The real failings in the Obama recovery program lie not in the stimulus package –  though it is too heavily weighted toward tax cuts, and much of it merely offsets cutbacks by states – but in its efforts to revive financial markets. America’s failures provide important lessons to countries around the world that are or will be facing increasing problems with their banks:

• Delaying bank restructuring is costly, in terms of both the eventual bailout costs and the damage to the overall economy in the interim.
• Governments do not like to admit the full costs of the problem, so they give the banking system just enough to survive, but not enough to return it to health.
• Confidence is important, but it must rest on sound fundamentals. Policies must not be based on the fiction that good loans were made, and that the business acumen of financial-market leaders and regulators will be validated once confidence is restored.
• Bankers can be expected to act in their self-interest on the basis of incentives.. Perverse incentives fueled excessive risk-taking, and banks that are near collapse but are too big to fail will engage in even more of it. Knowing that the government will pick up the pieces if necessary, they will postpone resolving mortgages and pay out billions in bonuses and dividends.
• Socializing losses while privatizing gains is more worrisome than the consequences of nationalizing banks. American taxpayers are getting an increasingly bad deal. In the first round of cash infusions, they got about 67 cents in assets for every dollar they gave (though the assets were almost surely overvalued, and quickly fell in value). But in the recent cash infusions, it is estimated that Americans are getting 25 cents, or less, for every dollar. Bad terms mean a large national debt in the future.
• Don’t confuse saving bankers and shareholders with saving banks. America could have saved its banks, but let the shareholders go, for far less than it has spent.
• Trickle-down economics almost never works. Throwing money at the banks hasn’t helped homeowners: foreclosures continue to increase. Letting AIG fail might have hurt some systemically important institutions, but dealing with that would have been better than to gamble upwards of $150 billion and hope that some of it might stick where it is important. One of the reasons we may be getting bad terms is that if we got fair value for our money, we would by now be the dominant shareholder in at least one of the major banks.
• Lack of transparency got America’s financial system into this trouble. Lack of transparency will not get it out. The Obama administration is promising to pick up losses to persuade hedge funds and other private investors to buy out banks’ bad assets. But this will not establish ”market prices,” as the administration claims. Banks’ losses have already occurred, and their gains must now come at taxpayers’ expense. Bringing in hedge funds as third parties will simply increase the cost.
• Better to be forward looking than backward looking, focusing on reducing the risk of new loans and ensuring that funds create new lending capacity.

There is no ”mystique” in finance: The era of believing that something can be created out of nothing should be over. Short-sighted responses by politicians  — who hope to get by with a deal that is small enough to please taxpayers and large enough to please the banks — will merely prolong the problem.

An impasse is looming. More money will be needed, but Americans are in no mood to provide it — certainly not on the terms that we have seen The well of money may be running dry, and so, too, may be America’s legendary optimism and hope.

Joseph E. Stiglitz is University Professor at Columbia University. Among many books, he is the author ofGlobalization and Its Discontents. He received the Nobel Prize in Economics in 2001 for research on the economics of information. Most recently, he is the co-author, with Linda Bilmes, of The Three Trillion Dollar War: The True Costs of the Iraq Conflict.

Everybody is rushing to condemn AIG’s bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG’s counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman’s collapse, they feared a systemic failure could be triggered by AIG’s inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG’s trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG’s counterparties are justified with an appeal to the sanctity of contract. If AIG’s contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.

But wait a moment, aren’t we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won’t be laid off. Why can’t Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn’t we already give Goldman a $25 billion capital infusion, and aren’t they sitting on more than $100 billion in cash? Haven’t we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn’t they have accepted a discount, and couldn’t they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

So here are several questions that should be answered, in public, under oath, to clear the air:

What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?

Was it already known who the counterparties were and what the exposure was for each of the counterparties?

What did Goldman, and all the other counterparties, know about AIG’s financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn’t they bear a percentage of the risk of failure of their own counterparty?

What is the deeper relationship between Goldman and AIG? Didn’t they almost merge a few years ago but did not because Goldman couldn’t get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG’s business model was not to pay on insurance it had issued.

Why weren’t the counterparties immediately and fully disclosed?

Failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.
Eliot Spitzer is the former governor of the state of New York.

Article URL: http://www.slate.com/id/2213942/

Article Date: 05 Mar 2009 – 6:00 PST

The Obama administration’s plans to hold a “Health Care Summit” that excludes advocates of single-payer healthcare reform has drawn a sharp response from labor leaders around the country.

“President Obama has indicated that his administration is committed to the passage of a new ‘universal’ national health care program for all Americans, and he wants it done this year. For working people, and particularly the 48 million Americans curren tly without health insurance, this is welcome news. We also applaud the President’s efforts to provide immediate relief to the growing number of unemployed workers faced with the loss of their health insurance,” said Mark Dudzic, National Coordinator of the Labor Campaign for Single Payer Healthcare.

“At the same time,” he continued, “we are deeply concerned by the apparent failure of the administration to include a single supporter of HR 676 among the 120 invited participants to Thursday’s Health Care Reform Summit. We are calling on our supporters to call and write the White House and demand that our voice be heard.”

HR 676, the “Expanded and Improved Medicare for All” Act, was re-introduced this year by Congressman John Conyers. It currently has 59 congressional co-sponsors. Because it eliminates the private insurance industry from profiting from people’s misfortunes and, like Medicare, establishes the federal government as the “single payer” of everyone’s medical bills, HR 676 can provide healthcare for all with no co-pays or deductibles in a fiscally prudent manner. HR 676 has the endorsement of hundreds of state and local labor federations and local unions as well as many other civic and religious organizations.

“The first step is to ensure that HR 676 has a ’seat at the table’ in the upcoming healthcare reform debates,” said South Carolina AFL-CIO President Donna Dewitt. “It needs to be given the same degree of attention as all other credible proposals for reform and subjected to a side-by-side ‘facts based’ analysis with those proposals.”

Leaders of the Labor Campaign for Single Payer are urging President Obama to consider alternatives which, like Medicare, would not rely on private, for-profit insurance companies to ration health care to the American people. “Proposals which funnel our precious healthcare dollars into the pockets of the for-profit insurance industry and other special interests will do nothing to contain and control costs or improve the quality of care,” said Fernando Gapasin, President of the West Central Oregon Central Labor Council.

Labor leaders from Massachusetts are particularly concerned that their state’s law requiring all individuals to purchase private health insurance is being touted as a model for the nation. “Last month 40 of my fellow union leaders wrote to President Obama to urge him to reject a Massachusetts-style plan that would leave private insurance companies at the center of the system through an individual mandate and expensive public subsidies supported by taxes for plans that still don’t provide enough coverage. The Massachusetts plan is widely recognized as unsustainable and now that we are facing an economic crisis, it is even more problematic.” said Peter Knowlton, president of the Northeast Region of the United Electrical Workers Union (UE).
“If anyone should be excluded from this summit,” said Ray Stever, New Jersey State Industrial Union Council President, “it should be the representatives of the health insurance industry. These are the very people who caused the crisis in the first place. They will move heaven and earth to continue to deny Americans the healthcare justice that citizens of all other industrialized countries enjoy.”

The Labor Campaign for Single Payer Healthcare joins other single payer advocates and organizations who are demanding that their views be represented in the growing debate over health care reform. These include the Leadership Conference for Guaranteed Healthcare, Healthcare-NOW, the All Unions Committee for Single Payer, the Physicians for a National Health Program and the California Nurses Association/National Nurses Organizing Committee whose Co-president, Geri Jenkins, RN, recently warned, “Any reform premised on expanding the insurance-based system will likely fail, frustrate the public desire for a real solution to our healthcare crisis, and undermine the political capital the administration has earned for reform.”
“That is why it is so important to speak up at this moment,” said Clyde Rivers of the California School Employees Association. “The stakes are too high to allow special interests to hijack a discussion whose outcome will so importantly affect the lives and livelihoods of the American people. We call on President Obama and the leaders of both houses of Congress to give HR 676 the fair and open hearing that it deserves,”

The Labor Campaign for Single Payer Healthcare was formed at a January 10th meeting in St. Louis, Missouri attended by over 150 representatives from labor organizations in 31 states that have endorsed HR 676. We believe that the struggle for universal, single-payer health care needs labor’s dynamic grassroots involvement.

http://www.laborforsinglepayer.org
California Nurses Association

I have played around with this idea for hours now, on whether or not to write this piece.  But the events of the last few hours, I believe, mandate that I raise my voice once again.

I have read and re-read President Obama’s Joint Congressional Address.  All of the “acceptable punditry” have spoken and given the President glowing reviews.  And so, to them and the population that still believes in them, “All is right with the world.”  But for the rest of us, who refuse to swallow the pill that puts us into the Matrix, a good dose of reality is strongly called for.

But reality is not what we’re getting, not even from one of the national columnists whom I’ve met, Maureen Dowd.

I think Maureen Dowd characterized it as “Spock at the Bridge.”  Now, being the Trekkie that I am, that headline grabbed my attention.  I nearly gagged, however, when I got to the line supposedly from President Obama calling President Bush to proclaim, “‘I’m ending your stupid war.’ Mission Relinquished.”

Why write things like this now that it is clear that the Obama Administration is continuing the Bush policies for missile strikes inside Pakistan; torture; rendition for torture; public release of Bush Administration e-mails; illegal wiretaps; status of prisoners at the U.S. base in Bagram, Afghanistan; and workplace immigration raids?

For the record, President Obama is also pursuing Bush policies on Iran and Israel.  As recently as yesterday, President Obama’s Chairman of the US Joint Chiefs of Staff, Admiral Mike Mullen, responded when asked whether Iran was capable of building an atom bomb.  Admiral Mullen replied, “We think they do, quite frankly.”

Dowd concludes her “Spock” piece by imbuing the President with “a Vulcan-like logic and detachment.”  But I think the detachment of “acceptable” political punditry from the real world is what is totally lamentable.  In the process, they render themselves irrelevant.

So, it’s clear.  I’m about to step into marshy soil here, by noting that I found 19 questionable Obama policies or statements in his Joint Congressional speech delivered three days before his announcement that upon the end of the U.S. combat mission in Iraq, up to 50,000 U.S. troops could remain through 2011, after the “pullout.”

And while various “mint” operations are peddling Obama “Change” coins for purchase, complete with a certificate of authenticity, I wade further into the muck by noting that the President continues the giveaway of our hard-earned coins to an economic team intent on keeping mismanagement structures in place, serving economic ends that do not constitute the common good.  I would refer readers to the many statements that I issued during the final days of our Power to the People Green Party Presidential campaign about re-creating an economic system truly and finally owned by the people, operating in our interest.  It is possible to do that.  All it requires is enough political will.

But what forces me out into the open marshland of “non-mainstream” political punditry has to do with the latest Obama “pullout:”  the decision to withdraw from the April 2009 Geneva United Nations World Conference Against Racism, dubbed Durban II.

We heard the same palaver in 2001 from the same forces inside our country, basically that a discussion of Zionism, in the context of such a Conference, would be anti-Semitic; therefore all the world’s dispossessed and marginalized people must continue to suffer and sacrifice while muting their grievances so that no discussion of Israel would take place on the world stage in this context.

Well, in 2001, upon hearing this line of reasoning, I went to then-Congressional Black Caucus (CBC) Chairwoman, Eddie Bernice Johnson, and asked if I could be appointed as the CBC Task Force Chair on Durban.  The non-participation argument was also a handy “peg on the track” with the potential of derailing many conversations, including a real discussion about the trans-Atlantic Slave Trade and the issue of reparations.  Respectful of the excellent preparatory work that had been done, I wanted to avoid that outcome.

Congresswoman Eddie Bernice Johnson made the appointment and I led a delegation of 5 Members of Congress to Durban.

The current Chairwoman of the Congressional Black Caucus, Barbara Lee, was a member of my delegation to Durban.  From my position on the International Relations Committee, we successfully argued for U.S. participation in that Conference at a Hearing designed to quash our effort.  We not only met with then-United Nations High Commissioner for Human Rights, Mary Robinson, we also presented her with the untold story of COINTELPRO and the remaining unsolved deaths of its Black Panther Party member victims, commissioned by me and written by Kathleen Cleaver and Paul Wolf.

Our CBC Chairwoman made a beautiful statement of why it was imperative that the United States join with our Native American and Latino brothers and sisters and with oppressed peoples all over the planet and not only make our statement of solidarity, but also institute policies at the Congress that recognized their needs.  It is incorrect to say that the United States was not present at Durban.  We were there and only when the duties of Congress pressed us to return to Washington, DC did the Bush Administration make a big deal about anti-Semitism and then staged its phony walk out.  The United States delegation of Congressional Black Caucus Members was there to support the phenomenal work of U.S. activists and the African and Caribbean delegations, in particular.  I think everyone in Durban was moved by the plight of the Dalits in India and understood better the surging political power of Afro-Latinos.

Durban was a clear victory for the world’s marginalized peoples, including those of us who reside inside the United States.  But, when the Congressional Delegation returned to the U.S., there was no time for celebration because the tragedy of September 11, 2001 unfolded.

What has happened in the interim has devastated the very people that Durban was designed to address, unfortunately, much of it due to U.S. policy.  Now is not the time for the United States to shrink from this call.

