Marty Moss-Coane: How would you describe the scale and scope of the crisis today?
James Galbraith: It's on a par with the events of 1929 in an institutional environment that's somewhat more favorable. But the scale of the meltdown of the financial sector is very much of the same order.
MM: Does that mean we face a depression like the 1930's or are we in the beginnings of it? I know we're in a recession, but are we facing a depression?
JG: If we did not have the institutions we have and the capacity to act, as we have, we might face a depression. But we are lucky. We had the New Deal. We had the Great Society. We have a government that can, in fact, govern. And if it moves quickly and effectively, then we won't.
MM: You're talking about the FDIC. You're talking about the other safety net programs established during the New Deal.
JG: Sure. Social Security. Minimum wage. The National Labor Relations Act -- many things out there that give us the capacity to act quickly if we need to.
MM: And if they weren't there, we would be facing a depression, like the Depression of the 1930's?
JG: Oh sure! In 1929, the US government was about 10% of GDP. Today government is about 40% of GDP. So there's this vast stabilizing force out there which doesn't have to move all that much. It doesn't have to double or triple in size to stabilize the economy. But it does have to act and act quickly and decisively.
MM: Did you favor the bailout that was passed by Congress?
JG: With severe reservations. I thought the right thing to do was to pass a bill and to try and get the problem over into the next administration without a complete collapse. Congress did that, and the Treasury has done some things which were not in the bill initially but which were dictated by circumstances. We basically guaranteed deposits in the banking system. We stabilized the commercial paper market. We started making direct equity purchases from the banks. All of those are good things to have done. But, of course, they don't solve the whole problem by any means.
MM: What were some of those reservations? If you could draft it and rewrite the bill, what would it say?
JG: The public interest was not adequately protected in the bill. There were not adequate measures against what's called "unjust enrichment." There were not adequate measures on executive compensation. There was not an adequate ring-fencing of the banking system so that the aid would go directly there and stay there. The Treasury did not get as good a deal as it should have when it bought preferred shares in the banks. There are many questions about design and implementation that could have been done better if you'd had a different administration in place. But you didn't. You had to work with the guys who were there. Under the circumstances, doing something was better than doing nothing.
MM: And what do you think the effect will be short-term, long-term, of the bailout bill?
JG: Well, as I say, with luck the bailout bill gets us to January 20th. Then we have a new administration coming in with a program that can actually turn things around. If we're not lucky, we face a severe crisis between now and then. But we'll see...
MM: Looking ahead to the new administration -- and you were an adviser to the Barack Obama economic policy team --let's go to January 21st. What should the new government do?
JG: This is a moment when circumstances are calling for fairly comprehensive action. There obviously does need to be a review and tightening up of the financial package. That's the first step. Beyond that, there needs to be immediate action to stabilize the economy. And here I would point to three major areas. The first is housing. The underlying cause of the problem is the collapse of the housing sector. We need to take steps that will stop foreclosures and to the maximum extent possible keep people in their homes so we stop the deterioration of neighborhoods and begin to bring the housing sector -- at least to stabilize it. I don't think it's going to turn around for a long time but you don't want housing values to continue to collapse indefinitely. The second step: the major problem in the real economy now is the collapsing budget situation of state and local governments. Their revenue bases are falling. They're cutting back on essential services. This is adding to the economic problem and is totally unnecessary and very damaging. It should be stopped, and the way to stop it is for the federal government to come in with a revenue-sharing program that provides resources to states and localities on the condition that they continue to maintain their public services and to expand them as necessary. And also to provide long-term capital resources to these states and municipalities that cannot get access to the credit markets so that they can maintain and expand their public investment projects in their capital spending budgets. If we do those two things, we'll put the real economy on a sounder footing and a somewhat more stable footing going forward. I would then look very carefully at how you might backstop the incomes of seniors -- which are taking a big hit as a result of the declining stock market. You can't obviously repair people's investment positions individually, but if you did something like raise Social Security benefits across the board you would be putting back purchasing power which is currently being drained out of that sector. That, again, would be a stabilizing move.
