Simon Johnson on the US Oligarchy

"If a company is too big to fail, it is too big to exist:"

Leading Economist Decries Power of Wall Street "Oligarchs"

Posted Apr 21, 2009 07:30am EDT by Henry Blodget in Investing, Recession, Banking

Related: ^DJI, ^GSPC, xlf

In a fascinating piece in the latest issue of The Atlantic, Simon Johnson, former chief economist at the International Monetary Fund, outlines what he sees as the alarming influence of Wall Street firms over the American economy. He expounds on his thesis in our interview, making several points:

America’s Crisis Resembles that of Emerging Markets: While at the IMF, Johnson saw so many financial crises that the core problem became old hat: In the free-wheeling growth years of an economic boom, the politicians and oligarchs of an emerging market like Russia or Argentina would get so close that eventually they would meld into a politico-industrial complex. As long as the boom lasted, this cozy relationship never bothered anyone--because everyone was getting rich. Fast forward to the latest market crisis--the one in the United States. The pattern is exactly the same, Simon Johnson says, with a mutually beneficial money-and-power corridor now running between Washington and the modern oligarchs Wall Street.

But There Are Key Differences: In the emerging markets, eventually, the bubble would burst. The banks and corporations would collapse, and suddenly it would be up to the government to seize and restructure the insolvent banks. In America, though, there will be no such defining collapse, nor a quick recovery, he argues. Instead, we face a “painful” L-shaped recovery, drawn out over 3-5 years.

Wall Street: “It’s Too Big, Too Powerful. It’s Dangerous.” Simon argues that the U.S. should invoke anti-trust laws to break up Wall Street, whose power poses a material threat to the American economy.

Simon Johnson is a senior fellow at the Peterson Institute and a professor at MIT’s Sloan School of Management. He is a co-founder of the popular economics blog, BaselineScenario.