In the second part of his interview with ND20 Editor Lynn Parramore, Roosevelt Institute Senior Fellow Jeff Madrick talks about the core message of his new book, Age of Greed, and what happens now that our economic myths have been shattered. If you're in the New York City area, you can catch Jeff's author's talk tomorrow night at Cooper Union. Click here for more information on the event.
Lynn Parramore: If the recent financial crisis disproved the dominant free market/efficient market economic models of the Age of Greed and exposed rampant fraud, deceit, and risky behavior, why are we still so firmly in the grip of faulty economic thinking?
Jeff Madrick: I think we're still in the grips of it for a couple of reasons. One is the extraordinary power of Wall Street and monied interests and the power of money in campaigns. This is a very serious sphere in the heart of democracy in America. Number two: the reformers, the good guys, are basically only looking to stop the next crisis. In fact, they should be looking to make the financial system work properly again. It didn't fail only in 2007 and 2008. It failed time and again since the 1970s. Reform has to be directed at that. That's a much harder issue.
LP: What areas of the financial system are most in need of new policies and practices?
JM: It's not about Too Big to Fail. It's about restraining crazy levels of speculation. It's about seriously restraining compensation that's based not on productive investments but on shuffling paper. It's about making individual executives responsible for what they do and subject to losses. Now they are not subject to losses because the shareholders bear the loss. One of the remarkable things about the Age of Greed -- and why I call it that -- is that not only did people make enormous money and were able to pursue their self-interest unchecked, but they reversed the history of American reforms. We learned how to deal with this in the 1930s. We learned the problems. We developed regulations. And not only were some of those regulations reversed in letter, they were basically reversed in spirit.
LP: What lessons of the 1930s did we unlearn in the Age of Greed?
JM: FDIC insurance was the most successful program of the 1930s. But when money-market funds came around, and you and I put our money there without thinking about it. Nobody thought, my God! We better ensure that these money-market funds are okay -- they're not insured! Well, sure enough, in 2007-8 there was a run on money-market funds. The SEC was created to make sure investment banks, when they raised money through stocks and other relevant securities, disclosed all relevant information. In the 1990s and 2000s, federal regulators stopped forcing disclosure. No one even knew what was in a collaterized debt obligation any longer. In fact, I think you aren't even allowed to know what was in it unless you were an investor. The SEC was created to make sure that pricing was transparent. Then we had the development of over-the-counter derivative markets where pricing was totally secret, totally subject to the whim of a particular investment bank -- Morgan Stanley, Goldman Sachs, and so forth. Things became obscure, which was the opposite of the spirit of the SEC. So America reversed history in this period.
LP: To get the fundamental restructuring that's necessary to put us on more sound economic footing, what's most vitally important for financial regulators do to?
JM: To concentrate on capital requirements, which is no small thing in a global world. To raise capital requirements significantly in order to restrain speculation. The same with leverage requirements. I believe what would help is a financial transactions tax to diminish over-speculation. But I think what regulators have to begin to come terms with -- and it's not even in the air, certainly not a serious consideration -- is to understand that Wall Street is a monopoly. Almost like an electric utility used to be a monopoly. Why is LinkedIn trading so high? Because Wall Street makes an enormous of money on an Initial Public Offering -- 5, 6, 7% of that offering. That's what drove the crazy high-tech fantasies of the late 1990s. Wall Street made absurd levels of compensation. That's what drove Walter Wriston's loans to South America. It wasn't the interest rate spread -- you know, "we'll charge you a certain interest rate and we're paying a slightly lower interest rate." It's that they made 2% of the face amount. 1-2% for every loan they made, which went right to the bottom line. This is monopoly stuff and it violates good economics and it's justification for the federal government to come in and begin to control the compensation. Now that, in the current environment, is considered radical. And it should not be considered radical.
LP: Some point to the current weak economy and high unemployment rates as evidence that the Keynesian economic model, which favors government intervention, doesn't work. The argument that things could have been much worse without the stimulus, for example, is easy to dismiss and attack. Are you optimistic about a revival of Keynsianism under these circumstances? Who are its most effective proponents?
