Understanding the Financial Crisis - The Good sense of Nomi Prins and Michael Hudson verses the nonsense of the Neo Liberal Apologists

Nomi Prins, former investment banker turned journalist. She used to run the European analytics group at Bear Stearns and is now a senior fellow at Demos. She is the author of two books: Other People’s Money: The Corporate Mugging of America and Jacked: How Conservatives Are Picking Your Pocket.

Michael Hudson, President of the Institute for the Study of Long-Term Economic Trends, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and author of Super-Imperialism: The Economic Strategy of American Empire. He is the chief economic adviser to Rep. Dennis Kucinich.


AMY GOODMAN: The US government has seized control of insurance giant AIG, American International Group, in an unprecedented $85 billion bailout. The Federal Reserve made the deal Tuesday to save AIG from collapse in what the New York Times describes as “the most radical intervention in private business in the central bank’s history.”
The move to lend AIG up to $85 billion for two years in exchange for nearly 80 percent of its stock effectively nationalizes one of the central institutions in the crisis that has swept through financial markets this month.

AIG found itself on the verge of bankruptcy largely because of complex securities that are tied to subprime home mortgages and which plunged in value as the nation’s housing crisis deepened.
The bailout marks a turnaround by the Bush administration and the Fed, who just two days earlier had refused to risk taxpayer money to prevent the collapse of Lehman Brothers or the distressed sale of Merrill Lynch to Bank of America. It also comes on the heels of a government bailout just over a week ago of mortgage giants Fannie Mae and Freddie Mac and six months after the Fed bailed out Bear Stearns by helping to finance a sale to JPMorgan Chase.

The unprecedented run of events has altered the shape of Wall Street and brings the total amount of government rescue efforts to stabilize the financial system and housing market to about $900 billion.

For more, we’re joined by two guests. Nomi Prins is a former investment banker turned journalist. She used to run the European analytics group at Bear Stearns. She is now a senior fellow at Demos. She is the author of two books: Other People’s Money: The Corporate Mugging of America and Jacked: How Conservatives Are Picking Your Pocket.

Michael Hudson is the president of the Institute for the Study of Long-Term Economic Trends, an economics professor at the University of Missouri, Kansas City, and author of Super-Imperialism: The Economic Strategy of American Empire. He is also—was chief economic adviser to Congress member Dennis Kucinich. He is currently, as well, as well as when he was presidential candidate.

We welcome you both to Democracy Now! Nomi Prins, let’s begin with you. The bailout of AIG.

NOMI PRINS: The bailout of AIG is an example of the government having to step in and clean up a mess. It is not so much that subprime mortgages fell and that caused some losses to AIG. AIG was acting not simply as an insurance company; it was acting as a speculative investment bank/hedge fund, as was Bear Stearns, as was Lehman Brothers, as is what will become Bank of America/Merrill Lynch. So you have a situation where it’s bailing out not just the money, but taking on the risk of items it cannot even begin to understand, because if it had understood them, this would never have gotten to the point to which it has gotten.

AMY GOODMAN: How did it get to this point? How did it go beyond insurance?

NOMI PRINS: In AIG and in Lehman and with Merrill and every other company on Wall Street that has faltered or is faltering, it’s about taking on too much leverage and borrowing to take on the risk and borrowing again and borrowing again, twenty-five to thirty times the amount of capital, the amount of money that they had to basically back the borrowing that they were doing. Human regular borrowers cannot do this. This is something that is an item only of the banking industry.

And not only was all that borrowing happening, but there was no transparency to the Fed, to the SEC, to the Treasury, to anyone who would have even bothered to look as to how much of a catastrophe was being created, so that when anything fell, whether it was the subprime mortgage or whether it was a credit complex security, it was all below a pile of immense interlocked, incestuous borrowing, and that’s what is bringing down the entire banking system.

AMY GOODMAN: Michael Hudson, we’re talking government bailout, which means taxpayers stuck with the bill. Do you think this is the right move?

MICHAEL HUDSON: No, it’s the worst possible move, and it puts the class war back in business with a vengeance. Wall Street has been preparing for this for years, because every financial analyst knows that the debts can’t be paid. And the question that Wall Street has, if you’re going to take a gamble on bad debts that can’t be paid, how are you going to come out a winner? And there’s only one way of coming out a winner, and that’s to make the government bail you out. This has been known for years, because it’s inherent almost in the mathematics of compound interest. Every banker I know knew that the loans they were making were going to go bad. They were trying to sell them to somebody else, ultimately expecting them to end up with some sovereign wealth fund.

