Crisis is not Behind us
Randall Wray: Banks are bigger than in ’07; are cooking their books to show profits — need regulation and increase in purchasing power and jobs program to avoid bigger crash
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay. We’re in Bretton Woods, New Hampshire, at the INET conference, which has been discussing and debating solutions to the economic crisis. Now joining us is Randall Wray. Randall is a professor of economics at the University of Missouri-Kansas City and a senior scholar at the Levy Economics Institute of Bard College in New York. Thanks for joining us.
L. RANDALL WRAY, SENIOR SCHOLAR, LEVY INSTITUTE: Thank you.
JAY: So before we get into some of your proposals, let’s talk about what you make of the current situation. I’ve heard at the conference that due to smart, coordinated international collaboration, at the G-20 mostly, the worst–we didn’t enter the great depression. We more or less–we’re in a great recession, but there’s a slow recovery coming. But some people are saying, hang on, maybe all we did was postpone this, and maybe we’re still headed towards the great–potentially great depression. Where are you at in this?
WRAY: Well, first, I wouldn’t quite say that we had a really smart intervention. I think that a lot of the policies actually were not very well thought out. In any case, I don’t believe that the crisis is behind us. I think that in many ways things actually look worse now than they did in 2007.
JAY: Give us examples [crosstalk]
WRAY: Well, I think that we have consolidated many already too large financial institutions. The concentration among the biggest financial institutions is even bigger than it was in 2007. They still are loaded with most of the bad assets that they had in 2007. If anything, the real estate sector is much worse than it was in 2007. Defaults are continuing to rise, foreclosures are rising. There are losses every time you foreclose on a house. So the banks still have the bad assets. We’ve lost over 8 million jobs. And, of course, many new people have come into the labor market since then, so that the shortfall in jobs will–even the most optimistic projections are that it will be many, many years before we create enough jobs.
JAY: Well, profits have recovered and there’s certainly no–there’s little sense of urgency anymore. You know, a couple of years ago we’re told we’re looking into the apocalypse. Now there’s next–and globally, in terms of financial, political, and financial elites, there’s little sense of urgency about the situation. It’s kind of back to business.
WRAY: Unfortunately, that’s true. And the biggest financial institutions are back to business as usual, and we know where that led last time. They’re going to reproduce the same conditions.
JAY: And do they not believe that? Or are they simply came out of it well enough last time, so why worry about going into it again?
WRAY: Yeah, from their point of view, everything turned out fine. And so why not continue with what they were doing? Now, let me say there is one huge elephant in the room, however you want to phrase this, and that is the deficit-cutting hysteria that has gripped most nations. And that is going to lead to cutbacks in government spending, which could very well precipitate the next crisis as spending declines, as unemployment continues to go up, as more people lose their jobs and default on their debt.
JAY: And the other factor that takes place with unemployment so high is wages go down. So on the demand side it’s getting worse. They’re going to cut back on the government side. It’s hard to understand how this doesn’t have a recessionary effect. And they must know that. They’re not fools. So what is there–I mean, what do you think is their strategy?
WRAY: Not fools? I don’t know. I’m not quite so convinced.
JAY: Well, they know how to make money, that’s for sure.
WRAY: Well, they know how to cook the books. That is a somewhat different matter. And I think that the largest financial institutions are cooking the books. I think that their reported profits are mostly false.
JAY: And this is because of how much bad debt they’re not really showing on the bottom line.
WRAY: The last reports a few months ago on the financial institutions, when they reported record profits, where did those come from? They reduced their loan loss reserves. That’s where the profits came from. They’re setting aside less money to take care of bad debts. This is ridiculous.
JAY: So let’s say you’re right–and a lot of people agree with you in the analysis–that none of the fundamentals have changed, and sooner or later, unless something happens, we’re going to be back into some kind of recession, if not worse. Or even if you take what’s happening and you take sort of the official version of what’s happening, unemployment’s still going to be very high for, you know, half a decade to a decade. So what’s your view on what should be done?
WRAY: Well, a lot of things need to be done. We need real financial system reform. This is a huge topic. That is important.
