Tom Keene Talks to MIT's Simon Johnson

The HBO version of Too Big to Fail just came out. What are we forgetting about the bank crisis of two to three years ago?
I think we are forgetting how much Mr. Paulson and the Treasury opposed any kind of preemptive measures and action. You know, the FDIC has a paper out saying they could have used the Dodd-Frank powers if it had them in the day to deal with Lehman six months before the crisis. I don't believe that is true, because I know from my own experience how steadfastly opposed the Treasury team was to anything at all getting ahead of the curve. That is not their mindset. It is all about muddling through.

Is your reading of history that we used to not muddle like that?
We have always muddled. But the extent to which we have built up moral hazard and encouraged creditors not to be careful, I think that has gone way beyond what is acceptable. We are still dealing with the breakdown of Bretton Woods. We lost our anchor. We tried to replace it with central bank credibility, but only to the extent central banks looked the other way from financial sector excesses.

What is the new anchor?
I don't think we have one. You cannot go back to gold. It is just not practical. You can have central banks that will keep to a zero to 4 percent inflation target. But how do you square that with the consequences for the financial sector, which we see again in Europe and around the world?

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