And now, you had at the beginning of the show, McCain saying that this is the result of fraud and incompetence. The government has now bailed them out. But by bailing them out—Wall Street was coming to terms with the bad debts. When Bear Stearns went under and when Lehman Brothers went under, this began to wipe away the bad debts. And when the debts exceed the ability to pay, there’s only one thing any economy can do, and that’s wipe them out. Instead, the government is trying to keep the fiction alive. And what Paulson did yesterday, in bailing out AIG, was to try to lock in whoever is the next president not only to further bailouts of Wall Street, ostensibly to protect the public money, but to make it impossible to write down the debts of the four million homeowners that are expected to default this year, impossible to write down the debts of companies that have issued junk bonds, impossible for the country to get rid of this excess of debts that can’t be repaid. And you’re having really a war now of creditors against debtors. And this is what Wall Street has been preparing for. It needed an emergency to do it. It’s really not an emergency at all. This has been building up for many years. Everybody expected it. And breathlessly now, the Secretary of Treasury has done it.

AMY GOODMAN: But, of course, the argument was, if you don’t bail out AIG, it could lead to a global financial meltdown.

MICHAEL HUDSON: What you—it’s a meltdown of the gamblers, as Nomi said. These are people who’ve gambled. You had McCain saying they’re gamblers. If these people have gambled, we’re talking about derivative trades, billions of dollars of bets on which way interest rates will go, billions of dollars of bad loans beyond the ability of debtors to pay. Why on earth would you want to bail out these creditors?

AMY GOODMAN: So, what would happen if you didn’t?

MICHAEL HUDSON: Then you would prepare the ground for writing down the debts of the homeowners that have no way of repaying the exploding mortgages. Those interest rates are going to be jumping up this year. You would be able to bring the debts down to the ability of the economy to pay, and you would save these four million homeowners from defaulting and being kicked out of their houses. Now they’re going to be kicked out of the houses. The houses will be vacant. The cities are going to now say, “Gee, we’re going to have to cut the property taxes to enable the debts to be paid to save the financial system.” So, if they cut the property taxes, they’re going to have to cut back local expenditures, local infrastructure. The economy is being sacrificed to pay the gamblers.

AMY GOODMAN: Nomi Prins, how has Wall Street changed? And how does this meet everyday people? Lehman, bankrupt; you’ve got AIG nationalized, same with Freddie and Fannie; you’ve got the takeover of Merrill Lynch, now part of Bank of America—happened over a weekend.

NOMI PRINS: It’s insane, actually. It’s bad math, and it’s a bad precedent, because they’re not simply bailing it out with putting taxpayers’ money through the Fed into taking on the risks of these companies; they’re taking on risks. They’re not bailing out and selling debt; they are taking on the risk. They’re becoming—the Fed is continuing to become a larger and larger hedge fund. And it’s doing it with taxpayer money, and it’s doing it with the future debt of the United States.

So, for the one thing, they’re not attaching any rules to these bailouts. You know, you bail out Bear Stearns, effectively you’re putting up $30 billion to take Bear Stearns’s junk and say, “Alright, we’ll back the junk. JPMorgan Chase, you take Bear Stearns. We’ll back whatever junk is there.” But there’s no decision to say, “But, you know, you’ve got to tell us what’s there. And JPMorgan, by the way, as you’re taking on this bank, you have to explain to us what you really have. And Bank of America, you have to explain to us what your risks are.”

I know that at Bank of America they were struggling with their own risks and trying to figure out what was going on in their own company, and now they have assumed Merrill Lynch. That creates a tremendous institution, where the Fed is now obligated, when that starts to have more and more trouble, which it will.

AMY GOODMAN: What started all this?

