BILL MOYERS: Welcome to the Journal. Americans are mad at bankers. Just Google the three words "I hate banks," and see what comes up. But nowhere has the anger been more palpable than outside the annual convention of the American Bankers Association in Chicago this week.
PROTESTERS: We're fired up, can't take no more! We're fired up, can't take no more!
BILL MOYERS: These demonstrators wanted to know why regular folks are facing foreclosures, rising credit card and checking fees, while bankers are laughing all the way — well, all the way to the bank.
PROTESTERS: We're fired up, can't take no more! We're fired up, can't take no more!
BILL MOYERS: They protested Wall Street's outrageous bonuses, subsidized with trillions — and I do mean trillions — of taxpayer dollars, after their reckless gambling with other people's money brought down the economy a year ago.
There's some historical irony in the timing of this meeting and the protests. 80 years ago this week, on October 29, 1929, the stock market crashed, bringing the Roaring Twenties to a screeching halt. The Roaring Twenties: that era of flappers, bathtub gin and dancing 'til dawn, of reckless speculation and living it up while raking in money from the stock market and buying on credit as if there were no tomorrow.
The ultimate judgment came from Al Capone, the city's celebrated gangster. The market's "a racket," he said. "Those stock market guys are crooked."
Black Tuesday, as the crash was called, saw already-shaky shares plunge twenty-five percent in just two days. Fortunes were wiped out in minutes and small investors saw dreams of prosperity, even security, disappear. As the weeks and months went by, the nation slipped deeper and deeper into the abyss of the Great Depression.
All these years later we're still arguing over what brought on the hard times. If you want to join the argument, you need to start with this classic: The Great Crash, 1929 by the noted economist John Kenneth Galbraith. First published in 1955, it has never been out of print, in part because its analysis is so prescient and, excuse the expression, on the money.
A new edition is out, as timely as today's headlines. And it comes with a new introduction by another noteworthy economist, James K. Galbraith. That's right, the son of John Kenneth.
James K. Galbraith, onetime executive director of Congress' Joint Economic Committee, teaches economics at the University of Texas, where he holds the Lloyd M. Bentsen Chair at the LBJ School of Public Affairs. He also directs the university's Inequality Project, which analyzes wages and industrial change around the world. His own seven books include this one, The Predator State: How Conservatives Abandoned the Free Market and why Liberals should too.
James Galbraith, welcome back to the Journal.
JAMES GALBRAITH: Thank you very much.
BILL MOYERS: How does this last year compare with what happened after the Great Crash in '29?
JAMES GALBRAITH: It's similar in important respects and different in others. If you look at the trends in world trade and manufacturing, they're very similar. There's been a massive collapse, a collapse which is comparable in scale to 1930. The overall economy hasn't come down nearly as much, and the reason for that is that we have the institutions that were created in the New Deal and the Great Society, institutions of the welfare state, social security. And, of course, there has been the influence of John Maynard Keynes, which gave us the very quick reaction in the form of the expansion bill of the stimulus package. And that also has kept the damage from being as large as it was in 1930 to '32.
So what we're seeing today is distress of a different kind. And I think it's playing out on a longer timeframe. The great wealth that the American middle class built up, over 70 years, largely in their homes, has been terrifically impaired. In many cases, wiped out.
People are upside down in their mortgages. Their mortgages are worth more than the houses that they live in. And that doesn't mean that they're going to default or millions will be foreclosed, but many millions more simply can't sell, can't move, can't change their circumstances, don't have a cushion. And that is a factor that will bring stress into their lives over time.
BILL MOYERS: A long time, right? And this is —
JAMES GALBRAITH: Over a long time, yes.
BILL MOYERS: — not something from which people recover. I mean, my father was about 24, 25, maybe at the time of the Great Crash of 1929 and he never recovered from it for the rest of his life. He never got over that experience. Is that likely to be the case with all these people suffering out across the country now?
