One of the things that Matt Stoller has stressed that the possibility of reform is remote until breaks within the elites take place.
Jeffrey Sachs, Columbia professor and director of the Earth Institute at Columbia, is a controversial figure for his neoliberal stance on macroeconomics and his role in promoting the use of “shock therapy” in emerging economies. But it is also important to recognize that criticism from a connected, respected insider has more significance than that of someone like Bill Black, who has made a career of taking on bank fraud but has never reached a top policy-making level.
This talk is blistering at several points. It was recorded at a conference “Fixing the Banking System for Good” on April 17 (hat tip Jesse). If you have trouble with the embedded version, .
[NC’s anonymous transcriber made a complete transcript of Sachs’ statement, so I’m going to replace the partial transcript previously posted with what follows. –lambert]
Professor Jeffrey Sachs, Columbia University
Philadelphia Federal Reserve
April 17, 2013
Jeffrey Sachs: […] I think, you know, your point, Larry, is a very powerful one. And at a not a literal level of single-purpose banking, but of, you know, a more general level, Glass-Steagall successfully did that for quite a long time, and its removal was a very, very cynical play by Rubin, Summers, Clinton, Gramm and others who all had very strong interests, personal interests, in the outcomes of that deregulation, and exploited the gaps that they created, and then to the chagrin of some of us at least were invited right back into the White House in early 2009, after they had made this calamitous mess, to be the ones supposedly to fix it. And I know that Summers, for example, continued to really institute moral hazard policies right and left by fighting against any limits on compensation of these people who had entered into the breach.
So, this is a case where institutional reform of separating fractional reserve banking and basically the provision of liquidity from gambling should be done, but I would add this other point, which is that a lot of what’s happened actually and what’s been revealed is in my view prima facie criminal behavior. It’s financial fraud on a very large extent. There’s also a tremendous amount of insider trading, and you can even watch it when you’re living in New York, how that works.
So it’s not so mysterious, but we don’t even act – take John Paulson, for example. Paulson worked together with Goldman Sachs to defraud massively many European banks which bought the toxic mortgages that Paulson had put together. When this Abacus deal was taken up by the SEC, Goldman ended up paying a small fine. The chair of Goldman, of course, continued in his position and continued at White House state dinners, and Paulson wasn’t even mentioned once in any of the proceedings, and he took home a $1 billion dollar paycheck the next year, even as Goldman was paying a roughly $700-million-dollar fine, if I remember correctly, for the abuse that Paulson was part of. I can’t believe, no matter what the financial regulations, we can’t do better than that. That’s really pathetic.
Audience: As a former congressional staff attorney and retired tax lawyer, looking at the possibilities of small steps which might be taken, how affirmative would you think reenactment of Glass-Steagall would be?
Jeffrey Sachs: I think that it is quite important to re-create a mechanism where liquidity is separated from large-scale financial gambling. It’s really, in my opinion as a macroeconomist, it’s the collapse of liquidity that is the real macro danger. The rest is the collapse of confidence, lawlessness, decency and so on, but what made Lehman so damaging, of course, was how it infected the money markets, the interbank loans, and the complete drying up of commercial paper. This was the devastating effect. It was basically March 1933 replayed.
So liquidity is what is the real value here from a macroeconomic point of view. Loss of wealth, I could care less whether they make more or less money. I don’t even care whether they make big money particularly except I think a lot of them are crooks and that it’s based on a lot of nefarious behavior, but the macroeconomic significance is a kind of diamond in the banking crisis which we know to be part of a fractional reserve banking system.
And it seems to me analytically we have two – we have basically two levels of decision making. One is separating liquidity in the banking sector from other kinds of speculative financial activity. This I would do for sure, and I would never have put Goldman Sachs back under the Fed’s protection as a banking unit so that it could receive direct loans from the Fed. That’s ridiculous, and sad, actually.
