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Transcript:

September 19, 2008

BILL MOYERS: Welcome to the Journal. The news this week drove us to pull THE GREAT GATSBY off the bookshelf and read what F. Scott Fitzgerald wrote of his protagonists, the Buchanans: "They were careless people, Tom and Daisy — they smashed up things and creatures and then retreated back into their money or their vast carelessness or whatever it was that kept them together, and let other people clean up the mess they had made."

It's happening all over again, except this time tom and daisy are the titans and speculators on Wall Street who took the money and ran. Their bubble burst, as it did in the roaring twenties, leaving the mess for you and me, our children and our grandchildren, to clean up. The big bad government — so despised in Wall Street boardrooms and beltway think tanks — has stepped in, hoping to save capitalism from the capitalists with possibly the biggest bailout in U.S. history. A summit of top officials last night was reportedly told the country is just days away from a complete financial meltdown.

TREASURY SECRETARY HENRY PAULSON: We must now take further, decisive action to fundamentally and comprehensively address the root causes of our financial system's stresses.

BILL MOYERS: The news caught everyone off guard, including my colleagues and me. For technical reasons we had to record our broadcast last night, with guests who have a deep understanding of the big picture. We decided to go on with the broadcast even as the news continued to pile up, because of the light our guests shed on the roots of the crisis.

Gretchen Morgenson writes the MarketWatch column for the Sunday NEW YORK TIMES.

Floyd Norris is the paper's chief financial correspondent.

Welcome to the JOURNAL.

FLOYD NORRIS: Thank you.

BILL MOYERS: You both have been at this a long time. Is this the biggest story like this that you've both covered in your long careers?

GRETCHEN MORGENSON: I think this is the biggest story in eighty years. This could be the biggest story since the Depression. And I know I'm not allowed to say the "D" word, because that makes everybody really afraid. But this is the single, you know, most traumatic financial crisis I've ever seen.

BILL MOYERS: How so? Why? What's at stake?

GRETCHEN MORGENSON: Because it affects everyone. It is now possibly bleeding into the economy. We've had a fairly strong economy up until now, which has been a godsend, while this incredible turmoil is taking place. If banks are stopping lending, which they appear to be doing, then that's going to affect the economy, to make the downturn. So it is affecting everyone.

There was a lack of accountability where a banker didn't care whether the loan was repaid. And the Wall Street firm that sold the securitization trust didn't care if it ever got paid back, because they were happy with their commission. The broker making the loan didn't care, because he got, all the way up the ladder to the CEOs of these companies, who are allowed to walk away from a financial cataclysm with huge payments.

BILL MOYERS: Should they be required to return the loot?

GRETCHEN MORGENSON: Yes. Why not? Claw that back. But does anybody ask for that? No.

BILL MOYERS: You were here a year and a half ago. Remember that? But did you have clues then that this whole thing was going to become unraveled?

GRETCHEN MORGENSON: The problem is that this is a de-leveraging. What we're going through now is we have to eliminate all the debt that has been amassed by not only the consumers with their credit cards, their mortgages, et cetera, their car loans, but also major corporations and Wall Street firms who were leveraging themselves, borrowing money to make their speculative bets. And now, those bets have gone bad, and they have to pay those debts back. You see, the assets shrink, but the debt doesn't. And so, you have to pay that debt back. And that's a difficult thing to do.

But we still, the AIG bailout proves that we don't know how bad things are at these firms. The idea that AIG could fail over a weekend, and where the government can't go through its books in an orderly fashion to see what it's worth, but just has to throw money at it to make the problem go away, tells you we're not anywhere near this.

BILL MOYERS: Well, AIG and Lehman, they kept assuring investors everything was all right, assuring the public everything was all right. Were they lying?

FLOYD NORRIS: Well, I'm sure they believed it.

BILL MOYERS: You really think they did?

FLOYD NORRIS: I believe Lehman believed it. Lehman, consistently during this, has believed that the bottom was upon us.

So they were buying as this started down last year, taking advantage of what they believed to be a temporary ridiculous decline. And they never quite realized that they were wrong. The prices on many of these assets now probably are ridiculously low. But buying them on heavy leverage is risking if you're a little wrong, you can die. And that's what happened to Lehman.

GRETCHEN MORGENSON: Well, the problem is that now, everything in our financial markets is super-interconnected. And so, one failure has the potential to push over other dominos.

BILL MOYERS: But why AIG and not Lehman?

GRETCHEN MORGENSON: Because AIG was so enormous, it's almost a paradox. It's almost perverse. Lehman was not big enough in the derivatives market.

That has counterparties, where if you fail, then they might then push over another domino. Lehman was not large enough in those areas. AIG was enormous. AIG had those derivatives from European banks, which may have failed. And so, you see, it's a worldwide problem.

FLOYD NORRIS: To let AIG go under now would have created an awful lot of problems for an awful lot of other institutions. And the government doesn't have any way to know exactly who and how much. And they were scared. And they probably were right to be scared.