JAY: So let’s start with that, the further consolidation in the banking sector, so you actually have more even bigger to fail than there was before.
WRAY: Yeah. Unfortunately, we’re not going to get fundamental financial reform until after we crash again. So to some extent it’s a little bit premature to be talking about this, because everything I’m going to say, the response will be, that’s impossible. Okay? Simon Johnson, who comes out of the financial sector, and he’s a mainstream economist, says we have to break them up. And I think this is absolutely correct, that we really can’t get fundamental financial reform unless we break up the biggest financial institutions. Now, as soon as you say that, the response is: how can you break them up? How are you going to break up Goldman Sachs when essentially it runs the Treasury? Okay? This is true. So, unfortunately, we won’t see fundamental reform until crisis.
JAY: What I would say is not how can you break them up, ’cause I agree with you: at a moment of great crisis, the conversation will come back on the table about breaking them up. But what we saw last time wasn’t like one big bank that was too big to fail. We saw an entire sector that was all doing the same stuff. So if you break them up, why don’t you still just have a bunch of smaller players, but all doing the same stuff–proprietary trading, and too much leveraging, and all kinds of risky investments? Like, it’s so systemic, I don’t see how breaking it up in itself is a solution. It maybe go part way, but–.
WRAY: It’s part of a solution. That’s correct. However, it wasn’t true that all banks were doing this. It’s the top ten banks. That is where all those problems were. Now, smaller banks are failing because of the state of the economy. They didn’t do the toxic waste, they didn’t do the subprime mortgage securitization, but now that we have a real estate crisis all across the country and people can’t make payments on their loans, smaller banks are starting to fail.
JAY: But what I’m getting at, if you don’t make laws against proprietary trading and all these kinds of craziness, if you don’t make it illegal to have that kind of casino capitalism, who cares whether it’s 20 rather than ten? If they’re still doing it, a whole sector can go down, ’cause we know from what happened is you get this herd investing, like, everyone runs to that bubble, then they all go to that bubble.
WRAY: Yeah. No, this [snip] absolutely right. So there are different ways to break up a bank. Okay. When and if the next crisis hits and you have an insolvent institution, we know what the FDIC is supposed to do. They are supposed to resolve that institution. They’re not supposed to keep them in business and allow them to continue to do what they did to get into the crisis. So at that point you can break them up. If we had the political will, we could also say that no bank with a charter, a bank charter, should be allowed to do proprietary trading. And so we let Goldman Sachs choose: would you rather be a bank or would you rather be a trader? You can’t do both. You know, this is sort of bringing back Glass-Steagall.
JAY: And this is where you get into the politics of it, ’cause that was something that was discussed during financial reform. And this, where you get into the situation where Wall Street, when we’re talking finance reform, although it applies in other sectors of the economy, have so much power in Washington that it doesn’t matter whether you have a good idea, in the sense that you can’t get it past, past the power of money in Washington.
WRAY: Yes. Yes. Very unfortunate.
JAY: So one of the options that was kind of talked about, but not that much, but it did come up in the health care debate, which is if you have a public option, it gives you leverage to, first of all, provide an alternative mechanism and ways to kind of discipline the industry, does that not make sense in the finance sector, too?
WRAY: Yeah. We need a financial system, of course, and we could probably list a half-dozen functions that we need to be supplied by some combination of public sector and private sector and public-private sector partnerships. So if we think there are three ways to provide a half-dozen financial services and there’s no reason why we have to rely on the private sector to provide all six of these functions, there’s no reason why we need to rely on the government to provide [crosstalk] We need–.
JAY: Especially when the private sector’s relying on public sector money to survive.
WRAY: Well, a very large part of our financial sector is supposedly privately supplied, but with the government backing them up. And in the old days there was a trade-off that the private banks had to accept: if you’re going to have the government standing behind you when things go bad–you have access to the Fed as the lender of last resort, you have access to the Treasury to ensure your deposits–then the trade-off is we’re going to regulate your activities. What we did is we reduced the regulations. We replaced them with self-regulation. We said, well, the stuff that you’re doing is so complex, we’re not sure we can regulate it, so we’ll let you regulate yourself. That is where the problems began, because now with self-regulation, you decide what you’re going to do. Try not to take too many risks, but we’re not going to look over your shoulder. But if things go bad, don’t worry, Uncle Sam’s here. This gave perverse incentives that everyone, I think, who wants to recognize is able to recognize that this is not the way to run a financial system.
