A Look inside Pandora´s Box

The US-economist James K. Galbraith gave a remarkable speech to the biennial convention of the CEP Union of Canada in Toronto on September 20, 2010. In that speech he looked inside Pandora´s Box – and what he found as the root-cause for the crisis we face was: FRAUD. In the following interview related to this speech he explains the need “to take control over institutions and restructure them.“

James K. Galbraith, one of the most respected economists in the United States, holds the Lloyd M. Bentsen, Jr. Chair of Government/Business Relations at the Lyndon B. Johnson School of Public Affairs, the University of Texas at Austin. He is a Senior Scholar with the Levy Economics Institute (www.levy.org), and Chair of the Board of Economists for Peace and Security (www.epsusa.org), an international association of professional economists.

Galbraith studied economics as a Marshall Scholar at King's College, Cambridge and holds degrees from Harvard and Yale (Ph.D. in Economics, 1981). He is the author of seven books and several hundred scholarly and policy articles. Galbraith’s most recent book, The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too was published in August, 2008 by Free Press, with the paperback appearing in May, 2009. His previous book, Unbearable Cost: Bush, Greenspan and the Economics of Empire was published by Palgrave-MacMillan in late 2006.

He served on the staff of the U.S. Congress, including as Executive Director of the Joint Economic Committee. He organized congressional oversight of the Federal Reserve (the Humphrey-Hawkins hearings) and worked on financial crises including New York City, the Chrysler Corporation and the Third World debt crisis of the 1980s. In the 1990s he served for four years as Chief Technical Adviser for macroeconomic reform to the State Planning Commission of China. He was called to advise the House of Representatives on the TARP legislation in September 2008 and on recovery strategy in December.

You can find a comprehensive interview that chostheorien.de conducted with James K. Galbraith earlier of this year under the headline "There is no return to self-sustaining growth" here:


James K. Galbraith was invited to give the keynote lecture on the economic crisis at the Communications, Energy and Paperworkers Union of Canada Convention 2010 in Toronto on September 20, 2010. Here you can watch the video of his speech:

Watch live streaming video from ceplive at livestream.com

Professor Galbraith, you have stated in your speech in Toronto that your professional colleagues haven't done very well, since they were not able in large parts to foresee the crisis we're in now. What is the major factor in your view that caused them to be blind, so to speak?

A professionally radical approach, which prevented them from even studying any of the signifant forces that lead to the crisis. For example, if you are working in a world where you assume a representative agent and an efficient market, then it's very hard to bring to bear any form of analysis that deals with the actual conduct of banking institutions and the problem of disparities between how different groups of people behave.

How do you judge on the response to the crisis now that we are in it for years by now?

The initial response had elements of coherence to it, which have largely disappeared. We are now seeing the assertion of a rather raw and in many ways brutal ideology.

In Toronto you've said that if one takes a look into Pandora's Box one does see as the root-cause for the crisis beyond all labels foremost one thing: fraud. Is it an healthy approach to deal with systemic fraud if there is no jail time by and large for the perpetrators?

Well, when you have a strong suspicion and lots of evidence of fraud, what you need is investigations, you need to have indictments, appropriate prosecutions and sentencing on conviction. That's what we should be calling for. The application of a functioning justice system to this problem is what has been missing. I am not going to short-circuit that, by calling for a particular outcome in any particular case.

When I've listened to your speech also this question came to my mind: Is it a symptom of our time that people like to know things in general – but then again not really exactly because this might be too uncomfortable to go along with such things?

I think there has been both in the U.S. and in Europe – perhaps especially in Europe – an unwillingness to face the underlying reality of the American financial crisis. A great many Europeans bought toxic assets directly or indirectly through pension funds and other investment vehicles, and they were defrauded. Of course, the people who were managing those funds have very ambivalent views. On the one hand, yes, it would be great to recover, but on the other hand it's  hard to acknowledge that they made investment decisions on behalf of their clients that turned out to be very foolish and also foolishly trusting of major American financial institutions.

In your speech you mentioned the need to restructure the financial system. Do you believe chances are good that this takes place or would you agree with Edward Harrison, the publisher of “Credit Writedowns“, who wrote not so long ago that there will be no subsubstantive change to the financial system before a total collapse happens in the U.S.?[1]

I am not in favor of total collapse.

Of course. And I am sure Mr. Harrison is neither.

Yes. At the same time it is difficult to argue that we are going to see an effective intervention to correct the basic structural problem without some new major impetus to do so. I think it's clear to most reasonable people that you do not want to have a banking system dominated by half a dozen major banks that are not in the business of making ordinary commercial and industrial loans. That's a mistake. But dealing with that requires to take control over institutions and restructure them.

What are your thoughts on “Foreclosuregate“? Isn't this problem more or less the logical result of not going after the fraud and criminality that took place before?

Well, it's clear that people who played fast and loose with securitisation of mortgages are now taking the next step and playing fast and loose with the documentation backing foreclosures. The likely implication of this is that you will have a slowdown in the foreclosure process. That means that it will become much harder to buy and sell houses – so prices will fall. And that will make it even more difficult to pretend that the banks don't have major losses that have to be recognized. Ultimately I suspect that this event will have consequences: it  makes very clear to ordinary people what the issues are from a standpoint of the rule of law, that we really have to deal with these institutions.

What do you think the optimal government response should be at this time?

I would suggest a new round of stress tests for the major banks. If we did them correctly with completely independent auditors and a sceptical approach rather than a public relations approach, we might be able to force a next step which would be a movement to triage the banking system and to begin to get a restructuring of the banking system underway. That's the structural approach I would take. At the same time, of course, resources obviously need to go into the investigation and approbiate prosecution of fraudulent activity.

