The Economic Shock: An Interview With Naomi Klein on the Current Crisis

When Naomi Klein published her latest book, The Shock Doctrine last year (recently out in paperback), she sought to illustrate the theory that the free market policies of economist Milton Friedman were pushed through in countries such as Chile and Iraq while their citizens were in shock from disaster or upheaval. Such policies were then used to transfer wealth and assets from governments to corporations. She noted then that the disasters did not have to be natural or military-led, but economic. Enter the current crisis in Wall Street, where a $700 billion bailout package is being promoted as immediately necessary to stave off further financial catastrophe. In a short space of time, evidence of Klein's theory have already surfaced in the form of Section 8 of the Bush administration's bailout plan, which states that as-yet undetermined decisions based on the plan are "non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Klein spoke with me on the consequences of the current financial crisis, where the seeds where planted, and how politicians from both sides helped contribute to a new round of "shock therapy."

ALI: With the Feds stepping in with Fannie Mae and Freddie Mac, and the $85 billion bailout of AIG, is this proof that the Republicans have learned to stop worrying and learned to love regulation?

Naomi Klein: This is a pattern that has repeated many times. It's not a new phenomenon. It's actually happened in many of the markets that have embraced deregulation. They create bubbles, accumulate huge debt, are rife with corruption, and then they're saved with exactly the thing that the ideologues have supposedly been against the whole time, which is "big government."

The Bush administration has really been a regime of "big government," of accumulating huge debt, and really just transferring public wealth into private hands. This is what they've done, certainly with the explosion of the war industry. And now, their final act is to transfer private debt into public hands.

But it's actually quite consistent. The first phase is to transfer public wealth into private hands, and then transferring private [debt] into public hands. Their final gift to Wall Street before they leave office.

Free market ideology is never applied with any consistency. It's not a real ideology, it's a tool for the elites to enrich themselves. And it ebbs and flows according to its usefulness. When bubbles are inflating, it's useful to believe in laissez-faire economics, because having an absentee government allows that bubble to inflate very rapidly and wealth to accumulate very, very rapidly.

When the bubble bursts, as bubbles inevitably do because they're built on fiction and hot air, then suddenly the ideologues sort of go dormant. We don't hear from them, and "big government" rides to the rescue.

But what's really frightening about this moment is the economic crisis that is going to be created within the US budget and internationally as well, with this huge amount of debt being transferred into the public hands. It's going to create an economic crisis on the public books, which will mean that even more of our social programs will be unaffordable, or we will be told that they're unaffordable because of the crisis being created at this very moment.

ALI: Is this an example of the failure of free market enterprise ideology or is this an aberration. Some say it's just the latter.

Naomi Klein: No, this is a pattern that's repeated again and again. It's not an aberration. We're hopping from bubble to bubble. You saw it with the dot-com bubble bursting. In my book [The Shock Doctrine] I talk about how this has happened actually in Chile, in Argentina. Often with bailouts that had very similar traits, of the transferring of private debt into public hands... I don't think it's an aberration at all. And I don't think it's a failure of anything.

I think the system works for the elites in the good times and it's working for the elites in the bad times, because it is a system built for the elite. It fails the public all the time and it works for the elites all the time.

ALI: Pretend you're talking to the public. It's not that we're stupid, but many of us are confused by finance and economics and business administration lingo. Let's name names. Let's take shots. Who do we blame? Who are the institutions to blame? Who are the actors to blame?

Naomi Klein: Well first of all, this issue's complexity is a very political one, because the sort of tyranny of complexity is really at the heart of this crisis. What allowed these junk loans to proliferate is because they were so complex, and such complex financial instruments were created, that even the regulators didn't understand them. And people put a tremendous amount of faith in the financial system, believing that these eggheads really understood it and we could just trust them.

If there's one lesson to learn from this disaster, it's that we cannot trust these so-called experts and that complexity really is a kind of armor protecting them from regulation and scrutiny. So we have to learn as much as we can. And if the system is too complex for regular people to understand it, there's probably something wrong with it. I really do hope that people have learned that lesson.

ALI: We have the Democrats and Republicans both now proposing...

Naomi Klein: ...In terms of naming names as those responsible for this, it definitely is bipartisan. The Bush administration happily inflated the housing bubble. But it began in the late 90's when Clinton was in office.

