Tom Ferguson: Stimulus package is dangerously small; plan for toxic assets shovels money to bankers Pt.1
Obama should save the banks, not the bankers
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. Tuesday night, President Obama spoke about his plans for the economy. Here’s what he had to say.
BARACK OBAMA, US PRESIDENT: Yesterday, Secretary Geithner announced a new plan that will partner government resources with private investment to buy up the assets that are preventing our banks from lending money. And we will continue to do whatever is necessary in the weeks ahead to ensure the banks Americans depend on have the money they need to lend, even if the economy gets worse. Finally, the most critical part of our strategy is to ensure that we do not return to an economic cycle of bubble and bust in this country. We know that an economy built on reckless speculation, inflated home prices, and maxed-out credit cards does not create lasting wealth; it creates the illusion of prosperity, and it’s endangering us all.
JAY: Joining us now in Wellesley, Massachusetts, is Tom Ferguson. He teaches at the University of Massachusetts in Boston political science and political economy. Thanks for joining us, Tom.
TOM FERGUSON, UNIVERSITY OF MASSACHUSETTS, BOSTON: Hi.
JAY: So President Obama says that his plan’s going to work, and not only is it going to deal with the short-term crisis, it’s going to deal with the long-term cycle of boom and bust. How do you assess it?
FERGUSON: Well, I’m underwhelmed, actually. I mean, it’s better than nothing, and, you know, we quite recently had nothing. I mean, George Bush was, after all, president. But on the other hand, look, these guys, I think, have made a series of mistakes, and they’re now beginning to compound. And the situation is sort of—. It’s not nice. Let me put it that way. They made a basic error when they designed the stimulus program: it’s just not big enough. I’m hardly the only person on earth who’s said this. And you know at this point your unemployment rate’s rising toward 10 percent. Moreover, there’s tremendous downward momentum in the whole world economy.
JAY: Now, their counter-argument to that would be they had trouble even passing this. They had to get, you know, three, four Republicans to cross the aisle, and they had to negotiate the size down.
FERGUSON: If you’re asking me, I think it wasn’t bad tactics to try to be bipartisan, but it was foolish to let these folks on the other side define so much of the program. I mean, I think it would have been very difficult to turn down the president if he had simply, for instance, gone on a nationwide address to the country and said, “Look, we need the following in order so we can actually put you people back to work.”
JAY: And roughly what size do you think the stimulus should have been?
FERGUSON: Well, it should have been another half times—it’s now around what? $880 billion? And it should have been at least $1.2 trillion or so, and maybe more. I mean, it needed to be a lot bigger.
JAY: But what do you make of the stimulus—?
FERGUSON: Well, the consequence of that is that they’re not going to correct for all the downward pressure in the economy. So you’re going to run way below full employment for a long period of time. That’s the first problem. And as people realize this, they’re going to sort of become rather more unhappy. You know, I mean, after you’re, say, still unemployed after six months, this is a problem.
JAY: Stay on the stimulus package first, though. One of the arguments or critiques that’s being made of the stimulus package is that Obama has said that 90 percent of the new employment will be done through the private sector, and he seems to be proud of that. Some people are suggesting it should have been actually the other way around. The quick fix here is a government job plan [inaudible]
FERGUSON: My take on this is, you know, pretty much what McCain said. Look, if you want to, you can put ’em back to work by having them dig up money in tin cans in the ground. I mean, better to actually build stuff that people want. And I’m not urging that we—but anything that gets the cash out the door is even something. I’m not pushing for theft either, but that will even work to get it going round, if that’s your problem. A lot of the criticism of this stimulus program was simply foolish from the standpoint of, you know, can you get the money out the door. There is a serious problem, I think. The one new idea that you find coming around on this great recession (we won’t yet call it a depression) is the so-called “balance-sheet recession” argument, which basically makes the point that in the US in the ’30s and in Japan in the ’90s, people were hugely in debt in a credit crunch, and even when they had positive cash flow, they’re still heavily in debt. So what they do is they keep paying down their debt. So they don’t spend. And so, when you get to a credit crunch of that type like we’re in now, there’s a strong tendency for the private economy’s private economic response to be real weak. So, yeah, I would have favored a more overt effort to aim at the public sector. On the other hand, you know, they gave, in the end, a fair amount of money, like, to the states, for example. But they’ll all learn this lesson in a little bit. I think the folks who think they can get a quick return to sort of normalcy in the private sector are just dreaming.
