Michael Hudson: Crippling student debt, which is also a drag on the whole ecnonomy, developed as governments pushed the burden of higher education costs onto students and pushed them into the arms of the banks.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Baltimore. And we’re continuing our discussion about the 80th anniversary of the inauguration of FDR and the New Deal.
Now joining us to continue our chat is, first of all, Professor Leo Panitch. He’s the Canada Research Chair in Political Economy and distinguished research professor of political science at York University in Toronto. And he’s the author of the book Global Capitalism and American Empire and coauthor of the book The Making of Global Capitalism.
Also joining us again, Professor James K. Galbraith. He’s the Lloyd M. Bentsen Chair in Government and Business Relations at the LBJ School of Public Affairs at the University of Texas, Austin. And he’s the author of The Predator State and Inequality and Instability: A Study of the World Economy Just Before the Great Crisis.
Thank you both for joining us again.
So, Leo, we’ll start with you this time. So we ended part one basically that the Fed has been able to stop a crash of the global banking system, but they haven’t had the effect perhaps some thought they might in terms of actually restarting growth in the American economy and global economy. In fact, Europe is a total mess. We’re looking at deep recession in many of the countries of Europe. We don’t know about China. There’s been lots of talk about the burst in the China real estate bubble. And in terms of the American economy, many people are saying what’s needed is a massive government intervention, both in terms of spending and in terms of labor law, in terms of facilitating a general rise in wages, not just a $9 an hour minimum wage, which I don’t think is going to have that much effect on demand. So, first of all, do you think that’s what’s needed? But more so, is it possible given today’s politics?
LEO PANITCH, PROF. POLITICAL SCIENCE, YORK UNIVERSITY: I think that it isn’t possible given today’s politics. And it goes back to what I was saying in the first segment when I was pointing to the massive mobilizations, the influence of very radical communists on that mobilization, how that even affected the rhetoric that Roosevelt—and one can point to many others, including Truman—spoke at the time. And that’s missing. There’s nothing on the scale of it, although there certainly has been some stuff going on.
But I think it’s important to point out that what has been effective is a prevention of that financial crisis equating to what the 1929 crisis led to in terms of an economic crisis. The pouring of liquidity into the system, the coordination by the American state of the G20 other states agreeing not to engage in beggar-my-neighbor policies, in that sense to keep globalization going. That involves keeping all the unequal power structures of it going as well. But nevertheless, for a crucial period in 2007, 2008, 2009—there was a coordinated fiscal stimulus in 2009 as well—that prevented the spiral that one saw back in the Depression.
But the main point I’d want to make is this, that what the New Deal didn’t do—and this is what I was trying to get to before—was take the private banking system, the financial system, into the public domain. It certainly regulated private banking, it provided protections, and in that sense was important, but it incubated a banking system that returned, eventually, to the kind of competitive speculative dynamism that led us to the 2007 crisis.
And what I would say is that in terms of the kind of policies we need and shift in the balance of forces we need, that does involve beginning to take class power away from the banks, not just regulate them, because what you ended up getting, of course—and James was alluding to it in the first section—not only by 1951, but even earlier, was a reversion to the kind of relationship that the Fed and Treasury, very close relationship, inevitably have with Wall Street when Wall Street is the power that it is. So one needs to think in terms of a shift in the balance of power. Eventually, if we’re not going to be facing crises like this into the future, it seems to me we’re just going to have to turn banking into a public utility.
Short of that, we don’t have in any sense the political forces to do this. Short of that, one could at least have an ambitious enough president, a self-conscious enough president who would be prepared to undertake massive direct public expenditure and public employment, at least to call for it in the run-up to the next congressional elections so people know what’s at stake, because even though the level of unemployment is nothing like it was in 1933, Heaven knows it continues to be severe enough.
Galbraith: Well, your question to begin with was can we have another New Deal. I think the answer to that is no. History is not going to repeat itself, and the conditions that gave us the New Deal are not going to recur. And in part the reason for that is that we had the New Deal, and the New Deal changed the nature of our economy in irreversible ways.
We are still fighting a battle to preserve the most important institutions of the New Deal, which are—include—New Deal and its successor, the Great Society, which are Social Security, Medicare, and Medicaid, and to preserve the larger regulatory functions that the federal government has assumed, and which in a complex economy are absolutely essential underpinnings to the functioning of the market. If air traffic control is curtailed, air travel will be curtailed, and everything that depends on it will also be affected.
So we are in a very different phase of, let’s say, the outfall from the last crisis than Roosevelt was four or five years after the crash of 1929.