In order to prevail in Durban, I had to go toe to toe with the Anti-Defamation League and Members of Congress Tom Lantos and Ileana Ros-Lehtinen who, among many other Members of Congress, vociferously denounced Durban.  This was something that I did because I felt it was the right thing to do.  Given Israel’s recent actions in Gaza that have brought upon it the world’s opprobrium, I can imagine that this is the last point in time that Israel might want to revisit Durban.  Israel has said that it will not attend the Conference in Geneva.

Early last year, a government official announced Canada’s decision to not attend Durban II after deeming the Conference to be anti-Israel.  Shortly afterwards, France followed suit with French President Nicolas Sarkozy stating that the “excesses of 2001″ transformed the Conference “into an intolerable platform against the State of Israel.”  I would note also that France must be particularly loath to discuss racism now with what is happening in Guadeloupe and Martinique as I write this piece.  And remembering that Paris, itself, was literally on fire just a few years ago.

The UK, which has been under severe racial tests with Asians rebelling openly in the streets since Durban 2001, and the Netherlands have both threatened to withdraw their support for the Conference if a “negative spiral” of events takes place.  Interestingly, these remarks came at the same time as the release of a European Commission Against Racism and Intolerance report which found that the tone of Dutch political and public debate on immigrant integration, racism, and other issues relevant to ethnic minorities, had experienced a “dramatic deterioration.”

So, we shouldn’t be surprised that the racism stress test is revealing cracks and fissures in human relations.  But the United States and President Obama should not shield them or this country from these stresses.  This Conference gives us the opportunity to get the issues out in the open and to deal with them.  That’s the way to put them to an end.  The world might have changed because of events occurring in September 2001, but it wasn’t because the United Nations successfully convened the World Conference Against Racism.

And now that I am as completely in the middle of the marsh as I was as completely in the international waters of the Mediterranean Sea when my boat was rammed by the Israelis, let me make an observation about one aspect of marshes.  I have witnessed the most beautiful sunrises and sunsets on the Savannah, Georgia marshland.  And the most beautiful rainbows.  Being away from the glass and concrete can give one a better perspective.

I observed last year that I thought U.S.. voters went to the polls in large numbers to try and regain a bit of dignity lost during the eight years of outright banditry played out in our names, with our resources, against our interests.  But I was reminded at the recently adjourned Transpartisan Alliance convention in Colorado that dignity will not come without first an acknowledgment of the truth:  with truth we can have justice; and with justice we can have peace; and it is only with peace that we can truly have dignity.  Something as easy as a vote, alone, is not going to be enough to wrest us from this mess that has been wrought.

This morning, I sent the following message to the White House:

‘Mr. President, it was with great disappointment that I read of your decision to pull out of Durban II.  Even the Bush Administration, under pressure from the Congressional Black Caucus, provided some funding for the United Nations effort and sent staff to support the Congressional delegation that attended the Conference.  I was there.  I was head of the Congressional Black Caucus Task Force that negotiated Congressional and Administration engagement on this issue.  There is still time for the U.S. to participate.  Your decision is not irrevocable.  I would encourage you to please reconsider this decision and not only attend the Conference, but also provide funding to ensure its success.”

I implore the Members of the Congressional Black Caucus to spearhead the participation of the United States in the United Nation’s World Conference Against Racism:  to boldly go where we have gone before.  Dr. King reminded us that “the ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy.”  On this issue, President Obama has shown us his measure.  I hope that the Congressional Black Caucus and the Progressive Caucus and the Democratic Caucus can show us, oh, so much more.

March 4, 2009, 6:58 am

The A.F.L.-C.I.O.’s executive council will call on the Obama administration on Wednesday to speed the nationalization of problem banks to stimulate lending and lift the sagging economy, The New York Times’s Steven Greenhouse reported.

The labor federation, a lobbying powerhouse that represents 10 million workers, will thus become one of the first groups — and certainly the most powerful — to call for moving more aggressively on nationalization, both to counter Republican and business cries against it and to press the Obama administration not to vacillate over such a move.

A.F.L.-C.I.O. officials asserted that the administration’s practice of giving billions of dollars in dribs and drabs to distressed banks had failed to restore their solvency, leaving them as zombie banks that largely refrain from lending, thereby contributing to the economy’s decline.

The executive council is scheduled to approve a statement that criticizes the Obama administration for indulging shareholders of distressed banks by not nationalizing the banks to speed the cleanup of their balance sheets.

“We believe the debate over nationalization is delaying the inevitable bank restructuring, which is something our economy cannot afford,” a draft of the council’s statement said.

The labor leaders also asserted that the Obama administration, like the Bush administration, had failed to obtain fair value for the tens of billions it had invested in distressed banks.

“By feeding the banks public money in fits and starts, and asking little or nothing in the way of sacrifice, we are going down the path Japan took in the 1990s — a path that leads to ‘zombie banks’ and long-term economic stagnation,” the draft statement said.

The statement makes clear that the group wants to add its political and lobbying muscle to calls by Joseph E. Stiglitz, Nouriel Roubini and other economists in favor of nationalization.

Labor leaders said the administration appeared to be vacillating on nationalization partly out of fear of Republican attacks that it was adopting socialist policies.

Banking executives have spoken out against nationalization, saying it would hurt shareholders and insisting they can nurse their banks back to health.

Some Obama officials voice fears that it will be hard to manage nationalized banks and that nationalization could drive down the shares of other financial institutions by generating fears that additional banks will be taken over.

A.F.L.-C.I.O. leaders said they did not favor long-term nationalization of banks, but rather temporary trusteeships in which the government would take a controlling stake in a bank, clean up its balance sheet, then spin it off.

“The result should be banks that can either be turned over to bondholders in exchange for bondholder concessions or sold back into the public markets,” the executive council’s draft said.

James A. Baker, the Treasury secretary under President Ronald Reagan, wrote in The Financial Times on Tuesday that temporary nationalization might be necessary to inject public funds into problem banks.

“I abhor the idea of government ownership — either partial or full — even if only temporary,” he wrote. “Unfortunately, we may have no choice. But we must be very careful. The government should hold equity no longer than necessary to restructure the banks, resume normal lending and recoup at least a portion of taxpayer investment.”

The labor leaders said that 43 percent of the nation’s bank assets were held by four institutions — Citigroup, Bank of America, Wells Fargo and JPMorgan Chase. One A.F.L.-C.I.O. financial expert said Citigroup and Bank of America were insolvent and candidates for quick nationalization.

“When these institutions are paralyzed, our whole economy suffers,” the labor statement said, adding, “However, government interventions must be structured to protect the public interest, and not merely rescue executives or wealthy investors.”

Subject: Call The White House: Let Single Payer In

On Thursday, March 5, 2009, the White House will host a summit on how to
reform the healthcare system.

The 120 invited guests include lobbyists for various interest groups
including the private-for-profit insurance industry (AHIP), some members
of Congress including Senate Finance Chairman Max Baucus who has already
ruled single payer “off the table,” and various others concerned with
healthcare.

No single payer advocates have been invited to attend.

Please urge President Obama to fulfill his promise for transparency and
openness in government

Call The White House (202) 456-1414 or (202) 456-1111.

Tell them to let single payer into the White House Summit on healthcare.

Distributed by:
All Unions Committee For Single Payer Health Care–HR 676
c/o Nurses Professional Organization (NPO)
1169 Eastern Parkway, Suite 2218
Louisville, KY 40217
(502) 636 1551
Email: nursenpo@aol.com

What seemed only a possibility a few months ago has now become a reality: The financial crisis that swept Wall Street has spread to all sectors of the economy at a pace that has alarmed even the most cautious analysts.

Economists are now stating openly that the recession will be deeper and longer than the preceding nine post-1945 recessions. Economics professor Jack Rasmus warns that, “the U.S. economy could be thrust toward a full-fledged Depression by early 2010.”

The layoffs are mounting daily and at a staggering rate. According to official government statistics, more than 500,000 workers lost their jobs in each of the last three months — the highest three-month job loss since 1931.

Taken over the last year, the number of jobless rose officially by 3.2 million, but when the “discouraged” (no longer seeking employment) and minimally employed are added, the totals are close to 5 million jobs lost.

Economists predict that if the recession continues its current course in 2009, there will be an additional 7 million workers left jobless. This would mean between 8 million and 12 million jobs lost in the span of 2008-2009. Professor Rasmus warns that as many as 20 million jobs could be lost by 2010.

The situation has become intolerable for working people. On every front, the country is confronted with a catastrophic situation: In addition to the massive job losses, more than 2 million people have lost their homes to foreclosure — and it is estimated that another 5 million to 7 million people risk foreclosure in the coming 18 months. A disproportionate number of those losing their homes are Blacks and Latinos.

Meanwhile, social services are being dismantled left and right as state and local budgets are facing unprecedented deficits. In California, a $16 billion budget deficit is being wielded as an axe to cut tens of thousands of public education and healthcare jobs.

Obama has just presented his new budget. Together with the $787 stimulus plan recently approved by the U.S. Congress and Obama’s three-point program to “stablize” the banking system, the budget is a central component of the Obama’s Economic Recovery Plan.

We are publishing below an interview with Professor Jack Rasmus on the five components of Obama’s economic recovery plan.

As readers will readily understand, the Obama plan underscores the absolute need for working people, with the trade unions in the lead, to organize and mobilize independently to put a stop to the corporate bailouts and to demand an economic recovery plan that bails out America’s working people and the oppressed.

Organizing the fightback around this perspective is the goal of the Workers’ Emergency Recovery Campaign (WERC) — a campaign that has gathered important support nationwide, including from prominent labor officials and nationally recognized leaders of progressive political campaigns.

– Alan Benjamin

Following is an interview with Jack Rasmus, a professor of economics at St. Mary’s College and Santa Clara University in Northern California. Prof. Rasmus is a member of the newly formed National Steering Committee of the Workers Emergency Recovery Campaign (WERC). The interview was conducted on March 2, 2009, by Alan Benjamin, organizer for the WERC.

WERC: What is your assessment of Obama’s economic recovery plan? Can you describe it for our readers and tell us if you think it will deliver the jobs and benefits that people are anxiously awaiting?

Jack Rasmus: The Obama Plan has five major components, The first is the $787 billion stimulus plan that was adopted recently by the U.S. Congress. The second, third and fourth parts aim to resuscitate the financial markets: Part 2 is the PPIF, or Public-Private Investment Fund; Part 3 is the TALF, or Term Asset-Backed Securities Loan Facility; and Part 4 is the Homeowner Affordability and Stability Plan. The fifth component is Obama’s proposed 2009 budget — which is likely to be modified substantially by the Republicans before it is finally adopted.

As for the stimulus package: As I have stated repeatedly, it’s too little too late. First, it’s not a jobs bill. By the end of 2009, there could be a total of 20 million people unemployed. We are now at 14 million jobs lost, and the job losses are accelerating. Over the past three months, we lost one million jobs each month, when job losses are calculated correctly. This package is not going to regenerate the jobs that we are talking about — and jobs are the most important thing, because job loss is what’s driving the collapse of consumption and bringing down the economy..

Thirty-eight percent of the stimulus package goes to providing aid; that is, unemployment, food stamps, vets’ benefits, medical aid, COBRA — as well as aid to state and local governments. This is all necessary, but what it shows is that this plan is aimed at softening the collapse, not at creating jobs. This aid will have little effect in terms of job creation. As for the aid to state and local governments, it is nowhere near the amount needed to halt the massive job cuts in state after state.

WERC: This is clear. In California Republican Governor Arnold Schwarzenegger is demanding that public-sector workers across the state take two days off per month with no pay. His plan also calls for tens of thousands of layoffs statewide.

The Progressive States Network (PSN) reported that the Obama stimulus plan would cover less than half of projected state deficits. The authors of the PSN report note, “A new study by the Center on Budget and Policy Priorities details that state deficits are projected to be $350 billion over the next 30 months. But the stimulus recovery plan includes only about $150 billion that can be used to address those shortfalls, meaning that 55% to 60% of projected state deficits will remain.”

Rasmus: Indeed. These “shortfalls” will mean millions of destroyed jobs, lives, families, and entire communities.

To continue with the stimulus plan: Another 38% of the package, or $300 billion, is tax cuts: (1) business tax cuts, (2) reversing the alternative minimum tax; and (3) payroll tax cuts. The business tax cuts will not have any effect in stimulating the economy. Some economists in fact are arguing they will have a negative effect that the spending from the tax cuts will be less than the amount of the tax cuts; they call this “negative multipliers.”

When you’re in a deep downturn like this, businesses sit on their tax cuts, waiting for better days ahead; they use the money to pay off their debts and that sort of thing. Even the payroll taxes will have virtually no effect in terms of consumption and stimulating the economy.

Only 24% of the stimulus plan, or $200 billion, will go to federal spending, with just $27 billion allocated this year to job-creating expenditures. The rest is long-term alternative energy technology and other similar projects, all of which are capital intensive.

The point is this: It’s not a jobs bill. Obama says the plan will create 3 million to 4 million jobs. But over what time period? It’s over multiple years, with the hope that the biggest impact will come in the second year.

This year the total spending impact of this bill, dollar-wise, is only $180 billion, which is roughly what 2008 stimulus package was last year. It had virtually no effect last year, and the conditions are even worse this year. We will continue to be gushing jobs this year at the continued rate of half a million to 1 million jobs per month.

