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Moving right along here on the opening bell our next guest.
Says the government needs to do more to reign in the banks specifically tackling be too big to fail issue Simon Johnson senior fellow.
At the Peterson Institute also an economics professor at MIT and Simon joins us now from DC it's always good to see -- good morning and and thanks for coming up.
My pleasure let's talk about.
The legislation is already passed the house on financial regulatory reform and now moves on to the senate there's two distinct differences -- Two distinct versions of of regulatory reform and now Chris Dodd's committee will take it up.
On the senate side with what they're talking about it in the house does that go far enough to -- shoot what you've been talking.
No -- that.
The house version is is unfortunately 22 week particularly key issue of too big to fail.
-- there is the so -- Kanjorski amendment that has some potential but at least too much discretion to the regulators with regard to breaking up the biggest banks I.
I think that congress needs to do more and the senate is not -- to to do that.
All right so this issue of -- -- the quote unquote too big to fail essentially the goal longer term here is to have financial institutions.
That could fail if their business model fails -- allow failure to happen and you don't feel in many people agree.
That that's allowed in the current system so one of the key elements that have to be put in place to allow that to happen.
Well the centerpiece is obviously -- we -- experiences CIT group this year about eighty billion dollars 80.
That's allowed to was allowed to fail the bankruptcy procedure the restructuring -- well pretty well that.
Goldman Sachs have a hand which (%expletive) -- -- 800.
Million dollars and he's clearly too big to fail -- -- Goldman another big refugees to be reduced in size.
Down to the hundred billion dollar all the low level on a risk adjusted -- basis and take Goldman Sachs breaking into ten.
If the argument against that I was actually talking to Dick bove says the financial industry analysts this morning about this very topic and he -- me there was a study does that he says in 1991.
That said that the banks were too small and that hurt their profitability and that hurt the the economy and hurt growth you're already -- so his point is smaller banks mean a smaller economy.
Not -- But come -- that that's that's not that's not -- Now it's not -- has a long time to get in 1990 for the -- six banks in the United States had total assets less than 20% of the GDP to 020% from the same six banks now.
Are over 60% of GDP they getting bigger the crisis make -- -- that's all the acquisitions remedy made of the last couple of years -- these banks.
Arguably -- too big to fail before the crisis now -- definitely to be to step we need to roll the banking system back to where it wants in terms of size and competitiveness.
In -- roughly 99499.
O'clock the bank's books fight nobody can show you any economies of scale scope or anything else since 94.
And -- -- -- a massive additional social -- you don't believe me talk to the eight million people lost their jobs since December 2007.
Who -- -- in the rest of the world doesn't go along with this may -- really limited interconnected banking system as you know and as banks you know banks sell overseas and UBS and others what a big what do they are still as -- as they've ever been and we break up all our banks won't be it won't we as Americans be -- a you know -- huge competitive disadvantage.
No actually not I think it's it's a big advantage to have banks that a small enough to fail a a competitive financial system is is what -- US -- was built on that's what we had until then thank you ladies.
Big European banks -- that problem that they gonna have to stand behind them they get right bailouts that that's a huge hit to that taxpayers.
We should -- and explain that to them pretty clearly.
And it unless they provide explicit -- -- to their -- banks that banks that are that are too dangerous to -- -- system we wish we should cease to have the same kinds of transactions we've been that we had that we have now no question but -- some time to get that right now we got to fix our own problems are not problems -- space the center or what went wrong with the rules.
Financial system right in the backs of anything I've gotten as you know I've gotten bigger since that collapse that we've had so now with regulatory -- reform not in place and navy.
You know not as much of -- movement to do it because things have improved some say that we might not see what you're asking for people who are your camp wanna see real aggressive reform -- mean.
Have you lost any of your optimism that this can actually get done.
This is going to get done it's not gonna get done in this cycle understandably is not going to deliver.
Would the without Chris -- at playing a major leadership role but the consensus but it did change I talked a lot of Democrats I'm I'm from the center -- -- the chief who pulled I'm -- chief economist of the IMF yeah I want a radical of the left -- right I'm speaking.
As attend the credit centrist I'm telling what the IMF should tell you but -- -- other not not not empowered to speak to say this to the United States.
This is what you -- do in order to have a sensible well functioning market based economy you cannot base -- -- system on the expectation of unconditional.
Bailouts that is a quote from Larry Summers.
Big speech to the American Economic Association in January 2000 when he was checking the -- that idea is it was right then it's right now it's going to be implemented sometime over the next three to five -- Simon thanks a lot appreciate you coming on once again.
But I Johnson from the Peterson institute also from MIC.
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