BILL MOYERS: Let me ask you about one telling anecdote, at least, telling to me. The Secretary of the Treasury, Paulson, calls the CEO of AIG and says, "You've got to go. Pack your bags and leave." That's usually a decision for a board of directors.

GRETCHEN MORGENSON: Well, you see, the problem is the government owns it now. With the $85 billion loan, they have taken over eighty percent of the company.

BILL MOYERS: They nationalized.

GRETCHEN MORGENSON: Okay. It's been nationalized.

So Paulson is the new chairman of the board. And he's saying you're gone, you're gone.

BILL MOYERS: You called this on your blog yesterday, "21st century socialism."

FLOYD NORRIS: That's right.

BILL MOYERS: How so?

FLOYD NORRIS: The government is nationalizing companies. They nationalized Fannie Mae and Freddie Mac. And that made a little bit of sense, since we'd always thought Fannie Mae and Freddie Mac had an implicit government guarantee, whatever that meant. And now they've nationalized AIG. They own eighty percent of the company. They have lent money to the company at very strict terms.

For this company to somehow pay that loan back will require amazing competence in managing things. And I don't think anybody expects them to ever do that. They're probably going to liquidate AIG. It amazes me. I'm not sure it was unnecessary, as I said. But I can only envision what the right wing would be saying if a liberal Democrat had decided to nationalize the biggest insurance company in America. I don't think you'd be hearing a lot of praise for it.

GRETCHEN MORGENSON: The ugly thing about this is this is privatizing gains and socializing losses. So when things are going well, the managements make out, the shareholders make out, the counterparties are fine. All the private sector people do well. But when something goes wrong, when decisions are made that turn out to be bad decisions, the U.S. taxpayer has to take on the problem.

And there's something very wrong about that. Because all of those people that made all that money are running off here into the distance with the money, carrying it in their bags. And the United States taxpayer is on the hook.

FLOYD NORRIS: But there's another aspect of that, which is the biggest risks were taken in the derivatives markets, and in the markets, what I call the shadow financial system. This is a completely unregulated financial system that grew up aside our fairly heavily regulated financial system. And the government decided it would not pay any attention to it, there was no need for regulation. Alan Greenspan was very adamant on that. He believed that the derivatives they were trading would shift the risk away from the banks he was supervising, and to institutions which could better withstand it.

But he had no facts to prove that. And it turns out a lot of it ended up at the banks, which is why the banks are in trouble. And a lot of it ended up other places. And the ability to shift the risk meant that more risk was taken.

BILL MOYERS: Here's what I don't understand about AIG. Now, you say it's been nationalized. And the company agreed to be nationalized, in effect, because it didn't have the cash that it needed, right? Didn't have the cash.

FLOYD NORRIS: Right.

BILL MOYERS: So it had to go to the government. Well, why were there no banks, or no group of banks that had the cash for AIG? Why did they have to come to you and me and the other taxpayers?

GRETCHEN MORGENSON: Well, right about now, banks are also in a very difficult spot with their capital. They, too, have absorbed enormous losses from mortgage-related securities, commercial real estate. They, too, are facing capital crunches. And so, they need to shore up their capital base themselves.

FLOYD NORRIS: But I think they could have done it if they'd had confidence that AIG was a good candidate for a bailout.

BILL MOYERS: And why didn't they have that confidence?

FLOYD NORRIS: Apparently, when they went through the books.

BILL MOYERS: They, the government? The banks?

FLOYD NORRIS: Both.

BILL MOYERS: How does this compare to the last big scandal like this, in which, after the savings and loan industry imploded, the taxpayer had to come riding to the rescue with billions of dollars to clean up the mess. Is this in any way comparable to that?

GRETCHEN MORGENSON: This is worse than that I think, Bill. Because, for instance, it's way more complicated. The S&L crisis was largely commercial real estate, and also multi-family homes. This crisis right now is single homes, one by one by one by one. Very difficult to buy up all those assets and then sell, them, and besides which, it is monumentally bigger.

FLOYD NORRIS: But one of the interesting things that's going to be happening is the government now is going to have to decide for an awful lot of homeowners, do we kick you out of your house? Fannie and Freddie have guaranteed, and therefore, effectively own, many, many billion dollars worth of mortgages.

GRETCHEN MORGENSON: Trillions.

FLOYD NORRIS: Trillions, yes. And it will be up to them to decide, do we restructure this mortgage, do we give you a concession, or do we tell you to go away? The FDIC, which has taken over IndyMac, which was a large, irresponsible lender, is making those decisions right now on mortgages issued by IndyMac that IndyMac still owned.

So, yeah, it's similar to the S&L crisis. It's also similar, the S&L crisis, of course, became immensely larger because the government, principally the Congress, found ways to postpone it. They changed rules of accounting so that people wouldn't have to recognize losses, and they could earn their way out of the situation. Well, you know, surprise. They simply lost their way into a bigger problem.

And there is a great temptation to do that now. We're seeing lots of pressure to relax accounting rules for banks, so they won't have to 'fess up, that they're underwater. And maybe, somehow, they'll be above water if we give them some time. And maybe they will be, and maybe there will be a little farther under.