JAMES GALBRAITH: The same was true of my grandfather on my mother's side, who was a lawyer whose practice depended upon the prosperity of the 1920s. My mother, who lived until last year, never really overcame the attitudes that were inculcated in her in the Great Depression. It will have a — if something is not done to provide particularly young people, who are looking for work and cannot find it, with an opportunity to move on in life at this stage, it will mark them for the rest of their lives. I think there's no doubt about that.
BILL MOYERS: The New York Times had a story just the other day about community colleges being so crowded right now that they're holding classes up until two o'clock in the morning. What do you make of that? What does that say to us?
JAMES GALBRAITH: It says that first of all, people cannot find jobs. And secondly, they are looking to the educational system to provide them with something to do, and some way out of this dilemma. But until jobs are created, and in great numbers, there will not be places for those people to come out of the community college system and find useful work. That's the problem.
We have a stimulus package, which is helping now, but it will be over with at the end of next year. Will there be a basis for another strong, privately financed expansion at that point? I don't see the evidence for that now. And that seems to me to be something we should be worrying about.
BILL MOYERS: So what should we do?
JAMES GALBRAITH: We need to find another path for economic expansion. We need to set a strategic direction.
Our problem now, our big social and environmental problem, is energy. It's climate change. It's the greenhouse gas emission issue. If we built a set of institutions that could deal with that problem effectively, you could employ a large part of the labor force for a generation, dealing with that. And you'd then make that profitable for private enterprise to get into in a serious way.
BILL MOYERS: The candidate Obama talked a lot about this, green energy, in the campaign. And he's talked a lot about it since he became president. Do you see signs that those aspirations are being implemented in institutional ways?
JAMES GALBRAITH: They made a start, and certainly in the stimulus package, there were important initiatives. But the stimulus package is framed as a stimulus, as something which is temporary, which will go away after a couple of years. And that is not the way to proceed here. The overwhelming emphasis in the administration's program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago. That is to say, we're back to a world in which Wall Street and the major banks are leading, and setting the path —
BILL MOYERS: To restore what was.
JAMES GALBRAITH: To restore what was —
BILL MOYERS: Instead of reform what is.
JAMES GALBRAITH: And I don't think what was can be restored.
BILL MOYERS: And you say that's the objective of the administration's policies? Geithner, Bernanke, Summers, the president himself?
JAMES GALBRAITH: To the extent that there's a defined objective, that's it, yes. I think in the immediate day-to-day work, they've largely been preoccupied with keeping the existing system from collapsing. And the government is powerful. It has substantially succeeded at that, but you really have to think about: Do you want to have a financial sector dominated by a small number of very large institutions, very difficult to manage, practically impossible to regulate, and ruled by, essentially, the same people and the same culture that caused the crisis in the first place?
BILL MOYERS: Well, that's what we're getting, because after all of the mergers, shakedowns, losses of the last year, you have five monster financial institutions really driving the system, right?
JAMES GALBRAITH: And they're highly profitable, and they are already paying, in some cases, extraordinary bonuses. And you have an enormous problem, as the public sees very clearly that a very small number of people really have been kept afloat by public action. And yet there is no visible benefit to people who are looking for jobs or people who are looking to try and save their houses or to somehow get out of a catastrophic personal debt situation that they're in.
BILL MOYERS: But when President Obama came into office, people said, "This is a Rooseveltian moment. This is a moment to seize a crisis and do what FDR did." How do you trace the comparison in the last 40 weeks, of Obama with Roosevelt?
JAMES GALBRAITH: Well, the public is way ahead of the political system. The public certainly wanted a Rooseveltian moment. The Congress, the Washington press corps, wanted a return to their familiar patterns of activity. And I'm not saying — the Congress did, in fact, respond quickly on the stimulus package, but in general, they're always more comfortable dealing with the issues they know than framing ideas with respect to new challenges. And so, Obama's objective situation is much more like Herbert Hoover's than it is like Roosevelt's.
BILL MOYERS: What do you mean?