Since you mentioned public relations: How do you assess the role of journalism in this crisis as a mediator between banks, politics and the ordinary people to make the latter understand what is going on?

Well, there are some news papers which have behaved very badly, others have behaved somewhat better. Just to give a concrete example: The Washington Post editorial-page ran the other day an editorial on foreclosures which gave the impression that they have taken it directly from a trade group from the industry. It was very hard to see how an independent-minded news paper could publish an editorial of this kind making excuses for the failure to handle foreclosures correctly.

But you wouldn't go so far to say journalism itself - and especially mainstream journalism – is in a crisis of its own?

I have only one crisis I am worried about in the moment, which is the financial crisis. If I would worry about a second one, it would be the crisis in economics. Don't give me on a third, that's more than I can handle.

I would also like to know how confident you feel that we can address the problems of corporate predation that you raised in your book, "The Predator State", given that the government which is supposed to police these corporations, now appears to be subject to the same kinds of predatory practices?

Well, the thesis of the book was precisely that we have a problem of government being run effectively in important areas by the representatives of predatory economic interests. So I continue to maintain that this is the essence of the problem.

In your country you have right now the so called “Tea Party.“ What's your comment on this party, especially seen from an economic point of view?

The Tea Party is a generalized reaction against the current economic conditions and channeled by its sponsors and authors against the Obama Administration. I don't frankly believe that the Tea Party has an economic programme worthy of the name. It is an expression to cover what is in part the genuine frustration of a group of people and in part a calculated and very well financed corporate  campaign in favor of the right-wing of the Republican Party.

The “Tea Party“ likes to talk a great deal about the public deficits in your country, but not about a large chunk of that deficit: the expenditures for the military. What has to be said on this topic in your capacity as the head of “Economists for Peace and Security“?

The position that Economists for Peace and Security has taken continously is that we should concentrate on measures that actually improve our security, and a great share of a certain part of the military budget doesn't do that. We have run into a pattern in the United States of buying weapons that actually perform worse than the ones we already have. We are trying to push for reforms in that respect.

In terms of the overall size of the military budget, which is an issue I haven't been as outspoken as some of my colleagues quite frankly: I certainly believe that the military budget can be reduced, but these are issues which need to be dealt with in the context of what your security needs actually are. There is not a simple answer to that question.

Professor Galbraith, during our first interview we talked about the “Audit the Fed“ bill that you supported. What has to be said related to this?

The last thing I've heard was that Chairman Bernanke announced that they will give a full accounting of the transactions that have been done in the crisis period and that the sky would not fall after all. Which is exactly in line with Federal Reserve behaviour in every previous effort to get them to open up a bit – they've always said this would lead to complete desaster and the collapse of Western civilization, until the Congress tells them what to do and then they turn around and say: Oh well, we go ahead and do it and everything will be fine.

With regard to the euro-zone: Do you think that the arrangement of the euro will last or will it break up?

That's a predictive question. My view is that the euro will probably not break up, but the problem is that keeping it together will require enforced stagnation on the smaller and peripheral countries in Europe. You will see continuing difficulties in those countries and a failure to recover from the current crisis.

The austerity measures will not solve the problems in your view?

No, the austerity measures are leading Europe into a long period of stagnation and high  unemployment, which are going to result in higher rates of internal migration. People will move from  low income regions to higher income regions to cope with the fact that they can't find jobs at home. Until the Europeans recognize that this is the alternative they are building for themselves, a deeply unstable and unhappy continent, nothing will  change along those lines, it will just  continue to be a very unhappy economic outcome.

Whether the protests now underway in France will make a sufficient impression on European policy makers to begin to bring about a change is unclear at this point. So far what you have is a continent whose policy is directed by very stubborn people who are very convinced of the righteousness of their views and very devoted to the service of the constituencies that they happened to be closest to, and indifferent to the wellfare of the larger population. Unfortunately this seems to be the fact.

In light of the fact that the mess we're in is the result of policies dating back at least ten years ago, do you think that your country and the world at large will be better off in ten years from now due to the policies of today?

No. First of all, I would say the difficulties we're in go back at least 30 years. If we look forward, we are facing some major challenges which are not financial in character. We are facing an energy challenge and a climate challenge. Dealing with those should be much higher on our agenda. But the failure to get the underlying economic and financial policies right  stands in the way of dealing with those problems. So I am not optimistic about the medium-term future.

And why do you think your country is so unwilling to target the energy issue?

Well, I don't think this is a great mystery. We have a politics that has very strong influence of the energy producers, especially coal and oil, who don't want major change in terms of their business model. And we have a population deeply commited to a high energy lifestyle for whom the transition will be painful. It is easy to persuade them that they should oppose measures that deal with these problems.

The forces of the future in this area are weak. And of course most of the major costs are known to science certainly, but not yet being experienced in a major way by the people. It would be remarkable in these conditions if we actually succeeded in getting a significant amount done. But right now it is really a question, at best, of very limited initiatives in areas which are relatively uncontroversial.

Thank you very much for taking your time, Professor Galbraith!


[1] compare Edward Harrison: “On ideology and economics and the apathy of the American   public“, published at chaostheorien.de on August 14, 2010 under: http://www.chaostheorien.de/artikel/-/asset_publisher/haR1/content/on-ideology-and-economics-and-the-apathy-of-the-american-public?redirect=%2Fartikel

Orginal article published by Chaostheorien