In a riveting conversation with Tyler, Simon Johnson, a renowned economist and professor, explores the intricate relationship between banking, technology, and prosperity.
He discusses the systemic implications of bank failures, the potential risks of insuring all deposits, and the future of Central Bank digitally managed currency.
He also shares insights from his book co-authored with Daron Acemoglu, challenging the common belief that technological progress naturally leads to widespread prosperity.
Skepticism Towards Privately Issued Stable Coins
Privately issued stable coins are viewed with skepticism due to their instability and lack of regulation.
The focus should instead be on developing better protocols for programmable money, given the current experiences and challenges.
Risks of Insuring All Deposits
Insuring all deposits could inadvertently encourage banks to take on more risk, potentially exacerbating the problem.
A more balanced approach might be to insure small business transaction accounts, which would support small businesses without promoting excessive risk-taking by banks.
The Relationship Between Technology and Prosperity
Widespread prosperity is not a natural consequence of technological progress.
It only happens when there is a conscious effort to direct the benefits of technological advances away from corporations and towards the wider population.
Separation of Tech Giants and Banking
If tech giants like Amazon, Microsoft, or Apple owned banks, it could potentially destabilize the system.
However, this separation is deeply ingrained in the U.S. and unlikely to change politically.
The complications of a Central Bank digitally managed currency are more apparent this week than they were a couple weeks ago. – Simon Johnson
Systemic Effects of Bank Failures
The systemic effects of bank failures can be significant, regardless of the size of the bank.
This challenges the previous consensus that only banks over $50 billion required systemic attention, indicating that even smaller banks can have substantial knock-on effects.
Implications of Credit Suisse’s Management
The handling of Credit Suisse’s convertible bonds could trigger a repricing in the market.
However, the confidence of authorities in taking this action suggests a thorough understanding of the bond owners and the potential risks involved.
Regulatory Landscape of Financial Entities
While the current regulation of banks and other financial entities is already rigorous, there is a consensus with Gary Gensler’s perspective that crypto exchanges should be regulated as exchanges.
Concentration of Power in Large Banks
The concentration of economic and political power in the hands of large banks is a cause for concern.
The strength and innovation of the U.S. economy have historically not been built on big banks.
Contagion and weaknesses in other parts of the system also need to be considered.
Lessons from the 2006-2007 Housing Bubble
The housing bubble of 2006-2007 was more of a derivatives bubble.
The crash was due to the concentration of risk in large financial institutions, which put downward pressure on house prices.
It is crucial to avoid such events in the future.
Challenges of Universal Banking
Countries with universal banking, such as Japan and Germany, have not been immune to banking troubles, indicating that banking is a challenging business regardless of its organization.
Concerns are raised about small countries having disproportionately large banks, which could pose systemic risks.
Potential Reforms for the IMF
Potential reforms for the IMF could include removing Russia from the board of directors due to its aggressive actions.
The IMF should focus on lending to countries in trouble and avoid getting involved in situations where deeper reforms are needed but can’t be delivered.
There is no definitive size at which a U.S bank is small enough to fail, as the systemic knock-on effects can be significant even for smaller banks. – Simon Johnson
Future of Central Bank Digital Currency
The development of a Central Bank digitally managed currency is likely a distant prospect.
The complexities of such a currency, particularly in relation to banks’ ability to fund their loan books, have become increasingly evident.
