YouTube video

Epstein: Need to make parasitical forms of investment illegal, need public control of finance sector

Story Transcript

Gerald Epstein Interview (Part 3 of 4)

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul in Washington. And we’re talking to Gerry Epstein. He’s the cofounder of the PERI institute, and he joins us from there, in Amherst, Massachusetts. Thanks for joining us again, Gerry.


JAY: So we’re talking about finance reform. And one of the things proposed in the Senate Finance Committee is to stop Goldman Sachs and Morgan Stanley from shedding their bank status. Now, just to remind people, they previously were called investment banks, which meant they couldn’t go to the Federal Reserve and get that emergencies, practically zero-interest cash out of the window. So—you have to be a bank to do that. So they called themselves—they got banking charters. They went and they started collecting millions, if not billions, of this virtually free money. But now they may want to go drop this banking status ’cause it’s a little more regulated, and the Senate bill would say, uh-uh, you can’t do that; you’re going to have to break yourself up in some way if you want go back to this kind of reckless derivatives trading. At least we’re told that’s what the legislation will do. So have I got it right? And do you think it’s going to be effective?

EPSTEIN: You have it right. This is the so-called Volcker Rule, named after former Fed chairman Paul Volcker. And the intention of this rule was to prevent banks from gambling with taxpayer-guaranteed money on their own account, so using taxpayer money to gamble in risky ways that might bring the banks down, so-called proprietary trading. It also said that these banks, if they’re going to have access to Federal Reserve funds, they can’t own hedge funds, which is another way that they’ve been able to gamble. And Goldman Sachs, it was thought, well, if this was imposed, they would just give back their banking charter and go back to being an investment bank and just continue doing what they were doing. And in the Senate bill, it’s saying no, you can’t do that, because the Senate bill also has a version of the Volcker Rule. The problem is the Volcker Rule that’s in the Senate banking bill is not strong enough. There are too many loopholes. Proprietary trading is defined too generally. It gives the Senate—the Senate gives the regulators a year or so, or six months, to really pin down what these rules are supposed to look like, rather than insisting that these rules come into play immediately. There’s a very important amendment by Jeff Merkley, a senator from Oregon, on proper proprietary trading that really tightens up these rules, that makes the definition clearer, that insists that the regulators institute these rules immediately or very soon. So this Merkley Rule, I think, should be supported and would greatly strengthen the bill.

JAY: Without some of these stronger amendments—and it’s very unclear whether they’ll pass—and even with some of them, is it really going to stop this potential bailout? And, in fact, what Republicans are saying—isn’t there some truth to it?—that in fact this really doesn’t close the door to future major bailouts.

EPSTEIN: There is some truth to what the Republicans are saying, but they’re saying it in a very cynical way. They’re saying it in a cynical way because there’s nothing that they have proposed that would prevent the bailouts either. But, yes, unless we break up the banks, unless we reduce their risky trading on their own account with taxpayer money, unless we prevent them from selling complex derivatives that can crash the system, unless we prevent their rainmakers from controlling the firms and winning whether they go up or go down, unless we do all of those things, unless we really get all of the assets and liabilities on the balance sheets and strict rules enforced, unless we get regulators on in the banks who, as [James] Crotty and I said, who have an incentive and who have the training and the pay scale to actually regulate these banks, unless we do all of those things, there are going to be more bank bailouts from the taxpayer.

JAY: I think it’s pretty safe to say that [as] this legislation works its way through Congress, we’re not going to get the things you just listed, at least not in an effective way. I think we’re seeing some of the wording, and the public is maybe getting the sense that they’re actually dealing with it, but when you get into what the real measures are going to be, it doesn’t sound like they’re going to be effective in the way you’re talking about.

EPSTEIN: I think it’s very doubtful that they will be. I do think, though, that if enough of these strengthening amendments do get passed and stay in the bill and then make it through the House-Senate conference, it will be an important step in the right direction. But even if that happens, all of us have to realize that it’s just the first step and that we all have to agitate, we all have to push our congresspeople, we all have to get out into the streets and demonstrate knowing that this is just really a first step. Chances are, though, it will be worse than that. Chances are a lot of the strengthening amendments will not go through, in which case it really will be a bit of a sham, and then we’re going to have to push harder. The main thing that we have to do, as Jim Crotty and I said, as Tom Ferguson has said, as many others have said, is we have to get money out of politics. As Dick Durbin said, the bankers own Capitol Hill. And until we get money off of the Hill and unless we end the revolving door of staff people and senators going into banking and then coming back to lobby, we’re not really going to be able to succeed.

JAY: What do you make of the more—the sort of libertarian argument which says the only thing you can do is create the environment where the banks really can burn, that without that risk that the banks go down, there’s no real regulation that can be effective?

EPSTEIN: Well, again I think there’s a kernel of truth in here. That’s one of the reasons why you really want to break up the banks and make them less interconnected, so that you could allow more of them to fail. But in the end, unless you get the casino under control, the so-called shadow banking system—the hedge fund, the private equity funds that are global—unless you get those under control, then not only are they going to continue to have the ability to put the whole economy at risk, but worse than that, even when the economy is not crashing, human and financial resources are being misallocated. They’re going to the wrong places. All of my students are—instead of going into teaching or health care or engineering, they’re going to want to go work on Wall Street and get big bonuses. Instead of the capital going to make a green transition, to help small businesses, to help communities build infrastructure, it’s going to go to the casino. So we’re not just talking about preventing the system from crashing; we’re talking about creating a financial system that will actually serve the needs of society. We can’t forget that.

JAY: So you’re talking essentially about making parasitical forms of investment illegal.

EPSTEIN: Yes. We’re talking about it being very difficult to engage in these kinds of parasitical types of investment, or at least shrinking it down to size and letting the more socially oriented financial system, more socially oriented form of investment grow significantly and dwarf the parasitical part. And I think in order to do that we have to come back again to the issue of the public option.

JAY: Explain that.

EPSTEIN: We have to get more public control over financial resources. Now, already we have the public ownership without the public control. We, the taxpayers, own AIG. We put in $180 billion. We put in $40 billion into Citibank or more. We have been subsidizing the large financial firms by keeping interest rates at zero—that’s what the Federal Reserve has been doing—and allowing them to gamble with that money and earn 4 or 5, 6, 7, 15 percent on that zero interest rate. And they’re able to take risks because they know, and the people who lend money to them know, that they’re too big to fail. We have to stop all that. We haven’t really talked about getting the Federal Reserve under control and making it more democratic, but perhaps we can come back to that.

JAY: Okay. In the next segment, let’s do that. Let’s talk about the Fed and what—should it be reformed? Should it be abolished as some people are suggesting? Please join us for one more segment with Gerry Epstein on The Real News Network.



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

Creative Commons License

Republish our articles for free, online or in print, under a Creative Commons license.

Gerald Epstein is co-director of the Political Economy Research Institute and Professor of Economics at UMass Amherst.