BILL MOYERS: I don't know two reporters who've tried harder to understand this. But let me ask you to take off your journalist hat for a moment. You both obviously have some pension or retirement plan at the NEW YORK TIMES. Are you scared?

GRETCHEN MORGENSON: I'm very, I'm actually sick about it. I wouldn't say I'm scared. But I'm kind of distraught at it, just because, not for myself, but for all the people out there who worked very hard, worked two jobs, trying to make ends meet, wanted to buy a house, got ripped off by some lender. I mean, you know, call me a bleeding heart. But I'm sorry. These people didn't understand what they were up against.

FLOYD NORRIS: You know, one of the trends over my lifetime is that people have been forced to take more and more risk. The, when I was young, most people had pension plans that worked. They, of course, had Social Security. Those pension plans said, we'll pay you so many dollars a month.

Those kind of pension plans are vanishing. Instead, people were forced into 401ks. And they had to decide what investments to make. So we are more dependent on the state of the financial markets, this generation is, than most of our parents ever could dream of being.

BILL MOYERS: Are you scared?

FLOYD NORRIS: I'm worried, yes. This is completely unprecedented in my lifetime. I'm fascinated. Things have happened that I didn't see coming and would have dismissed as unlikely. It was only a few months ago that I had Wall Street CEOs complaining to me that their stock prices were so low because the press was mean to them, and we didn't appreciate what wonderful business strategies they had. And, you know, if they were cheap then, boy, they're cheap now.

I'm worried about it. At the moment, Secretary Paulson is clearly scrambling. But that's to be expected.

You know, we don't fix the roof during the hurricane. We just try to deal with the winds. And once it's over, we can discuss how the roof should be built.

BILL MOYERS: Next Friday night is the first debate between the presidential candidates. Think a moment, and if you had the option to ask the first question on this issue, what would you ask?

GRETCHEN MORGENSON: I'd like to know just what John McCain has in mind when he talks about reforming Wall Street. Because I think those are very easy words to throw out there, and people might respond to them. Because, of course, we all know that there is something broken and there is something that needs reforming. But just exactly how is he going do that?

FLOYD NORRIS: I'd like to hear the same thing. I would hope the candidates would avoid the easy denunciations of the greedy, rich Wall Streeters who are destroying the country, which we've heard from both of them. Because that doesn't tell anything about what you're going to do about it.

BILL MOYERS: Neither Obama nor McCain have any real economic experience. And both are now talking like reformers. "Let's reform Wall Street," McCain said this week, after 24 hours earlier, saying that he didn't think the taxpayers should bail out AIG. He changed his mind. Obama has been looking for that populist voice that he had back in March of this year, before he got the nomination, when he was talking about Wall Street greed. But both of them are now talking about reform. What's the first thing that either one of them could do as president, if elected, that would convince you hard-boiled reporters who have been studying this a lot longer than the presidential or vice-presidential candidates, what's the first thing they could do to convince you that they're serious about this?

GRETCHEN MORGENSON: I would like to see them put some very tough cops on the beat at the SEC, the Securities and Exchange Commission, in the bank regulatory units. I would like to see, and I don't care if they come from, you know, government. I want to see them with a CV that looks like they're willing to take on the status quo and stand up to pressure and power.

FLOYD NORRIS: One of the interesting things is that you've had people at any number of government agencies in recent years, who did not believe in the function of the government agency. And you know, I agree with Gretchen. They need to put in some people who will be vigilant. They also need to put in some people who are smart enough to avoid the simple clichés of economics.

BILL MOYERS: Do you think it's true that this crisis today is the result of a sustained ideological push, to let the markets do what they want and get the government out of the way?

GRETCHEN MORGENSON: I think that the free market idea, the free market sort of constant mantra that it would bail everybody out, or it would operate in such a smooth fashion you don't need the government, was absolutely behind, you know, the last ten to fifteen years of what we've seen. And I think that we now seriously need to question that. And I'm very glad that if this crisis does anything, it will question that. In fact I feel like we're kind of lurching from problem to problem, lurching from bailout to bailout. I just feel we're shooting from the hip.

BILL MOYERS: Floyd Norris and Gretchen Morgenson, thank you so much for being with me on the Journal and talking about these issues.

FLOYD NORRIS: Thank you.

GRETCHEN MORGENSON: Thanks, Bill.

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BILL MOYERS: If you read only one book on the route to this financial meltdown, I recommend this one: BAD MONEY: RECKLESS FINANCE, FAILED POLITICS, AND THE GLOBAL CRISIS OF AMERICAN CAPITALISM. The author, Kevin Phillips, has a history of being way ahead of the curve. As a young man working for Richard Nixon, he wrote THE EMERGING REPUBLICAN MAJORITY, a book that uncannily predicted how the GOP would regain power in Washington. Kevin Phillips saw our current crisis coming a long time ago. And in one book of historical insight after another, laid out the clues he was tracking. As recently as last spring in the AMERICAN PROSPECT magazine, Phillips wrote that what he thought was about to happen would be "unusual and potentially tragic."