NOMI PRINS: What started all of this was a complete lack of transparency and regulation in the banking system. If we go back to a history where we had a similar situation on Wall Street, which was 1929, when we had a stock market crash followed by a Great Depression, in 1932, when FDR was elected and Herbert Hoover was ousted, right after that, we put together—he put together—

AMY GOODMAN: But interestingly, FDR didn’t come in on a plank of changing everything the way he did. It happened—didn’t it?—after he became president with—

NOMI PRINS: He had to take a look at the banking system, which was undermining the general economy, which had undermined the general economy, and say, “You know what? We do not understand what’s going on here. We have two types of banks. We have speculating investment banks, and we have commercial banks that deal with the public, take deposits, take savings, make mortgage loans, understand what’s going on. We’ll back those. The government will back those commercial institutions that deal with the public. It will not back speculative investment banks. And, by the way, those two things have to split. You pick a side. You want to be an investment bank? You be an investment bank. You want to be a commercial bank? We’ll back you. The Fed will back you. We will be there. We’ll create an insurance company, the FDIC, to back deposits for the public. We’ll have your back.” There was no—there was no agreement to have the back of the speculative investment banks.

Over the years, these things have merged and merged and merged. And in late 1999, Glass-Steagall, that act, was repealed, killed, died in Congress. And now you have a situation where everything that went wrong up until the creation of that act is happening now with a lot more capital and a lot more international interplay and a lot more money on the federal government to have to bail out when things go wrong. So, we have gone backwards in banking history, and having Merrill be a part of Bank of America is a tremendously big accident waiting to happen. Bear Stearns’s assets part of JPMorgan—they’re all part of recombining speculation and commercial.

AMY GOODMAN: We’ve got to go to break. When we come back, Michael Hudson, adviser to former presidential candidate Dennis Kucinich, I want to ask about the current presidential candidates right now, their proposals, the main party candidates, McCain and Obama. This is Democracy Now! Our guests are Nomi Prins—she worked at a lot of these places that are going under now, being taken over, going bankrupt—Michael Hudson, a professor, president of the Institute for the Study of Long-Term Economic Trends, chief economic adviser to Dennis Kucinich. Stay with us.

[break]
AMY GOODMAN: Major party presidential candidates Barack Obama and John McCain addressed the financial crisis on the campaign trail this week. Obama accused McCain of not understanding the seriousness of the crisis.

SEN. BARACK OBAMA: We are in the most serious financial crisis in generations, yet Senator McCain stood up yesterday and said that the fundamentals of the economy are strong. That’s what he said. Now, a few hours later, his campaign sends him back out to clean up his remarks. And he tried to explain himself again this morning by saying that what he meant to say was that the American workers are strong. But we know that Senator McCain meant what he said the first time, because he has said it over and over again throughout this campaign.

AMY GOODMAN: Meanwhile, John McCain tried to strike a populist tone on the campaign trail.

SEN. JOHN McCAIN: While employees, shareholders and other victims are left with nothing but trouble and debt, the people who helped cause the collapse make off with tens of millions in severance packages. Disgraceful. I’ve spoken out against the excess of corporate executives, and I can assure you that if I’m president, we’re not going to tolerate that anymore.

AMY GOODMAN: Professor Hudson?

MICHAEL HUDSON: That’s his constituency. His constituency are the people who have caused the crisis. That’s who he’s representing. Now, of course, you’re not going to come in and say, “I’m going to support the people who have caused this crisis at your expense.” If you’re going to bail out your constituency, you’re going to say exactly the opposite. So what he’s saying has no reality at all.

These are the people who sang, “There’s no money for Social Security. We’re going to have to privatize it. We’re going to have to turn over your Social Security to Bear Stearns, to AIG”—to the very people who have shown how they’re mismanaging money. Imagine if the Republican program had gone through and Social Security had been privatized and these were the jokers who were managing your Social Security. They’d stick you with the losses.

So, these are his constituency. He knows he’s not telling the truth. He’s not paid to tell the truth. He’s pretending that it’s a crisis that has to be bailed out, that it’s the financial system. But it’s not the financial system that’s being bailed out; it’s the debt system. And it’s the debts that the homeowners own and the industry owns. And now the government is coming on the side of the creditors, who are going to close down the industries, sell them off to pay the debts, foreclose on the houses, sell them off to pay the debts. And the economy is going to shrink and shrink. That’s the program that they’re standing for.

AMY GOODMAN: They’ve always said that Social Security can’t be bailed out, but that it’s going broke.

MICHAEL HUDSON: That [inaudible] bailout. They’ve already spent $5 trillion in the last two weeks to double the size of the national debt by taking over Fannie Mae. How can they bail out the gamblers, how can they bail out Wall Street and not—and claim that the Social Security system doesn’t really exist? They’ve used the Social Security money basically for the bailout. There it goes. They’ve made a choice. The choice is to bail out Wall Street against the people.