JAMES GALBRAITH: In the sense that Roosevelt was — when Roosevelt came in, in March, 1933, and there were machine gun nests on the rooftops of Washington for the inaugural parade, everybody knew — the banks were closed — everybody knew that you needed immediate action. Roosevelt's cabinet was sworn in on the first day. He had initiatives ready to go. This was not the situation that faced President Obama, by any stretch.
BILL MOYERS: Suppose that your father were around today, and '08 had happened, the Great Collapse. Do you think he might have said, "Aha. Told you so?"
JAMES GALBRAITH: He did say, "I told you so," in this book, in —
BILL MOYERS: The Great Crash?
JAMES GALBRAITH: — in The Great Crash. He talked about the conditions under which it would recur, and he said, "No one can doubt that the American people remain susceptible to the speculative mood, to the conviction that enterprise can be attended by unlimited rewards in which they, individually, were meant to share. A rising market can still bring the reality of riches. The government preventatives and controls are ready. In the hands of a determined government, their efficacy cannot be doubted. There are, however, a hundred reasons why a government will determine not to use them."
And that's the point about the crisis, is that it could have been prevented. The people in authority two, three, five years ago, knew how to prevent it. They chose not to act, because they were getting a political and an economic benefit out of the speculative explosion that was occurring.
BILL MOYERS: You mean, the people who could have prevented the dam from breaking were too busy fishing above it, and reaping big rewards to want to fix the crack in it?
JAMES GALBRAITH: Sure. The Federal Reserve, in particular, knew that the dam was cracking. Alan Greenspan, I think, almost surely knew this, and chose to wait until it had washed away.
BILL MOYERS: Why?
JAMES GALBRAITH: They let all of this run, because they were getting a superficially stronger economy out of it. The ownership society, all that was a scam, basically, designed to lure people who could never afford these mortgages into accepting them. And yes, I think they, any rational person, certainly people in the industry, knew that this was not going to last. There was a little industry code, I've learned, IBGYBG. "I'll be gone, you'll be gone."
BILL MOYERS: Really?
JAMES GALBRAITH: Yeah.
BILL MOYERS: The industry being the securities industry?
JAMES GALBRAITH: Well, and the mortgage originators and the bankers, generally.
BILL MOYERS: But that's criminal fraud.
JAMES GALBRAITH: Oh sure. There was a huge amount of it. The Bush administration did not actively investigate the fraud that they knew, that the FBI knew was occurring, from 2004 onward. And there will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that's a process which needs to get underway.
BILL MOYERS: The perplexing question to me is whether or not you can reform a system that is so infiltrated by the money from the people who are benefiting from what's going on, who have a vested interest, and use their money to promote that vested interest to make sure nothing changes.
JAMES GALBRAITH: I think you can. I think the law is powerful. I think you cannot legalize financial fraud. You cannot fully conceal the tracks of financial fraud. You have to put the resources in to uncover it. You have to prosecute it. You have to give appropriate punishments, but we have a system, in this country, for doing that. It is a question of a decision to use the judicial resources that we have, to clean up the system.
BILL MOYERS: Timothy Geithner wants to provide a super-regulator to keep those big five firms in line. Will that work?
JAMES GALBRAITH: No, it will not work. The super-regulator will not be able to control those institutions. And probably will make all of the mistakes that the — if it's the Federal Reserve — that the Federal Reserve made in the run-up to the last crisis.
BILL MOYERS: Under Greenspan.
JAMES GALBRAITH: Yes, because the priorities of the Fed are always going to be with the larger problem of economic growth, monetary policy. The culture is dominated by its economists. The regulators are down in the hierarchy. So it may have the authority, but as in 1929 it will, in the crunch, choose not to use it.
