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Jane D’Arista: Strong dollar, lower wages and relaxed regulations – Wall Street got what they wanted

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Anatomy of casino capitalism Pt.3

Jane D’Arista: Strong dollar, lower wages and relaxed regulations – Wall Street got what they wanted


Jane D’Arista is an economist with the Financial Markets Center in Philomont, VA. She is a Research Associate with the Political Economy Research Institute (PERI) and author of the masterful study of U.S. financial regulation, The Evolution of U.S. Finance. For more than thirty years, Jane D’Arista has been one of the country’s most insightful analysts of financial markets and regulation.



PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to [“HAD-line”], Connecticut. Real News Network. And we’re with Jane D’Arista. So we’ve been talking about the global financial crisis, the global Ponzi scheme, and we’re talking about what can really be done about the global kleptocracy. So you’ve been on the Hill testifying about what kind of regulation you think is needed. What have you been saying? And is anybody listening?

JANE D’ARISTA, AUTHOR, THE EVOLUTION OF US FINANCE: Well, one never knows if people are listening. And, unfortunately, you suspect they are not. However, it was not totally a silent response. I was arguing that we have to stop proprietary trading, and we do that in a couple of ways.

JAY: Okay. I’m just going to remind viewers that may not remember the explanation from the first time, these big investment banks normally take pension fund money and other people’s money, and they invest it for them so they can make money for the pension fund, except they got very interested in making money for themselves, which they did with highly leveraged bets, currency speculation, subprime mortgage speculation, and trying to just make themselves richer for bigger bonuses.

D’ARISTA: Right. And borrowing from one another, which meant that they created a web of counterparties, which was the domino effect. If I go down, you go down. So what do you do about it? How do you fix it? Well, okay, leverage—we go back to the old leverage requirements. In 1999 we passed something called Gramm-Leach-Bliley Modernization Act, which did a lot of bad things, including ending Glass-Steagall. But concentrate here on the fact that it allowed banks to borrow more for both traditional and non-traditional activities. Okay. Banks, assume, presumably take deposits. But now they can go into the repurchase agreement market and borrow the money, as I said, from other financial institutions. So repurchase agreements, or borrowed money, is a creeping up of the liabilities of the banking sector, which used to be just all deposits—CDs, but essentially a deposit [inaudible]

JAY: Something real, in theory.

D’ARISTA: Yeah. Right. That was allowed to happen in 1999. We need to go back and put back on—. Oh, and I forgot what happened to the investment banks. In 2004, and this is widely known, Henry Paulson, then head of Goldman Sachs, went to the SEC and said, “We can’t compete with the European banks. They can leverage up to $30 or $40 for every $1 of capital. They can borrow another $30 or $40 for every $1 of capital. You only allow us to do $12, or $15 at the most.” The SEC said, “Yeah, global competition is important. You can go to 30,” which is, of course, where Bear Stearns was when it went down, right? And Lehman, etc.

JAY: And no surprise that the head of the SEC at that time was someone who’d previously—a lobbyist for the finance sector.

D’ARISTA: Well, that is true, too. So we need to go back to the old leverage requirements, put them on very strictly.

JAY: Before we get more into what should be done, let’s just talk about that moment in the late ’90s. Why did the regulation—what were the forces at play? And this is under Clinton, so it’s not a Democrat-Republican thing here, really. Why were the regulations overturned? I mean, everyone knew what had happened in the ’30s. So what are the forces at play to kind of unravel the regulatory environment?

D’ARISTA: The fact of the matter is Wall Street was in ascendancy at that point. And we remember that Robert Rubin was in advising initially and then became a secretary of the Treasury. It’s a situation in which they were out to get what they wanted, and what they wanted was less regulation. We have what we call in economics financialization. We have a situation in which, as we saw over this period of time, financial institutions’ profits as a share of total corporate profits were higher than they were for the producing sector, companies that make things. So this is where they won.

JAY: Is part of this problem that—and it goes—we talked in the last segment about globalization having playing recessions off against each other, and maybe even more importantly playing workers’ wages off against each other. Is part of this reason that this all happens is because there’s just not enough money to be made in the productive sector anymore, that people just don’t have enough real money to buy things, and you’re just much more return on capital over here in a bunch of capital Ponzi schemes?

D’ARISTA: Well, in some sense, yes, because of course what happened was that we reamed our manufacturing sector by allowing the dollar to become the global currency and a strong dollar. Strong-dollar policy was a policy of the Reagan administration, and the Bush administration (the first one), the Clinton administration, and the Bush administration. And even now we’re talking strong-dollar, right? Economics 101 will tell you this: you’ve got a strong currency, you’re not going to sell anything abroad; somebody can out-price you.

JAY: But it’s good if you’re buying cheap money over here and you make money over here.

D’ARISTA: Right, but you are also not going to sell anything at home. So the deal was we gave Wall Street the money power. Strong dollar, great for Wall Street—make a lot of money. Very bad for Main Street—you can’t make money. And very bad for wages. So all of these things are very much linked. The lack of increase in wages, American families then going out, going into debt as the only way they can possibly maintain their standard of living. And we then became the consumer of last resort, buying everything that China made.

JAY: Okay. In terms of regulation, three, four things that people should say, “I want that to stop this from happening again.”

D’ARISTA: Absolutely. You’ve got to go back to the old leverage requirements and say, this is how much you can borrow, no more. You also can extend the margin requirements that we have had on stocks since 1933, meaning you want to buy a stock, here’s how much money you have to put down. The Depression came along because people put down $0.05 and bought $100 stock. So manage that. That needs to be managed across the system—mortgage-backed securities, all kinds of things, and commodities, and oil, because what we see is this liquidity in the market that moves from market to market. That’s why if the stock market is up, next thing you know it’ll be the oil price again moving right up as they begin to speculate in oil futures. So we have to stop it at that level. We’ve done it before. These were restrictions that were removed or were not applicable in the case—I mean, the speculation used to be all in stocks. And we need to go there again. The other thing we need to do is to put a limit on how much you can borrow from another financial institution. In other words, we have in the banking acts in the United States already, you can only lend to a customer 10 percent or 15 percent of your capital in relation to your capital. So you don’t want all your eggs in one basket. That’s the point. Diversification.

JAY: And would you stop proprietary trading?

D’ARISTA: Yes, if you could not borrow from other financial sectors, the other financial institutions, yes, you’d stop it. So those are the things that you could do. Any one of them will help.

JAY: They seem no-brainers. It’s rather obvious it’s needed, and it doesn’t really seem to be happening. So in the next segment of our interview, let’s talk about the politics of all of this, why—. According to President Obama, we were looking at the Apocalypse. And why aren’t we stopping that? So please join us for the next segment of our interview with Jane D’Arista.


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Jane D'Arista is a research associate with the Political Economy Research Institute (PERI), University of Massachusetts, Amherst where she also co-founded an Economists' Committee for Financial Reform called SAFER (Stable, Accountable, Efficient & Fair Reform) and gave testimony to Congress on financial reform. Jane served as a staff economist for the Banking and Commerce Committees of the U.S. House of Representatives, as a principal analyst in the international division of the Congressional Budget Office. Representing Americans for Financial Reform, Jane has currently given Congressional testimony at financial services hearings. Jane has lectured at the Boston University School of Law, the University of Massachusetts at Amherst, the University of Utah and the New School University and writes and lectures internationally. Her publications include The Evolution of U.S. Finance, a two-volume history of U.S. monetary policy and financial regulation.