JAY: Okay. Let’s move to unemployment. Talk about your proposals in terms of ways to lower unemployment and get closer to a full-employment economy.
WRAY: Okay. So there are immediate things we can do right now to deal with the crisis. What we need to do is to get more income into the hands of households, more income into the hands of state and local governments. Okay? We have to relieve the fiscal crisis of states and local governments that are being forced to downsize, to lay off workers, put workers on furlough. All this does is cripple the economy. It makes the housing sector worse, and makes the financial problems of banks worse, too. So we need to get money to the states. And we can do that with–go back to the days of Richard Nixon, Republican: block grants to the states, $400 billion or so, distributed on a per capita basis to the states, and allow them to prop up their budgets until we get economic recovery and their tax revenues are restored. So $400 billion there. We need to extend the payroll tax cut. The payroll tax cut was a good idea, something that we had been advocating for a long time. And this is the best way to get tax relief to average Americans, because about 70 percent of Americans pay more in the payroll tax than they do in the income tax. If you do a Bush income tax cut, most of the benefits go to high-income people because they pay most income taxes. If you do it through the payroll tax, you’re targeting workers. What we should have done in the payroll tax relief was also give the payroll tax relief to the employers. The employers pay a matching tax. This reduces the cost of keeping your employees. It reduces the costs of hiring a new employee. So let’s have a payroll tax holiday until we reach some target, like the unemployment rate falls to 4 percent, GDP growth reaches 6 percent, some sort of a target down the road several years from now. Then we can start phasing back in the payroll tax if we wanted to do that. So this could give another $400 billion or so tax relief immediately, starting next week. This is another good thing about the payroll tax: you just stop the withholding. It can be very quickly done, put in place. So these will help–.
JAY: Which is, like, a 30 percent increase in–well, it depends how much you cut the tax. But if you cut the whole tax, it would be, like, a 30 percent pay increase. How much would you cut it?
WRAY: To zero.
JAY: So you’re talking about 30 percent wage increase.
WRAY: Well, not that much. You pay 6.14 percent. Your employer pays 6.14. If you’re self-employed, you pay the 12 point. So it’s a 12 percent increase going to employers and employees. This would go a long way toward helping to deal with the crisis situation. We need help for homeowners. And this is going to take a little bit longer to formulate, but we’ve got to stop the foreclosures, stop the foreclosures immediately. We know–this is a big topic. I don’t know how much time we spend on it. But we know that foreclosure fraud is massive, and it could be that almost all foreclosures are fraudulent. We need to stop this. Foreclosures are not good for the holders of the mortgage-backed securities, and they’re not good, obviously, for the homeowners. Throwing people out of their homes makes no sense. So stop that immediately. And then we need to get mortgage relief. The best thing to do would be to provide better mortgages, better terms to indebted homeowners. That’s going to take a little bit of time and a lot of thought and, of course, a lot of politics to get that through. So ideally that is what we would do.
JAY: Okay. So that has increased purchasing power.
JAY: What’s the effect on unemployment?
WRAY: Well, the payroll tax, hopefully that can provide a little bit of help in job creation, or at least stop job losses. We need a jobs program. We need to look back to the New Deal. The New Deal created 13 million jobs.
JAY: So this would be a publicly funded infrastructure jobs program.
WRAY: Well, infrastructure is a good idea. It’s not going to be enough. We’re going to need something like the scale of the New Deal. We’re going to need 13 million jobs, maybe more. For a long time, I’ve advocated a job guarantee–employer of last resort it’s sometimes called. And this is the idea that the federal government provides the funding–it provides the funding–doesn’t mean it creates the job, it doesn’t mean that it designs every project and manages every project, but it provides the funding for the wages for a universal job creation program so that anyone who is willing to work at the program wage and benefit package–.
