James K. Galbraith: Unraveling of the Euro-Zone is panicking global markets, nothing to do with S&P
Story Transcript
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. So the markets seem to be in freefall Monday morning and throughout the day. S&P on Friday downgraded American sovereign debt from AAA to AA. But most observers don’t quite see the connection here, ’cause everyone doubts S&P’s motives for doing this. So why is the market in freefall if the downgrading isn’t really the underlying cause? Now joining us to unpack what’s happening today is Professor James Galbraith. He teaches at the University of Texas at Austin. He’s the author of the book The Predator State. Thanks for joining us again, James.
JAMES K. GALBRAITH, ECONOMIST AND AUTHOR: A pleasure.
JAY: So what’s really going on here? Why is the market tanking?
GALBRAITH: Well, it’s an interesting situation. Standard & Poor’s issued a downgrade of US government debt of Treasury bonds and bills–it didn’t downgrade the stock market. And yet it’s stocks, private securities that people are selling in order to buy US Treasuries bonds and bills. One thing you can say for sure is that people are not responding to anything S&P did directly. They clearly totally disregarded the nonsense claim that’s implicit in the downgrade, that US Treasury bonds and bills are in any way less trustworthy than they already–always have been. That’s clearly not the case. The prices of those assets are up.
JAY: Yeah, everybody’s–in fact, today, everybody’s buying more T-bills.
GALBRAITH: Yes, exactly. So that tells you that S&P just made a fool of themselves on the direct issue that it was speaking to. They may have made a small contribution to disorder and disturbance in the private capital markets by undermining the credibility of everything else that they rate and having basically exposed themselves as being capable of taking a plainly foolish position for plainly political reasons. It would be hard to see why you would trust their rating of anybody else at this point. So people looking for a little more security might well be getting out of private assets and private equities in order to get into government bonds. But I think that’s probably also fairly minor. The major news, the major event over the past several days has been the deepening crisis in the eurozone, and in particular the changing position of Italy, which is an enormous economy, seventh largest in the world, from being one of the countries that was guaranteeing the stability of the eurozone, helping with the purchases of the debt of Greece and Ireland and Portugal and so forth, to being one of the countries in need of assistance. And as that transformation occurs, it really does cut to the stability of the European system, the stability of the European economy. And if you read the European press this morning, you would find a mounting sense of disorder and, really, incoherence amongst the statements being made by central bankers, national and international level, in Europe. So I would think any investor who was thinking about companies that are doing a lot of business in Europe would have very good reason to be very nervous right now.
JAY: Is part of what’s going on here is that there are some people in this economy–and I mean people in corporations and banks–that are sitting on piles of cash and are really big who profit from this volatility? You know, apparently, the banks and corporations, with the amount of trillions they’re sitting on, if you have a big crash like this, you make money buying back in, ’cause you’re kind of big enough to withstand the downside and you have so much to gain on the upside in terms of buying and picking up stuff on the cheap. How much a role you think this has to play in this?
GALBRAITH: I have been thinking about that over the past some days. The consequence of the policy of quantitative easing: there’s a huge amount of free cash, particularly in the banking system. And so that incentive is there. If you can short the entire–the asset market of the entire country, not only stocks but also real estate, this is the way large accumulations are made at the bottom of a slump. So it may be that the Federal Reserve, in an effort, at least ostensibly, to promote economic expansion by flooding the economy with cash, has placed a very powerful weapon in the hands of people who are able to take a short position. And that may–that’s something we may discover later. I don’t–we don’t have direct evidence for it; it’s circumstantial at this point. But it’s a possibility.
JAY: Now, there’s another thing that isn’t getting talked about today on pundit TV, which is they keep talking about, oh, T-bills, people buying T-bills, don’t worry, people are buying T-bills. But what is all this going to mean for states and municipalities who don’t print their own money, who don’t have T-bills everybody’s wanting to buy? I mean, aren’t interest rates going to go up on municipal bonds, on state bonds? Isn’t that where Americans are really going to feel this?
GALBRAITH: There’s a serious risk of that, which the federal government could, if it were thinking clearly and acting purposefully, easily take care of by providing new and expanded assistance to state and local governments. The problem that we have here–in some way, what S&P did was firmly in the mainstream of Washington policy talk. It simply acted on the same basis that the Committee for a Responsible Federal Budget and the Concord Coalition and the Congressional Budget Office, all of these Cassandras out there who have–Chicken Littles, I should say, running around, warning that the sky is falling over long-term deficit projections which they themselves basically cooked up, are saying essentially the same thing that Standard & Poor’s said. So this is the problem that we have is that we have a policy process which is focused on the wrong issue, on some mid-level technician’s projections of what might happen 10 or 15 years from now, rather than on what is actually happening right now and the major problems that we do have and the steps that we would have to take to address them.
