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[Music]
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I have a question here that comes from
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Eve Smith who runs the popular blog
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called naked capitalism I'm just going
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to read it in your Atlantic article the
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quiet coup you stated that the hold of
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the financial services industry on
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government which you compared to to
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Third World oligarchs would not be
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broken you'd need to come you'd need to
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see some break ranks and back reforms as
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happened in the Great Depression clearly
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that has not occurred based on what you
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said today uh are you troubled to see
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discussions in the media ignore this
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issue and worse act as propagandist for
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the industry by suggesting that the
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reforms were tough and will
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inconvenience big
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Banks yes I I think uh e Eve Smith once
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again has hit the nail on the head it's
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about ideology and it's about what we
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what we call in the book cultural
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Capital financial sector persuaded
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people in the runup 2008 that they were
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smarter than their predecessors and then
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pretty much anyone else in the economy
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that they knew how to organize and
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manage risk and they should be allowed
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to do all kinds of things that a
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previous generation of regulators would
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would would not have permitted well that
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ideology was obviously shaken by the
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events of 2008 and 2009 but but now we
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see it coming through uh again
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in a in a apparently persuasive form
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backed of course by a lot of lobbying
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dollars and a lot of very articulate
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people in Washington who who work on
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behalf of the sector um but the essence
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I think you is right the essence if the
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media doesn't get it if the smartest
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journalists who you respect and read
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every day who write on the front page of
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major newspapers and on
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leading analytical serious websites run
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by those papers if they don't get it if
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they don't understand what the financial
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sector is doing why and how then that
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definitely contributes to the
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problem a related question I think
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that there's probably a handful of
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economists who who foresaw the bubble
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and predicted in one way or another
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forecast that that there would be a
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crash as a result uh those folks were
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pretty much ignored prior to the
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financial crisis once there was a the
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financial crisis hit they then predicted
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a lot of the things that were going to
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happen and you know first and foremost
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that it would be a very long recession
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however deep there were different
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opinions but that it would be longer
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than your garden variety because it was
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a a a debt deflation related recession
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which is very different and caused by a
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financial crash which which research
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shows they those kind tend to last
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longer they also predicted um that
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unemployment would be would be high but
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ongoing very difficult to get down so
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they've been proven that same group I
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think uh have been proven pretty pretty
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much right but still they don't get that
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much respect in the media and um they
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don't get that much attention uh
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meanwhile the analysts and economists
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that were mostly wrong on both counts uh
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seem to to be the ones that do get all
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the attention um what's going on there
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why why is that and is there anything
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that that could change that oh that's a
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fascinating question I think you've
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correctly identified the phenomenon but
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you really have to ask the media people
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what's going on I I I'm I I don't know
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it it is a puzzle and um there's lots of
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questions that that raises about really
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the nature of information in our society
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how experts are created perceived
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perhaps undermined by by by by events
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it's very interesting that even um in
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terms of consequences in terms of
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re-evaluating anyone or anything the New
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York Times reports that almost all of
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the board members of the financial
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companies at the heart of the crisis
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where there was clearly mismanagement
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clearly a failure of oversight almost
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all of people who had board positions
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still have board positions still
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continue in the same sort of places of
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presti and power and influence in our
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society so perhaps we've reached a point
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somehow in our I don't know if it's in
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our Consciousness or in our mechanisms
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of evaluation at the social level where
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we ignore consequences and and and we
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don't
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update you have a lot of historical uh
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information in your book and one of the
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more interesting ones I thought was when
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you talked about Teddy Roosevelt and how
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he changed talk about Consciousness he
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changed the Consciousness in his day of
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course he was well known for breaking up
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the the Trust In Those Days sort of
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monopolies or olgies and it it seems
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that um you're suggesting that it's
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going to take something like that uh the
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biggest thing that has to happen in your
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view is a change in public perception so
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I'm wondering what comes first the
