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Bob Pollin Pt.3: None of the fundamentals that led to the crash in ’08 have been corrected

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington. Now joining us again to continue our discussion about the state of the American economy and what to do about it is Bob Pollin. He’s the codirector of the PERI institute in Amherst, Massachusetts. Thanks for joining us again, Bob.


JAY: So, before we get into sort of what policy you think will get us out of this situation, or at least start down the road of getting us out of the situation, what do you make of what the bond rating agencies are saying? You’ve got threats to lower the creditworthiness of American Treasury bonds, and what is that about? If we take your argument from part one, that interest rates that are historic lows and the actual amount of money the federal government’s spending on servicing the debt is at a historic low, what the heck are the bond rating agencies talking about? ‘Cause if this was a company and it had a big debt, at the same time such low interest rating, service costs, you don’t think it would be getting threatened this way.

POLLIN: Well, you know, the bond ratings have–the bond rating agencies–Moody’s, Standard & Poor’s, Fitch–have already demonstrated their absolute low level of competence over the course of the bubble, when they were branding all these ultra-speculative deals and investment banks AAA, AAA, AAA, AAA. And, of course, they were getting paid by these same people to give these ratings. I basically–you know, all they do is they just reflect conventional wisdom. So if–you know, if the conventional wisdom is bubbled up in Washington and Wall Street that we’re in a debt crisis, then sure enough Moody’s, Standard & Poor’s are going to give that same reaction. I have not–like I said, I have not heard Moody’s, Standard & Poor’s, a major politician say that we are paying interest on our debt at a historically low level, though the facts are there for everybody to see. You would think that would factor in at least somewhat in Moody’s and Standard & Poor’s ratings, but you’re right; it hasn’t. The US is not about to default on any debts based on their ability to repay debts. We might default if the–you know, this manufactured crisis continues and we aren’t allowed to raise the debt ceiling.

JAY: Now, to what extent does Moody’s and S&P reflect maybe not really what they’re saying about, that they’re worried about a US default? But is there an underlying fear here of another meltdown, that there’s a panic that could start, either–perhaps sparked out of what’s happening in Europe? I know it wasn’t that long ago, I believe, with S&P, when they had this announcement where they were first talking about the possibility of lowering the creditworthiness of the United States. If you actually read the whole report that S&P issued, there’s a couple of paragraphs there where they do their kind of worst-case scenario for 2012, and they talk with great seriousness about another financial meltdown triggered by similar factors that triggered the ’08. I guess, as we all know, nothing much has been done on the regulatory regime as of yet that would stop it from happening again. Is there some of that beneath the surface, that there’s just this fear of another panic, another meltdown?

POLLIN: That certainly is factoring in more generally. I mean, the major causes of panic, though, is the manufactured debt crisis. I mean, if we just raise the debt ceiling–it could have happened–it wouldn’t have even been on the front page of the newspaper. No one would even know about it. We raised the debt ceiling 18 times already. So this is an entirely manufactured crisis. In terms of the panic, though, keep in mind part of the reason the interest rates are so low in the United States despite the high borrowing is precisely because of the panic. Because of the panic, US government debt is, like, the best thing people want to hold. That has been the case. So the more there’s panic all over the world, they say give me something safe, the financial market players say get me into something safe. And what’s the safest thing? US government debt.

JAY: Which is why the interest rates are so low.

POLLIN: That is the main reason, plus the fact of monetary policy. You mentioned quantitative easing. Basically it has been the policy of the Federal Reserve to keep government interest rates low. So the combination of the two things. So who knows? You know, were there to be a panic in Europe, which is a real possibility, that would most probably, as it has in the past three years, only intensify the eagerness of financial market investors to hold US government bonds as opposed to anything they could get in Europe, or for that matter anyplace else.

JAY: Well, just–I said we were going to get into our policy prescriptions, but maybe we’ll do that in the next segment, because I just have another question here. To what extent, then, is it in American interest that the rest of the world doesn’t get so stabilized so quickly, particularly Europe? I mean, as long as this, you know, crisis continues in Europe, as you say, the United States gets to borrow really cheap money.