JAY: Go back to Europe. There was an interesting comment on pundit TV. Again, one of the hedge funds managers used the phrase sovereign raiders, and he talked about in Europe how there’s raids taking place on Greece, and then Portugal and Spain, and then Italy, and he was talking about that and the comment one of the interviewers said–well, what could be next? France? And he said, no, France is too big; probably next they’re going to go after Belgium. So what is he talking about? What are these sovereign raiders accomplishing here?
GALBRAITH: Actually, I have seen similar analyses from an independent and disinterested source. And what is happening here is that you have entities which are capable of amassing, let’s say, credit default swaps against particular countries, which drives down the price and up the yield of those countries’ bonds, makes it virtually impossible for them to find the euro to service their debts and meet payroll and other basic commitments, and then forces them into crisis. And that basically has happened to tie–in such a way as to tie Portugal, Ireland, Greece, and to a certain extent Spain together so that practically nothing that any of these countries actually do–and they can sell off all their public assets and cut their civil services to the bone–it’s still not going to establish, reestablish anything like ordinary private credit for them. What then happens is that the raiders, as they get bigger and bolder and as countries that are close to that margin become weaker because they are piling up debt in order to bail out the peripheral countries, what happens is the countries tip over into the fallen zone, into the default zone or the zone of being vulnerable to this kind of attack. And that’s happened to Spain. It’s happening to Italy. And as you say, you can predict that Belgium will be next. And after Belgium there’s France. And, fundamentally, if we get that far and the French position becomes weaker when Italy goes and if Belgium goes, you get that far, then it’s very hard to see how Germany alone manages to act as the savior [of] everybody else in the eurozone, or for that matter that they would continue to be willing to act as the savior. And that’s the issue with the kind of toxic architectural failure in the way the European financial arrangements were put together.
JAY: And is part of what’s going on in Europe and here in the United States is that there’s just so much capital looking for someplace profitable to go, and one of the places capital could go is eating up pieces that are now publicly owned? And, you know, we know–see them picking the bones of Greece. And there’s this move to privatize like crazy here at the state level and municipal level. I mean, it’s–I mean, the crisis is real, but there’s also people taking advantage and exacerbating the crisis ’cause there’s a lot of money to be made in this.
GALBRAITH: That is certainly true. And you have to ask (I mean, Greece is a country with a great many islands) what is the potential efficiency gain from transferring a very small electrical system that’s specific to one island from public to private ownership. Basically, there is no efficiency gain. The only thing that will happen is that the same plant will start charging much more for power, and the residents who have lived there for many generations will not be able to afford to pay their electricity bills, and they’ll be forced out of their businesses and off the island. And so that kind of thing is just very worrisome to the–you know, to the structure of the society that Greece is is really the consequence of this massive selloff at firesale prices, at ridiculously low prices of public assets.
JAY: So what do you make of the Obama administration’s response? And what do you think they should be doing?
GALBRAITH: Well, the Obama administration has shown itself basically to be complicit with a process which is going to lead to very large cuts in the basic social insurance programs that have protected the American population for decades–Medicare, Social Security, and Medicaid. Those cuts were not actually made in the last deal, but the junta, the new super committee that they’ve set up, will be under very strong pressure to recommend them, and there will be a very tight squeeze between tax increases that the Republicans don’t want, defense budget cuts that the national security lobby and a large part of the population probably doesn’t want, and Social Security and Medicare, which, of course, another large part of the population depends upon. So we’re going to see that down the road. That’s [incompr.] which I think represents a huge failure of the Obama administration of an effort on their part to fold this very regressive long-term policy objective into the debt-ceiling theatricals of the far right of the Republican Party. And I fear that it’s going to be very hard to prevent those things from actually taking place.
JAY: And in terms of this crisis of this week, what should they be doing that they’re not doing?
GALBRAITH: Well, I basically don’t think there’s any capacity in the administration to come up with anything fresh and effective, so I’m not going to waste your viewers’ time by making–giving them gratuitous advice. But what is absolutely necessary is to realize that what’s going on now is pricing into the markets the consequences of these very deep austerity policies, both in Europe and in the United States. And this is a sign of the failure, of the complete dysfunctionality of this process that we’ve been in for months now, of framing policy around so-called long-term deficit reduction. Until we get away from that and start talking in plain, rational terms about the issues that we actually face, we’re simply never going to come close to dealing with our actual problems, and things will continue to deteriorate.
JAY: Thanks very much for joining us, James
GALBRAITH: Always a pleasure.
