the next financial crisis
TRANSCRIPT
The Next Financial Crisis
Simon Johnson
Co-author, with James Kwak, of
13 Bankers and White House Burning
1
Relative Financial Sector Wage and
Financial Deregulation, 1909-2006
2
-3
-2
-1
0
1
2
1
1.1
1.2
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1.4
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1.7
1.8
1909 1919 1929 1939 1949 1959 1969 1979 1989 1999
Fin
an
cia
l D
ere
gu
lati
on
In
de
x
Fin
an
cia
l S
ec
tor
Wa
ge
s R
ela
tive
to
Pri
va
te
Se
cto
r W
ag
es
Figure 5.2: Relative Financial Wage and Financial Deregulation
Financial Deregulation
Index (right scale)
Relative Wage in
Finance (left scale)
Source: Thomas Philippon and Ariel Reshef, "Wages and Human Capital in the U.S. Financial Industry: 1909-
2006," Figure 6
Big Banks Gone Bad: Europe
Too Big To Fail In Action: Even Canada?
“Maybe not explicitly, but
what are the chances
that TD bank will not be
bailed out if it did
something stupid?”
Ed Clark, President and CEO Toronto
Dominion Bank, on an investor
roadshow selling TD preference
shares, January 2009
Real Average Compensation: Banking
vs. Private Sector, 1948-2008
5
0
20,000
40,000
60,000
80,000
100,000
1948 1958 1968 1978 1988 1998 2008
20
08
Do
lla
rs
Source: Bureau of Economic Analysis, NIPA Tables 1.1.4, 6.3, 6.5; calculation by the authors. Banking includes
financial sector less insurance, real estate, and holding companies. Annual compensation is total wage and salary
accruals divided by full time equivalent employees.
Banking
Private Sector
Figure 5.1: Real Average Annual Compensation, Banking vs. Private Sector Overall
Economic Power Becomes
Political InfluenceReal Corporate Profits, 1929-2010
Real Corporate Profits, Financial vs. Nonfinancial Sectors, through Q4 2010
-100
0
100
200
300
400
500
600
700
800
900
1000
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Q1
2010
Q4
Financial profits (index=100 in 1980) Nonfinancial profits (index=100 in 1980)
Source: Bureau of Economic Analysis, NIPA Tables 1.1.4, 6.16; calculation by the authors. Financial sector excludes Financial
Reserve banks. Annual through 2009, quarterly for 2010 (annualized; seasonally adjusted).
Financial
Nonfinancial
Six Big U.S. Banks Getting Bigger(through end of Q3 2010)
Growth of Six Big Banks
0%
20%
40%
60%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Assets
as P
erc
enta
ge o
f G
DP
Bank of America
JPMorgan Chase*
Citigroup**
Wells Fargo***
Goldman Sachs
Morgan Stanley
* Chase Manhattan through 1999
** Travelers through 1997
*** First Union through 2000; Wachovia 2001-2007
Source: Company annual reports and Federal Reserve. 2009 is at end of Q3; 2010 is at end of Q3.
Financial System Has Become Very
Highly Leveraged:Equity As Percent Of Assets, US Commercial Banks,
1840-1995
Are We In A Boom-Bust-Bailout Loop?
Source: Boone and Johnson, “The Doomsday Cycle,” CEP/Vox
Or A Fiscal Disaster?Ireland: Bank Assets, Govt debt
(fraction of GDP)
-0.1
0.1
0.3
0.5
0.7
0.9
1.1
1.3
1.5
0
0.5
1
1.5
2
2.5
3
3.5
Allied Irish Bank of Ireland
Anglo Irish Govt Debt/GDP
B
a
n
k
s
G
o
v
e
r
n
m
e
n
t
Too Big To Save In Action:
Irish Public Debt/GDP(2004-2015E)
0
20
40
60
80
100
120
140
160
Includes NAMA
financing
Source: Peter Boone and Simon Johnson, “Will The Politics of Global Moral Hazard Sink Us Again? “ In The
Future of Finance http://harr123et.files.wordpress.com/2010/07/futureoffinance-chapter101.pdf
What Does This Imply For The
European Central Bank?
• Does price stability remain the sole mandate?– Jean-Claude Trichet (Sept 8, 2011): “Impeccable”
record, inflation at 1.55% per annum over 12-13 years
– Jurgen Stark: announced resignation (Sept 9, 2011), effective end of the year
“A person familiar with the matter said Mr. Stark is leaving due to a conflict over the bank's bond-purchase program.”(1)
• For more background and alternative scenarios, see Peter Boone and Simon Johnson, The European Crisis Deepens, PIIE policy paper, January 2012, http://piie.com/publications/pb/pb12-4.pdf
Source: WSJ news alert, 10:01am September 9, 2011, “ECB’s Stark resigns, rattling markets.”
Does The US Have A “Fiscal Crisis”?