In the preface of his book, he has written that these things usually come to fruition in August and September. And sure enough, here we are coping in September with the effects of bad money. Kevin, it's good to see you again.

KEVIN PHILLIPS: Nice to be here.

BILL MOYERS: Is there any consolation in being right when the conditions are so bad?

KEVIN PHILLIPS: Well, I guess there is in one narrow, little niche. But I do have the feeling that this is going to be a big one, that I hate to use the term "innings." But let's say I don't think we're too far into the ballgame. I think we have more of a ballgame to go than we've had. So, yes, I think it's going to be a real problem.

BILL MOYERS: In a ballgame, there are referees. There are umpires. Who are the referees now? Who are the umpires in this critical game?

KEVIN PHILLIPS: Well, in a sense, I think some of the umpires are investors. Some are people overseas who wonder what they have to think of the United States. Do they want to keep investing here? Do they want to support the dollar? Do they believe in the government here and know what it's doing?

But Americans, ordinary Americans don't have much of a role in this partly I think because they don't really know the dimensions of what's involved here. This is the denouement of the 25-year debt buildup which was undertaken mostly by the financial sector putting themselves on steroids to get bigger and bigger and bigger. And we've finally gotten to the point where the bubble isn't sustainable anymore but a lot of Wall Street is dedicated to minimizing the spattering of the bubble, so to speak.

BILL MOYERS: Give me a quick definition of "bad money."

KEVIN PHILLIPS: Well, "bad money" has a triple connotation. The first is "bad money" in the sense of bad capitalism drives out good capitalism.

BILL MOYERS: That's sort of a historical-

KEVIN PHILLIPS: That's right. We've had-

BILL MOYERS: I don't understand why it is. But-

KEVIN PHILLIPS: Well, because you have to compete with sleaze. Get a little more sleaze in your own operations. And you look at all these lies, these deceptions, these frauds that have been going on. But, I mean, there aren't too many people that would say back two or three years ago that the way to prosper more was to do less of the cheating. You had to do what the others were doing. And that's the way these things — it was true in the Twenties. It's been true in plenty of other bubbles. You have to do it. So just the question of what's been bubbling here and the hugeness of the problem hasn't been revealed to people.

BILL MOYERS: You say it's the greatest story never told.

KEVIN PHILLIPS: Well, the greatest story never told in several senses. The first sense and when I do bad money, it's bad capitalism and bad money in the sense of the dollar and bad money in the sense of bad dog, bad Wall Street. But what's here that doesn't get the attention is the United States in the last 20 years undertook an enormous transformation of itself with no attention paid. And what it means is and what makes all this so frightening is the country is at risk because of the size of the financial sector that has never been graded on its competence and behavior in any serious way. They are the economy at this point. And we are now seeing what happens when a 20 to 21 percent of GDP financial sector starts to come unglued.

BILL MOYERS: But there are people, Kevin, who disagree with us, who say that this financial industry has created great wealth for America in the last 25 years.

KEVIN PHILLIPS: Oh, it's created great wealth for a small slice of America. But if you go back and we remember the manufacturing heyday, the auto workers in Michigan had fishing cabins up on the lake. And the middle class had been fattened by the rise of the blue-collar middle class. Well, there's no rising blue-collar middle class now. The middle class is shrinking.

The pie in a financial economy goes to the one or two percent — or even less- that have capital skills and education. We have never had so much polarization and wealth disparity and just groaning wealth right at the top of ladder as we have now under finance.

BILL MOYERS: So how is it that, as you write in the book, the financial sector has hijacked the American economy? You used that term.

KEVIN PHILLIPS: I use the term. And without using a whole bunch of numbers, let me try to put it this way. You had-

BILL MOYERS: The numbers are there in chapter two.

KEVIN PHILLIPS: The numbers are there in chapter two. You had essentially a financial sector that, let's say, was sort of neck and neck with manufacturing back in the late 1980s. But they got control in a lot of ways in the agenda. Finance has been bailed out. I mean, everybody thinks this is horrible now what we're seeing in terms of bailouts. Even a lot of the people who do it think it's bad.

This has been going on since the beginning of the 1980s. Finance has been preferred as the sector that got government support. Manufacturing slides, nobody helps. Finance has a problem, Federal Reserve to the rescue. Treasury to the rescue. Subsidies this, that, and other.

So bit by bit, they got bigger. And the other reason they got bigger was because this became a country that was further and further in debt. Consumerism was just pushed to the nth degree. People were given the sense that they had to buy everything and they had to borrow to do it increasingly.

But we've seen the central component of the rise of the financial sector is the rise of the debt industry. Mortgage, credit cards, all these gimmicks that Wall Street sells-- just all kinds of products. And, of course, the products are laying an egg all over the world right now.

BILL MOYERS: You're very hard in here on Alan Greenspan's tenure at the Fed.

KEVIN PHILLIPS: Well, I know Alan from the Republican campaign back in 1968. He was always a very scholarly, data-driven guy. But I think, for some reason or other, his chairmanship will be remembered as turn on the spigots.

BILL MOYERS: Turn on the spigots?

