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The Turkey Votes for Thanksgiving

Banks to Cash-In Again on New Fed Plan Pt.2 with Naked Capitalism’s Yves Smith


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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay. We’re at the PERI institute in Amherst, Massachusetts, and joining us again is Yves Smith. Yves is the creator of the financial blog Naked Capitalism and author of ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism. Thanks for joining us again.


JAY: Okay. So, in episode one, the train is more or less half off the cliff, but there’s a lot of people figuring how to make money on it as it’s going over. And they’re going to—one would think people in the know would—and you need a lot of money to play this game, because they don’t even—have I have a friend who inherited some money and wants to get in on this game, and he was told you can’t even get in without $15 million. They won’t let you play. They won’t let you at the table. It’s like playing poker. You need the right level of stakes. They wouldn’t even let him in. He wants to get on some new type of derivatives and into this game, and he has a lot of money, but he doesn’t have $50 million. At any rate, you make money off the bubble. And they’re also playing the precious metals game, so when the bubble crashes, they’re going to make money on the precious metals. They’re making money getting zero percent money out of the Fed and loaning it back to government or loaning it now more to foreign governments. Okay. So the Fed plan we don’t think is going to work. What should government be doing now?

SMITH: Well, one thing is we actually do need to have more stimulus. There’s unfortunately a notion that’s become very popular that’s a bit dangerous, which is that it’s a good idea to have government austerity at the same time consumers are trying to get their debt levels down. If you’re going to have consumers lowering their debt levels, that’s a real big economic contractionary force, and therefore you need government to act as a counterweight. The one time when government deficit spending is unambiguously warranted is when consumers are deleveraging and businesses altogether aren’t spending either, that they are actually net saving. You know, the normal idea is that consumers normally like to save and that the—then business uses the money in investments. That’s the sort of standard story for why—.

JAY: Yeah, money goes into the bank, businesses borrow from the banks, they make investments, and—.

SMITH: Right. But if businesses aren’t making investments—and not only are they not making investments enough to [inaudible] savings now, businesses in America have been net saving since basically 2002. Even in our last expansion they were net saving.

JAY: Because consumer demand is either not there or artificial on credit cards.

SMITH: That’s correct. That’s why.

JAY: ‘Cause people aren’t getting paid enough.

SMITH: That’s correct. Exactly. So what happens in that scenario is that government spending is actually warranted. We are in one of those times where government deficits are warranted. The difficulty is that people look at the sort of debt-to-GDP ratio and they get freaked out. You know, it looks nervous-making. The problem is they look at the debt side, and that is a static number. They forget that the GDP number is dynamic and that, for example, we’ve now got 10 percent headline unemployment. It’s really closer to 20 percent if you really counted discouraged workers properly. You know, if we had 10,000 more jobs at $25,000, you know, average salary, you would have another $2.5 trillion of GDP. That would roughly be another fifth of the economy. You know, that would change the ratios in a very significant degree, and that’s before you get what they call multiplier effects, that those people, if you had 10 million people more employed and they were spending, it wouldn’t just be that one shot; it would actually increase the GDP even more.

JAY: Okay. Let me ask you a question that’s kind of bothering me. I assume that most of the people at the leadership of the Republican Party and in the business community—and it’s not the whole business community that’s pro-austerity, but the section that is—they’re not dummies. They’ve got to know that this works or doesn’t work. And the logic and evidence seems to lead that it doesn’t work, austerity plan. So why do they want it? What’s in it for them to have a big austerity plan and no stimulus?

SMITH: Well, unfortunately, they’re very driven by their tax bills. There are two things. There’s the free market ideology and this idea that government is bad, and anything to make government smaller is therefore good. And that’s—and we have actually bred for 20 or 30 years of less competent government. So we’ve managed—you know, the fact that government does occasionally shoot itself in the foot, it’s not as if this is an accident. I mean, there’s been an effort to—you know, the negative rhetoric around government has led to the caliber of people who think about public service being not the same that it used to be. You know, now people who are mainly attracted to government service, it’s they want to get their tickets punched so then they can go get a lobbyist job or get on the board of a big public company.

JAY: Senior levels of government service.

SMITH: Senior levels. Exactly. Exactly.

JAY: Because if you are handing out the mail door to door, you’re not—.

SMITH: No, exactly. Exactly. Or just a mid-level bureaucrat. You know. And those roles are actually very important, because they’re the people who, you know, give the advice to the more senior people, at least in theory. We’ve got a system where, you know, frankly, I think they’re blinded by ideology. And I actually disagree with the sort of thoughtfulness of most senior business people. I mean, they tend to operate in a very close circle of people who are like-minded. They tend not to get outside influences. And if you talk about—with a lot of them, if you talk about having more, you know, spending to help ordinary people or you talk about more spending, you know, they go, oh, that’s big government, oh, that’s corporatist. I mean, they have, like, a whole—they put up blinders and they won’t listen to the argument. I mean, it’s really a matter of—for many of them it really is a matter of ideology; it is not a matter of reasonable belief.

