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Welcome to the JOURNAL. Clamor has been building as more and more Americans want to know exactly what, and who, brought on the worst economic crisis since the great depression. What happened and how do we keep it from happening again.
Congress has finally acknowledged the outcry and is supporting some 21st century version of the "Pecora hearings."
"Pecora hearings?" That's right, as in Ferdinand Pecora, the savvy immigrant from Sicily who became a Manhattan prosecutor with a memory for facts and figures that proved the undoing of a Wall Street banking world gone berserk with greed and fraud.
In the early 1930's, during the Great Depression, and under threat of subpoena, one tycoon after another, including J.P. Morgan Jr., was hauled before the Senate Banking Committee and grilled by Pecora, the committee's chief counsel. Here he is on the cover of TIME Magazine in June 1933. "Wealth on Trial" reads the headline inside, where Pecora is described in ethnic slurs and stereotypes of the day as "The kinky-haired, olive-skinned, jut-jawed lawyer from Manhattan."
To their shock, pompous financiers, unaccustomed to having their actions or integrity questioned by anyone, much less some immigrant, pipsqueak legalist making $255 a month, were no match for his cross examination.
The revelations of the Pecora hearings and the public's anger led to sweeping reform, reining in the high-handed, free-wheeling banking industry. Those reforms stabilized our financial world for half a century, until the titans of finance and friendly politicians began to dismantle them.
Ferdinand Pecora, your time has come again. Your biography is being written by this man, Michael Perino. A scholar of Law and Securities Regulation, Michael teaches at St. John's University here in New York, and has been an advisor to the Securities and Exchange Commission, the government agency that was created because of the Pecora investigation. And, returning to the JOURNAL is Simon Johnson, former Chief Economist at the International Monetary Fund who now teaches at MIT's Sloan School of Management. Just this week Simon Johnson co-founded "The Hearing," a new economics blog at washingtonpost.com.
We welcome to the JOURNAL. Simon Johnson, Michael Perino MICHAEL PERINO:
Thank you.
BILL MOYERS: It's the spring of 1933, the height of the banking crisis. 38 of the 48 states have closed their banks. Unemployment is 25 percent. Breadlines are long. People are hungry and they're angry, and along comes this son of a shoemaker who takes on the movers and shakers of Wall Street. What did he do that touched such a nerve in the country? MICHAEL
PERINO: What Pecora did was to take complex, corporate maneuverings, complex transactions on Wall Street and really turn them into simple morality plays. That was his genius. He was a smart lawyer. And he knew that the game plan that he had to follow was to quite frankly whip some populace outrage. So, when he put Charles Mitchell, the head of National City Bank, on the stand, he started off with the same things we're talking about today. He started off with, "What did you get paid? What were your bonuses?" And by the way, at the end of the first day on the stand, "Didn't you engage in this wash sale with your wife where you basically sold her securities as a loss so you could essentially pay no taxes in that year?"
BILL MOYERS: And he had to resign soon after he was grilled by Pecora, right? MICHAEL PERINO: When Mitchell strode into that hearing room on February 21st, 1933, bankers had taken their fair share of lumps over the course of a few years. But, he was still the preeminent banker of his day. Just a few weeks earlier, he had been quoted in "The New York Times" telling the shareholders of National City, "The economy is sound." And five days later, he resigned from City Bank, and as a matter of fact, there's this famous scene where Pecora and the Chairman of the committee are looking out the Senate window and they see Mitchell who had strode into the hearing room surrounded by his retinue of staffers and lawyers walking alone to Washington Station in D.C. carrying his own suitcase. His career was over. Pecora was, if nothing else, an excellent courtroom lawyer. He knew how to ask questions. He was a pit bull. He would not let people get away with hemming and hawing and hedging their answers. And he would go after them, politely, of course. But, he would go after them until he got the answer that he wanted. What Pecora did was he did the grunt work. He did the unglamorous document review. He was able to go in and do the detective work so that when people tried to evade his questions, he knew the answers already. And you're right. In your introduction, you said he had a prodigious memory. His staff was amazed. He would read these complex briefing memos and, without notes, without missing a figure at all during the hearings, he would run through it and not miss a beat.