KEVIN PHILLIPS: Turn on the spigots. He started in 1987 with a crash that was a wicked one in one day in 1987. And he turned on the spigots. And they had the huge growth of the tech bubble in the 1990s. And then right after the tech and the stock market bubble blew up in 2000, you had 9/11. So there was a need for more stimulus. And they ginned up the stimulus again hugely.

And the upshot is that during Greenspan's tenure from 1987 to 2006, what they call total credit market debt in the United States quadrupled, quadrupled from about $11 trillion up to $44, $45, $46 trillion. And finance got the great bulk of it. And Greenspan would do nothing to disturb finance.

He wouldn't puncture a bubble. He wouldn't crack down on the exotic mortgages. He really wouldn't do much of anything except give obscure speeches in which, you know, he mumbled the different directions so nobody would know what he meant. But basically he gave finance what they wanted.

BILL MOYERS: And you write also that during this period the Clinton Administration aided and abetted this kind of speculation. Bill Clinton's economic advisor, Bob Rubin, who later became Secretary of Treasury — wanting to fuel this, right?

KEVIN PHILLIPS: It's been a bipartisan phenomenon. You can go back to the 1980s and say Reagan and George Bush, Sr., got a bubble started. Clinton got in and got an even bigger bubble going. And then George W. Bush with the biggest bubble of all. But it's not that the Clintonites didn't play. They did. Bob Rubin as Secretary of the Treasury — I mean, if he was a Hindu and he was being reincarnated, he'd come back as a pail because this guy bailed out everything you can imagine. They had the Mexican loan bailout. They had the long-term capital management bailout, the Russian Southeast Asian currency bailouts.

BILL MOYERS: All of which, however, kept them from coming into this economy, into our economy, coming to our continent.

KEVIN PHILLIPS: Well, except that a lot of the liquidity they created and the momentum and the borrowed money produced the implosion of the bubble in 2000. And a lot of what was imploding was the $2.5 trillion in new debt that was tied to energy and telecommunications, that's Enron, WorldCom, and Global Crossing. So there was a lot more of a bubble blown up there.

Rubin was also central — Democrats more than Republicans in a lot of ways with the Clinton Administration — in getting rid of Glass Stiegel, was the old restriction that the banks couldn't tie up with brokerage firms and insurance companies. Well, basically after they made their reform led by Clinton and by Bob Rubin, you had like four-color linguini here in a bowl. It's all mixed up together.

BILL MOYERS: So you have it — for this disaster has bipartisan parentage.

KEVIN PHILLIPS: Absolutely.

BILL MOYERS: But yet you say it's come to an end. You say there'll be no pretense any longer that the financial system is supreme.

KEVIN PHILLIPS: Oh, there may be a pretense in some quarters. I mean, obviously people who were doing the bailouts are saying how important it is that we don't rock or endanger the financial system. Some would say to the contrary that the best thing we could do would be to put its failings out there and let the making cure it.

I don't expect that to be the prevailing view. We've had 25 years of what I call financial mercantilism, which is the government aiding and pushing and bailing out the financial sector. It's not going to change. But I do think finance is going to lose its control over the economy in the sense that the public is going to be so angry they're going to insist on more regulation.

And you can see that both presidential contenders are now talking somewhat more regulation and anger at finance. So I think that'll crimp their style a little bit. But I'm afraid that the, you know, the horse is way out of the barn.

BILL MOYERS: But as we speak, central banks are pouring billions of dollars into the global economy. Is this a palliative or is this a panacea?

KEVIN PHILLIPS: Oh, I think it's a tricky game. In one respect, they want to make a lot of money available to make it easier to get lending unfrozen. The second thing they want to do is support the dollar, which is under enormous pressure now because people say it's not a store house of anything. If you want to keep your money safe, put it in gold. So they're worried about the huge rise that gold had in this week.

So I think what we're looking at here is an attempt really like a drunk will feel better and get over his hangover better sometimes just by having more liquor. And I think what we're seeing with the actions of the Federal Reserve Board is the people who are the arsonists, the people who pumped it all up, who blew up the bubble are now racing to show up in firemen's hats and say, "We're gonna solve it. We're gonna take care of all this. Oh, and by the way, we're gonna keep pumping in the gasoline that we pumped in before that made a good flame." But, you know, nobody knows that.

BILL MOYERS: Are you suggesting that the best thing to do is let the house burn down and build it over again?

KEVIN PHILLIPS: I would say, first of all, you never should have blown the bubble this way. If we could invent a time machine and go back and cure it that would be the best economics of all. Having blown it up, I think the case is that they should have accepted more of the tough medicine beginning last year and not tried to rescue every stray tentacle of the financial octopus-

BILL MOYERS: But they didn't. We don't have a time-

KEVIN PHILLIPS: They didn't. No.

BILL MOYERS: So here we are. Where are we?

KEVIN PHILLIPS: Where we are, in my opinion, is about halfway through. Halfway through the serious part.

BILL MOYERS: Halfway to the bottom?