We’re going to be in very bad shape at the end of the year. The number one cause driving foreclosures is job loss. I was just reading a statistic today that 72% of all the sub-prime loans issued between 2005 and 2007 are going to default. In other words, we haven’t seen the total impact of the housing price collapse. Housing prices will fall at least another 20%. There is no light at the end of this downturn tunnel.

With 20 million unemployed at the end of the year, with an additional 5 million to 7 million people losing their homes to foreclosure, the stimulus plan fails miserably when it comes to creating jobs — so bad that I predict they will have to come up with a Stimulus Plan II at some point.

So if there not a program this year to deal with this situation, the odds go up significantly that what I call an epic recession will become a classic global depression in 2010. We are on the cusp of this now. The momentum is moving in that direction.

WERC: Let’s look at the other components of Obama’s program. You mentioned that the administration is putting most of its hopes into reviving the banking system as a means to jump-start the economy. What about the Public-Private Investment Fund, for example?

In mid-February Treasury Secretary Tim Geithner announced that up to $1 trillion would be provided by the Treasury to “provide financing for private investors to buy ‘distressed securities.’” Geithner said the the goal is to clean up the banks’ “toxic assets so that the credit crunch that is hobbling the economy can be ended.” What is your take on the PPIF?

Rasmus: This is really Part Two of the big banks’ rescue plan — and the $1 trillion figure that Geithner presents is just for starters; the figure is going to increase significantly.

As you say, they plan to use taxpayer money to help the banks and investors buy bad assets that exist in these banks and financial institutions. It’s the existence of these bad assets that prevent the banks from making loans to businesses and homeowners. It’s what’s been clogging up the system.

But the Treasury has refused to deal with these bad assets. If you go back to then-Treasury Secretary Henry Paulson and the Troubled Assets Relief Plan (TARP), you can see that we gave the banks $700 billion in bailout funding. But Paulson didn’t buy up the bad assets, which was the whole idea behind the rescue plan. Why is that?

It’s because the banks are on strike. The banks don’t want to lend, or if they do, it’s at ridiculously high rates. They don’t want to sell all the bad assets on their books because they are essentially worthless now, and they don’t want to sell at their worthless market price.

If they sold them at their market prices, they would have even greater losses than they have now. They don’t want to loan when their balance sheets are so negative, because if they loan that reduces their reserves on hand. And this is freezing up the system.

Paulson and TARP could not buy them at above-market prices because Congress was looking over their shoulders and saying, “Hey! What are you doing, subsidizing these banks, giving them more than the market value of these assets?”

So, Paulson looked around, saw that he couldn’t do anything, and did nothing in relation to these bad assets.

Today, with the PPIF, we have essentially the same situation, but with a little twist.

What they’re trying to do with PPIF is to create a market price to sell these bad assets, thereby subsidizing not only the banks but the investors who would buy them. In other words, this $1 trillion is designed to give money incentives to the banks to make up the difference between what the price would be and what the market value would be. So, they are giving the banks a windfall to encourage them to sell at above-market price.

At the same time, they’re giving an incentive to the investors; in other words, they are subsidizing the investors as well, with taxpayer money, to come in and buy. They hope this will create a new market price that will take off on its own and unblock the lending. It’s going to cost well over $1 trillion to get that going, and it’s really questionable whether investors will want to buy those bad assets at any price.

WERC: All the business media report that investors are not willing to buy these assets, even at higher rates. …

Rasmus: That’s right. And if the $1 trillion doesn’t work, the government is prepared to throw more money at them. The investors know this, so they are going to sit and wait, saying that the price is not high enough and that you have to subsidize us even more. With the government already so committed to this effort, they will throw more money at the banks. Geithner and Obama are already saying that this is just a start, and that we may have to throw more money into this bad assets plan some time soon.

WERC: Some economists, and even some top-level financial gurus such as Former Federal Reserve chief Alan Greenspan, are saying that the government should simply take over and nationalize these bad assets. They say the Obama plan is doomed to fail.

Rasmus: The banks would love this. Keep in mind that Obama and Geithner are not talking about confiscating these bad assets. They are talking about is buying them. But they would have to buy at above-market price because the banks won’t sell them. The bankers are holding out for even-higher prices. That’s the crux of the problem.

And when Greenspan and the others talk about nationalization, we must be clear, that’s a misnomer. They don’t really mean nationalization. Buying preferred stock or even common stock does not amount to nationalization. It’s just partial receivership, or subsidization, at taxpayer expense.

Seizure of private companies on behalf of investors is not nationalization. Their goal is to buy the bad assets and then sell them back to private investors at below-market prices — all at taxpayers’ expense.

WERC: What is the total amount of bad assets, assuming there’s agreement on the amount?

Rasmus: Professor Rubini at New York University estimates that there’s at least $3.6 trillion in bad assets. Fortune magazine says $4 trillion. Geithner, last June, indicated he thought there was about $6 trillion.

So to buy these bad assets, the taxpayers; would have to fork over $6 trillion.

WERC: The figure is staggering. Clearly, this situation calls out for true nationalization.

Rasmus: Yes, it does. But what is true nationalization? It means totally taking over these banks and financial institutions — with bondholders and shareholders not just taking a haircut, but taking a scalping. It means getting rid of management. It means consolidating and running these banks on behalf of the interests of the working-class majority in the country. You don’t pay dividends. You don’t pay stock shares. you take full day-to-day operational control of all strategic decision-making. You run it and turn over the profits for public investment, not to line the pockets of private investors.

Without a doubt, what we need is a fully nationalized banking system.

WERC: Many of the initiators of the Workers Emergency Recovery Campaign are calling for the nationalization of the banks without compensation. They also say that the $700 billion in the Paulson plan — funds that are simply sitting in the banks waiting to ride out the recession — should be confiscated by the government and placed at the service of job creation.

Today, the government could nationalize the banks and use that $1 trillion in the PPIF fund — just to give one example — to put people back to work. If we assume a living wage of $50,000 per worker for one year, and we multiply this number by the 20 million projected unemployed workers, this gives us exactly $1 trillion. Shouldn’t the Obama administration earmark that $1 trillion to provide unionized, living-wage jobs for one year to the 20 million unemployed? Isn’t this a better way to jump-start the economy?

Rasmus: That’s the point I have been making all along. People are referring to the Great Depression. But what got us out of the Depression? It was not the New Deal.

The New Deal did not really come on the scene till 1935, with some success. It stopped the decline, but it did not generate the recovery, and after two years, Roosevelt and others started dismantling the New Deal. Once they started doing this and trying to balance the budget, in mid-1937, we went right back into the Depression. We did not come out of the Depression till 1942. Why was this? It was because government spending, i.e., public investment, rose from 20 percent to 40 percent of annual Gross Domestic Product (GDP), the total annual spending in the economy.

WERC: How are they planning to finance the PPIF: Would it be through the Treasury?

Rasmus: Yes. They’ve got about $190 billion left over from that $700 billion TARP fund, and they will put in initially another $810 million, again, to subsidize the investors and the banks with the hope that they will come into the market to start buying and selling the bad assets at above the market price. They want to induce a market and a price, and they hope that once they do this, all the investors will step in and follow suit. But that’s a big if. I don’t see it coming.

Now the second part of the financial plan is designed to work in conjunction with the PPIF, and that’s the TALF, or Term-Backed Securities Loan Facility. This will be run by the Federal Reserve.

The Fed had $200 billion assigned for this last November 2008, but it just held onto it. Now in about a week they are going to issue another $800 billion. So they’ll have an addition $1 trillion for TALF.

WERC: Will this mean that the Federal Reserve will issue bonds for the TALF?

Rasmus: Not exactly. The idea is for Fed to lend money to investors, particularly investors in the hedge funds, money-marked mutual funds, and private equity funds — that is, to the shadow banks that are responsible for so much of the speculation that got us into the mess we’re in today — so that they can buy the bad assets. As you see, they are coming at it from two directions.

But bad assets of what? The plan is to buy up the securitized bonds and loans associated with consumer credit. We are on the verge of another sub-prime-like bust in the consumer credit markets — meaning auto loans, student loans, credit card loans, and commercial property loans.

The whole idea here is that the Fed will loan money to hedge funds and private equity funds to buy these bad assets that are about to collapse. Estimates are that defaults on credit cards alone are going to rise from their current 2% to 3% today to 8% to 10%.

It’s ironic, when you think about it, that the government is going to try to resurrect this thing through the shadow banking system and securitized markets, which collapsed from more than a trillion dollars in credit a few years ago and which have lost close to $4 trillion total. The hedge funds have lost $1 trillion of their total value, and yet we are going to give them money to buy out all these bad assets … all of this to try to stimulate and increase the lending to industry, to commerce, and the like.

This doesn’t make any sense. It just shows that the government has absolutely no confidence that the commercial banks can lead a recovery.

The question is, Is anyone going to re-enter into these securitized markets that have collapsed and buy up these bad assets, even with these government loans? Does anyone want to touch the toxic securitized markets? I don’t think so. Even with loans … unless the government gives them interest-free loans — and if that happens, the government should just enter and take over these consumer credit markets and provide credit directly through the Fed the auto, student, commercial property and other markets. Let the Fed provide the funds directly to, for instance, credit unions as the local loaning institutions. Why have middle-men come in and skim off the profits?

We must also keep in mind that the $2 trillion they are throwing at the banks with this plan is just the beginning. Everyone is lining up at the trough for a taxpayer payout.

WERC: Let’s talk now about Homeowner Affordability and Stability Plan, which is both the third financial package and the fourth component of the Obama recovery plan.

Rasmus: There are two parts to it. The first is $200 billion to go to Fannie Mae and Freddie Mac, because they already ran through the $200 billion we gave them back in August 2008. They have bought up the bad housing loans, or mortgage loans — and as their values continue to fall as housing prices fall, the values of the loans they bought up have collapsed. So they have run through their $200 billion, and they need $200 billion more.

It’s not really going to improve anything when you just keep buying up these bad loans. That’s the first part.

Regarding the second part, we have to keep in mind that Fannie Mae, Freddie Mac, and AIG, which is now supposedly “government owned,” only constitute about  20% to 30% of the housing market. That leaves 70% to 80% of the bad housing mortgage market, which the government had not been addressing. It’s this other portion that the Homeowner Affordability and Stability Plan now addresses — but with only $75 billion, a paltry sum!

And even this $75 billion is targeting subsidies to mortgage lenders; in other words, it’s trickle-down once again — that is, give money to the mortgage lenders to have the government and taxpayers pay to lower the interest rates on new home loans — up to $75 billion, which is not all the many home loans.

And what’s even more outrageous, these loans are to go to new buyers — not to those 5 million to 7 million homeowners who face foreclosure, delinquency, or default. The government is not attempting to do anything about people who are losing their homes. What they plan to do is subsidize the markets, so that the lenders can create new, affordable buyers to buy up some of the foreclosed homes.

This is a sop, a freebie, thrown to the mortgage lenders who are asked to come in buy some of the foreclosures and some of the huge stock of homes, to help them sell all the new homes. So really, it’s a plan to benefit the mortgage lenders and construction firms holding all these new, unsold homes.

WERC: Now, let’s get to the last item: the 2009 budget. This is the part that many are touting as New Deal and even “socialist,” if we are to believe Rush Limbaugh.

Rasmus: This is a $3.6 trillion budget with a lot of spending. There is going to be a firestorm over it. Watch the Republicans, the corporations and the banking interests come out of the woodwork. The gloves are going to come off. This is where the big split in the capitalist class is going to reveal itself, because there are some proposals in this plan that would shift income. It’s a shift that is insufficient, — too little too late, once again — but it is certainly moving in a better direction.

This is what we know so far about the budget:

It will increase taxes on the wealthiest 2% of households — but it will only increase taxes from 35% to 39.5%. This will effect people making more than $250,000 per year. This amounts to a rollback to the Clinton period. But that tax increase on the top-margin rate does not take effect until  2011, when the Bush tax cuts expire. This is absurd. It should take effect in 2009. They shouldn’t be putting it off, when funding is needed so desperately to stop teacher layoffs, prevent home foreclosures, or to stop autoworker layoffs.

What’s more, they will not come close to obtaining the funding they need for a real economic recovery by only rolling back the capital gains’ and capital incomes’ tax cuts only to the 1990s levels. They have to roll them back to the pre-Reagan, pre-1980s, rates. They have to raise these rates back to 50%, minimum.

So there is some increase in the tax rate, but it is delayed and it is far less than what is needed. Again, 2009 is a critical juncture year. If the declining situation is not reversed, the odds are increasing that we will be moving in 2010 to a global recession. There really is no way out without a real re-distribution of income, reversing the redistribution of income from workers to investors and corporations that has been going on since 1980.

Second, on healthcare. The budget calls for $634 billion in healthcare funding, but this is only half of what is needed for single-payer. Also, if this funding goes to the private insurance companies, as appears to be the case, there will be no real solution to the healthcare crisis in our country. Only single-payer offers a solution.

Third, the budget calls for deprivatizing student loans. This is one point that is commendable in the plan.

The details of the plan are only emerging. We will have to monitor it closely. But one thing is certain: What has been proposed by the Obama administration is likely to be modified substantially by the Republicans and centrist Democrats. There is going to be a big fight, with major changes expected.

WERC: The government is talking about incurring a $1.75 trillion deficit with this budget. What does this mean? How will the deficit be financed?

