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On the streets of ‘The Wire’, Thomas Ferguson on financial crisis and the people of Baltimore

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore. Many of you might recognize the row of housing behind me and maybe the sound of the sirens. We’re in Baltimore, where The Wire was shot, and many of you probably have seen that show. We’re here discussing the economy, Wall Street, state financing, and what’s happening to people living in houses like this. And joining us to discuss all this is Tom Ferguson.


JAY: So tell us, what has Wall Street got to do with people living in houses like this?

FERGUSON: Well, Wall Street affects people here, you know, in the Wire part of Baltimore the way they affect pretty much the whole rest of the United States. They basically take enormous risks. If those work out for them, they keep the profits. If it doesn’t work out for them, we end up having to make up the losses. And since they’re banks, they take down the rest of the economy, and they take down not only themselves but the rest of us, and then the place stays down for years. I mean, you know, the problem of a financial crisis is bigger than just an ordinary recession. That’s what Wall Street�I mean, it’s that sort of second-order effect, not just on the fact that they’ve�we’ve had to make up their losses themselves [sic], but the way they can do all the collateral damage.

JAY: One of the big problems in Baltimore is affordable housing, even though so many houses are actually sitting empty and boarded up. But there’s no money for affordable housing. There’s a big crime problem in Baltimore, but apparently right now in Baltimore there’s a no-overtime policy at the police department, something people have seen in an episode of The Wire. So how does that�those two things�.

FERGUSON: Okay. There’s�they connect in not just the one but in several ways. First of all, just on mortgage financing, what you get is the system that pushed mortgage loans out on people, in many cases deliberately unaffordable, where you do these, you know, adjustable-rate mortgages that jump real fast, that they can’t possibly be paid off, and are often sold through mortgage brokers, where the mortgage broker, because they get paid deliberately from the company making the loan, which then sells it to Wall Street, which goes into the collateralized debt obligations, which go into the mortgage bonds, etc., all that stuff, they saddled this place with an enormous amount of debt that was essentially unpayable and that they knew was unpayable to begin with. One effect of Wall Street on a place like this is it bankrupts big chunks of it, and that of course then, as it collapses, well, not just the value of the houses that people couldn’t pay the mortgages on but all the houses around them go down. The usual problem in towns like this is there’s no tax base, and so it’s tough to issue bonds that anybody wants. And nobody is going to make them big loans, because they’ve [inaudible] just yesterday or so Harrisburg said it was going to miss a bond payment, for example. You’ll have to go beyond just sort of fixing on banks on that problem. I mean, somebody’s going to have to come in and provide low-interest finance to solve that type of a problem. You probably can’t get that through a private banking system.

JAY: For people that watch the TV show The Wire, they know that the city of Baltimore was constantly running out of money for its policing, particularly problems running out of money for schools and not enough money to pay teachers. You can see behind us boarded-up houses. There’s not enough money for affordable housing. At municipal and state level, there’s this financial crisis that’s hit and likely is going to hit even more seriously as some of the federal stimulus money that was going to states runs out.

FERGUSON: Sure [snip] if the Wall Street role in this was simply to take the enormous risks that collapsed the economy. And whenever the economy goes down, the tax collections fall way off. And, you know, the states and the localities cannot borrow endlessly, so they’re sort of stuck. They can’t print money. And so the debt limits are really hard and fast. In that situation, you have a problem. You know, in a market-driven society like that, where you’ve got this huge cyclical downturn and you won’t use federal policy to effectively pump up the economy to get to full employment, cities are�you know, it’s really a catch-22. It won’t work, no matter what you do. These people in effect can run all they want. Their problem is the national income’s way lower than it should be. It’s a super-cyclical problem; it’s not just cyclical. It’s a–financial crisis gives you worse than a regular business downturn. If you don’t have a national policy either to get back to full employment pretty fast or to bail out towns and cities, then they’re caught between a rock and a hard place, and you just get this endless nightmare, which you can see in, you know, both cities and state. Baltimore, obviously, state of California, they’re cutting back. The income is still either not rising at all or falling. Tax collections fall off. It just gets worse and worse.

JAY: So there’s elections coming in November. So if you lived in one of these areas, or to people who do, what should they be asking their politicians?

FERGUSON: Well, they need to be asking the Democrats: why didn’t they act like Democrats? And that answer�and actually do something for ordinary people? Why did you just rescue the banks? That’s the question they should be asking the Democrats. And, of course, you don’t have to ask that question, I think, if�I mean, I wouldn’t like to get directly into partisan politics, but who would ask a Republican, you know, why they rescued the banks and not the ordinary population? The unemployment is the�you know, you only have to have one panacea, and full employment is the panacea. If you get people back to work, almost everything else will right itself.