JAY: Is there both in the stimulus package—and we’re going to talk soon about the banking reforms, but is there sort of a fear of looking like, quote-unquote, “you’re going socialist, you’re going socialis?”
FERGUSON: Well, it’s obvious the president’s worried about it. People like David Brooks of The New York Times were sort of tossing the term around as though it were some kind of, you know, rubber ball at a salon or something like that. But, I mean, all I can say is it seems to be public-private partnership when you hand money to banks; it’s socialism if you give money to ordinary people. I haven’t been able to tell the difference, apart from that, yet. I mean, that stuff just strikes me—frankly, I think that stuff is silly, but that doesn’t keep it from being in the political debate. At any rate, just from the standpoint of what I think is wrong with this program, I mean, this is a testable hypothesis we can see. First point is stimulus wasn’t enough. Second point is they have waited forever to try to fix the banking system. They’ve done more than one effort at it, and, you know, the first couple, the market just laughed off themselves. I mean, Geithner’s first press conference was such a disaster, and he didn’t appear in public for quite some time after that. And they still haven’t fixed this. The problem with not fixing the banking system is very simple: it means that you’re not going to have people in the sort of normal process of making loans to get economic growth to happen. Now, public-private partnership stuff they did today is not really going to fix that. I’ve got two problems with it. One is is that, I mean, all it is in the end is it’s trying to—the banks have all these bad assets that are worth a lot less than they paid for ’em, and they also don’t want to admit that, because if they actually have to write all that stuff down, a fair number of them would be insolvent. So they want to sell them for more than they can get right now. So they’ve got an asking price, and no person on the outside, no sensible being, is going to bid what they want. The administration is proposing to close that gap with, basically, our money. I mean—.
JAY: Now, talk about what are those assets.
FERGUSON: Well, I mean, the usual view is they’re houses or something. They’re actually typically bonds built out of houses, collateralized debt obligations and things, though there are a lot of other things, and some of them don’t have anything to do with housing. I mean, you’ve got floating rate notes; you’ve got all kinds of structured products that the banks had to take back on their balance sheet that they had been stuck in the shadow banking system that they had helped create. There are all kinds of things there. And, you know, the heart of those things is they’re just not worth what they paid for them. And so the administration is basically saying, “Look, we’ll give you public money.” They’re saying to the private sector folks in the hedge funds and private equity firms, “You guys go bid on this. You do it with our money, and you can bid some of these prices up.” Well, you know, look, you just don’t need to do this. A much simpler scheme would be to just take the insolvent banks over, and then you can stick the bad assets any place you want.
JAY: Isn’t what’s being proposed now a way to take the risk so many people took speculating on this paper and take it out of the—essentially, pay them—if the assets aren’t worth anything, then too bad, then they’re not work anything, so take your loss?
FERGUSON: Depending on the program. No, they’re proposing to pay the banks a lot more than they’re worth. We don’t know how much. That’s going to depend on the bids that are made there.
JAY: If there’s so much public money in play, then the bid goes up.
FERGUSON: It’s going to go—absolutely. That’s the whole point. This is nothing but a scheme to push public money out to the banks without appearing quite to be doing so, and in doing it, you know, with mostly talk about how the private marketplace is going to help out in pricing and stuff like that, as if, you know, this were the problem. It’s not. I mean, you just basically are betting that the economy will improve and some of these will come back with—.
JAY: Which is why Wall Street reacted so positively to this.
FERGUSON: They love—the idea of a transfer from taxpayers to Wall Street is certainly popular on Wall Street, and you can see how, like, Goldman Sachs’s stock went up 16 percent yesterday.
JAY: What is a good way in your opinion?
FERGUSON: They should just nationalize the bad banks. That is to say, you need to inspect. What they should have done is inspected—look, just pretty much they should have just done the Franklin Roosevelt route. You know, Roosevelt had the immeasurable advantage of having all the banks in the United States closed when he came in as president. So, I mean, they immediately dispatched bank examiners to shut the ones that were really insolvent, and then they gave folks options to raise money or put federal money in through the Reconstruction Finance Corporation to recapitalize those. So, I mean, they got the banking system going real fast on that. Our folks, unfortunately, did not do that.
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