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chicken or the egg is it a change in
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public perception that allows a leader
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like it was as well to come up and do it
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or is it a leader that sort of pulls
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together to discontent rallies the
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troops and and makes change uh for these
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kinds of difficult issues that that's a
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great question and and at least the the
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Roosevelt parallel the Tedd Rosevelt
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parallel suggests and actually the FDR
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parallel as well suggests It's a
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combination of events a a an articulate
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segment of the population that is
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somewhat ahead of the curve and a leader
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who sees as the moment and who goes
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somewhat counter to the current so and
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counter what what you expected Teddy r
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was a republican Teddy Rosevelt was
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coming from the party that controlled
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the Senate the Senate was known as the
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millionaires Club um he was a surprise
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pick as vice president he um became
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president only
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through a bizarre tragedy the
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assassination of of of McKinley um
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and he was he picked up ideas that
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really came from another part of the
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spectrum um but at the same time he was
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tapping into a a strong vein of of small
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business sentiment of of of independ
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depent farmer sentiment that was against
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bigness and against was worried about
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concentration of power so I think you
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need that combination and you need that
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somebody who's willing to take the lead
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on this and and I think that's one of
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the key pieces that's currently missing
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and talking about concentration so after
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this um this crash uh it turns out that
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I I don't know if that was 13 banks that
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you were referring to with the 13
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Bankers but that um some of the bigger
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Banks uh in an effort to to salvage the
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system
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took over competitors and so now there
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are really six large Banks could you
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talk about them just how much um they
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control and um and and some of the uh
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points you make about them in your book
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sure well the six banks are I think the
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hard heart of the problem uh those six
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Banks control have assets size of the
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bank balance sheet roughly 63 maybe 65%
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of GDP right now before the crisis they
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were 57 or 58% of GDP and if you go back
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to the early to mid 99 that same group
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of Banks and their the other banks that
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they guled up along the way that same
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group was 16% of GDP so they've become
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much larger relative to the economy
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this's a very important point that the
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US is not a country based on big Banks
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we don't have a big banking tradition
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relative to other countries we don't
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have a tradition of Bank concentration
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or concentration relative to the the
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size of the economy
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and there's no benefits that anyone can
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point to from a broader economic point
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of view of this increase in Bank size so
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at the very least we should roll the
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banks back to where they were before
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before this merger movement before many
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of the barriers on their activities were
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were taken off and we should also
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consider very seriously putting other
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controls and restrictions on the ability
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of those banks that are essential to our
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credit system essential to our payment
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system those Banks ability to take huge
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amounts of risk should be severely
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curtailed well people that would
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disagree with that point of view might
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say something like look the United
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States is operating globally it's a big
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economy other countries have big Banks
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we need big Banks too how do you answer
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that well I I I go talk to the CFOs and
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CEOs of major corporations and and these
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people are very accessible and and
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they're very interested in this question
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and and their views ones I talk to the
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ones who go on the record Clearly say
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that we don't need Banks of this size
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the idea that JP Morgan Chase has to be
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a $2 trillion Bank in order to provide
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the kind of financial service in order
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for us to get the kind Financial
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Services we need to operate a
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non-financial company
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globally for them that's a non-sour for
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them that is a story made up by JP
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Morgan Chase and by by other leading
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Bankers they they don't see it that way
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and and I say the experts agree with
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them partly they can tap the markets on
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their own is that one reason yes
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absolutely what they need is people who
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people who are good in local markets
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they need uh the ability they need deep
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liquid markets for Securities that they
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that they care about and that would
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include derivatives for example so they
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can hedge some of their risk that's I
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think understandable and acceptable but
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in terms of have to having to deal with
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one big bank they don't want to do it
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because that would make them overly
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dependent on one supplier and they would
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always like to diversify their suppliers
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that's practical business
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experience another interesting idea that
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runs through the book is this idea of
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regulatory capture can you explain that
