BILL MOYERS: If you read only one book on the route to this financial meltdown, I recommend this one: Bad Money: Reckless Finance, Failed Politics, And The Global Crisis Of American Capitalism. The author, Kevin Phillips, has a history of being way ahead of the curve. As a young man working for Richard Nixon, he wrote The Emerging Republican Majority, a book that uncannily predicted how the GOP would regain power in Washington. Kevin Phillips saw our current crisis coming a long time ago. And in one book of historical insight after another, laid out the clues he was tracking. As recently as last spring in the American Prospect magazine, Phillips wrote that what he thought was about to happen would be "unusual and potentially tragic." In the preface of his book, he has written that these things usually come to fruition in August and September. And sure enough, here we are coping in September with the effects of bad money. Kevin, it's good to see you again.

KEVIN PHILLIPS: Nice to be here.

BILL MOYERS: Is there any consolation in being right when the conditions are so bad?

KEVIN PHILLIPS: Well, I guess there is in one narrow, little niche. But I do have the feeling that this is going to be a big one, that — I hate to use the term "innings," but let's say I don't think we're too far into the ballgame. I think we have more of a ballgame to go than we've had. So, yes, I think it's going to be a real problem.

BILL MOYERS: In a ballgame, there are referees. There are umpires. Who are the referees now? Who are the umpires in this critical game?

KEVIN PHILLIPS: Well, in a sense, I think some of the umpires are investors. Some are people overseas who wonder what they have to think of the United States. Do they want to keep investing here? Do they want to support the dollar? Do they believe in the government here and know what it's doing?

But Americans, ordinary Americans don't have much of a role in this partly I think because they don't really know the dimensions of what's involved here. This is the denouement of the 25-year debt buildup which was undertaken mostly by the financial sector putting themselves on steroids to get bigger and bigger and bigger. And we've finally gotten to the point where the bubble isn't sustainable anymore, but a lot of Wall Street is dedicated to minimizing the spattering of the bubble, so to speak.

BILL MOYERS: Give me a quick definition of "bad money."

KEVIN PHILLIPS: Well, "bad money" has a triple connotation. The first is "bad money" in the sense of bad capitalism drives out good capitalism.

BILL MOYERS: That's sort of a historical —

KEVIN PHILLIPS: That's right. We've had —

BILL MOYERS: I don't understand why it is. But — KEVIN PHILLIPS: Well, because you have to compete with sleaze. Get a little more sleaze in your own operations. And you look at all these lies, these deceptions, these frauds that have been going on. But, I mean, there aren't too many people that would say back two or three years ago that the way to prosper more was to do less of the cheating. You had to do what the others were doing. And that's the way these things — it was true in the '20s. It's been true in plenty of other bubbles. You have to do it. So just the question of what's been bubbling here and the hugeness of the problem hasn't been revealed to people.

BILL MOYERS: You say it's the greatest story never told.

KEVIN PHILLIPS: Well, the greatest story never told in several senses. The first sense and when I do bad money, it's bad capitalism and bad money in the sense of the dollar and bad money in the sense of bad dog, bad Wall Street. But what's here that doesn't get the attention is the United States in the last 20 years undertook an enormous transformation of itself with no attention paid. And what it means is and what makes all this so frightening is the country is at risk because of the size of the financial sector that has never been graded on its competence and behavior in any serious way. They are the economy at this point. And we are now seeing what happens when a 20 to 21 percent of GDP financial sector starts to come unglued.

BILL MOYERS: But there are people, Kevin, who disagree with us, who say that this financial industry has created great wealth for America in the last 25 years.

KEVIN PHILLIPS: Oh, it's created great wealth for a small slice of America. But if you go back and we remember the manufacturing heyday, the auto workers in Michigan had fishing cabins up on the lake. And the middle class had been fattened by the rise of the blue-collar middle class. Well, there's no rising blue-collar middle class now. The middle class is shrinking. The pie in a financial economy goes to the one or two percent — or even less — that have capital skills and education. We have never had so much polarization and wealth disparity and just groaning wealth right at the top of ladder as we have now under finance.