KEVIN PHILLIPS: It depends what you use in terms of bottom. I mean, in some ways, real estate prices were lower in 1936, '37 than they were in 1929 or '30. So I'm not sure exactly what you use as the measurement, real estate, the stock market. But it's a package which Americans have to understand is going to be awful. We're probably going to wind up nationally losing 20 to 30 percent of the average value of homes.

The stock market will — right now it's in the middle 10,000s. The people who were nervous but not super bears expect that the Dow will go back down into the 9,000s. But what people have to remember is that in 2000 the Dow was 11,700. If you take off where it's lost since then and you adjust for inflation, you're looking at a 30 to 40 percent decline. So houses are matched in a way by what's happening in stocks.

BILL MOYERS: So we're all going to be poor? Well, not all-

KEVIN PHILLIPS: Well, we're not all going to be poor because there are people in Wall Street who've used all this new technology basically to bet the other way. I mean, one of the things that finance can do now, it can bet on anything. It's like Las Vegas merged with insurance and real estate people. And they have figured out new ways to gamble. And they can gamble on how many people in Ohio are going to lose their shirt.

BILL MOYERS: So who do you trust anymore? I mean, you write in your book that the most worrisome thing is the extent of official understatement and misstatement, the preference for minimizing how many problems there are and how interconnected they are.

KEVIN PHILLIPS: Well, just to give you an example of how many there are, Alan Greenspan has finally decided to admit, you know, this may be one of those once-a-century biggies. Well, what makes it fascinating is that I sometimes use the description "seven sharks." There are seven sharks in the tank with the economy.

And the first is financialization because we're so dependent on this industry that's sort of half lost its marbles. The second is that you have this huge buildup of debt, absolutely unprecedented anywhere in the world. The third is you've now got home prices collapsing. The fourth is you've got global commodity inflation building up.

The fifth is you've got flawed and deceptive government economics statistics. The sixth is that you've got what they call peak oil where the world is, to some extent, running out of oil. So it's not just commodity inflation, it's a shortage of oil. And then the last thing is the collapsing dollar. Now, whenever you get this sort of package in one decade, you got a big one. And when Greenspan says it's a once a century, I think it's another variation but on a par with the Thirties.

BILL MOYERS: What do you think when you hear John McCain and Secretary Paulson say that the fundamentals, however, are solid?

KEVIN PHILLIPS: Well, John McCain once said he didn't know anything about economics. And half the time what he says, you know, proves that on a day-by-day basis. I don't think we have a sound economy at all. Not remotely at this point. I mean, there are, like, ten yardsticks I could use. Paulson is your typical Treasury Secretary guy that has to deal with it. And everybody knows he has to exaggerate. He has to say all the Hoover type stuff about how strong the economy is and the recession's going to be over in three months and that sort of stuff. I don't really credit these people very much. But, frankly, I don't credit the Democrats either.

BILL MOYERS: No, I was going to say Obama's trademark rhetoric of inspiration seems to desert him when he talks about economic affairs.

KEVIN PHILLIPS: He doesn't seem to have anything very specific to say. That's part of the problem. A second problem is, for me at least, you know, just as I can't believe that John McCain ever wanted to get his economic advice from Phil Gramm. I mean, Phil Gramm, a former Texas Senator, appalling. He and his wife were known as Mr. and Mrs. Enron because they were so flagrant, that's McCain.

But then you've got Obama with Bob Rubin and he doesn't have any problem with the hedge fund types. I mean, one of the Chicago people was a major financer of his. He gets a guy to pick his vice-president. Turns out to be somebody who was part of the Fannie and Freddie mess.

So I don't exactly see Obama as this fellow riding in on a horse who represents all kinds of reformism. It's an important thing probably to have to change from the Republicans but I don't see that he is free of the ties to finance and Democratic Party financial types.

BILL MOYERS: I've known you a long time. Are you reaching the point where you're leaving yourself and us despairing?

KEVIN PHILLIPS: Well, I'm not despairing because one of the things, as you know, when you get to be more or less our age, you've got grandchildren you can feel young with. But I'm sick of Washington. It really deserves the fact that 81 percent or 85 percent of the people think we're on the wrong track. I mean, we are on the wrong track. I wish I could say that there's a blueprint that would get us back on the right track. But my sense of histories previous goes to the one or two percent leading world economic power is you don't get back on the right track.

BILL MOYERS: So what happens?

KEVIN PHILLIPS: You go through a painful adjustment process. The British were absolutely top dog in the world in 1914. Two world wars and 35 years later, they were having, after World War II, they were having food rationing, the pound sterling crashed, dukes were giving guided tours of their castles because they couldn't afford to maintain them otherwise. Doesn't take long. And I'm afraid the United States is coming right into that period which marks a couple of decades coming up that are going to be very difficult for America.

BILL MOYERS: You wrote in that AMERICAN PROSPECT piece that some people, particularly in the reform community and among progressives, see this as a great opportunity for returning to the New Deal regulatory period instigated by Franklin Roosevelt in the pits of the Depression. You don't think that's happening.

KEVIN PHILLIPS: Well, I mean, there's several difficulties here. First of all, at this point, what you've got are the Democrats are the party right at this point that's getting most of the financial money. When Franklin D. Roosevelt won in 1932, we know he wasn't getting most of the financial money.