That said, the New Deal would not have been possible in 1930 either. It would not have been possible, I don’t think, in 1931. It took a certain amount of time for the realization to set in that the system was not going to correct itself, that a truly great disaster, irreversible changes had occurred, and that fundamental institutional reconstruction was required. And that had happened by 1933.
I was just reading, for example, a little passage from Frances Perkins, who became the secretary of labor under FDR, talking about setting up, at Roosevelt’s instruction in the first days, some hearings with the coal mine operators who came in asking plaintively for the government to take over the coal mines. And Perkins, along with Harold Ickes, the secretary of the interior, who was also deputized by Roosevelt to listen to these people, were saying, how on earth would we do that? The government doesn’t have anybody who knows how to run a coal mine. And they simply importuned the coal mine operators to keep going for a while until they could get some income flowing through a revival of demand, which in fact they achieved.
I disagree with Leo about the role of the New Deal with respect to the financial sector. I think the New Deal institutions did keep the financial sector effectively under discipline, and that the benefits of that extended well into the—through the ’60s into the early 1970s, and even a bit beyond. It was only really in the last 30 years that we have begun to revert to the idea that—or have reverted to the idea that banking institutions can call the tune that public policy has to dance to. And the culmination of that, a relatively recent reversion, was the crisis of 2009.
We do in fact [incompr.] back to, you know, agreement that we do in fact face a major problem with these unreformed massive institutions, heavily concentrated, in control—six institutions—of more than half of U.S. banking assets, which are not serving the purpose that a publicly chartered bank needs to serve. I think that is a big part of our problem.
The way you deal with that is to utilize, use the instruments that actually do already exist. The Federal Deposit Insurance Corporation has the authority to assume control of banks when they are nearing insolvency, and so as to protect the government’s exposure via the insurance fund. And the new legislation, the Dodd-Frank legislation, does have in principle resolution plans even for large institutions that are more complicated than the FDIC felt it could handle in 2009.
Jay: Leo, just do you want to respond to this issue that the banks were regulated and there was—.
Panitch: The reason I’m confirmed in my socialism, I must say, is that I think that the financialization of capitalism in the ’80s and ’90s was a product of the contradictions that the New Deal reforms ran into by the 1960s, indeed by 1951, when, as James indicated, the Fed-Treasury Accord was established to further beef up the role of investment banks in New York.
The truce with business by 1938 had already preserved financial capital as a very powerful force in the United States, and it ran a rearguard campaign against Bretton Woods and already softened a good many of the New Deal reforms, including the labor reforms and others, by the end of the 1940s, if not earlier. So I do think it’s right to see in the long term the extent to which the preservation of especially financial power through the course of the New Deal era led to the contradictions when full employment started producing wage pressure and inflation, when a completely unregulated Euro dollar market in London began to make it very, very difficult for American banks not to try to escape the New Deal regulation [kju] limits on interest rates, etc. These were contradictions that eventually were to undo the New Deal reforms in a capitalist economy which the American state was sponsoring around the world from 1945 on.
So it wasn’t just a matter that some bad guys with bad ideas got in. It was that the Keynesian New Deal reforms were increasingly running into contradictions in the face of a dynamic and changing capitalism. And I think we need to draw the conclusion from this that we should be looking at this inherent crisis-ridden tendency of capitalism as an opportunity to educate people to the need to democratize our economies. And that has to begin with democratizing, turning into democratic public utilities those institutions that control the fundamental decisions about where investment is to go. That’s the conclusion, I think, that needs to be drawn in the long run, although I entirely agree that obviously the political horses aren’t there right now to even begin to put that on the American political agenda. But I think one even wins smaller reforms by putting that larger issue of the lack of democracy in the economy being at the core of the problem. If we put that on the agenda, I think even the smaller reforms are more easily won.
Jay: James, if you look at ’08, when the banks were so vulnerable, a time where perhaps there could have been this discussion of nationalization of some sector of it or some creation of public utility banking, what happens instead of that, the banks are, you know, bailed out, as everyone knows. But they also regain their political power so that you can’t even regulate them. Like, Dodd-Frank, the regulations to enact Dodd-Frank are, you know, filled with loopholes and holes. The Commodity Futures Trading Commission can barely pass the weakest position limits that the agencies you’re talking about that you say the tools are there, but given the politics, they can’t do anything. They’re getting underfunded. They’re becoming smaller. Their mandates are getting weaker.
Galbraith: What happened in late ’08 and early ’09 was, I think, an avoidable tragedy, really. And one had a competent federal agency, the Federal Deposit Insurance Corporation, under an eminently nonpolitical leader, a Republican, in fact, appointed by President Bush, Sheila Bair, who has written about this very clearly in her book Bull by the Horns, and who would have, I think, given her agency’s evaluation of the situation, moved to resolve at least several of the largest American banks at that time.