BILL MOYERS: He also had to play against these awful stereotypes of the time, right? The ethnic jibes and the depictions.
MICHAEL PERINO: Absolutely. There was-- as I've been writing this book, I've begun to think of Pecora sort of the Jackie Robinson of Italian American lawyers. When he went to law school in the early 1900's, there were 15,000 lawyers in New York. There were 39 who were Italian Americans. So, when he entered first the local stage, the New York City stage, and then when he entered the national stage, he was a novelty. I mean, an Italian American lawyer? He grew up in a time-- he came to the United States in 1886. It was a time of virulent anti-immigrant sentiment. And he grew up in that. And-- and part of his motivation was proving the stereotype wrong. And the stereotype was that Italians, particularly southern Italians, were lawless. They were essentially all criminals. And, quite frankly, they weren't very smart. Part of the effectiveness of the hearings, part of why they were such a media sensation, was because they played so much against that stereotype. There was novelty in this theoretically lawless Sicilian showing the lawlessness and chicanery that was going on among the Anglo-Saxons on Wall Street.
BILL MOYERS: He discovered, as I understand it, that some of these banks were making interest-free loans to their own officers, right?
MICHAEL PERINO: One of the things that National City did was that as the stock market was collapsing in 1929, what they did was that they floated interest-free loans to their executives so that they wouldn't over extend themselves in the marketplace. Now, these were on top of the very large bonuses that they had already received. At the same time, some low-- they had to entice some lower-level employees to buy National City stock. And they bought it when it was trading in the $500 range. After the crash it was trading in the $30 range or so. And even though they had floated the loans to the high-level executives, they continued to make those lower-level executives buy their stock at the inflated prices that they had bought it at. So, what he showed was essentially favoritism.
BILL MOYERS: And how did the country react?
MICHAEL PERINO: Angrily. People were outraged at what was going on in Wall Street. And when you look at Roosevelt's famous inaugural address in 1933, he famously tells Americans they have nothing to fear but fear itself, of course. But he also says that the money-changers have fled the temple and it's a direct reference to Mitchell. He got that anger. And once that anger was in place, once that clamor for reform was in place, Congress essentially fell in line.
BILL MOYERS: In those days the new president was inaugurated in March of the follow-- of the year following the election. So, Roosevelt was coming into office in March of '33 just as the Pecora hearings were hitting their stride, right?
MICHAEL PERINO: He had just finished his stunning examination, which was front-page news across the country of Mitchell just before the inauguration.
BILL MOYERS: So, that dynamic played in. A new president who came in a banking crisis wanting reforms, needing public sentiment behind those reforms. MICHAEL PERINO: And Roosevelt was a big booster for the hearings. He met secretly with Pecora on a number of occasions. He met with the committee chairmen who were running the hearings. And he was pushing the hearings. As a matter of fact, it was from Roosevelt that the suggestion came that the next person on the stand should be JP Morgan.
BILL MOYERS: Why?
MICHAEL PERINO: Because J.P. Morgan was the epitome of Wall Street. Now, this is Jack Morgan. This is not the famous--
BILL MOYERS: The son of the--
MICHAEL PERINO: -- the son of J.P. Morgan, and he wasn't the banker his father was. But, J.P. Morgan still had the mystique. And-- BILL MOYERS: The House of Morgan, it was-- MICHAEL PERINO: It's The House of Morgan. Exactly right. And so, you know, you can assume that Roosevelt knew that that's the kind of public sentiment 'I need to keep going.' And people are going to have that kind of interest in what's going on in Morgan. And that will create the atmosphere where we can pass the first Federal Securities Laws ever. We can create reform of the banking industry. None of that stuff would have happened but for the clamor that Pecora created.
BILL MOYERS: Is there a House of Morgan today?
SIMON JOHNSON: It's the House of Morgan. JPMorgan. And Citigroup.
BILL MOYERS: The house still stands, right?
