Monday, January 28, 2008

“Most Serious Financial Crisis Since the Great Depression

A financial crisis in the US amounts to a global crisis. This is an important interview with a detailed analysis on this crisis that all should read. This could have been prevented.

-Dra. Valenzuela


January 23, 2008

Economics Journalist Robert Kuttner on the “Most Serious Financial Crisis Since the Great Depression”: “This is the Result of Rightwing Ideology and the Political Power of Wall Street”

Amid growing fears of a worldwide recession, the Federal Reserve
slashed a key interest rate by three-quarters of a percentage point on
Tuesday, the biggest single cut in nearly a quarter of a century.
Meanwhile, President Bush and congressional leaders pledged to work
together on a stimulus measure that would inject about $150 billion in
additional money into the economy. But many economists are skeptical
over whether any measures can turn around a severe slump in the
housing market and the subprime mortgage crisis, signs of growing
unemployment and weakening consumer spending and the added blow of
record high oil prices. We speak to veteran economics journalist
Robert Kuttner and Robert Weissman, co-director of the corporate
accountability group Essential Action and editor of Multinational
Monitor magazine. [includes rush transcript]


Guests:
Robert Kuttner, Veteran economics and financial journalist. He is a
founder and co-editor of the American Prospect magazine and a former
investigator for the Senate Banking Committee. He is the author of
seven books, his latest is The Squandering of America: How the Failure
of Our Politics Undermines Our Prosperity.
Robert Weissman, Co-director of Essential Action, a corporate
accountability group based in Washington, D.C. He is also editor of
Multinational Monitor magazine.

Rush Transcript

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AMY GOODMAN: Amid growing fears of a worldwide recession, the Federal
Reserve slashed a key interest rate by three-quarters of a percentage
point Tuesday, the biggest single cut in nearly a quarter of a
century. The move marks only the fifth time in history the Fed has
reduced the overnight federal funds rate outside of its scheduled
policy meetings. The last time was after the 9/11 attacks, when the
Fed cut rates by half a percentage point.
The Fed’s move was prompted in part by turmoil in global markets
Monday with stock averages in Japan and Germany and elsewhere seeing
some of their worst declines in decades. On Wall Street, stocks
plunged at the opening of trading on Tuesday, propelling the Dow Jones
Industrial Average down about 400 points before climbing back up to
close down about one percent. The major US market indexes are down
about ten percent so far in January.
Meanwhile, President Bush and congressional leaders pledged to work
together on a bipartisan stimulus measure that would inject about $150
billion in additional money into the economy. Flanked by House Speaker
Nancy Pelosi and Senate Majority Leader Harry Reid, Bush told
reporters he’s confident an agreement on a stimulus package could be reached.
PRESIDENT GEORGE W. BUSH: I believe we can find common ground to get
something done that’s big enough and effective enough so that an
economy that is inherently strong gets a boost to make sure that this
uncertainty doesn’t translate into, you know, more economic woes for
our workers and small-business people. And so, I really want to thank
you all for coming, and I’m looking forward to our discussions.
And­look, there’s a­everybody wants to get something done quickly, but
we want to make sure it gets done right and make sure that
we’re­everybody is realistic about a­the timetable. Legislative bodies
don’t move as­you know, necessarily in an orderly, quick way. And
therefore, these leaders are committed, and they want to get something
done. But we want to make sure we’re realistic about how fast that can
possibly happen. So when we say “as soon as possible,” that means
within the­obviously within the ability of these bodies to effectively
do their jobs. So I have got reasonable expectations about how fast
something can happen, but I also am optimistic that something will
happen. And I appreciate very much the leadership being here today.
AMY GOODMAN: But many economists are skeptical over whether any
measures can turn around a severe slump in the housing market and the
subprime mortgage crisis, signs of growing unemployment and weakening
consumer spending and the added blow of record-high oil prices.