The second thing is I don't think we're more than partway through. The Democrats think it's going to be another 1933, they get in there, they can do all the New Deal stuff. My feeling is that they're coming in halfway and they're going to have to make hard decisions that are going to eat the Democratic coalition like a bologna sandwich. They're going to start civil wars-

BILL MOYERS: How come? What do you mean?

KEVIN PHILLIPS: Well, if you're going to bail out Wall Street while you're saying oh, the Social Security recipients, maybe they don't even need that money. A lot of people in the financial community basically want to push Social Security on some sort of voluntary basis and needs test it and get rid of it. Now, a lot of Democrats in the labor movement are very nervous about Obama. They put out press releases talking about Rubin-nomics because they see that the flesh of the Democratic Party carries a lunchbox. But the new soul of the Democratic Party wears a pinstripe suit.

BILL MOYERS: And the Republicans, what do they do?

KEVIN PHILLIPS: Well, they're-

BILL MOYERS: More of the same? I mean-

KEVIN PHILLIPS: Well, different flavors. I can't imagine anything worse than having another four years of George W. Bush. I think he's probably the biggest disaster at the worst period of time that we could ever have a disaster in modern history. But could the Republicans be different and better? Oddly enough, I think they might have a small bit of integrity as opposition people, whereas subordinate to Bush and all the people that control national Republican politics, the Republicans were a waste of time.

But, for example, Senator Grassley of Iowa was ranking Republican on the Senate Finance Committee. He opposed the Fannie/Freddie Bill and said it was a payoff to Wall Street and K Street. That's the lobbyists in Washington. You now have the Senator of Alabama, Shelby, who's the ranking Republican on Senate Banking, totally opposed anymore bailouts. We've got to let the markets do it. Well, the National Republican Party doesn't believe that for one minute.

BILL MOYERS: Because they get their money from the same people.

KEVIN PHILLIPS: That's right. The same money goes to the Democrats.

BILL MOYERS: Right.

KEVIN PHILLIPS: But what these people develop a bit more of a sense of ordinary Americans and live up to some of your 4th of July speeches if they don't have a Republican White House, yes, I think they — some of them might be helpful in talking about how the Democrats just want to move in and get the money so that, you know, they can get the bigger checks.

BILL MOYERS: So we at least finally have an election about something, don't we? I mean, with the Fed and the economy at the heart of the debate now?

KEVIN PHILLIPS: The people who have the connections with the lobbies and the big donors have absolutely no problem with all these bailouts and rescues. But they don't dare admit it because who's rescuing the laid off worker? Nobody's rescuing them. The fact that the Democrats don't want to talk about what they're going to do if they get the chance, that's dishonesty. But the Republican Party is thoroughly dishonest in the same way.

BILL MOYERS: But we are going to have a new president in January, no matter how despairing people may be about that. What is the first thing you would find convincing if he did it to meet this meltdown, this issue, this crisis?

KEVIN PHILLIPS: Well, I guess I would without talking out of school particularly, Obama told me one time he read some of my books. So I would be very interested and impressed if he in January started to say something has really gone wrong in this country. And I'm not sure that I or anybody else can turn it around. But we borrowed so much money.

We've let this Las Vegas version of what used to be ordinary banks in our ordinary hometowns go berserk. Our currency is having enormous problems. People are losing their homes. We've got to face up to what our problems are and talk about how this happened. Who did it? Why? Who made the money?

Well, I think if he were to start talking about I'd take him seriously. But I think half of Washington would have a problem in their stomach needing quick relief, let me put it that way. Cause you don't rock that boat. You pretend that it's a sound economy. And if it's not sound, it's nothing that the old Democratic elixir can't fix, you know? Old New Deal in a bottle. We'll have a couple of swigs and you'll be happy again. I don't expect him to level.

BILL MOYERS: But is it conceivable to you that a John McCain might have gotten the message now to see what's at stake in the presidency that he would hold if he is elected and that he might actually turn out to be a reformer?

KEVIN PHILLIPS: Well, I think there's some element there in contrast to what you've sort of osmose at the Harvard Law School, what you osmose in a naval family I think would be much less sycophancy toward Wall Street and the money crowd. So I think McCain has that. On the other hand, he doesn't have any knowledge. Anybody who thought that Phil Gramm was somebody who could instruct you in fairness to ordinary people and your — this is the guy, "Nation of Whiners" remember Phil.

BILL MOYERS: Yeah.

KEVIN PHILLIPS: So I'm very dubious. I think part of McCain would probably feel like his father and grandfather, the naval officers. But, you know, he's a Republican. He'd have a Republican package.

BILL MOYERS: The book is BAD MONEY: RECKLESS FINANCE, FAILED POLITICS, AND THE GLOBAL CRISIS OF AMERICAN CAPITALISM. And as I said at the beginning of this interview, if you have to read one book, this is the one to do it. Kevin Phillips, thanks very much for being with me.

KEVIN PHILLIPS: Good to see you.