And one of the most destructive contributors to the situation we find ourselves in now with all of these Wall Street firms - supposedly too big to fail - and then having too much of the public's money at stake, that has to do with the decision that was made under Clinton to kill Glass-Steagall, which was the Depression era law that prevented consumer banks and investment banks from being in the same institution. You had to either be an investment bank and engage in high-risk speculative investment, or be a commercial bank and be entrusted with people's life savings. You couldn't do both.

It was the Clinton administration and Robert Rubin who took down that firewall and allowed a massive merger of the Travelers and Citicorp [to create Citigroup in a $70 billion deal in 1998]. There was no reason for it except that it was the height of the dot-com boom and the commercial banks were tired of being kept out of the party, of the speculative bubble. They wanted in and Clinton allowed that, and now you have these mega-financial institutions that are banks, that are insurance companies, that are investment funds, that are hedge funds. That's when you have this huge fear of a domino effect if one of them fails.

ALI: So you've heard the Democrats proposal and the Republican's proposal for "fixing the ship." Which one is more tenable? Will any of them help?

Naomi Klein: (sighs) Well, actually, I read Obama's speech this morning, but I don't think I can assess the plans, such as it is. It's too vague. The Republican plan also is fairly vague. Everybody seems to agree with this idea of creating a relief agency, which is a real misnomer, because it sounds kind of like a, "Brother, can you spare a dime?" Depression-era relief agency. This is a relief agency for Goldman Sachs!

Essentially what they're talking about in both - this is bipartisan - is the government forming sort of a debt jubilee for corporate America, for Wall Street. So it's sort of like Jesus throwing the money lenders out of the temple (laughs) and "rebooting" is the phrase that they're using. So basically, you clean the slate of these bad debts and the health of the market is restored.

This is an incredibly dangerous proposal. First of all, if you think about what's actually happening - because you're not "erasing" the debt, you're transferring this junk debt from the people who created it and enriched themselves from it, and you're transferring all of that bad money into this new government agency. (Laughs) "Big government!"

So rather than a government agency that is actually a relief agency that is actually helping the people who are facing foreclosure... you know, the relief agency is a receptacle for all of this bad debt. And the price of this, you know... we don't even know. The government is proposing to buy debt for which it still doesn't even understand the risk, because part of the problem is a total lack of transparency. So we don't even know the burden that would be accepted by the taxpayer.

I just think it's a huge mistake for Democrats to allow something so dramatic and potentially so disastrous for generations into the future to be pushed through in a week in a rush. Something that deeply affects America's future that should be debated, deeply understood by everyone, and not rushed through hastily in an emergency, no matter what the Democrats managed to get tacked on that sounds like they're standing up for the little guy. Fundamentally, both parties agree in this massive acceptance of Wall Street's debt, this transfer of corporate debt - a jubilee for the rich, that's what they're talking about.

ALI: Suppose Naomi Klein takes over the Fed, Naomi Klein is the economic policy advisor for America. You have an opportunity to fix this mess and provide a roadmap for the future, and we're in a crisis right now. What do you do?

Naomi Klein: Well, first of all, I'm not qualified to run the Fed. And this is such a mess, that there aren't happy, easy solutions to get out of it. I think that the main thing you can do at a moment like this is to try to prevent actions that are disguised as a bailout by the public, that will actually make the situation worse for the public. We're definitely not out of the woods. All I'm trying to do is raise the alarm on that.

But I think the other thing we need to understand is that this is a moment of leverage. Obviously, Wall Street is weak, they're coming to the public. Unfortunately, that public is represented by George Bush and Hank Paulson. But they're coming to the public with their hands out looking for emergency help.

Now, we know what the IMF does when desperate countries come to them with their hands out and ask for help. And that is, they give them a list of conditions, things that countries have to do in order to get that help, supposedly to be more sustainable in the future. In this case, I think there are a lot of things the taxpayers have a right to ask Wall Street in exchange for these bailouts.

For instance, this was proposed by Dean Baker, a very good progressive economist... he said that if a Wall Street firm wants to come get a handout, they should agree to cap executive pay at $2 million. And Joseph Stieglitz is talking about restructuring executive pay rather than it be based on performance in the past year, it's based on performance in the past five years so that you don't have this incentive for reckless, short term behavior that will then be rewarded with a huge bonus. Let's remember that Lehman's handed out $5.7 billion in bonuses just last year.

