 And so I decided to read up on what the history of the debtor's prison because he's in Britain. He had the confluence of Obama's play of the merchant class found himself in debtor's prison and he's slowly gone on temple here before what would later be called insight, was that if you could bring a debtor and his predators before a magistrate and have the debtor something that was meant to be, is that what I call the double standards of debtorly were present at the very event. So if you fast forward, you realize that the double standards of debtorly are Chapter 11 and shift their creditors, the workers, as they are unsecured creditors. Whereas if you're an airline, you have to lean on your aircraft. And so as part of the back of the settlement, they were able to unload on the history of the politics of debt, the politics in the United States. How is it that something that has been so utterly discredited is still conventional? It explains why the Europeans doesn't explain totally European Europe as its own very complicated story. But it's part of the explanation for why the Europeans, in the second phase of the crisis which began in the fall of 2009, did not come to the rescue of Greece even though the failure to rescue Greece and the willingness to let financial speculators have their way with Greece set in motion a chain reaction where the sovereign debt of one EU member country after another was vulnerable to attack in a fashion that has now put Europe into negative growth for six consecutive quarters and the threats to destroy the Euro and the entire European project. Now, what everybody, almost everybody, forgets, and you can read about this in the book, is that in the first phase of the crisis, which really began in 2007 with the failure of hedge funds that had been heavily unsubprime, the European Union performed rather well. The European Central Bank was ahead of the curve in providing liquidity to money markets so that there would not be contagion from these insolvent hedge funds to the rest of the financial system. And in London's summit, there was a pledge of a trillion dollars worth of stimulus. And it wasn't until, and so in 2008, 2009, Europe is coming out of the recession. It's recovering from the financial shock. And then George Papandreou was elected Prime Minister of Greece in the fall of 2009, and he revealed that the predecessor government had fiddled with its books and that the real debt ratio in Greece was not 3% of GDP as reported, was 12% of GDP. And that was a signal for speculators to start attacking Greek sovereign debt. Now, at that point, the European Central Bank could have said, sorry, guys, we're gonna take the other side of those bets. We're not gonna let you take down this country. But because of the privacy of finance and the view on the part of Germany and other countries that the Greeks needed to be punished, the ECB didn't do that. So a crisis that could have been headed off for a few tens of billions of euros has now consumed about 170 billion euros and has spread to Spain and Portugal and Italy and maybe France. And to talk to the leaders of the European Commission and top officials in Germany and other neoliberals, you would think that what set off this crisis was rigid labor markets. It's as if the fact that there was a financial collapse has dropped into the memory hole. And supposedly rigid labor markets caused this and therefore the cure is a good stiff dose of austerity to force workers to live in a more spot labor market, lower their wages, as if Cain should never live, as if you could somehow deflate your way to recover it in a situation where you have high unemployment, declining wages, declining personal power. It's a very interesting intricate history. Part of the story I think is Germany's misunderstanding of its own enlightened self-interest. One of the stories I tell in the book is the difference in the historical experience of Germany after World War I and after World War II. After World War I, as most of you know, the Allies extracted horrific reparations demands in Germany that destroyed the ability of Germany to recover after the war. It led to the hyperinflation of 1923. It led indirectly to Hitler. And after World War II, the Allies initially tried to pursue something of the very same policy. But what intervened in 1947 was the Cold War. And so Allied policy towards Germany turned around 180 degrees. And in 1948, as part of currency reform and a recovery program, the Allies agreed to write off 93% of the Hitler era debt. Hitler, in making war on the rest of Europe, had run up the largest debt to GDP ratio in the history of the world, 675%. And in 1948, the German economy was operated monetarily with an amalgam of barter and occupation marks and leftover Reich marks from the Hitler era. And most debts, private debts as well as public debts was still denominated in Hitler era Reich marks. And so by writing off 93%, the Allies agreed that only the banks would get some credits that could be converted to the new Deutschmarks because the banks needed capital. But the rest of this debt would be written off. And so in 1952, the German debt to GDP ratio, West German, the Federal Republic of Germany, was 12%. At a time when Britain, who had won the war, was struggling with the debt ratio over 200%. And you might think that Germany, in bringing to heel the rest of Europe, might remember this act of macroeconomic mercy, but it has also dropped into the National Memory Hall and aid to other European countries is so unpopular in Germany that neither the Social Democrats nor the Greens have a policy that is all that different from that of Mrs. Merkel because they're afraid of the electorate. Now the other interesting story, and I don't want to get into too much detail on Europe because it's a very complicated story and I want you to find the book. But the other interesting history here is the collapse of the Democratic left as an opposition party and the capture of the instruments of the European Union by the forces of neoliberalism. If you go back to the history of the founding of the EU, which was the European Economic Community of Rome after 1956, there was a balance between strong nation states that had the power to pursue full employment and build a welfare state and regulate capitalism on the one hand and an emerging customs union that was the market part of the bargain. And this bargain between a strong state and an institution that was creating a stronger market with a lot of pulling and hauling was the bargain until the Maastricht Treaty. And then the whole thing tilted in favor of neoliberalism and in favor of the market. And so the European community, which a lot of American conservatives used to criticize as being Fortress Europe, a kind of ecartiste or a social democratic bastion, has really become an instrument of neoliberalism. And this reached its zenith with the election of Merkel in 2005 where the predecessor of social democratic government had run up deficits in violation of the limits of the Maastricht Treaty, which had been Germany's idea. And Merkel was determined to use whatever leverage he had to force countries to respect these limits. And what gave her the leverage to do that was the financial crisis, because the financial crisis meant that other countries, particularly the lower countries, needed the support of the European Central Bank. Now, the timing was totally perverse. As Keynes wrote, the time to pursue budgetary surpluses is when the economy is good. It's not when the economy is in depression. So Europe is a complicated story of misperceived national interests and dysfunctional institutions and a kind of roach motel Europe where you can get in, which is a Europe where you can get in, which you can't get out, countries that might have chosen to devalue, had they not been part of the Eurozone, there's no provision for exiting the Euro. There's much less excuse, I think, at the United States of America, where even with all of the dysfunctional parts and splits, we don't have the institutional complexity of the European Union where it is so clear that austerity has failed, and yet it's the failure that lives on. It has failed everywhere except in the policy discourse in Washington, D.C. And P. Peterson