MM: What you're talking about is increasing government spending.
JG: Sure. Absolutely. Because at a moment when the private sector is not prepared to spend, cannot get access to credit, then the public sector has to step up and take on that function.
MM: Even though the country faces something like a$1 trillion deficit this year -- of course, adding to the overall debt of the government. That doesn't concern you?
JG: The overall debt of the US government is not very high by historical standards or by comparative standards. It's much lower than in comparable countries in Europe. This $1 trillion deficit is a somewhat artificial number. It comes from the fact that the asset-repurchase program of the Paulson bailout bill is being counted as a deficit. But in fact it's basically a financial transaction, an exchange of assets. If the Federal Reserve were doing it rather than the Treasury -- which from a technical point of view would be perfectly possible -- it wouldn't be counted as part of a deficit at all. So no, I think the time is not now to worry about or to be sidetracked by concerns about big numbers on the federal balance sheet. In order to do the job that's necessary, this is a moment when the federal government is going to have to take action.
MM: I'm no economist and you'll get that from the question I'm going to ask next! One of the arguments against increasing deficit spending is that more and more of government spending has to pay off debt on deficit spending. That begins to eat into or could eat into some of the programs that you're talking about. What's your response to that?
JG: It's too easy to get tied up in knots when thinking about these issues and to say we can't do anything because that might mean we can't do something else. The way to proceed here -- an important point to appreciate -- is that you have to identify the problems in the real economy and address them. Housing is a problem and you address it by taking measures that help people renegotiate their mortgages to a point where their payments are sustainable so they can stay in their homes. State and local government finance is a problem because schools and libraries and police and fire stations are going to be shut down if we don't provide the revenue to keep the whole federal system of government going. The income of the elderly is an issue because people have been relying on sources of income beyond Social Security that are not there anymore. So you have to address these questions as they come up. Going beyond that, I'd say, we need to have a national infrastructure fund so that the deficit in public capital spending (which has been there for thirty years) gets repaired. We start building what we need to build, rebuilding the country as it should be and dealing with our problems of energy security and climate change. This is a great moment to be doing this. In fact, the credit of the US government -- of Uncle Sam -- is extremely good at the moment. Everybody wants to lend to the US government because it's a safe haven. It's one borrower, people are absolutely sure, that won't default on its debts. There's no credit risk. In fact, government can borrow short-term for practically nothing. It can borrow long-term -- twenty years -- for just 4%, which is a very, very good rate, basically the same as it was in 1959. So we're at a moment when not only do we have the need for action, we also have the capacity for action.
MM: But are you also saying that by helping homeowners and by helping seniors, that stabilizes that part of the economy and they then can either start to spend or invest in economy so that whatever deficits are incurred are offset by consumer spending?
JG: Up to a point. Yes. I want to distinguish between measures which I think would stabilize the economy and prevent a further deterioration -- further decline -- and measures which are aimed at producing the next wave of economic growth. The three things that I just discussed are really stabilization measures. They're not going to add to growth, but they are going to help prevent further decline. When you start talking about energy and climate change and rebuilding the physical capital of the country, then you're talking about the way forward for economic growth for the next decade or next generation. That's the direction we need to move in, but it's going to take some time to get there..
MM: But it sounds like borrowing a page from the New Deal or the Great Society, those programs that many people have come to depend on.
JG: Yes. Absolutely! These were institutions put in place seventy and thirty or forty years ago that are still with us and which have proved their merit and their mettle. They have become part of the fabric of American life. I think they're reason why we're not going to go down into another Great Depression. But if we want to avoid a long period of stagnation and a lot of economic hardship, we need to follow the lessons of that period, build the institutions now to carry us forward.
MM: Just to understand, then, the debt or deficit -- one of the concerns about this growing debt/deficit is that we owe money to the Chinese, that they're the people who are lending us money and that's a risk for the US. What's your response to that?
