BILL MOYERS: How perilous is this situation?
JAMES GALBRAITH: Oh, very much so. This is the big one. I have been working on financial crises since the New York City rescue in 1975. And this is, by far and away, the biggest threat to the system as a whole that we've seen in my lifetime and I think the biggest threat since the late 1920s.
BILL MOYERS: Is it possible that the adrenaline of fear could push us over the brink into panic so that we stop acting rationally or deliberately?
JAMES GALBRAITH: Fear is a factor. But we have an enormous advantage over our predecessors in 1929. We have the fact that the New Deal happened. And we have the institutions of the New Deal, though they have been badly damaged in the last decade, they are still with us. We have deposit insurance. We have Social Security. We have a government which is capable of acting as the lender of last resort, which can borrow and spend as needed to deal with this crisis.
So here in the United States the capacity to handle the crisis exists. What we need is a government that's willing to use that capacity, that believes in it. And that's where the collapse of the old objectivism of Alan Greenspan is such a fundamental feature of the present situation, and very timely. With the collapse of that system of ideas perhaps the way will be cleared for thinking afresh and clearly about the problems that we face and how to solve them.
BILL MOYERS: Well, they have been acting as born-again believers in government intervention.
JAMES GALBRAITH: I think, though, that there's still a great deal still to be learned and still be to done. We are going to hear a great deal in the next few weeks about the need for a stimulus package. And a lot of people will be talking about how they will be conceding that the government should get involved short term.
But what needs to be stressed is that we've seen a breakdown of an entire system. The consequence of the failure of regulation, of supervision of the banking system over the past eight years, has been to cause a collapse of trust, a poisoning of the well.
BILL MOYERS: Trust?
JAMES GALBRAITH: Of trust, yes. Banks -
BILL MOYERS: Between?
JAMES GALBRAITH: Banks no longer trust each other because they no longer know whether their counterparties are solvent. Customers no longer trust the banking system. Banks no longer trust the people who would like to borrow from them for commercial purposes. This is a poisoned well. It is going to take a fair amount of time for it to be cleaned up.
BILL MOYERS: Fair amount of time? What do you mean?
JAMES GALBRAITH: My feeling is, if it is done correctly, aggressively, effectively, we could begin to work out of it in three years. But it is not a problem that's going to be solved with a six-month program.
BILL MOYERS: What scares you most right now?
JAMES GALBRAITH: Well, a week ago or two weeks ago I would have said the possibility that Phil Gramm might become Secretary of the Treasury.
BILL MOYERS: Your former Texas soul mate, right?
JAMES GALBRAITH: Yes, exactly. Yeah. We have a contest between a philosophy of deregulation, of de-supervision, a philosophy of anything goes. Gramm himself was the architect, a deep architect of the speculative markets that have just collapsed. And an alternative which says that there really has to be a pragmatic approach to these problems. And that's a choice the American public obviously is going to be making in a few days.
BILL MOYERS: What's the worst-case scenario you think about late at night?
JAMES GALBRAITH: Right now the thing that troubles me most is not the United States. The thing that troubles me most is that the same ideas of deregulation, of free markets, were applied in the construction of modern Europe. And the Europeans don't have the institutions of the New Deal, a central bank that can lend as necessary.
BILL MOYERS: Right.
JAMES GALBRAITH: Government that can borrow as necessary; that can take the initiative. They have expanded themselves into Eastern Europe in a way in which Communism was replaced by nothing. And a financial collapse is going on there now is, in many ways, more profound than the one we are experiencing here.
BILL MOYERS: But we've seen Gordon Brown, the Prime Minister of Britain, step forward in a way that our own government hasn't and try to orchestrate a European-wide response to this.
JAMES GALBRAITH: That is true. And that is, you know, collection of the finance ministers getting together over the weekend to try and do this on an ad hoc basis. Mercifully, we have the institutions of government in this country that can act. The Europeans are winging it. They have to go against their charter of the Central Bank, against the Maastricht Treaty and its restrictions on government spending, government deficits. They- that problem is a systemic problem. Our problem is a policy problem. We can solve our problem.
BILL MOYERS: Isn't our government winging it, too? I mean, the NEW YORK TIMES this week-
JAMES GALBRAITH: Yeah.
BILL MOYERS: Had a long story saying that Secretary of Treasury Paulson was behind the curve at almost every turn.