JM: The issue is -- as is often the case -- that the president has not reminded people how effective the stimulus was. Now most economists know this. The right wing denies it. Alan Greenspan continues to do damage by claiming a "lack of confidence" and uncertainty and saying that it's the budget that has kept people from investing. It is utter nonsense. And it has to be combated at the very top. I've heard Geithner combat it. I don't think he's a very effective guy, but at least he tried to combat that and show that those policies work. Unemployment would have gone to 12 and 13% if there had not been these Keynesian policies. The loudest credible voices are obvious. It's Joe Stiglitz and Paul Krugman. How effective they are, I'm not so sure. But they are right. And right is all you can be, in some senses.
LP: What would you say is the main message of your book?
JM: I hope that the main message of my book is that individuals created this crisis. It was not an act of nature. It was not inevitable. People say, what are you getting so angry about? Just roll with the punches. But this is not just 'how it is.' Sure, there's going to be overspeculation in a free market system occasionally, and some kinds of market contractions, but they don't have to be catastrophic. There is no inevitability unless government abandons its responsibility.
Cross-posted from New Deal 2.0.
Follow Lynn Parramore on Twitter: www.twitter.com/LynnParramore
As a Socialist this scares me: Americans will swing to the extreme right and that is to the far right of the Tea Party. Anyone remember National Socialism?
I've never lived in a Democracy so corrupted by greed nor so stupid as to rouse a mob from their sofas. Unbelievable violence is coming and no one in power seems to notice, nor care if it happens. Obama if he stands firm against anymore cuts, fights for the average American; can stop the coming storm.
This endless asset stripping by the rich, at our expense, cannot continue.
The problem is NOT the individuals who took advantage of decades of bipartisan regulatory breakdown.
The problem is NOT human nature that moves those individuals to act in their self-interest in that deregulated environment, and destroy our economy.
The problem is having a national money system that is structurally flawed by an immoral private privilege enjoyed by those unregulated greedy parasites. YES, folks, we do have a national money system.
The real problem dates back to the system of the gold-keepers, perfected by the Rothschilds.
The problem is the debt-based money system of fractional-reserve banking.
The problem is that ALL money must be created as a debt through private bank credit.
Again, the Austrians have that part right.
Why should ANYONE enjoy the privilege of lending out the same money twice, or three times, or ten? Only by restoring monetary stability can we begin to restore economic stability.
That was tried in the Monetary Control Act of 1934.
This failed, replaced by Glass-Steagall and other banking regulatory reforms which have also failed - falling victim to the de-regulatory cycle.
You can't regulate that greed, Jeff.
You can eliminate its ability to destroy the economy.
Congressman Dennis Kucinich has shown the leadership needed to reverse this governmental breakdown in issuing and controlling the national money system.
http://www.economicstability.org/wp/wp-content/uploads/2010/12/NEED_ACT-12.20101.pdf
Thanks.
The percentage of the federal budget funded by corporate taxes
The level of employee post-retirement benefits funded by employers
As wide a dispersion of annual income across the population
Paradoxically, in spite of America’s declining competitiveness and rate of productivity, the 40 years through 2006 has resulted in:
The percentage of the annual income accruing to the top 20% of the population (the special interest) reaching an all-time high
The percentage of the federal budget funded by corporate taxes reaching an all time low
The level of employee post-retirement benefits funded by employers reaching an all time low
The aforementioned, have resulted in the bottom 80% (the common interest) bearing the brunt of America’s declining competitiveness and rate of productivity.
The predominate reason corporate taxes were lowered and businesses justified freezing/terminating the funding of employee post-retirement benefits was to make America companies more competitive. Yet in spite of the lack of increased competitiveness, the percentage of the annual income accruing to the top 20% of the population reached an all-time high.
There is a fine line between holding leaders accountable and partaking in the blame game, but this should not deter holding interest groups accountable. Self-interest partisans have over-promised and have set the stage for to gross under-deliver to the American people, who above all deserve balanced and sustainable.