PAUL JAY: Welcome to The Real News Network. I'm Paul Jay, coming to you from New York
City. We're at Rizzoli Bookstore in New York on 57th Avenue, who have generously provided
the space. Yves Smith, the founder of nakedcapitalism.com, in her book ECONned wrote the following. Capture
of the executive branch and much of Congress by a well-heeled financial services industry
means that we have not merely let a crisis go to waste; we have actually allowed a predatory
financial services industry to further its self-serving agenda. The industry has seized
control of the regulatory process. Now joining us is Yves Smith, the founder of nakedcapitalism.com.
Thanks for joining us again.
YVES SMITH: Thanks so much, Paul.
JAY: So in your book you make a proposal for how we can get out of this mess, and it fundamentally
comes down to banking should be--or at least some banking should be a public utility. So
what's your thinking on that?
SMITH: Well, the whole notion is that the reason that banks enjoy such extensive protection
is that these are essential public services. You know, people need payment services. They
need places where they can store their money. You know, they need access to certain types
of debt products. And that's why they're backstopped so heavily. And the thing that most people
don't realize is the extent of the subsidies that the banking sector enjoys. You know,
deposits are insured. We've seen that banks are bailed out when they get in trouble. They
are now getting continuing subsidies via the super-low interest rates that the Federal
Reserve and other central banks around the world are keeping in place. That's basically
a massive tax on savers in order to allow the banks to earn very easy profits, because
they can borrow at very low interest rates and, if they wanted to, earn completely risk-free
returns by buying Treasury bonds. So, you know--and these are just--you know, even military
contractors don't get this level of subsidy.
JAY: Or they take some of this almost zero interest Fed money and walk it over to Brazil
and get a three-, four-point spread.
SMITH: Exactly. Exactly.
JAY: Or they just--one way or the other, they find ways to make money out of it, rather
then putting it back into the economy.
SMITH: No, that's correct. That's correct. The--so what's happened is that we've got
a system where the banks have really lost sight of their public role. And I think if--the
proof of the pudding is what happened immediately after the bailout. I mean, if the industry
had behaved, even for a couple of years, and said, okay, we just got a lot of money from
the government, you know, we really should be very grateful, let's rein in the bonuses
for a couple of years and then we'll go back to life as normal, I would have had some sympathy
for their position. Instead, 2000--instead, 2009 bonuses and 2010 bonuses were at record
levels. You know, if they wanted to do the responsible thing, they would instead have
reined back the pay and used that to rebuild their balance sheets, because in fact their
balance sheets are not as strong as the Treasury and other public officials have been saying.
JAY: And you point out in your book, when Sweden went through something like this, they
fired all the management of their banks that had gone down, and, in fact, at GM, they make
the president of GM step out. But in New York [incompr.] they actually got bigger bonuses.
SMITH: No, that's absolutely right. And then none of these contracts were questioned, right?
The unions, to extend what you're saying, the unions, everybody in the GM case was made
to take a haircut--the bondholders, the unions. You know, instead, with the banks, the bondholders
didn't take any haircuts, the employee contracts were all kept in place. I mean, the asymmetry
is enormous. I mean, it's very clear who's driving the train here.
JAY: Okay. So let's jump to what would it mean to have banks or some banks as a public
utility. What would that look like?
SMITH: You'd have to have--you'd have very strict regulation. You'd have very strict
regulation of what products they were permitted to be involved in. You'd have much more intrusive
examinations than they have right now. You would probably have at least informal regulation
of pay. I mean, for example, there's been a proposal made on a completely different
front of what one writer at the site called a maximum wage, of, say, you can only pay
so much of a multiple of the lowest-paid staffer. But you wouldn't have--or you could--or [incompr.]
just say, look, we're going to set an aggregate level; you can't pay--you know, it's considered
to be unacceptable--again, it would be informal. I mean, you--.
JAY: And this would imply there'd be some massive wall, then, against what's normal
traditional banking and speculation and proprietary trading.
SMITH: Yeah. If people--if people want to go out and set up a hedge fund, fine, but
the hedge funds can't get their money as they do now. For example, right now, hedge funds
borrow from what they call the prime brokerage units of banks. The biggest players in the
prime brokerage market are Goldman Sachs, Morgan Stanley, and Deutsche Bank. Those are
all backstopped by their respective governments. So the hedge funds are basically benefiting
from the fact that they have access to the backstopped banking system. Similarly, a big
source of money for the banks is what they call repo. I don't want to go into the detail,
but it's a way of doing overnight funding. And money market funds are significant--are
a big source of repo money. Paul Volcker has basically said we need to eliminate the way
we've backstopped money market funds. You know, money market funds have this $1 net
asset value. That's a promise; it's not a guarantee. You know, if people had lost one
cent or two cents of what they put into money market funds, maybe they'd wake up and realize
they need to be careful about this, and maybe they should put their money in regulated banks
if they're really concerned about safety.