Rasmus: First, it should be noted that the real deficit by 2010 will be $2.25 trillion.

One way they are talking about financing this deficit is with carbon credits. These are carbon pollution permits. The government is expecting a $526 billion revenue from this source, though it’s questionable whether they will be able to raise this amount. Governments and corporations in Europe want to give corporations credits for free. They’ll try that here too.

They will issue more Treasury bonds, and they will simply have go to the printing presses and print more money. Clearly, they are in a bind — especially if the economy continues to tank.

WERC: You have made many predictions that have actually come true — unlike just about every mainstream economist and forecaster. What are your predictions today?

Rasmus: We’re on the knife’s edge of a transition between this epic recession and a depression. The bank bailout will require trillions more dollars. And even then, the impact is likely to be marginal.

The depression could be triggered by one or more of the following factors: sovereign debt crises in Eastern Europe, deepening job losses in the United States, the collapse of the treasuries’ markets; the collapse of the global bond markets. These are among the many possible scenarios.

WERC: What is to be done?

Rasmus: I have outlined some policy recommendations here. Readers who would like to delve into this question in greater depth can get my full set of proposals on my website, which is www.kyklosproductions.com. You can also see my latest article in the March 2009 of “Z” magazine, where I describe my full set of proposals for recovery as an alternative to the Obama program.

From Democracy Now February 13, 2009

Both the House and Senate are set to vote today on the $789 billion economic stimulus package. The vote follows weeks of political wrangling that culminated in compromise legislation struck on Wednesday. The final size of the package is less than what both the House and Senate originally passed and far smaller than what many economists say is needed. But it still marks the nation’s largest economic rescue program since Franklin Roosevelt launched the New Deal.

Guests:
Michael Hudson, Distinguished Research Professor at University of Missouri, Kansas City. A former Wall Street economist, he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire. His latest article, “Obama’s Awful Financial Recovery Plan,” is online at counterpunch.org

Robert Kuttner, Journalist and economist. He is the co-founder and co-editor of The American Prospect magazine, as well as a Distinguished Senior Fellow of the think tank Demos. His latest book is called Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.

JUAN GONZALEZ: Both the House and Senate are set to vote today on the $789 billion economic stimulus package. The vote follows weeks of political wrangling that culminated in compromise legislation struck on Wednesday. The final size of the package is less than what both the House and Senate originally passed and far smaller than what many economists say is needed. But it still marks the nation’s largest economic rescue program since Franklin Delano Roosevelt launched the New Deal.

The final bill includes $507 billion in spending programs and $282 billion in tax relief. Independent Senator Joseph Lieberman hailed it as a bipartisan achievement.

SEN. JOSEPH LIEBERMAN: We came a long way in a relatively short time to achieve something big and urgently necessary for our country and our people. And when I say “we,” I mean the President, the House, the Senate, members of both political parties. Everybody gave something in these negotiations to achieve something bigger for our country and our people.

JUAN GONZALEZ: House Democrats have voiced criticism that the final legislation more closely resembles the less-expensive measure approved by the Senate. $20 billion in education funding was cut, along with $30 billion for state governments to prevent reductions in social services to the poor and unemployed. But some key boosts to social programs were preserved, including a $20 billion allotment for food stamps.

Most Republican lawmakers have opposed the stimulus. The partisan divide extended to the White House Thursday, when Senator Judd Gregg of New Hampshire withdrew his nomination as Commerce Secretary. The Republican, Gregg, cited what he called “irresolvable conflicts” with the economic stimulus plan.

SEN. JUDD GREGG: Well, I want to begin by thanking the President for considering me for the position of Secretary of Commerce. This was truly a great honor, and I had felt that I could bring some very positive and instructive things to this administration and was looking forward to that. However, as we proceeded down the road here since the nomination was made, it’s become clear to me that—you know, I’ve been my own person for thirty years. I’ve been a governor, and I’ve been a congressman, I’ve been a senator, made my own decisions, stood for what I believe in. You know I’m a fiscal conservative, as everybody knows, fairly strong one.

And it just became clear to me that it would be very difficult, day in and day out, to serve in this cabinet or any cabinet, for that matter, and be a part of a team and not be able to be 100 percent with the team, 110 percent with the team. You know, you can’t have a blocking back who only pulls off every second or third play.

JUAN GONZALEZ: Gregg is Obama’s second Commerce pick to withdraw from nomination, following New Mexico Governor Bill Richardson.

Meanwhile, more federal aid for the nation’s banking system is likely on the horizon. In a new report, New York University economist Nouriel Roubini estimates financial firms stand to lose up to $3.6 trillion on troubled loans and devalued assets. Echoing other economists, Roubini concludes the US banking system is “effectively insolvent.”

AMY GOODMAN: For more on the economy, we’re joined now by two guests. Here at the firehouse studio, Michael Hudson, Distinguished Research Professor at University of Missouri, Kansas City. A former Wall Street economist, he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire. His latest article, “Obama’s Awful Financial Recovery Plan.” It’s online at counterpunch.org.

Joining us from Washington, D.C., Robert Kuttner, journalist and economist, co-founder and co-editor of The American Prospect magazine, as well as Distinguished Senior Fellow at the think tank Demos. His latest book is called Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.

Michael Hudson, let’s begin with you here in New York. Why do you think that Obama’s financial recovery plan is “awful”?

MICHAEL HUDSON: Because it’s not leading to recovery at all. It’s now up to $12 trillion. It’s a giveaway to the banks, to the creditors, without a single penny for actual debt reduction. And I had thought that at least half a percentage point, $50 billion, was going to be to write down troubled mortgage debtors, but it turns out that not a penny of mortgage debt is going to be written down. When the banks have lent more money than a mortgage owes, with 38 percent, the government is going to create its own debt to come in and make up the difference, so the debt is going to continue to grow exponentially, and it’s way beyond the ability of the economy to pay. If people have to pay the amount of debt that they have now, there won’t be any money to buy goods and services, companies will not sell as much, they’ll invest less, they’ll hire less, and they’ll continue to downsize.

And what’s happened is that this is the greatest transfer of wealth really in American history. It’s doubled the American debt. The closest parallel I can think of is William the Conqueror’s conquest of England. He came with a military band, conquered the land and imposed taxes over the whole land, basing it all on the Domesday Book, what—the rent could be squeezed out. In this case, the rip-off has been non-military. The bankers have done insider dealing to get the government to give them or guarantee them $12 trillion of bad loans they’ve made, many of them fraudulent.

And then they’re trying to blame the poor for all this, as if the poor are somehow exploiting the rich by taking out more loans than they can pay. Yesterday, Senator McCain said—he warned that all of this debt was going to be paid by the future generation, and we’re exploiting them. But that’s not how to think of it at all. When you have a debt that goes to a future generation, you have taxpayers paying to bondholders, just like in the nineteenth century you had the western states paying to the eastern states. So what you’ve done is given $12 trillion to the richest one percent—or ten percent of the population, and you’ve indebted the economy and the government to them for the next hundred years. You’ve created a new class of ruling families.

And Obama has—by doing this, he’s broken with every president in history. Whenever the debts have exceeded the ability to pay, they’ve been written down to the ability to pay, either through bankruptcy or through conscious government write-down. But instead of writing down the debts, he says the creditors are not going to lose money, despite what Mr. Roubini said. They may have lost money, but they will be made whole by the government. And that’s crazy. That’s why every economic chart you see, there will be a gradual rise and then a sudden collapse. Everything is turned into a vertical fall. Prices, international shipping, employment, profits, they’ve all hit a wall. And there’s no way that the economy can recover when people have to pay interest and amortization instead of buying goods and services, or companies will have to pay their junk bond holders instead of investing in new equipment.

JUAN GONZALEZ: Let me ask Robert Kuttner—I don’t know if your analysis is as pessimistic of the recovery package. But also, I’d like to ask you why, if everyone agrees that the heart of the original trigger for this crisis was the mortgage crisis, is the—the helping out of homeowners continues to be pushed back in the response to it?

ROBERT KUTTNER: Well, my analysis is somewhat different from Mr. Hudson’s analysis. I don’t think this adds up to $12 trillion, and we can have a little debate about that. But I do think that the plan does not go nearly far enough and, in some respects, is just completely wrongheaded.

I think you have to divide what needs to be done into three areas. Number one, we need to refinance mortgages directly so that aid goes directly to homeowners, and the banks and the bondholders who profited from these Mafia loans take the hit, and homeowners stay in their homes. That’s what Roosevelt did in the ’30s with the Home Owners’ Loan Corporation, where the government refinanced mortgages directly. So that’s the first big problem. They haven’t done anything, and the approach they’re taking, when they do get around to it, is wrong, because it bails out bondholders and bankers rather than homeowners.

Secondly, the stimulus is too small by about a factor of three. Just to take one example, state and local governments are going to be out of revenues to the tune of $400 to $500 billion over the next two years. The money in the stimulus package, about $140 billion. So, you know, these are layoffs of teachers and police and fire and cuts in programs that are completely needless. All the government has to do is write a check, and state and local services can continue.

The biggest problem of all is the Geithner plan to try and bring hedge funds and private equity companies with loans from the Federal Reserve as a way of propping up banks. It’s resuscitating the same system that got us into this mess. It’s totally wrongheaded. All of the economists who I respect, from Joe Stiglitz to Paul Krugman to Nouriel Roubini, all argue that, sooner or later, we’re going to have to nationalize the banks, clean out the bad assets, make the bad actors take a hit, replace corrupt management, and clean the slate so that we start out with new—with viable banks that can get the credit system operating again. And the longer we defer that with more pyramid schemes financed by the Fed or the Treasury or the taxpayers, the deeper the hole is.
You asked the question, why we’re not doing it right. The problem is political. On the one hand, Obama has hired a lot of Bob Rubin’s protégés, who aren’t even advocating the right policy. On the other hand, the Republicans are stonewalling him across the board. And so people like Susan Collins, senator from Maine, who are pretty conservative get to block this thing. The only way to end this blockage is for Obama to go to the country and to become a lot more radical, because the times demand radical solutions.

AMY GOODMAN: We’re talking to economists Robert Kuttner and, here in New York, Michael Hudson. We’ll be back with them in a minute.

[break]

AMY GOODMAN: Our guests are two economists. Robert Kuttner joins us from Washington, D.C. His latest book is Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency. Michael Hudson is also with us. He’s here in New York. He has also written many books. His latest article, though, is “Obama’s Awful Financial Recovery Plan.” Juan?

JUAN GONZALEZ: Yeah, Michael Hudson, I’d like to ask you—Robert Kuttner just mentioned the whole issue of the Obama administration attempting to bring in private equity firms to help bail out the system. But isn’t part of the problem of these private equity funds, hedge funds, that they are even less transparent than your average corporation, which at least is filing SEC reports and has boards of directors and has to respond to shareholders to some degree? These are even more of the problem of lack of transparency that we’ve had in the financial system generally.

MICHAEL HUDSON: Well, AIG insurance company has been given $135 billion by the US government to pay hedge fund bets that it was on the wrong side of. Now, to invest in a hedge fund, you have to sign a document with the Securities and Exchange Commission saying you have over a million dollars to lose, and you can lose all your money, and it’s not going to affect your life, that you can take the risk, and you’ll be OK if you lose it all. That’s what you have to do to get a hedge fund.

These are the people who Obama is rescuing, not the people who have less than a million dollars and who really have risked their life in buying the houses, the homes, and losing their jobs. He’s protecting the people who could lose all their money, and they’d function, and not protecting the people who actually need help. That’s the irony of all this.

And it’s almost unprecedented that someone who was elected with an overwhelming mandate for change should then feel that he has to depend on Republicans, whereas you had George Bush come in with maybe a half a percentage point victory and say he has a mandate to make the most sweeping changes in history. There’s a complete disconnect there.

AMY GOODMAN: So how does he get it passed in the Senate then?

MICHAEL HUDSON: How did—

AMY GOODMAN: How would he get his plan passed in the Senate then, if he doesn’t bring some Republicans on board?

MICHAEL HUDSON: A president is able to use a bully pulpit. He had a lot of public—enormous public support. He could have gone to the people, like Roosevelt did, and said, “Here is my plan, and I’m going to protect the workers and American industry who are productive. I’m not going to support the extractive sector.” And instead, he talked as if he was supporting labor, he talked as if he was supporting industry, but all the money he’s been given—has been given to essentially Wall Street and, as Mr. Kuttner said, to Mr. Rubin’s protégés.

And if you want to see a kind of scenario where this is leading, you can look at what Mr. Rubin did in Russia and the Baltic countries and the post-Soviet economies. Right now, they’re all broke, and there’s no visible means of support. And in a way, you could say that countries like Latvia represent a foretaste of what we will be moving towards if the program isn’t drastically inverted to help the actual economy instead of the financial claims on the economy. Finance is extracting the income from the economy, not producing it, and they’re the people who are getting the benefit and getting the guarantees.

AMY GOODMAN: What’s a zombie bank?

MICHAEL HUDSON: Well, it’s very funny. A zombie bank is supposed to be a bank that has negative equity. And the word “zombie” comes basically from parasitology. Everybody—people often say the financial sector is a parasite extracting. But a parasite does more than that. It doesn’t just take nourishment from the host; it takes over the host’s brain, so the host thinks it’s actually part of the host’s body and, in fact, it’s its child, and it nurtures it. And the financial sector represents itself as being part of the economy. Mr. Geithner, two days ago, said that we can’t have a recovery of the economy without making the banks healthy and whole and profitable. And that’s just the wrong thing.

