Is the Global Economy a Mistake?


Paul Craig Roberts served as Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.

According to the basic definition an economy is the realized social system of production, exchange, distribution, and consumption of goods and services of a country or other area.   Could you provide a brief assessment of the modern financial system’s contribution to the above mentioned functions?

PCR: A financial system matches up savers with investors and higher returns with higher risks.  When this becomes global, misbehavior by the reserve currency country causes problems for all.

From my point of view the Wall Street investment systems have created much more harm than good for the world economy from 1929 onward.   Wouldn’t it be advisable to eliminate so called “investment houses” altogether, leaving only a “traditional” banking system with a strict but simple regulations, in order to provide needed credits for tangible investments and a “safe haven” for customers deposits?

PCR: In the US the Glass-Steagall Act separated commercial from investment banking.  It was repealed in 1999.  As a result of the present crisis, the major US investment banks have disappeared as such, having become part of depositor banks or having become banks themselves.  I don’t want to hypothesize if the modern economy can do without the investment bank function.

As you stated in your recent article, financial deregulation was an important factor in the development of the crisis. The most reckless deregulation occurred in 1999, 2000, and 2004. Subprime mortgages became a potential systemic threat when issuers ceased to bear any risk by selling the mortgages, which were then amalgamated with other mortgages and became collateral for mortgage-backed securities….The financial markets must be carefully re-regulated, not over-regulated or wrongly regulated. Don’t you think that the very existence of such “financiers” that have always been the economic parasites, poses a continuous threat to the global economy?  The complexity of modern financial schemes makes it virtually impossible to create the “tamperproof” regulations.

PCR: Deregulation in the US resulted in part from the decline of the culture of prudence.  Prudence lost its authority and was pushed aside by greed at all costs.  Probably speculators should not be permitted to sell stocks and national currencies short.

As the crisis unfolds, it becomes more apparent that the entire FIRE [finance, insurance, real estate] segment may be classified as a “burden” rather than “support” for tangible economy.  Here is an excerpt from your article: Wall Street analysts pushed financial institutions to increase their earnings, which they did by leveraging their assets and by insuring debt instruments instead of maintaining appropriate reserves. This spread the crisis from banks to insurance companies.  What kind of limitations (if any) should be imposed on the FIRE segment to assure its constructive role in the economy?

PCR: The problem is not that regulations were evaded, but that regulations were repealed. Risky instruments were permitted to proliferate without issuers having to maintain reserves against potential claims.  For example, institutions that sold credit default swaps were not required to reserve against the instruments in the event they resulted in claims.

You have acknowledged that a fractional reserve banking system based on fiat money appears to be capable of creating debt instruments faster than an economy can create real wealth. Add in credit card debt, stocks purchased on margin, and leveraged derivatives, and debt is pyramided relative to real assets.  On the other hand you advocate measures to restore credibility to the US dollar as world reserve currency.

Having the US dollar (or any other national currency) as a reserve one imposes an unfair tax on the rest of the global economy and provides plutocrats with the “imperial leverage” that is obviously unwelcome to the world’s societies.  On the other hand, having gold as a reserve currency proved to be an efficient solution.  Dr. Ron Paul (R-Texas) backs such an approach.  Even Alan Greenspan seems to acknowledge  this concept.  Could you comment on this?

PCR: Gold standards are not perfect.  As Milton Friedman observed, central banks offset with monetary policy the automatic functionings of the gold standard.  Another problem is the size of the world economy relative to the stock of gold. To sustain the current level of activity means a high price of gold and corresponding windfalls to current owners.  Also, the annual increase in gold supply from mining might not suffice to sustain much growth in world output at stable prices.

Keep in mind that a large part of the current problem came not from private behavior but from Federal Reserve interest rate policy.  It was the inexplicably low interest rates that set off the housing boom and inappropriate lending that initiated the collection of misdeeds that resulted in the current crisis.

In your recent CounterPunch article: “What is to be Done?” you have proposed a concise and workable remedy for the US economic ills.  With you Uncle Sam’s hat off, could you tackle this problem from a broader perspective?  What would be the ultimate solution for the global economy in current circumstances?