has spent a billion dollars, has set up dozens and dozens of front groups to create the impression that everybody in America is clamoring for austerity and events keep disproving this view of how the economy works, but he's had a few important converts like President Obama and Max Baucus and a third of the Democrats in Congress and most of the Republicans. And so the idea that you can deflate your way of recovery is still conventional wisdom. And I think the reason for that is the same reason for why it's still conventional wisdom in Europe, namely the primacy of the finance. So if we are going to dislodge this and pursue sensible full employment policies, sensible recovery policies, we need to use the political process to dislodge that primacy. One other historical part of the book, and I'll close on this note, reminds us of what happened in the 1930s and the 1940s. And in many respects, the 40s are more important than the 30s. In the 30s, we got halfway out of the Depression, but of course it took World War II to get us all the way out of the Depression. World War II reminds, I mean, the 30s remind us that it is possible to be out of a recession and still be in a depression. The depression was over by 1934 in the sense of the definition that the NBER uses. We had positive economic growth, but we still had unemployment north of 12% for six more years because the economy had suffered such a deflationary shock. And I think it's time to stop using the terms for a recession in the sense that this is not a slightly worse or a much worse recession. It's a low-level depression. Well, what happened in World War II? World War II was the greatest unintended macroeconomic recovery program in the history of the world. Unemployment melted away from almost 13% before Pearl Harbor to 2% by June of 1942. Job training solved itself when you have a shortage of workers and you have factory jobs to fill. People got trained on the job. And even though half of the stuff that we built was built to be blown up, GDP was 48% larger by the end of 1945 than it was at the beginning of 1942. But the other thing that we did in the 30s and 40s was we repressed finance. We funded the war debt at very low interest rates. And in order that those very low interest rates not go to speculative purposes, we drastically limited what the financial industry could do. Carmen Reinhardt, who retrospectively got herself into trouble for an article that she wrote with Kim Rogoff four years ago now, wrote an article where she got her facts right, an obscure NBE art paper in which she pointed out that the real interest rate, the real inflation adjusted interest rate on bonds for the 25 year period after World War II was a negative 3% to 4%. And so you would think this would be horrible for the real economy, but as EPI knows better than anybody, this was the golden age of the real economy. The economy grew at 3.8% a year for a quarter century. The economy became more unequal. And I would argue it became more equal, not unequal. And grew so well, precisely because financial markets were repressed. And so those low interest rates could go to underwrite the growth of the real economy and not the feathered analysis of finance. So we need to learn both parts of the lessons of the 30s and the 40s, not just the macroeconomic stimulus lessons, but the importance of harnessing finance to serve the rest of the economy rather than to serve its own self-interest. And the risk now that is being hotly discussed at the Fed is that the very low interest rates that the Fed is using to keep the economy afloat at all in the face of fiscal headwind could be pumping up the next bubble. And when Bernanke called for low interest rates, his purpose was not to pump up the stock market. And yet one of the biggest forms of stimulus that we're getting is from a hyperactive stock market. And so the challenge is to get this money into the real economy and not to have it pump up the next financial bubble. Now for the most part, I will leave it to my distinguished commentators to talk about the politics of how we turn this around. But I want to close with this thought. Last week, Elizabeth Warren introduced as her first freestanding bill, a bill to lower the cost of student debt to basically the treasury borrowing rate. And it seems to me that there is a huge potential coal industry here of about 60 million people who are not just ideologically prospective allies, but whose lives are being stunted by the way student debt works. Yeah, about 37 people carrying student debt, 37 million people carrying student debt. You've got another 10 million who are either students or prospective students. And then you've got 10 or 15 million parents who colleges and universities who may be cosigners who are at risk of mortgaging their own retirement if they're kids to fall. That's a lot of people. It's mostly people in the prime of economic life that's being stunted. And I think a call to refinance all of the student debt and change the way we pay for college could be the entering wedge of a different consciousness and different politics on the whole subject of debt relief and austerity. So with that, I thank you for your attention. And I turn it over to our panel. Thank you. Sure. That's why we're here. We each have 10 minutes and I'll let my iPhone guide me. I want to talk about the politics and the economics of a policy measure that infuses all of our lives and that we really need a critical review of it here and let's start that critical review here. And that is the project of behavioral economists and the policies of financial literacy. So let's turn our heads around away from our household, concern or morality that we balance our checkbooks and we watch our credit cards. I pay cash for the book. I didn't put it on my American Express. And actually talk about that household finance in the broader light, in the broader light of this book because that's what got people into prison. So the last 20 years has been a sea change, has represented a sea change in the way that working families, middle class families have interacted with financial institutions. You used to go to the bank and your banker told you how much house you could afford. Now that conversation is completely different. They tell you what house to buy so they can make money. With this financial development, with this change of the relationship, households have completely changed their exposure to financial risk. And this change has been dealt with in the academy and in academics, I'm a professor. And the project is called Various Things. One is a body of social scientists who are looking at the culture of finance. That happens to be an NYU seminar this summer put on by some business professors, academic, I mean it's banking economists, economists of work for investment bankers and actually anthropologists. Look at this kind of culture of finance. Other scholars have called this line of inquiry the financialization of households, a term coined by a sociologist who looked at financial institutions of culture of finance called the financialization of households, Louis Calter in 1999. And another economist have called it The Varieties of Capitalism by David Soskis, Robin Blackburn. So this project really seeks to understand, as Bob does, how households are taking on more and more economic risk. Economic risk that was once managed by government through Keynesian macroeconomic policies and by employers through social insurance arrangements at work, pension plans, severance paid plans, even supplemental unemployment benefit plans. Congressional leadership and the presidency in Democratic and Republican administrations have really led the way for this exposure of risk to finance that households have taken on. They've led the way ideologically and they've led the way in real institutional legal changes. And this financialization is actually documented in this new book and the horrible consequences of it are also documented. So let's think about this. Households and workers are no longer the side of consumer demand, the side for which labor is supplied, or the side in which political action takes place of civic engagement. Households have become a major source of demand for financial products. They become the source