SIMON JOHNSON: Absolutely. BILL MOYERS: The house built upon--
SIMON JOHNSON: Yeah, well, it's been remade, and refashioned to some degree. But, these big finance houses and securities firms that merged with commercial banks, and vice versa, are incredibly powerful. And they have, you know, questionable practices in New York on and around Wall Street. They're also incredibly powerful in Washington. The strength of their connections possibly is even greater now than it was back in the early 1930's. I think you see it everywhere. You see it this week, for example, in-- in these banks that receive massive amount of government assistance pushing back against other Treasury initiatives, for example, to help consumers in changing the rules around mortgages and around credit cards. And also with regard to Chrysler. So, the government has a broader set of public policy initiatives. One of them is: save the banks. Others are: help consumers and some auto companies. The banks are happy to take the money on pretty generous terms, and won't cooperate on the other aspects of public policy. That tells you how powerful they are and how much hubris they have in these kind of situations.
MICHAEL PERINO: It's not much different in that way. I mean, there was a regular communication between the House of Morgan and Washington back in those days. And if you look back at the history of financial regulation, you see the same pattern over and over again. There are always huge biases toward the status quo. People want to keep the structure the way it is, because it's worked well for them. And it's only when there's the whiff of scandal, only when there's some crisis that's occurring that the forces for reform are strong enough to overcome that status quo.
SIMON JOHNSON: And the laws that came out of the-- after the Pecora hearings were-- were good laws, right? The founding of the Securities and Exchange Commission--
MICHAEL PERINO: Absolutely. SIMON JOHNSON: The way the securities are regulated. I mean, these are things we've thought for a long time were sort of the bastion of good behavior and what really made financial markets in the United States better than in some other places. Turns out perhaps they were better, but not very good. Or at least it wasn't good in a sustainable way. So, it's not the case if you have hearings, if you have this kind of dramatic, front-page investigation that you necessarily end up with populism or extreme measures. You may end up with very reasonable legislation. Which is what happened-
MICHAEL PERINO: You may end up with very reasonable measures. But if you whip up that sentiment too strongly, then there's going to be incentive to just go overboard and maybe perhaps regulate too much.
BILL MOYERS: And to scapegoat, right? I mean, it's possible the scapegoat in situations like this.
MICHAEL PERINO: There's a huge aspect of scapegoating in all of this. And if you look at some of the comments that have been made just in the last few days, what you see is very subtly the statements blending from, "We need to find out what happened" to, "We need to see who caused this." And that's--
BILL MOYERS: Well, that's a legitimate question.
MICHAEL PERINO: It is and--
BILL MOYERS: There are moments from the intersection between Wall Street and politics brought about the kind of compromise in regulation that encouraged these tendencies toward greed and fraud, right?
MICHAEL PERINO: There's no question about it. My point is simply that it sometimes becomes very easy to obscure the broader causes of a financial crisis by doing a little finger pointing and saying, "Ah-ha, here's the bad person. We found him. And we can move on."
BILL MOYERS: Do you think we need hearings like this now?
SIMON JOHNSON: Absolutely, what I take from what Michael's saying and my understanding, is the Pecora hearings, they were pretty focused. They were focused on specific individuals, specific potentially illegal or unethical practices. And I would have thought today you could look much more carefully at predatory practices around the way that consumers were treated, for example. That's a very focused item. You could also look at some of the issues that come out of, at least, the spirit of our antitrust laws. So, the antitrust movement started out as a really a concern about political oligarchs at the end of the 19th Century. You have to a strong general counsel, I think, who asks the tough questions and who could-- who doesn't let you off the hook. You've got to push it through. So, I think if you can get those procedures, I'm strongly in favor.
MICHAEL PERINO: And I think you can do both. And one of the things that-- we forget a lot of what happened during the Pecora hearings. But, at the same time that Pecora was putting the chieftains of Wall Street on the stand and showing the bad things that he was doing, he was also engaging in a broad ranging investigation of actually how Wall Street worked. He sent out questionnaires to all of Wall Street, essentially, asking a series of questions about the basic nuts and bolts of the operation of the business. And the answers to those questions, which appear in a long report that Congress eventually put out, formed a lot of the basis for what became the Securities and Exchange Act of 1934. The Act that created the SEC.