JAY: Alright. So how does the government get [inaudible]

FERGUSON: Well, we all�I think we all know what they did wrong, which was, when they came into office, they offered a stimulus program that was about half the size of the one they should have. And they also didn’t do anything on housing [inaudible] the Obama administration’s housing programs have just been�and mortgage relief, they’re not�they just do nothing. They should have just done what they did in the New Deal: moved vigorously to put people back to work. You should have seen, you know, cranes and construction stuff everywhere, kids who couldn’t find jobs, Civilian Conservation Corps, Federal Emergency Relief, you know, all that stuff should have�that should have happened.

JAY: [inaudible] still what they should be doing?

FERGUSON: Yeah. Their�well, their problem is we all know we’re stuck in a kind of underemployment equilibrium, meaning you’re stuck with high unemployment for years and years. Yeah, they need to move vigorously against this. It’s plain that the invisible hand is just waving goodbye. Okay?

JAY: So the Republicans say you do that and you wind up, number one, creating an inflationary cycle, and two, they say these kinds of government-made jobs eventually run out and don’t actually build anything.

FERGUSON: Republican�well, Republicans�first of all, do the government jobs build anything? You know, if we go down the street, you’ll run over a whole load of WPA [Works Progress Administration] bridges and buildings in this town that were built. Now tell me they didn’t build anything. You know, I’m looking down the street, okay? The question about the deficit is, if you come back to full employment, national income goes back up, the tax base goes back up. The claims about inflation are just nonsense. That’s the thing that was so crazy. When everybody�when Obama came into office, it is true, exactly what you said, Republicans said, you do this, you’ll get a huge inflation deal. Well they did about a half-size thing, and there’s no trace of inflation at all [snip] people now fearing deflation. You know, when was the last time in our lifetimes�I’ve never seen deflation specters before, and yet that is plainly a possibility here. And, I mean, we’re not�there’s�you show me where inflation is in the United States.

JAY: So the counterargument goes, whether it’s inflationary or not, you can create a kind of crisis of credibility about the currency, ’cause where is all the stimulus money coming from?

FERGUSON: The whole world’s buying dollars. You know, I mean, since this crisis began, stepping back from 2008, I mean, the dollar has gone up and up. Indeed, the administration’s plans to some extent were�I think they were hoping for an export boom. That’s never going to happen. And when you have a crisis in the euro, nobody wants to sort of lay in 25 years’ worth of euros much. It’s not like there’s lots of currencies out there. I mean, people are even buying the yen right now. There’s a limit to the yen for yen. I think that whole story is, frankly, a fantasy.

JAY: But is part of the issue, too, is that it’s just the question of taxation, which is that there’s going to be enormous pressure, if you have this kind of government works program, to start taxing wealthy people to pay for it?

FERGUSON: Oh, if you’ve got an issue with the expiration of the Bush tax cuts, you know, and the administration basically wants to freeze them in place for middle- and lower-income folks, and the upper 2 percent or so they want to do taxes, it’s not much of a tax rise. It just puts it back to where it was in the 1990s, where nobody was particularly claiming they were hugely overtaxed.

JAY: If you forget that some people like it or don’t like it, in terms of its pure economic effect, does taxing the wealthy slow down the economy? ‘Cause that’s the argument.

FERGUSON: Well, if you tax anybody in a recession, you will slow buying, I mean, in the sense that aggregate demand will fall. But, you know, that’s an easy offset: you just do a government program [inaudible] which in general it won’t be spent at the same rate it’s all saved anyway. I mean, that’s part of the problem. So you’re better off with a vigorous government program. And the real issue on those tax cuts is what happens 5 or 10 years out. And, you know, I think there’s a case for not�I’m not an alarmist about the state of the US deficit. Most of the stuff that’s written on this is just nonsense, and, you know, we’re nowhere near going all bankrupt or anything like that. That’s why people are buying dollars, and it’s just�that’s all they’re�and the�why the yield curves don’t look at all like an incipient financial panic in dollars or anything like that. Quite the reverse. So I wouldn’t�you know, I don’t worry about that stuff very much.

JAY: Alright. So a final word, if you’re going to say something to people living around here.

FERGUSON: They need full employment more than anything else. That’s what you’ve got to have. You need an economic program to put people back to work fast.

End of Transcript

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Thomas Ferguson is Professor of Political Science at the University of Massachusetts, Boston and a Senior Fellow of the Roosevelt Institute. He received his Ph.D. from Princeton University and taught formerly at MIT and the University of Texas, Austin. He is the author or coauthor of several books, including Golden Rule (University of Chicago Press, 1995) and Right Turn (Hill & Wang, 1986). Most of his research focuses on how economics and politics affect institutions and vice versa. His articles have appeared in many scholarly journals, including the Quarterly Journal of Economics, International Organization, International Studies Quarterly, and the Journal of Economic History. He is a long time Contributing Editor to The Nation and a member of the editorial boards of the Journal of the Historical Society and the International Journal of Political Economy.