of financial innovation. It used to, this is also happening at the same time that corporations are becoming net savers and households are becoming net debtors. Households have now accumulated trillions of dollars in debt and corporations have accumulated trillions of dollars of assets, they're sitting on a trillion dollars of cash. This has completely changed macroeconomic models in the academy. We've always modeled corporations as debtors, households as savers, and it's really dramatically changed economic policy makers. We have actually privatized Keynesian economics. We've let households be the source of economic stimulus by corporations and the government, our sources of austerity. The response to that exposure of household debt is financial literacy. So there's actually a great deal of money spent by financial institutions and by the Federal Reserve Bank. It's a big project of New York Fed and by the President himself to actually make households financially literate. The way I see it is to make households sort of more ready to accept this new role as demanders of financial innovation. And I've looked at the scholar of retirement funds and a scholar of how people deal with their 401ks and I've come to the conclusion that financial literacy is more dangerous than helpful. It's as if we're giving BB guns to people in the midst of a firefight against stealth bombers and bazookas. It actually gives people, lots of studies have shown, a false sense of confidence when they have, when they foray into the stock market. We see that people who say that they're confident about their ability to invest actually trade more. They spend more money on financial advisors and they get a lower rate of return. So the Obama administration's initiative for retirement security and debt which is to default people into individual retirement accounts and to default them into safe investment portfolios may actually do more harm than do good. It will put people into the most profitable area of the commercial bank which is the IRA. It puts people into the financial vehicle as probably the worst place to save your money. You are put into very high fee mutual funds and even though you intended to be illiquid, meant for your long term savings goals, you are forced into very liquid accounts. You're already losing money because you're forced into false liquidity and we're the only country on the planet that actually tax, that incents people through our tax code to put money into retirement accounts that can be withdrawn before you retire. We're the only country on the planet that's done that. So the IRA initiative by the Obama administration may do more harm than good but that may be the intent. It will leave people impoverished in retirement ready in the labor market for Ristas at age 70 and it will leave the political framework ready to blame the victim for being in that situation. The President Obama announced financial literacy month in the middle of the year of 2010 with this quote. A recent economic crisis, to say the least, was a result of both irresponsible action on Wall Street and everyday choices on Main Street. Already the causes of the financial crisis has been balanced Wall Street, Main Street. Why doesn't government have a critical role to playing protecting consumers by promoting financial literacy? We are each responsible for understanding basic concepts, how to balance a checkbook, safer a child's education, steer clear of deceptive financial products and plan for retirement and avoid a king-reading excessive debt. If only Main Street had done that, he says, President Obama, then we wouldn't be able to guess that we were. That's financial sedutions at one, if that's the framework for what caused the financial crisis. Behavioral economists, my colleagues, are very much codependence in this point of view. I'm talking about Robert Schiller at Yale, whose excellent book, Irrational Exuberance, actually talked about the problems in macroeconomic policy that relied on the stock market, followed very closely with a book that said that financial innovation would get us out of the mess. And then Richard Thaler at the University of Chicago, a regular contributor in the New York Times, who was actually lifted up this idea that we can solve big social problems with little tiny changes in design to financial products. That's called nudge economics. And if we just nudge people into households making the right decisions, then they will accumulate and be really good consumers of financial products. It's a false promise that we can actually solve these problems of economic insecurity, with small changes in pension design, like automatic enrollment in IRAs and automatic defaults of participation in diversified liquid assets. So what we need is a reality-based program to secure household economic life. That's my cue, I'm almost done. So there we are, that we escape our debtor's prison. We need to, as Bob has called for, ride off the debt. We now have a vehicle with warrants of bill to support, ride off the debt. But we also need smart macroeconomic policy to really challenge this financial primacy. We need to actually uplift old programs such as Social Security. We need to improve newish programs like the National Health Insurance. And we need not-for-profit options for people to save their money, like the initiatives in various states to let private workers save money through state pension funds. The bill passed in California. There are six other states that may open up the state retirement plans to let people have an alternative to formal or case and libraries. Yeah, I'm sure of that. So it's sort of challenging for me to comment on Bob's book. So very much agree with what Bob was saying about the world. No, the mic's on. The mic's on. It's very close. All right, sorry. How can you not talk loud? You can just shout at me if you can bring it up. You know, it's really challenging to comment on Bob's book because Bob and I, in various ways and in various circumstances, work closely through the period of the book prescribes. And a lot of our thoughts, I think we're thought together at various times. And so if you're looking for a trenchant critique of Bob's work, I'm probably the wrong person. But I'm really, I think this whole thing is so fascinating and so many different levels. I want to try to go at it in the spirit of what Bob, the way Bob's book was constructed, you know, with some history and culture with the front end and a really kind of detailed examination of contemporary political economy is the heart of the matter. Because I think, and I think this is what sort of, I'm trying to sort of capture the question Bob is asking, which is really the question of what do we do? Like we, I mean, in government society, what do we do and what do we think when someone, or more pertinently, everyone borrows money we can't pay back? Which can be unpacked a little bit and means that credit was supplied, Theresa points out, there were two sides of these transactions, credit was supplied on terms and with assumptions about economic life that were just totally wrong. And what happens when that happens and happens on a large scale, right? What happens on an individual scale? I mean, look, people make stupid decisions or people were fooled, conned on an individual level throughout the post-war era. And probably a personal tragedy's a curve and people did bad things and we had to just do usury laws and all that stuff. But what do we do when this happens on a societal or economy-wide basis? And what do we think about it? And I think Bob's book in a way starts with talking about how we think about it. And reference is some very long-running themes of human culture about sort of on the one hand, notions of kind of personal moral poverty, what constitutes responsible behavior, right? Of the kind that all of us, I'm sure, when we go home and deal with our children or parents or both at some level with here too, right? You know, don't over-extend yourself, pay your bills, you know, that kind of thing, right? That idea, which, you know, if you're wondering if that idea is a new idea, if you read it all in the literature of the 19th century, a literature of any kind, political literature, more religious literature, foundly kind