JG: Well, the Chinese do hold about $2 trillion of US Treasury bills and bonds. Why do they do that? They do it because it's in their interest. That money came into China partly because that country runs an export surplus -- it exports more than it imports -- and partly because it was having an enormous real estate boom and a boom in the stock market. As money came in to finance those things -- from HongKong, from Taiwan, and from other parts of the world -- the Chinese authorities converted that money into dollars, converted the dollars into local currency, and somebody held the dollars in the central bank and held them in Treasury bonds. They don't have a strategy for dealing with that pile-up of reserves. It's basically a by-product of the conditions and policies that they face. In other words, I would not worry too much about the Chinese trying to use that as an active policy instrument. If they did, it would hurt them more than us.
MM: Describe the "predator state" that you write about in your book.
JG: Well, I came up in politics in the early Reagan period when a great many ideas were being put forward by the conservative administration which I opposed, but which I came to respect. They had a certain coherence to them. The idea that tax cuts would stimulate saving and investment. The idea that free trade would make us more efficient, that deregulation and cutting the size of government would move resources from an inefficient public sector to an efficient private sector. I didn't think these ideas were correct but I thought the people who advanced them were serious people. I don't think that same seriousness the administration that's now coming to an end. I think the basic tenet of the Bush/Cheney administration has been one of using public power for the benefit of private interests of friends, clients -- of a narrow group of powerful constituencies. And turning the regulatory authority in particular over to the regulated industry and to the most conservative, reactionary, unprogressive elements of the regulated industries. In particular, in finance, what happened was that the business of mortgage finance and securitization got taken over by shady operators, by card sharks, by institutions that were making enormous sums of money on fees, issuing loans that they, themselves, understood were extremely unlikely to be serviced over the entire lifetime. So the whole system, which should be protected by regulation was corrupted by deregulation. A few people got very rich. And a stinking mess was left for us to clean up now and in the next administration. That, to me, is the predator state.
MM: Picking up on that, it sounds like in so-called "good times," there's the effort to privatize some efforts of government, but in bad times the government bails out these private companies?
JG: You get to a situation which is so serious and has so many victims that the government has no choice but to come in with some kind of rescue and bailout mechanism. And of course if the bailout mechanism is in the hands of the same people who designed the original disaster, then of course it is going to benefit and rescue exactly the same people who created it. That is an ultimate disaster.
MM: I remember after Bush won his second term, his going around the country talking about privatizing Social Security. That was something the McCain campaign talked about. Is that what you're talking about?
JG: Privatization of Social Security was being advanced by the interests of people who ran mutual funds, brokerages, and who would have benefited from all those private accounts that would have been set up. They would have made enormous fortunes off fees that would basically have been paid by the payroll tax. It's a very good thing it didn't happen but it was very much part of a predatory agenda.
MM: What's interesting is that the public really seemed to push back on that.
JG: Yes. The public understands and understands this very well. It understands what's happened with Social Security and what's happened in the housing sector. I think once this issue broke through in the summer of 2008, the election was basically decided at that point. It became very clear that you had a choice between a possibility of change, the possibility of a new philosophy and a new body of personnel and principle. The McCain administration would have continued along the same lines as the previous administration and the public saw that very clearly and made it very decisive.
MM: What did you make of that charge from the McCain-Palin camp that Barack Obama was a socialist, that he was talking about bringing socialism to the US? What was your reaction to that?
JG: Such big words from such desperate people! Really! I mean! This was almost childish. What I say where I am in Texas, is if you aren't called a communist, you're not making any progress. It's just silly. It's a word which doesn't terrify anybody any longer, which nobody takes seriously any longer. It was a clear sign that the election was over, far as I could tell.
MM: Does it also say that there are parts of our economy -- parts of our government -- that meet the criteria of socialism?
