Economist Gerald Epstein says Paul Krugman misrepresented economic evidence about the 2008 financial crisis and underestimated Sanders’ plan to rein in the big banks
SHARMINI PERIES, TRNN: It’s the Real News Network. I’m Sharmini Peries coming to you from Baltimore. Over the course of the Democratic presidential primary, economist and New York Times columnist Paul Krugman has been a vocal critic of Bernie Sanders’ policy positions. In a piece titled “Sanders Over The Edge”, Krugman calls into question the idea that big banks were central to the financial crisis in 2007. The notable New York Times columnist also takes aim at Sanders over the candidates’ comments during an interview with the New York Daily News. Sanders is coming off a key loss in the New York primary early this week, and pundits have been both citing Krugman’s position and the New York Daily interview as reasons Sanders should now opt out of the race. Next Tuesday marks a pivotal point in the Democratic presidential primary race, with Pennsylvania, Maryland, Connecticut, Rhode Island, and Delaware holding their primaries. Joining us now to discuss all of this from Amherst, Massachusetts, is Gerald Epstein. Gerald is co-director of the Political Economy Research Institute, and professor of economics at UMass Amherst, and the author of the piece that has been widely circulated, titled “Paul Krugman Crosses the Line.” Gerald, thank you so much for joining us today. GERALD EPSTEIN: Thank you very much for having me. PERIES: So, Jerry, give us a sense of how accurate Paul Krugman’s analysis is when it comes to Bernie Sanders’ understanding of, say, Dodd-Frank and regulating Wall Street, and his positions as per the interviews that were cited in terms of the New York Daily News? EPSTEIN: Yeah, I think it’s a very poor misunderstanding. And this notion, as you said in your intro, that Bernie Sanders doesn’t understand what Dodd-Frank says and how to break up the big banks. I think it’s completely wrong. If you read the transcript of the Daily News interview, Bernie Sanders says at the beginning there are basically two or three ways to do this. One is you have to pass new legislation. Two, there are tools in Dodd-Frank that allows the Secretary of the Treasury, who is the head of the Financial Oversight Council that was created by Dodd-Frank, there’s steps the Secretary of the Treasury along with other regulators can take to break up the big banks. And the Federal Reserve also has certain tools within Dodd-Frank to do this. So this is basically all correct. It’s true that in the context of the interview, the interviewer kept interrupting Sanders and pushing him here and there, that gave the impression of a kind of, a bit of inelegance in the discussion. But if one digs more deeply into the rules, it’s pretty clear that Bernie Sanders knew what he was talking about. PERIES: And give us this issue, give us a better understanding of this issue, really, what breaking up the big banks and including shadow banking in the critique of the big banks, because there’s some confusion by way of Hillary Clinton saying, you know, I’m for breaking up the big banks, and Dodd-Frank allows for that. But I’m going to include shadow banking. But you were arguing in your article that Dodd-Frank already includes shadow banking. Explain that. EPSTEIN: Well, so there is a debate among economists and policymakers. This stems back to the causes of the crisis of 2007-2008. How much were the big banks at fault, how much was other kinds of financial institutions like hedge funds, [inaud.] market funds and so forth, how much were they at fault? And would breaking up the big banks really get at the heart of the problem? Now, Elizabeth Warren and Bernie Sanders and others have argued that ending the too big to fail by breaking up the big banks is a crucial component of coming up with any solution, partly because they were very important in the causes of the crisis. What Paul Krugman said in his article was that economists understand that they weren’t really at the center of it, that it was all these smaller prime lending companies, mortgage companies, like Century Financial and so forth. But I think most economists agree, including the economists who did the study, the Financial Crisis Inquiry Commission that the Congress undertook, shows that in fact the big banks were really at the center of this, of buying the loans from the mortgage companies, packaging them in these complicated instruments, selling them off, and then betting against them. I mean, if you’ve seen The Big Short, or if you’ve read the book, it’s a bit of a popularization of all this but it really gets to the core of the issue, which is that the big banks were, were very much at the center of this. Now, the shadow banks, it’s a complicated [inaud.] in fact many people, economists [inaud.] economists [inaud.] agreed on what exactly that means. But it’s this vast, these vast pools of money, trillions of