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Gerry Epstein: S&P face possible prosecution for role in sub-prime debacle

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. And on Monday the stock market melted in New York and stock markets more or less around the world. And while all the talk is about S&P, the underlying issues are actually more pertinent. Most people realize the S&P downgrading of American debt was kind of meaningless, and that’s more or less proven by the fact that on Monday, when the stock market crashed, what did everybody do? Buy more American Treasury bills. Now joining us to talk about all of this is Gerry Epstein. Gerry is codirector of the PERI institute in Amherst, Massachusetts. Thanks for joining us again, Gerry.


JAY: So what do you make of this? You know, does the S&P downgrading actually really a factor? And what’s really going on here?

EPSTEIN: Well, the S&P downgrading is a factor to the extent to which investors think that the government of the United States is going to take it seriously. If the government takes it seriously, then it might lead the Obama administration and Congress to cut even more from the government spending, which would be a disaster because, after all, what the markets are really concerned about is the fact that the real economy is stagnating–it’s not generating jobs, it’s not generating investments, and it’s not going to generate profits, either, if this recession keeps going.

JAY: Yeah. I think what you’re saying, it’s really important that this is not just coming from you and other economists in some of the think tanks. When you read the financial press, there’s been op-ed after op-ed from fund managers–CEOs of big hedge funds, even–all saying that the real danger is deeper recession, not long-term US debt. But that–you don’t even hear that hedge fund money manager voice in DC.

EPSTEIN: No, you don’t. In fact, Obama gave a speech talking about the downgrade, and he paid only lip service to the problem of unemployment and slow growth, and his major focus again was talking about the deficit and we have to deal with the deficit. So everything is really upside down, and the markets understand that.

JAY: So what do you make of S&P’s downgrading? What’s behind it?

EPSTEIN: Well, look, it couldn’t possibly be that they don’t think the United States is going to pay its debt. There are several reasons for that. Number one, the Federal Reserve can just print the reserve currency. So the Federal Reserve can print the money to pay the debt. Everybody understands that. Number two, there’s a constitutional requirement. The Fourteenth Amendment requires the president to pay the debt. It would be a constitutional crisis if the government–if the president didn’t pay the debt. So the president has the obligation and the Federal Reserve has the means to pay the debt no matter what else happens. The third thing is that Standard & Poor’s made a $2 trillion overestimate of the long-run debt that the United States would be incurring when they delivered the message to the Treasury Department in the afternoon on Friday. Somebody at the Treasury found this $2 trillion error, and that’s precisely the amount of money that Standard & Poor’s is saying the US is not cutting enough of. So error gone, problem solved. It’s really a political and a strategic shot across the bow of the government. And the reason why is this. The Levin report–Carl Levin gave a congressional report saying that Standard & Poor’s and Moody’s was–were one of the major factors that caused the financial crisis. The Treasury Department could be investigating Standard & Poor’s for fraud, because they rated this junk AAA, these toxic mortgages AAA, and then allowed the banks like Lehman Brothers and JPMorgan and Goldman Sachs and others to sell them. So what Standard & Poor’s is saying is, look, if you try to bring us to accountability for these fraudulent activities that we engaged in, number one, we can hurt you by downgrading your debt, and number two, it’s a preemptive strike, ’cause what they’re saying is, look, if you try to come after us now, we can claim it’s just political payback for downgrading your debt. It’s a bit too clever a move by Standard & Poor’s, because I don’t think it’s going to work.

JAY: Well, if you want to be a little more generous to Standard & Poor’s–and I don’t in any way discount or disagree with what you’re saying, but there is a somewhat quasi-sympathetic take you could have on it, although S&P’s not talking about it. But when you read the warning they gave–. And we did an interview, you and I, I guess a couple of months ago, when Standard & Poor’s warned that they might downgrade US debt. When you read that warning, one of the things that was sort of buried down about three-quarters of the way was their medium worst-case scenario was for another meltdown of the finance sector in 2012, and it actually sounded like that was more the real reason they might downgrade than anything else. And I’m wondering if what’s really happening here between the lines–and I don’t know why they wouldn’t talk about that more openly, except, as you say, for political reasons, perhaps, they’re using this as well–is that they’re all concerned that this, what’s going on in Europe, is leading to another major meltdown of the whole finance sector, and so that that’s the real crisis they’re talking about, not that anybody thinks that the US can’t, you know, fulfill its debt obligations.

EPSTEIN: Well, I think, as you said, there is a real danger that the overhang from the initial financial crisis in 2008 plus the straightjacket of austerity that Standard & Poor’s is helping to put the world in, helping to put Europe in, as well as the Tea Party types, both here and in Europe, is creating a serious danger of financial meltdown, as we’re seeing in Europe. And whether Standard & Poor’s in some perverse or paradoxical sense understands that the straightjacket they’re helping to put the world in is actually creating a boomerang and creating more problems in finance, I don’t know. But there are two legitimate problems which Standard & Poor’s has pointed to and which I think they’re correct about. Number one, the Tea Party insanity, saying that there can’t be that they’re willing to risk the faith and credit of the United States for their own political ends does generate political instability. I think that’s true. But secondly, it’s also true that you cannot run a modern economy and a modern political system like the United States is supposed to have unless you’re able to tax the rich. And to the extent to which the Tea Party, along with Obama’s caving in to them time and time again, is making it impossible to tax the top 1 percent, the top 10 percent, it’s going to lead to the further decline of the ability of the United States to run its economy, to play the role that the capitalists themselves want the government to play in the world, and this is a real danger. So what it means is that unless the government comes up with a way of taxing the people who’ve gotten the massive gains the last 20 years in our economy, that the United States is going to continue to decline, and that’s going to possibly create more serious crises down the road.

JAY: Thanks very much for joining us, Gerry.

EPSTEIN: Thank you.

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

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