But the second point then is Larry’s point, and this is whether fractional reserve banking itself has value enough to keep it in its current form. I’m not convinced, I have to say, one way or another. I kind of, you know, grew up in a fractional reserve banking system. I do believe that it provides liquidity in normal times if regulation is good. I tend to believe that there is value in reserve banking, but it’s also highly volatile, as theorists have recognized at least for 150 years, and as Milt Friedman agreed, as Diamond said, as Larry has pointed out, and I think we have the choice, could we really have liquidity without fractional reserve banking? If we could, we might be able to address, you know, another, another degree of this problem.
The final point, of course, is separating the politicians from the crooks, but maybe that’s so close together that they can’t actually be separated. Maybe it’s just the same community.
Audience: Yeah, hi. This is Mike Imhoff. [inaudible] My question was, your international experience, you’re talking, you were starting off by saying you’re talking to a lot of international decision-makers. What is the sense there about the readiness to try different monetary and financial approaches to what we have today? Do they feel that they can start to do that on their own in their own countries, or do they feel that they depend on the central countries like the United States and the Europeans to do something first?
Jeffrey Sachs: I think in general for most small countries or most developing countries – I’ll put aside the very largest ones – there is a sense of almost complete dependency on the international system – their payments, their lines of credit, interbank markets, the need for swap facilities with the Fed or the ECB, the pervasiveness of tax havens, the extent of flight capital from their countries, the legal structures where basically very clever U.S. lawyers helped to free all of these countries from their tax revenues. They feel very much dependent on a system that they feel is dysfunctional, but they are also, they’ve been well schooled that for the last 25 years their goal is to be part of the international system. They just woke up to a system that they find very destabilizing, and they don’t see any clarity of the way forward, and most of the advice that they get is to be part of this system and be quiet, basically. This is how the system is; you join it, you stay on good terms with the Fed, with the IMF, with others, and there is very little sense of autonomous potential among these countries. Really I can only emphasize the palpable anger and vulnerability that’s felt right now is very, very high.
Audience: My name is Dennis Peacock, and I represent the faith-based side of macroeconomics, and I just want to congratulate you that you pulled us back to the reality that in spite of all the complexities and theories and mechanics that we deal with in economics, that economics is really about values and the values and ethics of people. Thank you very much.
Jeffrey Sachs: Well, thank you very much for saying it and practicing it. I do believe – by the way, I’m just going to end here because I’ve been told I have to run to the U.N. in fact right now – I believe we have a crisis of values that is extremely deep, because the regulations and the legal structures need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I’m going to put it very bluntly. I regard the moral environment as pathological. And I’m talking about the human interactions that I have. I’ve not seen anything like this, not felt it so palpably. These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients. They have no responsibility to people, counterparties in transactions. They are tough, greedy, aggressive, and feel absolutely out of control, you know, in a quite literal sense. And they have gamed the system to a remarkable extent, and they have a docile president, a docile White House, and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies.
If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I’m afraid to say, and no party is – I mean there’s – if not both parties are up to their necks in this. This has nothing to do with Democrats or Republicans. It really doesn’t have anything to do with right wing or left wing, by the way. The corruption is, as far as I can see, everywhere. But what it’s led to is this sense of impunity that is really stunning, and you feel it on the individual level right now, and it’s very, very unhealthy.
I have waited for four years, five years now, to see one figure on Wall Street speak in a moral language, and I’ve not seen it once. And that is shocking to me. And if they won’t, I’ve waited for a judge, for our president, for somebody, and it hasn’t happened. And by the way it’s not going to happen anytime soon it seems.
[Moderator]: Professor Sachs, thank you so much.
Clearly, Sachs is not taken by Lloyd Blankfein’s “doing God’s work” claims, nor by the hectoring of overstretched consumers to make their debt payments after banks got overt and back door bailouts, and continue to be subsidized by savers via ZIRP.
We can only hope that Sachs’ direct talk emboldens others at his level to speak up.