Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

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Today is November 21st, 2011, and my guest is Simon Johnson. The Ronald Day Courts Professor

of Entrepreneurship at MIT Sloan School of Management. He blogs at Baseline Scenario with James

Quack and he and Quack are the authors of 13 bankers. The Wall Street takeover and the next

financial meltdown. Simon, welcome to econtalk. Thanks for having me. Our topic for today is the

financial crisis in your book, 13 bankers. Let's set the stage. What changed in the last three

decades or so in the relationship between the American economy and the financial sector? Because the

financial sector recently before the crisis and the run-up to the crisis played a very different

role in the economy than it had before. What was different? That's the right way to come at this

issue for 150 or so years in the development of the American Republic and the creation of the

greatest industrial power the world's ever seen. Finance was not particularly a critical sector.

We certainly didn't rely on big banks. After the Great Depression, banking was quite tightly

regulated in the United States. I think it played a perfectly healthy role, for example, in financing

entrepreneurs, creating venture capital, sector and so on and so forth. But from the 1970s,

it really changed dramatically because the banks became bigger. They were able to take on more risk

and eventually they were able to blow themselves up at great cost to all society.

Their profits increased dramatically over that time period. Their profits is a share of the economy

right. Their role as an employer also increased although not quite as dramatically.

...