End of Transcript
DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.
Story Transcript
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. So the markets seem to be in freefall Monday morning and throughout the day. S&P on Friday downgraded American sovereign debt from AAA to AA. But most observers don’t quite see the connection here, ’cause everyone doubts S&P’s motives for doing this. So why is the market in freefall if the downgrading isn’t really the underlying cause? Now joining us to unpack what’s happening today is Professor James Galbraith. He teaches at the University of Texas at Austin. He’s the author of the book The Predator State. Thanks for joining us again, James.
JAMES K. GALBRAITH, ECONOMIST AND AUTHOR: A pleasure.
JAY: So what’s really going on here? Why is the market tanking?
GALBRAITH: Well, it’s an interesting situation. Standard & Poor’s issued a downgrade of US government debt of Treasury bonds and bills–it didn’t downgrade the stock market. And yet it’s stocks, private securities that people are selling in order to buy US Treasuries bonds and bills. One thing you can say for sure is that people are not responding to anything S&P did directly. They clearly totally disregarded the nonsense claim that’s implicit in the downgrade, that US Treasury bonds and bills are in any way less trustworthy than they already–always have been. That’s clearly not the case. The prices of those assets are up.
JAY: Yeah, everybody’s–in fact, today, everybody’s buying more T-bills.
GALBRAITH: Yes, exactly. So that tells you that S&P just made a fool of themselves on the direct issue that it was speaking to. They may have made a small contribution to disorder and disturbance in the private capital markets by undermining the credibility of everything else that they rate and having basically exposed themselves as being capable of taking a plainly foolish position for plainly political reasons. It would be hard to see why you would trust their rating of anybody else at this point. So people looking for a little more security might well be getting out of private assets and private equities in order to get into government bonds. But I think that’s probably also fairly minor. The major news, the major event over the past several days has been the deepening crisis in the eurozone, and in particular the changing position of Italy, which is an enormous economy, seventh largest in the world, from being one of the countries that was guaranteeing the stability of the eurozone, helping with the purchases of the debt of Greece and Ireland and Portugal and so forth, to being one of the countries in need of assistance. And as that transformation occurs, it really does cut to the stability of the European system, the stability of the European economy. And if you read the European press this morning, you would find a mounting sense of disorder and, really, incoherence amongst the statements being made by central bankers, national and international level, in Europe. So I would think any investor who was thinking about companies that are doing a lot of business in Europe would have very good reason to be very nervous right now.
JAY: Is part of what’s going on here is that there are some people in this economy–and I mean people in corporations and banks–that are sitting on piles of cash and are really big who profit from this volatility? You know, apparently, the banks and corporations, with the amount of trillions they’re sitting on, if you have a big crash like this, you make money buying back in, ’cause you’re kind of big enough to withstand the downside and you have so much to gain on the upside in terms of buying and picking up stuff on the cheap. How much a role you think this has to play in this?
GALBRAITH: I have been thinking about that over the past some days. The consequence of the policy of quantitative easing: there’s a huge amount of free cash, particularly in the banking system. And so that incentive is there. If you can short the entire–the asset market of the entire country, not only stocks but also real estate, this is the way large accumulations are made at the bottom of a slump. So it may be that the Federal Reserve, in an effort, at least ostensibly, to promote economic expansion by flooding the economy with cash, has placed a very powerful weapon in the hands of people who are able to take a short position. And that may–that’s something we may discover later. I don’t–we don’t have direct evidence for it; it’s circumstantial at this point. But it’s a possibility.
JAY: Now, there’s another thing that isn’t getting talked about today on pundit TV, which is they keep talking about, oh, T-bills, people buying T-bills, don’t worry, people are buying T-bills. But what is all this going to mean for states and municipalities who don’t print their own money, who don’t have T-bills everybody’s wanting to buy? I mean, aren’t interest rates going to go up on municipal bonds, on state bonds? Isn’t that where Americans are really going to feel this?
GALBRAITH: There’s a serious risk of that, which the federal government could, if it were thinking clearly and acting purposefully, easily take care of by providing new and expanded assistance to state and local governments. The problem that we have here–in some way, what S&P did was firmly in the mainstream of Washington policy talk. It simply acted on the same basis that the Committee for a Responsible Federal Budget and the Concord Coalition and the Congressional Budget Office, all of these Cassandras out there who have–Chicken Littles, I should say, running around, warning that the sky is falling over long-term deficit projections which they themselves basically cooked up, are saying essentially the same thing that Standard & Poor’s said. So this is the problem that we have is that we have a policy process which is focused on the wrong issue, on some mid-level technician’s projections of what might happen 10 or 15 years from now, rather than on what is actually happening right now and the major problems that we do have and the steps that we would have to take to address them.
