Monday, April 16, 2012
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Washington (GoinsReport.com) – An MIT economist said Monday that he isn’t convinced that the steps taken to address the financial crisis of 2008 have actually “fixed” the problems that led up to it.
Simon Johnson, a professor at the Massachusetts Institute of Technology and frequent New York Times contributor, said: “I’m not convinced that we’ve fixed the problems that led to the financial crisis.”
He continued: “There’s a huge contingent liability that looms over us.”
Contingent liabilities are possible obligations to pay a sum depending on how history plays out.
Because obligations are only “possible” at a certain time, and future events dictate if an obligation becomes due, contingent liabilities are kept off the books of financial statements of private firms and, in this case, the fiscal statements of the government.
Johnson made his remarks at the Peterson Institute for International Economics to discuss his new book “White House Burning: The Founding Fathers, Our National Debt, And Why It Matters To You.”
When asked by GoinsReport.com to identify some of the problems that he thought haven’t been fixed yet, Johnson further stated that “the very big banks” were still a problem.
“On the financial side, the main problem is the very big banks, the so-called “too big to fail” banks. It’s very hard to manage problems or liquidation at one of those banks,” Johnson said.
Johnson said that Title II of the Dodd-Frank Wall Street financial reform bill, which authorizes the FDIC to place large, nonbank corporations into a process similar to bankruptcy and allows for the orderly liquidation of nonbank financial institutions covered and not-covered by the Federal Deposit Insurance Corporation, and FDIC’s current attempts to put forth resolution plans are steps “in the right direction.”
“I think these are steps in the right direction but the structures are still very fragile,” he said.
“So the essence of the problem is very big financial corporations that are effectively government subsidized and encouraged to take excessive risk when those structures become high leverage and blow themselves up,” Johnson continued.
“So it comes on top of the spending versus revenue gap that has been developing for some time. On top of that you have a big crisis. And if you can finance it, if you can go through this without a disaster, best-case you have another 40, 50, 80 percent GDP increase in debt. That’s a huge fiscal risk.”
Johnson also pointed out that it is “awkward” that Congressional Budget Office doesn’t score that “huge fiscal risk” because it does score other kinds of contingent liabilities, such as Medicare.
“They should do the same thing with the financial crisis, but they don’t,” he said.
Johnson, alongside Sheila Bair, the former FDIC chair, recently sent a letter on March 30, 2012 to the Federal Reserve giving recommendations on how to dissolve the large financial institutions.
He also said that Medicare would be a contingent liability 50 years down the road.