of read through that whole 19th century Europe of America was the idea that this constitutes whether you're a good or a bad person, right? Whether you pay your debts, whether you manage your personal finances in a conservative and responsible way or whatever you don't. That set us up against a counter narrative, which was out there in European and American society, I can't comment on other societies, I don't know about them in this respect, but which was out there in European and American society from the early modern era on, that said that at least in certain circumstances, and maybe in all circumstances, it's just this idea, this very sort of simple set of ideas that at one level we all live by is neither an accurate description of the actual nature of economic life and of the decisions people make and of the moral implications of those decisions, nor is it a functional way to think about what to do from a public policy perspective when everybody borrows under family mistaken understandings, right? And what's that counter narrative? I just, as happened before, my son starred in a play this week, a production, a community theater production of the Life and Adventures of Nicholas Nicolli by Charles Dickens. Charles Dickens was one of the key figures in the counter narrative. His villains are all money lenders, but more. He might be one of them too. I suspect if he met a lot of lawyers, four money lenders, he wouldn't have liked them either. But his sense of money lending as an exploitative enterprise, deeply rooted sense, also was a too fond of school teachers. His sense of money lending as an exploitative enterprise, profound. And as part of the cultural backdrop, that gives us what became the predominant American cultural attitude during and just after the Depression. And I represent to you that I suspect, although I don't know all the details, that the construction of this cultural attitude was intentional and political. And the key American cultural document around this counter narrative about who's responsible, who isn't, is the Frank Capri movie It's a Wonderful Life in which it's really very clear in that movie that that movie represents it as speaking to a society that view foreclosing on people's homes is a fundamentally evil thing to do. And that type of culture was the dominant backdrop to the public policies that Bob referred to that distinguished the United States from the European countries in the 1930s and 1940s. And it was dominant a long time. I'll refer you to another movie that really captures this and captures it in a surprising way. In the movie Chinatown, which was made in the mid 1970s. So 40 years after those events. By the way, now we are as far away from Chinatown as Chinatown was from the time it was set, right? But in the movie Chinatown, Jack Nelson is sitting in the barber's chair and he is a private detective who entirely specializes in the adultery cases. And he's sitting in the barber's chair and those papers are just published. The fact is that it's fine on people. And the barber, and the guy sitting next to him, the guy sitting next to him says, you know, you're really a scumbag, you're a terrible person. And Jack Nicholson says, this is them and then who the hell are you? What do you do? And he says, I'm a banker. And Jack Nicholson says, so you foreclosed on anybody today? The point is that the movie audience in 1973 understood that that was the end of the argument. That was as terrible a person as Jack Nicholson had just been revealed to be, that he had just won. Now, obviously we live in a very different society where those narratives contested with each other during the 2007 to 2009 period, right? And the bank was won. Now, history doesn't stop, but we have to admit that that is what happened. And the question is, what kind of answer are we giving now? Have we given now? To the question of what do you do when everybody borrows under fundamentally mistaken and perhaps manipulated terms? I think there's no way to understand the housing market during this period as anything other than that. That borrowers and ultimate borrowers and ultimate lenders, homeowners on the one hand, providers of capital into the subprime mortgage markets on the other, were both laboring under the illusion that the manufactured by the middlemen were getting a percentage of the action. What do we do when that has happened society-wide? And I just had the good fortune to come off and come to this, I meant from having a 45-minute conversation with a reporter about the Fed, and the Fed's response to these circumstances. And one of the Fed is to blame for the risk that I think Bob talked about, that the Fed's monetary policies might be something that didn't bubble right now. And it's impossible to answer that question or to understand where we stand in the United States without understanding that this is not a simple question, that there are in fact three separate strands of public policy that have reacted to this set of circumstances. And then more about it, but these are the three fundamental monetary policy, fiscal policy, and financial regulatory policy. And they are all kind of about the same thing. And that different actors have behaved really differently and have been constrained by the other actors in response to this question of what do we do about debt? And that fiscal policy, and I'll just summarize it this way, in the Great Depression as Bob said, I'm done, so I'm gonna let you guys think about 90 seconds more. Like in the Great Depression, we had ultimately expansionary fiscal policy, monetary policy, very dramatically expansionary fiscal policy. We had debt forgiveness in a variety of ways, right? And we restructured the banks. On punitive terms, frankly, the bank invested. That's what we did. And it worked fairly well, particularly when the fiscal engine really got going in the war. What's happened in the last five years, though, is this. That we have managed the financial sector primarily to ensure that debts were paid as contracted, which has killed household spending and has killed commercial credit. So then we start off behind the curve in a huge way because of those decisions. And they are the consequence of the political power of finance and the intellectual power of failed ideas in the context of the political power of finance. We then engaged in what Tim Geithner in a different context referred when he was discussing Japan in a congressional oversight panel hearing. We have met engaged in what Tim Geithner referred to as inconsistent fiscal policy. Meaning that he had the stimulus which was a neo-nudeal fiscal policy. Little underpowered, but that's what it was. And then since then, we've engaged in austerity. These two facts have then been the constraints under which the Fed has executed monetary policy. Now the Fed is partly to blame for the financial policy, because the Fed is perhaps the major regulator, but only very partly to blame. Against the backdrop of these two things, the Fed has sought through monetary policy to mitigate these two problems. Whether the Fed understands this consciously or not, that's what the Fed has been doing. And the problem is the Fed only has a limited set of tools and those tools bring with them potentially bad consequences in terms of both of revived asset bubbles and in terms of inequality, which is what Elizabeth Warren's student loan bill was attempting to point out and to suggest a way of remedy. Now that's, I think, the scorecard. The question of what is necessary to change this is I would hope that it has been my belief throughout this period that these questions remain always open. But I think we have to recognize that in the last round, which was my point about history and culture, in the last round, these efforts took decades to bring to fruition, right? That before the United States got it right in the new deal, there were multiple episodes of getting it wrong. The most savage in this country was the 1890s. There were multiple episodes of getting it wrong. Now, can we afford, how many of these episodes can we afford? I don't know, but I will close by pointing out something about Germany. People misunderstand their histories in profound ways and sometimes they're encouraged to misunderstand their