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and um whether you think any progress
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has been made on that with the latest
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Financial legislation well no progress
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has been made and sadly regulatory
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capture is an idea that doesn't come
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from the left some people think this is
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a left-wing book I don't think it is at
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all and in part because regulatory
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capture is an idea that was really
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invented and honed by George Stigler
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from University of Chicago who was
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definitely not a leftwing person he was
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a right-wing person and he pointed out
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that when you regulate an industry of
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any kind over time the industry figures
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out how to capture The Regulators the
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minds of the regulators and persuade
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them to do things that are the interest
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of the incumbents and really what you
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get in the classic Stigler
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view is a collusion between the
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regulator and the regulated that is
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against the social interest and against
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the interests of people who like to
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enter that business so entry barriers
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would be constructed now what we've seen
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in the past 30 years is George Stigler
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type regulatory capture on steroids for
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the financial sector where the problem
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is not just collusion between regulated
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and regulator that that's a problem but
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the implications that has for financial
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stability that you don't have in any
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other sector if if you regulate
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utilities or you regulate uh any other
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manufacturing type of industry or any
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kind of services apart from Finance bad
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things can happen in terms of society
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paying a higher price for something but
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you can't build up the sort of risk that
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will bring down the world economy at
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least that hasn't happened to my
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knowledge anytime in human history
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previously but the financial sector
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repeatedly blows itself up and the more
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you let them capture The Regulators the
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bigger they're allowed to
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become in that captured mode capturing
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mode the more danger you face at the end
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so you say that it takes a long time to
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turn a ship around like that it takes
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years of of I guess hammering away in
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order to make progress against you know
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what you see as these big problems how
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do you see this most likely playing out
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I mean on the one hand you
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say we're likely to have another
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financial crisis although I don't think
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you're willing to predict exactly when
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um but on the other hand you hold out
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this hope that
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that um public Consciousness could
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change public opinion could change it's
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a matter of years you point out that in
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the in the depression um after after the
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crash that it took many years to get the
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kind of banking legislation which held
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up and supported a very strong economy
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for for a third of a century I think you
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said in your book so um what what do you
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see happening well I hope that we have a
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Teddy Rosevelt type experience the
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Sherman Antitrust Act was passed in 1890
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it did not was not used against
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excessive corporate concentration of
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power or Market power until Roosevelt
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seized the opportunity 1901 a very large
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Monopoly was formed by JP Morgan's
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Associates at railroad Monopoly part of
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the country that called Northern
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Securities Roosevelt saw this as an
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opportunity to try and break that trust
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and other trusts and in early he brought
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a suit against Northern Securities in
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early 1902 JP Morgan came to see reserv
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the White House and he said according to
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the record he said if we've done
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anything wrong send your man to see my
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man and we'll fix it up and Roosevelt
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thank goodness
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said no we don't want to fix it up we
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want to stop it and he did and in the 10
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years that followed from 1901 to 1911
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the mainstream consensus on this issue
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shifted in 1901 most people thought
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revelt was a little bit crazy for doing
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this they didn't understand the logic
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the idea that there was such a thing as
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Monopoly and Monopoly power that should
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be addressed was not a mainstream
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consensus idea in the United states by
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1911 1912 breaking up Standard Oil the
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most powerful company in in the history
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certainly of this country that that was
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not controversial and it was broken up
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in in Great American
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style so that all the shareholders made
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money and uh Johny Rockefeller and his
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family rehabilitated themselves in the
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in the eyes of the American public with
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with great acts of of generosity that's
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what we should be looking for that kind
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of opportunity because if you don't take
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that opportunity you'll face what FDR
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faced and the early 1930s when
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everything's broken then sure there's a
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consensus for change but at what cost so
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it's a classic human nature where you
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can't get a traffic light at an
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intersection until there's been some
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serious accident I am asking uh the DC
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government to address an issue in
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intersection in my house and and they
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they will not pay attention because they