We can’t have a recovery in the economy until we let the banks take the losses and we let the hedge funds essentially take their losses. There was no need to give $135 billion to AIG, which yesterday was raided by Britain’s office of serious crimes for financial fraud, when the US government refused to move against it for fraud. It’s paying the fraudsters instead of paying the victims, and then it’s blaming the victims as if somehow the bank’s a zombie instead of the bank turning the economy into a zombie economy run by insiders in Washington giving themselves what Bloomberg Financial said was $9 trillion two months ago and two days ago an added two-and-a-half trillion, which, to me, makes up $12 trillion, rounding off.

JUAN GONZALEZ: Robert Kuttner, I’d like to ask you—a couple of days ago, the top bankers in the country testified before Congress. I was struck that there was a similar type of testimony conducted by the top bankers in Britain recently before Parliament. The difference was that all of the British bankers are basically out of jobs. They were testifying after losing their jobs, whereas the American bankers, except for John Thain at Merrill Lynch, most of them still have their jobs. Your sense of how the banking CEOs are being dealt with in this country?

ROBERT KUTTNER: Well, they’re being coddled. I mean, if you look at Citigroup, the Treasury has put in $45 billion of direct equity capital into Citigroup. It’s guaranteed another $306 billion of toxic assets. You can buy all of Citigroup for about $25 billion. So the taxpayers effectively own it. What the government ought to do is exercise the rights of ownership, go in there, put a majority of public appointees on the board, get rid of existing management. I think in the case of Citigroup, the best thing you could do is break it up, because it is a zombie bank in the sense of it being insolvent. And most of the large banks are insolvent. Their debts exceed their capital. And what Geithner is doing, he’s trying to just disguise this by one more effort to double down using the same kind of financial razzle dazzle that got us into this trouble. So it would be much cleaner to put these banks into receivership.

And if that sounds radical, it is radical, but it’s important to keep in mind that the FDIC, which is the one agency that’s behaved responsibly in this whole mess, the FDIC does this every day of the week. If a bank that has FDIC insurance goes bust, the FDIC goes in, they shut the thing down, they fire incumbent management, the shareholders lose everything, they take it over as a publicly owned bank. The biggest case of this was a bank called IndyMac in California, one of the worst of the subprime malefactors. And the FDIC went in, and they took it over. They put 150 people in to run it. And now they’re gradually selling it back to private owners. So you could do this with the biggest banks, and I think you need to do it with the biggest banks. It does nothing but defer the day of reckoning and dig the hole deeper to pretend that an insolvent bank can somehow be kept on life supports with more and more infusions of taxpayer money.

AMY GOODMAN: Economist Michael Hudson?

MICHAEL HUDSON: Mr. Kuttner is quite right to single out Citibank and the large banks. What the newspapers call a subprime problem is really a big bank problem. Almost all of this negative equity is concentrated in four or five, maybe ten, of the very biggest banks.

And what have they done with the bailout money? They’ve gone and bought the small and healthy banks, infecting the small healthy banks with their philosophy of salesmanship. Now, on the way over here, at Heathrow Airport, they had the British investigation in Parliament on the BBC television in the lounge. And it turned out that the heads of every one of these British banks who were fired were salesmen. None of them were bankers. They were into just selling. And when I was on Wall Street, that was my experience. They had stopped doing research. They had stopped doing analysis. And what they wanted were people who could sell bonds and sell mutual funds. And the whole idea has turned into salesmanship.

For Citibank, their practice for years was what they called stretching the envelope. And what that means is breaking the law and daring the government to try to move against it, by saying, “If you move against this, if you close us down or prosecute us for stretching the envelope,” such as when Citibank bought—merged with the insurance company in violation of the Glass-Steagall Act, “then we’ll bring the whole economy down in a crisis.” And they’re holding the economy hostage in order to extract this money from the government. That’s the real problem. That’s what frightens the senators, and I’m sure that’s what frightens Mr. Obama, that these guys are threatening to wreck the economy if we don’t give them everything they want.

JUAN GONZALEZ: And, Robert Kuttner, from the perspective of ordinary Americans who are dealing with not only losses of jobs and the situation with the—so many homes now worth less than the mortgages that are out on them, I was struck recently by some of these major banks increasing the interest rates on their credit cards. Now, here you have interest rates in the United States at an all-time low, yet banks like Citibank are charging 21 percent interest on the credit card. They’re increasing the interest rates. How can ordinary Americans have an impact on trying to get the leaders in Washington and the Obama administration to change some course now in this—in their efforts to develop a rescue package?

ROBERT KUTTNER: Well, ordinary Americans should be kicking and screaming. There should be ceilings on what banks can charge on credit cards, like they were in the old days when you had usury laws.

You know, banking, done properly, is very simple. Someone applies for a loan; a loan officer assesses the credit worthiness of that borrower, puts an interest rate on the loan. And the banking system is almost like a public utility. It’s not a big drain on the real economy. It supplies capital and credit to the real economy. And when you get these exaggerated, convoluted schemes that are bets on bets on bets, you create the kind of leverage that then comes crashing down when you have something like subprime. So I think the historic task of this administration is a radical simplification of the banking system so that the banking system doesn’t need to charge 23 and 30 percent on credit cards to try and recoup the loss that it made gambling on subprime bonds.

AMY GOODMAN: I want to ask about the stimulus package. It’s supposed to be voted on today. It is the nation’s largest economic rescue program since FDR. Is it big enough? And talk about the Judd Gregg, as well, Michael Hudson, the [inaudible]—

MICHAEL HUDSON: Well, in any rescue program, the first question is, who’s being rescued? And who’s being rescued are apparently the very wealthy, not the people who one would think is being rescued. And then, how are they being rescued? They’re being rescued by making the lower income brackets pay to the higher income brackets. So this sort of turns everything, the usual Progressive Era idea, upside-down. It’s a regressive idea. And it almost makes you wonder whether America is becoming a failed economy. Mr. Kuttner was right, quite right, when he said you have to transform banking. And if you don’t transform banking along the lines that he and I seem to agree on, then the economy will fail. It’s that serious.

AMY GOODMAN: Robert Kuttner, your response to the economic stimulus plan? Do you think it’s big enough?

ROBERT KUTTNER: I think it’s important that Mr. Hudson and I and your listeners and viewers keep straight the difference between the banking rescue and the stimulus package, which are two very different pieces of legislation. I think it was a real political blunder to put them forward in the same week, because people tend to confuse them.

The banking rescue put forward by Mr. Geithner is a complete disaster. The problem with the stimulus package is not that it helps the wrong people. For the most part, it helps the right people. But it’s too small by a factor of about two-thirds, because the stimulus package is about two-and-a-half percent of GDP per year for two years. The economy is declining at the rate of about five percent of GDP. I mentioned before the state and local government figures, where state and local government is out about three times the revenue that the stimulus package is going to replace. So I think some of the things in the stimulus package are absolutely admirable: down payments on high-speed rail, on clean energy, on infrastructure repair, on food stamps, on unemployment compensation, on public health. But the problem is, even though $789 billion is a huge amount of money, given the scale of this collapse, it’s too small to do the job.

And I think in order to have any effect of any significance, they’re going to have to come back again by April, May, June, maybe as part of the budget process, and put even more money into it. And it is going to take an incredible persuasion job by the chief executive to persuade the American people that you need to spend another trillion, another trillion and a half. And you need to recapitalize the banks, but to do it right, by nationalizing them, but that’s going to take more money, too. And if you think of the controversy that he faced in getting a $789 billion package through Congress, imagine what’s going to happen when he comes back and says, “By the way, we need another trillion and a half.” And he has to be damn sure that that money doesn’t go to bankers, that it goes to ordinary Americans.

AMY GOODMAN: What about Judd Gregg? What’s the politics of this, Robert Kuttner?

ROBERT KUTTNER: Well, this was a miscalculation, a blunder. I think it’s an example of Obama’s excessive tendency to bend over backwards to be bipartisan. And, you know, sometimes when you bend over backwards, things happen that you can’t repeat in family broadcasting. And I think that’s what the Republicans are doing to Mr. Obama. So he’s going to have to do this with Democrats, and he’s going to have to make it embarrassing for Republicans to block him.

Republican senators and congressmen have people—and congresswomen have people in their districts who are hurting, too, just as much as Democratic legislators have people who are hurting. If he goes to the country, the way he did in Elkhart the other day or the way he did in Peoria, and spins out a narrative that ties the suffering of ordinary people to the failed policies that we need to reverse, he can really move public opinion. And he’s got to resolve to do that, and he’s got to think much bigger.

AMY GOODMAN: I want to thank you both for being with us. Robert Kuttner, economist; co-founder, co-editor of The American Prospect magazine; latest book, Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency. Michael Hudson, Distinguished Research Professor at the University of Missouri, Kansas City, former Wall Street economist. “Obama’s Awful Financial Recovery Plan” is his latest article. It’s online at counterpunch.org.

Martin Wolf started off his Financial Times column for February 11 with the bold question: “Has Barack Obama’s presidency already failed?” The stock market had a similar opinion, plunging 382 points. Having promised “change,” Mr. Obama is giving us more Clinton-Bush via Robert Rubin’s protégé, Tim Geithner. Tuesday’s $2.5 trillion Financial Stabilization Plan to re-inflate the Bubble Economy is basically an extension of the Bush-Paulson giveaway – yet more Rubinomics for financial insiders in the emerging Wall Street trusts. The financial system is to be concentrated into a cartel of just a few giant conglomerates to act as the economy’s central planners and resource allocators. This makes banks the big winners in the game of “chicken” they’ve been playing with Washington, a shakedown holding the economy hostage. “Give us what we want or we’ll plunge the economy into financial crisis.” Washington has given them $9 trillion so far, with promises now of another $2 trillion– and still counting.

A true reform – one designed to undo the systemic market distortions that led to the real estate bubble – would have set out to reverse the Clinton-Rubin repeal of the Glass-Steagall Act so as to prevent the corrupting conflicts of interest that have resulted in vertical trusts such as Citibank and Bank of America/Countrywide/Merrill Lynch. By unleashing these conglomerate grupos (to use the term popularized under Pinochet with Chicago Boy direction – a dress rehearsal of the mass financial bankruptcies they caused in Chile by the end of the 1970s) the Clinton administration enabled banks to merge with junk mortgage companies, junk-money managers, fictitious property appraisal companies, and law-evasion firms all designed to package debts to investors who trusted them enough to let them rake off enough commissions and capital gains to make their managers the world’s highest-paid economic planners.

Today’s economic collapse is the direct result of their planning philosophy. It actually was taught as “wealth creation” and still is, as supposedly more productive than the public regulation and oversight so detested by Wall Street and its Chicago School aficionados. The financial powerhouses created by this “free market” philosophy span the entire FIRE sector – finance, insurance and real estate, “financializing” housing and commercial property markets in ways guaranteed to make money by creating and selling debt. Mr. Obama’s advisors are precisely those of the Clinton Administration who supported trustification of the FIRE sector. This is the broad deregulatory medium in which today’s bad-debt disaster has been able to spread so much more rapidly than at any time since the 1920s.

The commercial banks have used their credit-creating power not to expand the production of goods and services or raise living standards but simply to inflate prices for real estate (making fortunes for their brokerage, property appraisal and insurance affiliates), stocks and bonds (making more fortunes for their investment bank subsidiaries), fine arts (whose demand is now essentially for trophies, degrading the idea of art accordingly) and other assets already in place.

The resulting dot.com and real estate bubbles were not inevitable, not economically necessary. They were financially engineered by the political deregulatory power acquired by banks corrupting Congress through campaign contributions and public relations “think tanks” (more in the character of doublethink tanks) to promote the perverse fiction that Wall Street can be and indeed is automatically self-regulating — a travesty of Adam Smith’s “Invisible Hand.” This hand is better thought of as covert. The myth of “free markets” is now supposed to consist of governments withdrawing from planning and taxing wealth, so as to leave resource allocation and the economic surplus to bankers rather than elected public representatives. This is what classically is called oligarchy, not democracy.

This centralization of planning, debt creation and revenue-extracting power is defended as the alternative to Hayek’s road to serfdom. But it is itself the road to debt peonage, a.k.a. the post-industrial economy or “Information Economy.” The latter term is another euphemistic travesty in view of the kind of information the banking system has promoted in the junk accounting crafted by their accounting firms and tax lawyers (off-balance-sheet entities registered on offshore tax-avoidance islands), the AAA applause provided as “information” to investors by the bond-rating cartel, and indeed the national income and product accounts that depict the FIRE sector as being part of the “real” economy, not as an institutional wrapping of special interests and government-sanctioned privilege  acting in an extractive rather than a productive way.

“Thanks for the bonuses,” bankers in the United States and England testified this week before Congress and Parliament. “We’ll keep the money, but rest assured that we are truly sorry for having to ask you for another few trillion dollars. At least you should remember our theme song: We are still better managers than the government, and the bulwark against government bureaucratic resource allocation.” This is the ideological Big Lie sold by the Chicago School “free market” celebration of dismantling government power over finance, all defended by complex math rivaling that of nuclear physics that the financial sector is part of the “real” economy automatically producing a fair and equitable equilibrium.