JAY: And what are you imagining that is, that wage? ‘Cause this is where we get into the whole issue of how inflationary is this. I mean, if everyone got $50 an hour, that’d be one thing. If they’re getting $7, it’s another.
WRAY: Well, where you set the wage initially could have an impact on wages and prices when you implement the program. So this is–rather than inflation, this is more like a one-shot. It could be a one-shot increase. All wages would adjust upward if you set this at a high wage. Okay? The least disruptive thing to do would be to set it at a minimum wage, because we’ve already got a minimum wage, and presumably no one can pay below that. We know that illegally there are employers paying less than that. So you set it at a minimum wage. You give a package of benefits. It should include health care. And then the private sector is going to have to match this. Now, ideally, I would like to see a living wage. That should be the goal.
JAY: Which some people are saying could be $14, $15, $16 an hour.
WRAY: It’s probably going to be–it depends, of course, on the state, the city, how expensive it is where you happen to be. But, yeah, it’s going to be probably more like double the minimum wage. I think that that should be our goal. I think it should be our goal anyway. Why are people working full time and living in poverty?
JAY: Okay. So what’s the bill, and how are you going to pay it?
WRAY: Okay. Well, the bill actually is surprisingly low. So I don’t think this is something we should be concerned with, but I realize that people are. It will be 1 to 2 percent of GDP. The reason that there’s a range is, of course, it’s going to depend on the wage, it’s going to depend on the benefits we give, it’s going to depend on how much would unemployment compensation spending go down as people move out of unemployment benefits into this program. We’re going to get a saving in that program as people transition over here. We might get by with less welfare spending, fewer food stamps because people are moving into this program. Maybe incarceration costs are going to go down because people now have an opportunity, young people have an opportunity to get jobs rather than going into a life of crime. So, obviously, the estimates are going to be a bit fuzzy. But 1 to 2 percent of GDP–.
JAY: Which is how much?
WRAY: Well, GDP is $13-14 trillion.
JAY: So what’s that come to? I can’t do the math in my head. You’ve been asked this 100 times. You’ve got to know the answer to this.
WRAY: Well, take two zeroes off $13 trillion.
JAY: Alright. Do it for me. You’re the economist.
WRAY: $130 billion.
JAY: Alright. So we’re $130 billion, which actually doesn’t sound like that much.
WRAY: It’s surprisingly little. Actually, you know, if you think about how much do we spend on social programs–. And a lot of the social programs exist exactly because we don’t offer jobs, we don’t offer an opportunity to work and earn a living. We have to have an array of social programs, including incarceration, in order to take care of the population that can’t get work.
JAY: So let’s say it’s $130 billion to $150 billion, for the sake of argument. Where does it come from?
WRAY: Well, it’s going to come from the same place all federal government spending comes from. That’s why I said it’s important that this program is funded by the federal government. If we’re talking about state and local governments, they are revenue-constrained. We know that. That’s why they’re cutting back and laying off their workers, because they really do have to pay for their spending out of their tax revenue, plus borrowing, although they’re very constrained in borrowing, because as soon as they run a deficit, Moody’s downgrades their debt, their interest rate goes up, and they can get into a vicious debt cycle. The federal government is completely different. The federal government actually–when Bernanke was asked where does he get all this money that the Fed is using to buy toxic waste from banks in the bailout, and Bernanke said, you know, what we do is we have somebody that uses keystrokes. We push buttons on the computer and the deposits of the banks are increased.
JAY: And it was several trillion dollars.
WRAY: Well, the total accounting of the bailout for Wall Street might be $20 trillion. A lot of that is guarantees that will only kick in when the next crisis hits. If banks don’t recover, the bill will get bigger and bigger. But the guarantees plus the purchases plus the lending is $20 trillion. Okay? Compare that to the stimulus package, which was $1 trillion over two years. So that gives you the order of magnitude there.
JAY: So $150 billion doesn’t sound like enough money for–13 million jobs you’re saying? It doesn’t sound like enough dough. Like, if almost–if the stimulus package was over $800 million [sic] and didn’t seem to create that many jobs–mostly it seemed to save some jobs at the state and municipal levels–how do you get to creating 13 million jobs with far less money?