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they are distracted um and and I fear
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it's not just human nature it's the
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nature of human
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organizations and and the way we run our
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society that very much in this direction
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so um based on some of the things we've
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talked about are are you expecting a lot
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more volatility in the economy you talk
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about recessions metab booms um it
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sounds like you're predicting a lot of
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volatility to me yes I I I think this is
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a a recipe not for stagnation I know a
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lot of people are pessimistic a lot of
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people are worried about the job market
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going forward and that's understandable
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on a short-term basis but the the the
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conditions that I'm describing and the
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incentive schemes that have been put in
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place Point towards a boom a global boom
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a perhaps centered around Emerging
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Markets but with these massive twoo big
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to fail American and European by the way
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banks at the center of the action again
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you remember in the 1970s there was a
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so-called recycling of U Petra dollars
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of the oil the oil countries had large
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current account surpluses they parked
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those with banks in London and in New
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York and and those banks for example
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City Bank lent those dollars to Latin
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America and to communist Poland and
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communist Romania and that ended very
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badly in 1982 so repeating some version
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of a global cycle like that strikes me
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as as the most likely outcome and the
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1920s of course were were terrific there
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was a transformation in the American
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economy there was a growth in middle
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class the automobile industry took off
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there were real productive changes and
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and finance played a constructive role
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there but Finance also got out of
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control the big Banks went into
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Securities trading business they didn't
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understand they didn't know the risk
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they were taking they abused a lot of
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customers by the way they learned them
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into products they didn't understand but
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the heart of the problem 1931 1932 1933
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was that the major Banks had taken risks
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onto the balance sheet that they didn't
00:15:39
understand and they were essentially
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insolvent some of them failed some of
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them were saved the rest of the system
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also suffered Calamity under those
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circumstances let's not do that again
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but that that's why this is pointing
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what haveen I asked you that I should
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have and you'd like to tell us
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about there's a great deal discussion
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right now in America about fiscal
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responsibility and and I just cannot
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take anybody seriously who wishes to
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discuss this issue without putting the
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financial sector front and center as a
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matter of historical record just look at
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the Congressional budget office data
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uncontroversial on this point the
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increase in government debt net
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government debt help by the private
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sector which started out around
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41% of GDP it's on its way to 70 80% of
00:16:26
GDP roughly doubling that that increase
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is due
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primarily to the financial crisis it's
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not by the way the result of the fiscal
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stimulus even most of that increase is
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just because when you have a big
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recession you pay unemployment benefit
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to people and you collect less
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taxes nobody in my mind can be taken
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seriously if they wish to
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discuss bringing the US debt under
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control unless and until they're willing
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to deal with
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these financial sector issues that again
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threaten to completely
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destabilize both our economy and the
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fiscal soundness of the government those
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wouldn't be naturally Linked In The
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public's mind though explain why they
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should be well look I testified to the
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Senate budget committee on these issues
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and related issues recently and the the
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reaction among the Senators who were
00:17:23
present and I must say from left and
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right there were very responsible
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sensible people there who whom I have a
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great deal of respect you know they felt
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that they already have enough on that
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plate that they already have difficult
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enough problems and I and I respect that
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I'm very sympathetic to that but this is
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where you need leadership this is where
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you need someone who goes out and
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explains it to people and the data are
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not controversial I'm not I'm I'm on the
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panel of economic advisors for the CBO
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so these are their data not my data I am
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explaining them to
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you but what you need is a political
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leadership that gets this that is
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willing to go out and explain to people
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where this fiscal problem came from and
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where it's going to go
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otherwise you'll end up like Ireland
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otherwise you'll let the banks get too
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big the banks will fail they'll ruin you
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fiscally Ireland was considered to have
00:18:06
a very responsible fiscal policy prior
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to 2008 it didn't because of the Hidden
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vulnerability people call it contingent
00:18:13
liability the money they owed the money
00:18:15
they were going to provide in the event
00:18:17
of this financial
00:18:18
failure why why should we go there why
00:18:20
why would we ruin ourselves in in that
00:18:23
way makes no sense well thank you so
00:18:25
much for joining us really appreciate it
00:18:27
thank you for
