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Professor Emeritus James R. Crotty teaches in the Department of Economics at the University of Massachusetts, Amherst. He is a Research Associate at PERI. He's a macro economist with broad interests whose research in theory and policy attempts to integrate the complementary analytical strengths of the Marxian and Keynesian traditions. His writings have appeared in such diverse journals as the American Economic Review, the Quarterly Journal of Economics, the Cambridge Journal of Economics, the Review of Radical Economics, Monthly Review, the Journal of Post Keynesian Economics, and the Journal of Economic Issues, and in many edited collections.
His research interests include: economic methodology; the implications of radical uncertainty for macro theory and policy; theories of financial markets and their implications for understanding financial booms and crises; Marxian and Keynesian perspectives on investment theory; the structure and performance of the global neoliberal economy; theories of competition and their impact on theories of macro dynamics; the financialization of the non-financial firm; and the political economy of South Korea.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay, coming to you again from the PERI institute in Amherst, Massachusetts. So who benefits from austerity? That's the question we've been asking in our interviews at PERI. Now joining us to talk further about this is James Crotty. He's a professor emeritus at Amherst, and he is also a senior fellow at the PERI institute. Thanks for joining us.JAMES CROTTY, PROF. EMERITUS ECONOMICS, UMASS AMHERST: My pleasure.JAY: Senior by age at least.CROTTY: At least, if nothing else.JAY: When President Obama was candidate Obama, he raised a lot of money on Wall Street. Early on in the campaign, when Hillary Clinton was ahead of him in terms of the polling, he was apparently raising more money than she was, which is not normal. Usually if you're ahead in the polls, you're raising more dough. So a big section of the finance sector supported Obama and wanted to get Bush-Cheney out. Now they seem a little bit--they could go either way. This last election, apparently, the finance--Wall Street gave a lot more money to the Republicans than they had in '08. What are the interests of--first of all, they may not be monolithic. So kind of describe Wall Street finance sector to us. And what do they want out of austerity? And where are they in terms of the politics?CROTTY: Well, the money that they gave to Obama was certainly a tremendous investment for them. In return for their investment in Obama's election, they got a set of people in the highest positions of government--at the Federal Reserve system, and in as the secretary of the Treasury, as chief economic advisor--are people who are all from Wall Street and essentially believed in Wall Street and believed that the financial system should be big and powerful, and it's run by the smartest people in the world, and we should do anything required to save them and the bondholders and bonuses of the rainmakers. And they did a fabulous job--Wall Street has bounced back. There are still problems, but the bondholders were bailed out and they didn't lose any money, and the top people, the rainmakers in these institutions, got returned to the fabulous growth, their enormous bonuses in the 10s of--20s, 50s, 100 million dollars. So that was a fabulous investment. That was quite sensible. I think that they got a little bit annoyed with Obama, because he did support, you know, some positive moderate regulations, which would to some extent restrict what they did--not near enough. They did--it's relatively weak legislation.JAY: And there were even some people in Wall Street that--they understood, like Soros, certainly, at any rate.CROTTY: Well, Soros is not in Wall Street. I mean, Soros has always been--walked to a different drummer. He's made immense fortunes. In that sense he's on Wall Street. But he's always been critical of the economic theories and ideologies supportive of deregulating financial markets. So Soros has never believed that financial markets should be completely deregulated, and in fact has his own theory about why financial markets go into bubbles and crashes and inevitably do so.JAY: But one of the arguments that seemed to be persuasive in the [Tuesday ] election was that it's because Wall Street knew government would come and save them, because they have--government had so much clout, and it's so big that Wall Street could do all the shenanigans, so that if you shrink government, don't have any regulation, get it out of the sector completely, if they gamble they lose. That's the theory, and people were persuaded by it.CROTTY: Well, that's one theory, but it's a kind of funny theory, because the financial institutions are enormous and huge and one of the biggest parts of the economy. They may be the most powerful institutions in the United States, in the global economy. So if you literally let them do anything that they wanted and they have incentives to take risks, to borrow money, to [be leveraged], and so on, if you allow them to do anything they wanted and they all crashed, the whole the global economy would crash. So nobody--it's not a believable scenario.JAY: Well, the argument is markets are essentially efficient if you leave them alone.CROTTY: Yes, and the argument is that Santa Claus comes down the chimney with the presents on Christmas Eve. This is the silliest set of arguments that have ever been created by serious intellectuals. If I told you the list of assumptions required to prove that markets are efficient, you would think I was kidding you.JAY: Like?CROTTY: Like people know the future, they know what's going to happen to--they know the correct distributions of all the money that will come for this stock and this bond and so on, so that they basically--it's--you know, it's like when you go to play dice or something, and there's probabilities involved in this, but they know the correct probabilities of the