This is not bad news for stockholders of more local and relatively healthy banks (healthy in the sense of avoiding negative equity). Their stocks soared and were by far the major gainers on Tuesday’s stock market, while Wall Street’s large Bad Banks plunged to new lows. Solvent local banks are the sort that were normal prior to repeal of Glass Steagall. They are to be bought by the large “troubled” banks, whose “toxic loans” reflect a basically toxic operating philosophy. In other words, small banks who have made loans carefully will be sucked into Citibank, Bank of America, JP Morgan Chase and Wells Fargo – the Big Four or Five where the junk mortgages, junk CDOs and junk derivatives are concentrated, and have used Treasury money from the past bailout to buy out smaller banks that were not infected with such reckless financial opportunism. Even the Wall Street Journal editorialized regarding the Obama Treasury’s new “Public-Private Investment Fund” to pump a trillion dollars into this mess: “Mr. Geithner would be wise to put someone strong and independent in charge of this fund – someone who can say no to Congress and has no ties to Citigroup, Robert Rubin or Wall Street.”

None of this can solve today’s financial problem. The debt overhead far exceeds the economy’s ability to pay. If the banks would indeed do what Pres. Obama’s appointees are begging them to do and lend more, the debt burden would become even heavier and buying access to housing even more costly. When the banks look back fondly on what Alan Greenspan called “wealth creation,” we can see today that the less euphemistic terminology would be “debt creation.” This is the objective of the new bank giveaway. It threatens to spread the distortions that the large banks have introduced until the entire system presumably looks like Citibank, long the number-one offender of “stretching the envelope,” its euphemism for breaking the law bit by bit and daring government regulators and prosecutors to try and stop it and thereby plunging the U.S. financial system into crisis. This is the shakedown that is being played out this week. And the Obama administration blinked – as these same regulators did when they were in charge of the Clinton administration’s bank policy. So much for the promised change!

The three-pronged Treasury program seems to be only Stage One of a two-stage “dream recovery plan” for Wall Street. Enough hints have trickled out for the past three months in Wall Street Journal op-eds to tip the hand for what may be in store. Watch for the magic phrase “equity kicker,” first heard in the S&L mortgage crisis of the 1980s. It refers to the banker’s share of capital gains, that is, asset price inflation in Bubble #2 that the Recovery Program hopes to sponsor.

The first question to ask about any Recovery Program is, “Recovery for whom?” The answer given on Tuesday is, “For the people who design the Program and their constituency” – in this case, the bank lobby. The second question is, “Just what is it they want to ‘recover’?” The answer is, the Bubble Economy. For the financial sector it was a golden age. Having enjoyed the Greenspan Bubble that made them so rich, its managers would love to create yet more wealth for themselves by indebting the “real” economy yet further while inflating prices all over again to make new capital gains.

The problem for today’s financial elites is that it is not possible to inflate another bubble from today’s debt levels, widespread negative equity, and still-high level of real estate, stock and bond prices. No amount of new capital will induce banks to provide credit to real estate already over-mortgaged or to individuals and corporations already over-indebted. Moody’s and other leading professional observers have forecast property prices to keep on plunging for at least the next year, which is as far as the eye can see in today’s unstable conditions. So the smartest money is still waiting like vultures in the wings – waiting for government guarantees that toxic loans will pay off. Another no-risk private profit to be subsidized by public-sector losses.

While the Obama administration’s financial planners wring their hands in public and say “We feel your pain” to debtors at large, they know that the past ten years have been a golden age for the banking system and the rest of Wall Street. Like feudal lords claiming the economic surplus for themselves while administering austerity for the population at large, the wealthiest 1 per cent of the population has raised their appropriation of the nationwide returns to wealth – dividends, interest, rent and capital gains – from 37 per cent of the total ten years ago to 57 per cent five years ago and it seems nearly 70 per cent today. This is the highest proportion since records have been kept. We are approaching Russian kleptocratic levels.

The officials drawn from Wall Street who now control of the Treasury and Federal Reserve repeat the right-wing Big Lie: Poor “subprime families” have brought the system down, exploiting the rich by trying to ape their betters and live beyond their means. Taking out subprime loans and not revealing their actual ability to pay, the NINJA poor (no income, no job, no audit) signed up to obtain “liars’ loans” as no-documentation Alt-A loans are called in the financial junk-paper trade.

I learned the reality a few years ago in London, talking to a commercial banker. “We’ve had an intellectual breakthrough,” he said. “It’s changed our credit philosophy.”

“What is it?” I asked, imagining that he was about to come out with yet a new magical mathematics formula?

“The poor are honest,” he said, accompanying his words with his jaw dropping open as if to say, “Who would have guessed?”

The meaning was clear enough. The poor pay their debts as a matter of honor, even at great personal sacrifice and what today’s neoliberal Chicago School language would call uneconomic behavior. Unlike Donald Trump, they are less likely to walk away from their homes when market prices sink below the mortgage level. This sociological gullibility does not make economic sense, but reflects a group morality that has made them rich pickings for predatory lenders such as Countrywide, Wachovia and Citibank. So it’s not the “lying poor.” It’s the banksters’ fault after all!

For this elite the Bubble Economy was a deliberate policy they would love to recover. The problem is how to start a new bubble to make yet another fortune? The alternative is not so bad – to keep the bonuses, capital gains and golden parachutes they have given themselves, and run. But perhaps they can improve in Bubble Economy #2.

The Treasury’s newest Financial Stability Plan (Bailout 2.0) is only the first step. It aims at putting in place enough new bank-lending capacity to start inflating prices on credit all over again. But a new bubble can’t be started from today’s asset-price levels. How can the $10 to $20 trillion capital-gain run-up of the Greenspan years been repeated in an economy that is “all loaned up”?

One thing Wall Street knows is that in order to make money, asset prices not only need to rise, they have to go down again. Without going down, after all, how can they rise up? Without a crucifixion for the economy, how can there be a resurrection? The more frenetic the price fibrillation, the easier it is for computerized buy-and-sell programs to make money on options and derivatives.

So here’s the situation as I see it. The first objective is to preserve the wealth of the creditor class – Wall Street, the banks and the other financial vehicles that enrich the wealthiest 1 per cent and, to be fair within America’s emerging new financial oligarchy, the richest 10 per cent of the population. Stage One involves buying out their bad loans at a price that saves them from taking a loss. The money will be depicted to voters as a “loan,” to be repaid by banks extracting enough new debt charges in the new rigged game the Treasury is setting up. The current loss will be shifted the onto “taxpayers” and made up by new debtors – in both cases labor, onto whose shoulders the tax burden has been shifted steadily, step by step since 1980.

An “aggregator” bank (sounds like “alligator,” from the swamps of toxic waste) will buy the bad debts and put them in a public agency. The government calls this the “bad” bank. (This is Geithner’s first point.) But it does good for Wall Street – by buying loans that have gone bad, along with loans and derivative guarantees and swaps that never were good in the first place. If the private sector refuses to buy these bad loans at prices the banks are asking for, why should the government pretend that these debt claims are worth more. Vulture funds are said to be offering about what they were when Lehman Brothers went bankrupt: about 22 cents on the dollar. The banks are asking for 75 cents on the dollar. What will the government offer?

Perhaps the worst alternative is that is now being promoted by the banks and vulture investors in tandem: the government will guarantee the price at which private investors buy toxic financial waste from the banks. A vulture fund would be happy enough to pay 75 cents on the dollar for worthless junk if the government were to provide a guarantee. The Treasury and Federal Reserve pretend that they simply would be “providing liquidity” to “frozen markets.” But the problem is not liquidity and it is not subjective “market psychology.” It is “solvency,” that is, a realistic awareness that toxic waste and bad derivatives gambles are junk. Mr. Geithner has not been able to come to terms with how to value this – without bringing the Obama administration down in a wave of populist protest – any more than Mr. Paulson was able to carry out his original Tarp proposal along these lines.

The hardest task for today’s banksters is to revive opportunities for creditors to make a new killing. (It’s the economy that’s being killed, of course.) This seems to be the aim of the Public/Private investment company that Mr. Geithner is establishing as the second element in his plan. The easiest free lunch is to ride the wave of a new bubble – a fresh wave of asset-price inflation to be introduced to “cure” the problem of debt deflation.

Here’s how I imagine the ploy might work. Suppose a hapless family has bought a home for $500,000, with a full 100 per cent $500,000 adjustable-rate mortgage scheduled to reset this year at 8 per cent. Suppose too that the current market price will fall to $250,000, a loss of 50 per cent by yearend 2009. Sometime in mid 2010 would seem to be long enough for prices to decline by enough to make “recovery” possible – Bubble Economy 2.0. Without such a plunge, there will be no economy to “rescue,” no opportunity for Tim Geithner and Laurence Summers to “feel your pain” and pull out of their pocket the following package – a variant on the “cash for trash” swap, a public agency to acquire the $500,000 mortgage that is going bad, heading toward only a $250,000 market price.

The “bad bank” was not quite ready to be created this week, but the embryo is there. It will take the form of a public/private partnership (PPP) of the sort that Tony Blair made so notorious in Britain. And speaking of Mr. Blair, I am writing this from England, where almost every America-watcher I talk to has expressed amazement at Obama’s performance last week idealizing England’s counterpart to George Bush when it comes to unpopularity contests. Blair’s tenure in office was a horror story, not something to be congratulated for. He entered into the disastrous public/private partnership that doubled, tripled or quadrupled the cost of public projects by adding on a heavy financial overhead. If Obama does not realize how he shocked Britain and much of Europe with his praise, then he is in danger of foisting a similar public/private financialized “partnership” on the United States.

The new public/private institution will be financed with private funds – in fact, with the money now being given to re-capitalize America’s banks (headed by the Wall St. banks that have done so badly). Banks will use the Treasury money they have received by “borrowing” against their junk mortgages at or near par to buy shares in a new $5 trillion institution created along the lines of the unfortunate Fanny Mae and Freddie Mac. Its bonds will be guaranteed. (That’s the “public” part – “socializing” the risk.) The PPP institution will have the power to buy and renegotiate the mortgages that have passed into the hands of the government and other holders. This “Homeowner Rescue Trust” will use its private funding for the “socially responsible” purpose of “saving the taxpayer” and middle class homeowners by renegotiating the mortgage down from its original $500,000 to the new $250,000 market price.

Here’s the patter talk you can expect, with the usual euphemisms. The Homeowners Rescue PPP will appear as a veritable Savior Bank resurrected from the wreckage of Bubble #1. Its clients will be families strapped by their mortgage debt and feeling more and more desperate as the price of their major asset plummets more deeply into Negative Equity territory. To them, the new PPP will say: “We’ve got a deal to save you. We’ll renegotiate your mortgage down to the current market price, $250,000, and we’ll also lower your interest rate to just 5.50 per cent, the new rate. This will cut your monthly debt charges by nearly two thirds. Not only can you afford to stay in your home, you will escape from your negative equity.”

The family probably will say, “Great.” But they will have to make a concession. That’s where the new public/private partnership makes its killing. Funded with private money that will take the “risk” (and also reap the rewards), the Savior Bank will say to the family that agrees to renegotiate its mortgage: “Now that the government has absorbed a loss (in today’s travesty of “socializing” the financial system) while letting let you stay in your home, we need to recover the money that’s been lost. If we make you whole, we want to be made whole too. So when the time comes for you to sell your home or renegotiate your mortgage, our Homeowners Rescue PPP will receive the capital gain up to the original amount written off.”

In other words, if the homeowner sells the property for $400,000, the Homeowners Rescue PPP will get $150,000 of the capital gain. If the home sells for $500,000, the bank will get $250,000. And if it sells for more, thanks to some new clone of Alan Greenspan acting as bubblemeister, the capital gain will be split in some way. If the split is 50/50 and the home sells for $600,000, the owner will split the $100,000 further capital gain with the Homeowners Rescue PPP. It thus will make much more through its appropriation of capital gains (the new debt-fueled asset-price inflation being put in place) than it extracts in interest!

This would make Bubble 2.0 even richer for Wall Street than the Greenspan bubble! Last time around, it was the middle class that got the gains – even if new buyers had to enter a lifetime of debt peonage to buy higher-priced homes. It really was the bank that got the gains, of course, because mortgage interest charges absorbed the entire rental value and even the hoped-for price gain. But homeowners at least had a chance at the free ride, if they didn’t squander their money in refinancing their mortgages to “cash out” on their equity to support their living standards in a generation whose wage levels had stagnated since 1979. As Mr. Greenspan observed in testimony before Congress, a major reason why wages have not risen is that workers are afraid to strike or even to complain about being worked harder and harder for longer and longer hours (“raising productivity”), because they are one paycheck away from missing their mortgage payment – or, if renters, one paycheck or two away from homelessness.

This is the happy condition of normalcy that Wall Street’s financial planners would like to recover. This time around, they may not be obliged to make their gains in a way that also makes middle class homeowners rich. In the wake of Bubble Economy #1, today’s debt-strapped homeowners are willing to settle merely for a plan that leaves them in their homes! The Homeowners Rescue PPP can appropriate for its stockholder banks and other large investors the capital gains that have been the driving force of U.S. “wealth creation,” bubble-style. That is what the term “equity kicker” means.