0
20
40
60
80
100
120
1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010
National Debt as a Percentage of GDP, 1790–2010
Source: TreasuryDirect, Historical Debt Outstanding—Annual; Louis Johnston and Samuel H. Williamson, "What Was the U.S. GDP Then?" MeasuringWorth; OMB, Fiscal Year 2012 Budget of the United States, Historical Tables, Table 7-1. Includes gross government debt through 1939, net debt (held by the public) thereafter. (The difference between the two in 1940 was less than 2 percent of GDP.)
-1,500
-1,000
-500
0
500
1,000
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Bil
lio
ns
of
Do
lla
rs
Change in Projected 2010 Budget Balance, 2001–2011
Source: CBO, Budget and Economic Outlook and Budget and Economic Outlook: An Update, 2001–2011.
2001 tax cut
2003 tax cutInvasion of Iraq
2008 tax cut
Peak of financial crisis
2009 stimulus
Invasion of Afghanistan
Medicare Part D
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0
10
20
30
40
50
60
70
80
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Pe
rce
nt
of
GD
P
Increase in National Debt Due to Financial Crisis
Source: CBO, Budget and Economic Outlook, January 2008; Budget and Economic Outlook: An Update, August 2009.
January 2008 Baseline Projection
August 2009 Baseline Projection
An Inconvenient Truth
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Interest $196
Social Security$701
Medicare$446
Medicaid$273
Other Mandatory$493
Defense$689
Other Discretionary$658
Federal Spending, 2010Billions of Dollars
Source: OMB, Fiscal Year 2012 Budget of the United States Government, Historical Tables, Tables 8.1, 8.5
Likely Outcome: Cut Spending
and Raise Tax Rates On Richest
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Alternatively:
Revenue To Support Social Insurance
0
5
10
15
20
25
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Pe
rce
nt
of
GD
P
Composition of Federal Revenues, 1945–2010Trailing 3-Year Averages
Source: OMB, Fiscal Year 2012 Budget of the United States, Historical Tables, Tables 8-4, 8-5.
Corporate Tax
Individual Income Tax
Social Insurance
Other
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Yes We Can Fix The Budget
0
20
40
60
80
100
120
140
160
2010 2015 2020 2025 2030 2035 2040
Pe
rce
nt
of
GD
P
Figure 6-1: National Debt Projections: Tax Cuts Expire
3.0% Adjustment to Annual Primary Balance
No Change
Source: CBO, The Budget and Economic Outlook: An Update, August 2011; CBO, 2011 Long-Term Budget Outlook,
June 2011; CBO, The Long-Term Budget Outlook, June 2009; analysis by the authors (for details, see the Appendix).
For simplicity, we assume a 3.0 percentage point adjustment to the primary balance in every year beginning in 2022.18
Or Maybe We Can’t
0
20
40
60
80
100
120
140
160
2010 2015 2020 2025 2030 2035 2040
Pe
rce
nt
of
GD
P
Figure 6-2: National Debt Projections: Tax Cuts Do Not Expire
5.5% Adjustment to Annual Primary Balance
No Change
Source: CBO, The Budget and Economic Outlook: An Update, August 2011; CBO, 2011 Long-Term Budget Outlook,
June 2011; CBO, The Long-Term Budget Outlook, June 2009; analysis by the authors (for details, see the Appendix).
For simplicity, we assume a 5.5 percentage point adjustment to the primary balance in every year beginning in 2022.
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Fiscal Adjustment Under Clinton
• Five major periods of U.S. debt reduction– 1791 to 1835: from 39.9 percent of GDP to ~0 percent; 0.9 perc.pts. p.a.
– 1866 to 1916: from 33.5 percent to 3.0 percent; 0.6 perc.pts p.a.
– 1919 to 1930: from 34.6 percent to 15.6 percent; 1.7 perc.pts p.a.
– 1946 to 1974, from 108.7 percent to 23.9 percent; 3.0 perc.pts p.a.
– 1993 to 2001, from 49.3 percent to 32.5 percent; 2.1 perc.pts p.a.
• Post-World War II : primary surplus, 1.0% of GDP, second-lowest of
these periods (Oliver Jeanne)
– Real interest rate was 3.4 percentage points less than the real growth rate; in
all other periods, the real interest rate was higher than the real growth rate.
• Clinton years, 1993-2001: primary surplus was 2.7% of GDP, by far
the highest of any of these periods (next is 1919-30; 1.8% of GDP)
– Real interest rate was 1.4 percentage points above the real growth rate, the
highest gap (and least favorable to fiscal adjustment) of any of these periods
(tied with 1866-1916)20
US Dollar/Treasury Debt
As Safe Haven – For How Long?
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
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10
-Ye
ar
Tre
as
ury
Yie
ld (
Pe
rce
nt)
20
18
De
bt
(Pe
rce
nt
of
GD
P)
National Debt and Interest Rates 2018 Debt (CBO Baseline Projection)
Source: Federal Reserve Statistical Release H.15; CBO Budget and Economic Outlook, Analysis of the President's Budgetary Proposals,and Budget and Economic Outlook: An Update, 2008–2011.
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License Plate of Robert Kindler,
vice-chairman of Morgan Stanley
(after the crisis)