Comments

[fisharefreinds]

Judging by the people who blog on this post, so many are super intelligent and informed and yet, not heard in Washington

[kaski]

I read Naomi's book : The Shock Doctrine and found it very informative and a must read. To find the real root of the cause of all these economic disasters to go along with Friedman economics I highly recommend everyone reading: The Web of Debt by Ellen Hodgson Brown. The Federal Reserve is a privately owned banking institution, owned by 12 American families such as the Rockeffellers, Morgans, Warburgs... These families also own the big banks on Wall Street. These privately owned banks are the root of our Empire creating. They deal in and with fear, greed, genocide and paranoia. Our forefathers knew of the dangers of allowing private bankers controlling our central banking system, and even a few tried to get rid of them. Lincoln and Kennedy are two of them. They were only two men fighting overwhelming odds and power. The American public needs to become educated on the truths of both books subjects, for they go hand in hand. It is time that the American people stand up and demand that Congress overturn the Federal Reserve Act of 1913. They can't kill us all. I have witnessed genocide, wars, assassinations all in the name of total greed and the need of power. It must be stopped if we ever want peace in our world amongst all peoples of every nation.

[rwe2late]

Crisis almost always provided an opportunity for change.
And
Naomi Klein's delineation of how every means of wealth and power has been used to push through a radical neo-Liberal or neo-Conservative (actually neo-Fascist?) agenda in times of crisis, is always illuminating.
Sadly, some crises are intentionally created for the very purpose of seizing power and wealth.

[juliette23]

Thank you, Naomi Klein. For saying the things I don't hear in my daily monitoring of the cable network news and so-called analysis. Pa

[candyc]

I'm a well informed voter who is still trying to understand the implications of the negotiations in DC.
I guess the question really comes down to "Are we being tricked by the exact same tactics that Bush used to get us into this dreadful , stupid war, or are we actually teetering on the edge of permanent misery and deprivation?
How are we supposed to know?
My gut feeling is that this bailout is wrong without punitive measures. It seems too big, and it seems too rushed . BUT, I listen to Chris Dodd, Barney Frank and the Republicans (on the committee) and feel like the Banking Committee is determined to set up a comprehensive preliminary bailout because they believe that we really could face total financial destruction as early as Monday.

The fact that the alarm was triggered by Bush makes me very worried that it's all a lie. The fact that serious people like Chris Dodd think the crisis is real makes me believe that I should trust what he says.

On the subject of McCain. He is the most immature 72 year old man I've ever seen. Those of us who
have never liked him are appalled. And, once again, as in 00 and 04, "Marge on the couch", an undereducated , angry couch potato who gets all of her information from TV will determine the outcome of the election?

What does Naomi Klein suggest we do? Go into Monday with no plan and take our chances?

[kaski]

We are being "tricked" again and they are using the fear card once again. They must be stopped. They are the privately owned Federal Reserve. Have you ever asked yourself just who we are in debt to and looked for real answers? Why does the American government need to borrow money and from whom? The Federal Reserve owns us (each and every American for generations to come) through accruing debt owed to them!! They control our very government, dictating to Congress our foreign policies, economic policies... They are evil for the operate on total greed by spreading fear and paranoia to gain total control of power.
"The modern theory of the perpetuation of debt has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating." Thomas Jefferson
"The only thing necessary for evil to exist is for good men to do nothing." One of JFKs favorite quotes.

[BadChristian]

Thank you for this and other recent interviews, Mr Ali.

I think that Andrew Bacevich ("The Limits of Power") would classify this as yet another result of America's "crisis of profligacy."

[blackmouth]

Naomi, thanks for letting me understand just what is going on with the mess these people have created. Both, Dems and Repubs have a hand in this and it's always the little guy who suffers. It's like collateral damage by the rich and powerful and I am sick and tired of them always winning and me loosing.

[luziannagirl]

If I hear the hallowed phrase "Free Market" invoked from on high one more time, I'm going to start throwing things.

As you pointed out, it's never been free, nor is it a market.

It's just Government Welfare for the rich.