Tags: simon | johnson | banks | crisis

Johnson: Six Big Risky Banks Will Spark Next Crisis

Tuesday, 12 Jan 2010 01:11 PM

Former IMF chief economist and MIT School of Management professor Simon Johnson says we're on track for another financial crisis this year, in part because the six big U.S. banks left standing — whose balance sheets now constitute over 60 percent of GDP — believe they’re immune from future failures.

“That’s what Tim Geithner has told them, that’s what Larry Summers has told them,” Johnson told CNBC. “Crazy things happen when you have a financial system like that," he said.

“All the big guys are out there looking to take risks. If you had a ‘Get Out of Jail Free Card,’ wouldn’t you?”

Big banks should be broken up, Johnson says, but “no one has the political gall to do that now.”

Conventional wisdom back-to-back major financial crises don’t happen, but Johnson believes this may well be untrue.

“The next 12 months could really be exciting,” he observes.

“People could be very positive, but we are setting ourselves up for an enormous catastrophe."

“I think it’s mostly going to be where everyone thinks prices can only go up, and that’s China (and) other emerging markets,” Johnson says, where the real economy could become dismal, causing “all kinds of interesting exchange rate dynamics that are going to impact the rest of the world.”

Legislation sponsored by Senators John McCain and Maria Cantwell, and a companion one authored by Representative Maurice Hinchey, would restore some of the key provisions of the Glass-Steagall Act, passed in the Great Depression and repealed in 1999, which separated commercial and investment banking completely.

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Former IMF chief economist and MIT School of Management professor Simon Johnson says we're on track for another financial crisis this year, in part because the six big U.S. banks left standing whose balance sheets now constitute over 60 percent of GDP believe they re...
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