Simon Johnson and the London School of Economics' Peter Boone offer up a critique of the proposed Obama bank tax in the Financial Times Tuesday and -- surprise, surprise -- find it wanting. And once again they use the opportunity to declare not only that doomsday is upon us but that the U.S. banks now resemble the Soviet banking system just before the collapse. Now it's fine, and probably correct, to make an argument about the tax that suggests it will have very little long-term effect. But that assumes that the levy is the only regulatory response against the banks in the government kit bag. And the metaphor they roll out is absurd and hysterical.
Johnson has shown this propensity for wild-eyed metaphor production in the past. A year ago, he was comparing the U.S. banking system to the corrupt, emerging-market systems that he dealt with in his time at the International Monetary Fund. Johnson used that particular critique to demand that the banks be nationalized because they were both all broke and because they needed to be cleansed -- and the only solution was a radically interventionist policy of bank seizure by the government, a policy the Obama administration ignored. Now he is arguing that the banks resemble Communist-era Soviet banking, a system that was, to say the least, already nationalized and that was collapsing as the Soviet economy crumbled around it. At least some of Soviet banking's bottomless corruption and irrationality stemmed from its intimacy with state power. So what do Johnson and Boone want: nationalization or not?
Johnson and Boone seem quite sanguine that their "dramatic reforms" of jacking up capital levels and installing size limits on all banks -- the kind of actions taken by "tough leaders and clear thinkers, such as Boris Yeltsin and Yegor Gaidar" -- is the answer in the U.S. and U.K. They want us to go through a radical process like the one led by that notably "clear thinker" Yeltsin. They're willing to send the economy into another tailspin to break the "doomsday cycle" they claim to see clearly, and which they argue began in the '70s. Now I hate to sound like a Panglossian here, but if you take the period from the late '70s to 2010, would you do it again, or would you rather take the Russian experience from Yeltsin to Putin? There was an awful lot of growth in those years and more than a few good years, even decades. Who would want to suffer through the Yeltsin implosion in Russia? And how much is the authoritarian Putin a political response to the chaos and dislocation of Yeltsin?
And why back to the '70s? Arguably, deregulation has its roots in that era. But of course the stagflation '70s were hardly an era too many folks want to re-visit. What are Johnson and Boone trying to avoid? Are they arguing that the LDC debt crisis was part of this doomsday cycle, along with the failure of Continental Illinois (a lone big bank), the S&L crisis (many small banks) or the failure of Long-Term Capital Management (lone hedge fund) or the dot-com bubble? What exactly is their critique -- and how would breaking up the big banks (nationalization as a solution seems to have disappeared) make a difference in eliminating other asset bubbles? While it's true that too-big-to-fail is a looming problem that must be dealt with, there are a variety of other ways besides sheer size that banks can cause a lot of harm, and do, with some regularity: It's in the nature of banks to blow up. At the very least, Johnson and Boone should offer up a few more details about our woes before demanding such brutal medicine.
Johnson is a sophisticated and often articulate pundit on economic matters -- but like his political confederate Paul Krugman there's more than a bit of bully in him. Both of them opt for scare tactics -- a doomsday cycle, the banks as Soviet-era dinosaurs, a decade of decline -- to get their way. Both of them draw their authority from their credentials as economists, a shaky pillar these days. Both of them make political arguments but ignore political realities. And what's surprising in both men, who argue for the greater good of mankind and an end to suffering and want, is how readily they are to send an economic system into a period of significant, even radical experimentation. Die now, you'll feel better later. - Robert Teitelman
Robert Teitelman is the editor in chief of The Deal.