This situation confronts the economy with a dilemma. The only policies deemed politically correct these days are those that make the situation worse: yet more government money in the hope that banks will create yet more credit/debt to raise house prices and make them even more unaffordable; credit/debt to inflate a new Bubble Economy #2.

Lobbyists for Wall Street’s enormous Bad Bank conglomerates are screaming that all real solutions to today’s debt problem and tax shift onto labor are politically incorrect, above all the time-honored debt write-downs to bring the debt burden within the ability to pay. That is what the market is supposed to do, after all, by bankruptcy in an anarchic collapse if not by more deliberate and targeted government policy. The Bad Banks, having demanded “free markets” all these years, fear a really free market when it threatens their bonuses and other takings. For Wall Street, free markets are “free” of public regulation against predatory lending; “free” of taxing the wealthy so as to shift the burden onto labor; “free” for the financial sector to wrap itself around the “real” economy like parasitic ivy around a tree to extract the surplus.

This is a travesty of freedom. As the premature neoliberal Adam Smith explained, “The government of an exclusive company of merchants, is, perhaps, the worst of all governments.” But worst of all is the “freedom” of today’s economic discussion from the wisdom of classical political economy and from historical experience regarding how societies through the ages have coped with the debt overhead.

How to save the economy from Wall Street

There is an alternative to ward all this off, and it is the classic definition of freedom from debt peonage and predatory credit. The only real solution to today’s debt overhang is a debt write-down. Until this occurs, debt service will crowd out spending on goods and services and there will be no recovery. Debt deflation will drag the economy down while assets are transferred further into the hands of the wealthiest 10 percent of the population, operating via the financial sector.

If Obama means what he says, he would use his office as a bully pulpit to urge repeal the present harsh creditor-oriented bankruptcy law sponsored by the banks and credit-card companies [and pushed through by then-Senator Joe Biden. Editors]. He would campaign to restore the long-term trend of laws favoring debtors rather than creditors, and introduce legislation to restore the practice of writing down debts to reflect the debtor’s ability to pay, imposing market reality to debts that are far in excess of realistic valuations.

A second policy would be to restore the power of state attorneys general to bring financial fraud charges against the most egregious mortgage lenders – the prosecutions that the Bush Administration got thrown out of court by claiming that under an 1864 National Bank Act clause, the federal government had the right to override state prosecutions of national banks – and then appointing a non-prosecutor to this enforcement position.

On the basis of reinstated fraud charges, the government might claw back the bank bonuses, salaries and bank earnings that represented the profits from America’s greatest financial and real estate fraud in history. And to prevent repetition of the past decade’s experience, the Obama Administration might help popularize a new psychology of debt. The government could encourage “the poor” to act as “economically” as Donald Trumps or Angelo Mozilos would do, making it clear that debt write-downs are a right.

Also to ward off repetition of the Bubble Economy, the Treasury could impose the “Tobin tax” of 1 per cent on purchases and options for stocks, bonds and foreign currency. Critics of this tax point out that it can be evaded by speculators trading offshore in the rights to securities held in U.S. accounts. But the government could simply refuse to provide deposit insurance and other support to institutions trading offshore, or simply could announce that trades in such “deposit receipts” for shares would not have legal standing. As for trades in derivatives, depository institutions – including conglomerates owning such banks – can simply be banned as inherently unsafe. If foreigners wish to speculate on financial horse races, let them.

Financial policy ultimately rests on tax policy. It is the ability to levy taxes, after all, that gives value to Treasury money (just as it is the inability to collect on debts that has depreciated the value of commercial bank deposits). It is easy enough for fiscal policy to prevent a new real estate bubble. Simply shift the tax system back to where it originally was, on the land’s site-rental value. The “free lunch” (what John Stuart Mill called the “unearned increment” of rising land prices, a gain that landlords made “in their sleep”) would serve as the tax base instead of burdening labor and industry with income taxes and sales taxes. This would achieve the kind of free market that Adam Smith, John Stuart Mill and Alfred Marshall described, and which the Progressive Era aimed to achieve with America’s first income tax in 1913. It would be a market free of the free lunch that Chicago Boys insist does not exist.  But the recent Bubble Economy and today’s Bailout Sequel have been all about getting a free lunch.

A land tax would prevent housing prices from rising again. It is the most hated tax in America today, largely because of the disinformation campaign that has been mounted by the real estate interests and amplified by the banks that stand behind them. The reality is that taxing land appreciation rather than wages or corporate profits would save homeowners from having to take on so much debt in order to obtain housing. It would save the economy from seeing “wealth creation” take the form of the “unearned increment” being capitalized into higher bank loans with their associated carrying charges (interest and amortization).

The wealth tax originally fell mainly on real estate. The most immediate and politically feasible priority of the Obama Administration thus should be to repeal the Bush Administration’s drastic tax cuts for the top brackets and its moratorium on the estate tax. The aim should be to bring down the polarization between creditors and debtors that has concentrated over two-thirds of the returns to wealth in the richest 1 per cent of the population.

If alternatives to the Bubble Economy such as these are not promoted, we will know that promises of change were mere rhetoric, Tony Blair style. Mr. Geithner may have given the game away in his February 10 statement that “Access to public support is a privilege, not a right.” The literal meaning of “privilege” is “private law” (Lat. leges), a law to benefit individuals as a special interest separate from the public interest. The problem is that Mr. Geithner is seeking to save a system that creates no real jobs products. The debt that banks sell is not really a “product.” Extracting interest and receiving public bailouts to make financial gamblers whole is extractive, not productive.

The banking system often has been characterized as parasitic. The metaphor is appropriate on more than one plane. Most people think of parasites simply as leeches, draining nourishment from the host. But biological nature is more complex. In order for parasites to succeed they must first numb the host’s pain-warning system so that they can get a foothold. They then take control of the host’s brain. The trick the host into believing that the parasite is part of its own body, and indeed even its child, to be nurtured, protected and given preference. They turn the host into a zombie. So the problem we are facing is not “zombie banks,” but the ability of Wall Street to create a zombie economy.

This is what the financial sector has done vis-à-vis the economy at large. It depicts itself and the rest of the symbiotic FIRE sector as part of the “real” economy, so that its extraction of interest, economic rent and monopoly prices is payment for providing a “service”: the privilege of credit creation, landlordship and “corporate management. Like his predecessor Hank Paulson, Mr. Geithner claims that recovery cannot occur until the banking system is put back on its feet in sufficiently solvent and indeed, prosperous condition to “get credit flowing again,” he said. “Without credit, economies cannot grow at their potential.” But is the solution really to create yet more debt for the already debt-ridden U.S. economy? It was the Greenspan debt bubble that brought it to a halt! Interest and amortization charges on new debt will eats into the ability of consumers and companies to spend and invest. Claiming that economic recovery must be led by renewed debt creation threatens only to deepen debt dependency and further erode discretionary consumer spending power.

When it comes to cleaning up the Greenspan Bubble legacy by writing down homeowner mortgage debt, the Treasury proposal offers homeowners $50 billion – just 0.5 percent of the $10 trillion Wall Street bailout to date, and less than half the amount given to AIG to pay its hedge fund speculators on their derivative gambles. The Treasury has handed out $25 billion to each and every big bank, so just two of these banks alone got as much as the reported one-quarter of all homeowners in America suffering from Negative Equity on their homes and in need of mortgage renegotiation. Yet today’s economic shrinkage cannot be reversed without a recovery in consumer demand. The economy has lost the “virtual wealth” in higher-priced homes and the stock market, and must rely on after-tax earnings. But I see little concern for wage earners in the Treasury plan. Without debt relief, consumer spending and business investment will not recover.

This debt dimension is what the Treasury’s “recovery” plan leaves out of account. It seeks to recover the debt-bubble economy, not the real economy of production and consumption.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

Nobel Prize-Winning Economist JOSEPH STIGLITZ: Obama Has Confused Saving the Banks with Saving the Bankers

Democracy Now! Interviews Joseph Stiglitz, February 25, 2009 
Link: http://www.democracynow.org/2009/2/25/stieglitz

We get reaction to President Obama’s speech from Nobel economics laureate and former World Bank chief economist, Joseph Stiglitz. Stiglitz says the Obama administration has failed to address the structural and regulatory flaws at the heart of the financial crisis that stand in the way of economic recovery. Stiglitz also talks about why he thinks Obama’s strategy on Afghanistan is wrong and that Obama’s plan to keep a “residual force” in Iraq will be “very expensive.” On health care, Stiglitz says a single-payer system is “the only alternative.”

AMY GOODMAN: To talk more about President Obama’s speech, I’m joined in the firehouse studio by Nobel Prize-winning economist Joseph Stiglitz, professor at Columbia University, former chief economist at the World Bank, and co-author of The Three Trillion Dollar War: The True Cost of the Iraq Conflict.

Welcome to Democracy Now!

JOSEPH STIGLITZ: Nice to be here.

AMY GOODMAN: Your first assessment of the speech last night?

JOSEPH STIGLITZ: Oh, I thought it was a brilliant speech. I thought he did an excellent job of wending his way through the fine line of trying to say-give confidence about where we’re going, and yet the reality of our economy-country facing a very severe economic downturn. I thought he was good in also giving a vision and saying while we’re doing the short run, here are three very fundamental long-run problems that we have to deal.

The critical question that many Americans are obviously concerned about is the question of what do we do with the banks. And on that, he again was very clear that he recognized the anger that Americans have about the way the banks have taken our taxpayer money and misspent it, but he didn’t give a clear view of what he was going to do.

AMY GOODMAN: Let’s go to the clip last night. During his speech, President Obama acknowledged more bailouts of the nation’s banks would be needed, but didn’t directly say, as Joe Stiglitz was saying, whether the government would move to nationalize Citigroup and Bank of America.

PRESIDENT BARACK OBAMA: We will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. And when we learn that a major bank has serious problems, we will hold accountable those responsible; force the necessary adjustments; provide the support to clean up their balance sheets; and assure the continuity of a strong, viable institution that can serve our people and our economy.

Now, I understand that on any given day Wall Street may be more comforted by an approach that gives bank bailouts with no strings attached and that holds nobody accountable for their reckless decisions. But such an approach won’t solve the problem. And our goal is to quicken the day when we restart lending to the American people and American business and end this crisis once and for all. And I intend to hold these banks fully accountable for the assistance they receive, and this time they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer.

AMY GOODMAN: President Obama on Tuesday night. Joe Stiglitz, is he holding the banks accountable?

JOSEPH STIGLITZ: Well, so far, it hasn’t happened. I think the more fundamental issues are the following. He says what we need is to get lending restarted. If he had taken the $700 billion that we gave, levered it ten-to-one, created some new institution guaranteed-provide partial guarantees going for, that would have generated $7 trillion of new lending. So, if he hadn’t looked at the past, tried to bail out the banks, bail out the shareholders, bail out the other-the bankers’ retirement fund, we would have easily been able to generate the lending that he says we need.

So the question isn’t just whether we hold them accountable; the question is: what do we get in return for the money that we’re giving them? At the end of his speech, he spent a lot of time talking about the deficit. And yet, if we don’t do things right-and we haven’t been doing them right-the deficit will be much larger. You know, whether you spend money well in the stimulus bill or whether you’re spending money well in the bank recapitalization, it’s important in everything that we do that we get the bang for the buck. And the fact is, the bank recovery bill, the way we’ve been spending the money on the bank recovery, has not been giving bang for the buck. We haven’t gotten anything out.

What we got in terms of preferred shares, relative to what we gave them, a congressional oversight panel calculated, was only sixty-seven cents on the dollar. And the preferred shares that we got have diminished in value since then. So we got cheated, to put it bluntly. What we don’t know is that-whether we will continue to get cheated. And that’s really at the core of much of what we’re talking about. Are we going to continue to get cheated?

Now, why that’s so important is, one way of thinking about this-end of the speech, he starts talking about a need of reforms in Social Security, put it-you know, there’s a deficit in Social Security. Well, a few years ago, when President Bush came to the American people and said there was a hole in Social Security, the size of the hole was $560 billion approximately. That meant that if we spent that amount of money, we would have guaranteed the-put on sound financial basis our Social Security system. We wouldn’t have to talk about all these issues. We would have provided security for retirement for hundreds of millions of Americans over the next seventy-five years. That’s less money than we spent in the bailouts of the banks, for which we have not been able to see any outcome. So it’s that kind of tradeoff that seems to me that we ought to begin to talk about.

AMY GOODMAN: So, you say Obama, too, has confused saving the banks with saving the bankers.

JOSEPH STIGLITZ: Exactly.

AMY GOODMAN: Should they all have been fired?

JOSEPH STIGLITZ: Well, I think one has to look at it on a bank-by-bank basis. Clearly, the banks that have not been managed very well, we need to not only fire them, we have to change their incentive structure. And it’s not just the level of pay; it’s the form of the pay.. Their incentive structures encourage excessive risk taking, shortsighted behavior. And in a way, it’s a vindication of economic theory. They behaved in the irresponsible way that their incentive structures would have led them to behave.

AMY GOODMAN: Explain that.

JOSEPH STIGLITZ: Well, if you get an incentive structure where you say you get huge pay if things go well, but you don’t pay any consequences if things go badly, and you’re going to look at it only in terms of the profits that you make this year, not the losses that you make next year and the year after, then of course you’re going to try to get a gamble, because if you gamble and you win, you walk off with the money; if you lose, somebody else picks up the losses.

