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Robert Pollin is Professor of Economics and founding Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst. His research centers on macroeconomics, conditions for low-wage workers in the U.S. and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the U.S. Most recently, he co-authored the reports “Job Opportunities for the Green Economy” (June 2008) and “Green Recovery” (September 2008), exploring the broader economic benefits of large-scale investments in a clean-energy economy in the U.S. He has worked with the United Nations Development Programme and the United Nations Economic Commission on Africa on policies to promote to promote decent employment expansion and poverty reduction in Latin America and sub-Saharan Africa. He has also worked with the Joint Economic Committee of the U.S. Congress and as a member of the Capital Formation Subcouncil of the U.S. Competiveness Policy Council.

PAUL JAY, SENIOR EDITOR, TRNN: Hi. Welcome to The Real News Network. I'm Paul Jay. We're in Amherst, Massachusetts. We're at the PERI Institute, the Political Economic Research Institute. And its codirector: Bob Pollin. Thanks for joining us again, Bob.


JAY: So on The Real News we've been running a series we did together with McClatchy Newspapers, which was a piece of investigative journalism on Goldman Sachs and their relationships to the subprime mortgage bubble, and essentially a big Ponzi scheme, that Goldman buys UP masses [inaudible] mortgages from places like New Century Real Estate in California and buy essentially unreviewed mortgages—nobody even cares whether people can pay them back. The underlying operating thesis is, oh, real estate can never go down in California and Florida, so who cares if we have to repossess? Goldman finally realizes the crash is coming. Then they have a whole 'nother scheme. They buy a whack of insurance from AIG. Then they offload this crap onto their foreign clients and domestic clients, including pension funds. They do a lot of it offshore in the Cayman Islands. And so on and so on. The crash comes, and Goldman does fine. They get a whack of public money through AIG, and they've offloaded a lot of their risk, and they're back to the trough again. The question is this: is anything changed in the regulatory environment that would stop this in one form or another happening all over again? And if it isn't on the table now, serious regulations, what should be?

POLLIN: Well, the short answer is no, nothing has changed. In terms of things getting passed, nothing has passed of significance. The debate in the House and Senate around regulation, around the proposals advanced by the Obama administration are pretty mild. They would not in themselves prevent a recurrence of the kind of bubble and crisis that we've experienced. And so we've got a long way to go. We've definitely got a long way to go. There is an organization called Americans for Financial Reform, which is a collection of unions and public-interest groups that are trying to push a pretty good agenda, but they're up against fierce competition in the form of lobbyists for the financial industry.

JAY: So what would you like to see? What are the basic principles? And what policy would you like to see that would stop this from happening again?

POLLIN: Well, I think the simplest idea, the simplest principle, is the financial system and the regulations around it should be organized on the premise that credit should be allocated to productive activities, to support productive activities. And in this era, we need credit to be channeled to job-creating activities and to promoting the creation of a clean-energy economy. Now, and by the same token, credit should be prevented from building up the kinds of bubbles, the kind of hyperspeculation that were characteristic of casino capitalism. Now, those are very, very general, broad statements, but they're some things that you could think about that would get you pretty far pretty efficiently in terms of regulations.

JAY: For example?

POLLIN: Okay. One thing is you have to start taxing speculative financial transactions. And this is being done in many countries throughout the world. It was actually proposed in the US in 1987-88 after the Wall Street crash then. It was supported by the George Bush administration. The Treasury Secretary, Brady at the time, supported the idea.

JAY: How would it work?

POLLIN: Well, just like a sales tax. If you want to trade in financial assets, okay, you trade, but there is a tax and you pay a tax. So the more you trade, the higher your burden of taxes, so it discourages taxation, it discourages trading. I mean, the idea was, you know, the modern version was first articulated by James Tobin, who was a Nobel prize-winning economist at Yale, and he proposed it for the global foreign exchange markets. But the same idea does—it is in place and it does work and can work in the United States.

JAY: This isn't a tax of some ordinary person who goes and buys the shares. This is a tax on speculation [inaudible] and such.

POLLIN: If an ordinary—everything. So every—yes, an ordinary person, if you go and buy a share, you'll pay a small tax, but you wouldn't care 'cause it would be a small tax if you were going to hold. If you were buying to hold, the tax would be trivial, if we say, like, 0.5 percent or 0.25 percent. The tax starts to bite, though, when you decide that you're a trader and you're trying to gamble on the market that the market's going up, and so you can trade continuously. And so then the tax starts to get serious, because every trade you make, instead of doing it and paying the tax once, you're going to pay it for every time you trade. And so the tax—we actually have the apparatus in place now. There's a very small tax through the Securities and Exchange Commission that companies have to pay, and so we already have the apparatus, and that finances the Securities and Exchange Commission. But the tax, no, even a modest tax, 0.5 percent, say, on a stock or a share and a smaller tax for bonds and derivatives, even at that level, some research I've done you can think about raising about $175 billion per year, and that would assume that you cut trading by 50 percent, which is implausibly high. But it is a very effective policy tool that—. And, you know, a lot of people are saying that, you know, the market is too big, too big, there's too much going on. Well, the whole point of this would be to shrink the market, so all the activity that goes on would be diminished relative to productive investment activity. One other point I should make is, if you look at actually how productive investments get financed, almost 100 percent are financed by the corporation's own internal profits—almost none of it comes from any of this stuff on the financial market. It is almost entirely a gambling casino.