JAY: But they also take advantage of a moment when people, workers are particularly weak because of such high unemployment. So the moment is let’s beat up the unions, let’s beat up workers and have lower wages. Let’s not—let’s use this situation and the ideology to make sure we’re not paying any higher taxes, because we can say that’s—you know, it’s anti-stimulus. Of course, they play both sides of the stimulus game. But is there also another piece of this that if you’re sitting on a lot of cash right now, the more things burn, the cheaper it’s going to be to buy back in? Isn’t that there a certain point where it’s actually advantageous to you, if you are of that mindset, to let it melt and maybe even give it a push?

SMITH: Well, that happened with the subprime shorts, the people who shorted subprime market. Even with—some of them I’m not quite sure there was a design element to it. People are very complicated in how they can rationalize their behavior. So I would suspect that even the people who are engaging in behavior, you know, that they’re torching the neighborhood so that they can then buy it on the cheap, I doubt that many of them would be able to admit to themselves that that was the behavior they were engaging in. People are very adept at rationalizing what they’re doing.

JAY: Talk a little bit about the psychology of people who have been persuaded by Tea Party Republican arguments. Like, one of the things I find kind of odd is that a lot of retired people who lost their income because interest rates are so low—and it’s understandable they’re very concerned about that—are voting for policies that are all supposed to be about stopping inflation. But if you had higher inflation, they’d be earning more money. The interest rates would go up and they’d earn more on their savings, would they not?

SMITH: Well, I actually think that the vote for the Tea Party is—you know, both the Republican numbers and the Democratic numbers are awful. I mean, they’re just—so the idea that people are voting for something, I think, is a big misinterpretation of what happened in this election. People are very angry about the economy. And Obama made a huge mistake in not making a break, both policy-wise and just in his stance, from the Bush policies. I mean, this really has been in many respects a continuation of Bush policies, unfortunately, with him trying to put liberal rhetoric around it and a few liberal gestures to try to appeal to the traditional Democratic base. So he’s basically succeeded in not making a lot of traditional Democrats—I mean, there is some loyalty to Obama, just because there are still loyal Democrats, but, you know, the progressive wing is certainly very unhappy with Obama, and yet he’s delivered right-wing policies, but with enough left-wing rhetoric that the Republicans can shoot at him. They can sort of take advantage of his confused positioning versus what he’s actually been up to. So I think it’s just been a very bad policy [inaudible]

JAY: But what I’m getting at is that if from the point of view of small business and retired people, who, if we understand the demographics of who voted Republican, and especially Tea Party movement, that’s a very high percentage of who makes up that movement, retired people and small business, and it’s not only, but they’re a big piece, aren’t they going to be some of the first people to get creamed by austerity measures and—?

SMITH: Yes, absolutely. Well, this is—this goes back to what Thomas Frank was saying, that there’s large segments of the population who have been persuaded for social reasons to vote against their economic interests. Unfortunately, this has become a well-established pattern with large groups within the public. And I think that part of this is that there is a big racist element in the vote against Obama. Like, you know, I have family in Alabama, and 80 percent of the white people voted against Obama. The second—and there is a feeling among older white people of being sort of beleaguered and that they’re sort of losing out, that all the things that the sort of traditional middle class—you know, if you saved, if you did the right thing, you’d have a decent retirement, that’s all being pulled out from under them. And yet they’ve been steered to blame the wrong people for why they’re—.

JAY: But am I right that if you have no more government stimulus and you have smaller government, what’s likely to happen is deeper depression, low interest rates? So people who want more interest on their retirement savings are not going to get higher interest rates. Small business are going to have no market to sell to because there’s going to be higher unemployment. So two of the pillars of this movement are going to be ones that get creamed. I mean, is the logic right?

SMITH: No, your logic is absolutely correct. But I’m just saying that they’ve been sold, yes, they’ve been sold a bill of goods.

JAY: ‘Cause they’re being sold that there’s going to be some economic revival out of smaller government.

SMITH: I don’t even know that they’ve really—well, that’s—you know, yes, this whole government, it’s the whole—.

JAY: Get regulation and government out of the way and business will be free to invest.

SMITH: And I just—and there’s—it’s just not going to happen.

JAY: Okay. So I don’t get this. They’re going to be—retired people and small business are going to be the first one killed by what’s coming.

SMITH: Exactly. Well, what happened turns out was basically like the turkey decided to vote for Thanksgiving.

JAY: So people better stop taking economics on faith and try to get a handle on what’s really happening to them.

SMITH: Exactly.

JAY: Okay. Just so everybody knows at home, Yves Smith is not only a writer and doesn’t only have a blog, but you manage money on Wall Street, so you know from the inside some of these dynamics, ’cause I know that we keep hearing this sort of critique, oh, they never ran a business, they don’t really know.

SMITH: No, I have. I run a business.

JAY: Thanks for joining us.

SMITH: Take care. Thank you.

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

End of Transcript

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