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

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]
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.
And—look, there’s a—everybody wants to get something done quickly, but we want to make sure it gets done right and make sure that we’re—everybody is realistic about a—the timetable. Legislative bodies don’t move as—you 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 the—obviously 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 books—his 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 now—the Fed interest-rate cut, the stimulus package—is 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 bonds—you 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 good—or horrible—analogy. 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 homeowners—and that’s about 70 percent of Americans—are 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 stimulus—and they’re talking about $140–$145 billion, that’s one percent of GDP—that’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 not—authority 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 them—Bush, Pelosi and Reid, the images—going 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 dollar—they’ve already been written down to zero, because nobody wants to buy them—and 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 the—tax 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, no—crucial 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 I—my guess—and I don’t claim to be an expert in this area—is 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 response—and I think these are inadequate, but not trivial—will 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 similarities—the 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 schemes—are 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 here—we’re in an election year—they 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.