BILL MOYERS: So how is it that, as you write in the book, the financial sector has hijacked the American economy? You used that term.

KEVIN PHILLIPS: I use the term. And without using a whole bunch of numbers, let me try to put it this way. You had —

BILL MOYERS: The numbers are there in chapter two.

KEVIN PHILLIPS: The numbers are there in chapter two. You had essentially a financial sector that, let's say, was sort of neck and neck with manufacturing back in the late 1980s. But they got control in a lot of ways in the agenda. Finance has been bailed out. I mean, everybody thinks this is horrible now what we're seeing in terms of bailouts. Even a lot of the people who do it think it's bad. This has been going on since the beginning of the 1980s. Finance has been preferred as the sector that got government support. Manufacturing slides, nobody helps. Finance has a problem, Federal Reserve to the rescue. Treasury to the rescue. Subsidies this, that and the other.

So bit by bit, they got bigger. And the other reason they got bigger was because this became a country that was further and further in debt. Consumerism was just pushed to the nth degree. People were given the sense that they had to buy everything and they had to borrow to do it increasingly.

But we've seen the central component of the rise of the financial sector is the rise of the debt industry. Mortgage, credit cards, all these gimmicks that Wall Street sells — just all kinds of products. And, of course, the products are laying an egg all over the world right now.

BILL MOYERS: You're very hard in here on Alan Greenspan's tenure at the Fed.

KEVIN PHILLIPS: Well, I know Alan from the Republican campaign back in 1968. He was always a very scholarly, data-driven guy. But I think, for some reason or other, his chairmanship will be remembered as turn on the spigots.

BILL MOYERS: Turn on the spigots?

KEVIN PHILLIPS: Turn on the spigots. He started in 1987 with a crash that was a wicked one in one day in 1987. And he turned on the spigots. And they had the huge growth of the tech bubble in the 1990s. And then right after the tech and the stock market bubble blew up in 2000, you had 9/11. So there was a need for more stimulus. And they ginned up the stimulus again hugely. And the upshot is that during Greenspan's tenure from 1987 to 2006, what they call total credit market debt in the United States quadrupled, quadrupled from about $11 trillion up to $44, $45, $46 trillion. And finance got the great bulk of it. And Greenspan would do nothing to disturb finance. He wouldn't puncture a bubble. He wouldn't crack down on the exotic mortgages. He really wouldn't do much of anything except give obscure speeches in which, you know, he mumbled the different directions so nobody would know what he meant. But basically he gave finance what they wanted.

BILL MOYERS: And you write also that during this period the Clinton Administration aided and abetted this kind of speculation. Bill Clinton's economic advisor, Bob Rubin, who later became Secretary of Treasury — wanting to fuel this, right?

KEVIN PHILLIPS: It's been a bipartisan phenomenon. You can go back to the 1980s and say Reagan and George Bush, Sr., got a bubble started. Clinton got in and got an even bigger bubble going. And then George W. Bush with the biggest bubble of all. But it's not that the Clintonites didn't play. They did. Bob Rubin as Secretary of the Treasury — I mean, if he was a Hindu and he was being reincarnated, he'd come back as a pail because this guy bailed out everything you can imagine. They had the Mexican loan bailout. They had the long-term capital management bailout, the Russian Southeast Asian currency bailouts.

BILL MOYERS: All of which, however, kept them from coming into this economy, into our economy, coming to our continent.

KEVIN PHILLIPS: Well, except that a lot of the liquidity they created and the momentum and the borrowed money produced the implosion of the bubble in 2000. And a lot of what was imploding was the $2.5 trillion in new debt that was tied to energy and telecommunications, that's Enron, WorldCom, and Global Crossing. So there was a lot more of a bubble blown up there.