history. I was recently courtesy of our friends from the Frieder-Gabertschrift and some of them are with us this evening, except, no, P.M. Gartner and her colleagues. I was recently at a meeting on this subject in Germany and it was reminded by one of the German participants in the meeting that hyperinflation did not actually produce fascism. The hyperinflation preceded fascism by about 10 years in the middle of which was a period of relative prosperity and relative political stability in Germany. What the approximate economic policy cause of Hitler's rise to power was economic policies and German conservative chancellor named Brunning. And what Brunning's economic policies were austerity. Now, there were reasons in post-war Germany why the story was told differently. Because it had to do with establishing the legitimacy of the Christian democratic governments in Germany after the war. There were reasons why a different history embedded itself. But the danger of the fact that some of this didn't take a long time is that in the short run, we may not be able to afford the political consequences of debtors' prison. It certainly turned out that the Germans in the early part of the century and a lot of other people could not afford the political consequences of these policies. And it was the United States, and we need to remember as Americans that it was the United States's renunciation of debtors' prison that gave birth to the American Central. Well, I so enjoyed my fellow panelists' comments. I've just been kind of drifting away, listening to how interesting them are, both Damon and Teresa's comments have been. I really wish you guys would write both of them down. Like Bob, go ahead and stop. Yeah, go ahead and stop. Because that's really, this is all, I find this to be all very important. I read Bob's book, or tried to read as many of his books as he can, he writes more books than I read, so it's a problem. But I think that this book has an essential primer for anyone who reads the newspaper. That's the way I think. You can't really understand what's going on in economic or political reporting or political economy, the business page, without absorbing this book. You'll understand, you're understanding what you're reading will be very incomplete. By the way, it's an odd book in the sense that it's a book about debt and debt forgiveness, and it doesn't have a chapter 11. It's an upside chapter 10. Ah, oh, good. You also heard Bob and Damon warn about deflating your way to recovery under austerity. I will only point out that we learned this morning that the consumer price index has now been negative for two months in a row. That doesn't mean we're in some deflationary spiral, the core index when you take out food and energy has been flat, not minus, but year over year inflation's been around 1%. That is a symbol of economy that is not growing nearly quickly enough. I think it's, I'm happy to say, I think, that my comments are quite different than the ones you've heard so far. It's a rich book, and I'm focusing on something quite different. I'm gonna say a little bit more about a theme of this book, which is I think, which hasn't come out in the conversation so much, I don't think. Some of my comments here to provoke Bob to respond as well, so I'm gonna pose some questions to you, Bob, is what's the difference between good debt and bad debt? I think book at some level is a tale of two debts. When you criticize austerity at some level, you're saying we should become more indebted in terms of sovereign or public debt. But of course, there's a very deep criticism of financial debt that runs throughout the book and through comments you've heard so far. Summarizing some of Bob's arguments, good debt does a couple of things. It provides investment capital, and that's not just, and here I'm talking about private debt or financial markets, that when I was in grad school, it seems funny now, but the conventional approach to teaching about financial markets is that's a device in advanced economies to allocate excess savings to its most productive use. That's why we have financial markets. That doesn't really describe financial markets very well today. But in Bob's book, when he talks about getting back to what others have called more boring banking, I think that's what he's thinking of in part, channeling savings to productive investment channels, and then in terms of public debt, of course, Bob is a very deep Keynesian, of setting private slumps, especially when you're in the kind of liquidity trap we're in right now, where you have excess savings throughout the world that aren't being channeled to productive investments, regardless of the rate of interest, but the rate of interest is essentially zero on at least treasury bills, and can't really go lower. So that's good debt. Good debt provides investment capital, channeled savings to productive places, allocate savings efficiently, and offsets of private slumps in a Keynesian sense. Bad debt, actually, that's somewhat less clear. It's a little bit harder to describe what bad debt is. Justice, it's not always easy to describe what a bubble is, or if we're in a bubble. The financial, you know, Bob invades in the book, as I'm sure we all agree, against excessive leverage, but there is sort of this, I think there's a bit of a, it's kind of like a bad debt, well, we'll know it when we see it. And Bob talks about speculation and bubbles, but again, markets are engaged in speculation every day. So I tried to think about, as I was reading the book and preparing my comments today, how do we recognize bad debt? You know, it's obvious when it gets to a point, I think as it did in 2007, 2008, how do we recognize it for them? One of the things Bob says is, well, if you have the right regulatory oversight regime in place, you know, your best bet is to not get there in the first place, but I'm not optimistic that we can do that any time soon. By the way, there's a little editorial comment here, Bob. I would never call, at least on television, which is where I spend too much of my life, I would never label financial regulation or financial oversight, financial repression, which is what Bob called it in the book, which is a very cutnerian way to put it, because it cuts right to what he wants to say. So I'm saying there's rhetoric and then there's cutnerian speech. Not always the same. So how do we discern bad debt, particularly in financial markets? Well, to me, the key has to do with recognizing that risk has become underpriced. Because when you underpriced risk, that's when you inflate bonds, and that's when you have a structural, I think, failing in your financial markets that in place above. So I'd like to say a few words about things that I think contribute to the underpricing, mispricing of risk. I'm still enough of an economist to believe that once you get prices wrong in an economy, a lot of things go back. Particularly the price of risk. So non-transparency, okay? That's one of the things that really leads to underpricing of risk. And that has to do with shadow banking and derivatives that are twice derived from whatever asset they're taking their value from. So the fact that you had CEOs of banks admitting, I don't understand what these incidents are. That should have been a clue that we were into non-transparency. A minute. Now, securitization, I wrote down with a question mark because I don't think securitization is necessarily a bad thing. But I think there are, but I think securitization in a climate where credit-rated agencies don't do their jobs is a very bad thing. So that's another way that risk gets underpriced. When there's too much distance between lenders and borrowers, Bob cites the acronym IBGYBG. That's what one broker says to another. I'll be gone, you'll be gone. Before the ultimate holder of this loan turns out to be insolvent. It won't be our problem. So the distance between securitization is a workable tool of financial markets that can help to increase liquidity in helpful ways, but only if credit-rating agencies do their jobs and lenders have skin in the game and get away from IBGYBG. Now, here's another one. A Federal Reserve that's too aggressive and keeps rates too low for too long. Now, I don't think this is a problem and Bob