JG: We have a mixed economy. To describe the American economy as a free enterprise, capitalistic economy is to miss some of its most important features since the mid-1930's. We have an economy in which institutions created by the public sector -- by the government -- plan an enormously important role. 40% of America's seniors live on Social Security. 60% have most of their income from Social Security. Almost all of the middle class live in houses where the mortgages were facilitated by institutions like Fannie Mae and Freddie Mac which were public institutions. One could go down the list. When you reach the age of 65, you're eligible for Medicare. That is a single payer system which has greatly improved the lives and lengthened the lives of America's elderly. So you can say, yes, this is an economy with a very robust private sector and a strong capital market -- lots and lots of important things that are private. But it also has many, many important institutions that are public.
MM: Is it your belief that the government does a better job than the private sector?
JG: The government does some things quite well. Social Security is a very efficient insurance system. It runs at a very, very low cost and keeps the entire elderly population largely out of poverty. There is still some poverty, but it's a group which is much less poor than it was forty years ago. In the case of health care, again, it's very difficult to do health insurance in a private system because what private insurance companies do is try to separate the healthy from the sick and insure the healthy while denying insurance to the sick. That is not what you want. It can't happen in a healthcare system. You want the sick to get care. So there are things which the government does quite well. There are other things which you don't want government doing. You don't want the government running the commercial retail system.
MM: Perish the thought!
JG: Exactly! That was tried in the Soviet Union and some of the worst aspects of Soviet life was the quality of the food because no one was taking care than it didn't spoil in the warehouses. You want government regulating the food system but you want a private system running it. There are lots of ways of dividing up the functions here. But one thing you do want government doing in the financial sector is supervising and regulating because it's very hard to tell, if you're a private party, whether you're getting a fair deal or being fleeced. Unfortunately, if you put people in charge of the regulatory system who don't do that job, then the swindlers have a field day.
MM: Do you think Congress will step up and provide that kind of oversight and regulation?
JG: I think we're at a moment where what the public has clearly stated it wants to happen will happen. President-elect Obama won a very decisive victory. He showed he has very long coattails and has lengthened the Democratic majorities in both House and Senate and he's coming in under conditions where the test of the presidency will not be an ideological test, but a practical test. Will we accomplish -- will we take steps that will actually work? I think the situation is such, the breakdown in the previously functioning and previous underpinnings of the system is so serious, that very significant steps are required. This is the moment to take those steps. I can't imagine, for the life of me, 42 Republican senators will band together as a unit to block what the new administration asks of the Congress and the American public. If they did I think it would be, from their point of view, a very serious political mistake.
MM: But even with the best scenario, do you anticipate some lean years ahead for the American people?
JG: Oh, yes. This is a situation in which the well of prosperity -- the well of the credit system -- has been poisoned. The housing problem is a problem of millions of houses out many of which are in foreclosure. Many of them will lie vacant. There's going to be enormous downward pressure on housing prices. That means families will not have the collateral against which to borrow. The whole system has frozen up and unfreezing it is certainly going to take some time. If we did nothing, it might take ten years. If we work on it very effectively, we might be able to see progress in maybe three. That's what I would hope for.
MM: And getting more trust back in the system -- is that the key to any kind of recovery?
JG: Yes. A private economy functions to a great degree on trust. You have to have trust in the market institutions you're dealing with before you work with them. That's what gets money out from under mattresses and into the banking system and the stock market and into the company sector. Getting there is -- when trust has been destroyed, getting it back is not an easy task.
MM: Is the system, though, trustworthy from your perspective?
JG: Right now, no! Right now a great deal of work has to be done to restore trustworthiness.
MM: We have a caller, Michael.
Michael: I have a question about infrastructure. It's seem to me that the economic crisis we're looking at is kind of [inaudible] energy crisis. I've heard talk of Obama's administration putting money into investment and bridges and things like that. I'm wondering if he's seeing the possibility of putting some of that instead into railways, getting some competition for Amtrak?
