12 April 2009

Veteran journalist William Greider on the current financial crisis and what he calls "the great deflation of Wall Street."

Watch the program here.

BILL MOYERS: With me now is one of America's leading chroniclers of money, power, and politics, who says what's happening is the disgrace of Wall Street, its excesses paid for by people like those in Cleveland and millions like them around the country.

William Greider has spent forty years examining how powerful institutions affect ordinary people. Once a top editor of THE WASHINGTON POST, a columnist for ROLLING STONE, and now National Affairs Correspondent for THE NATION, he has produced a series of best-selling books: SECRETS OF THE TEMPLE: HOW THE FEDERAL RESERVE RUNS THE COUNTRY, ONE WORLD, READY OR NOT: THE MANIC LOGIC OF GLOBAL CAPITALISM, WHO WILL TELL THE PEOPLE: THE BETRAYAL OF AMERICAN DEMOCRACY, and this one, THE SOUL OF CAPITALISM. He's working on a new book with the title: COME HOME, AMERICA.

Good to see you in person.


BILL MOYERS: What were you thinking as you saw that report from Cleveland?

WILLIAM GREIDER: Made me angry all over again, even though I know the story. And then I thought, "This is usury." This is a living example of what the Bible prohibited, which is the sin of usury. Most Americans have never heard of it probably.


WILLIAM GREIDER: Usury, to be clear about it, is rich people taking advantage of poor people by lending them money on terms that are sure to make them fail. All three of the great religions, Judaism, Christianity, Islam, had a moral prohibition against usury because they recognized that society can't function like that. People of great wealth and their institutions like banks naturally have the power to overwhelm people of lesser means. And you can't allow that in a decent society. It won't survive.

BILL MOYERS: Where were the gatekeepers? Where were the watchdogs? Why did it take the Fed so long to put an end to-


BILL MOYERS: -predatory practices?

WILLIAM GREIDER: To make the story overly crude, Congress repealed the law against usury. It was done in 1980 by a Democratic Congress, Democratic President. And, of course, the Republicans all piled on and voted for it. And that was the first stroke, only the first of many, in which they stripped away the regulatory laws from the financial system and from banking.

And that allowed the free market modernized gimmicks of one kind or another, all these things we're now reading about, to flourish. And that's where we are. I mean, the gatekeepers said to the banking industry and to the financial industry, "We don't think federal control or regulation is good for you, so we're, therefore, liberating you to do your own thing."

BILL MOYERS: So why did they do that in 1980? I mean, there was, of course, the rise of the backlash to regulation from 40 years of Democratic rule-


BILL MOYERS: -there was the rise, the arrival of the conservatives with their free market ideology.

WILLIAM GREIDER: Right, right.

BILL MOYERS: What was the issue?

WILLIAM GREIDER: Well, the driver then, and it was a powerful driver, was inflation. And through the '70s, for lots of reasons inflation, which tends to undermine the value of financial wealth and money, was out of control. The Federal Reserve had lost control of it, not entirely its fault. But that set up a political climate that said the government is not working and that wasn't wrong at the moment. Let's get the government out of the way.

And that was very appealing as framed by Ronald Reagan and other conservatives. But I think it's fair to say most Democrats yielded to it against whatever their original instincts were because of political necessity. And then the third dimension, maybe the most important, was that you had this very powerful industrial sector, that is banking and finance, that wanted and had pushed for years to get out from under the regulatory controls, limits on interest rates, the law against usury, the merger of commercial banks with investment banks, which had been prohibited in the New Deal because it caused the disaster of 1929.

I can go on and on. But you see the pattern. And the point I keep trying to make to people is that history learned the hard way that you do need prudential controls on industries like banking 'cause they're so central to everybody's well being.

BILL MOYERS: Left to their own devices, they go too far?

WILLIAM GREIDER: Yeah. They will use their power to their own advantage. And that's what we're witnessing now, a kind of recklessness that was set free by political retreat and people, some of them were sincere. Some of them were just on the make. But here's our great American tension. We want an economy that's dynamic, that's growing, puts more jobs out there for people to get, rising wages, all that good stuff. And at the same time, we want an economy that's stable. And that means no inflation, steady as you go, so forth and so on.