The Treasury is supposed to represent the government and the economy, and the Fed is supposed to be the board of directors of commercial banks, but now Wall Street plays both sides of the game. It not only supplies the heads of the Fed; it supplies the Secretary of the Treasury. And that’s why I said the class war is back in business with a vengeance.

AMY GOODMAN: Nomi Prins, you worked at a number of these places, like Bear Stearns. You worked at Lehman Brothers, too, now bankrupt. Let’s talk about the money that Obama and McCain get. According to the Center for Responsive Politics, Obama, it’s nearly $10 million from the securities investment industry; McCain, it’s nearly $7 million. So Obama actually gets more. Employees of Merrill Lynch, the investment bank that’s been taken over by Bank of America, have given the largest corporate money to Senator McCain’s campaign, Merrill employees giving some—close to $300,000 to McCain, close to $200,000 to Obama. Lehman Brothers, which filed for bankruptcy, given—has been the eighth-largest corporate giver to Senator Obama’s campaign. Democrats have become increasingly reliant on Wall Street money. The industry ranks as the third-biggest giver to Senator Obama’s presidential campaign. How does this influence the debate, and what are the proposals of the two men?

NOMI PRINS: Well, the proposals of McCain have to do with—well, they’re very nondescript. Basically, he says there is a greed situation, and we need to contain it. And we need—

AMY GOODMAN: And he says we have to set up a commission.

NOMI PRINS: We need to set up a commission to understand what’s going on. Well, we have seven different regulatory bodies in Washington, and they’re supposed to be watching various aspects of the financial community. And we have state ones that are supposed to be watching over insurance companies. So we actually have regulatory agencies. And Obama has basically said the same thing. He wants to strengthen the ones that do exist.

The problem is being connected to Wall Street, in terms of your funding. And Washington, in general—Wall Street, in general, was the biggest contributor to all of the politicians in Washington over the last decade. It’s where the most money comes from. So you have a situation where that money doesn’t want oversight, even when it so badly, as Michael was talking about, mismanages and over-leverages and over-bets and gets into such a tremendous problem that we haven’t seen. They don’t want the regulation.

What you should do, what the candidates should do, is step back and say, OK, well, you know what? Instead of having them dictate the terms and us coming in to bail them out with no strings attached—we’ll bail you out, and we won’t even ask you to explain to us what the heck has been going on with your balance sheets; we’re taking stuff on we don’t even understand—actually have to make it transparent and actually have to dissect the businesses back into a form where speculative businesses and commercial businesses are once again separated, at least until our government can understand what’s going on and understand the hook onto which they’re taking American public money to bail them out.

AMY GOODMAN: Professor Hudson, Phil Gramm was the top adviser to McCain. What was his role in all of this, the former senator from Texas?

MICHAEL HUDSON: He’s the frontman for the biggest crooks in the country. Basically, he says don’t regulate. He has responded to the lobbies by cutting back all of the information. The regulatory agencies don’t collect the information to let them know what’s happening. The government has no adequate statistics on what the value of real estate is, what the amount of debt is, because if it did have statistics, it would show that the volume of debt is far in excess of the ability of debtors to pay. And when you have that, you would have to do something about it.

Gramm has said don’t collect statistics, because if you know how these guys are making money, they’re going to pay taxes on it. And if you don’t look at what they’re doing, if you let them all do it through offshore vehicles, if you let them all bury everything, then they’re not going to be taxed. And that’s his constituency, to un-tax finance and to shift it onto labor and industry.

AMY GOODMAN: Where does Glass-Steagall fit into this?

MICHAEL HUDSON: That, as Nomi said—

AMY GOODMAN: And explain it.

MICHAEL HUDSON: It’s—Glass-Steagall was designed to prevent what has happened. It was designed to keep investment banking apart from commercial banking. Now you have the banking system taking—merging with the most crooked companies in the country, like Countrywide Financial that’s under indictment by attorney generals all over the country. You’re having the banking system commit its deposits and its space to recycle the savings not into industrial investment, but into exploitive loans.

AMY GOODMAN: Maybe injecting a little humor here, could this lead to single-payer healthcare? I mean, we’re talking about nationalizing of insurance.

NOMI PRINS: You might as well nationalize insurance.