JAY: Now, one of the things that came out of the McClatchy series was that Goldman was betting against its own properties it was selling to

clients. So it was selling these bundled mortgages to a pension fund, and over here is buying insurance from AIG because they knew that the whole thing was going to crash. But there was no regulation that caused them to disclose to their clients that they're betting the other way over here. What do you do in an environment where the people writing the regulation, they're all coming from Goldman, so that the people who were playing that game are the ones supposed to be writing the rules now?

POLLIN: Yeah, and that, unfortunately, is kind of what's going on now, in that the people that are deeply involved in writing the new financial regulation regime are almost entirely from the industry—maybe not all from Goldman per se, but they are dominating the discussion. And, you know, you're not going to get a good end result. The only reason there's any semblance of a serious discussion is because the disaster that these people brought on us—I mean, you know, in the absence of this trillion-dollars bailout, you know, we would be in a great depression right now, and they brought it on. And why? Because there's so much money to be made by leveraging, leveraging, leveraging, leveraging that it's irresistible. So it's an irresistible attraction, and it has to be controlled by regulation.

JAY: Or the other option is if public option made sense as a way to force the insurance industry, health-insurance industry, to change their standards, then why not a public option in the lending industry?

POLLIN: Yeah. Well, I mean, number one, I mean, one of the things that I proposed is a public option with the credit ratings industry [inaudible] in itself that would be a relatively small thing. It could even be, like, 15 people, 20 people who are doing serious research on giving ratings. And without the AAA ratings that these activities got from Moody's, Standard & Poor, and Fitch, without that, none of this actually would have happened.

JAY: Yeah. So, just make this clear, Goldman would bundle all these securities from, say, New Century Realty in California, and now without any investigation they would go out and get these five-star ratings on these bundled package, and no one had ever looked whether anybody who had taken out one of these mortgages could actually pay it back, and they're still giving them five-star ratings. So, of course, when they go to their clients and they say, "Oh, what kind of rating has it got?" "Oh, Moody's gave it five stars." So you have a public agency that does the ratings.

POLLIN: In fact, I proposed this, and two colleagues, we've written it, and it is somehow filtered into the discussion in the House Banking Committee. They're considering it. Who knows what'll be the outcome?

JAY: Well, you can kind of guess.

POLLIN: Yeah. But, I mean, it is an example of a relatively small thing that could have a massive impact, because when you tell your story like you told about—okay, Goldman is bundling the stuff and selling it to pension funds. Well, why in the hell were pension funds buying it if it's junk to begin with? Because they're looking at the rating agency. If it's—"Oh," they say, "It's AAA rated. How bad can it be?" And, you know, 10 percent return? AAA rated? It's a deal. How can you resist it? But if you had, actually, an independent rating agency that says this is, you know, highly risky, it does not serve the public interest, that alone would not be enough to, of course, regulate these activities, but it could have a significant impact.

JAY: And it still comes back to the fundamental thing is: if you want to buy a house, you have to borrow money; you're in a small business, you need to expand, you need money. Why not the public option? I mean it's a bit of a softball question, 'cause I assume you probably are for this, but why not a public option to lend money directly?

POLLIN: Yeah. And so what happened in—you know, I mean, the amount, the trillions that we spent on the bailout, we could have actually bought the bank, the US government could own the banks, and we could have at least one bank that was a public bank that operated according to some principles of social welfare. I mean, that is done in Japan. You know, the single biggest single lender still in Japan is the post office. And, you know, it's a very kind of safe, small, basic lending, basic credit. But that has served—you know, that—especially during the high-development era in Japan, that was a very important foundation. There was a speculative market, but it was separated off from what the post office was doing. And so that principle, yeah, could easily be applied here. It could've been applied, you know in a moment had we taken that initiative and bought one of the big banks and then just put them under public control.

JAY: The Obama administration seems allergic to that.

POLLIN: Yeah. Well, of course they are, because look who Obama picked as his leading economic advisors, especially on financial issues. I mean, Larry Summers, who is—he is a very, very smart person, but he's, you know, definitely very close to Wall Street. He made millions of dollars on Wall Street himself. [Timothy] Geithner, who was a regulator under the Bush administration, and, you know, the reports came out that Geithner spent all of his time going out to lunch with the big bankers. That's who he would meet with. So why would you expect anything different? So you need to, obviously, have some counterforce in there arguing for some serious public interest here.

JAY: Thanks for joining us.

POLLIN: Okay. Thank you.

JAY: And thank you for joining us on The Real News Network.


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