PCR: The global economy, other than traditional trade, is perhaps a mistake.  Initially, investors believed that global diversification in equity ownership would shield investment portfolios from being all weighted with the home country’s stocks, thus protecting portfolios from large declines from corrections.  In practice, the global economy now brings down all equities together.  The global economy subjects each national economy to the mistakes made elsewhere.

Paul Craig Roberts was Assistant Secretary of the US Treasury Department in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.

Dr. IGNACY NOWOPOLSKI is editor in chief of Polska Panorama. He can be reached at redakcja@polskapanorama.org





Weekend Edition
November 27-29, 2015
Andrew Levine
The Real Trouble With Bernie
Gary Leupp
Ben Carson, Joseph in Egypt, and the Attack on Rational Thought
John Whitbeck
Who’s Afraid of ISIS?
Michael Brenner
Europe’s Crisis: Terror, Refugees and Impotence
Pepe Escobar
Will Chess, Not Battleship, Be the Game of the Future in Eurasia?
Vijay Prashad
Showdown on the Syrian Border
Colin Todhunter
Class, War and David Cameron
Jean Bricmont
The Ideology of Humanitarian Imperialism
Dan Glazebrook
Deadliest Terror in the World: the West’s Latest Gift to Africa
Mats Svensson
Madness in Hebron: Hashem Had No Enemies, Yet Hashem Was Hated
Walter Brasch
Terrorism on American Soil
Louisa Willcox
Grizzly Bears, Dreaming and the Frontier of Wonder
Dave Lindorff
Gen. John Campbell, Commander in Afghanistan and Serial Liar
Michael Welton
Yahweh is Not Exactly Politically Correct
Joseph Natoli
A Politics of Stupid and How to Leave It Behind
Karl Grossman
Our Solar Bonanza!
John Cox
You Should Fear Racism and Xenophobia, Not Syrian Refugees or Muslims
Barrie Gilbert
Sacrificing the Grizzlies of Katmai: the Plan to Turn Brooks Camp Into a Theme
Rev. William Alberts
The Church of “Something Else” in “an Ecclesiastical Desert”
Mark Hand
Escape From New York: the Emancipation of Activist Cecily McMillan
Ramzy Baroud
Forget ISIS: Humanity is at Stake
Andrew Gavin Marshall
Bank Crimes Pay
Elliot Murphy
Cameron’s Syrian Strategy
Gareth Porter
How Terror in Paris Calls for Revising US Syria Policy
Thomas S. Harrington
Jeff Jacoby of the Boston Globe and the Death of Ezra Schwartz
Michael Perino
The Arc of Instability
Yves Engler
Justin Trudeau and Canada’s Mining Industry
Tom H. Hastings
ISIS and Changing the Game
Lars Jørgensen
Vive la Résistance
John Halle
A Yale Education as a Tool of Power and Privilege
Norman Pollack
Syrian “Civil War”?: No, A Proxy War of Global Confrontation
Sheldon Richman
Let the Refugees In
James Anderson
Reframing Black Friday: an Imperative for Déclassé Intellectuals
Simon Bowring
UN Climate Talks 2009: a Merger of Interest and Indifference
Ron Jacobs
Rosa Luxembourg–From Street Organizer to Street Name
Aidan O'Brien
Same-Sex Sellout in Ireland
David Stocker
Report from the Frontline of Resistance in America
Patrick Bond
China Sucked Deeper Into World Financial Vortex and Vice Versa, as BRICS Sink Fast
James A Haught
The Values of Jesus
Binoy Kampmark
British Austerity: Cutting One’s Own Backyard
Ed Rampell
45 Years: A Rumination on Aging
Charles R. Larson
Chronicle of Sex Reassignment Surgery: Juliet Jacques’s “Trans: a Memoir”
Jeffrey St. Clair - Alexander Cockburn
CounterPunch’s Favorite Films
November 26, 2015
Ashley Nicole McCray – Lawrence Ware
Decolonizing the History of Thanksgiving
Joseph Grosso
The Enduring Tragedy: Guatemala’s Bloody Farce