future, that there's no defaults, that nobody ever can--goes bankrupt, that people don't trade--.JAY: Well, they're arguing that you should let--the problem is the government didn't let people go bankrupt.CROTTY: I mean, there's two points. One is, should you let people go bankrupt. The second is, is there any reason why any sane person should accept the very inefficient financial markets. Now, no sane person--I mean, economists in some ways have swallowed a kind of methodological Kool-Aid which allows them to think that you can make realistic theories with totally unrealistic assumptions, but that doesn't make any sense at all. And the whole history of financial markets, over the history of capitalism and before, are boom-bust. That's what happened. So it's just crazy. Now, if you let them go bust and then you don't bail anybody out, but they're big and they're systemically connected and everyone's got money in them, then you can't let them go bust. What you could have done was to say that they're too big to fail; to break them up, so that you could let--they were small enough so that they could go down; to completely separate, as Paul Volcker kind of wanted, gambling activities from the normal activities of borrowing and lending that have to go on. But we didn't accomplish these things.JAY: So their argument, if I understand it correctly, would be the market would have done that; the market would have punished gamblers that lost.CROTTY: They would have punished gamblers, non-gamblers, people who save for their pensions, school systems who invest in pension funds. They would have lost everybody. Right? So what you have to have is a financial system which is small enough--it's probably three or four times too big to do the basic things that financial markets need to do, and in which the institutions are not so big and so powerful, and mixing up gambling with deposits and loans and so on. So what we needed was really good, strict, tight regulation, including getting rid of too big to fail, and including really strict Volcker rules about separating gambling from them. We didn't get that. And, moreover, these institutions are not really regulated by anybody effectively, because they operate in all the countries of the world. Citigroup, one of our biggest banks, gets something like 75 percent of its revenues from outside the United States. So it isn't, like, this little model that they have. It's really dangerous. And the Obama administration and the Congress failed to protect the American public from a recurrence of the problems that we just saw.JAY: And how close are we to an occurrence of what we just saw, a reoccurrence?CROTTY: Well, I wouldn't say we're particularly close at the moment. One of the problems is no one can answer these questions, that these institutions are so big that they do--they operate in so many places, with so many different kinds of businesses, so many different kinds of securities [inaudible] lending, they're not required to report to anybody in detail about what they own and what they owe, their assets and liabilities, so that even the presidents of the companies have no idea how risky they are. So we don't know. But there's no indication right at the moment that there's an insolvency problem or a liquidity problem.JAY: We understand that there's a lot of toxic assets that are kind of being hidden on the books.CROTTY: Yes. That's because the accounting rules, especially that Congress changed recently, allow them to keep toxic assets on their books and to report them at their historic face value.JAY: And this is essentially a bunch of lousy mortgages, mostly.CROTTY: Yes, and mortgage-related securities.JAY: And we've also heard from time to time that the commercial real estate market, you know, it may be taking another big hit.CROTTY: Yes, the commercial real estate market is quite shaken.JAY: So how fragile is it? Or we don't know how fragile is it [sic].CROTTY: I don't think we know how fragile it is. If we were going to effectively regulate the financial system, we'd need a revolution in the requirements that we have on their accounting and the information that they provide to the public and to the regulator. You can't--I've tried to do it--you can't read the reported balance sheets and income statements of a place like Goldman Sachs or any of the other big banks and have any idea what they're doing. They're broad categories; they mix things up together. The regulators don't know what they're doing. Nobody knows what they're doing. They're too complicated. And the securities, as you know--I'm sure you've had people on, interviewed--are so complicated that no one knows what their value should be.JAY: And now that the Republicans have come in, let's free, untie the hands of business, any further regulation is probably off the table, and they might even do some of what's been done.CROTTY: Yes. I think both of those statements are true. Presumably there's a limit on how much they can do. I mean, you know, the Democrats still, you know, control the Senate, and Obama has veto power. We don't know whether he'll think it to be good politics to use it. But a lot of the changes in the regulations said the regulators have the power to do X, Y, and Z--they're not obligated to do X, Y, and Z.JAY: And it all depends who gets appointed as the regulator.CROTTY: It's--all depends on who gets appointed to the regulators. It all depends on the committees in the House and Senate that oversee the regulators. And, for example, the Securities and Exchange Committee gets its budget from the Congress. So they can't even operate unless the Congress--financially unless the Congress supports them and gives them these budget things. So lots of things that could be done in the legislation may not be done, and the regulatory agencies that have some power may not be able to use it as aggressively now that the Congress is divided.JAY: Thanks for joining us.CROTTY: You're welcome.JAY: Thank you for joining us on The Real News Network.
End of Transcript
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