I think what you have to do is to aim to reduce the market power of these enormous, strategically, systemically dangerous institutions. And the way to do that is by re-imposing some internal barriers, the Glass-Steagall separation of commercial and investment banking. And by resolving, auditing and resolving the institutions that are really close to failure. Those institutions, if they're taken out of the picture, that would permit smaller banks who did not get caught up in this dreadful business, to grow into their market roles. And you would have a more competitive and healthier financial system, as a result.
BILL MOYERS: But as you speak, Congress is watering down the legislation proposed to regulate the ratings agencies that were such a part of the problem.
JAMES GALBRAITH: Well, the fact that there is lobbying going on, from financial institutions that were only yesterday bailed out by the taxpayer, is just egregious. It's an outrage. And I know the administration has said this. And I applaud them for having said it, but the political position of the banks, to me, is just totally unacceptable. The public was obliged to rescue them. It is not their role, now, to be trying to tell Congress what shape and direction of the reform should take. This really should be out of their hands entirely.
BILL MOYERS: So you can understand that anger on the streets, outside the American Bankers Association's meeting in Chicago this week.
JAMES GALBRAITH: Of course. It's entirely justified.
BILL MOYERS: Where do you think that anger might go? It could go either direction.
JAMES GALBRAITH: Well, of course. I mean, that's the great danger, is that if there is not a constructive program that people can identify with, there will be a destructive program that they will identify with. And it will come along quite soon. And what form it will take, and it's anybody's guess, but the result will be, very well could be disastrous.
BILL MOYERS: So we're not out of the woods yet.
JAMES GALBRAITH: No, not by any means. I think we're in an extremely dangerous period. And which, as I said, everybody can see that a few, very small number of people have come out of this. And they cannot see how this is bringing any benefit to their own lives. It's not saving their houses. It's not providing them with jobs.
BILL MOYERS: Is our system so vulnerable that this is going to keep happening, '29, the savings and loan scandals in '89, and now the great collapse of '08.
JAMES GALBRAITH: It's clear that it's vulnerable and that this is a cyclical problem. This is something which comes back after a few decades, because —
BILL MOYERS: Because we forget?
JAMES GALBRAITH: Because people forget, and because when the system succeeds, then you build up prosperous institutions and they start lobbying. They say, "Everything's fine. Things are going well." And they start lobbying for a relaxation of the rules. So you have — it's never going to go away. But you want to have these 20, 30, 40 year periods when you have relatively stable growth.
And when you're focused on achieving a certain goal, you can eliminate poverty. You can deal with the environmental questions. You can, in fact, do this if you can sustain a course of policy for, let's say, a 30 or 40 year period. That's — and then you may have strong institutions which can carry you even further. Social Security, for example, is a nice example. It keeps the elderly population of the country largely out of poverty.
If I had one thing I could add to the health care debate, I would lower the age of eligibility of Medicare, say, to 55.
And the reason for that is that it would help workers who are only hanging onto their jobs because they don't want to lose their medical benefits, to move out of the labor force. And there are a fair number of those, and it's a fairly heavy burden on the business sector. So what you want to do, you want to create jobs.
But you've got to recognize, we've lost 7 million jobs. Many of those are older workers, and the jobs that you create, you want to give the first crack at those jobs to people who have started their careers. You want to get them into the work force.
BILL MOYERS: Young people.
JAMES GALBRAITH: Young people, sure. Let older people, you know, some of them, anyway, a fair number of them, pass to retirement comfortably, a little earlier than they otherwise would. I mean, you've got to think about every possible way to make getting through this crisis tolerable for the population. Recognizing that a year, even two years from now, we are not going to be through it. The official forecasts say we're not going to go back to five percent unemployment till 2014.
BILL MOYERS: The headline this week. "Recession unofficially ends as economy grows."
JAMES GALBRAITH: That means we're at the bottom. But from the standpoint of the population, the bottom is going to go on for a long time.
BILL MOYERS: Didn't you recommend recently that anybody who wants a job should be able to get a job, paid eight dollars an hour or something like that?
