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Yves Smith has written the popular and trenchant financial blog "Naked Capitalism" since 2006.
Yves has spent more than 25 years in the financial services industry and currently heads Aurora Advisors, a New York-based management consulting firm specializing in corporate finance advisory and financial services. Prior experience includes Goldman Sachs (in corporate finance), McKinsey & Co., and Sumitomo Bank (as head of mergers and acquisitions). Yves has written for publications in the United States and Australia, including The New York Times, The Christian Science Monitor, Slate, The Conference Board Review, Institutional Investor, The Daily Deal and the Australian Financial Review. Yves is a graduate of Harvard College and Harvard Business School.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. February 6 is the 100th anniversary of the birth of Ronald Reagan. Now joining us from New York City to talk about Reaganomics and his legacy is Yves Smith. She's the author of the book ECONned and the creator of the website NakedCapitalism.com. Thanks for joining us, Yves.YVES SMITH, AUTHOR, BLOGGER: Paul, glad to be here. Thanks so much. JAY: So we're hearing President Reagan was one of the great presidents, and the front that he is perhaps lauded most on is on the economy. And we hear it from all sides, not just from the right. The--many people in the Democratic Party and in certainly--broadly across the media applaud the legacy of Reagan. Is it deserved?SMITH: I would disagree 100 percent. Reagan was one of the key moving forces, along with Maggie Thatcher, of giving the deregulation movement real headway. And, now, admittedly, deregulation started under Jimmy Carter. That part of the story often gets airbrushed out. But the big deregulation movement and the whole notion of let markets have their way started under Reagan. And in a way it wasn't even symmetrically letting--having markets have their way, because here the notion is that he was very much opposed to things like unions. You know. The--I mean, one of his most famous act was breaking the air traffic controllers union.JAY: Even though he used to be president of the Screen Actors Guild.SMITH: Exactly. That was one of the ways he rose to prominence. And the Screen Actors Guild still exists. And we still have a number of what amount to white collar unions. You know, we have accountants, doctors, lawyers. Those are effectively unions, and nobody objects to those. So the antiunion movement has really been very much along class lines, because the blue collar unions, the manufacturing unions, gave labor bargaining power against corporations. So there's a big asymmetry here in theory of what happened under the Reagan era versus actual practice.JAY: Now, his supporters will say that weakening the unions, weakening regulation, is what gave rise to prosperity, that that's--. You know, they'll agree with everything you said. They'll just say it's all--that was all a good thing for the economy.SMITH: That causality's never been proved. I mean, in fact, there are a lot of studies at the time, when they were first looking at deregulation, in the Carter era, on this. The Carter aide who was responsible for--who nevertheless took this initiative on, it even would even talk about--they would use expressions like "believed benefits". They--because everybody knew that the benefits of--the idea that deregulation promoted efficiency were not proven. So the idea that the regulations were actually hamstringing the economy is an urban legend that everybody's bought into. I mean, if you go back to the records of the time in the 1970s, it's very clear no one could produce any research to support this thesis and that, believe me, they were doing everything they could to try to prove it.JAY: So in terms of deregulation, what are some examples of the deregulation that you think had negative consequences?SMITH: Well, the big one is the deregulation of the financial services industry. Now, you can make an argument that in certain cases there could be--you know, of--in goods markets, that there might be regulations that were inefficient that were well drafted. You know, certainly a lot of times legislators might take a first pass at regulation which, two or three years down the road, it's discovered to have problematic side effects. You know, you can debate around that issue. But financial services, you have companies that have state guarantees. That's the bottom line with the banking system. Ever since the 1930s, we in advanced economies have made the decision we're not going to let the banking system fail. So if you don't regulate banks, you have set up the situation that we have now, which is that you have socialized losses and privatized gains. And what have we seen come out of that? Financial crises. When we had a heavily regulated financial system, we had nearly 40 years of hardly any financial crises. When we started deregulating the banks, you saw increasing in frequency and increasing in significance financial crises directly resulting from that.JAY: The savings and loans crisis or collapse happens during the Reagan years.SMITH: That is correct. I mean, they start--they became severe. They were actually unwound afterwards, but they started falling over in the later Reagan era.JAY: What was President Reagan's role in the savings and loans collapse, that era's version of the financial meltdown?SMITH: Well, again, it wasn't as if he directly went out and authored the legislation, but the attitude at the time, which his administration was promoting very aggressively, was the notion that anything that happened out of market activity was virtuous. Now, in fact, ironically, Reagan himself had to backpedal hugely, because when part of that was not intervening in trade, when we started having very big trade deficits, we had a very strong dollar, we started getting enormous trade deficits, we saw a lot of loss of manufacturing to Japanese manufacturers. I mean, it happened much faster because of the strong dollar than it would have happened otherwise. And Reagan got so concerned about it when unemployment went over 8 percent that he went in and pushed for something called the Plaza Accord in 1985, which was coordinated intervention by the then-G5 to drive the dollar down. So here it blew up on his watch. Free markets, the dollar goes up, American manufacturing starts hurting, we have big unemployment, you know, and suddenly he has religion and is fighting the markets. So he wasn't even true to his own ideology.JAY: So how do you explain why not only is--does the conservative opinion lionize President Reagan, but much of the leadership of the Democratic Party does, too? They don't take on this, you know, sort of what seems to be the truth of the Reagan economics.SMITH: Well, that's because the entire country has moved to the right. I would argue that Reagan's big accomplishment is very forcefully shoving the country in a rightward direction. And that trajectory has continued to today. So what--. I consider myself to be middle-of-the-road Reagan era, and I'm stunned that my position, having not moved, is now considered to be left-wing. I went to Harvard Business School in--I graduated in 1981. My position might even--relative to my Harvard Business School peers might have been even a little conservative. So I'm shocked at what's happened to the country. And so what--the Democratic Party is really ideologically not very different from the Republicans in its posture towards business, despite the fact that the Chamber of Commerce loves to sort of brandish the socialist flag every time anybody dares breathe an idea that might be slightly inconvenient to business. The vast majority of Democrats are very business-friendly.JAY: So the leadership of the Democratic Party, what some people call the corporate Democrats, more or less have picked up the Reagan legacy. So that's why they also idealize him.SMITH: Right. I mean, you know, obviously there are some important differences. You know, the Democrats are willing to talk more in terms of redistributed taxes. You know, they--not to say that they're identical, but in terms of their general posture towards business, the Democrats are slightly more pro-regulation. But even then, they are very--push comes to shove, they are very low to push very hard. That's why Dodd-Frank came out the way it came out. You know, I mean, you can look--. That's why the health care bill came out the way it came out. You know, this is--the health care bill amounted to a boondoggle for big pharma and the health insurers. You know, they came out ahead of the game. That should not have been how this equation worked.JAY: Thanks very much for joining us, Yves. And if we're going to keep doing more interviews like this, we need you to find the donate button and do that. Thanks again for joining us.
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