Robert Kuttner joins us today, veteran economics and financial
journalist, founder and co-editor of American Prospect magazine,
former investigator for the Senate Banking Committee, author of seven
books­his latest, The Squandering of America: How the Failure of Our
Politics Undermines Our Prosperity. He is also former general manager
of Pacifica station WBAI in New York, joining us here in our firehouse
studio. Joining us in Washington, Robert Weissman, co-director of
Essential Action, a corporate accountability group. He’s also editor
of Multinational Monitor magazine.
We welcome you both to Democracy Now! The solutions now­the Fed
interest-rate cut, the stimulus package­is this enough, Robert Kuttner?
ROBERT KUTTNER: No, it’s not the beginning of enough. And I think the
place to start is to recognize why this recession is different from
all other recessions. This began and is continuing with a collapse in
credit markets, and the collapse in credit markets is, in turn, the
result of deregulation gone nuts. And it’s a repeat of a lot of things
that happened in the 1920s, where there was too much speculation with
too much borrowed money and a complete lack of transparency. The
regulators, the public had no idea of what these bonds that had been
created out of subprime mortgages really contained, what they were
worth. The people who packaged them were not subject to any kind of
regulatory scrutiny.
And when it turned out that a lot of these loans were never going to
be paid back, the layer upon layer upon layer of bonds and then
securities based on the bonds­you know, if you can picture the World
Trade Center collapsing floor by floor or you can picture the collapse
of the Ponzi schemes of the 1920s, that’s a good­or horrible­analogy.
And when you have a credit contraction, it means that banks have less
capital against which to make loans, and lowering interest rates
doesn’t fix that.
There are two other things that lowering interest rates and an
ordinary stimulus package won’t fix. One, you alluded to in your
opening comments, Amy, and that’s the collapse in housing prices. At
the current rate of decline in housing values, American homeowners­and
that’s about 70 percent of Americans­are going to lose $2.2 trillion
of net worth this year alone. Well, when you lose $2.2 trillion of
savings, you’re not inclined to rush out and do home improvements,
you’re not inclined to rush out and buy durable goods. And again,
compared to that kind of a loss, a stimulus­and they’re talking about
$140–$145 billion, that’s one percent of GDP­that’s a drop in the bucket.
Lastly, this occurs on top of thirty years of increasing insecurity on
a whole bunch of fronts: the greater risk of losing your job, the
greater risk of having your paycheck not keep pace with inflation,
rising energy costs, rising tuition costs, rising health insurance
costs. All of the things that make you middle class have become more
difficult to attain in the past thirty years. So you’ve got a
three-layer cake here. You’ve got this thirty-year history of flat or
declining living standards for most Americans, you’ve got this
terrible weakness in financial markets, and you’ve got this housing collapse.
AMY GOODMAN: Thirty years would take us back to the beginning of Reagan.
ROBERT KUTTNER: A little bit before, actually. I mean, the great
experiment in deregulation really started under Carter in the late
1970s. It was Carter who started the deregulation of trucking and
natural gas and broadcasting. And the whole ideology of deregulation
and the practice of deregulation was unfortunately bipartisan.
AMY GOODMAN: Rob Weissman, you talk about deregulation and the
financial crisis, and you talk about at least five distinct regulatory
failures that led to the current crisis. First, explain deregulation,
and then go through what you think these failures are.
ROBERT WEISSMAN: Well, there’s both the actual rollback of regulation,
is the ones were in place, that kind of deregulation. There’s also a
kind of non-regulation, the failure of government agencies to exercise
authority that they have, but just choose not to use or choose
not­authority they choose not to assert. There are five that I laid
out in a recent column, but there are many more, as Bob is
referencing, including ones that led directly or indirectly to this crisis.
I think one big-picture deregulatory failure was the failure to manage
the trade deficit. The US trade deficit led to this huge accumulation
of capital in countries like China, and that capital had to find a
place to go, and that ended up lowering interest rates and sort of
chasing after all kinds of investments, including the mortgage
investments that were the trigger for this crisis.
