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  August 8, 2011

Meltdown on Monday

Rob Johnson: Fear of recession real cause of stock market crash
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Rob Johnson is President of the Institute for New Economic Thinking. He was previously Director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute and is a regular contributor to the Institute's blog NewDeal 2.0. He serves on the UN Commission of Experts on Finance and International Monetary Reform. Dr. Johnson was also 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. It was meltdown on Monday, stock exchanges around the world. The New York exchange apparently lost about $1 trillion on paper. Are we poised for a spiral into deeper recession? Or is this a blip in the markets? Now joining us to unpack all this is Rob Johnson. Rob was a former trader on Wall Street. He's now a senior fellow at the Roosevelt Institute. Thanks for joining us again, Rob.


JAY: So unravel for us. S&P does this downgrade on Friday. Most of the markets dismiss it as having any real significance. Nobody thinks the US is actually going to default on its debt. On the other hand, Monday, the big institutions jump in, selling off. Why?

JOHNSON: Well, the why is we just created a contractionary debt deal with a super committee going to meet to cut more out of the economy, where one in six people is unemployed. We're putting austerity into a slump. It's absolutely dreadful, foolish macroeconomics. And now it got blessed by the S&P, proving that two wrongs can never make a right.

JAY: Now, how much this has--does this have to do with an underlying fear that what's happening in Europe is going to continue to unravel? There's talk about--a nice term I heard on TV today from one of the money managers is sovereign raiders, the next target being Belgium. And there's even talk about France. What does this mean?

JOHNSON: What I would say is that the anxiety about Europe and contagion like Lehman Brothers was contagious in 2008 all around the world, people are very concerned that our out-of-control, too-big-to-fail financial institutions are so intertwined that someplace the size of the state of Rhode Island or Nevada can propagate through the entire planet. People have been concerned about Greece. When you step up to Spain and Italy, it gets bigger and it gets wilder. United States has been decelerating. It didn't do enough or long enough stimulus. We didn't orient the stimulus towards things like investment in productivity that could pay back that debt in the long run. And when we gave up the ghost and Obama lost the midterm election, capitulated into this austerity agenda, you drop a contagion banking crisis on top of that debt deal and the whole world starts to melt down.

JAY: Now, on top of the austerity agenda, is there also an agenda that some of the big players make money out of these big downward spirals, that they play volatility? I was talking to a commodities trader the other day, and he says one of the things that isn't getting talked about enough is how the big players in the market can sustain these big downward turns, and they wind up sitting on--they go into them sitting on cash, and then, when their smaller competitors get really demolished, they make money going short. They make--then they take all this cash and they buy back in and pick up bargains. And so some of this is actually--I don't know; what's the word?--deliberate.

JOHNSON: You might call it the children of Andrew Mellon, whose famous quote was liquidate, liquidate, liquidate. There are no question that there are lots of very smart bearish people with lots and lots of cash who will benefit from, what you might say, buying everything at half-price. It's like America goes on sale, Portugal goes on sale, Ireland goes on sale, Greece goes on super sale. Anybody that has big cash, anybody that can squeeze a governor in Wisconsin or California or any of these other states, can extract an awful lot and buy things at a very profitable level if they can keep the pain threshold up.

JAY: Yeah, that's something that's not being talked about again on TV very much. The people are talking about how the federal government can print money and one way or the other will pay off its debts, and that interest rates are going to be very low on federal Treasury bonds. But that's not the case for cities, for municipalities and states across the country, is it?

JOHNSON: They don't have a central bank that issues state currency. So they can issue debt, but they can't, what you might call, validate that debt in the way that Alan Greenspan explained on Meet the Press this weekend, that the United States can by running the printing press. The United States will not default. But the United States can't push on a string, either. Ben Bernanke can try all he wants, but until we come out of this madness with regard to fiscal austerity in America, we won't--. What we need right now is an infrastructure bank, education spending, science spending. What we need is infrastructure modernization, things that attract private investment. That requires a big retooling, like a Reconstruction Finance Corporation, like the building of the Erie Canal, like all the things that Felix Rohatyn wrote about in his last book. And none of those things are even on the drawing board right now, even though Obama told us it was a Sputnik moment. We are failing in a bipartisan way.

