How soon before the headline, "GOP to Detroit: Drop Dead?" While Republicans throw $700 billion to Wall Street but complain about a $14 billion loan for blue collar workers, Bob Kuttner explains why this should be a transforming economic and political moment for Obama.
Interview of Bob Kuttner, author of Obama's Challenge, Dec. 12, 2008
MARK GREEN: How big a flop was round one in the bailout approach -- the $700 billion for Wall Street?
ROBERT KUTTNER: It's been a flop in almost every respect. I mean, you recall they started out saying they were going to take this money and use it to buy up toxic bonds and get them off the books of the banks. They couldn't figure out how to make that work. So then, they used authority that had been put into the bill by the Democrats, over the objection of Hank Paulson, to put capital into banks directly. Citigroup, all by itself, got $45 billion. That's more than the entire value of the shares of Citigroup stock, as currently valued by Wall Street. So, in effect, the government owns the thing. Except that under Paulson, who really views himself as Wall Street's guy at the U.S. Treasury rather than the agent of the American tax payers, has not attached any meaningful conditions in return. And when you compare this to what they're doing to the auto industry, it's really quite instructive.
GREEN: Is there any way that the next administration can retroactively condition future flow of funds to Citigroup on standards similar to the way they're suggesting for the auto industry?
KUTTNER: Totally. There are lots of ways, because Citigroup is going to be back for more. I mean, Citigroup, by any normal test, is insolvent. In a sense that if government were not aiding it it would be out of business. In addition to the $45 billion in actual cash the government handed over, the government is guaranteed $306 billion dollars more in guarantees of mostly toxic securities. So, they need the cooperation of the government going forward. We're eventually going to need an agency, something like the Reconstruction Finance Administration of the Roosevelt era, that has the power to restructure private companies that get government help -- in some cases has the power to take them over, has the power to put people on the board - it needs to be much, much more proactive. Not just because tax payers are footing the bill and they need something in exchange, but because this is the gang that can't shoot straight.
GREEN: What is the proposal that you're urging Obama to pursue in office, and what standards should there be to avoid "lemon socialism"?
KUTTNER: Here's my short list. First of all, in the re-capitalizing of banks, there need to be lots of standards, and before this is all over they may need to nationalize one or two banks to do it right. And to show the rest of this traumatized industry how to right. Secondly, they need to put a floor under housing prices. Instead of throwing money at bond-holders and at banks, the government needs to refinance a lot of troubled mortgages directly, which is what Roosevelt also did through the homeowners loan corporation. Third, we need a much tougher regime of financial regulation going forward. We need a huge stimulus package, probably close to a trillion dollars next year. But most importantly, we need to use this as a teachable moment in the sense that the stimulus package is not a one-shot. It's a down payment on a permanent increase of public outlays of all kinds: infrastructure, green energy, health, education, early childhood. Things that people will value.
GREEN: Dick Cheney said that "deficits don't matter". Do you regard there to be any limits in the volume of federal economic investmentsj to stimulate us out of this deep recession and avoid even worse?
KUTTNER: The part of the national debt that's held by the public, as opposed to one government agency borrowing from another, is 40% of GDP. It's about $6.3 trillion dollars. That is not high by historic standards or by international standards. If that has to go to 60% of GDP, because of two years of large deficit spending, we can easily pay that down after the economy gets back on track. The alternative, letting the economy go into a depression is far worse than a temporary increase in the deficit. After the economy is out of recovery, then you gradually reduce the deficit to something normal, which is 2% or 3% of GDP, and you pay for the additional spending by raising taxes on wealthy people and restoring normal tax enforcement, which was completely gutted under the Bush administration. I mean, there have been study, after study, after study which show that about $300 billion collectible revenue is left on the table every year because the Bush administration stopped auditing rich people.
GREEN: As we speak, Congress is fighting over a possible rescue of the auto industry - - or Bush could do it out of TARP funds. What would your plan look like that could be enacted that would salvage the industry, but not own it?
