developments. Having worked for more than twenty years on crisis mitigation in countries around the world, Johnson talks easily to bankers, traders, technocrats and elected officials. He is neither Democrat nor Republican, neither especially British nor American (his undergraduate college was Corpus Christi, Oxford, his graduate school MIT). Turning to his page is like sitting down with the hard-bitten macro types he is accustomed to consulting over coffee.

 

“We tell you what the IMF should tell you and would tell you, if only it could speak freely,” says Johnson. “We are trying to speed things up, to run through the bad ideas more quickly.”

 

Recently he has been telling readers that the United Stated increasingly looks to world economists like a much poorer country headed into the grip of a severe crisis, one in which a relative handful of ruling rich interests are determined not to lose control – a familiar enough story in Russia or Indonesia, Thailand or Korea, but not the way Americans are accustomed to thinking of themselves. In a post last week, High Noon: Geithner vs. the American Oligarchs, Johnson wrote,

There comes a time in every economic crisis or, more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that – they say – will deliver you back to growth.  The person has political support, a strong track record, and every incentive to enter the history books.  But one nagging question remains.

 

Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble?  The form of these vested interests, of course, varies substantially across situations, but they are always still strong, despite the downward spiral which they did so much to bring about.  And fully escaping the grip of crisis really means breaking their power.

The oligarchs he had in mind are, of course, the banks – not a few super-wealthy families but instead a highly concentrated industry, an interlocking web of present and former bankers and investment bankers from companies such as Citigroup, Goldman Sachs, Morgan Stanley, Bank of America, and J.P Morgan Chase The strategist whose plan he was discussing was Treasury Secretary Timothy Geithner, whose plan to ease the strains on the American banking system was ill-received last week as gauzy and apparently timid.

The course of action he urged instead was a forced recapitalization and change of ownership/management in the banking system, to be led by the Federal Deposit Insurance Corporation, empowered by President Barack Obama to take over  banks that appear to be insolvent, or otherwise cause them to restructure themselves. Such a massive reorganization would require overcoming perhaps the single strongest interest group in the United States today, the giant banks, and might require legislation. In a widely-watched (and read) interview Friday with the Public Broadcasting System’s Bill Moyers, Johnson elaborated:

I would go back to Teddy Roosevelt 100 years ago, and think about trust busting. Now, the banks don’t violate existing antitrust laws. That’s because our antitrust laws are 100 years old and need to be changed. We need to break them up for exactly the same reason that Rockefeller and the oil interests, Standard Oil, at the end of the nineteenth century, was too powerful, economically and politically. And it had to be broken up. And breaking it up was the right thing to do. That’s where we are with the banks today.

That’s one man’s opinion, of course.  There are many other interesting voices in the blogosphere.  Johnson recommends a few himself. But no outsider’s voice is more striking at the moment than that of Simon Johnson. And no site better demonstrates the power of the Web to restructure debate, by bringing deep and different thinking to the fore.

 

The battle of the banks is just beginning. The industry will be very different when it is done. 

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