A second regulatory failure was the failure to address the housing
bubble. Even if interest rates were low, there was a lot of ability
for especially Federal Reserve Chair Alan Greenspan to pop the bubble
before it reached the point that it got to. And this is not just a
retrospective criticism. People at the time identified the housing
bubble as taking place. And you had to believe that the rules of
economy, as they have existed for the last hundred years, had been
suspended to think that we didn’t have a housing bubble. But Greenspan
let it go by.
A third failure was the broader financial deregulatory failure, which
is both a specific rollback of prior financial regulations on Wall
Street and on big banks and, more generally, a laissez-faire attitude
about let finance do whatever it wants. And Wall Street has gone crazy
over the last decade, and now we’re going to pay a very serious price
for that.
With the government not acting, there were private actors that were
supposed to regulate and provide important signals for high finance.
Those are especially the credit rating agencies, like Standard &
Poor’s and Moody’s. They failed totally, probably because of their own
conflicts of interest, in part.
And finally, there was the failure to regulate in the housing market
itself, with all the subprime mortgage lending abuses. Again, these
were things that were identified not just in the last couple months,
but five years ago. You’ve had guests on from ACORN and other
organizations fighting against predatory lending. We’ve reported on
it. This is something that people highlighted over the years, but was
let to spin completely out of control by a federal government that
didn’t care and by state governments that sometimes care, but were
often lobbied against doing anything by the banking industry itself.
AMY GOODMAN: We’re talking to Robert Weissman, co-director of
Essential Action, editor of Multinational Monitor magazine; and Robert
Kuttner, veteran economic journalist, author of the book The
Squandering of America. We’ll be back with both of them in a minute.
[break]
AMY GOODMAN: I’m Amy Goodman, as we talk about the crisis in the
economy today with two experts. Robert Kuttner, veteran economic
journalist, author of The Squandering of America: How the Failure of
Our Politics Undermines Our Prosperity, he is the co-editor of
American Prospect. Robert Weissman is with us in Washington. He is
editor of Multinational Monitor magazine and co-director of Essential Action.
Robert Kuttner, that image that we have of President Bush flanked by
Nancy Pelosi, the House Speaker, and Harry Reid, the Senate Majority
Leader, either all of them­Bush, Pelosi and Reid, the images­going to
solve this problem or all owning this problem. What is your response?
ROBERT KUTTNER: Well, let’s bring this back to politics. There’s a big
risk that the Democrats, trying to be realists, trying to help out in
a crisis, enact something that President Bush can sign, and then their
fingerprints are on a piece of legislation that is obviously not going
to solve the problem. There’s a time for bipartisanship, and there’s a
time for a partisan difference. It seems to me the duty of an
opposition party is to oppose, and this is one of those moments when
the Democrats would be well-advised to really clarify the differences
between themselves and President Bush.
But I want to bring it back to politics in a broader sense. Rob
Weissman, I think very eloquently, ticked off all the multiple
failures of deregulation. This did not just happen. This was not an
accident. This was the agenda of business, particularly Wall Street,
going back thirty years. And if you look at the history of this, the
Great Depression discredited free-market ideology, because it was such
a colossal practical failure. Nobody in the 1930s could argue with a
straight face that free markets worked. And so, we had a whole mixed
economy, a regulatory structure invented during the New Deal, that
really lasted thirty or forty years. By the ’70s, for a variety of
reasons, big business had recovered a lot of the political power that
it had lost in the Depression. And both parties, beginning with
Carter, continuing with Clinton, became enablers of the kind of
deregulation that finally has come home to roost in this crisis.
So now we’re learning, painfully, for a second time a lesson that we
never should have had to learn twice, that markets don’t regulate
themselves. Markets, left to their own devices, create grotesque
inequality, ruin the environment and ruin the economy. And we’re
seeing that unfold.
AMY GOODMAN: And what could the Democrats do right now as an opposition party?
