Moyers: James K. Galbraith on Financial Crises

Bill Moyers talks about the economic future with with James
K. Galbraith, Lloyd Bentsen, Jr. Chair in Government/Business Relations
at the LBJ School of Public Affairs at the University of Texas at
Austin. Galbraith is the author of six books, the most recent, The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.

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Bill Moyers Journal
PBS, October 24, 2008

BILL MOYERS: Watching Alan Greenspan testify before
Congress this week, I tried, I tried very hard not to keep thinking of
Ayn Rand. I failed.

The philosopher and novelist Ayn Rand was Alan Greenspan’s ideological
guru, his intellectual mentor. She was also one of the most amazing
fantasists of the last century, the author of two of the most
influential books of my generation THE FOUNTAINHEAD and ATLAS SHRUGGED,
both timeless best-sellers.

Rand was a hedonist, an exponent of radical self-interest, who so
believed in unfettered, unbridled capitalism that she advocated the
abolition of all state regulations except those dealing with crime. In
the gospel according to Rand, the business community was constantly
beleaguered by evil forces practicing, are you ready for this?
Altruism! Yes, the unselfish regard for the welfare of others was a
menace to greed, and Rand would have none of it.

Alan Greenspan met her as a much younger man in New York and, like so
many blossoming capitalists, was smitten. He has since downplayed her
influence on him, but as Chairman of the Fed for nearly 19 years he
seemed quite Rand-like as he watched Wall Street run wild. Yesterday,
like an old warrior still in a fog after his armies have been routed
from the field of battle, he expressed shock at how his ideology has
failed him. He didn’t see it coming, he told the House Oversight
Committee. The extent of the meltdown is, “Much broader than anything
that I could have imagined,” a “Once-in-a-century credit tsunami.” The
wondrous glories of a free market with no need of pesky oversight had
somehow gone wrong. Now you tell us.

I made a mistake in presuming that the self-interests of organizations,
specifically banks and others, were such as that they were best capable
of protecting their own shareholders and their equity in the firms…

In other words, you found that your view of the world, your ideology, was not right, it was not working.

Absolutely, precisely. You know, that’s precisely the reason I was
shocked, because I have been going for 40 years or more with very
considerable evidence that it was working exceptionally well.

BILL MOYERS: With his ideological blinders stripped away by
reality, Alan Greenspan might well do penance by curling up this
weekend not with THE FOUNTAINHEAD and ATLAS SHRUGGED but with James K.
“Why not build a new economic policy based on what is really
happening?” A fundamental question that surely has Ayn Rand and Milton
Friedman spinning in their graves.

James K. Galbraith is with me now. Professor Galbraith once served as
Executive Director of Congress’ Joint Economic Committee. He teaches
economics at the LBJ School of Public Affairs at The University of
Texas, where he also directs the University’s Inequality Project,
analyzing wages and earnings and patterns of industrial change around
the world.

James Galbraith, welcome.

Pleasure to be here.

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.

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.


Of trust, yes.  Banks –


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.

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.

What scares you most right now?

Well, a week ago or two weeks ago I would have said the possibility that Phil Gramm might become Secretary of the Treasury.

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.

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


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.

Isn’t our government winging it, too?  I mean, the NEW YORK TIMES this week-


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

Federal Deposit Insurance Corporation.

– has proposed something quite similar.

And so has Governor John-

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.


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.


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.

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.

For a temporary measure?

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?

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.

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.

You call it a corporate republic.

It is a corporate republic.

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.

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

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,


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

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

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

James K. Galbraith, thanks for being with me.

Thank you.

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