And this is the, you know, this is the mortal condition. You're not going to escape that tension. Government is a powerful intervener that tries, ought to try, to balance those two desires. For many years, the Federal Reserve served that role and tried to strike a balance.

BILL MOYERS: And then what happened?

WILLIAM GREIDER: During the last generation, 25, 30 years ago, the Federal Reserve, the central bank that regulates money and credit, tipped hard in one direction.


WILLIAM GREIDER: Crudely put, toward capital, in favor of capital and against labor. It not only hardened the value of money by suppressing inflation, but it participated very aggressively in the role of stripping away regulatory breaks on financial system and banks. Declined to enforce many of its own regulatory powers that exist in law. And meanwhile, sort of kept a foot on the brake about economic growth and full employment and all those good things that might help working people by encouraging rising wages.

BILL MOYERS: So at the same time the Fed was helping to keep wages down in order to keep inflation from escalating, its policies were, nonetheless, helping banks and investors to inflate the cost of their-


BILL MOYERS: -the value of their assets beyond reality-


BILL MOYERS: -right?

WILLIAM GREIDER: That's it. At one point, writing in "The Nation," I somewhat playfully and wickedly referred to Alan Greenspan, the Federal Reserve chairman, as the "one-eyed chairman." He can see inflation and wages and goods and services, the prices that consumer prices, even when it doesn't exist. And he'll put his foot down on the brake. But he doesn't see the inflation in the financial system at all.

And the inflation in the financial system is the value, the prices, of financial assets, most obviously stock, rose fantastically over 20, 25 years, two, three times the growth in the real underlying economy. Something's wrong there, right? How do these financial assets, which supposedly reflect the economy, suddenly become worth three times more?

BILL MOYERS: Yes. How did they?

WILLIAM GREIDER: Well, now we're back in the game, aren't we? With deregulation, with the help of the Fed, and with the success of the Super Bull market, everybody's animal spirits in the financial system became more animal. And they and they went for it, and they said, "If you'll get this rule out of the way or you let us make this kind of weird little gimmicky paper innovation, we'll do even better."

BILL MOYERS: Yeah, you-

WILLIAM GREIDER: And you had this force rising up, driving things higher in the stock market while, in many sectors of the economy, if not everywhere, people are saying, "Gee, this doesn't feel that good to us." And particularly working people.

BILL MOYERS: You've written about a fantasy, an illusion that led to the housing bubble. You wrote about a fantasy that was sold, an illusion that led to the housing bubble. Whose interest was it to sell a fantasy?

WILLIAM GREIDER: Well, the merchants of financial paper, to put it bluntly. I mean, the illusion was that you could dismantle or disregard fairly old-time traditional rules of proper banking and stewardship and that that would definitely allow prices, profits, everything to go still higher. But that they could somehow dissolve the risk in that for the society, not just for the society but for themselves.

One example of that was what you heard about in the sub-prime mortgage thing. Who is holding this mortgage that's been lent to these people who we know are going to fail 'cause their incomes just aren't sufficient? Well, it's kind of hard to say because this mortgage is designed as a securitized package of 1,000 mortgages. And you sell it in the financial market to investors all over the world.

And then they sell it to somebody else, and it moves round literally. So what you've done with this innovation is you've distanced the lender from the borrower. Each party, the guy who sold the mortgage, the bank, then the next, the guy who buys the bond, takes his returns upfront, sells it on, and you stripped away the responsibility for that lending. And that's a pretty good microcosm of what happened generally in the financial system.

BILL MOYERS: How is it that these banks wind up holding the rotten mortgage securities that of Fannie Mae and Freddie Mac?

WILLIAM GREIDER: There is a level of fraud here which shouldn't be neglected that, I mean, people lied to their customers' banks-

BILL MOYERS: -mortgage-

WILLIAM GREIDER: -banks, mortgage houses, lied to the people they were selling these bonds to. But as we heard, they also lied to the people who were borrowing the money. I mean, this is fraud with the conflicts of interest. There's an investigation underway now with a number of the biggest banks stuck with all this bad paper, this rotten mortgage securities. Who can they sell them to?