JAMES GALBRAITH: I think it's a very sensible idea. Why not have a large job core involving, among other things, neighborhood conservation efforts, or health home care efforts or —
BILL MOYERS: Shades of the New Deal, right?
JAMES GALBRAITH: Of course. Of course. But —
BILL MOYERS: But when you talk like that, you immediately bring chills to the back of the deficit hawks, who say, "Wait a minute. We can't afford to do what we're doing now. We're putting it all on our grandchildren's credit card. How can Jamie Galbraith be arguing for more deficit spending now?"
JAMES GALBRAITH: With all respect to the deficit hawks, they don't understand the situation. And they don't know what they're talking about, in terms of federal finances. The United States is a large and powerful country. And it can, if it chooses, employ its work force in a useful way. But the point I would make about jobs programs is that the alternative is not spending nothing. The alternative is keeping people on the dole, the term Roosevelt hated.
BILL MOYERS: And Lyndon Johnson hated —
JAMES GALBRAITH: And Lyndon Johnson, keeping them on the dole, which is costly. But it's also debilitating to those people. And you don't get anything out of it, from the standpoint of the country. The obstacle here is not fiscal, federal finance. The federal government can finance what it wants to finance. It's, as I say, the most powerful financial entity in the world.
The problem here is organizational. It's a matter of will. It's a matter of creating appropriate institutions that are in the public sector, and incentives in the private sector, to get certain jobs done. When you approach it with that frame of mind, we wouldn't be asking about the budget deficit.
We'd be asking about the unemployment rate. We'd be asking about how we're doing in getting down, meeting our energy and our environmental goals.
BILL MOYERS: So what is the fundamental question, the one question you think all of us should be thinking about right now?
JAMES GALBRAITH: Where do we want to be in 30 years time? How do we get there? It's not a question of how do we return to full employment prosperity in five years. But how we solve the fundamental problems that we face, in a way which gives us a generation of steady progress. And living standards that people can accept, that they'll live with, that they'll be happy with, while at the same time, achieving sustainability and reestablishing the American position as a leading and responsible country in the world. So that we are developing the technologies and the practices that other countries will then adopt, something which we have done very effectively for a century, but which we are certainly not doing now.
BILL MOYERS: I want to show you something that resonates with what you're saying. I've been looking at it for a while now. It's an excerpt from a speech that Franklin Delano Roosevelt made in 1944, in the midst of war, a speech that not many people have seen, but take a look at this excerpt.
PRES. FRANKLIN DELANO ROOSEVELT: In our day certain economic truths have become accepted as self-evident. A second Bill of Rights under which a new basis of security and prosperity can be established for all regardless of station, or race, or creed. Among these are: The right to a useful and remunerative job in the industries or shops or farms or mines throughout the nation. The right to earn enough to provide adequate food and clothing and recreation. The right of every farmer to raise and sell his products at a return which will give him and his family a decent living. The right of every businessman, large and small, to trade in an atmosphere of freedom, freedom from unfair competition and domination by monopolies at home or abroad. The right of every family to a decent home. The right to adequate medical care and the opportunity to achieve and enjoy good health. The right to adequate protection from the economic fears of old age, sickness, accident and unemployment. The right to a good education. All of these rights spell security. And after this war is won we must be prepared to move forward in the implementation of these rights to new goals of human happiness and well-being. For unless there is security here at home there cannot be lasting peace in the world.
BILL MOYERS: What do you think about, listening to that?
JAMES GALBRAITH: It's wonderful. It's splendid. It defined what we should have achieved in the last 50 years and in many ways, what we still need to achieve.
It's a test. It's a test for the country as a whole, as to whether we have the capacity to state and pursue a truly public purpose. We've come through a generation where we have really denied the existence of a common good or a public purpose. And I think we've recognized that that path leads to collapse, the collapse that we've seen. And that the way out is to somehow reestablish for ourselves this vision of what we really could be.
BILL MOYERS: James K. Galbraith, thank you for being with me again on the Journal.
JAMES GALBRAITH: My pleasure.