dollars sloshing around the world economy. And the question is, well, how important are the big banks in this whole network of funding? And in fact, I think economists are increasingly coming to understand that the big banks like JP Morgan, Goldman Sachs, Deutschebank and others, are very much involved if not at the center of this vast set of the pools of money. Now, it is true, what Hillary Clinton says is true, that these funds are not very strongly regulated in Dodd-Frank. But that’s because these hedge funds and private equity funds, and the big banks themselves, lobbied very strenuously against including them at a very central level. So I don’t think there’s anything that Bernie Sanders has said which suggested that he doesn’t think bringing the hedge funds–he agrees that bringing the hedge funds under more regulation is important. These things are not mutually exclusive. Hillary Clinton talks as if these two things are mutually exclusive, but in fact they’re not. You both have to break up the too big to fail banks and you have to regulate the so-called shadow banking system better. PERIES: Now, recently the Treasury Department actually reported, as did some of the business press, that once again, that some of the biggest banks out there failed to register plans to break themselves up somewhat under the new regulations. And then again I noticed that the very next day after the New York primary, the New York Times did run a front page article saying, well, Citibank has actually been successfully breaking themselves up. So what’s going on in the sector? Is there any corrective surgery going on here? EPSTEIN: Well, these things they are talking about are referred to as living wills. And it was kind of a substitute that was put into Dodd-Frank instead of a number of bills, a number of portions that had not made it through, to actually break up or limit the size of the big banks. So these living wills were supposed to be these plans that the banks would submit that said, look, if we had another 2007-2008 crisis, this is the way you can break us up, so that you don’t have to bail us out. And most of the regulators who were opposed to breaking up the big banks say, see, we have this living will process, so that we can resolve these banks in the process. We don’t have to bail them out, we can break them up. The problem is it’s virtually impossible to actually come up with a set of plans that in real time and the time of a crisis, when the world financial system is melting down as it was in 2007-2008, it’s virtually impossible to come up with a plan that would really work to break up the banks in that situation. And I think the fact that these living wills still aren’t adequate may not be indicative of problems, the banks making these living wills. I think it’s indicative of the fact that they’re impossible to make. You cannot come up with a credible plan for the most part to break up these banks in a crisis. They have multiple subsidiaries, multiple organizations all around the world, some of which are hidden, some of which are not well-understood by the regulators, that would all begin to seize up in a crisis like this. So I think the critics say, look, this living will process is a sham. You’ve just got to break them up into a reasonable size. PERIES: Jerry, so does Bernie Sanders have a plan to address this problem in terms of the size of the banks? EPSTEIN: Yeah, I think he has a reasonable plan, and it’s not that different from other people like Elizabeth Warren and others. It says you put a cap on the total size of the banks, and if they’re banks that are over that size, you tell them they have to get down to that size. And he says, you know, you let the banks decide how they want to reduce their size, you don’t need a central planner to tell them that. Let them decide, depending on the comparative advantages, the profit centers and so forth. And you get the asset size down to that limit. There were proposals like that by Brad Sherman and others for Dodd-Frank that didn’t make it in. there are people like Simon Johnson, Neel Kashkari, who is the head of the Minneapolis Fed, who’s looking at things like this. There are many other regulators who said something like this is a good idea. So at this point, what Bernie is suggesting about this is both doable and it is really not that extreme relative to a lot of knowledgeable critics who have been making proposals like this. PERIES: Including our very own Bill Black, who has actually released a paper recently about the theoretical underpinnings of Bernie Sanders’ position, which is also worth citing. EPSTEIN: Yeah, Bill Black has been doing a lot of good work on this and related areas. PERIES: All right. Jerry Epstein, I thank you so much for joining us today, and for the good work you’re doing. Thank you. EPSTEIN: Thank you, Sharmini. PERIES: And thank you for joining us on the Real News Network.
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