doesn't either. And he talks about it a little bit in the book. But it certainly is an accusation, as all of the, I think some of the panelists have already said today, that that's another thing that leads up. And that's probably, in fact, if you ask the typical sort of Washington finance reporter, what do you think is the main thing that leads to underpriced states saying the Federal Reserve is too aggressive? So I'd like Bob maybe to say a few words about that, if he would. And finally, this is one that is near and dear to the hearts of myself and my colleagues at EPI, Larry, and I mean in particular, is wage stagnation and incremental quality. There are some very compelling models, and some of them now have a little bit of empirical meat on their bones, I'm working on this myself, that are looking for linkages and connections between income inequality, wage stagnation, sticky poverty rates, all the stuff that EPI has put on the map, and in a climate of very cheap credit. Leading to situations where for, and this is part of the book as well, leading to situations where the only way for middle class and lower, lower, moderate income families to get ahead is through our own, because the paychecks aren't getting them there. That's also a formula for underpriced risk and bubbles. Okay, I'm almost done, I want to say two more things. Switching gears, you did different, slightly different topic, but related. I really, having read this book and debated a lot of my friends and talked about these issues with a lot of my friends here, I think one of the problems that we have right now, in my view, maybe this isn't a problem, I'd be interested to get what others have to say. We have been so anti-austerity for very good reasons and so critical of these Austarians with their hair on fire about the debt and the deficit, the Pete Peterson's of the world, who deserve all of our criticism and more. That people, I think people can legitimately ask those of us on the left who are taking this position, the debtors' prison view of the world, well, do deficits matter at all? Why should we care at all about deficits and debt? And, you know, partly as a card-carrying employee at the Center on Budget and Policy Parities, who I would argue are worried about this more than some other groups on our side of the spectrum, I think it's a good question. And I would like to hear people like Bob Cutner think about at what point should we worry about deficits and debt? Not at all, a little bit. When, why? I have two things I'd say about it. One, here are the two reasons why I am a very, I think, pretty dovish person on these things. I think of myself as a cyclical dove and a structural hawk, but very much a cyclical dove. Why am I at all hawky in the structural sense for two reasons? One is because if you have a larger body of debt, your financial accounts are simply more vulnerable to interest rates fights. So that's just the fact. One, part two is political. I actually think that if your debt to GDP ratio is quote, too high, whatever that means. And in the eyes of the people who are going to be sitting in power the next time a recession comes along, if it's too high, it will make it that much harder to bring it up in one of the Keynesian measures that you need to. So one reason you want to get your debt to GDP ratio coming down when a bonafide recovery is solidly underway is because you want a perch where it can come up again when you hit your next recession. OK, last point. This was just something that I know about, couldn't possibly have meant because it just jumped out of me. I wanted to just make sure that he and I are on the same page here. But it's relevant to everything we've been talking about. At one point in the book, Bob talks about he's criticizing a Chicago economist for being against being too deregulatory regarding financial markets. And he says, that's really Adam Smith applied to financial markets. And I wanted to be very clear. Adam Smith was actually very much in sync with much of what Bob talks about in debtor's prison. Smith and this gets, it's important here. I'm not just trying to be cute. Because Adam Smith is cited as the founder of capitalism cited by these rational expectations people who are behind so much of this regulation. That's not how he saw things at all. He was much more grounded in reality. There's a book I like very much. A great compliment to this book by John Cassidy, called How Markets Fail, he writes, Smith and his successors believed that the government had the duty to protect the public from financial swindles and speculative panics, which were both common in 18th and 19th century Britain. And Smith himself writes in The Wealth of Nations, and this is my instance I've done after this, such regulations, so regulating financial markets of the type that Bob calls repression, such regulations may no doubt be considered as in some respects a violation of natural liberty. But these exertions of the natural liberty of a few individuals which might endanger the security of the whole society are and ought to be restrained by the laws of all governments. The obligation of building party walls, that's like a firewall. The obligation of building firewalls in order to prevent the communication of a fire is a violation of natural liberty exactly of the same time that the regulators of the banking trade, which are here proposed. So Adam Smith saying, we need firewalls, we need banking regulation, and we shouldn't worry about the few individuals who squawk about their natural liberties. So I thought that was a good correction. Thank you, Jared. Let me just take, I'll do this in five minutes because I know folks who want to comment. Let me try to respond to Jared's very good comments. And I think the first response is in the spirit of Damon. How do you know the difference between good debt and bad debt? I think you have to look at an ex ante and ex post. Ex ante before the collapse. You need all kinds of constraints on irresponsible leverage and IVG, YBG scams and the kind of thing that Adam Smith was invading against. And then if that fails and you have a general collapse, the policy on debt relief after the fact needs to be completely different. That's not the time to go overboard on the kind of thing that Mrs. Merkel is imposing on Spain and Portugal and Greece. That's the time for debt relief. So moral hazard is a term that's thrown around by conservative. But in fact, the immoralists were mostly financiers. They were not low income people trying to use the community to reinvest them. Just to correct the record, financial repression is not my term. It's an obscure term that was popularized by of all people Reinhard Garogorov in their book in which they warned against financial repression. And I was arguing, tongue a little bit in cheek, quoting Reinhard Garogorov, signing another paper of Reinhard's that the great thing about the 40s and the 50s was that thanks to the regulatory scheme it invented in the New Deal, you had a lot of salutary financial repression in precisely the terms that Ken Rogov criticizes, meaning that you didn't have any of the kind of stuff that led to the financial collapse in 2008. And yet, capital for the real economy was highly plentiful. Well, I checked the spreadsheet. Before you go quoting Reinhard Garogorov. Second. I thought I'd check the spreadsheet before you go quoting Reinhard Garogorov. All right. That's just snarking. Right. Now, this brings me to the Federal Reserve. The Fed, including the Greenspan Fed, takes a lot of heat for pumping up bubbles with very cheap money. That's only half a fair criticism. The sweet spot is loose money and tight regulation. If you have loose money and tight regulation, the loose money doesn't pump up bubbles. It flows to the real economy. And on the question of, again, good debt and bad debt, I want to quote from one short passage in the book. Edward Chancellor, historian of speculation, once observed somewhat archvally, quote, the line separating speculation from investment is so thin that it has been said that speculation is the name given to a failed investment and investment is the name given to a successful speculation. That's not true. And Keynes was particularly eloquent on this. Three features