WRAY: Well, for one thing, you’re not spending it through the private sector. There’s not going to be the profit markup on this.
JAY: But didn’t most of that money wind up going to state and municipal governments?
WRAY: But, again, it’s–this program–I’m only talking about the wage bill in the program. Wages at the minimum wage times 13 million people doesn’t amount to very much. There have been programs like this. We had the New Deal in the United States. But even today there are programs like a job guarantee, employer of last resort. And the common experience is that it’s about 1 percent of GDP to supply a job at the minimum wage in whichever society you’re talking about to anyone who can’t find work in the private sector or in the regular government jobs. It doesn’t come to much.
JAY: And a job at a living wage is, what, double?
WRAY: It would be double.
JAY: So it’d be, like, $300 billion. So what’s the resistance to this? I mean, when I originally heard about this plan, I thought it was a lot more money. I could never get my head around how do you just create that much money. Well, they’ve actually–I take your point. They’ve actually created a lot more than that money in terms of the way that they’ve been bailing out banks. So it’s actually not really that much money. So what’s the resistance you get to this?
WRAY: Okay. Well, so, one is that people don’t understand how the federal government spends, so they worry about affordability. And I know you could say on even conventional terms this doesn’t sound like a whole lot of money, but still they’re going to say, but hold it, the federal government’s already broke–how are they going to pay for this? Okay? We’ve already got a $1 trillion budget deficit. So you’re going to be adding to the budget deficit. So you need to explain that Bernanke was right that this is not a question of the government doesn’t have the money. The government creates the money as it spends. If you’re a Social Security recipient, on the first of the month what happens is you get a credit to your bank account. Where did the money come from? A keystroke, okay, as Bernanke said. It’s exactly the same way that the Fed buys toxic waste from banks. It’s a keystroke. This is the same way that the Treasury credits the Social Security recipient.
JAY: So the critique of this is at some point it becomes inflationary.
WRAY: Okay. So then the second issue is the inflation issue. The way this program is designed, it’s a hire-off-the-bottom scheme. It is a fixed price floating quantity–that sounds a little bit technical, but the idea is the government doesn’t bid against the private sector to get employees into this program. It just offers. It says, we’re going to pay $7.50 an hour. If you want a job, we will pay the wages for the job. Okay? If the private sector wants to hire people out of this program, all they have to do is pay $7.55. Okay? And when the private sector offers $7.55, the government doesn’t say, ah, we’ll pay you $7.60. You see, they don’t bid against the private sector. They have a fixed wage. A fixed wage provides a wage floor–a wage floor. It doesn’t push wages up. It prevents them from falling below the floor. So the wage itself is not going to pressure private sector wages.
JAY: Well, I can imagine that it could in some ways, although I don’t know why that would be a bad thing. But the more desperate and unemployed people are, the more you can beat people up, including unionized workers and others. I mean, it could have somewhat of an upward pressure, although, as I said, it seems to me that would be a good thing, not a bad thing.
WRAY: Yeah. But against that, what you’re doing is you’re creating a pool of employable labor, people who are going to work every day. They’re proving that they’re ready, willing, and able to work. They’re gaining skills on the job. They will be more desirable for the private sector. And so I don’t see this as a bad thing for the private sector either. It could actually reduce their hiring costs. They don’t have to go take a chance on someone who’s been out of work for a year whether they’re going to be a good employee, whether they’re going to show up on time. They’ve already got the employment record. This person has been in this program. So I don’t think that business costs actually will go up because of it.
JAY: What are the limits of this kind of strategy? You know, as I say, $300 billion in this economy is not a lot of money. But what are the limits of how much you can do this? I mean, you know, if you want to extend it into the ridiculous, you know, you could just give everybody $20,000 a year, and that would be a great stimulus. Like, where is there a limit to how much you can just create money and distribute it?