JG: I think they're very closely connected. Anything that makes us more energy efficient is obviously a positive step. We're going to have to reduce our demand for oil or we're simply going to watch the price go up as the economy recovers and that's not acceptable. What we need to be doing is to design infrastructure improvements that move us down the path of reducing demand on energy and increasing energy efficiency. So it's both how we consume energy and how we produce it that have to be brought into play here. This is obviously the work of a decade, two decades, or a generation that needs to be started. I think the president-elect has spoken very clearly about this. So I think it's very much on the agenda. It's got to be something that builds up from the research institutions that we have, the universities, the national labs -- something that is thought through by an appropriate agency that can help map out a path. That will work, some better than others. We need to think carefully about how best to do it. But yes, changing the way in which we live so that we can live sustainably and still live well is the challenge that we face going forward.
MM: There's been talk about green jobs. These are jobs like building solar panels, jobs described as jobs that might replace some of those factory jobs. They might be jobs that come with a fairly good paycheck. What's your view on the so-called "green jobs"?
JG: I think there are industries out there to be built, that achieve many of the things we want, and that do so at a much lower cost than fossil fuels. So yes, this is what we should be doing. This is what the US is institutionally set up to do. We are an innovating country. We have a great capacity to finance and design for technological change. And if we set out on this path, in my view the rest of the world will be quite happy to continue to finance us. If we're just doing something for consumption for the sake of consumption, to me that's a more questionable proposition. But if we're preparing new technologies that the rest of the world can later adopt and will help them with their energy issues -- and with the global energy question -- then it seems to me we will have found our place in the world and will be able to maintain the position that we have now in the financial sphere.
MM: John is joining us.
John: I want to to thank Mr. Galbraith for what I think is the most coherent and accurate summary, in his opening remarks, about what has gone wrong in the direction of the conservative movement economically. But I want to ask, then, as we look forward to this enormous amount of spending that you're proposing, what might be the impact on the value of the dollar and inflation for Americans over the next five to ten years?
JG: I don't see a serious inflation issue arising simply because of the recovery program. The biggest threat for inflation is from commodity prices that went soaring through the roof last summer. They've come down a great deal since then. But if you had a strong demand program and you didn't deal with energy efficiency, in particular, then you're at the mercy of the Saudis and others who control the oil prices. They will not be sympathetic. So that's where you have to look at the danger and take steps to counter it. In terms of the value of the dollar, it's a very, very important question. To some extent, I was just addressing that in my last answer. A program which is justified to the world by what it contributes long term to the solution of global problems seems to me will support the value of the dollar going forward. I'm not sure I want the dollar to be as high as it is threatening to go right now as the euro comes down very sharply (and that's going to cause us some problems on the export side). But you want to maintain the position of the dollar as the reserve currency for the world until and unless you've got an acceptable alternative to which one could transition in a stable way. From that point of view, it seems to me having a purpose of providing security to the world community was the purpose the US served from the post World War period. We're obviously going to continue to do that. We need to reestablish our reputation for doing that in a responsible way. But then we also need to be using our capacities here at home to innovate and develop in ways which the world is prepared to support.
MM: You mentioned the word "planning" and in your book you say planning is considered, in some quarters, a dirty word, a heretical idea. I need to understand what you mean by that.
JG: This was something -- again -- like "socialism." It's a term of abuse that was thrown at people if you favored an element of planning. My argument in the book is that planning is really just a matter of thinking ahead, of having an element of the government which is able to detach itself from the lobbies, from the interests of the people who are presently playing in the marketplace and think about what the interests of the next generation are going to be. That's an institutional capacity that you need to have if you're going to deal with a problem like climate change where the people who will be affected are not yet born and really don't have any voice, either in politics or the market at the moment.
MM: That makes it a dirty word?
JG: Well, it has! You can always find someone who'll accuse you of being a "central planner"! Clearly, a code word meaning you think dangerous thoughts! The reality is that every large company does a measure of planning. It can't produce sophisticated products if it doesn't. If the government does not plan autonomously, the mechanisms of planning will be carried out but they'll be in the interests of the powerful players in the system. And if those players happen to be -- for example -- energy companies, fossil fuel producers, you're not going to get where you need to go in thinking about how to counterbalance those interests with the interests of the atmosphere which are not represented at all.