BILL MOYERS: It also led to the Glass-Steagall Act didn't it? The Glass-Steagall Act separated commercial from investment banking and that persisted up until the 1990's when the Clinton administration-- Bob Rubin, Larry Summers, Senator Phil Gramm of Texas-- did away with the Glass-Steagall Act.
MICHAEL PERINO: Glass-Steagall, or the idea behind Glass-Steagall, to separate the commercial banks from the investment banks, had been an idea that was floating around since at least 1930. And essentially, the political bias toward keeping everything the way it was, was sufficiently strong that the idea went nowhere until Pecora showed all the things that the securities affiliates were doing that were improper. And within six months, Glass-Steagall was passed.
BILL MOYERS: And it survived until, as I said, the 1990's. To what extent, Simon, do you think the repeal of the Glass-Steagall Act in the 1990's contributed to this present collapse?
SIMON JOHNSON: I think there was a much broader sort of wave of deregulation or removing restrictions on banking that definitely contributed. I'm not sure I would put Glass-Steagall at the top of the list. I think declining to regulate derivatives, which was also a decision made under the Clinton administration, was probably more critical. Because that allowed a very big market to develop, which a lot of people didn't understand. Even the people who were big players in that market.
BILL MOYERS: The Pecora Hearings became something of a circus, did they not? I mean, there's a famous photograph of J.P. Morgan, Jr. with a midget on his lap. Play that out for us.
MICHAEL PERINO: What happened was that Morgan was the event that everyone was anticipating. This was the public relations event of the day. They brought in special telegraph lines into the Senate so that people could get out their stories as quickly as they possibly could. Carter Glass was a Democrat from Virginia, probably the foremost expert on banking.
BILL MOYERS: Very powerful. It was the Glass-Steagall Act.
MICHAEL PERINO: It was the Glass-Steagall Act. Exactly right. Glass didn't really think much of Pecora's methods. He wanted to have a much more sober, academic discussion of the issues and not this kind of populist outrage. And he and Pecora had a very public clash during the Morgan hearings at which point, at one point Carter Glass said, "This is a circus. All we need is peanuts and colored lemonade." Well, one of the promoters for Ringling Brother's Circus caught onto that. And the next day, he showed up with Lya Graf who was one of the circus midgets. And he had the idea that the shortest woman in the world should sit on the lap of the richest man. And that's what happened. And that photograph eventually captured what was going on in the hearings.
BILL MOYERS: Do you think these hearings that are approved by the Senate this week can avoid that? Or should they try to have some theatre in it?
SIMON JOHNSON: Obviously, you need theatre. And theatre emerges from anything like this. I think the issue is the focus. Is it something concrete? Is there a conceptualization that people can understand? Because these financial issues are complex, and just like Mr. Pecora did, you need to find some way to crystallize it. I don't know if it's income tax. I suspect that it's not. I think the world is more sophisticated now. But, I think the way that consumers have been treated, predatory practices in and around housing, clearly prevalent.
BILL MOYERS: Such as?
SIMON JOHNSON: The way that mortgages are sold to people, and what they're told about their mortgages and the way they're pressured in to certain kinds of borrowings. And that's also true, by the way, for credit cards. And these are things that people can understand. They're very real. They're interactions that many, many people have had. At least potentially somebody's trying to sell you on a dubious loan. And I think investigating, coming in with a focus, for example, Elizabeth Warren, who is the current head of the Congressional Oversight Panel, is a very distinguished lawyer, she's on the faculty of Harvard Law School, who's focused on these sort of consumer protection issues. Now, she's dealing with a broader financial bailout. And I think she's doing a very good job of bringing an educated, legal, financial perspective, which hadn't been her focus before. She comes with expertise, but is now drilling into areas where she's not well-connected. She's not a Wall Street player by any means. You need someone like that to really get their teeth into these issues and to find a way to communicate the complexity to a broader audience.