Rubin was also central — Democrats more than Republicans in a lot of ways with the Clinton Administration — in getting rid of Glass-Steagall, was the old restriction that the banks couldn't tie up with brokerage firms and insurance companies. Well, basically after they made their reform led by Clinton and by Bob Rubin, you had like four-color linguini here in a bowl. It's all mixed up together.

BILL MOYERS: So you have it — for this disaster has bipartisan parentage.


BILL MOYERS: But yet you say it's come to an end. You say there'll be no pretense any longer that the financial system is supreme.

KEVIN PHILLIPS: Oh, there may be a pretense in some quarters. I mean, obviously people who were doing the bailouts are saying how important it is that we don't rock or endanger the financial system. Some would say to the contrary that the best thing we could do would be to put its failings out there and let the making cure it.

I don't expect that to be the prevailing view. We've had 25 years of what I call financial mercantilism, which is the government aiding and pushing and bailing out the financial sector. It's not going to change. But I do think finance is going to lose its control over the economy in the sense that the public is going to be so angry they're going to insist on more regulation.

And you can see that both presidential contenders are now talking somewhat more regulation and anger at finance. So I think that'll crimp their style a little bit. But I'm afraid that the, you know, the horse is way out of the barn.

BILL MOYERS: But as we speak, central banks are pouring billions of dollars into the global economy. Is this a palliative or is this a panacea?

KEVIN PHILLIPS: Oh, I think it's a tricky game. In one respect, they want to make a lot of money available to make it easier to get lending unfrozen. The second thing they want to do is support the dollar, which is under enormous pressure now because people say it's not a store house of anything. If you want to keep your money safe, put it in gold. So they're worried about the huge rise that gold had in this week.

So I think what we're looking at here is an attempt really like a drunk will feel better and get over his hangover better sometimes just by having more liquor. And I think what we're seeing with the actions of the Federal Reserve Board is the people who are the arsonists, the people who pumped it all up, who blew up the bubble are now racing to show up in firemen's hats and say, "We're gonna solve it. We're gonna take care of all this. Oh, and by the way, we're gonna keep pumping in the gasoline that we pumped in before that made a good flame." But, you know, nobody knows that.

BILL MOYERS: Are you suggesting that the best thing to do is let the house burn down and build it over again?

KEVIN PHILLIPS: I would say, first of all, you never should have blown the bubble this way. If we could invent a time machine and go back and cure it that would be the best economics of all. Having blown it up, I think the case is that they should have accepted more of the tough medicine beginning last year and not tried to rescue every stray tentacle of the financial octopus —

BILL MOYERS: But they didn't. We don't have a time —

KEVIN PHILLIPS: They didn't. No.

BILL MOYERS: So here we are. Where are we?

KEVIN PHILLIPS: Where we are, in my opinion, is about halfway through. Halfway through the serious part.

BILL MOYERS: Halfway to the bottom?

KEVIN PHILLIPS: It depends what you use in terms of bottom. I mean, in some ways, real estate prices were lower in 1936, '37 than they were in 1929 or '30. So I'm not sure exactly what you use as the measurement, real estate, the stock market. But it's a package which Americans have to understand is going to be awful. We're probably going to wind up nationally losing 20 to 30 percent of the average value of homes.

The stock market will — right now it's in the middle 10,000s. The people who were nervous but not super bears expect that the Dow will go back down into the 9,000s. But what people have to remember is that in 2000 the Dow was 11,700. If you take off where it's lost since then and you adjust for inflation, you're looking at a 30 to 40 percent decline. So houses are matched in a way by what's happening in stocks.

BILL MOYERS: So we're all going to be poor? Well, not all —

KEVIN PHILLIPS: Well, we're not all going to be poor because there are people in Wall Street who've used all this new technology basically to bet the other way. I mean, one of the things that finance can do now, it can bet on anything. It's like Las Vegas merged with insurance and real estate people. And they have figured out new ways to gamble. And they can gamble on how many people in Ohio are going to lose their shirt.

