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The roots and remedies of the financial crisis

In the last segment of Senior Editor Paul Jay’s discussion with Leo Panitch, Leo describes the various decisions on the part of the US government which led to the crisis. In short, Leo claims that the effort to house the poor without mobilizing large public expenditure is what created the conditions for the crisis. As a result, the only way to resolve the situation is to return this role to the state itself, as funded by progressive taxation and a sharp decline in military spending.

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Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to the next segment of our interview with Dr.Leo Panitch, professor of political science at York University in Toronto and the author of American Empire and the Political Economy of International Finance. Thanks for joining us again Leo.

LEO PANITCH: Hi, Paul.

JAY: So let’s revisit this question of how did we get to this crisis and what immediate things could people be demanding in terms of solution.

PANITCH: Well, in terms of how the mass of Americans got into this crisis, I think it does go back to the fact that in the 1970s there was a fundamental switch from trying to integrate the workers and the poor people of America into American society, into the riches of American consumerism.

JAY: And maybe just to get some context, especially for some of the younger people in our audience, there were cities burning in the 1960s. You had the Civil Rights Movement. You had workers demonstrating for their rights and for higher wages. The entire society in North America was at a state of intense conflict.

PANITCH: Yes, and you were sending off young black men, conscripting them and sending them off to the Vietnam War. There was the Black Power movement. And the response more under Lyndon Johnson than under Kennedy was to create the war on poverty, or what was known as the Great Society programs, which involved increasing public expenditure at the same time as you were prosecuting the war in Vietnam at great expense. And that was part of the period of inflationary pressures that public deficits were causing, that workers wage demands were causing, ’cause when workers had full employment, they, you know, felt they could make high wage demands in order to buy everything that they were being told to buy that the good life was all about. And the response in the 1970s—and it was a product of the fact that the United States dollar was the world currency, and on here was the rest of the world holding dollars, and they didn’t want their dollars to be devalued by inflation, were demanding of the United States that they cut back on their public expenditure. And they did, and they cut back on it.

JAY: You’re talking about the Volcker shock treatment.

PANITCH: They cut back on it even before that, even under Jimmy Carter in 1976-77. And they cut back on public expenditure, but they still had to try to integrate the masses in the cities. They still had the problem of how do you house people. And one of the things they did was to try to integrate them through getting them into the financial system as borrowers. A act which a lot of radicals were pushing—and they didn’t mean it in a way that would end up in this crisis that we’re now in—was that banks ought to be required to lend to poor people, that they had to lend to those portions of their communities they’d never lent to. Right? And the banks all objected. "What do you mean? We can’t lend to poor people. We’re not going to be sure we’re going to get paid back." They said, "Okay. We’ll allow Fannie Mae and Freddie Mac, the government-sponsored mortgage housing corporations, to create this secondary market in mortgages. They’ll buy them off you."

JAY: When the Republicans now critique this, they leave out the extent to which there was social unrest that had to be dealt with.

PANITCH: Well, they leave out the fact that this was actually a poor option relative to the Great Society programs, that it was happening because they were cutting back on welfare, on the Great Society programs, on food stamps, on public expenditure in the cities, etcetera. So in a sense they drove people into, "Okay, you want to deal, you want to be able to buy in our society, get it from the banks." And Clinton made it worse: having bought into neoliberalism as all part of the third way, I mean, partly he said, "I’m being driven into this because of some"—and he used a word we can’t use on television, blank-blank-blank 28-year-old bond trader. Right? But once he did, he cut back on welfare. He did away with the American welfare system, Clinton, right? And what he then did was he radicalized this community reinvestment act, radicalized it in the sense of push people further into trying to get mortgages through this. Right? And this created it even more. And then Bush came in and let every shyster in the mortgage system into this as a competitor, completely unregulated; removed the reserve requirements on Fannie Mae and Freddie Mac, who—you know, banks have a 10 percent reserve requirement that they have to loan as cash—they only have to have 2.5 percent rather than 10; and you got this mountain of debt. It isn’t the poor people’s fault; it’s the product of not being willing to have public expenditure. It’s a scandal that the United States doesn’t have a massive program of public housing.

JAY: So they could have had two strategies here. One is state investment in cheap public housing direct. Get people to borrow money, get into debt, to somehow buy their own housing.

PANITCH: Exactly. And they pushed it through the private sector; they pushed it through private finance. And of course it was the biggest portion—.

JAY: And they were making money on both sides here: they make money on the interest on the debt, and they make money through the asset inflation in the real estate market.

PANITCH: Yeah, until it all blows up in their faces. So, you know, in terms of what is to be done, we need to look at it historically. Sure, there needs to be regulation; sure, the Bush administration should not have allowed every shyster in the mortgage industry in.

JAY: I can’t resist doing a Sarah Palin, her doggone, do you want to look back again [inaudible]. Go on.

PANITCH: Yeah. Well, we do. I mean, we need to learn the lessons from mistakes of the past. And we need to go back to public expenditure. Now, I think it is true that, you know, this is a capitalist system, and that will itself create contradictions. So down the road you have to be able to think ambitiously about being prepared for what’s going to happen if you’re doing redistributed taxation in order to raise that money. If you’re pushing out the private sector through public expenditure, what’s going to happen in the long run? And I think you have to build support during that process of public expenditure for actually taking the banking system into public hands, making that a public utility. You can’t do that right now apart from a bailout. But I think there’s enough anger around that you could be building towards it, not just as a bailout, but as this will become a way of redistributing what is produced in our society in a more rationable, more equitable way, will have a banking system that serves a different function.

JAY: And then the other issue raised by—. I interviewed Chalmers Johnson the other day, and he was saying he wrote a piece recently called "We Have the Money," and he talked about this recent Pentagon budget, which is over $600 billion, that, in fact, right now, if we could just reallocate some of the military budget to civilian expenditure and infrastructure, you could solve some of it rather quickly.

PANITCH: Both through increasing taxes on those who haven’t paid, through introducing a massive wealth tax, and through reducing the military budget. And this goes back again to the ’60s Vietnam expenditure on the Cold War expenditure, Reagan’s enormous inflation of military expenditure just when he was calling for, you know, reducing government spending. There’s been a tremendous misallocation of funds. And I must say one of the things that’s most scary about Obama and Biden’s buying into the threat from Russia and the threat from Iran and the threat from Pakistan is it creates the basis of continuing this kind of increased military expenditure, apart from whatever misjudgment’s going to be involved, and I think there are many. And I find that very worrying in terms of what is needed. We need a reallocation of state funding, of state expenditure, massive kind.

JAY: Well, I guess we’ll find out whether the reality of this crisis pierces some of the mythology behind the need for militarization.

PANITCH: It certainly looks like it.

JAY: Yeah. So thank you for joining us, and let’s do it again soon. And thank you for joining us. We’ll be, of course, continuing our conversations and analysis of the financial crisis in the coming days as we head towards a Canadian and a US presidential election.

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