BILL MOYERS: Even as we speak, though, the banking lobby is going after her, saying that she's promoting an anti business agenda, right?
SIMON JOHNSON: Yes, and I think that's a key point. So, on the Pecora hearings as I understand them-- I'll put it this way. I've never read anybody who suggested that the Pecora hearings caused the Great Depression, okay? But what we're hearing now from the banking industry is, "Oh, wait a minute. If you vilify us, if you say that we did these bad things or even if you hold a serious investigation, that will further undermine confidence and cause a much deeper recession and a slower recovery and you'll lose more jobs."
MICHAEL PERINO: Actually, the banks said exactly the same thing in the 1930's. BILL MOYERS: About the Pecora hearings? MICHAEL PERINO: About the Pecora hearings. They said, "If you investigate, you're going to find a world of mess, probably. It's going to create sensations and that's going to actually retard recovery." You know, you interestingly said about the Pecora hearings causing the Great Depression. You know, we need to be a little humble about what these kind of hearings are likely to be able to do not be able to do. Pecora was a fabulous lawyer. There's no doubt that he did an amazing job at these hearings. If the hearings were intended to find the causes of the crash and the causes of the Great Depression, they failed. 'Cause they never actually did that. They did show bankers behaving badly. And there's no question about that. And showing that created the atmosphere in which reform could pass. But, he never actually showed what caused the Depression. Now, we can't really fault him really too much for that. I don't think people understood it very well then, and I think economists are still debating it today.
SIMON JOHNSON: And will be for another 50 years.
BILL MOYERS: Ben Bernanke spent a lifetime trying to figure that out, right?
SIMON JOHNSON: Right. Exactly.
BILL MOYERS: Is Elizabeth Warren potentially the new Pecora?
SIMON JOHNSON: She might be, and I think she comes with the right combination of qualifications. Relevant experience, and obviously you need a lawyer. You need somebody who knows how to handle themselves in a courtroom-type setting. And then somebody who's not too close to finance. Someone who's not compromised. Someone who hasn't-- isn't too deeply enmeshed in the belief system, which I think that we all, you know, one way or another either created or watched develop and didn't stop, okay? Maybe you need somebody who's a prosecutor and that's the other point I take from what Michael's saying, is that a prosecutorial background, somebody who doesn't let you off the hook doesn't ask questions just for five minutes or 20 minutes, but pursues the questions to the end of the day and presumably into the next day until they get the answer. And that's the framework I think people are looking for.
BILL MOYERS: Simon, you wrote earlier this week that our government seems helpless or unwilling to act against these financiers. Because of all these financial contributions, is the Senate Banking Committee compromised?
SIMON JOHNSON: I think it has some conflicts of interest. And I think the ordinary mechanisms of donations and the way that deals are worked out between that committee, those other committees on Congress with jurisdiction over finance and the financial industry, makes everybody uncomfortable right now. And we need to go back and find out how finance interacts with politics among other things. I think that has to be on the table, by the way, the connections, which I understand Mr. Pecora did get at to some degree, between Washington and Wall Street found that there had been some particular advantage or privileges given to politicians by the big bankers. Those are the kinds of things that need to be on the table,
MICHAEL PERINO: Let me underscore something you said. There's one way in which I think Pecora is not the model for the kind of lawyer we need to lead the hearings today. Pecora did some work when he was a DA going after what we call bucket shops, essentially fly-by-night securities operations. But, this was low-level fraud kind of stuff. He really didn't understand very well how Wall Street worked. He was a quick study. He was a very smart man, and he was able to overcome that. But, Wall Street's a lot more complicated place today than it was in the 1930's. And I think a lawyer who really didn't understand the workings of Wall Street very well would be at a severe disadvantage.
SIMON JOHNSON: Here, I might disagree a little bit. I think you need a brilliant person, and you need somebody who's a very quick study. And I have many friends who-- I'm not a lawyer myself. But, I have great admiration for my friends and colleagues who are lawyers who can really master the facts. And I think Wall Street is complicated, and maybe it's more complicated than the late 1920's. But I think it can be understood. And I think that, you know, you need a staff. And I think Mr. Pecora had a great staff.