MM: Can you really wall off planners from the influence of the political system?
JG: No. You can't wall them off entirely and you wouldn't want to do that. You need to have checks and balances; you need to have discussion. That's part of the function of the Congress -- to provide a framework for that. But you want to have people who are dedicated civil servants who have a responsibility to think these issues through in an independent way.
MM: Martin is calling us.
Martin: I appreciate your having Mr. Galbraith on... I want to set up loudspeakers out on the driveway out in front of our house! ... One question in particular with specifics: what does Mr. Galbraith think of something specific like reinstating the Glass-Stiegel Act of 1933 which worked well. It was one of those things that wasn't broken, so why did they fix it. What does he feel about reinstating something like it if not it literally.
JG: Let me first explain for listeners that Glass-Stiegel was a law passed in 1933 that separated out commercial banks -- which had deposit insurance and were subject to fairly strict regulation -- from investment banks which underwrote securities and were much less regulated. The idea was that you wanted to have the speculative players separated from the major source of funds in the economy which was bank deposits. As the caller said correctly, it worked quite well for a number of decades. It was gradually eroded in the 1990's and finally repealed in 1999 in a bill sponsored by Phil Gramm. It took about a decade for the basic problem which Glass-Stiegel was established to combat to well up and produce an enormous financial crisis. ...You had, in most recent experience mortgage originators package and sell the mortgages -- which were in some cases subprime mortgages -- which were not sound but then packaged and underwritten and given ratings and sold off to pension funds, hedge funds, and foreign investors and anybody else who wanted to hold them in a way which set up the whole system for a massive collapse, which has now occurred. Should we go forward and reestablish the Glass-Stiegel framework? I'm not sure of this, actually, because at the moment of course we don't have many investment banks. They've all been sold to commercial banks or they have disappeared. What we do need to do is to reestablish a sound and strong regulatory framework which carries out the function Glass-Stiegel carried out, namely that prevents this kind of extreme conflict of interest in the financial sector that brought us this crisis. How do we do this exactly going forward? I think that's something that needs to be worked out carefully, in the current institutional context. We'll see how that develops over the next six months or a year.
MM: Ken is calling in.
Ken: My question is about the mortgage meltdown and how, in the mouths of politicians and even most people that talk about it -- they about about it's triggering the overall collapse we've had but they almost make it the only focus. The math just doesn't work out in my mind with the way the credit default swaps were built on top of these securities. My understanding is that sometimes the credit default swaps can be multiples of ten, maybe twenty, times of the amount of the underlying securities. Even worse, many times the credit default swaps are put on top of these securities by people who don't even have an interest in the default. It used to be a one-for-one situation and these are put on top of these securities by people. So when you look at the $700 billion, AIG, and Fannie Mae and all the other money put out the door, that seems to be much, much higher than the underlying value. Because there is some equity in these properties...
JG: The collapse of mortgage-backed securities was the trigger for the crisis. It's what brought down Bear Stearns, Merrill Lynch, Lehmann Brothers. But the caller is entirely correct that there is, on top of this, a vast pyramiding and leveraging of a problem that's associated essentially with these insurance contracts -- although without the reserves that insurance companies usually hold called credit default swaps. Which were essentially legalized by another piece of legislative legerdemain in 2000, also offered by Phil Gramm and which have created an opaque network of financial fragility -- interdependent fragility -- which means a default anywhere in the system can reverberate around the financial system in ways which are impossible at this point to predict. So unwinding the world of credit default swaps -- setting up the appropriate clearing houses and canceling these things out -- is going to be an epic task for the regulatory environment that is going to have to be established.
MM: Should there be criminal charges?