ROBERT KUTTNER: Well, I think there are three things they ought to be
doing. First of all, there’s the housing mess. We need something like
the Home Owners’ Loan Corporation of the 1930s, where a government
agency, financed by government bonds, would buy these bonds back from
Citigroup and Merrill and whoever at a steep discount, maybe thirty or
forty cents on the dollar­they’ve already been written down to zero,
because nobody wants to buy them­and turn them back into affordable
mortgages, turn them into mortgages that would have a rate below
market instead of the kind of predatory rate that subprime mortgages
had. And you could then repopulate these houses. People on the brink
of foreclosure would be able to keep their houses. Other people could
become homeowners. So you need a much bolder approach to the housing crisis.
Secondly, I don’t even think “stimulus” is a good word. You need a
recovery program. And a recovery program means not just a quick shot
in the arm, it means reversing all of the things that make it harder
to be middle class in this country. It means everything from a massive
program of infrastructure repair to energy independence to good jobs
in the service sector, reversing the whole thirty-year trajectory of
ordinary people finding that their personal economic situation is
insecure, they can’t keep up with the cost of living. And a “stimulus”
implies a kind of a quick jolt to get us out of a temporary problem.
This is not a temporary problem, this is a long-term problem. It’s
going to require long-term solutions. And that doesn’t even get at
some of the harder stuff, like the dependency on foreign borrowing
that was caused by chronic trade deficits that in turn were the result
of bad trade policies.
AMY GOODMAN: We’re going to turn to an excerpt of the Democratic
debate now that took place in Myrtle Beach, South Carolina. Senators
Hillary Clinton, Barack Obama, John Edwards sparred over the economy.
This was the first question put on the issue of the economy, put by
CNN moderator Joe Johns.
JOE JOHNS: Senator Clinton, good evening. The number one issue for
Americans of both parties is the economy, and today the news is simply
not good. Markets around the world are in a tailspin because of fears
of a US recession. So far this year, the Dow has lost nearly nine
percent. How much money would your stimulus plan put in the pockets of
the average South Carolinian?
SEN. HILLARY CLINTON: Well, Joe, I’m glad you started with the
economy, because that is the number one issue: what’s been happening
in the markets, what’s been happening with the home mortgage crisis,
$100-a-barrel oil, so many of the issues that are really at the
kitchen tables of Americans today and what they’re talking to me about.
We have to stimulate the economy. I began calling for some kind of
economic action plan back at the beginning of December. I have a
package of $110 billion. $70 billion of that would go toward dealing
with the mortgage crisis, which, unfortunately, I don’t think that
President Bush has really taken seriously enough.
I would have a moratorium on home foreclosures for ninety days to try
to help families work it out so that they don’t lose their homes.
We’re in danger of seeing millions of Americans become basically, you
know, homeless and losing the American dream.
I want to have an interest rate freeze for five years, because these
adjustable-rate mortgages, if they keep going up, the problem will
just get compounded. And we need more transparency in the market.
Then, I think we need to give people about $650, if they qualify,
which will be millions of people, to help pay their energy bills this winter.
SEN. BARACK OBAMA: It is absolutely critical right now to give a
stimulus to the economy. And Senator Clinton mentioned tax rebates.
That wasn’t the original focus of her plan. I think recently she has
caught up with what I had originally said, which is we’ve got to get
taxes into the­tax cuts into the pockets of hard-working Americans
right away. And it is important for us to make sure that they are not
just going to the wealthy. They should be going to folks who are
making $75,000 a year or less, and they should be going to folks who
only pay payroll tax, but typically are not paying income tax. If we
do that, then not only can we stimulate the economy, those are the
folks who are most likely to spend money right away.
WOLF BLITZER: Do you agree with her, $650 is a good number for a tax rebate?
SEN. BARACK OBAMA: Well, I think that we are going to have to get some
immediate money. What I do is I say, for a typical family, $500 for a
tax rebate per family. But also, for senior citizens, get a supplement
to their Social Security check, because they get that every month. We
know exactly how to do it. And that would provide seniors all across
the country right away some money to help pay for their heating bills
and other expenses that they’ve got right now.