The decision to do so had to be approved by the Treasury Department. And when President Obama appointed Secretary Geithner to the Treasury Department, that option was foreclosed, and what one had was a Treasury which constantly took the line that nothing could be done along these lines because that would destroy the confidence of the financial markets, as if the confidence of the financial markets had not already been destroyed.
And I think one also has seen a complete failure of the Justice Department to pursue financial fraud, which underlay a great part of the development of the crisis, underlay the entire structure of the securitization of subprime mortgages—liar’s loans and so forth—in the run-up to the crisis. And we have seen figure after figure, insider after insider, being given a pass, to the point where one gets the impression that to be a senior officer of a major bank is to be immunized against criminal liability for practically anything, including, for that matter, the laundering of the money of the drug cartels in Mexico in a recent case.
So we are really seeing—have seen a very depressing example of the culture of complacency and power of the financial sector in the period since the crisis.
And the argument I would make is twofold. One is that this in fact has contributed seriously to the failure and inability to reconstruct the financial sector, because after all, who is going to trust a set of institutions which are known to be infested with fraud and where the fraud has been treated with the kind of impunity that it has in fact received? This is a very serious problem of economic functioning, not just a problem of justice and the rest. It has practical implications for the ability of the financial sector to actually return to a regular order in the aftermath, and secondly, that in fact the government does have and must have the power to begin to clean up this sector. It did in fact do so in the savings and loan debacle, and it could have done so in this series of events to a substantial extent. The methods are not secret. They are known to regulators and prosecutors and investigators, and they do tend to have a disciplining effect on the behavior of the sector for a time.
Now, Leo would like to, in some sense, say that, well, the whole system cannot be reformed, and therefore we have to resolve the contradictions in some other way. I say—to that I say, well, you know, I’m sympathetic, but good luck. The contradictions will always reemerge. There has to be what another Galbraith referred to as countervailing power. And it’s a never ending task of a reasonably well-functioning government to exercise that power and to keep the tendency of unregulated financial institutions from blowing themselves and the economy up under control. I do think that has to—we have to believe that that’s a possibility.
Panitch: To which I say, James, good luck. I mean, I agree with your diagnosis, but I think the way in which the Treasury and the other agencies are structured—and indeed, you pointed to a leader of one of the agencies who was prepared to go a little further, and she got smashed—the way they are structured is in terms of their embeddedness with Wall Street. And the notion that these institutions are interested or willing, or if you simply drop me or you or Paul Jay into them, that given the way they’re structured, they would play the kind of role that you think a regulated capitalist economy can play, I would say, good luck. I think that’s actually more utopian than—.
Galbraith: Well, I would start with reforming the Treasury Department. I think you could make out a reasonable program for achieving that. And that is largely a question of personnel, sure.
Panitch: No, I think it’s also—it’s personnel, but it’s also structure, certainly it’s also structure, especially in the case of the New York Fed, which is so embedded in Wall Street.
So, no, I think people like us have a lot of room for agreement. And I would want to put the stress on the contradictions that emerge when you leave a very powerful private capitalist class in place, which isn’t just the market. It isn’t just competing institutions that are engaged in private capital accumulation. They are a powerful social force. And when you leave that, that powerful social force in place and you expect the state to be able to rein it in, I think that’s relatively utopian. And I think we’ve seen the consequences. Sure, it took a very long time until it all worked itself out, but I think we’ve seen the consequences of the contradictions that emerged out of the New Deal.
And I would hope the lessons we would draw would—that were there to be the kind of mobilization from below, were there to be the kind of political leader who in his inauguration address would be self-confident enough to use the phrases that I quoted Roosevelt used—and I could have quoted many more—that I would hope that this time it would be to the end of developing some more radical perspective than thinking that we’re going to get a capitalist state to adequately sit on a capitalist financial system.
Galbraith: Well, I guess I can say I’m happy to play the role of the practical-minded conservative in this conversation. It’s not a role I get to play very often.
Panitch: That’s right. And I think this is a lovely conversation, I have to say.
Jay: Okay. We’re going to do one more final segment, one more segment. It will be the final segment. And I want to free the conversation up. So we’re going to imagine that there is such a mobilization, that there is a new alliance of forces that takes over the Democratic Party and is actually in power, and it’s in today’s world, more or less, although today’s world doesn’t have all those factors I just said. But what would that president do? That will be the next segment. Sort of we could say maybe it’s utopian, but a vision people could fight for.
Now, thanks again for joining us. Thank you both. And join us again for the continuation of this discussion on The Real News Network.