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G20: DOVES ON FINANCE REFORM, HAWKS ON AUSTERITY

Rob Johnson: Real cause of massive debt was caused by finance sector, not people's social programs


Dr. Robert A. Johnson - Executive Director of The Institute New Economic Thinking (INET). Dr. Johnson served on the United Nations Commission of Experts on International Monetary Reform under the Chairmanship of Joseph Stiglitz. He is also the Director of Economic Policy for the Franklin and Eleanor Roosevelt Institute (FERI) in New York. Dr. Johnson was previously a managing director at Soros Fund Management where he managed a global currency, bond and equity portfolio specializing in emerging markets. Prior to that time, Johnson was a managing director of Bankers Trust Company managing a global currency fund. He also served as Chief Economist of the U.S. Senate Banking Committee under the leadership of Chairman William Proxmire (D. Wisconsin) and before that, he was Senior Economist of the U.S. Senate Budget Committee under the leadership of Chairman Pete Domenici (R. New Mexico).
Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I'm Paul Jay in Washington. And joining us now is Rob Johnson. He's the director of the Global Finance Project at the Roosevelt Institute in New York. Thanks for joining us.

ROB JOHNSON, DIRECTOR, ROOSEVELT INSTITUTE GLOBAL FINANCE PROJECT: My pleasure.

JAY: So the G-20 is coming up in a few days. What do you think are the issues?

JOHNSON: The concerns about inter-European adjustment are a big issue. I think the recommendations that seem to be coming from every elite corner on the planet to engage in fiscal austerity in the aftermath of the Greek problem are somewhat surprising, given the fragility of demand and fragility of recovery around the world.

JAY: Yeah, everything seems to be about the deficit. We had the—Peter Peterson had his conference with a lot of the big players in Washington, all decrying the great threat to the economy is the deficit and not unemployment. Coming out of Europe it's all about austerity. What do you make of the austerity regime and where this all leads to?

JOHNSON: If it wasn't so tragic, I would say it was humorous to see all these luminaries mute about the prospects of financial reform while they're deficit hawks. If one looks at the history of countries and their public finances, wars and financial crises are the key to budget problems and severe sovereign default risk. What we've seen in the United States is people endorsing very, very tepid financial reform. My view is, if you're going to be a deficit hawk, you have to be a financial reform hawk. You're risking what I'll call a contingent liability of another big financial crisis when both people say this one raised the debt-to-GDP ratio by 40 points, nearly doubling the debt-to-GDP ratio in America.

JAY: So they want all the focus to be on Social Security and what might happen in 30 years. What you're saying is the financial sector abuses have added far more to the debt-to-GDP ratio than some possible thing that might happen when—.

JOHNSON: Grandma in 2047.

JAY: Or maybe it's us. It's not Grandma; it's us, man.

JOHNSON: That's right. When we're grandmas and grandpas.

JAY: Yeah, it's going to be—we're the ones they're talking about.

JOHNSON: [inaudible] having paid into that fund and the financiers who made this mess and the urgency to curtail or be credible in deficit reduction is not taking the form of deficit reduction, where I think credibility can be obtained. You've got to cut medical costs. You've got to close some bases. You've got to perhaps raise taxes on wealthy and powerful people. And then the world will say America has changed, and credibly, and for a durable period cut their deficit. If you whack on Grandma in 2047, all those other power groups are going to fill the void and we'll be back in another budget crisis.

JAY: And the solution they're talking about in Washington now is not whacking that Wall Street kleptocracy. What they want to do is not just go after Social Security, but the in thing to talk about now is value added tax. They want to actually increase the tax load on ordinary people and not touch the wealthy.

JOHNSON: It's very interesting, when you look at what's happened to the distribution of income in the last 25 years, that when we are in a crisis that was really engineered by the elites at the top and when they have lost credibility, what they want to do is impose yet one more burden on regular people. I think they're playing a very dangerous game politically, and we may see some turnover in November. But this top-down approach is very risky. Zbigniew Brzezinski just gave a speech at the Council on Foreign Relations, and he said there's two problems. The G-20 has a lot of new elites at the table, not just the right guys in the North Atlantic, and they don't agree, among those elites, on proper design for the plan. Simultaneously, with all the inequality, inequities, abuses, and fraud after the financial crisis, the body politic, the people around the world, are more alert and more agitated about politics than they have been probably in 100 years.

