Simon Johnson is Worried about Growth of Largest US Banks

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Simon Johnson, who has been a critic of weak financial reform efforts following the financial crisis, views Timothy Geithner as part of the problem. Our US Secretary of the Treasury gave a speech in which he promoted the views of Jamie Dimon, who is the CEO of JP Morgan. Dimon sees big opportunities for US banks in emerging markets and he wants JP Morgan to be a leader in this effort. Geithner refers to this as "capital deepening" in emerging markets and he agrees that US banks must pursue this opportunity. Johnson's experiences with the IMF have made him wary about this prospect. Banker bonuses are a function of return on equity. This leads them to increase debt relative to equity and it exposes them to risk when the loans go bad. Since JP Morgan, and several other giant US banks are to big to fail, the risk is transferred to the US taxpayer. Its also a problem when the financial sector becomes large relative to the economy. Iceland, Ireland and Switzerland allowed bank assets to expand to several times their respective GDP. This made Iceland and Ireland to big to save and they had to rely upon external help. Switzerland's two largest banks had assets greater than GDP and the government was barely able to rescue them from their bets on mortgage securities. Switzerland has taken steps to correct this imbalance and other nations have made changes as well. He worries that Geithner, who is a major policy maker on banking in the US, has been drinking the kool aide being sold by the very large US banks.