JAY: So the principle here is, if you're going to take public money, if you're going to expect
public backup, if you go on deposit insurance, which is public money, you're going to be
super-regulated because the public's involved in your business, you're not normal commercial
business, as you point out in the book, that can go down. So you're subject to very, very
serious regulation.
SMITH: Right. Exactly.
JAY: If you want to go off and speculate, go and do it, but you have no access to public
money.
SMITH: Exactly.
JAY: Alright. So here's the other problem, the argument which also kind of comes out
of your book, which is, it doesn't seem you can win the regulatory fight. Even, like,
what you're saying makes so much sense. Even the smallest regulation seems unpassable in
Washington right now.
SMITH: Well, no, and that's--gets back to we're probably going to have to have another
crisis to fix this. And I don't know that even if we have another crisis this will be
fixed. I mean, quite--you know, I mean, quite frankly, it's a--.
JAY: Yeah, we were told this was the Apocalypse, though.
SMITH: Right, we were told this was the Apocalypse. And for example--and the cost--what's very
offensive is this discussion that, oh, the bailouts paid for themselves. That's absolute
nonsense. The proper way to measure--first thing, a lot of chickens haven't come home
to roost yet. You know, look at what's happening with the debt--with the European crisis and
with the budget fight right now. We have a lot of plates in the air. If any of those
plates fall, God knows what's happen to the financial system. The other big problem, of
course, is campaign finance reform. You know, this is all sort of circular, right, that
the banks have now become so powerful that nobody seems able to break them. Now, an interesting
analogy, however, is to that of Fannie Mae. You know, Fannie Mae similarly seemed a completely
unbeatable force in Washington. You know, Fannie, Fannie was, you know, a huge institution,
enormously profitable. Jim Johnson, its CEO, had succeeded in basically buying every housing
analyst, had succeeded in, if anybody criticized a housing policy, of going after them through
lobbyists. And yet when they--they were taken down by cheating on their accounting. I mean,
that was--. You know. So even as powerful an organization as Fannie was brought to heel.
So it's not impossible; it's just very difficult.
JAY: One option some people have suggested is that if you--that--well, they say the problem
is, if you get into this regulatory fight, like what's taking place in Dodd-Frank legislation
right now, where you can't even get something so obvious as position limits to try to, you
know, rein back what's going on in derivatives trading, that, you know, you wind up with--I
think it was--what is it?--40 or 50 lobbyists from Wall Street for every member of Congress
or some crazy ratio.
SMITH: No, it's a huge ratio. Well, the problem is that Dodd-Frank was a lot weaker than most
people want to admit. I mean, in fact, a lot of--one writer characterized Dodd-Frank as
a bill to ride a bill. A tremendous amount of Dodd-Frank was not decided at the time
Dodd-Frank was done, but instead was either kicked over to studies or was kicked over
into rule-making. And that meant that that put it--that gave the--Wall Street another
whack at it. So it was significant amounts of Dodd-Frank were designed to be retreaded
in a weekend. And that part of the story just hasn't gotten the press that it deserves.
JAY: One proposal I've heard is that because so many of these banks would have been bankrupt
without public money, and still there is public--significant public ownership, really, in some of these
banks [incompr.] just take one of them and you make it a public utility, and you say,
okay, you now have a public interest mandate, and if people want to, they can choose to
deal with this public utility bank. If they want to deal with the private banks, they
can. And you create a real public option in banking. Does that make any sense?
SMITH: That's actually a decent idea. I mean, you know, we've spoken in the past about the
Bank of North Dakota, which is a public bank. It's been profitable, it's provided significant
returns to the government, and it has a fairly narrow mandate in terms of what it does. It
does a lot of lending, and it also actually provides support to the private banks in the
state as well. But, again, it does it on very specific issues when it thinks there's a public
interest involved. I hate to say it: we may have the opportunity sooner than we think,
because Bank of America isn't in the greatest shape, and I don't see it getting out of its
problems with housing anytime soon. The market's already got significant question marks over
Bank of America, as you can see from its stock price. It's actually trading at a significant
discount to its reported equity, which is a big vote of no confidence.
JAY: So the Bank of America could be a--
SMITH: Wind up being a test case.
JAY: --a test case for a public banking system. Of course, you'd need somebody in Washington
that wasn't so beholden to Wall Street to get that done.
SMITH: That's true.
JAY: Thanks for joining us. And thank you for joining us on The Real News Network, coming
to you today from Rizzoli Bookstore on 57th in New York City.