JG: There will be. No doubt. Unquestionably, massive frauds were committed in the course of the latest hysteria. Frauds in housing appraisals, frauds in mortgage origination, frauds in the securitization. The FBI, in 2004, was already warning about what it called an "epidemic" of mortgage fraud. The resources to deal with it at that time were not provided to the FBI. So yes, there will be major investigations going forward. I think that's almost inevitable. In the savings and loan crisis, at the end of the day, about a thousand S&L insiders were convicted of federal felonies, and something like 750 or 800 spent time in prison. In the wake of these kinds of disasters a cleaning not only has to happen but it does happen.
MM: Alan Greenspan testified before Congress -- a committee or subcommittee -- and I'm not going to get his quote exactly correctly, but he seemed to be shocked that deregulation led to the problems we have today!
JG: Yeah. Capt. Renault at Rick's Casino!
MM: Is that how you see it?
JG: Absolutely! Alan Greenspan believed all of his life -- and I'm sure he believed it sincerely -- in the fundamental correctness of whatever the market happened to be doing. This was the Ayn Rand philosophy that he carried with him through his whole career. In this period he actively encouraged American homeowners to cash in their stable, fixed-rate mortgages for these new adjustable rate instruments which could save them a little money in the first couple of years. This was either an act of massive self-delusion or an act of massive bad faith. I think it's to Mr. Greenspan's credit that he now concedes that his philosophy was deeply flawed. But really and truthfully, what we're seeing is the revelation that this man, who got so much praise during his career, was not well-suited to a major federal responsibility, major governmental responsibility. That's the reality.
MM: Does this discredit deregulation or in half a generation or a generation are we going to be back to some kind of deregulated financial markets?
JG: Well, memory fades. The memory of 1929 had faded by 1990. So who's to say what will happen in 60 years. But we should learn from this that regulation is not something which is a burden on the private sector. Regulation -- prudent, effective regulation -- is essential to establish the trust the private sector needs in order to operate efficiently and fairly. Without the regulation, there is a tendency for the system to go bad. It can go bad with amazing speed because you have sharp operators who will be willing to take advantage of a lax system. The consequences of it are enormous. We're feeling them right now. It's a decisive verdict on deregulation in a free and open society.
MM: Alex is calling in.
Alex: About the banks hoarding the money they were given by the government.
MM: ... And how you get them to unhoard that money?
Alex: Is there a way to enlist them somehow away from their self-interest to become part of the campaign to save jobs and businesses? Because the spiral is just going down and down as people are laid off and businesses are closing down. The banks could be part of the solution but it looks like right now they're just looking after their own interests.
JG: It's entirely true, and an important point. What has happened is that banks have been provided with capital but they are unwilling to extend loans. And that's partly on the other side as well: there aren't many people coming to the banks to borrow for business expansion because everybody faces a rather grim climate. There are two ways to deal with this. One is the British approach: Gordon Brown put much tougher conditions on the British banking system or similar assistance. We'll see if that's in fact effective, whether the British banks become more aggressive in lending than they would otherwise be. The other way to do it is to build parallel institutions, to set up something like the Reconstruction Finance Corporation of the Depresssion period which makes loans directly that the banking system is unwilling to make. Let the banking system recuperate, build its capital, recognizing that the economy is not going to function on terms that the commercial bankers are accustomed to. Then have somebody else come out to support local governments, support private businesses. That's a possible alternative. What needs to be dealt with particularly here is the leakage of public funds through the banks in, for example, dividend payouts, executive compensation, and other ways in which the capital doesn't stay in the banking system. That is something which is an enormous defect in the way the Treasury has operated in the last few weeks and needs to be reviewed very quickly.
MM: How much does the US economy depend on consumer spending?
JG: About 70%. And if consumer spending goes down even a little, everybody's going to feel the consequences. So yes, it's a major issue that has to be dealt with.
MM: From the consumer side, we hear that in order to spend money people are going into debt! And for some basic services, like healthcare, like education, like even food and energy.
JG: Well, this is one reason why we do need to have a tax relief for working Americans. That's part of the President-elect's program, I'm sure.