JAMES GALBRAITH: That's no doubt true. First of all, the crisis had been developing for a year. When it broke, he sent up a three-page bill to Congress. Many people said that's a power grab. My view was it was a punt. It said to the Congress, "You take this ball. You write the legislation," which Barney Frank and the other leadership of the Congress actually did do. And they came back. And eventually they passed a bill. And Paulson has been improvising ever since. He's done a number of things that actually I was recommending as early as the 25th of September in the "Washington Post". Guarantee all deposits in the banking system. Support the commercial paper market. Take out equity investment in the banks, effectively partially nationalizing them. All of these things which were unimaginable in mid-September are now policy, even though they were, strictly speaking, part of the bill.
So we are improvising very fast. The next problem is going to be that the economy needs to be dealt with, not just the financial sector. The fact is we have a million homes in foreclosure. That number's going to be rising. It could be two and a half or five million in a few months. We are going to have to take very significant steps to try and keep people in their homes, to try and minimize the amount of abandonment, the amount of blight, the amount of sort of permanent damage to the houses out there and to the people who live in them.
BILL MOYERS: Yeah, that's one calamity I wanted to ask you about. You own a home on which the value of it is far less now than the mortgage that you have to pay off. What do we do about that?
JAMES GALBRAITH: You renegotiate the mortgage. And that is something that has to be done on a case-to-case-by-case basis with government help. That is what, in the 1930s, Roosevelt established a Home Owners' Loan Corporation to do. And we're going to need to go back to that model and do something similar. Sheila Bair, the head of the FDIC-
BILL MOYERS: Federal Deposit Insurance Corporation.
JAMES GALBRAITH: - has proposed something quite similar.
BILL MOYERS: And so has Governor John-
JAMES GALBRAITH: So we're-
BILL MOYERS: -Corzine of New Jersey is coming forward with something like that. Details to follow. But I know he's groping with that. Other governors are, too.
JAMES GALBRAITH: Yeah.
BILL MOYERS: Can they do it on their own at the state level?
JAMES GALBRAITH: No. It is going to require federal organization and federal funds. And the states have another problem, which is states and localities fund themselves from the property tax and the local economies.
BILL MOYERS: Right.
JAMES GALBRAITH: Those are collapsing. So they need support and help to maintain their public services, to keep their staff, their civil servants on payroll so that you don't complicate the housing problem, among other things.
BILL MOYERS: And since there's no private capital from that they can borrow now, where do they go?
JAMES GALBRAITH: Well, they have to - the federal government is going to have to provide both operating revenue and support for capital investment by state and local government.
BILL MOYERS: What about the other calamity? The other calamity is that people nearing retirement and the elderly, have really been hit hard in their pension plans. What happens to them?
JAMES GALBRAITH: Well, you can't make people whole individually because everybody made different portfolio choices. Some were more in the stock market, some less. Those who were more in the stock market have been hurt harder. What you can do is protect the population as a whole. And we have a system for doing that. It's called Social Security.
It supports today about 40% of the American elderly population has basically no other income. It's more than half of the retirement of maybe 50 or 60% of that population. Social Security benefits, except for inflation adjustment, haven't been raised in a generation. We ought to think about replacing the losses to some degree in the aggregate that have occurred in the markets by raising Social Security benefits and particularly raising them for the poorest and most vulnerable.
BILL MOYERS: For a temporary measure?
JAMES GALBRAITH: Well, I'm in favor of doing it on a permanent basis.
BILL MOYERS: But, you know, you and everybody else have been reading or talking to or calling for more spending, more spending because that's the only way you say to get capital into the system. But where's that money going to come from, Jamie?
JAMES GALBRAITH: The government has no problem with money. What we're learning, first of all, is that the dollar remains the anchor currency of the world. The euro is the one, is the currency that's collapsing right now, not the dollar.
Uncle Sam's credit is excellent. Uncle Sam can borrow short term for practically nothing these days. Everybody wants to have Treasury Bills and bonds because they're safe. Uncle Sam can borrow for 20 years at 4.3%. That's the same rate that the United States could borrow at for 20 years in the last month of the Eisenhower administration. So from our point of view, we're actually well placed, I mean, as the government of the United States is well placed to take the lead in pulling the country and the world out of this crisis.
BILL MOYERS: But even Barack Obama's website calls the deficit America's "Domestic Enemy." Even he's aware of the fact that the deficit's beyond sight.
