Former IMF chief economist blasts "overgrown" U.S. financial services industry

11:51, June 27, 2010      

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Simon Johnson, a former International Monetary Fund chief economist, on Saturday blasted the "overgrown" financial services industry in the United States for creating the global financial crisis.

He said the U.S. industry, which was getting bigger each day, was not only the cause of the current crisis, but could bring about other crises in future.

Some said "what we experienced in the fall of 2008 was very bad luck," but "another interpretation is that we have been building ingredients for repeated disasters for a critical period of time,” he told an annual academic meeting co-sponsored by the National Bureau of Economic Research (NBER) in the United States and the China Center for Economic Research (CCER) of China’s Beijing University.

He the level of private sector credit relative to gross domestic product (GDP) had been growing steadily in the U.S. for the past 30 years or so. Financial sector wages had also been growing disproportionately to those in the wider private sector, the industry had gained political power to influence decision-making in Washington, and the six largest American banks had been getting bigger each day.

All these factors had contributed to creating monstrous financial institutions which were "too big to fail", he said. This overgrown financial services industry in the United States, armed with the sense of exemption, would take too much risk and bring about one crisis after another, effectively creating a “Doom Loop” for the world economy.

He agreed with a Chinese professor who said at the meeting the financial services industry, supposed to be a “servant” of the economy, now had become the “master.”

The former IMF chief economist said large financial institutions should be broken up, compensation schemes for top level executives changed and those who helped create the financial crisis should be held accountable.

Johnson was the chief economist of the IMF from March 2007 until August 2008. He is now a professor of entrepreneurship at the Sloan School of Management of the Massachusetts Institute of Technology. He is also a senior fellow at the Peterson Institute for International Economics.

CCER was founded in 1994 and has since become an influential academic institution in China, while the NBER, created in 1924, was one of the leading private, non-profit economic research organizations in the U.S.

This was the 12th annual academic meeting on China and the world economy held by the two organizations. The meeting started Friday in a traditional Chinese courtyard complex on the picturesque Beijing University campus, and it will last until Monday.

This year’s topics include macroeconomics in the United States and China, exchange rates, capital allocation, consumer finance and other economic issues.

Source: Xinhua

(Editor:王千原雪)

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