JAY: But is that a good thing or a bad thing? I guess it depends what side of the barricades you're on. But what is their motivation for wanting this massive austerity regime? I mean, don't they actually benefit if the economy is growing, there's more stimulus, and more people are working? Austerity leads to a deeper recession, doesn't it?

JOHNSON: Well, it seems to depend upon where you sit. If you're a big bank right now that's loaded up on Treasury bonds, paying zero and earning 3.5 percent, the thing that can hurt you is interest rates go to 5 percent, which they would do if the economy recovered. So you have essentially used what I'll call the yield curve trade, the riskless yield curve trade of the Treasury market on the balance sheet of big banks to create a coalition for maintained austerity.

JAY: What are the other bad benefits of this austerity? To what extent are they genuinely concerned that there'll be a devaluation of their assets? Because if there's too much stimulus, too much money in circulation, in theory the value of the dollar gets deflated some—inflated, I should say. I mean, is that a legitimate fear on their part? Or is that more rhetoric to cover up something else?

JOHNSON: I think in the short term the risk of deflation is much greater than the risk of inflation. But characteristically, deflation is a temporary phenomenon, because the stress is so painful and it often results in dysfunction that leads to inflation. Right now I don't think anybody wants to cut the deficit in the next year or two years. Pete Peterson's institute is not recommending that, nor are people on the left like Economic Policy Institute.

JAY: 'Cause the only way to do that would be, probably, to go after the stuff that's going to the finance sector, and nobody wants to talk about that.

JOHNSON: Well, when you look right now, the IMF says that they're projecting a change in the world debt-to-GDP ratio of about 35 percent between now and 2014. I believe over 25 percent of that is because of lost revenues and automatic stabilizers. It's not because of discretionary spending on new programs. I would favor a public investment strategy to rebuild infrastructure and catalize or attract new private sector development, education spending, on early-age human capital. And maybe we should subsidize venture capital, which helps us in transitions, rather than too-big-to-fail institutions, which are about yesterday's profits.

JAY: Well, if we're to learn anything from history, the deficit hawks are probably going to win this battle, because they are in control of all the heights of power, apparently, in North America and Europe. I don't know, in terms of the other countries at the G-20 maybe have a different tack on this. Then we're probably looking at what they're calling a double-dip recession but what we probably should call the so-called recovery. Has this really just been a blip in a decade of depression?

JOHNSON: Or maybe what they call a lost decade, which is a stagnant decade. I think the best analogy right now is Ramsay MacDonald's government. Between 1926 and 1932-33 in the UK, they were stagnant. All their elites at the time—Britain was like the United States today, the kind of world financial leader, and they were stagnant. Their politics couldn't come to agreement to re-stimulate the economy. The stagnance continued. In many respects the hollowing out of the British economy continued from 1930 right into the 1960s or 70s. And the United States is facing that challenge right now. We have a financial sector that was 46 percent of corporate profits in 2007. I think last year it approached 40 percent again in the recovery. It's only 3 percent of the workforce. We have a system of politics that's very dominated by finance. Financial services beg the question: what are you—if you're taking that much of the profit, if you're taking that much of the income, if you're taking an $800 billion bailout, what are you doing for society? What's the basic function? And once finance becomes so overgrown [that] instead of taking 5 or 6 or 7 percent of profits it's taking 30 to 40 percent, we have to ask ourselves: are we not as a society paying an enormous tax to a system that is designed to be a—. You know, finance is supposed to be a servant to commerce. Commerce and economy and markets are a service to social goals. Well, the servant's servant has become the master's master, and it's time to re-invert that. I think the political process we see underway and the hostility and the anger and the pressure on legislators is an early—what you might call an early stage of that rebalancing. But it will be a hard and tough road. And it was in Great Britain. And they didn't really get out from the clutches of the control of finance for quite a long time.

JAY: Well, they're still not.

JOHNSON: That's right.

JAY: Really. I mean, the finance sector—.

JOHNSON: Well, that's what resumed growth of financial services there. I think it's very daunting for the British, because our banks are about 60, 65 percent of GDP; theirs are between 300 and 400 percent of GDP.

JAY: So the people who are listening to this might want to think about how they're going to pry their political parties out of the hands of people who are so indebted to the finance sector that they can't even—first to talk about this being an apocalyptic moment, and then we get a washed-down piece of legislation. Thanks for joining us.

JOHNSON: My pleasure.