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Crony capitalism unchanged Pt1


Robert Johnson: Only public money pushed the economy back from the cliff; it can all happen again -   December 29, 2009
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Bio

Dr. Robert A. Johnson - Executive Director of The Institute New Economic Thinking (INET) and a senior fellow at the Roosevelt Institute. Dr. Johnson served on the United Nations Commission of Experts on International Monetary Reform under the Chairmanship of Joseph Stiglitz. He is also the Director of Economic Policy for the Franklin and Eleanor Roosevelt Institute (FERI) in New York. Dr. Johnson was previously a managing director at Soros Fund Management where he managed a global currency, bond and equity portfolio specializing in emerging markets. Prior to that time, Johnson was a managing director of Bankers Trust Company managing a global currency fund. He also served as Chief Economist of the U.S. Senate Banking Committee under the leadership of Chairman William Proxmire (D. Wisconsin) and before that, he was Senior Economist of the U.S. Senate Budget Committee under the leadership of Chairman Pete Domenici (R. New Mexico).

Transcript

Crony capitalism unchanged Pt1PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in New York City. And today on the market here in New York, things are rather skittish—people looking at the crisis in Dubai, wondering if this is an indication of another unraveling. Some people say just another blip, but one thing or another, it doesn't take much to get people scared these days. How real is this recovery? Everyone's asking. To help us answer that question, and also answer the question why we're in this mess, is Robert Johnson. He's the director of financial reform at the Roosevelt Institute. He's also the new executive director of INET, the Institute for New Economic Thinking, which he's creating together with George Soros. Thanks for joining us.

ROBERT JOHNSON, DIRECTOR OF FINANCIAL REFORM, ROOSEVELT INSTITUTE: My pleasure.

JAY: So let's start with INET (Institute for New Economic Thinking). Now, George Soros—and you worked with Mr. Soros in his investment arm, and Mr. Soros made a lot of money under the current rules that govern speculation, and I'm guessing you did pretty good too. Why do you guys want to change the rules, why do you want new economic thinking, when it's been working so well for you?

JOHNSON: Well, what I would say is Mr. Soros' thinking is quite different from what prevails in the academic world. So-called rational expectations hypothesis or the efficient-market hypothesis is a far stride away from what he practices. Mr. Soros is in his late 70s now. He's been trying in his own writings to espouse what's happening in financial markets, and he's been ridiculed by academics for many years. The latest crisis, which is kind of a culmination of predictions that he'd been making for many years about the fragileness of the financial system, left him making money and being right, while many in the academic world had nothing to say. They did not prescribe preventive medicine, they did not diagnose the illness or the extent and depth of the illness, and they still can't explain what's happened. Mr. Soros is not only a financial speculator; he's an individual who cares about the future of the world.

JAY: Because as a speculator, if you got a lot, if you're sitting on a lot of capital, you can make a lot of money in this kind of situation with wild swings, and, you know, you can wait for things to dump, and you've got the capital to go buy back in. It's actually a very good situation if you're sitting on enough money.

JOHNSON: Well, when you know how the world works and the rest of the world doesn't know, you tend to be able to make a lot of money when you [inaudible]

JAY: So why do you guys want to fix this?

JOHNSON: Well, 'cause I think that you view life as more than just what you make personally and financially, and I think Mr. Soros is very strong in his belief that we've been way, way off course since the late '70s, in this era of free market fundamentalism, and he would like to see the world organized in a way that's much more productive for the economy and for the people of the world as a whole.

JAY: So what's this institute going to do?

JOHNSON: It's bringing together many of the leading academics from various different camps—the post-Keynesians, some of the Chicago school, some political scientists, some biologists, some regulatory officials. And we all agree, meaning 20 or 30 people that are on the board, that the current paradigm has been shattered and that it doesn't breathe with the life of what you might call inspiration from the real events in the world, it's not empirically well grounded, and its theoretical predictions, while being internally consistent mathematically, don't describe the planet on which we live. So we'd like to build a community to come together to resolve what you might say where the next direction is [inaudible]

JAY: If you look at what's going on in Washington and the kind of discussions that are going on about banking reform and financial reform, if you look what's happening on Wall Street, it's more or less back to business as usual. It's like, okay, we came close to going over the cliff, but we didn't go over the cliff, so let's go back to business again. There's certainly no sense that there's a fundamental fracture or that the system itself is broken.

JOHNSON: Oh, I would say everyone, if they're being truthful, will tell you we went well over the cliff and that we pushed them back up over the top with government money and the taxpayers and the bailouts and the guarantees.

