My Talk with Bob Reich
Nathan Gardels, HuffPost
Robert Reich was U.S.
secretary of labor under President Bill Clinton. His most recent book is
\"Supercapitalism.\" He spoke with me about the economic crisis.
Nathan Gardels: Now FNMA (the Federal National Mortgage Association) -- one
of the pillars of the post-depression American economic order -- is in trouble.
What does this say about the depth of the U.S. economic crisis resulting from
the housing bubble?
Robert Reich: The crisis is worse than most economists assumed, and it all goes
back to the early years of this decade when real interest rates were below
zero. When real interest rates are less than zero, it\'s crazy not to borrow,
and that\'s what everyone did -- not only homeowners getting mortgages but
every financial institution and millions of investors.
Gardels: Nobel laureate for economics Ed Phelps says the current financial
crisis has given capitalism a "black eye." It turns out that the
neo-liberal model that says capitalism is self-correcting is wrong. Is the U.S. headed
back toward New Deal-type regulation after the long embrace of ever-freer
markets?
Reich: Capitalism is not self-correcting. It has never been. Capitalism has
always required regulation in order to ensure against fraud and excessive
speculation, especially when money is so cheap. Alan Greenspan, the former Fed
chief, allowed the current crisis to happen because he did, indeed, believe
that capitalism was self-correcting.
George W. Bush and others in the Bush administration have also assumed,
wrongly, that regulation is unnecessary. Time and again, we\'ve learned that
markets don\'t work without regulation.
At bottom, markets depend on trust. But trust doesn\'t happen automatically,
simply because individual players in the market often can get away with
behavior that breeds distrust. They don\'t bear the full cost of imposing fraud
or excessive speculation on others. The cost is spread over all players. This
is what we\'re now witnessing. Because of the excesses of the last few years,
lenders and investors no longer trust that the people with whom they\'re
dealing will fulfill their commitments. As a result, credit is drying up.
Gardels: No matter how much Barack Obama hews to the center in the campaign,
won\'t he be forced by social circumstances, if president, to pursue government
intervention of a kind unseen (in terms of re-regulation, if not new
institutions) since the Great Depression? What kind of intervention do you deem
necessary?
Reich: Obama is a pragmatist. He\'ll do what\'s necessary, and no more. We
need smart regulation of financial markets, including mortgages and consumer
credit, and many such regulations will need to be international because
financial markets are now global.
Gardels: Obamania has not hit Asia, which tends to be more focused on
interests than values, as much as it has Europe.
In general, Japan, China and the
rest prefer Republicans and free trade. They fear protectionism from Democrats.
Reich: They\'re wrong to fear protectionism. Democrats have led the way to
internationalism and global trade -- starting with the Kennedy Round in the
1960s and continuing through NAFTA and China's
entry into the World Trade Organization under Clinton.
Backlashes against globalism occur under Republicans, as they did under
Herbert Hoover in the early 1930s and now under George W. Bush. The reason is
simple. America\'s huge middle class doesn\'t do as well under Republicans.
Their jobs are more threatened. As a result, they fear trade and other global
commitments.
Under Democratic administrations, on the other hand, the middle class does
better -- their wages rise, their jobs are more stable. As a result, they\'re
more willing to embrace the advantages of trade and globalization. I expect the
same pattern to hold under an Obama administration.
Universal health care, relief for those who can\'t pay their mortgages or
can\'t afford college tuition, investments in infrastructure and in education
-- all these, which Obama will champion, make Americans more willing to accept
the changes that globalization inevitably brings.
Without these sources of security, Americans fear change. Right now, the
largest percentage of Americans since the 1960s are against further
trade-opening agreements. Why? Largely because they\'ve done so badly under
George W. Bush. The median wage, adjusted for inflation, is lower than it was
when Bush came to office.