By Simon Johnson

The newly standard line from big global banks has two components – as seen clearly, for example, in the statements of Jamie Dimon (JP Morgan Chase) and Bob Diamond (Barclays in the UK) at Davos last weekend. First, if you regulate us, we’ll move to other countries. And second, the public policy priority should not be banks, but rather the spending cuts needed to get budget deficits under control in the US, UK, and other industrialized countries.

This rhetoric is misleading at best. At worst it represents a blatant attempt to effectively shakedown the public purse.

On Tuesday morning, in testimony to the Senate Budget Committee, I had an opportunity to confront this myth- making by the banks head-on and to suggest that the bankers’ logic is completely backwards.

Start with the bankers’ point about budget deficits and spending cuts. Public deficits and debt relative to GDP have ballooned in the past three years for one simple reason – the big banks at the heart of our financial system blew themselves up. On this point, the conclusions of the Financial Crisis Inquiry Commission, which appeared last week, are very clear and utterly compelling.

No one forced the banks to take on so much risk. Top bankers lobbied long and hard for the rules that allowed them to behave recklessly. And these same people effectively captured the hearts, minds and some would say pocket books of the regulators (in the sense that a well-regarded regulator can and often does go work for a bank afterwards).

The mega-recession, which is starting to look more like a mini-depression in employment terms for the US (we lost 6 percent of employment and we are still down 5 percent from the pre-crisis peak), caused a big decline in tax revenues. Falling taxes under such circumstances is known technically as part of the “automatic stabilizers” for the economy, meaning in this context that they help offset the contractionary effect of the financial shock – without the government having to take any discretionary action.

Whatever you think about the effectiveness of the additional fiscal stimulus packages provided to the economy in early 2008 (under President Bush) or starting in early 2009 (under President Obama), just remember that the impact of these on the deficit was small relative to the decline in tax revenues.

The total fiscal impact of this regulatory capture cycle, as reflected for example on the Congressional Budget Office baseline debt forecast – comparing what this was pre-crisis and what this is now – is about a 40 percentage point increase in net federal government debt held by the private sector.

As we discussed at length during the Senate hearing, it is therefore not possible to seriously discuss bringing the budget deficit under control in the foreseeable future without measuring and confronting the risks still posed by our financial system.

Neil Barofsky, the Special Inspector General for the Troubled Assets Relief Program put it well in his latest quarterly report, which appeared last week: “perhaps TARP’s most significant legacy, the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail.’”

But next up for the US economic outlook is not necessarily another ”too big to fail” boom-bust-bailout cycle; we may well move on to “too big to save”, which is what Ireland is now experiencing. When reckless banks get big enough, their self-destruction ruins the fiscal balance sheet of an entire country.

In this context, the idea that megabanks would move to other countries is simply ludicrous. These behemoths need a public balance sheet to back them up, otherwise they will not be able to borrow anywhere near their current amounts.

Whatever you think of places like Grand Cayman, the Bahamas, or San Marino as off-shore financial centers, there is no way that a JP Morgan Chase or a Barclays could consider moving there. The “national champions” of banking are actually very poorly-run casinos with completely messed-up incentives; they need a deep-pocketed and somewhat dumb sovereign to back them.

The latest credit rating methodology from Standard and Poor’s says essentially just this – henceforth, it will evaluate banks not just on their “stand alone” creditworthiness, but also in terms of their ability to attract generous support from a creditworthy government in the event of a crisis.

New York-based banks might move to London, and vice versa. But the Bank of England is far ahead of the Federal Reserve in its thinking about how to rein in banks – see, for example, the new paper by David Miles (member of the Monetary Policy Committee in the UK) on the need for much more equity financing in banks than specified in the Basel III agreement.

Officials outside the US are increasingly beginning to understand the point being made by Anat Admati and her colleagues — bank capital is not expensive in any social sense (e.g., look at Switzerland, where the biggest banks are now required to have about double the Basel III levels of equity funding). We need our financial system, particularly our largest banks, to be financed much more with equity than is currently the case.

The intellectual right in the United States understands all this and, broadly speaking, agrees. Officials in other countries begin to see the light. Unfortunately, officials in the United States and most of the political right (i.e., those who seek public office) – as well as much of the political left – still appears greatly in thrall to the big banks.

An edited version of this post appeared this morning on the NYT’s Economix blog; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.