JAMES GALBRAITH: Well, the deficit isn't beyond sight. The deficits in the Bush administration in relation to the size of the economy were never all that large. They were certainly larger than they were under Clinton, but that was in part necessary because of the changed economic situation, the collapse of the dot-com bubble in 2000.
The United States government's credit is good. The deficit is a financial number that people are going to have to get used to because there is no way in these circumstances of avoiding an increase in the deficit. One of two things can happen. The government can take action and help stabilize the economy in which case we will have more spending but also more employment.
Or the government cannot take action and let the economy collapse in which case we will have much less tax revenue. The deficit is going to be larger either way. There is no way of avoiding that. The only question is do you work to have a good economy or do you accept a terrible economy?
BILL MOYERS: What are the negative effects of a soaring deficit?
JAMES GALBRAITH: Well, the one thing I would have worried about is that we might not find lenders who are willing to provide funds to the U.S. government, that the Chinese or the Japanese might decide that they would rather be in some other currency and that we'd then have trouble with inflation. But that's not going to happen.
It's not going to happen because, as it turns out, the major alternative, the euro, simply isn't viable as a reserve asset for the rest of the world. It's the dollar or nothing. So the United States basically can finance itself to the extent necessary to deal with this crisis. And I'm right now quite sanguine about that, quite confident that we won't face a problem.
BILL MOYERS: You call your book THE PREDATOR STATE, what do you mean predator?
JAMES GALBRAITH: What I mean is the people who took over the government were not interested in reducing the government and having a small government, the conservative principle. They were interested in using these great institutions for private benefit, to place them in the control of their friends and to put them to the use of their clients. They wanted to privatize Social Security. They created a Medicare drug benefit in such a way as to create the maximum profit for pharmaceutical companies.
They used trade agreements to extend patent protections for various interests or to promote the expansion of the corporate agriculture's markets in the third world. A whole range of things that were basically political and clientelistic. That's the predator state.
BILL MOYERS: You call it a corporate republic.
JAMES GALBRAITH: It is a corporate republic.
BILL MOYERS: Which means that the purpose of government is to divert funds from the public sector to the private sector?
JAMES GALBRAITH: I think it's very clear. They also turned over the regulatory apparatus to the regulated industries. They turned over the henhouse to the foxes in every single case. And that is the source of the decline in, the abandonment of environmental responsibility, the source of the collapse of consumer protection, and the source of the collapse of the financial system, all trace back to a common root, which is the failure to maintain a public sector that works in the public interest, that provides discipline and standards, a framework within which the private sector can operate and compete. That's been abandoned.
BILL MOYERS: We saw what Alan Greenspan said yesterday. But did you see what the chairman of the Securities and Exchange Commission, Christopher Cox, said? I mean, it was one of the great recantings in modern American history. Quote, "The last six months have made it abundantly clear that voluntary regulation does not work."
Now, we all know that the government can screw up, too. We all know that government can make serious mistakes. What kind of regulation do you think we should have that doesn't poison and punish entrepreneurial talent but protects the public interest?
JAMES GALBRAITH: Well, first of all, anyone who thought, up until six months ago, that voluntary regulation could work was either being dishonest or delusional. Voluntary regulation is regulation that, by its nature, you can evade. And what happens is that the people, who are most intent on evading it, on not respecting the standards, come to take over the process. Their profits are better. And so they drive the complying firms and businesses to the wall. They out-compete them.
You need to have a mandatory system so that the firms which are more technologically progressive, which are safer, which are more complaint, which provide, which are prudent in the financial sector, which maintain credit standards so that those firms have a competitive chance. That's the first purpose of regulation.
It is a framework which it favors, when it's done properly, it's a framework which favors the more efficient, the more progressive, the elements that are prepared to work within the guidelines set by a larger public purpose.
BILL MOYERS: What kind of regulation do you think might be most effective?
JAMES GALBRAITH: The, well first of all, we need to clean up the mess that's there. And that's going to include a fair amount of legal intervention, criminal prosecution, malfeasance. There was a lot of fraud in the housing sector, in the, amongst the loan originators, amongst the appraisers. This all needs to be investigated. And people need to be moved out of positions in the financial industry that they have abused.
The regulatory system going forward is going to have to be basically like a utility. It's going to have to treat banking like a utility with limitations on growth, on rate of return, and on credit in such a way as to be much more transparent, to make it much easier to evaluate financial products that are traded. None of this over-the-counter, occult, too complex to value stuff.
