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James Crotty: People should demand legislation that breaks the power of major financial firms

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. We’re joined again by Jim Crotty. He joins us from Amherst, Massachusetts, where he teaches at the University of Massachusetts there and is an associate with the PERI institute. Thanks for joining us, Jim.


JAY: So in the first couple of segments we talked about the problem of executive compensation in the finance sector and the whole bubble scheme, which everyone knows leads to a bursted bubble, the built-in structural savior being the government, and everybody knows, too-big-to-fail, eventually the state’s going to come in. But the problem in all of this is, even if the state comes in and saves the executives’ bacon and even the shareholders of most of the companies�maybe not all of them made it, but most of them did�thousands of people, hundreds of thousands of people have lost their homes and millions of people are losing their jobs. So the consequences of this are very severe. And who really pays for these Ponzi schemes? So if you don’t think Obama and the Congress is really doing anything serious about it, what do you think they should be doing?

CROTTY: There are lots of things they should be doing, and most of them, in fact, have appeared in some bill or some proposed legislation in the House or the Senate. The problem is that these provisions or the bills or attempts to regulate don’t survive the process, either in the Congress or because the president’s not interested in it. On the bonuses, lots of people have talked about dealing with the bonuses in ways which eliminated the problem of illusory or false values. So we could say that perhaps if you received bonuses, let’s say in stock or stock options, that you can’t exercise those stock options until several cycles have passed, until you get the boom and the crash where it all goes down in the boom and the crash again. So, you know, maybe for ten years or whatever you shouldn’t exercise these options. Other people have proposed clawbacks, that you might get whatever bonuses you’re supposed to get, but these would be held in escrow and would be reduced when the value of the firm’s assets and the firm’s stock went down again to eliminate this short-run problem that�the short-run horizon that these people have. So there are a number of things that people have proposed about the bonuses themselves. But then the bigger problem is: what do you propose about the whole financial system? There’s been lots of proposals floating around about that as well. So, you know, one of the proposals is that we should regulate. Some people here, a colleague, Jerry Epstein, and I, wrote some material about ways in which you could regulate financial markets. We did it before. In the 1930s we proposed new legislation that in fact kept most of the financial system quite boring, doing its basic functions, where there were�nobody was making big fortunes in them until the 1980s. So there are lots of regulation proposals around. But, again, there’s no support from them or insufficient support for them in the Congress and certainly from the Obama administration.

JAY: The big underlying problem, other than the effect of lobbying and the way they can influence the voter, is this structural blackmail you talked about in the earlier interview segment. I mean, how do you create a situation where this doesn’t just continue? ‘Cause we’re right back in it. There’s going to be another bubble, there’ll be another structural blackmail, and the whole thing’s going to happen again.

CROTTY: I guess what I would stress is it’s not because we don’t know what to do. In addition to the things I’ve been talking about, there are all these too-big-to-fail things. If you’re too big to fail, you’re too big. So there are ways to prevent firms from becoming so large that their failure would create structural blackmail. So the idea is to eliminate the structural blackmail so that there would be certain firms which are large, but they would be like public utilities and we would regulate them tightly, and other firms who gamble, the casino firms that cause us most of the trouble, that either we would impose taxes on their assets or whatever to keep them from being too large to cause this trouble.

JAY: Now, some people have suggested at the time when the crisis was most acute�and people these days like quoting a Rahm Emanuel quote, “Don’t ever let a crisis go to waste,” and this was one, apparently, they did, where there could have been a kind of nationalization of some of the banks. They were bankrupt. Their shares were�they could have been purchased by the state for nothing. What do you think of that? Why not have had nationalized some of these institutions and then let them play their role?

CROTTY: Well, if we had done it appropriately and properly, that would’ve been a better solution. But the question which you raised is the real question: will the political process allow us to do this? We just got our answer.

JAY: A viewer wrote us about this, actually, ’cause we’ve raised this idea in some of our other interviews, is that it’s illegal to have nationalized these institutions. How do you answer that?

CROTTY: Well, we would have had to pass legislation which would have made it legal. But I don’t trust those statements, because we’ve had statements from the secretary of the Treasury, and we’ve had statements from Ben Bernanke, and we’ve had statements from lots of people which said that there are certain things that are not legal that they want to do. But then, when things come up that they want to do, they don’t seem to pay too much attention to it. For example, they rescued all the investment banks, which they weren’t supposed to do, according to the law. So either it’s a failure of will, not really of law, or they’re creative about evading or alighting [sic] or sliding across the laws when they want to and not when they’re not, or that we have to pass legislation that makes this all legal. The question really is: going forward, what do we do now? And the answer has been made clear, and it’s really important: we are not going to get fundamental, effective regulation of the bonus system or the financial system, and we are going to do something, repeat something like we’ve had in the recent past. The structure has not changed significantly, and we will again be posed with structural blackmail somewhere down the line when it’s even more dangerous than it is now.

JAY: For people watching this, if there’s one or two things they should be demanding from their representatives or otherwise, what would it be?

CROTTY: I could state two things that they should be demanding, particular things, but mostly they should be demanding that there be substantial change to eliminate structural blackmail in this system. And now they have to then support�there’s lots of different proposals there, but what they have to do is demand that there be substantial structural change so that we don’t run the same movie over again, so that we don’t have the same incentives, we don’t have the same size, we don’t have the same structural blackmail. The bonus system is back again. In 2009 we’re going to have record bonuses, and only because of all the government money that’s been put in. So I’m not sure which two specific proposals�. Let me say, just for simplicity, too big to fail�if you’re too big to fail, you’re too big. Support that.

JAY: Thanks very much for joining us, Jim.

CROTTY: You’re welcome.

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


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

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James R. Crotty is a Professor Emeritus of Economics and Sheridan Scholar at University of Massachusetts. His writings have appeared in such diverse journals as the American Economic Review, the Quarterly Journal of Economics, the Cambridge Journal of Economics, the Review of Radical Economics, Monthly Review, the Journal of Post Keynesian Economics, and the Journal of Economic Issues.