The otherwise savvy investors around the world have gotten burned already, so they won't touch them. I know. Let's sell them to our customers. And so they're literally taking the bonds out of their own portfolio as a bank and selling them to the banks' closed customers. Now, that's going to stop, too, because now everybody's onto the secrets.

WILLIAM GREIDER: I think you can get lost in the mechanics of how all this works. And it's pretty sometimes pretty dizzying stuff. I think the bigger message is that what some of our old folks knew turns out still to be true.

BILL MOYERS: Which is?

WILLIAM GREIDER: Which is the process of lending, borrowing, investing, all of those things, require a personal hands-on knowledge of what you're doing but also a level of integrity that, put it bluntly, does not exist at this time in our financial system.

BILL MOYERS: You see a direct connection between what happened to those people in Cleveland and across the country and the cozy relationship that you've often written about between Wall Street and Washington?

WILLIAM GREIDER: Yeah. Yeah. The point I want to make, though, is that this is deeper than politician rolling over for his campaign contributor, the guys who finance the Democratic Party or the Republican Party. They do that, too. But they were sold a fantasy, an illusion, which sounded wonderful about how markets make better judgments than government and the public. And that liberating finance and business from prudential rules that society imposes upon them will produce a bigger, better economy and better returns for everyone.

All those fantasies have been destroyed by these events, I mean, wiped out. And if you think about it, as we go through the hard months ahead, America's going to have to take some pain, right? In one form or another. The government's going to have to probably ask for some sacrifices.

How do they do that when the American people have just seen the government rush in three days, five days or less, to bail out the biggest, most powerful institutions in the country? That is, the financial investment houses and banks and major banks.

BILL MOYERS: In your opinion, the bailout of Freddie Mac and Fannie Mae, good or bad?

WILLIAM GREIDER: I think it's bad. I mean, I think the way they're doing it is terrible. It's not done in the public interest. The bailout is necessary. They are failing at the bailout. And I believe they're failing because they haven't gone far enough.

They need to start thinking of, okay, how do we save the folks? That is, the broad interests of the American people as a nation, as workers, as family, blah, blah, blah. And the way to deal with Fannie Mae and Freddie Mac and some others like it is to nationalize them. Make them agencies of the federal government. That's what they were originally. And they performed for many years a really valuable service to housing markets.

They sort of re-circulated the capital and the mortgages and so forth. Make them a sub-agency of government. Let the shareholders of Fannie Mae and the rest eat their losses. They were playing risk taker shareholders. Let them suffer the consequences of their wrong bets. And go back to a more normal configuration.

Not a casino. No private shareholders. Look, the bailout of Fannie Mae that they're proposing says, somewhat generously I think, we'll put $300 billion on the table to buy the shares of stockholders in Fannie Mae and Freddie Mac. And just us saying that should give them a lot of confidence. Well, yeah, wouldn't it if you've just had the federal government promise to buy your shares if you don't want to hold them anymore.

BILL MOYERS: Maybe that's why all the foreign investors rushed in yesterday to buy Fannie Mae and Freddie Mac-

WILLIAM GREIDER: It might have some connection, yes.

BILL MOYERS: -if they know the taxpayers are going to put the money in, they've got a pretty good-

WILLIAM GREIDER: They've got what you might call a no-lose proposition. And the other part of that, and this would be simple. You could pass this in three days. Restore the federal law against usury. That won't have too many details to it at first. But it'll be a general statement that the federal government is prohibiting the kind of outrageous predatory practices, which have become general in this country, of not just banks but other financial firms.

BILL MOYERS: Credit card companies and-

WILLIAM GREIDER: Credit card - yeah, it's a long list. We know those abuses.

BILL MOYERS: Put some limits, some boundaries?

WILLIAM GREIDER: Well, eventually you have to draw very precise boundaries, I think, and restore some structure that says, okay, you can get a return of X on credit cards, but you can't get a return of triple X, right? And that kind of regulation. And that's not easy to draw. It takes a while.

But the first law that would just reassure the public, we're against usury. Muslims are against it. Christians are against it. Jews are against it. And we're going to develop a government laws that prohibited and penalized these institutions when they get caught doing it.

BILL MOYERS: Excessive interest, owned loans.


