Today, with financial-reform legislation a leading topic on Capitol Hill, Johnson is testifying before the Senate Banking Committee about the state of the industry — a topic he also dissects further, with co-author James Kwak, in his forthcoming book “13 Bankers,” due out in March. Johnson spoke with MIT News on Wednesday.
Q. The Obama administration has recently proposed restrictions on the size of banks. What is your view of their ideas, and what chance do they have of becoming law?
A. These proposals don’t go far enough. The size restrictions should be tougher, but that has basically no chance of passing the Senate right now. What I see as being really up for grabs here is mainstream consensus opinion about what are safe banks, and what are dangerous banks. Big Finance has gotten out of control and needs to be reined in, but it’s only really going to happen once reasonable people change their minds about what is too big to fail.
Q. But if you were involved in these congressional negotiations and could choose just one element of reform to include in legislation, what would it be?
A. I would amend the 1994 Riegle-Neale Interstate Banking and Branching Efficiency Act, which said no bank can have more than 10 percent of retail deposits in the United States. Two problems have become apparent since 1994. First of all, a lot of the action for banks is not in retail deposits, it’s in so-called wholesale financing, financial companies lending to each other. That’s where banks became a lot bigger. Secondly, that cap wasn’t enforced because we had some regulators who were very laissez-faire, or just lazy, and so Bank of America, Chase, JP Morgan and Wells Fargo all received waivers on that size cap. You need a different cap that reflects changes in finance. I would cap bank assets and liabilities as not more than a small percentage of Gross Domestic Product, and set that percentage so the banks go back to the size they were in the early 1990s, when the banking system worked fine and we didn’t have anything like our current levels of systemic risk. That seems like a completely reasonable proposal. And I would enforce the cap. The regulators have to wake up.
Q. We’re living with 10 percent unemployment. At what point do economic conditions themselves alter this mainstream consensus view, about the value of the financial industry?
A. The big question is whether real change can come without a major depression. Because it’s just astonishing in Washington to see the presumption among lobbyists that it’s business as usual, since we didn’t have a Great Depression. That’s really shocking and discouraging. But the mainstream consensus has changed before in big ways. In 1902, when Teddy Roosevelt decided to take on the trusts, nobody thought that was a good idea, and nobody thought it would work. Yet by 1910, or 1911, everybody thought the trusts were bad for society, and had to be broken up — even Standard Oil was broken into 35 or so pieces, all of which were quite viable and most of which turned out to be extremely profitable. I think that what we’re looking for is a change in views similar to what Teddy Roosevelt achieved.
Q. What do you think of the White House’s performance on banking issues?
A. I voted for President Obama and like him and wish him well, and we do try to make constructive suggestions to his people both in private and on The Baseline Scenario. I think he’s pretty much at this point established himself on these issues as a conventional centrist, not a radical reformer, contrary to what people thought they heard him say. I don’t know if President Obama is the person who is going to do this. I don’t know if the person who will do it will eventually come from the left or the right. It will probably be someone with more of a maverick streak in him or her. Now, mavericks come with other attributes, so be careful what you wish for. But conventional thinking is not going to get us out of this, it’s clear. We’re in far too deep and the corporate banking lobby is far too powerful.
Q. You’ve started advocating a “move your money” initiative to get citizens and politicians to transfer their funds to smaller banks. What might that accomplish?
A. It’s about changing people’s attitudes and opening people’s eyes to the behavior of the financial sector and the big banks, who often don’t treat you well as customers, let alone in terms of what they do to the economy. So when people look carefully, they often find small banks are better. I banked with a small bank in Cambridge for 20-some years, and in D.C. I’m with a credit union, and it’s terrific service. And I’ve had three mortgages, from the same people I keep my money with, very good interest rates, and if there’s a problem you call up and you talk to someone right away, they don’t mess around with you. Even if we’re looking at a decade to change attitudes, those can change, and I think they will change. That’s the good thing about American society and American democracy.