AMY GOODMAN: And why does that have to be humorous?

NOMI PRINS: Well, no, exactly right. If you’re effectively nationalizing a portion of the banking—you’re nationalizing the worst portion of the banking system is what you’re effectively nationalizing. But you’re not even doing that, because you’re not running as a public entity.

You’re taking on risk you won’t be able to understand, and you’re not even trying to. So it’s even more dangerous.

With health insurance, which actually those companies have not sort of been involved in this, because they haven’t had the same derivatives, type of financial services, speculative activity that AIG has under its umbrella, which is the real reason it is imploding, you could actually put some money into something that preempts a problem happening and helps people get healthcare.

AMY GOODMAN: What do you see has to happen now? And are we going to see a lot more banks going down, Professor Hudson?

MICHAEL HUDSON: You’ll see big fish eat little fish. The strong are going to win out. The people who are not going to be bailed out are going to be the pension funds, the labor funds, the small investors. You’re going to—the government has come down on the side of the sharks. And what they did yesterday is to lock in and prevent any Democratic administration from coming in and cleaning up the mess. The people who’ve made the mess are now in control.

AMY GOODMAN: But Obama is not against this.

MICHAEL HUDSON: You know, that’s true. He is not against it, and it was, after all, a Democratic president, Clinton, who repealed Glass-Steagall. And it was a Democratic Treasury secretary, Robert Rubin, who supported all of this. So they’re the—

AMY GOODMAN: Top adviser to Obama.

MICHAEL HUDSON: That’s right, the Treasury secretary. Yes, and still the top adviser. So, you’ve had both—I guess you could say the Republicans are a wholly owned subsidiary of Wall Street, the Democrats are a partially owned subsidiary.

AMY GOODMAN: Nomi Prins?

NOMI PRINS: Well, yeah. Robert Rubin was at Goldman. So is the current Treasury secretary, Hank Paulson. So are a number of people in Washington. And you have that situation where you have people with speculative sort of minds running this concept of free market through Washington, which has created this complete catastrophe in the financial sector.

It will get worse, because the fact is these new conglomerates—the JPMorgan/Bear Stearns, the Bank of America/Merrill Lynch—they are larger, more risky entities than they were before the happening, and they have not disclosed the risks that they have. I worked in some of these companies. You cannot merge risk—you know, you cannot merge risk systems between the products within your own company. So when you start merging tremendously big companies, there is no hope in any sort of short timeframe the you are going to actually understand that risk. And there’s no need to report it to our government, because it’s not required. So it will get worse.

MICHAEL HUDSON: Nomi used the word “free markets.” Obviously, this is not a free market. They say they’re acting on behalf of Adam Smith. Adam Smith said that no government has ever repaid its debts. And it could be said that no private sector has, either. So, this is not a free market; this is a guaranteed gamble for Wall Street against industry and against labor.

AMY GOODMAN: You each have thirty seconds. You’re being called in by Senator McCain and Senator Obama to make your recommendation to them. They would maybe give you fifteen seconds, if they give you that, but, Nomi Prins, what are you going to tell them?

NOMI PRINS: It’s very simple. You don’t understand the system, so you know what? You take some guts, and you create a situation where you dissect the system. You don’t merge it; you dissect it. And you make accountable what is going on within each segment of the speculative and commercial banks, so that you know what’s going on, as was had to do in 1933, because that will create an actual stable system that the government can actually understand and quantify.

AMY GOODMAN: Professor Hudson?

MICHAEL HUDSON: You realize the debts can’t be repaid, and you’re going to write down the debts to the ability of the debtors to pay.

AMY GOODMAN: You’re not bailing out any of these companies.

MICHAEL HUDSON: That’s right, you don’t. They knew they were bad debts. They knew they were bad loans. You don’t bail out the people who knew the debts were going to go bad and thought that they’d bought the government to bail them out. You say, “We’re not going to bail you out, and you haven’t bought us. And we’re going to act on behalf of the economy and the voters, not your behalf.”

AMY GOODMAN: I want to thank you both for being with us. Nomi Prins, former investment banker turned journalist, she worked at Bear Stearns, she worked at Lehman. She’s now a senior fellow at Demos. Michael Hudson is president of the Institute for the Study of Long-Term Economic Trends, a chief economic adviser to Congress member Dennis Kucinich, a professor at University of Missouri, Kansas City.