JOHN EDWARDS: Now, one difference between what I have proposed and
what my two colleagues have proposed is I have done something that not
only stimulates the economy, but creates long-term benefits:
investment in green infrastructure, which creates jobs. Instead of
just getting money out in the short term, this will actually create
jobs over the long term, create green infrastructure. Yes, we need to
do something about the mortgage crisis.
I want to mention one last thing. There is one other issue that was
mentioned in passing by the two of them, which is the issue of jobs.
And there is a difference between myself and my colleagues on this
issue of jobs, because they both supported the Peru trade deal. My
view is the Peru trade deal was similar to NAFTA. And this is crucial
to the state of South Carolina and­
WOLF BLITZER: But­
JOHN EDWARDS: No, no­crucial to the state of the South Carolina and
jobs in South Carolina. South Carolina has been devastated by NAFTA
and trade deals like NAFTA.
WOLF BLITZER: But I just want to be precise. What you’re proposing are
really long-term objectives. In terms of a short-term stimulus
package, you disagree with them on an immediate tax rebate.
JOHN EDWARDS: No, no. What I’m saying is, if we do what we should do
to green the economy, if we change our unemployment insurance laws,
modernize them to make them available to more people, to more
Americans, if we in fact get help to the states, which gets money
straight into the economy, and we deal with the mortgage crisis in a
serious way with a home rescue fund to provide transitional financing
for those people who are about to lose their homes, all those things
will stimulate the economy.
AMY GOODMAN: Former Senator Edwards, Senator Barack Obama and Hillary
Clinton debating in Myrtle Beach, South Carolina. Robert Weissman,
your assessment? Did they satisfactorily come up with proposals that
will resolve this crisis?
ROBERT WEISSMAN: Well, everything they say isn’t bad, but of course
the answer is no. And also, it’s interesting to hear the questioner,
Wolf Blitzer, impose the conventional wisdom on presidential
candidates. There is a need to take immediate action. And while I­my
guess­and I don’t claim to be an expert in this area­is that Bob’s
sense of how deep this problem is is right. There is a possibility
that a short-term fix will paper it over for a while. We shouldn’t
underestimate the adaptability of the global capitalist and financial
capitalist system. It’s proven itself quite resilient in a lot of ways.
A huge danger is that a short-term response­and I think these are
inadequate, but not trivial­will enable policymakers and the public to
look away from the much deeper problems that Bob is talking about and
that must be addressed, which include the excessive financialization
of the economy, not just the deregulation, but the capture of
political and economic power by Wall Street over the rest of the
economy, its major control over what we do.
AMY GOODMAN: Well, let me put that question to Bob, to Robert Kuttner,
editor of the American Prospect, author of Squandering of America. Do
you think their answers were satisfactory?
ROBERT KUTTNER: I think Edwards came closest, because, first of all,
what he was proposing was bolder and bigger, but also he was tying the
need for short-term medicine to the need for longer-term structural
change. And I liked the idea of putting money into green
infrastructure that would promote energy independence, promote a
cleaner economy and also create some good jobs. I think Rob Weissman
is right that the conventional wisdom, as enforced by the usual media
suspects, keeps this narrowly focused as a stimulus. And it’s really a
down payment on a longer-term recovery strategy. So Edwards comes closest.
And I think even Edwards doesn’t go far enough, because if you think
about 600 bucks a year, that’s twelve bucks a week, you know, in the
face of a ten percent increase in health insurance premiums and a ten
percent increase in gas at the pump and tuition costs. And now you’ve
got rising food prices because of all the mistaken use of food
production for energy and the assault on the environment. So you’re
going to have a kind of ’70s stagflation on top of everything else,
where you’ve got declining purchasing power and rising inflation. What
even the Democrats are proposing doesn’t begin to come to terms with
that. And they need to be saying so.