BILL MOYERS: From our offices here in New York, we look out on the tall gleaming skyscrapers that are cathedrals of wealth and power — the Olympus ruled by the gods of finance, the temples of the mighty, the holy of holies, whose priests guard the sacred texts of salvation containing the secrets of sub-prime lending and derivatives as mysterious and elusive as the grail itself.

This last couple of weeks, ordinary mortals below could almost hear the ripcords of golden parachutes being pulled as the divinities on high prepared for soft, safe landings. All this while tossing their workers into the purgatory of unemployment, like sacrificial lambs. Yes, the billionaires who fed during the fat years of speculation are long gone, to their yachts and offshore islands.

During the last five years of his tenure as CEO of Lehman Brothers, Richard Fuld's total take was $354 million. The current chairman of Merrill Lynch, who's been on the job just nine months, pocketed a $15 million signing bonus. His predecessor, Stan O'Neal, retired with a package valued at $161 million after the company reported an 8 billion dollar loss in a single quarter. And remember Bear Stearns chairman James Cayne? After the company collapsed and was up for sale at bargain prices, he sold his stake for more than $60 million. And the former heads of Fannie Mae and Freddie Mac, the gods who failed, are fighting to keep severance packages of close to $24 million combined on top of the millions in salary each earned last year while slaughtering the golden calf. As it is written in the gospel according to me first, when the going gets tough, the tough get going.

But let's change our metaphor for a moment. Let's go to our sports desk. Because if religion is no longer the soul of capitalism, we have to look somewhere else to understand this new gilded age. And there it is, just a few miles north of Wall Street, the "House that Ruth Built". Babe Ruth, the Sultan of Swat, who ruled Yankee Stadium and sired generations of princes after him: DiMaggio and Gehrig, Mantle, Maris, and Jackson. Yankee Stadium, as fabled a place to Americans as Ilium was to the Greeks.

But believe it or not, this Sunday — weather permitting — the Yankees will play their last game here. The stadium's being demolished, to be replaced next year with a brand new one. What a history to disappear down the memory hole.

On opening day, in 1923, New York Governor Al Smith threw out the first pitch and John Philip Sousa led a big brass band playing his famous marches. It was the roaring Twenties, when the money flowed like bootleg whiskey, the pride before the fall. The year after the market crashed, as the Great Depression began, Babe Ruth was taking home $80,000 a year, more than the President of the United States, Herbert Hoover. "Why not?" Ruth asked "I had a better year than he did."

Yankee star Alex Rodriguez had a better year than both of them. This season, A-Rod is making $28 million. Just part of an annual Yankee payroll of $200 million-plus, the richest in baseball. Their owner, George Steinbrenner, is one of the country's richest tycoons, among the Forbes 400. But when it came to paying for the new pleasure dome costing $1.3 billion, the millionaires on the field and King Midas in the skybox came up with some razzle-dazzle plays to finance their wealth machine. Tax-free bonds, requiring ordinary citizens to subsidize the construction, and hundreds of millions more for new parking garages, a train station and parks. Those parks, by the way, will supposedly replace the ones seized by the city to make room for the new stadium. The little league games that used to flourish on sandlots just outside the old ball park have been moved miles away, sent down to the minors on a long road trip.

That's okay, you may think, there will be plenty of room for the tax-paying public to come root, root, root for the home team — even the coliseum in ancient Rome had bleachers, for the commoners. But in fact there will be 5,000 fewer seats in the new stands.

And while the Yankees reportedly have promised that half of what's left will cost $45 apiece or less, those seats that used to cost $250, right behind the dugout, will cost you $850. And if you want to be near home plate, you'll have to cough up $2,500...per game.

Meanwhile, there will be more luxury suites and party rooms where the fat cats gather, safely removed from the sweaty masses. Corporations and wealthy individuals will be able to rent the luxury suites for anywhere from $600,000 to $850,000 tax deductible dollars a year, assuming they haven't filed for bankruptcy this week.

GEORGE STEINBRENNER: "We are all here today to celebrate the new Yankee Stadium. It's a pleasure to give it to you people. That's what we're doing. This is for you people."

BILL MOYERS: Why aren't the fans and tax payers giving the Yankees a Bronx Cheer? They are. But city officials rolled over them while making sure local politicians stay in the line up. The pols are getting their own luxury suite at the new stadium for free and first shot at buying the best available seats.

And so this Sunday evening we will bid farewell to dear old Yankee Stadium, and await the new colossus to rise from its ruins. It will cast its majestic shadow across one of the country's poorest neighborhoods, whose residents will watch from the outside as suburban drivers avail themselves of 9,000 new or refurbished parking spaces. Never mind all the exhaust, even though in this part of town respiratory disease is already so high they call it "asthma alley."

Not that the well-to-do in the infield seats will have to hear that wheezing. They'll have access to a private club, a private entrance and a private elevator. Totems of this Gilded Age. Let the games begin.

That's it for the Journal. Don't forget to check out our website at pbs.org. And remember the first presidential debate is coming up and we want to hear what questions you'd like to ask the candidates. Be in touch with us at pbs.org. I'm Bill Moyers.

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