So what happened was, the banks gambled. They gambled very big. They had big profits for four years. But in the fifth year, the losses were greater than all the profits that they had in the first four years. But meanwhile, they walk off with the bonuses based on the four-year performance, and then, the fifth year, they don’t-I mean, it was quite remarkable, they didn’t even-they even got big bonuses for the record losses. Then that’s what, of course, has gotten Americans angry, so that the bonuses were described as incentive pay. But that was all a charade.

But the basic thing is, you know, our bankers are-many of them, not all of them-are, you might say, ethically challenged. But even were not they ethically challenged, the fact is they had incentive structures that led them to behave in the way they did.

AMY GOODMAN: Should the banks be nationalized?

JOSEPH STIGLITZ: Many of the banks clearly should be put into, you might say, conservatorship. Americans don’t like to use the word “nationalization.” We do it all the time. We do it every week.

AMY GOODMAN: Explain.

JOSEPH STIGLITZ: Well, if banks don’t have enough capital so that they can meet the commitments they’ve made to the depositors, at the end of every week the FDIC looks at the balance sheet, and it says, “You don’t have enough capital. You’re not allowed to continue.” And then what they do is they either find some other bank to take it over and fill in the hole, or they take it into government control-it sounds terrible, to take it into government control-and then sell it.

And that’s what other countries have done when they faced this kind of problem-the countries that have done it well. One of the important lessons is this is the kind of thing can be done well, could be done badly. And the countries that have done badly have wound up paying to restructure the bank 20, 30, 40 percent, even 50 percent of GDP. We’re on our way to that kind of debacle. But that shows you how bad things can be, how costly it can be, if you don’t do it well.

AMY GOODMAN: We’re talking to Joe Stiglitz. He won the Nobel Prize in Economics in 2001, professor at Columbia University, former chief economist at the World Bank. We’ll be back with him in a minute.

[break]

AMY GOODMAN: Joe Stiglitz, our guest, he’s the Nobel Prize-winning economist from Columbia University and co-author of The Three Trillion Dollar War: The True Cost of the Iraq Conflict.

So, you’re saying small and big banks are being treated differently.

JOSEPH STIGLITZ: Very much so. The small banks were shut down. The big banks-Citibank, Bank of America-we’re giving huge bailouts.

Most interesting case is actually AIG, not even a bank, and we poured in $150 billion. Originally, they said they only needed $20 billion. And then, every few hours, every few days, the losses got bigger, [inaudible] another $60 billion. Now, that fact, the fact that we keep getting bad news and have to pour money in, should make us really worried. The question is, why did we bail out AIG? What they said is, the reason we bailed it out is if we didn’t bail it out, there would be consequences somewhere else. They didn’t tell us where.

It would make much more sense if we looked at where the consequences were and deal with the problems as they turn out. Just for instance, some of the, quote, “insurance policy derivatives” were not in the United States. The people that would have problems may be gamblers, may be other institutions abroad. Do American taxpayers want to be bailing out institutions abroad? That’s a question we ought to be debating. There may be pension funds that may be hurt. Well, some of the pension funds may be able to withstand it; other pension funds will need to have assistance. But let’s get the money going to where we think it ought to go, rather than this trickle-down approach that we’ve been using with AIG.

AMY GOODMAN: Very quickly, which countries do you think did things well, and which didn’t?

JOSEPH STIGLITZ: Well, Sweden and Norway did things very well back in the end of the ’80s, beginning of the ’90s.

The UK, I think, has been doing it much better than the United States. Its problems are bigger- we have to realize that-because its banking sector was a more important part of the economy, and one of the banks actually had liabilities greater than the GDP of the UK.. So it’s going to be facing a very difficult time. But the fact of the matter is, the way Gordon Brown did it, replacing the heads of the banks-it was real sense of accountability there. Government got control and shares commensurate with the money that it was paying in-it wasn’t a giveaway-and now trying to make sure that they start lending, forward-looking. So it’s clearly-they have a much clearer concept of what is needed.

AMY GOODMAN: Why is Obama saving these bankers?

JOSEPH STIGLITZ: Well, we could all guess about the politics. We know one of the problems about American politics is the role of campaign contributions, and that’s plagued every one of our major problems. Under the Bush administration, we couldn’t deal with a large number problems, like the oil industry, like the pharmaceutical, the healthcare, because of the influence of campaign contributions. Now, my view is, one of the problems is that whether it’s because of that or not, it lends an aura of suspicion. The fact that there was so much campaign contributions from the financial sector at least raises the concern.

Now, there is one other legitimate concern, that Wall Street has done a very good job of fear mongering. They say, “If you don’t save us, the whole system will go down.” But, you know, when these banks that I talked about before, when they go down, there’s not even a ripple. The fact is, you change ownership. It happens on airlines all the time. An airline goes bankrupt, a new ownership, financial reorganization-not a big deal. What they’ve succeeded in doing is instilling a sense of fear, so that it’s a kind of paralysis that hangs over what we’re doing. And you could understand a politician. He’s been told if you do one thing, the whole system-the sky is falling, it’s going to fall. That induces political leaders to try to do the smallest incremental step, and that’s what got Japan in trouble.

AMY GOODMAN: And your thoughts on Geithner and Summers? Can they handle this? What do you think of them as the economics team?

JOSEPH STIGLITZ: Well, the question is, are they willing to take the bold measures that are necessary? Everybody keeps saying we need to take bold measures, inaction is not a possibility. That’s not the issue on the table. Action will be taken. The question is, which action? Is the action pouring more money into the banks without any effect on lending, increasing the deficit, which the President talked about, or the actions which could be taken, starting on new banks, looking forward rather than looking to the past, significant financial restructuring?

Are we going to bail out the shareholders, bail out the bankers, rather than focusing on saving the systemically important parts of these institutions? There are some important parts of these institutions that we’ll have to save. The question is, are you going to go do it like with a bludgeon, throw money at it, or are you going to try to do it more surgically and save the parts that need to be saved? And one of the things that went wrong is when we went-let Lehman Brothers go. It caused this enormous trauma. And that’s increased the fear about-but that’s an example of doing things wrong. We didn’t ask the question. There was a systemically important part of Lehman Brothers.

AMY GOODMAN: Which was?

JOSEPH STIGLITZ: Which were the commercial paper that was part of the money market funds that were-people were using like banks, like part of our basic payment mechanism. We could have saved that part and let the gambling part of Lehman Brothers, which is not part of the payment mechanism, go down. And because we took this blunt approach, we failed. And what the financial markets are doing are saying, “You have to save everything, if you’re going to save anything.” And that’s just wrong.

AMY GOODMAN: Tomorrow, President Obama is going to announce plans to cut the deficit in half. Do you think that’s the right way to go?

JOSEPH STIGLITZ: What we have to remember is we are in for almost like-most likely a long and extended downturn. Now, we will eventually recover. That’s not a question. But in 2011, 2012, will we be in a sharp recovery or in a more slow recovery?

One of the lessons from Japan was that in 1997, when they were in the beginning of their recovery, they increased taxes because they wanted to get rid of their deficit, and the economy sank down back into a downturn.

The way to look at it is the following. Right now, in 2009, 2010, we’re talking about, per year, something like a stimulus bill of $350 billion per year. To cut the deficit in half, with a deficit as we go into-without the stimulus is one-and-a-half trillion dollars, so we’re talking about pulling out $600, $700, $750 billion. That’s the reverse of an expenditure, taking out the stimulus and cutting back expenditures by another $600 billion-we’re talking about a turnaround of a trillion dollars. Do you really believe that by 2010, by 2011, 2012, our economic recovery will be so strong that it can withstand that kind of taking out of expenditure? I don’t think so. And so, if you went ahead and did that, we will go back into a downturn.

AMY GOODMAN: Joe Stiglitz, you co-wrote The Three Trillion Dollar War: The True Cost of the Iraq Conflict. Talk about the effect of war on the economic crisis. And now we’re not only talking about Iraq. But your thoughts on increasing the number of troops, intensifying the war in Afghanistan?

JOSEPH STIGLITZ: Well, first, let me say, one of-the President did have two things that I really welcome. And several of the suggestions that we made in our book, he has adopted. For instance, in the past, under the Bush administration, the war was totally funded by-or almost totally funded by emergency appropriations. It was as if every year was a surprise. And he said he’s going to put that on the books so that we can evaluate it, make sure their money is going in the best possible way.

A second thing in our book that was, you know, really-was really, I found, very moving was the way we treat our veterans is terrible. And he said, you know, they fought for us; we have to fully fund the Veterans Administration. So those were really important moves in the right direction.

But on the other side, the move into Afghanistan is going to be very expensive. Things are not going very well. Our European-those who-NATO partners are getting disillusioned with the war. I talked to a lot of the people in Europe, and they really feel this is a quagmire, we’re going into another quagmire. And one of the things that we do talk about in our book is that if you keep a residual force in Iraq, it’s going to be very expensive. That’s the experience that Britain has had. They’ve kept a relatively few troops, and the result of that is the savings that they had hoped weren’t materialized. So that goes back to the part that he talked about at the end of his speech: the deficit. If you’re going to be spending all this money in Afghanistan and in Iraq, that deficit is just going to be that much greater.

AMY GOODMAN: So you think Obama is wrong on Afghanistan?

JOSEPH STIGLITZ: I think so.

AMY GOODMAN: Have you told him? Have you been talking to him?

JOSEPH STIGLITZ: Not on that issue.

AMY GOODMAN: You’ve been talking to him, though?

JOSEPH STIGLITZ: During the primary and the period afterwards in some discussions about what to do with the banks. There were discussions. The-

AMY GOODMAN: Meaning you talked to him-

JOSEPH STIGLITZ: Yeah.

AMY GOODMAN: -on the telephone.

JOSEPH STIGLITZ: Yeah.

AMY GOODMAN: I wanted to get your response-after President Obama spoke, the Louisiana Governor Bobby Jindal gave the Republican Party’s official response. He blasted President Obama’s stimulus bill as an irresponsible piece of legislation.

GOV. BOBBY JINDAL: Democratic leaders in Washington, they place their hope in the federal government. We place our hope in you, the American people. In the end, it comes down to an honest and fundamental disagreement about the proper role of government. We oppose the national Democratic view that says the way to strengthen our country is to increase dependence on government. We believe the way to strengthen our country is to restrain spending in Washington, to empower individuals and small businesses to grow our economy and to create jobs.

AMY GOODMAN: Louisiana Governor Jindal. Your response, Joe Stiglitz?

JOSEPH STIGLITZ: I wish he had taken an economics course. The fact is that when the economy is weak, as it is, you need to stimulate aggregate demand. If you don’t do that, the economy gets weaker. And what’s good about most of Obama’s plan is that it’s creating assets. So, while the liabilities go up-we’re going to have to borrow-we also are creating assets. If we had spent a few billion dollars under the beginning of the Bush administration on the levees in New Orleans, we would not have had to spend so much money in the cleanup, in dealing with the devastation that it brought. That would have been money that would have had an enormous return. $5 billion would have saved $150 billion. And so, that’s an example where there are certain kinds of investments-investments in technology, investments in people-that the private sector can’t do and the government can do in ways that give us a very high return.

AMY GOODMAN: Joe Stiglitz, very briefly, the whole issue of globalization-we’re in the tenth anniversary of the mass protests in Seattle, the Battle of Seattle. What about the questions raised in corporate-led globalization?

JOSEPH STIGLITZ: Well, I think two very important issues. One of them is the model that was behind much of the impetus for that globalization was a model based on free unfettered markets. And we know that model, deregulation, has failed. That was the kind of thinking that led into the problems the United States is in today.

The second point is that while we talk about free and open markets, what the United States has been doing has destroyed a level playing field and will have profound implications for the evolution of globalization going forward.

AMY GOODMAN: And for developing countries?

JOSEPH STIGLITZ: And for developing countries, it’s having a devastating effect. I mean, just a couple days ago, the other American banks were complaining about the huge subsidies that were given to Citibank. They say, “How can we compete when the government is subsidizing Citibank to that extent?” Now, if you think these other American banks that have gotten massive subsidies are complaining, you can imagine the kind of feelings that people have in developing countries that say, “We can’t afford those mega-subsidies. How can we compete against Washington being able to write a check any time anything goes wrong?”

AMY GOODMAN: And healthcare? He’s called for universal healthcare, but he does not call for single-payer healthcare.

JOSEPH STIGLITZ: I think that there are some fundamental problems in the efficiency of our healthcare system. And what we’ve seen is that the private healthcare insurers do not know how to deliver an efficient way.

AMY GOODMAN: Do you support single-payer healthcare?

JOSEPH STIGLITZ: I think I’ve reluctantly come to the view that it’s the only alternative. You know, we’ve tried a lot of other things. And we’ve been-you know, I was in the Clinton administration, and we debated a lot of alternatives, and I’ve watched things as they’ve emerged and, you know, evolved over the last twelve, sixteen years, and I think there’s a growing consensus that the private market exclusion is not going to work.

AMY GOODMAN: Joe Stiglitz, I want to thank you for being with us, the Nobel Prize-winning economist, professor at Columbia University, co-author of The Three Trillion Dollar War: The True Cost of the Iraq Conflict.