May 1, 2011
Follow the Money: Looking at the Economic Crisis @ LAT FOB
Would like the panel to address how we got in this crisis and ways we can move forward.
Moderator read a passage from Scheer's book, The Great American Stick Up. If you had the power, as emporer Scheer to make one change what would it be?
Scheer: I didn't think you would ask that broad a question. The short thing I would do, not as an emperor, but as a responsible leader of the country, would be to save people from foreclosures. ...We've made money cost next to nothing for banks and corporations, and we've done nothing to save people and their homes. And the bankrutcy courts need to force banks to do what is in their long term interest, to save people's homes...The longer term efforts I would suggest something the radical John McCain suggested, which is to reverse the Financial Services Modernization Act, reverse Glass Steegil. I think we need a restoration of that barrier because the banks are become larger...I believe in democracy, and that was unfortunately what was distorted by that legislation. I would also reverse the commodities future modernization act. That says there will be no regulation of these new financial instruments. I would reverse that and put these new financial gimmicks under the reins of real regulation.
I'd like to nationalize the biggest banks. I don't think these people do much in terms of jobs creation, but they're swindlers. They're liquidity traps. Yes, I would put the big banks under public control, but I know it's not going to happen in my lifetime.
Moderator: reads from Farmer's book, which begins with a quote from John Adams. The role of the federal reserve is misunderstood...The truth is that without the Fed controlling the interest rate, the economic history of the 21st century might have been more catastrophic than it was....The fact that post WWII business cycle were much less erractic than preWWII business cycles proves it is learning how to do this." Do you think the Fed is doing the right thing?
Farmer: First let me say something of Bob's statement, which I agree with completely. ...Did the Fed do the right thing? My response is absolutely yes. The way to think about the institution, there's a lovely part of the Wizard of Oz where it moves from black and white to color. Quantitative easing, involved a huge expansion of the Fed's balance sheet but didn't create a huge increase in the money supply. The move to color that I refer to, in the past the Fed had one tool which was to raise or lower the interest rate and now it can change the composition of its balance sheet. The Bank of England is under huge pressure to raise its interest rates, and there's hawks that have put the Fed under pressure to raise the rates.
Moderator: could they be too late?
Farmer: No, the answer is we have unemployment almost 9%. For me, its the misery of unemployed people that is far more important. The one instrument argument that has occurred in the past sees commodity prices as the same thing as house prices and asset prices, which isn't the same thing at all. The composition of the balance sheet, which is not just federal securities, but also mortgage backed securities, ...What I've been arguing is that they should also be directly controlling the stock market.
Moderator reads from Paul's book. "It's not the endless cycle of elections that sees little time for governance....The worst thing about California's fix is that under the current state of California there is no fix."
Paul: Well, that was a transition from the federal reserve to California governance....In California we've created a very bad problem. We've gone through cycles of boom and bust, prosperity and poverty. We have never had a founding moment that crafts a government that fits who we are as a people. We obviously have an economic challenge in this state, but so does the whole country. We were hit very hard by the housing bubble, harder than most of the country. If you leave out the moribound housing sector...without the housing part of the economy, we're going to be hurting. If you look at the rest of the economy, since 2009 we've actually been doing better than the rest of the country...This government that we've been improvising doesn't allow us to do what we need to do. To allow the poeple who we elect to make the decisions that move us forward. We have 3 government systems in fight with each other - Majority rule elects the state legislature. 2/3 votes required to pass most things in the legislature allow minority view. And then we pile on the system of initiatives and direct democracy. We have been limiting the ability of the people we elect to govern to do anything. The legislature has been reduced to janitors that sweep up after the messes we the voters have made. ...If we don't fix our governing problems, we're going to kill the things that matter for the future: education, infrastructure, which we can't do without a real founding moment that creates a government that is real, accountable, and can actually act.
moderator: I'd like to pose a question to all panelists. This is the greatest national debate. The country and the state face massive budget gaps. In order to reduce the budget gap, do you raise taxes or cut services, or a combination?
Scheer: While I love the Festival Of Books, which my wife happened to launch...I am appalled that there is only one panel to deal with this enormous crisis. I don't want to fall into the trap of pretending we can.
We have 44 million living under the poverty level. It takes up back very far. We have 50 million people who have lost their homes or are in serious danger of losing their homes...We have an enormous crisis in this country. It is a crisis made by the federal government...We had 23 states in this country that had control of the interest rates that was stripped away by the federal government...The state did not have power to control CountryWide, which was based in California...so basically the power was taken away from the state. Why is Wisconsin struggling over what is really chump change when AIG was bailed out? ...The fact is that the jewel of Orange County where I was sentenced for 10 years is Newport Harbor, which was created by the WPA. ...The big corporations get what they want and the rest of us are scrambling around. Now getting to the debt, which is a serious problem, I don't like it getting mixed up with entitlements. Entitlements can be fixed by raising the premiums on those that can afford it. Social security is not in trouble until 2047...The money is there, it can be obtained. This idea that we're going to tax teachers that are going to school...The thing that is sacrosanct that hasn't been touched is the defense system. And we're fighting people who can buy all their weapons for $150 at Home Depot. We spend more in per capita dollars than we did at the height of the Cold War...
