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Rob Johnson is the Director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute and is a regular contributor to the Institute's blog NewDeal2.0. He serves on the UN Commission of Experts on Finance and International Monetary Reform.
Previously, Dr. Johnson was a Managing Director at Soros Fund Management where he managed a global currency, bond and equity portfolio specializing in emerging markets. He was also a Managing Director at the Bankers Trust Company. Dr. Johnson has served as Chief Economist of the US Senate Banking Committee under the leadership of Chairman William Proxmire and was Senior Economist of the US Senate Budget Committee under the leadership of Chairman Pete Domenici. Dr. Johnson was an Executive Producer of Taxi to the Dark Side, an Oscar Winning documentary produced and directed by Alex Gibney.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in New York City. The crisis in Europe continues. Various forms of proposals for bailouts. But one thing is constant: everything seems to be predicated on the issue of whether banks are going to be repaid or not. Even though thousands of people, sometimes hundreds of thousands of people, are hitting the streets in opposition to the policies of austerity, the policies continue down that path. Now joining us to unpack all of this is Rob Johnson. He's the senior fellow at the Roosevelt Institute and executive director at INET. Thanks for joining us again.ROB JOHNSON, SENIOR FELLOW, ROOSEVELT INSTITUTE: My pleasure.JAY: So why does what's going on in Europe matter to North Americans?JOHNSON: It matters for two reasons, the first of which is turbulence over there in their financial system can propagate right back into this fragile recovery in the United States and send us down again. Just like our Lehman episode, from the housing bubble, took Europe and Latin America and Asia right off of its feet, something emanating from Europe could do the same to us. Second reason is that Europe is this composite of many, many different countries and cultures. It's a rather fragile, what you might call democratic system, as a whole, and it's a work in progress. And breaking it up now through the extremes of austerity in places like Ireland, Portugal, Spain, Italy, Greece, obviously, could lead to what you might call hostilities. You know, this isn't like we all are Americans and just living in different states. These are completely different cultures.JAY: It's not that many years ago that mostly what Europeans did was slaughter each other. I mean, there's hundreds of years of them killing each other.JOHNSON: I--how do we say? Economists tend not to look with such a long lens, but historians see that as imminently possible that something like that in the medium term could return, not only disrupting commerce but disrupting the balance and the balance power on the entire planet.JAY: Now, in an earlier interview, we talked about how investors or Wall Street and other people sitting on a lot of money are using and going to use municipal crisis, state budget crisis to start big campaigns of privatization. And we're already seeing models for that in Europe, and particularly in Greece, that this is the part of the prescription they're offering up. So how much do you envision what's going on there could happen here? But let's start with what's happening there.JOHNSON: Let's start with what's happening in Europe in the large. They built a system that's a political bubble. And what I mean by a political bubble is everybody's trading on the notion that Germany guarantees everything. And the idea is Germany's the strong hand. They guarantee everything. So everything's priced as if it was the credit quality of Germany. And Germany, by playing along in that European system, is essentially writing an insurance contract. And you know how insurers are. When they're collecting your premiums, they're smiling, but when an accident happens, they try to wiggle off the hook. And what happened, beginning in 2009, was Angela Merkel stood up and she said, we're not going to guarantee all the banks of Europe. Every man, every country for themselves. And she divided Europe. Where all of a sudden the Irish had been part of the European system, they had an enormous amount of bank liabilities relative to their GDP, and now they were left on their own to guarantee themselves. Well, as they say too big to fail, well, these were too big to save. The guarantees were not credible. So now, all of a sudden, you had all of these fault lines within Europe emerging again. And the--late 2009, early 2010, they could see that Greece, Portugal in a downturn, potentially Spain and Ireland, were all in jeopardy. And an ounce of prevention would have been a pound of cure at that time. But that would have been everybody banding together and the Germans providing guarantees to the others and making good on that promise, which they didn't do.JAY: And part of that, this guarantee, wasn't just out of the good-heartedness of the Germans. German exports were profiting enormously because of the way Europe was structured.JOHNSON: Europe as a whole is largely in trade balance, with Germany the surplus country and the rest of peripheral Europe the deficit country. Now, Germany in the current circumstance is actually reorienting their trade towards Eastern Europe and towards the far east. And they have been growing strongly and may come out really vital. But Southern Europe now is struggling a great deal, and the Germans are very reluctant. And this isn't about a logic. For instance, Wolfgang Schauble, the finance minister, is very acutely aware of this and wants to provide those guarantees. But the internal politics of Germany between the Free Democrats, the SPD, and the Christian Democrats is a constant fight, and right now it doesn't look as if there is a coalition that can rule the country that clearly wants to conserve and rebuild that common Europe that they embarked upon a few years ago, at this time when they're, what you might say, the insurance that was given, the guarantees that were given, would have to be collected on. Germany is not showing itself to be the strong hand. That's why I called it a political bubble, 'cause they have to make good on the deal. They don't get to choose now whether they join Europe. They chose that years ago. And now they have to pay the price, and they're reluctant to do so, and they're waffling.JAY: So if you're sitting in German seats and you look around at the countries they're calling the periphery, and they're trying to push Italy into that now, into what--the periphery, these policies of austerity, one would think, are going to lead to a decade or more of deeper recession, which you would also--you would think, would