JAY: Go back to Europe. There was an interesting comment on pundit TV. Again, one of the hedge funds managers used the phrase sovereign raiders, and he talked about in Europe how there’s raids taking place on Greece, and then Portugal and Spain, and then Italy, and he was talking about that and the comment one of the interviewers said–well, what could be next? France? And he said, no, France is too big; probably next they’re going to go after Belgium. So what is he talking about? What are these sovereign raiders accomplishing here?
GALBRAITH: Actually, I have seen similar analyses from an independent and disinterested source. And what is happening here is that you have entities which are capable of amassing, let’s say, credit default swaps against particular countries, which drives down the price and up the yield of those countries’ bonds, makes it virtually impossible for them to find the euro to service their debts and meet payroll and other basic commitments, and then forces them into crisis. And that basically has happened to tie–in such a way as to tie Portugal, Ireland, Greece, and to a certain extent Spain together so that practically nothing that any of these countries actually do–and they can sell off all their public assets and cut their civil services to the bone–it’s still not going to establish, reestablish anything like ordinary private credit for them. What then happens is that the raiders, as they get bigger and bolder and as countries that are close to that margin become weaker because they are piling up debt in order to bail out the peripheral countries, what happens is the countries tip over into the fallen zone, into the default zone or the zone of being vulnerable to this kind of attack. And that’s happened to Spain. It’s happening to Italy. And as you say, you can predict that Belgium will be next. And after Belgium there’s France. And, fundamentally, if we get that far and the French position becomes weaker when Italy goes and if Belgium goes, you get that far, then it’s very hard to see how Germany alone manages to act as the savior [of] everybody else in the eurozone, or for that matter that they would continue to be willing to act as the savior. And that’s the issue with the kind of toxic architectural failure in the way the European financial arrangements were put together.
JAY: And is part of what’s going on in Europe and here in the United States is that there’s just so much capital looking for someplace profitable to go, and one of the places capital could go is eating up pieces that are now publicly owned? And, you know, we know–see them picking the bones of Greece. And there’s this move to privatize like crazy here at the state level and municipal level. I mean, it’s–I mean, the crisis is real, but there’s also people taking advantage and exacerbating the crisis ’cause there’s a lot of money to be made in this.
GALBRAITH: That is certainly true. And you have to ask (I mean, Greece is a country with a great many islands) what is the potential efficiency gain from transferring a very small electrical system that’s specific to one island from public to private ownership. Basically, there is no efficiency gain. The only thing that will happen is that the same plant will start charging much more for power, and the residents who have lived there for many generations will not be able to afford to pay their electricity bills, and they’ll be forced out of their businesses and off the island. And so that kind of thing is just very worrisome to the–you know, to the structure of the society that Greece is is really the consequence of this massive selloff at firesale prices, at ridiculously low prices of public assets.
JAY: So what do you make of the Obama administration’s response? And what do you think they should be doing?
GALBRAITH: Well, the Obama administration has shown itself basically to be complicit with a process which is going to lead to very large cuts in the basic social insurance programs that have protected the American population for decades–Medicare, Social Security, and Medicaid. Those cuts were not actually made in the last deal, but the junta, the new super committee that they’ve set up, will be under very strong pressure to recommend them, and there will be a very tight squeeze between tax increases that the Republicans don’t want, defense budget cuts that the national security lobby and a large part of the population probably doesn’t want, and Social Security and Medicare, which, of course, another large part of the population depends upon. So we’re going to see that down the road. That’s [incompr.] which I think represents a huge failure of the Obama administration of an effort on their part to fold this very regressive long-term policy objective into the debt-ceiling theatricals of the far right of the Republican Party. And I fear that it’s going to be very hard to prevent those things from actually taking place.
JAY: And in terms of this crisis of this week, what should they be doing that they’re not doing?
GALBRAITH: Well, I basically don’t think there’s any capacity in the administration to come up with anything fresh and effective, so I’m not going to waste your viewers’ time by making–giving them gratuitous advice. But what is absolutely necessary is to realize that what’s going on now is pricing into the markets the consequences of these very deep austerity policies, both in Europe and in the United States. And this is a sign of the failure, of the complete dysfunctionality of this process that we’ve been in for months now, of framing policy around so-called long-term deficit reduction. Until we get away from that and start talking in plain, rational terms about the issues that we actually face, we’re simply never going to come close to dealing with our actual problems, and things will continue to deteriorate.
JAY: Thanks very much for joining us, James
GALBRAITH: Always a pleasure.
End of Transcript
DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.