We need to end the offshore tax havens and other ways in which institutions have hid out from their responsibility to the country to pay their share of taxes. And we need to have a set of prudential standards that are reasonable and that basically can put the business of finance on a sustainable footing. It'll be a much less glamorous business going forward. But it will be more reliable for the country as a whole.
BILL MOYERS: You are such an experienced economist in your own right. But I hesitate to bring the spirit of your father to this table. He would have been 100 last week had he not died two years ago, right? And his classic book, of course, one of his classic books is "The Great Crash of 1929". Is the situation today comparable to what happened when your father was a young economist?
JAMES GALBRAITH: It is. The situation today is very similar to the moment of panic and collapse that we saw in 1929. And for very similar reasons. An abandonment of the supervisory responsibility that should have been applied to keep the speculation and the fraud and the abuse from getting out of control. So there's going to be a major period of correction. And dad, in writing this in 1955, talks about how memory fades and how eventually, although so long as people remembered '29 it wouldn't be repeated, eventually it would be forgotten and the underlying speculative impulse would come back. So the book, in addition to being a great read, is really prescient in a very balanced way. But I will say that we're not going to go back to 1929 because in 1929 we hadn't had Roosevelt. We hadn't had Kennedy and Johnson. We had had them now. So we have a body of history to work with.
BILL MOYERS: There's a precedent, you're saying, that there are tools there if people want to use them.
JAMES GALBRAITH: Tools, not only precedent, there are institutions. There's a government structure. And if we use them, we can avoid, we can't avoid '29. But we can avoid 1930 and 1931, 1932, when-
BILL MOYERS: When-
JAMES GALBRAITH: -output fell by a third, unemployment rose to 25 percent of the labor force and a third or more of the banks in the country closed and people lost their savings. In fact, we are already in a position of moving to take steps to prevent that from happening. We need to recognize, though, that we can never go back to a system of this kind of buccaneering finance driven, Wall Street-led economy in which a group of people who are profoundly unqualified to run the country are, in fact, dictating policy from perches here in Manhattan.
BILL MOYERS: But there are capitalists like Steve Forbes, I just read a long article by him in the current issue of "Forbes Magazine," who argue that people like you are going to go too far and that it was actually the government's excesses and failures in the '80s and '90s that contributed to what began to happen in 2007 with the meltdown. And that if you have your way, people like you have your way, you will criminalize business. You will raise taxes and dry up the economy. You will take government unchecked into the same kind of catastrophe that unchecked Wall Street has carried us. How do you answer a Steve Forbes?
JAMES GALBRAITH: Well, first of all, I very much agree with him, that it was failures of government that were responsible for this. It was the actual failure, the abandonment, the neglect of the supervisory regulatory responsibility. That's at the root of this.
Just as you cannot prosper without a private economy, you cannot prosper without an effective autonomous government capable of thinking for itself, capable of balancing things out, of standing for other interests, of standing for labor and consumers and for the public interest as a whole. If you don't have that, you're going to get these pyramids, these bubbles, these epidemics of fraud and abuse, and ultimately the collapse of trust and the collapse of the economy itself. That's what's happened in the predator state.
BILL MOYERS: I wrote down something you wrote elsewhere, that struck me. You wrote that after World War II our American system wasn't imperial. Quote, "We spoke instead of community, of freedom, of common purposes and common values. And the world took us seriously because we had paid our dues." What's happened to those values?
JAMES GALBRAITH: Well, it's clear that world has lost its confidence in the responsible role of the United States. Iraq is viewed by the world as reckless and self-serving rather than being a necessary step to protect the mutual security.
In the financial sector, the world viewed us as a safe haven because they believed we had effective systems for legality, transparency and security. That's taken a hard knock. But we are rescued for the moment by the fact that other people's systems turn out to be even worse. I believe that you can turn a page and that you can rebuild the position of the country in the world community if you do so in a way which is fully credible. New people, new philosophies, new policies.
October 26, 2008
Bill Moyers recently interviewed economist James Galbraith (whom I wrote about earlier this month). The topic, of course, was on the financial crisis. To a degree, this interview is "$#|+ in your pants"-scary as it outlines not only the current problems we face, but some other potential problems that I haven't heard anyone else talk about (and I read four blogs devoted to economics on my RSS reader). The good news is that Galbraith remains optimistic that the problems can be overcome, although it will take some time (he estimates three years at a minimum). Below is most of the transcript; the video of the interview and the full transcript can be found here.