hurt Germany, because these were such important markets for German products.JOHNSON: Well, it could hurt German banks, 'cause they have a lot of credit extended to places that are now going to deflate and default. And it could hurt German commerce, 'cause it was a source of demand, as you had suggested. And at the other side, it could actually make, if you push these places down far enough in austerity, acquisitions on the cheap. In other words, you might be able to buy an island or a [crosstalk] company or whatever.JAY: Well, that's what I'm about to ask you. Who benefits from this is what I'm asking here.JOHNSON: The people who have money for potential acquisitions in the future.JAY: Can pick the bones of these countries.JOHNSON: You know, one of the things people always talk about, why was there a big construction boom in Spain, well, in the old days, you buy a vacation house on the Spanish coast, it was kind of nice, except you knew every 15 years you were going to take a hit, 'cause the Spanish peseta was going to devalue. Once you had a vacation home denominated in euro and inside the euro system, the value of that home was worth more because you didn't fear that depreciation. As a result, there was a building boom. As a result, lots of people from Northern Europe bought homes in Spain thinking they were now part of the common currency system. I don't buy a home in California in fear of depreciation. I think California's part of the dollar zone. Well, that change spurred a real estate boom in Spain and other coastal places.JAY: So you have this boom in Spain, and now you have a crash.JOHNSON: And now you have a crash in Spain. The building boom is over, and people are again beginning to fear that if Greece and Portugal and Ireland have problems, it can propagate up. If the Germans don't step in, and the French, and the Dutch, to provide the guarantees, then the euro system can break up and the Italians and the Spanish can become, how you say, individual countries, own currencies, and risky again. But it's a terribly complicated process to take a common currency union and take it back apart. So I still think it's better than a 50 percent chance that that won't happen.JAY: So if you look at who benefits from these severe austerity policies, number one, you create these crises where you can privatize.JOHNSON: When people get in distress, they sell assets at distressed prices.JAY: And is the other part of it that the banks are just absolutely fixated that they need to get repaid, and they--you know, apres moi le deluge--pay us today, and we'll figure out a way to make money out of the disaster that comes tomorrow?JOHNSON: Well, there's part of that. But there's also a fear right now that concerns me a great deal. At the one level we're told to treat the rating agencies and the banks like they're the wise men, they're, like, the prudent, they're the ones that understand discipline, etc. Why we think that after 2008 is beyond my imagination, but that is the ritual. At the same time, we are being told that you cannot restructure. I mean, you know, when a corporation goes bust, like an airline or whatever, you just do a restructuring of the debt, and the equity's wiped out. This is almost like engineering--it's pretty mechanical. But we're being told you can't do that to Greece because it creates contagion, contagion of two forms. One, what you do for Greece is a precedent for what happens to Portugal, Spain, Italy, and it gets bigger and bigger. But the second thing is they have these derivatives--credit default swaps are the most notorious--and they're intertwined through the entire system, and nobody knows how much they are, because there's no law or rule that says they can only be as large as the insurable risk, meaning the size of outstanding Greek debt. So people like Jean-Claude Trichet have no idea, if they restructure Greece, what they are unleashing not only within Europe but in the world financial system. And so we're at a place where something the size of Rhode Island or Nevada is holding the world hostage. And what's happening is, when it's holding the world hostage, the world says, well, we can't adjust these things financially, we can't do the restructuring, so we have to grind down the people of, say, Portugal even further. And then you run into the question: can these democracies withstand that much austerity? Or will they rupture? Will they become like a--there's an old saying in engineering, the elastic limit of a material. You pull it, it springs back. If you pull it too far, it deforms. Well, we deformed the democracies of Portugal and Greece and Spain, and potentially Ireland, because we have to put them through the wringer too hard. When--for hundreds of years, when you get people into that much debt, you do restructuring. You have bankruptcies. In the religious literature they called it a jubilee.JAY: It's not that long ago there was dictatorship in Greece.JOHNSON: That's right.JAY: And in terms of deforming democracy, if it's in the most narrowest sense German interest to break this partnership, there's certainly, you know, the historical roots of what extreme German nationalism looks like. Are we starting--you know, is the potential here to start seeing some of the earlier parts of the 20th century repeated?JOHNSON: Well, when you saw the banking crisis of 1931 which emanated from Austria and Germany, there were plenty of things that a logical financier could step back and say, systemically you can do this about the past. But the politics couldn't produce the result. And the result the politics produced enraged people, and it enraged people to the point where they didn't trust in government. The government became more dysfunctional. The trust further deteriorated. And as you know, the system degenerated and ended up in a world war. That--those are the real stakes. That's the long-term stakes of something becoming dysfunctional which could have, in February 2010, been solved. But when I say solved, somebody had to pay a small amount of money in the scheme of things, a much smaller amount of money than we will ultimately have to pay even now. But you couldn't decide who paid at that time. And the banks were disproportionate powerful, so they were saying, even though those losses occur on our balance sheet, we're not paying.JAY: Rather than the US playing some role pushing in the other direction, this administration and this whole Congress is going down the same path.JOHNSON: Well, there we are, structurally deferential to the financial sector. As Dick Durbin says, the senator from Illinois, the banks own the place.JAY: Thanks for joining us.JOHNSON: My pleasure.JAY: And thank you for joining us on The Real News Network.
End of Transcript
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