BILL MOYERS: So who do you trust anymore? I mean, you write in your book that the most worrisome thing is the extent of official understatement and misstatement, the preference for minimizing how many problems there are and how interconnected they are.

KEVIN PHILLIPS: Well, just to give you an example of how many there are, Alan Greenspan has finally decided to admit, you know, this may be one of those once-a-century biggies. Well, what makes it fascinating is that I sometimes use the description "seven sharks." There are seven sharks in the tank with the economy.

And the first is financialization because we're so dependent on this industry that's sort of half lost its marbles. The second is that you have this huge buildup of debt, absolutely unprecedented anywhere in the world. The third is you've now got home prices collapsing. The fourth is you've got global commodity inflation building up. The fifth is you've got flawed and deceptive government economic statistics. The sixth is that you've got what they call peak oil where the world is, to some extent, running out of oil. So it's not just commodity inflation, it's a shortage of oil. And then the last thing is the collapsing dollar. Now, whenever you get this sort of package in one decade, you got a big one. And when Greenspan says it's a once a century, I think it's another variation but on a par with the '30s.

BILL MOYERS: What do you think when you hear John McCain and Secretary Paulson say that the fundamentals, however, are solid?

KEVIN PHILLIPS: Well, John McCain once said he didn't know anything about economics. And half the time what he says, you know, proves that on a day-by-day basis. I don't think we have a sound economy at all. Not remotely at this point. I mean, there are, like, ten yardsticks I could use. Paulson is your typical Treasury Secretary guy that has to deal with it. And everybody knows he has to exaggerate. He has to say all the Hoover-type stuff about how strong the economy is and the recession's going to be over in three months and that sort of stuff. I don't really credit these people very much. But, frankly, I don't credit the Democrats either.

BILL MOYERS: No, I was going to say Obama's trademark rhetoric of inspiration seems to desert him when he talks about economic affairs.

KEVIN PHILLIPS: He doesn't seem to have anything very specific to say. That's part of the problem. A second problem is, for me at least, you know, just as I can't believe that John McCain ever wanted to get his economic advice from Phil Gramm. I mean, Phil Gramm, a former Texas Senator, appalling. He and his wife were known as Mr. and Mrs. Enron because they were so flagrant, that's McCain.

But then you've got Obama with Bob Rubin and he doesn't have any problem with the hedge fund types. I mean, one of the Chicago people was a major financier of his. He gets a guy to pick his vice-president. Turns out to be somebody who was part of the Fannie and Freddie mess. So I don't exactly see Obama as this fellow riding in on a horse who represents all kinds of reformism. It's an important thing probably to have to change from the Republicans but I don't see that he is free of the ties to finance and Democratic Party financial types.

BILL MOYERS: I've known you a long time. Are you reaching the point where you're leaving yourself and us despairing?

KEVIN PHILLIPS: Well, I'm not despairing because one of the things, as you know, when you get to be more or less our age, you've got grandchildren you can feel young with. But I'm sick of Washington. It really deserves the fact that 81 percent or 85 percent of the people think we're on the wrong track. I mean, we are on the wrong track. I wish I could say that there's a blueprint that would get us back on the right track. But my sense of histories previous goes to the one or two percent leading world economic power is you don't get back on the right track.

BILL MOYERS: So what happens?

KEVIN PHILLIPS: You go through a painful adjustment process. The British were absolutely top dog in the world in 1914. Two world wars and 35 years later, they were having, after World War II, they were having food rationing, the pound sterling crashed, dukes were giving guided tours of their castles because they couldn't afford to maintain them otherwise. Doesn't take long. And I'm afraid the United States is coming right into that period which marks a couple of decades coming up that are going to be very difficult for America.

BILL MOYERS: You wrote in that American Prospect piece that some people, particularly in the reform community and among progressives, see this as a great opportunity for returning to the New Deal regulatory period instigated by Franklin Roosevelt in the pits of the Depression. You don't think that's happening.

