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We Need to Get Our Economic Facts Straight

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Simon Johnson

History matters. Without understanding how we reached our present economic and financial situation, it is hard for people to think sensibly about what needs to be done now.

Our current budget deficits are the result of 10 years of fiscal mismanagement, beginning with the tax cuts passed under President George W. Bush. At the time, there was this illusion of “extra” revenue that could be returned to taxpayers. In fact, the baby boomers were starting to retire in large numbers and that surplus was needed to cover their Social Security benefits. The facts, as presented, were wrong.

The facts were also wrong on the expense of two foreign wars in Iraq and Afghanistan. The Bush administration fired a senior official who predicted that the war in Iraq would cost considerably more than others were suggesting at the time. In retrospect, the wars will end up costing far more than even that official estimated.

There was also complete — bipartisan — delusion on the dangers posed by the financial sector. In this case, the most powerful people on Wall Street were the ones who had their facts wrong. Their mistakes blew up their companies in spectacular fashion and pushed the economy into a severe recession from which we are still, five years later, struggling to recover.

We need to strengthen our federal tax revenue base. We can do that by reducing or eliminating tax breaks that favor very rich financiers and limiting tax breaks that encourage overspending on healthcare. We need to stay out of war — and reduce the size of our military. We need to complete the process of financial reform that was started by the Dodd-Frank Act of 2010.

But we should go further. I support the SAFE Banking Act proposed by Senator Sherrod Brown. We should make our largest financial institutions small enough and simple enough so that they can, when appropriate, fail – just like any other American company. We should and must move to end “too big to fail.”


Simon Johnson spoke with Bill Moyers about JP Morgan’s multi-billion dollar loss in May. Johnson is a former chief economist of the International Monetary Fund and now a professor at MIT’s Sloan School of Management and senior fellow at the Peterson Institute for International Economics. His most recent book is White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.

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  • Anonymous

    Instead of listing the events we need to understand in detail the motivation of those who, as the evidence now clearly indicates, deliberately misled us into this morass.
    The first place to look is where there is obvious overlap between those who influenced events and also benefited from them.
    If they are not being held accountable – and there is no sign that they are – then their agendas remain the driving force behind what is being proposed now with the distinct possibility of more of the same and no solution.
    If we can’t or won’t acknowledge this then we are going to repeat the same mistakes whether we know the history or not.

  • http://www.facebook.com/mike.phx Mike Phx

    And end “too important to Jail” as well.

  • Steve

    It is all about MONEY and the 1%. How can Congress accepting huge campaign donations not be a conflict of interest? Especially when they retire and go to work with million dollar plus salaries for those they formerly regulated . . . duh, are we that stupid to let this practice continue? We need to return to Glass-Steagall and much stricter oversight of banks and Wall Street. Then we need regulations with legal teeth and consequences. No longer too big to fail or too big to jail. The line in the sand must be drawn by We the People to let Congress and the Government know who really is in charge. We’re mad as hell and not going to take this anymore. Oh and by the way, hasn’t anyone ever heard of demanding a balanced budget? But that would require too much financial discipline by a bunch of bought and sold grifters.

  • Steve

    It is
    all about MONEY and the 1%. How can Congress accepting huge campaign donations
    not be a conflict of interest? Especially when they retire and go to work with
    million dollar plus salaries for those they formerly regulated . . . duh, are
    we that stupid to let this practice continue? We need to return to
    Glass-Steagall and much stricter oversight of banks and Wall Street. Then we
    need regulations with legal teeth and consequences. No longer too big to fail
    or too big to jail. The line in the sand must be drawn by We the People to let
    Congress and the Government know who really is in charge. We’re mad as hell and
    not going to take this anymore. Oh and by the way, hasn’t anyone ever heard of
    demanding a balanced budget? But that would require too much financial
    discipline by a bunch of bought and sold grifters

  • http://www.facebook.com/bruce.park.2012 Bruce Park

    The “years of fiscal mismanagement” began with Lyndon Johnson (Sorry Bill). They run deficits no matter whether the economy is good or bad. It’s not Keynes, it’s a limitless credit card. They have no intention of ever paying it back, so why practice restraint?

    Actually Wall Street got their facts right. They correctly calculated that if they gambled enough money, when it went belly up they’d get bailed out. They knew that from the example ten years earlier of Long-Term Capital Management. If you gamble trillions of dollars and win, you cash in. If you lose, the gov’t has no choice but to backstop you. It’s a win-win situation for them. And they are not struggling to recover.

    You describe what a solution would look like, but you don’t actually offer a plan on how it could be done. Great ideas, but they will never materialize in the real world. I appreciate you’re an economist and not a political strategist, and this is what you wanted the Prez to say, but the people who are benefiting from the current situation are in charge and have no intention of ever changing anything. Obama serves at their pleasure.

  • JohnR

    and isn’t it great we have computers recording each and every transaction of not only every Federal Office… but also every Federal Official’s Bank Accounts as well. And they’re only getting more and more powerful every day! I can’t hardly wait till the Diamond provcessors get turned lose tying all of these illegal transfers of OUR money from here to there… I hope I’m still alive to watch the mighty fall.

  • Lynn Cole

    I’m not sure that I completely agree with Mr. Johnson. There are times when we need large financial institutions to finance large projects. It may be very difficult to get a coalition of small banks together to provide that financing. However, I do think that the larger a financial institution is, the more strictly it should be regulated to disallow the financial shenanigans that got JP Morgan and others in trouble. Very strict regulation would lessen the likelihood that they would fail, and some institutions might decide that they would rather be smaller and have less regulation. That would increase competition and limit the number of institutions that are too big to fail.