Zombie Banks Are Devouring Our Public Money with No End in Sight

By Bill Moyers, Bill Moyers Journal. Posted March 4, 2009.

Moyers: So we had a system that enabled them to take huge sums of cash out of the short run, and pass the long run losses onto the public. That's essentially what it comes down to.

Johnson: That's right.

Moyers: As you look around the world, and see what's happening, the consequences of our own financial meltdown, what's the worst case scenario?

Johnson: The worst case scenario is that the Asians have built a world based on export led growth. Ever since World War II, the United States consumer has been the buyer of last resort. The American consumer is shut down. If the Asians don't rebuild, based on the power of their own consumers, and they drop their exchange rate, what's called beggar thy neighbor devaluation, it can put deflationary stress back on the United States and on the European countries.

Moyers: Deflationary stress meaning?

Johnson: Lower prices. In other words, if the yen weakens tremendously, the US car companies have an even greater problem competing with Toyota and Nissan. But I think there's even a more violent possibility.

We have a group of countries in central Europe and Russia. CIS, the Commonwealth of Independent States that were in the transition, from the days of communism, and they haven't become mature industrial market economies.

Moyers: You mean, the Berlin Wall is down, but they haven't built up their own--

Johnson: They were on their way. But this disruption is so violent that we could see their social systems disrupted and shattered as credit is cut off, as banks pull back, as foreign direct investment ceases. And they could go back into turmoil. And the, what you might call architecture of the integrated world, would be shattered. They have a system there. They have this European Union. I think, if it starts to disintegrate, the Germans and the French are going to have to step forward.

So the existing constellation of property rights means the Swiss banks or the Austrian banks experience the default. But if the whole system disintegrates, they'll have to socialize those losses, just like the Americans are socializing the loss of its mega-banks.

Moyers: By socializing the losses you mean?

Johnson: The taxpayers of the respective countries would pay those losses together. So that a German bank may not be the one that created the losses, but they may have to bail out the Austrian banks to keep the whole system functioning.

Moyers: And then what happens to us? The United States?

Johnson: Well, if they don't handle that resolution well, the further weakening of those countries feeds back to weakening in the United States.

Moyers: What's the worst case scenario there for us?

Johnson: Well, the worst case scenario for us we saw in the 1930s, was the Great Depression. I don't think it's as likely. We have made some structural changes. Obama's administration did pass what I don't think was a strong or vigorous enough stimulus program, but they did pass a stimulus program, that will alleviate some of that downturn.

Moyers: When I talked to you last week, you were really pessimistic. This week you seem a little more hopeful. What's happened?

Johnson: Well, they say life is a fine balance between hope and despair. And I've seen this week on the positive side. Conversations about reinvigorated regulation. I've seen a very capable man appointed for procurement at the Pentagon to stop spending, Ashton Carter.

I've seen a budget plan that involved changes in tax loopholes, and a positive stride towards health care spending. And the only thing that sticks in my craw is I don't think that the bank resolution plan, the capital assistance program is strong enough or fast enough.

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Bill Moyers is the host of Bill Moyers Journal.

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