differentiate speculation from productive investment. One is that speculation is typically done with borrowed money. You don't have your own skin in the game. Secondly, speculations are invariably short-term bets on market fluctuations, pumping down rather than long-term debts in the enterprise itself. And Keynes, quoting Keynes here, productive investment entails forecasting the prospective yield of assets over their whole life, while speculation is merely forecasting the psychology of the market. So I think there is a distinction between speculation and productive investment. There is a distinction between virtuous debt and bad debt. And again, picking up on a comment of Teresa's, what happened in the 30 years before the collapse? This is a phrase, I think, original to the British political time, was Colin Crouch. You had privatized Keynesianism, meaning that the burden of sustaining aggregate demand in the face of flat or declining wages was borne by the household borrowing against inflated assets. So your income might be lagging the cost of living, but for some reason that you didn't fully understand the value of your housing by group. And meanwhile, thanks to financial deregulation, your friendly lender was willing to give you a first mortgage, a second mortgage, and a third mortgage rebranded as a home equity line of credit. And so the ratio of consumer debt to consumer income went through the roof. And then when it collapsed, as it had to, it was all pro-ciprocal because lenders ran for cover and the borrowers couldn't service their debts, a lot of them lost their houses. Now the difference between privatized Keynesianism, which is the connection, by the way, between financial recklessness and financial deregulation and income inequality, right? Because if you had had rising real incomes, people would not have needed to borrow against their homes. The connection, the difference between that kind of pro-ciprocal privatized Keynesianism and genuine Keynesianism is that Keynesianism could be counter-ciprocal and needs to be counter-ciprocal. It needs to compensate for the collapse of demand in the private part of the economy. And I guess this brings me to Jared's last comment or a second to the last comment. Should we care about deficits at all? Well, we know from the rebuttal, the refutation of Reinhardt and Rogoff, that 90% GDP, a debt-to-GDP ratio, is not some kind of horrific turning point. We know from the World War II experience that 120% of GDP could be lived with and, in fact, ushered in a 25-year boom because a lot of that debt had gone to rebuild the productive capacity of the economy and the purchasing power of workers. We know from the experience of Europe after the war that debt ratios, even as high as 200% of GDP, did not prove to be disabled. So somewhere between where we are now and 200% of GDP starts becoming too high, but I completely agree with Jared's point, which is really Keynes's point, that the time to reduce the debt ratio is when the economy is prospering. And the post-war experience, by the way, at one, shows that, to a large extent, this takes care of itself. You actually can grow your way out of debt if the rate of growth is higher than the rate of new indebtedness, which was the case after World War II. So this is an argument in part about causality. Do you cut the debt and hope that through some alchemy of the confidence fairy that never turns out to be true, that restores business investment? I think a sensible person would say, well, all you're going to do is maybe have a reduced ratio at a much, much lower level of output. Or do you get growth back up, and then the real burden of the debt comes down, and the debt ratio comes down, which is the way we surmounted both the Great Depression and the debt incurred during the war. So I don't think there's any absolute number, I mean, Britain, during the period of its ascendancy. In the 19th century, it had a debt ratio of 200% GDP. It's partly a question of whether you're financing internally or externally. It's partly a function of savings rates. There's no hard and fast rule, but we do know that the time to get the debt ratio down is not when the economy is at a low level of depression. So with that, Heidi, do you want to chair it or? Do we have? Sure. We just have a couple of minutes left, so we'll take it to the top. It's probably just one minute. Help what? Yeah. I'm Caroline Poplin. You all know me except for Damon. My question, this is all very convincing. My question is how do we get back to the Democratic Party? 1890, it was very clear to ordinary people that it was the financiers who were causing the problem, similarly in 1935. But it isn't clear now. And a lot of people who represent the Democratic Party are talking about, as you said, they're talking about the debt. And lots of people are going along with that. They think that they don't care about Wall Street. They think the government is the enemy rather than the government is their friend. And Wall Street is the enemy, and they need their government if they want to do anything about Wall Street. The politicians have been bought, but what do we do? I have three very short, sweet ideas, and then I know Damon has been thinking about this one. The great deal, one. I think the fact that the administration, Caroline might disagree on this, embraced a backdoor cut in Social Security, has set off a very useful fire storm that can be the entering wedge that just makes the metaphor. It's set off a very useful fire storm that can perhaps stimulate a larger reaction of backfire against austerity policy. The backlash against Social Security starts the conversation, and maybe we can get Democrats in Congress not only to say, sorry, Mr. President, we're not going to back a deal that includes a tampering with a CPI, and nor are we going to back a grand bargain at all. Secondly, I think Elizabeth Warren's kind of stuff on student debt to build a coalition. Thirdly, I think we need to elect a progressive president. And thank God for Jared. I mean, Jared was in a den of Ruben Estes. Jared was the progressive. But that doesn't mean Obama was a progressive. And we've had three senator-right Democratic presidents in a row, and Bob Ruben has run the whole table. The exception of Jared and Tim Geiger, who turned out to be a turncoat from Ruben's point of view, and other Gensler, not Geiger. The whole damn lot of them are fiscal austerity walks who are protégés of Bob Ruben, who had sinning through his own Wall Street in between their gates of government. And I think that's going to hesitate the Democratic Party back from. So you do it by pushback at the grassroots in Congress, and you do it by electing an actual progressive next time. I think a lot of us thought that might be Barack Obama. That was not who Barack Obama turned out to be. And I quote the historian, A.J. P. Taylor, who said of the revolutionary year, 1848, when all of the revolutions were crushed, it was a turning point of history, but history didn't turn. And I hope that's not the epitaph on 2008. I'll only say that this in response to Bob, that if there's so many issues you raise there, we're not going to get into them all right now. The only thing I'll say is that there were some people within the administration, with whom I worked, who were a very good staunch king. Christie Romer, Larry Summers, there was others, but consistently pushing for more in terms of Keynesian students. Not that we got it. I lost way more arguments than I won. But just one little question. I agree, by the way. And I take my hand off to Christie Romer. I think the virtuous Larry, who was the Keynesian, was overwhelmed by the vicious Larry, who was a student for Wall Street. We can argue about that on this. I'm just saying about this because I'll reference what you're thinking about this. Can you speak up? I'm sorry. I just want to say one thing about this. I didn't mean to understand the question that's being asked. And I want to pose it to you in this play. And this may be, this reflects what I'm coming from as Jared's experience of fighting these same battles in a different place. Now, it's the street. It's a long, it's a long, it's a long, a hundred yards. The, what is the National Democratic Party? What are we