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An Interview with Paul Craig Roberts

Is the Global Economy a Mistake?

by IGNACY NOWOPOLSKI

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  It was repealed in 1999.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