POLLIN: Well, it depends on what you mean, Paul, by American interest. I mean, for most Americans, the most important thing is to create jobs. That’s the American interest [crosstalk]

JAY: I should say American,–

POLLIN: Wall Street interest.

JAY: –Wall Street, and perhaps government interest, from the point of view of borrowing cheap money.

POLLIN: Well, yeah. I mean, we have gotten a free ride. It has been in a sense unfair. I mean, you know, if Greece had our situation, there would be no crisis in Greece. The point is: Greece does have a crisis, ’cause they don’t know where to come up with the money to pay their bills next month. We have absolutely no problem with that whatsoever. We can cover our interest payments easily. So, yes, we have gotten a free ride. Now, whether people want that to continue in Europe I don’t know. I don’t actually even see the logic, because once things get really severe in Europe, you know, all kinds of things can spin out of control, including things that would be bad for Wall Street.

JAY: When–I guess one of the votes of confidence in the American debt situation is the fact that China keeps buying and, as you say, the world keeps buying American T-bills. But is it because it’s–they believe in it? Or there just isn’t any choice? Like, how much of this is sort of that the system itself is kind of running out of alternatives here, so everyone’s betting on this American T-bill? But if you look at the underpinnings of the ’08 crisis, the underlying factors, both in terms of financial speculation on that side and lack of real demand because of low wages in terms of what they call the real economy, nothing’s changed.

POLLIN: No. No, we haven’t solved the financial imbalances. I mean, we are not as severe as we were in ’08, but we’re heading back in that direction. You do have–the stock market had been going up. You don’t have the–you know, the prices of the stocks are going up much faster than profits. So the standard measure of balance in the financial markets, the price of assets relative to their earnings, the price-to-earnings ratio, is going up. That’s an indicator of imbalance. On top of that, we have all this talk about crisis both in Europe and in the United States. So, no, the basic fundamental things have not been solved. I mean, there was a moment early in the Obama administration, as part of the stimulus, where the short-term stimulus program was also seen as a way to start channeling into a restructuring of the economy long-term, through investments in infrastructure and the green economy. Long-term, I think that’s an important part of the solution, as well as having a much more equal income distribution that would stimulate market demand.

JAY: Yeah, President Obama in the last week or two hasn’t even talked about this anymore.

POLLIN: No. That’s what I’m saying. I mean, we have been consumed by this entirely manufactured crisis, Democrats and Republicans. So even, you know, this important issue of the crafting of the financial regulatory system is not even on the table anymore; it’s not even discussed. So we have been entirely distracted from the real crisis of unemployment at 9.2 percent officially, almost at 16 percent if you add in underemployed and discouraged workers. That’s 25 million people. That’s the real crisis. That needs to be the focus.

JAY: Well, what we’re being told, certainly, by the Republicans and the Democrats, increasingly, at least at the level of President Obama, or seem to be buying into it, is that the less government spending there is, the more the debt is reduced, the more confidence there will be, and in fact this will lead to more jobs. If you watch the Republican Sunday messages, it’s all about jobs, jobs, jobs if government debt and deficit is reduced, reduced, reduced. What do you make of that?

POLLIN: Well, again, there’s no evidence for that. What makes businesses want to invest is not the government debt. What makes businesses want to invest is when they see a market opportunity. Now, if you keep withdrawing demand from the economy, if people don’t have money to spend, if people can’t borrow, that means that markets are going to be weak, flat at best, contracting. If you keep cutting back on state and local governments, imposing austerity, as we are doing–. State and local governments actually spend a lot of money buying things from private businesses, so those private businesses are losing a gigantic market the more we cut back on state and local governments. So everything is moving in the wrong direction. What we need to do is stabilize the floor of the economy, demand, and build it up. And the government is the only one that’s able to do that, because everybody else is looking for where the market opportunity is. The government can do things even if there isn’t a building market.

JAY: Okay. So in the next segment of the interview, we will talk about what you think should be done. Please join us on The Real News Network with Bob Pollin in the next segment of this series.

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U.S. Government Deficits andDebt Amid the Great Recession

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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.