KEVIN PHILLIPS: Well, I mean, there's several difficulties here. First of all, at this point, what you've got are the Democrats are the party right at this point that's getting most of the financial money. When Franklin D. Roosevelt won in 1932, we know he wasn't getting most of the financial money.

The second thing is I don't think we're more than partway through. The Democrats think it's going to be another 1933, they get in there, they can do all the New Deal stuff. My feeling is that they're coming in halfway and they're going to have to make hard decisions that are going to eat the Democratic coalition like a bologna sandwich. They're going to start civil wars —

BILL MOYERS: How come? What do you mean?

KEVIN PHILLIPS: Well, if you're going to bail out Wall Street while you're saying oh, the Social Security recipients, maybe they don't even need that money. A lot of people in the financial community basically want to push Social Security on some sort of voluntary basis and needs test it and get rid of it. Now, a lot of Democrats in the labor movement are very nervous about Obama. They put out press releases talking about Rubin-nomics because they see that the flesh of the Democratic Party carries a lunchbox. But the new soul of the Democratic Party wears a pinstripe suit.

BILL MOYERS: And the Republicans, what do they do?

KEVIN PHILLIPS: Well, they're —

BILL MOYERS: More of the same? I mean —

KEVIN PHILLIPS: Well, different flavors. I can't imagine anything worse than having another four years of George W. Bush. I think he's probably the biggest disaster at the worst period of time that we could ever have a disaster in modern history. But could the Republicans be different and better? Oddly enough, I think they might have a small bit of integrity as opposition people, whereas subordinate to Bush and all the people that control national Republican politics, the Republicans were a waste of time. But, for example, Senator Grassley of Iowa was ranking Republican on the Senate Finance Committee. He opposed the Fannie/Freddie Bill and said it was a payoff to Wall Street and K Street. That's the lobbyists in Washington. You now have the Senator of Alabama, Shelby, who's the ranking Republican on Senate Banking, totally opposed anymore bailouts. We've got to let the markets do it. Well, the National Republican Party doesn't believe that for one minute.

BILL MOYERS: Because they get their money from the same people.

KEVIN PHILLIPS: That's right. The same money goes to the Democrats.


KEVIN PHILLIPS: But would these people develop a bit more of a sense of ordinary Americans and live up to some of your 4th of July speeches if they don't have a Republican White House, yes, I think they — some of them might be helpful in talking about how the Democrats just want to move in and get the money so that, you know, they can get the bigger checks.

BILL MOYERS: So we at least finally have an election about something, don't we? I mean, with the Fed and the economy at the heart of the debate now?

KEVIN PHILLIPS: The people who have the connections with the lobbies and the big donors have absolutely no problem with all these bailouts and rescues. But they don't dare admit it because who's rescuing the laid off worker? Nobody's rescuing them. The fact that the Democrats don't want to talk about what they're going to do if they get the chance, that's dishonesty. But the Republican Party is thoroughly dishonest in the same way.

BILL MOYERS: But we are going to have a new president in January, no matter how despairing people may be about that. What is the first thing you would find convincing, if he did it, to meet this meltdown, this issue, this crisis?

KEVIN PHILLIPS: Well, I guess I would, without talking out of school particularly, Obama told me one time he read some of my books. So I would be very interested and impressed if he in January started to say something has really gone wrong in this country. And I'm not sure that I or anybody else can turn it around. But we borrowed so much money. We've let this Las Vegas version of what used to be ordinary banks in our ordinary hometowns go berserk. Our currency is having enormous problems. People are losing their homes. We've got to face up to what our problems are and talk about how this happened. Who did it? Why? Who made the money?

Well, I think if he were to start talking about it I'd take him seriously. But I think half of Washington would have a problem in their stomach needing quick relief, let me put it that way. Cause you don't rock that boat. You pretend that it's a sound economy. And if it's not sound, it's nothing that the old Democratic elixir can't fix, you know? Old New Deal in a bottle. We'll have a couple of swigs and you'll be happy again. I don't expect him to level.

