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PAUL JAY: Welcome to The Real News Network. It was meltdown on Monday, stock exchanges
around the world. The New York exchange apparently lost about $1 trillion on paper. Are we poised
for a spiral into deeper recession? Or is this a blip in the markets? Now joining us
to unpack all this is Rob Johnson. Rob was a former trader on Wall Street. He's now a
senior fellow at the Roosevelt Institute. Thanks for joining us again, Rob.
ROB JOHNSON: My pleasure.
JAY: So unravel for us. S&P does this downgrade on Friday. Most of the markets dismiss it
as having any real significance. Nobody thinks the US is actually going to default on its
debt. On the other hand, Monday, the big institutions jump in, selling off. Why?
JOHNSON: Well, the "why" is we just created a contractionary debt deal with a super committee
going to meet to cut more out of the economy, where one in six people is unemployed. We're
putting austerity into a slump. It's absolutely dreadful, foolish macroeconomics. And now
it got blessed by the S&P, proving that two wrongs can never make a right.
JAY: Now, how much this has--does this have to do with an underlying fear that what's
happening in Europe is going to continue to unravel? There's talk about--a nice term I
heard on TV today from one of the money managers is sovereign raiders, the next target being
Belgium. And there's even talk about France. What does this mean?
JOHNSON: What I would say is that the anxiety about Europe and contagion like Lehman Brothers
was contagious in 2008 all around the world, people are very concerned that our out-of-control,
too-big-to-fail financial institutions are so intertwined that someplace the size of
the state of Rhode Island or Nevada can propagate through the entire planet. People have been
concerned about Greece. When you step up to Spain and Italy, it gets bigger and it gets
wilder. United States has been decelerating. It didn't do enough or long enough stimulus.
We didn't orient the stimulus towards things like investment in productivity that could
pay back that debt in the long run. And when we gave up the ghost and Obama lost the midterm
election, capitulated into this austerity agenda, you drop a contagion banking crisis
on top of that debt deal and the whole world starts to melt down.
JAY: Now, on top of the austerity agenda, is there also an agenda that some of the big
players make money out of these big downward spirals, that they play volatility? I was
talking to a commodities trader the other day, and he says one of the things that isn't
getting talked about enough is how the big players in the market can sustain these big
downward turns, and they wind up sitting on--they go into them sitting on cash, and then, when
their smaller competitors get really demolished, they make money going short. They make--then
they take all this cash and they buy back in and pick up bargains. And so some of this
is actually--I don't know; what's the word?--deliberate.
JOHNSON: You might call it the children of Andrew Mellon, whose famous quote was liquidate,
liquidate, liquidate. There are no question that there are lots of very smart bearish
people with lots and lots of cash who will benefit from, what you might say, buying everything
at half-price. It's like America goes on sale, Portugal goes on sale, Ireland goes on sale,
Greece goes on super sale. Anybody that has big cash, anybody that can squeeze a governor
in Wisconsin or California or any of these other states, can extract an awful lot and
buy things at a very profitable level if they can keep the pain threshold up.
JAY: Yeah, that's something that's not being talked about again on TV very much. The people
are talking about how the federal government can print money and one way or the other will
pay off its debts, and that interest rates are going to be very low on federal Treasury
bonds. But that's not the case for cities, for municipalities and states across the country,
is it?
JOHNSON: They don't have a central bank that issues state currency. So they can issue debt,
but they can't, what you might call, validate that debt in the way that Alan Greenspan explained
on Meet the Press this weekend, that the United States can by running the printing press.
The United States will not default. But the United States can't push on a string, either.
Ben Bernanke can try all he wants, but until we come out of this madness with regard to
fiscal austerity in America, we won't--. What we need right now is an infrastructure bank,
education spending, science spending. What we need is infrastructure modernization, things
that attract private investment. That requires a big retooling, like a Reconstruction Finance
Corporation, like the building of the Erie Canal, like all the things that Felix Rohatyn
wrote about in his last book. And none of those things are even on the drawing board
right now, even though Obama told us it was a Sputnik moment. We are failing in a bipartisan
way.
JAY: So what do you make of what we should be doing? I mean, we're--the rest of us, most
of us are going to be affected by all this. How serious do you think this is going to
get? And what should we be doing, demanding?
JOHNSON: Well, this evening, since I came home for this interview, I've had friends,
old friends from the Middle East, from New Zealand, from China, and from France call
me and ask exactly that same question. I think very intelligent investors, very intelligent
policy analysts can see the gridlock in the United States, the austerity and turmoil in
Europe, the reluctance of the Germans to fulfill their guarantee that they made years ago.
They--as you and I talked about before, they wrote an insurance policy, they collected
the premiums, but they don't want to pay out now that there's an accident. You see the
Chinese turning inward. You don't see their exchange rate appreciating in order to take
pressure off of manufacturing all around the rest of the world. It's every man and every
woman for themselves. This is a system that's disintegrating right now. I do think we are
potentially on the cusp of a downturn and a multicountry, self--how you say?--mutually
reinforcing downturn that could be quite a bit like the 1931 banking crisis that led
to the Great Depression, or, alternatively, in the United States, like 1937, when the
orthodoxy won over Franklin Roosevelt and set us down for a second deep dip that wasn't
quite as severe as the early '30s. But it was unnecessary, just like what's happening
in America right now isn't necessary.
JAY: I mean, it's--from a political point of view, it seems almost weird that President
Obama, who, if he goes into an economy--2012 with an economy like this, he ain't going
to do very well. But he's not coming out swinging. He's still talking austerity and cuts. In
the statement he made today, today being Monday, I mean, all he talked about was how S&P shouldn't
have downgraded US debt, and Warren Buffett says it's really, you know, AAA or better,
and so on and so on. There was no talk about any real stimulus program, and there didn't
seem to be any sense from what he said of how serious the situation is. It was--it's
all going to get better is what he was telling us.
JOHNSON: Well, he's employed what George Akerlof calls the "confidence multiplier" many times,
and it's blown back in his face because he didn't, what you might say, deliver on the
goods. I think Barack Obama's in real trouble now. I think he's in serious trouble for his
reelection. I think you can see third parties. I think you can see primary challengers. And
just with the deceleration at--starting at 9 percent unemployment, just like The New
York Times talked about today, the next downturn starts from a base of fragility, and that
we didn't really recover and repair our balance sheets in the last shot that happened in 2008.
[crosstalk] I was going to say, Barack Obama's in trouble. And he's got to act like he represents
people. When you look at the budget polls, what the American people wanted to happen
is not what happened. What the American people are talking about is getting out of wars.
What they're talking about is raising taxes on the wealthy. What they're talking about
is rebuilding the basic infrastructure. And that's not what's happening. And I won't blame
Barack Obama entirely, but I will blame him in one respect. He did not pitch a fit. He
did not go nuts about doing the right thing. He tried to act like a referee, like a moderator.
And he actually concurs blessing on the reasonableness of crazy policies that emanate from people
on the radical right, people who are good souls, who believe that the American government
is an insurance agency for the rich and powerful and just want to cut him off. Barack Obama
needs to work to illuminate and to educate the American people on the ways in which government
can help them realize, how do we say, the benefits and the optimism of their livelihood
on doing real things on their behalf. When 3 percent of the population's taking all the
gains, when you've got to raise $1 billion to remain president, when the other side's
gnawing at your ankles, it's a hard, hard job. And he's not even making the case. I'd
rather see the guy go out in flames than go out with a whimper like it appears he's doing
right now.
JAY: Thanks very much for joining us, Rob.
JOHNSON: My pleasure.
JAY: And thank you for joining us on The Real News Network.