KUTTNER: It's one of the toughest questions --since you can lead a horse to water but you can't make him drink. In other words, we can condition the $15 billion on a plan, and then after 120 days, we can offer additional money subject to all kinds of constraints. There has to be a serious commitment to produce energy efficient cars, etc. There have to be public members of the board, they have to fire management and get in people that know what they're doing. GREEN: But we can't force the public to buy our cars. KUTTNER: Right, we can't force the public to buy American cars. And the Japanese have a huge head start. I mean, I hope your listeners have all seen the documentary "Who Killed the Electric Car?" Because Detroit had a production vehicle that was a plug-in car 12 years ago, they killed it because it didn't make enough profit. They've wasted at least a decade. And that's the problem. So, in a sense, I think this is Detroit's last chance, with a lot of taxpayer money and a lot of government supervision, to demonstrate that they can finally learn to make a competitive car... By the way, I'm going to use a dirty word so I hope adults are mainly listening, this is an industrial policy. This is something that has been verboten for 30 years, as inappropriate government meddling in the economy. But when the government throws $700 billion dollars at Wall Street, it's appropriate to have an industrial policy, especially when you have an industry that doesn't know what it's doing, but is vital to the future of American manufacturing. So, this is a kind of laboratory experiment in whether we can do industrial policy right.
GREEN: How close is the now oft-drawn parallel between FDR's circumstances in 1933 -- Republican orthodoxy worsening a market collapse -- and Obama's today?
KUTTNER: I think it's very close in two respects. First of all, as you indicated, Mark, the financial crash is also a crash of ideology. Everything that conservatives have been selling for the past 35 years has been discredited by a collision with reality. And it isn't just a financial crash, it's 30 years of hidden depression for most Americans. So, it's a teachable moment, and Obama happens to be a very effective teacher. He can help Americans connect the dots. But, I also think, even though unemployment isn't 25%, this crisis is very, very serious. It's interesting. If you look at what happened after 1929, the crash was in October, 1930 the unemployment rate was only 8.8%. I mean, it takes a while for the air to come out of the real economy, and that's starting to happen with retail sales down at a more rapid clip at any time since statistics have been kept, with auto sales down 40%, and you're now starting to see they layoff numbers really go up. I would bet my house, which is worth less than it used to be, on unemployment going to double digits sometime in 2009. It's very serious. And the only way of rescuing the economy is to put government back into the equation big time.
Interview audio can be found at Airamerica.com
MARK GREEN: When Republican Senators throw $700 billion to Wall Street without any questions but refuse a $14 billion loan to help auto makers and workers, is this an example of what they call 'class warfare?'
ARIANNA HUFFINGTON: Well, you know, there isn't much to be learned by calling it class warfare on either side. I think there's a lot to be learned by looking at ideology again. At the very moment, when the Republicans should be reevaluating their view of the role of government in their lives -- given the expectations from government right now -- instead, they're just sticking to their completely obsolete talking points about the role of unions, about the free market. As though a tsunami of economic calamity brought about by these beliefs in unfettered free markets and no regulation has not happened.
GREEN: Doesn't the GOP risk a huge backlash from blue collar voters that could affect the GOP for years to come?
RON REAGAN: Yeah, I think there is. You're absolutely right that the GOP is being revealed as a party that doesn't care about industrial workers. People that work with their hands, people who don't make millions of dollars, who aren't white collar folks sitting up there on Wall Street pulling down these fancy bonuses. (They're) happy to toss money at Wall Street! But when it comes to regular folks in Michigan, or Ohio, or places like that, no, the GOP doesn't seem to be interested, and they start getting snarkey about what the paychecks these people are bringing home are.
GREEN: Is the Blagojevich scandal a political cancer for the Obama transition that can be cut out or might it have a longer effect as some journalists seem eager to happen?
HUFFINGTON: Well, actually I don't think it's a cancer on Obama's body politic. I think the attempt to link Obama to the governor is a complete media fabrication. Fitzgerald himself said there's no connection. Blagojevich said there's no connection, when he actually complained that all he's being offered is appreciation, and it's only the media that's trying to make a connection that quite simply does not exist. I don't actually see what is the problem with Rahm Emmanuel giving a list of acceptable candidates. I mean, wouldn't it be dereliction of duty not to do that? Shouldn't they all be very, very concerned with whom the next Senator from Illinois will be?
GREEN: Let's move from scandal to substance: what's your view of Obama's 'Green Team' of pending environmental picks?
REAGAN: You know, what's nice about some of these appointments, especially Dr. Chu as secretary of energy, is that we've had 8 years where things like energy, the environment, healthcare, and stuff like that, science has been roundly ignored. And all of these agencies have become heavily politicized. And now, at least, you have the sense that there are going to be actual scientists in charge. Maybe somebody at the top that will listen to the scientific evidence, and set policy based on actual facts instead of ideologies.