Banking Reform Agenda is Likely to Run for a Long While

I was on a Capitol Hill panel yesterday morning, organized by the National Community Reinvestment Coalition, with Jim Carr and Mike Lux; Nancy Cleeland was the moderator.  We had a wide-ranging discussion about the origins of our current economic crisis (the banks, their regulators, their lack of regulation), progress to date with financial sector reform (not much), and what should be the legislative agenda (a long list, ranging from protecting individuals to better safeguarding the system; if you can get any sensible measure past the lobbies, take it).

I was particularly struck by one point made by Mike Lux.  Sometimes it seems the administration talks in terms of having limited political capital and of needing to decide where to spend it – perhaps, for example, it has all been stored up to address health care.  Mike’s model is somewhat different – once you defeat one powerful industrial lobby, it becomes easier to defeat others; success can snowball.  Drawing on the experience of FDR, in particular, Mike stressed that early success (e.g., initial recovery measures that were opposed by industry) laid the political foundations and generated the kind of public support necessary for further achievement (e.g., the introduction of social security).

What does that mean in today’s context?

It means that the banking reform agenda is likely to run for a long while.  Sensible measures may not at first succeed and, let’s be honest, the prospects for the fall legislation do not currently look encouraging – various parts of the financial lobby are flexing their muscle already.  But that is not necessarily the end of the conversation.

In particular, if banks make further mistakes – even if not on the recent scale – this will shift opinion towards reform.  Jamie Dimon, for example, has another brilliant statement on why banking, or at least JP Morgan Chase, should be allowed to go back to “business as usual”.  But his reasoning rests largely on the idea that JP Morgan has a culture that can manage risk, forever.

From all accounts, Dimon’s personality and demeanor are a critical determinant of the firm’s culture in general and the fact that it (partly) sat out the housing craze.  Everything we know about the evolution of firms is that while some aspects of culture survive growth and a rise to predominance (and JP Morgan is now #1, in case you’re keeping score), generally attitudes change as top people change.  And any rise to power brings with it potential sclerosis of various kinds – just ask Citigroup or Bank of America.

So major banks will run into some variety of trouble, probably sooner rather than later – remember there is a potential global credit boom underway (check your local oil prices for details).  If enough transparency, accountability, and public discussion is preparing and waiting for that moment, attitudes towards permissible banking behavior can change quickly.

And this administration will at some point, hopefully, prevail against some powerful industrial group or other.  If they can just get some political momentum vs. recalcitrant lobbies going, such success can be brought over into the financial sphere.

The wave of “reforms” this fall will likely not solve anything.  But this is not the end of attempts to better regulate the functioning of finance and to make sure it can never again run us into a crisis that results in doubling the national debt.  What we are looking at now is just the beginning of a 5 or 10 year struggle for real change in the structure of economic and political power around finance in the United States.

About Simon Johnson 101 Articles

Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at MIT's Sloan School of Management. He is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C., a co-founder of BaselineScenario.com, a widely cited website on the global economy, and is a member of the Congressional Budget Office's Panel of Economic Advisers.

Mr. Johnson appears regularly on NPR's Planet Money podcast in the Economist House Calls feature, is a weekly contributor to NYT.com's Economix, and has a video blog feature on The New Republic's website. He is co-director of the NBER project on Africa and President of the Association for Comparative Economic Studies (term of office 2008-2009).

From March 2007 through the end of August 2008, Professor Johnson was the International Monetary Fund's Economic Counsellor (chief economist) and Director of its Research Department. At the IMF, Professor Johnson led the global economic outlook team, helped formulate innovative responses to worldwide financial turmoil, and was among the earliest to propose new forms of engagement for sovereign wealth funds. He was also the first IMF chief economist to have a blog.

His PhD is in economics from MIT, while his MA is from the University of Manchester and his BA is from the University of Oxford.

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