Roger: I'm going to say a lot less than that. THere are two issues that we need to face with the budget. Everybody knows that we need to either increase taxes or cut spending. ...At least the trigger for the current budget crisis is the recession...The second problem is that when we were going through years of plenty, we thought they would last forever and under Bush we cut taxes and that shouldn't have happened....As Neils Bohr said, 'predictions are very difficult, especially about the future.'...Long term, we need to put regulatory systems in place.
Paul: It's incorrect. In California, the income tax accounts for about a 1/3 of our financing. ...The enormous transfer of income and wealth over the last 40 or 50 years....the rates on the high income were higher when Reagan was governor, but still we're getting a lot of income from them. We are having an argument in California over half a penny of the state's output. ..During the dot com boom, we cut taxes pretty steeply in California...in real life, do we really notice? In January, when Jerry Brown was elected, a pollster went out and did a poll and one of the questions was "are you aware that in 2009 the legislature passed temporary taxes?" Only 39% knew the taxes were enacted? Then pollster asked if taxes had hurt them and 44% said yes, the taxes had hurt them. ...not a single person can name how much they pay in state and local taxes in a year. The reason we stay stuck is that we have this system that doesn't allow us to make decisions. 1/3 of one house of the state legislature can keep us from moving forward....Most Californians are unaware that we made big spending cuts.
question: Why we can forecast fraud?
Scheer: We don't live in an Athenian democracy...The reason they were opposed to wars by the way, Washington warned us against false patriotism....we have to stop laboring under this mythology that we live under a representative democracy...we have false demagogues that find all kind of false targets like immigrants who want our jobs or poor people who want houses...we don't live in that kind of society. I find it appalling. I don't blame the public. I don't think they're informed. I traced that - how did the media cover this? It was appalling. It was cheerleading for the banks. We don't even have labor unions of any real strength. We don't have a progressive, populist movement. ...A.J. Liebling said 'Freedom of the press is guaranteed only to those who own one.'...corporations aren't great. They shelter their profits abroad. They don't care about people here.
Farmer: The question is about fraud. Everytime Berlosconi commits a crime, he changes the law so it isn't a crime anymore....what went on with the financial services industry was quite different. The regulations were removed, so what happened wasn't a crime anymore....Financial crises like the one we just observed is a little bit like diseases. ...When it came to 2008 and Lehman Brothers was allowed to crash, at that point it was a little bit like refusing to treat someone with small pox because they refused to buy insurance....we need to bail out good banks, and allow bad banks to fail..and you need to read my book to figure out how to do that.
Paul: I was in the press at the time...What good is it if the value of your house going up? The only value is that you could borrow against it...It was a crazy thing to allow us take out huge amounts of equity...
Question: Who owns the Fed?
Farmer: The Fed was created in 1915 by Congress. The profits of the Fed is returned to the government every year. The reason for an independent central bank - if the Fed is subjected to political pressure...there are pressures leading up to elections that there's a pressure to ease. The banks owns the Fed.
Scheer: I'd like to challenge the assumption that individuals were responsible. ...What happened, is that houses were made part of securities. This is not something Adam Smith knew about or even Ronald Reagan knew about. That is at the heart of the problem and we haven't even begun to discuss it...and then you change Fannie Mae and Freddie Mac into for-profit industries.
Farmer: I think you need to put yourself in the head of the people who were doing this at the time. Most of these people didn't believe they were defrauding the people. In 1987, the stock market crashed and it was the longest stock market crash including the Great Depression....it's that single incident that changed the whole mentality of the people involved in the financial industry...they convinced themselves that they were creating wealth, and the wealth was real. Now they were wrong. They were benefiting from tax payer bailouts in case things went wrong. If you were running that, you would try to persuade yourself that you were the good guy.
Paul: Had an acronym: IBG, UBG - I'll Be Gone, You'll Be Gone. Lots of people on Wall Street understood what crazy risks they were making and had a number they were trying to reach, and they would leave.
Question: what tax rate would you impose on small business owners say earning more than $250,000 a year who employ many, many millions of people?
Scheer: First of all, I am a small business owner of TruthDig.com ...We're basically talking about continuing tax cuts of the Bush administration....what I'm appalled with is that big businesses, like GE and Bank of America who pay no taxes...we spend a lot of money on big government and big defense to make the world safe for these businesses, and then we've changed the laws - in terms that we don't regulate labor or the environment around the world...to me it's not a game. I think these people really are horrible.
Paul: A small business owner, an individual proprietor, pays taxes based on how much income he takes out of the business. He has a lot of control over whether to take the money out or re-invest in the business. We have a progressive tax system....I have no problem with the rates going back to where they were.
Farmer: The solution is going to include tax increases on some of us, most of us.
We haven't lived in an unregulated economy for at least 215 years. The moral hazard problem has not been solved, it needs to be solved. My plan is not to support any individual bank, but to support a mutual fund of all banks' stocks. We don't want to give an incentive to any individual bank to gamble with our money.
Scheer: I think there's a big difference between the moral hazards of investment banks and people who have run up their credit cards and have 30% interest...With the individual, we broke down completely what was in the small print. ...I love Ron Paul, not for everything he's ever said or ever done, but for having one guy in Congress who wants to make the Fed transparent.
Farmer: Transparency yes, getting rid of the Fed no.
After the panel, Chung and I went to The Nation booth and ran into Robert Scheer. We bought a copy of his book, The Great American Stick Up, which he signed for us. We also grabbed free copies of The Nation, even though I'm a Kindle subscriber.
Posted by cj at May 1, 2011 2:31 PM
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