JAY: But what's changed that would stop it from happening all over again?

JOHNSON: Nothing has changed in legislation, regulation, and that's very haunting. Many, many people now can see that the House bill that was just passed by Barney Frank's committee is really not up to the task. If you say to yourself, "Does Goldman Sachs still get to engage in proprietary trading with government guarantees?" the answer's "yes" under the new legislation. Could the collapse of AIG, where the credit default swap market collapsed, happen again if this bill were law? The answer is probably yes. Will the next Treasury secretary, like Henry Paulson was last fall, be able under new legislation to engage in crony capitalism, where it can hand out bailouts at his discretion, or does he have to follow rules? The current House bill does not make them follow strict rules that will penalize the bankers. I don't think that this is as much a failing of intellect as it is a failure of will, given the role of money in politics and given the power of the financial sector's money in lobbying.

JAY: If anything's changed, the banking sector now knows that public opinion has been prepared for this precedent or idea that they are too big to fail. And President Obama made this speech, and we're not doing this for Wall Street, we're bailing them out for Main Street. The concept is there now. So what's to lose if you do it all over again?

JOHNSON: Well, obviously, this too-big-to-fail and bailout, followed by a recovery of Wall Street and their bonuses and not the real economy, is very difficult to digest. The idea of the free market, what you might call the era of Alan Greenspan, has come to a crashing close. And whether or not the elites will pretend that it's not over or we can go back to business as usual, the public's not buying it. You can see it in the polls. You can see Mr. Obama—President Obama is being forced to come out and to castigate people who were his big fundraisers in his presidential election campaign 'cause the public opinion polls are saying they're not doing enough, it's not strong enough, it's not up to the task.

JAY: So let's dig into that a little bit. It's not that well known. I mean, people that follow campaign financing know, but it's not that talked about, the extent to which Wall Street was one of the early financiers of President Obama, and over the other candidates, including over, you know, New York senator Clinton. To what extent is that playing a role?

JOHNSON: Well, it was a fascinating thing. As you know, Tom Ferguson, who you've talked to, has done very detailed studies. And when Obama was 20 points behind Hillary Clinton, he was matching her dollar for dollar in 2007 among Wall Street fundraisers. So they obviously saw some promise in him. I wouldn't say now that he's elected president that he necessarily has to do a little payback like it's cause and effect, but one has to consider, coming up for reelection in 2012, when the unemployment rate's still likely to be pretty close to 10 percent, who's going to support his campaign.

JAY: Maybe part of the other issue that goes on here—and I don't know how much this affects the person Barack Obama or not, but it's not just too big to fail: it's also too complicated to understand; like, there's a deliberate complexity to all of this. And I'm not the biggest President Obama defender, but for him get his head around it and to think he needs to gather around him the people who know, so he gets the people from Goldman Sachs and people from Wall Street, and he surrounds himself because supposedly they know—. But talk a little bit about the fundamental philosophical assumptions these people have about the world and about the economy, 'cause you've been with them, you were one of them.

JOHNSON: Well, this complexity you refer to and this opaqueness seems to give a number of people license to believe that they can make decisions that are good for the society as a whole, because they're what you might call the elite ones who understand. Problem is—what is it Upton Sinclair used to say? That the ability of someone to not understand is highly correlated with where their paycheck comes from and the need to not understand in order to collect a paycheck. Well, I think there are an awful lot of people who get confused between their own personal wellbeing and the wellbeing of society. So the circle that's drawn in to this elite, what the Treasury secretary often calls "the adults", tend to take care of themselves, and they've left 90-some percent of the population behind the door [inaudible]

JAY: I guess it's an old—kings used to believe what's good for the king is good for the kingdom, and it was for a time what's good for General Motors was good for the society [inaudible]

JOHNSON: And you'd just as well have an "S" instead of an "M" in there—"GS" for Goldman Sachs.

JAY: In the next segment of our interview, let's talk about how this all works. What are the mechanics of this? Because it's—for people that aren't able to follow this, it seems so mysterious. And we're left with this idea that we need all of these—the derivatives trading, we need all these layers and layers of finance, financial complication, or somehow Main Street won't work, because I won't be able to get a house loan, and small business won't be able to get a loan, and without financial shenanigans on Wall Street, society will get paralyzed. That's what we've been told, so let's find out whether you think that's true or not. So please join us for the next segment of our interview with Robert Johnson.


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