JAY: So what do you make of what we should be doing? I mean, we're--the rest of us, most of us are going to be affected by all this. How serious do you think this is going to get? And what should we be doing, demanding?

JOHNSON: Well, this evening, since I came home for this interview, I've had friends, old friends from the Middle East, from New Zealand, from China, and from France call me and ask exactly that same question. I think very intelligent investors, very intelligent policy analysts can see the gridlock in the United States, the austerity and turmoil in Europe, the reluctance of the Germans to fulfill their guarantee that they made years ago. They--as you and I talked about before, they wrote an insurance policy, they collected the premiums, but they don't want to pay out now that there's an accident. You see the Chinese turning inward. You don't see their exchange rate appreciating in order to take pressure off of manufacturing all around the rest of the world. It's every man and every woman for themselves. This is a system that's disintegrating right now. I do think we are potentially on the cusp of a downturn and a multicountry, self--how you say?--mutually reinforcing downturn that could be quite a bit like the 1931 banking crisis that led to the Great Depression, or, alternatively, in the United States, like 1937, when the orthodoxy won over Franklin Roosevelt and set us down for a second deep dip that wasn't quite as severe as the early '30s. But it was unnecessary, just like what's happening in America right now isn't necessary.

JAY: I mean, it's--from a political point of view, it seems almost weird that President Obama, who, if he goes into an economy--2012 with an economy like this, he ain't going to do very well. But he's not coming out swinging. He's still talking austerity and cuts. In the statement he made today, today being Monday, I mean, all he talked about was how S&P shouldn't have downgraded US debt, and Warren Buffett says it's really, you know, AAA or better, and so on and so on. There was no talk about any real stimulus program, and there didn't seem to be any sense from what he said of how serious the situation is. It was--it's all going to get better is what he was telling us.

JOHNSON: Well, he's employed what George Akerlof calls the confidence multiplier many times, and it's blown back in his face because he didn't, what you might say, deliver on the goods. I think Barack Obama's in real trouble now. I think he's in serious trouble for his reelection. I think you can see third parties. I think you can see primary challengers. And just with the deceleration at--starting at 9 percent unemployment, just like The New York Times talked about today, the next downturn starts from a base of fragility, and that we didn't really recover and repair our balance sheets in the last shot that happened in 2008. [crosstalk] I was going to say, Barack Obama's in trouble. And he's got to act like he represents people. When you look at the budget polls, what the American people wanted to happen is not what happened. What the American people are talking about is getting out of wars. What they're talking about is raising taxes on the wealthy. What they're talking about is rebuilding the basic infrastructure. And that's not what's happening. And I won't blame Barack Obama entirely, but I will blame him in one respect. He did not pitch a fit. He did not go nuts about doing the right thing. He tried to act like a referee, like a moderator. And he actually concurs blessing on the reasonableness of crazy policies that emanate from people on the radical right, people who are good souls, who believe that the American government is an insurance agency for the rich and powerful and just want to cut him off. Barack Obama needs to work to illuminate and to educate the American people on the ways in which government can help them realize, how do we say, the benefits and the optimism of their livelihood on doing real things on their behalf. When 3 percent of the population's taking all the gains, when you've got to raise $1 billion to remain president, when the other side's gnawing at your ankles, it's a hard, hard job. And he's not even making the case. I'd rather see the guy go out in flames than go out with a whimper like it appears he's doing right now.

JAY: Thanks very much for joining us, Rob.

JOHNSON: My pleasure.

JAY: And thank you for joining us on The Real News Network.

End of Transcript

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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