BILL MOYERS: Well, he had only three people, I believe, right? A staff of three people believe it or not.
MICHAEL PERINO: When he started, at least, he had three-- it's such a quaint notion, right? You know? He had-- it's him, these three people he's just hired, and they go in and they investigate and the world changes, basically, as far as Wall Street is concerned.
BILL MOYERS: But, point taken. If you were asked by this commission what are the questions that you think we should try to answer, what would your first question be? Simon? SIMON JOHNSON: I think I would want to understand whether the laws were broken in the predatory practices, around the way the consumers were treated in the housing market and in the credit card market recently. And if it's a case that no laws were broken, then that investigation to answer that question will reveal a lot of unethical behavior or a lot of behavior that we should be uncomfortable with and that will then lead I think to sensible changes in the laws. So, really digging into the micro-details of who was taking advantage of, who was misled, how do you get, you know, retired people into some of these esoteric financial products, and of course the selling of savings products also. We know that local governments, for example, were enticed into schemes that they really didn't understand. And, of course, it may turn out in investigation that the banks didn't understand it either. But, going through that level of detail and showing, you know, who made what kind of mistake, who was misled by whom. Who misled themselves? That, I think, is going to give you the factual basis on what you could construct a lot of new, sensible laws.
MICHAEL PERINO: I think that is a very good first question to ask. I think I'd add to it, the role that the credit rating agencies played in this entire process. Particularly in the creation of these derivative instruments. It's an industry that I think is not well understood in Wall Street. I think there has been some reluctance to dig into exactly what's going on there. And that's something I think I'd want to take a hard look at.
SIMON JOHNSON: I would add on a proactive, going forward basis, ask the following question: Do we really need a banking industry that takes these kinds of risks? Professor Joe Stiglitz of Columbia, for example--
BILL MOYERS: Nobel Laureate.
SIMON JOHNSON: Nobel Laureate is proposing- proposed to the Joint Economic Committee in his testimony on Tuesday think about splitting financial services into two parts: a public utility model, which is where you put your money and where-- that's what handles payments. That doesn't take any risks. It runs like a utility. It's low risk, low return from an investor point of view. It's boring. In fact Paul Krugman has a great line on this. Make banking boring again. And they're talking about that part of banking. But, at the same time, both Professor Stiglitz and Professor Krugman would emphasize, and I would absolutely want to second, that you need some risk takers. And you need some people to provide money to risk takers. And the good news is we have a very strong entrepreneurial sector in this economy. We have venture capital in this economy. And they've got a great attitude and maybe sometimes things go wrong. We have bubbles there. But, the dot com bubble and the bursting of that didn't do anything like the kind of damage that this debt finance bubble has done. Venture capital is about equity. Wall Street has been much more about debt. And we need to be able to-- we need those entrepreneurs also to be able to go public. So, we need ability to raise capital, bring in investors, go public and sell your shares to people. That doesn't have to be part of the banking system. Split up boring banks and risk taking and make the risk fully disclosed. And maybe we have to work, you know, and that was the core idea as I understand it of the 1930's. A lot more disclosure around what are you selling exactly. And what are the problems-- potential problems and what are the conflicts of interest at stake. More disclosure I would guess on the securities side. That's where you take the risk. We want the risks, this is an economy based and society based on risk taking. But, our banks don't have to be risk takers. In fact, it turns out, they don't understand the first thing about risk.
MICHAEL PERINO: Yeah, this is an important point to keep in mind. If you look back at that period in the 1930's, you see banks taking on these kinds of market risks, and they're doing it with leverage. The same thing we're really seeing today. But, the point you made about markets and entrepreneurial spirit is one that we have to keep in mind in all of this. Back in the beginning of the Roosevelt Administration, there were two sets of advisors. One set of advisors basically said, we need to have a command and control economy. We need to have a regulator in Washington who decides which portion of the economy is going to get capital. And then within that portion of the economy, which are the right companies to get which amount of capital? The other group said, no, we can't be in that business. The business we need to be in is we need to let the market work to the extent that it can. And the way we're going to let the market work is we're going to tell people exactly what the material things they need to know are before they buy or sell these securities. And then we let them decide. And, you know, this is a point that President Obama made recently when he was in Europe. He said, We can't forget the fact that, you know, markets do good things. And they're useful things to have. Which doesn't mean they're completely unregulated. But, it doesn't mean we abandon them either.