talking about? I can tell you that the Democratic Party, in my neighborhood, is one of them. What is the National Democratic Party? National Democratic Party, being best understood by a question that somebody asked in the 19th century, which was, why does a lot of capital hire labor rather than the other way around? National Democratic Party is a network of people whose job it is to intermediate between essentially voters whose common characteristic, not exclusively, but largely, is that they work for a living. And money, which is necessary to buy TV ads. This mediation is not a luxury or an ideological delusion. It's a true reality of winning an election. Now, it's always been, before there was TV, this was the reality of what a National Political Party was, to some degree. Now, the terms, who's hiring whom? What the terms of the intermediation are are very different now than what they were, say, in the 1960s and 1970s, not alone in the 1940s. And understand that the Democratic Party used to be probably about mediating between a northern labor union based white ethnic constituency and the racist white South, and the oligarchy that ran the red and the racist white South. That used to be one of the immediate functions of the party. And today, I suppose you could say that there's something kind of related to that that goes on between working class constituency and a kind of constituency based on an enlightenment, sort of an enlightenment security of social issues. There's something like that goes on there, very different and moral quality. But the real thing is about the money. It's about taking the constituency and the money and coordinating it. Now, a strategy for doing something about this, which is a prerequisite to doing things like electing a progressive president, whether or not you think we've done that already or not, I'm not going to pine on that. But it's a prerequisite to doing things like that, to have a strategy for how to change the nature of that bargain. Now, the most interesting thing, in my opinion, and I'm, of course, totally biased on this, the most interesting thing, in my opinion, about this has occurred in the last few years is Elizabeth Warren's Senate race. Because Elizabeth got the second most money ever raised in the Senate, with effectively taking very, very little difference. And by the way, the first most was Hillary Clinton who was running a shadow presidential election. So it's not really comfortable. Thank you. First, I wanted to say how much I appreciate, and particularly the historical perspective. Because the historic perspective says, we've been through these things, again, there's a difference, et cetera. But I'd like to challenge you, and I think that you walk up to the line, and you won't cross it. And I think that conversation becomes sterile in a way. And it's one of the reasons that liberals and progressives are being pumped. And I use that term pumped, because Obama feels, and the Democratic Party feels, no threat at giving us rhetoric, while at the same time, just in our face, doing the opposite of what had been since Carter and Clinton. What I would say to you is this, you ask the question, why would smart people, really smart people, espouse a theory that has repeatedly shown itself not to work? So you use the word not to work. And then you use the term not successful. But once you don't ask, you ask that question, if people are that smart, just go to the next step. Maybe they are successful. Maybe it does work. But you stop yourself from asking the true intention, not the espoused intention, but you won't challenge the true intention, or I think the true intention. The second thing is I think that you limit yourself, or you don't discuss any alternatives to money creation beyond Keynes, beyond Keynes. It is possible to create money into the economy without creating debt. It's possible to spend money into the economy, but that's never considered. The only consideration is creating money through debt. And the third point I wanna make is that you never question the true motives and relationship of the Federal Reserve to our nation. And you talk about their stuff, their conundrum, it doesn't work. You don't look at or you don't address to me. When they stimulate and create money, who does that money go to? It doesn't go into the real economy. It goes into the casino economy. So it seems to me that you're playing a game where somebody is giving you rules by which you can't be effective or you can't win, because you play the game nicely and buy those rules. So let us respond, yeah. Did you, Tracy, wanna, I just don't wanna. Well, I just have a little story that actually maybe shift where the locus of change will be. I was in the Inland Empire with the Industrial Areas Foundation, a community organization. It was the same organization that Obama was in. The three to four million people were low-wage workers, and it was mainly with church groups and some teachers. And they got up to this point, and maybe across the line, they had economic analysis of their debtors' prison. It was mainly 45% of the houses were at war, highest concentration. And they each had stories of what their families had to go through when they foreclosed or about ready to foreclose. And then they took stock, and by the end of the day, they were about ready to organize a strike. That they were all going to organize, they were all going to default. And many of them had moral problems, even against the teachings of their boy scouts, of their families. And they are, it was just a couple weeks ago, they're up to that line. And it may be crossing that line that changes things. And not, you won't wait for the president to come up for some other place. So sorry. No, no, I just wanna quickly say, and unfortunately I have to get to my next appointment, I have consistently in writings, almost daily, stress something that I'm not sure if it's come out period yet at all, but I think it's consistent with what you're saying. A lot of people are calling for austerity, not because they care less about the budget deficit or the debt or its alleged impact on other economic variables with the interest rate, but because they just use it as a cudgel to whack away at the size of government. That's completely clear to me. And if you look at, say, the budget of the House Republicans, you know what you actually see there is if interestingly, this would resonate with Bob, I think, not in a good way, but President Obama had over the 10-year budget window, President Obama has a lot more in entitlement cuts than Paul Ryan does. So the recognition that Austarians are gunning for the size of government is one that I've made explicitly before and I'm sure is shared by everyone on this panel. Yeah, I would certainly in my writings, I've crossed all three lines that you mentioned. One, I think these policies are deliberate from the point of view of Wall Street care successes. They're not failures. They weaken government, they weaken regulation, they weaken taxation, they weaken the power workers. So they're huge successes. I think secondly, the federal reserve, for most of its life, has been the instrument of bankers and even over NANKE, I think, is a little bit more open. In fact, helicopter Ben, as he's known, crops his money on Wall Street. All of the Fed infusions of money go through banks and bail out banks and the Fed, through its emergency power, could buy securities of student debt, it could buy securities to refinance housing, but there is not the constituency within the Fed among the Board of Governors to do that right now. And by having a very accommodated monetary policy, the Fed, in effect, creates money without creating debt. It just puts the money in the wrong places. So I'm perfectly happy to step over your three bright lines. Do we have time, or is this it? I think this is it, we're the panelists that are about to apply. I would just like to say that's gonna be a big protest on Monday, 1 p.m. Freedom Plaza. The bank's too big to fail, that has to end. We're going to the Department of Justice, we have to stop banks too big to fail. Monday, 1 p.m. Freedom Plaza. Thank you very much for the panelists tonight. Thank you very much. I don't need books outside, if anybody else is finding books.