BILL MOYERS: That's what you mean by usury?

WILLIAM GREIDER: That's the narrowest meaning. But the larger meaning is wealthy people, whether they're banks or individuals, ought not to be able to use their power, their wealth to exploit people who don't have wealth, great wealth. That's not too complicated. And I'm not being utopian here. I'm just saying that you can reestablish legal-slash-moral limits on the behavior of finance and their wealthy patrons. And if they don't want to observe those rules then they need not apply for emergency loans at the Federal Reserve or the Treasury Department.

BILL MOYERS: In other words-

WILLIAM GREIDER: You see what I'm getting at? And-

BILL MOYERS: Yeah, in other words, so-

WILLIAM GREIDER: -and this is a-

BILL MOYERS: -if there's a bailout, certain conditions on that bailout.


BILL MOYERS: Not just a free pass.

WILLIAM GREIDER: And what they've done in the last year, now two or three times and they're going to do more is to say, "Oh, my goodness, the biggest investment bank, houses are in trouble. We don't usually lend directly to them. We only lend to big banks, but they're in trouble, too. Let's lend to both of them. Let's open the windows and pour out the capital, the liquidity, and so forth." And there wasn't a day that where they paused to say, "What are we getting in return? That these guys promise not to fail?" You see what I'm getting at? It's-


WILLIAM GREIDER: -it's a wildly grotesque transaction where the public guarantees the life of these firms, and there isn't any effort that we know of to say, "And in return, you're going to behave in the following ways for the next ten years or maybe forever. We'll pass a law later that spells that out more clearly, but this is our starting demand." And I suppose they would say, "Well, we don't have time to do that. This is a crisis, blah, blah, blah." I don't buy that. I think that's a way to avoid those questions is not even mention them.

BILL MOYERS: You have been writing for a long time now that America's moving toward a corporate state. If we become one, can we exercise the self-correcting faculty that prevents us from hitting the iceberg out there?

WILLIAM GREIDER: One of the reasons I think politics is going to change fairly dramatically is that the Federal Reserve, accompanied by the Treasury Department and I think will be accompanied by the Congress, has crossed a very dangerous line in their bailout. They have essentially said, "We will put money on the table, taxpayers' money on the table, for any financial institution or business that is too big to fail." That is, if it fails, it'll send dangerous ripples through the economy.

And we've got a list now of maybe 30, 40, depending on how you count them, that we will be there to save you. I regard that as profoundly dangerous for the American Republic because once you cross that line and you have this special club that's privileged, that has benefits from government that nobody else can get, where do you stop it?

I mean, if I were running a big manufacturing company, I would have quickly run out and buy a subsidiary that's a bank or a financial firm that looks like a bank. And I would then try to get myself on that list. Who wouldn't? What's going on right now it's gotten a little attention - the union SEIU is fighting it, is these private equity firms, which are huge money pots of investors that take over and change corporations and come away with huge profits. The private equity firms are trying to buy into the banks and financial firms.

BILL MOYERS: And what would that mean?

WILLIAM GREIDER: That would mean that this private unregulated equity fund would be participating behind the door, so to speak, in the management of our regulated banks. But it would also, in a pinch, if it's big enough, maybe have a tap into that federal guarantee that if you're too big to fail, we'll be there for you.


WILLIAM GREIDER: You see what I'm getting at? And-

BILL MOYERS: I do. This morning in the "New York Times" one of the big stories in the business section is the financial industry is organizing to stop Congress from trying to regulate excessive speculation on oil and energy. They don't want this capacity for exploiting-


BILL MOYERS: -people's needs.

WILLIAM GREIDER: Well, I could lay us alongside that the Securities and Exchange Commission, which, remember in olden days, was supposed to defend us innocent investors against the guys running corporations. And that's why we have all these reports and so forth and so on. They announced this past week that they're going to go after the short sellers in the stock market.

The short sellers are the guys who say these folks at the corporate headquarters are lying to you or the folks at Citigroup are still not telling the truth about their losses and liabilities. So you see what I'm getting at. It's equivalent to saying we don't want anybody bad mouthing us in the middle of this trouble. And we'll try to penalize them if we can. Isn't that contradictory to the public interest?