SIMON JOHNSON: The one thing, though, I think we've learned since the 1920's just to add onto this very nice distinction Michael's making, is that anything gets too big, if it gets too big relative to the economy it's dangerous. Too big to fail. Thomas Hoenig who's the president of the Kansas City Fed said on Tuesday again--
BILL MOYERS: And a fairly conservative guy, right?
SIMON JOHNSON: I think so--
BILL MOYERS: I mean, he--
SIMON JOHNSON: That's my understanding of where he's coming from. He said to the Joint Economic Committee something-- my recollection of what he said which I think is absolutely brilliant and really hits the nail on the head, is any time you have financial institutions, banks that are-- or also could be securities firms, that are too big fail, you're going to get oligarchs. He actually used the word oligarch which senior fed officials do not usually use that word. I think his point is a very good one, which is sensible regulation of behavior is what we got from the 1930's, and it was good.
BILL MOYERS: Sensible? MICHAEL PERINO: Regulation of behavior. So, you're saying you have to disclose. You have to-- you musn't have the following conflicts of interest. If you had these other conflicts, you've got to tell people about them. So, your behavior is regulated. That's a fundamental approach to this. But, the problem with any kind of regulation, Bill is the regulators get captured, right? And that's a very-- that, by the way, is a very odd idea which comes in from the Chicago School of economics, which is, you know, the right and the left and the center are agreeing a lot on this issue here, which is very, very interesting. BILL MOYERS: How so?
SIMON JOHNSON: Well, I think that everyone's worried about power. And everyone's worried about, you know, disproportion of power in the hands of a relatively few financial big players, or maybe let's call them oligarchs. Which was the issue and that's what I think Mr. Pecora was really highlighting in the early 1930's, and I think that's what we've come back to today. And if you focus on that and worry about it, you can worry about it from a left point of view. You say, "Well, this is just unfair and it obviously affects distribution of power and income." You can worry about it from a right point of view because it leads to corporate welfare. Actually, I think everyone's opposed to corporate welfare when it's these big players. Remember, Bill, the big banks have got massive amounts of money. Your money. My money. And our children's money, okay? There's future taxes. We're loading up on debt to bail them out to keep them with the same kind of compensation schemes, the same kind of approach to bonuses and the same wrongheaded approach to risk taking. And that issue, that central issue is something that both, that the right, and the left, and the center are not comfortable with. Particularly if they're not comfortable with big finance. Obviously, they do have some supporters.
BILL MOYERS: Even as we speak, some Wall Street sources and some conservative commentators are saying that Obama's got state control of the banks now and that he's dictator or he's a king. One column in the "Wall Street Journal" kept referring to him over and over again as a king because he is doing whatever it is he's doing in regard to debt.
SIMON JOHNSON: I think the banks have control of the state, Bill. Not the state control of the bank. If the state had control of the banks, the banks wouldn't be able to turn around and say, no on your Chrysler deal and no way on modifying the rules about mortgages and allowing bankruptcy judges to modify mortgages in bankruptcy. These are two hot issues this week. The banks are saying no to the government while receiving taxpayer bailouts.
BILL MOYERS: Here are these people receiving billions of dollars in taxpayer money who are now raising fees on credit cards, who are resisting any more regulation of credit card interest rates, who are, you know, saying, "We're going to get out of the game if you insist that we do something about executive compensation." What is going there as you see it? Both of you.
SIMON JOHNSON: I think there's an arrogance of power. They think they won. BILL MOYERS: Even now--
SIMON JOHNSON: And actually they're pretty confident they won. And I think probably at this point, they have won. They got the bailout. They got the money they needed to st
