Low Bank Capital Is Next Fiscal Crisis: Simon Johnson

From Bloomberg News

The summer debate that has dominated Washington seems straightforward. Under what conditions should the U.S. government be allowed to borrow more money? The numbers that have been bandied about focus on reducing the cumulative deficit projection over the next 10 years, as measured by the Congressional Budget Office.

But there is a serious drawback to this measure because it ignores what will probably prove to be the U.S.’s single largest fiscal problem over the next decade: The lack of adequate capital buffers at banks.

The Congressional Budget Office was created in 1974 to provide nonpartisan analysis of budget issues. This was a major breakthrough. It’s hard to exaggerate the lack of serious and timely budget information that existed previously. The CBO still does great work, but it has a major blind spot. (Disclosure: I’m a member of the CBO’s panel of economic advisers; I don’t speak for them here or anywhere else.)

See the full article at Bloomberg View 

Simon Johnson, a professor of global economics and management at MIT Sloan, is the former chief economist at the International Monetary Fund and co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown

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