WRAY: Well, there is no limit to the government’s ability to credit banking accounts. So if the government decided to credit everybody’s account by $20,000, the government could do this. Okay? The only constraint is the government budgets programs. You know, this is not likely to get through Congress, let’s credit everybody’s bank account with $20,000. It’s not likely to get through Congress. But if Congress decided that they wanted to do this, there wasn’t a political constraint to it, there is no financial constraint to the government’s ability to do that. Now, that probably would be inflationary.
JAY: Well, that’s my question is when does this get inflationary, not whether they have the technical ability to do it.
WRAY: But, of course, $20,000 into 300 million bank accounts is a lot more than what I’m talking about, okay, first. The second is the incentive thing. Here we’re just saying, you’re ready and willing to work; we will give you a job. Okay? That is less inflationary than saying, oh, you can quit your job and stay home, because we’re going to credit your bank account anyway.
JAY: Right. Okay. Let’s pull back from the ridiculous. Where are you at with this plan? What kind of response [incompr.]
WRAY: Well, people are a little bit more open to the notion that it is the government’s responsibility, at least in a crisis, to provide jobs programs. So the crisis has opened an opportunity. It’s still a hard sell, and it has become harder because of the deficit hysteria in Washington, where you can’t–you know, what are they arguing about in Congress? Thirty billion dollars, right? They’re going to shut down the government for $30 billion. So that has become a huge barrier.
JAY: I mean, just to close the loop on the argument, ’cause I don’t think I did, I assume your argument is that once you do this, it will generate so much economic activity that the government actually winds up getting back more or less the $300 billion, $150 billion that it put out.
WRAY: I can tell you I’m not the only person working on this proposal. Phil Harvey has done very careful calculations, because he’s more concerned about the budget than I am, because we have different views about government affordability and so on. And his best estimates are the net is just about zero, because tax revenue will go up and other kinds of spending will go down as you create the jobs. Okay? So the 1 percent, the 2 percent of GDP, it’s probably going to end up being much less than that. It could even be zero.
JAY: So just to conclude, your view, at any rate, is that the objections to this are more philosophical, ideological. It’s more about the role of government. But when actually you crunched the numbers, you actually don’t–it’s not really an issue.
WRAY: Yeah. There is a third argument, and that is: how are you going to run a program that is this big? Will you be able to manage it? How will you prevent corruption? How will you make sure that the people are doing useful things? And so on. This is one of the reasons why the program I recommend would not be a federal government-run program. Federal government-funded, but it would be run by local community service organizations, not-for-profit. Perhaps state and local governments would create the jobs, as they did in the [incompre.] jobs under President Carter. So you decentralize the program. Communities know where they can usefully employ people. You go to your local Red Cross office and ask, could you employ two more people if the federal government would pay the wage, and–.
JAY: And how long does the program last?
WRAY: Well, as I was saying, we are making some headway because of the crisis, because people see it as a anti-crisis program. And that is the way that the New Deal job creation programs were seen. Now, I think that was a mistake. The belief was that, you know, with the war and with the postwar boom, we no longer need the government to create jobs. The reality is that we always had unemployment problems. Even in the early postwar period, the golden age of the US capitalism, there were millions of people who could not find jobs. Unemployment is concentrated among groups that are easy to identify: people with lower education, people with criminal records, and of course minorities. So unemployment rates remained high even in the postwar boom among obvious groups. A job guarantee program would have eliminated the waste. People who wanted to work, whose family lives were hurt, whose health was hurt, the communities were hurt, because we’d never created jobs for everyone who wanted to work, if we’re going to live–.
JAY: So for you this is a permanent program.
WRAY: This would have to be a–this should be a permanent program. It will help to solve the crisis. And then as we move out of the crisis, as the private sector recovers, it will hire many of these people out of the program back into the private sector. And this is fine. This should be one of the goals of the program: move as many people as you can out into the private sector or into government sector jobs, which are going to, by definition, pay better than this program does, because this is the wage floor.
JAY: Okay. So what we’ll do next to pursue this conversation is we’re going to find someone who really disagrees with you.
JAY: And then we’ll do a debate.
JAY: Are you on?
JAY: Okay. Cool. Thanks for joining us. And we will pick this up on The Real News Network.
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