And finally, they need to hang this around the necks, not just of the
Republican Party, not just around George W. Bush, but around the whole
conservative ideology, because this economic mess is the gift that’s
going to keep on giving, unfortunately, for years to come, of
rightwing ideology put into practice in its most extreme form since
Reagan. And that message, I think, has to keep getting out. This did
not come out of thin air. This was not like a comet striking the
earth. This was the result of rightwing ideology and the political
power of Wall Street taking over the economy.
AMY GOODMAN: You’ve talked about a crash, like 1929. Is that what you see?
ROBERT KUTTNER: I think the Fed has some powers now that it didn’t
have in 1929. The Fed is determined to try and get out ahead of this.
Mercifully, all of the stabilizers of the New Deal were not repealed,
even though a lot of Republicans wanted to. We still have unemployment
comp, although it’s too weak. We still have Social Security; the
Republicans didn’t manage to privatize that. We still have Federal
Deposit Insurance, or we’d have runs on banks. So they didn’t repeal
the entire New Deal, thank God.
On the other hand, the similarities­the weakness in credit markets,
the assault on financial institutions, the hit that purchasing power
has taken, the speculation with other people’s money and these
pyramiding schemes­are all too familiar. So I can say flatly, this is
the most serious financial crisis since the Great Depression, and
we’ve only begun to see how bad it is.
AMY GOODMAN: What about specifically the role of the banks on Wall
Street? You had Jesse Jackson leading a march on Wall Street with the
subprime crimes, as he called them, the subprime crisis­
ROBERT KUTTNER: Yes.
AMY GOODMAN: ­saying that they should give back their bonuses at
Christmas to deal with this crisis.
ROBERT KUTTNER: Right.
AMY GOODMAN: Can you name the names of these companies and what they
should be doing right now, or what should be done to them? And again
the role of the opposition party here­we’re in an election year­they
could be making a statement or join with the ruling party, with the
Republicans, and support President Bush right now.
ROBERT KUTTNER: Well, you know, some people have this picture of
subprime lenders as these neighborhood predators. They were put in
business by Citigroup. They were put in business by Merrill Lynch.
They were put in business by the bluest chip names on Wall Street.
The prime enabler under Clinton of deregulation was Robert Rubin,
Secretary of the Treasury. And Rubin comes out of Goldman Sachs, then
he goes to work as one of Clinton’s top guys. He presides over the
repeal of the key piece of New Deal legislation designed to prevent
conflicts of interest, the Glass-Steagall Act. And then he lets a
short interval go by, and then he becomes chairman of the executive
committee of Citigroup, which was only able to become the kind of
conglomerate it did because of the repeal of the Glass-Steagall Act.
Now, that’s a flat-out conflict of interest.
And so, what should the big banks do? Well, they should hang their
heads in shame. But they’re not going to become converts to our view
of the economy. We have to impose that on them as citizens through the
democratic process of legislation and regulation. We have to fight the
battle that we fought in the 1930s and onward and win it all over
again, because, otherwise, if we don’t, the power of speculative
finance is going to just wreck the economy for the rest of us.
AMY GOODMAN: And the stimulus package, who exactly does it help?
ROBERT KUTTNER: Well, it will put a little bit of money, hopefully,
into the pockets of ordinary people rather than business, which is
what Bush wants to use it for. I would like to see a much bigger
program of aid to the states, because, you know, the states are
required to have a balanced budget. So when a recession strikes, tax
receipts to the states go down. States have to cut back services at
exactly the moment when they should be increasing services. One way of
making sure that the money is going to get spent is to prevent the
states from cutting back services. You need to have a much stronger
program of unemployment insurance. Most Americans aren’t even covered
by unemployment insurance, because there are so many temp jobs and
contract jobs now. That would help, but it would be like taking
aspirin; it would be symptomatic relief; it will not cure the deeper
problems of the economy.
AMY GOODMAN: I want to thank you, Robert Kuttner, for joining us, as
well as Robert Weissman. Robert Kuttner, author of The Squandering of
America: How the Failure of Our Politics Undermines Our Prosperity.
Robert Weissman is editor of Multinational Monitor magazine in
Washington, D.C., and co-director of Essential Action.
 

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