BILL MOYERS: But is it conceivable to you that a John McCain might have gotten the message now to see what's at stake in the presidency that he would hold if he is elected and that he might actually turn out to be a reformer?

KEVIN PHILLIPS: Well, I think there's some element there in contrast to what you sort of osmose at the Harvard Law School — what you osmose in a naval family I think would be much less sycophancy toward Wall Street and the money crowd. So I think McCain has that. On the other hand, he doesn't have any knowledge. Anybody who thought that Phil Gramm was somebody who could instruct you in fairness to ordinary people and your — this is the guy, "Nation of Whiners" remember Phil.


KEVIN PHILLIPS: So I'm very dubious. I think part of McCain would probably feel like his father and grandfather, the naval officers. But, you know, he's a Republican. He'd have a Republican package.

BILL MOYERS: The book is Bad Money: Reckless Finance, Failed Politics, And The Global Crisis Of American Capitalism. And as I said at the beginning of this interview, if you have to read one book, this is the one to do it. Kevin Phillips, thanks very much for being with me.

KEVIN PHILLIPS: Good to see you.

Kevin Phillips on America’s Financial Crisis

September 19, 2008

Recently, even people unaccustomed to paying mind to the world of finance suddenly began to learn a lot about terms like “sub-prime mortgages,” “securitization,” “derivatives” and, more ominously, “negative equity” and “the great unwind.” And now, when several blue-chip firms have failed in rapid succession, many Americans are getting another crash course in high finance as they try to understand the collapses, buy-outs, and government takeovers of respected household names like Merrill Lynch, Fannie Mae and Freddie Mac, Bear Stearns, Lehman Brothers and American International Group (AIG).

Why has all this taken Main Street by surprise? In part, according to Kevin Phillips, because we’ve been served up years of faulty statistics and even faultier economic projects. This, Phillips maintains, has led to a spiral of false economic security — Pollyanna Creep. A  political analyst and historian, Phillips has been watching this crisis unfold for a long time now, and has a theory about what’s gone wrong. As he explains to Bill Moyers on the Journal:

“This is the denouement of the 25-year debt buildup which was undertaken mostly by the financial sector putting themselves on steroids to get bigger and bigger and bigger. And we’ve finally gotten to the point where the bubble isn’t sustainable anymore but a lot of Wall Street is dedicated to minimizing the spattering of the bubble, so to speak.”

Phillips explains that these are the fruits of what he calls the “financialization” of the United States: the decline of manufacturing and the rise of finance as the central driver of the nation’s GDP. And it is not a change Phillips believes happened by chance.

About Kevin Phillips

Kevin Phillips is a political analyst, historian and author of thirteen books. Mr. Phillips first gained prominence as the chief political strategist for Richard Nixon during the 1968 election. In 1969, he published The Emerging Republican Majority, which forecasted a major shift to the right in electoral politics — a prediction that has been remarkably accurate. Over twenty years, he has contributed commentary to CBS TV News, National Public Radio, and The Los Angeles Times.

His books have covered the range of history, politics and economics. In 1990, The Politics of Rich and Poor, a critique of Reagan-Bush economics, rose to number two on the New York Times bestseller list; in 1999, Phillips stepped back from politics to write a history of three Anglo-American civil wars, The Cousins’ Wars; his 2002 Wealth And Democracy chronicled the history of America’s wealthiest families and their effect on public policy from 1780s to 1991, arguing that America has entered a new gilded age; in 2003, he produced a biography, William McKinley; then, in 2004, American Dynasty: Aristocracy, Fortune, and The Politics of Deceit In The House of Bush rose to number two on the New York Times bestseller list. And in 2006, American Theocracy explored the corrosive influence of oil, fundamentalist religion, and debt on American democracy.

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