BILL MOYERS: Have we hit bottom?

WILLIAM GREIDER: I don't think so. But I think the short answer is nobody knows. My sense is, partly because the rottenness, the bad assets and so forth and the inflated housing prices and all the other defaults have so much more to play out - I think they will then feed back, and are already, into real economic consequences for the general life of the economy.


WILLIAM GREIDER: Well, people lose jobs. Unemployment will rise.

BILL MOYERS: Like Cleveland. Yeah-

WILLIAM GREIDER: And like, you know, a perhaps less vicious story because it'll be more gradual than what's happening in those neighborhoods in Cleveland. But then as that happens, the losses feed back into banks because they've got consumer loans, they've got car loans, they've got business loans. And even banks that have been more or less virtuous in their behavior will be impinged by that. So I'm not making some grandiose calamity prediction. I'm just saying we got a lot more pain to take in this society before this works out.

BILL MOYERS: Both parties have put the watchdogs to sleep, right?

WILLIAM GREIDER: A better metaphor, instead of putting them to sleep, would be castration.

WILLIAM GREIDER: I don't know what you want, I mean-

BILL MOYERS: Both parties of complict-

WILLIAM GREIDER: Putting them to sleep is just a metaphor that stops me-

BILL MOYERS: Both parties have been complicit in tipping the balance of power to capital, right?

WILLIAM GREIDER: I'm afraid so. That's right. I mean, if you go back over the last 20, 25 years, it was always portrayed as a cause of conservative Republicans, even right-wing Republicans. And that was, of course, true. But I think a majority of the Democrats were in collusion virtually every step of the way, and sometimes they led the way.

BILL MOYERS: Do you think Washington really knows what's going on? Do you think they really understand what's happening out there in Cleveland and places like that all over the country?

WILLIAM GREIDER: The short answer is, no, I've been in Washington as a citizen and resident for 40 years. And I'm still occasionally shocked by its ignorance of the rest of the country. And some of that is willful, of course. But some of it is just, it's a very nice life in Washington. You get used to certain protective qualities.

We saw that recently with these political players, who got good mortgages. How do they do that? Well, we know how they did it. And in any case, Washington doesn't yet see the depth of the problem.

If you ask me, well, who's figured this out? Who understands, at least in general terms, where we are? The guys in Washington? The politicians and their governing policy advisors? Or the dimwitted public? I would say the public. And I think there's a lot of evidence in that. You know, they keep seeing these polls where the public expresses doubt about this, about-

BILL MOYERS: Eighty-one percent of the people in the most recent polls say we're heading in the wrong direction.

WILLIAM GREIDER: I call that an extreme consensus. Why do the newspapers not celebrate that? They're always looking for consensus politics. Here's the American public, they've got an eighty-- you know, that's extraordinary.

WILLIAM GREIDER: We have an opening in this crisis for, this is really going to sound grandiose. We have an opening in this crisis for a deep transformation in American politics. I don't say it happens this year, next year, or it's going to take a number of years. But we are in the shock of reality. And people get it everywhere and see the blood in the streets. And you tell them how this worked and who did what to whom, and that's a basis for a new politics.

But it requires people - this is the hard part - to get out of their sort of passive resignation to, "Well, we follow the Democrats" or "we follow the Republicans" or "we let this group or that group tell us how to think" and engage among themselves in a much more serious role as citizens. And when, as they do that, they have to be willing to punish the political powers, in smart ways or crude ways, however they can, first, to get a place in the debate. But, secondly, to force the changing values of the system.

And I, this may be wishful, but I think in the next year, two years, five years, you're going to see both political parties floundering. What do we believe about all this stuff? We've told folks this, you know, lovely story for 20, 25 years about the magic of the marketplace. Do we still want to kind of prop that up? That's where they are now. They're still trying to prop up the marketplace vision and make it work again. It's over.

I think events will demonstrate that. So if they're not willing to change then we need to change the politicians. And that's all a bloody process and doesn't happen quickly. But that's why I'm optimistic.

BILL MOYERS: Bill Greider we look forward to your new book, the title of it will be-

WILLIAM GREIDER: "Come Home, America"

BILL MOYERS: And you come back to the Journal.


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