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Paul Jay speaks to Thomas Ferguson, professor of political science at the University of Massachusetts Boston on the Obama-Geithner plan. Speaking to what he would have done instead, Ferguson says, “I would have done it as Roosevelt did with the New Deal. You gotta make the banks write down the bad assets, and you gotta get the bad assets out of the banks, throw them into something owned by the people of the United States, and then try to sell them back.” He says, “the simplest way of doing it is taking them over.”

Story Transcript

Obama and Wall St.

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network and our series of interviews with Tom Ferguson. Thanks, Tom. So we’re talking about the stimulus package in Segment 1. We talked about the stimulus package not being big enough. And later we’ll talk about “So, then, what are the consequences of it not being big enough?” Then we started talking about the banking, quote-unquote, “reform.” How would you have done the banking reform? What should have been the plan?

THOMAS FERGUSON, UNIVERSITY OF MASSACHUSETTS, BOSTON: I would have done it the way Roosevelt did it in the New Deal, or with some variations—what the Swedes did in the early 1990s, what the Norwegians did, for that matter even what the Germans did in the ’30s, an example that tends to drop off charts. I mean, it’s not as though there’s a huge bone of contention in this in economic history. You’ve got to make the banks write down the bad assets, you have to get the bad assets out of the bank, ’cause if you don’t, they just sit there under zombie banks always worried about, you know, tipping into insolvency in the next cash-flow crisis. So you’ve got to get the bad assets out of there. The simple way to do that is to just—if the bank is insolvent—’cause if it’s insolvent, you’re not taking anybody’s property. There’s no equity there to take—zero, effectively. You just take ’em over.

JAY: You’ve talked about starting the process with actually finding out what the truth [inaudible]

FERGUSON: Yeah, you have to go find—. This means you unleash bank examiners to actually go find out what’s up. I mean, one of the striking things about the Geithner program yesterday was he’s busily announcing his program before he does the stress tests on the banks. Remember, they were supposed to find out the condition of the banks and all that. Well, you’ve got to say, “Wait a minute. Don’t we have the cart before the horse here? Like, do we have the slightest idea who’s solvent and who’s not?” You know, my suspicion is all along they have never been too clear about that, and this is a case of—the technical term for this is “regulatory forbearance”; that is to say, they know they’re broke, and everybody’s afraid to ask. It’s sort of don’t ask, don’t tell for banking. That’s the sort of story. You’ve clearly got auto-zombie banks. And the thing is you should get rid of the zombies and just take the bad assets out of them, throw them into some owned by the people of the United States for the time being, and then try to sell them back. That’s one way you get some money back.

JAY: Let the zombie banks go down.

FERGUSON: Well, you take ’em over. You can either close some, you don’t need to save them all, but you’re going to have to have some banks in order to do economic growth.

JAY: So, in other words, the ones that seem to have something left [inaudible]

FERGUSON: Well, the obvious move is, if they’re hopelessly insolvent, close them. And if they’re close to being solvent—this was the formula in the Reconstruction Finance Corporation in the New Deal: if they were close, I think it was if you could reach 90 percent, you were safe; if you were between 75 and 90, they gave you a chance to raise some private capital; and if you were below 75, you were closed.

JAY: The ones you say, essentially, you nationalize.

FERGUSON: Well, yeah. At that point you take ownership in exchange for putting in the money. You take them over, recapitalize them. Now you own the bank, the bad assets, and you put the new money into it. So you can now resell the bank onto the private marketplace for, actually, a fair amount of cash. I mean, these are now going concerns again and they’re worth a lot. So you can recoup—you know, the Norwegians claim they made all their money back. The Swedes sometimes do. I’m a little skeptical, but they made a lot of money out of their re-privatizing—out of privatizing the bank [inaudible] that they took over. That’s clear. They got, I think, one or two that they still haven’t done. And so you can do that. And, thing is, you get rid of this quick, and somebody is back in there immediately, I mean, like, within a month or two or three, not within three, four, or five years. You’re not doing the Japan-style story, which is what the US has embarked on: a public-private partnership that is effectively—it’s very Japanese, and it’s going to give you the Japanese outcome, which is slow growth for a long time. I mean, these guys are not going to be in the business of making loans.

JAY: Now, what you’re suggesting—.

FERGUSON: There’s a wonderful moment in Davos a few weeks ago, when the head of Citigroup, he actually got up and said something like, “You know, well, gee, if you really want a bank loan, why don’t you just buy it on the secondary market?” You know, that’s not what the US needs right now.

JAY: A lot of people were suggesting what you’re saying before Geithner’s plan came out. He didn’t go this [inaudible]

FERGUSON: It’s fair to say they are obsessed with the private financial sector. Now, there are various views about this. I’ve got a very definite one. I actually do campaign finance. I mean, what I actually do is political moneying. And so, I mean, I’m in the process of finishing my—. Every four years my slogan is: I’ll tell you who bought your candidate before you vote for him or her. And it takes a lot. I mean, I did a study of the early money, and it was perfectly obvious that Obama was the candidate of finance, and to an almost exclusive degree in the sense that that was the sector that had a—he was far more concentrated there than, say, Hillary Clinton was. She had plenty of support in finance too.

JAY: Finance meaning Wall Street.

FERGUSON: Wall Street, in a sentence. Banks, investment houses, private equity; insurance I would count in that too. I take it there will be no argument on this after AIG. Anyway, and I’m just finishing for the whole 2008, and it’s just obvious, you know, you get what you pay for, and they pay. And so I’m sorry to say the people who caused the problem are to a very large degree the folks who—sort of primary backers of Obama. So I’m not surprised that, to use Paul Krugman’s term, they’re almost obsessed with this sort of private-sector solution in finance. It’s not an obsession.

JAY: Now, just for the record, when did you see this coming and when did [inaudible] start?

FERGUSON: Well, it depends what you mean by “this” is. I mean, ever since I had a conversation with Congressman Barney Frank back early in ’08, it was clear. I tried to warn him at that point about what would happen if the bond insurers were allowed to go broke. And what would happen is that huge numbers of non-profits would be unable to sell floating-rate notes. And my university doesn’t really do that. A lot of universities do. That strikes me as a tragedy just by itself there. But it’s also true that hospitals, a lot of higher-education funding authorities, and things like that, they all use floating-rate notes to get funded. [inaudible] that market dried up. It did. But Congressman Frank actually said to me, and I will remember this as long as I live, “What difference would it make?” And, you know, I came home to my wife and I said, “Look, this guy doesn’t get it, and he’s talking to Treasury. They clearly don’t get it. Time to get out of the market.”

JAY: Well, in the next segment of our interview, let’s talk about this. If the stimulus isn’t big enough, if the quote-unquote “bank reform” isn’t going to work,—

FERGUSON: We have a problem.

JAY: —what is this economy going to look like in the next year or two? So let’s talk about that in Segment 2. Please join us for the next segment of our interview with Tom Ferguson.


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

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Thomas Ferguson is Professor of Political Science at the University of Massachusetts, Boston and a Senior Fellow of the Roosevelt Institute. He received his Ph.D. from Princeton University and taught formerly at MIT and the University of Texas, Austin. He is the author or coauthor of several books, including Golden Rule (University of Chicago Press, 1995) and Right Turn (Hill & Wang, 1986). Most of his research focuses on how economics and politics affect institutions and vice versa. His articles have appeared in many scholarly journals, including the Quarterly Journal of Economics, International Organization, International Studies Quarterly, and the Journal of Economic History. He is a long time Contributing Editor to The Nation and a member of the editorial boards of the Journal of the Historical Society and the International Journal of Political Economy.