Guest Post: Galbraith Says Administration’s Sole Goal is to Restore System of 5 or 10 Years Ago, But Confidence Won’t be Restored Unless Fraud Which Caused the Crash is Investigated

By George Washington of Washington’s Blog.

As I have repeatedly written, the largest U.S. banks have repeatedly gone bankrupt due to wild speculation which was blessed by the Fed, and then the government covered up their bankruptcy.

Indeed, the New York Times writes today about one of the too big to fails:

Over the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup.

But prominent economist James Galbraith recently told Bill Moyers:

JAMES GALBRAITH: The overwhelming emphasis, in the administration’s program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago. That is to say, we’re back to a world in which Wall Street and the major banks are leading, and setting the path–

BILL MOYERS: To restore what was.

JAMES GALBRAITH: To restore what was–

BILL MOYERS: Instead of reform what is.

JAMES GALBRAITH: And I don’t think what was can be restored.

BILL MOYERS: And you say that’s the objective of the administration’s policies? Geithner, Bernanke, Summers, the President himself?

JAMES GALBRAITH: To the extent that there’s a defined objective, that’s it, yes. I think in the immediate day-to-day work, they’ve largely been preoccupied with keeping the existing system from collapsing. And the government is powerful. It has substantially succeeded at that, but you really have to think about, do you want to have a financial sector dominated by a small number of very large institutions, very difficult to manage, practically impossible to regulate, and ruled by, essentially, the same people and the same culture that caused the crisis in the first place.

In other words – as I have repeatedly written – the administration’s talk of reform is just talk … the boys are just trying to restore the status quo.

Galbraith also pointed out – as many other experts have – that confidence in the system cannot be restored unless the fraud which led to the crash is investigated:

JAMES GALBRAITH: That’s the point about the crisis, is that it could have been prevented. The people in authority two, three, five years ago, knew how to prevent it. They chose not to act, because they were getting a political and an economic benefit out of the speculative explosion that was occurring.

BILL MOYERS: You mean, the people who could have prevented the dam from breaking were too busy fishing above it, and reaping big rewards to want to fix the crack in it?

JAMES GALBRAITH: Sure. The Federal Reserve, in particular, knew that the dam was cracking. Alan Greenspan, I think, almost surely knew this, and chose to wait until it had washed away.


JAMES GALBRAITH: They let all of this run, because they were getting a superficially stronger economy out of it. The ownership society, all that was a scam, basically, designed to lure people who could never afford these mortgages into accepting them. And yes, I think they, any rational person, certainly people in the industry, knew that this was not going to last. There was a little industry code, I’ve learned, IBGYBG. “I’ll be gone. You’ll be gone.”



BILL MOYERS: The industry being the securities industry?

JAMES GALBRAITH: Well, and the mortgage originators and the bankers, generally.

BILL MOYERS: But that’s criminal fraud.

JAMES GALBRAITH: Oh sure. There was a huge amount of it. The Bush administration did not actively investigate the fraud that they knew, that the FBI knew was occurring, from 2004 onward. And there will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that’s a process which needs to get underway.

As the New York Times article notes, the lack of transparency is ongoing, even as between different branches of government:

Representative Lloyd Doggett, a Texas Democrat on the House Ways and Means Committee, recently registered unease about the government’s guarantee of $300 billion in Citigroup assets and how effectively the Treasury secretary, Timothy F. Geithner, was monitoring the bank.

“We cannot know the full scope of the taxpayers’ potential cost from these hasty guarantees,” Mr. Doggett said last week in an e-mail message. “Inexplicably, Secretary Geithner appears unwilling to commit to conduct an analysis, despite my specific request to him in March. A critical and transparent examination of the response to the financial crisis is essential not only to learn from past mistakes, but also to prevent further erosion of the public’s trust in government.”

Mario Seccareccia – editor of the International Journal of Political Economy – points out:

The Great Crash of 1929 taught us that a modern monetary market economy is governed by confidence. As John Maynard Keynes put it, monetary relations and, more precisely, asset values, are held up by one’s belief in the future. Without it, the whole credit-driven economic system comes to a halt and economic agents scramble for cover by seeking to acquire liquidity.

While in a non commodity-based monetary system a central bank can quite easily supply liquidity in its role as lender of last resort, a central bank cannot single-handedly instill confidence in the future. When confidence is lost, monetary policy is impotent in building up asset values, which can only be sustained if people believe in future revenue arising from future production. The economy remains trapped in a state of paralysis in which everyone is seeking to remain liquid. History tells the tale: Excessive optimism prior to the Great Crash turned to hopelessness during the early 1930s.

Without a thorough investigation like the Pecora Commission, and without prosecuting those who are guilty, confidence and hope in the future will not be restored, consumer confidence will remain depressed, and we will remain in an economic slump.

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  1. Lavrenti Beria

    The Galbraith interview was interesting but it told little most of us haven’t known or suspected for some time now. When asked the critical question about whether a system as corrupt as ours could be reformed, however, Galbraith’s analytical skills seemed to go decidedly limp, almost as though to say what needed to be said – that reform is out off the question and that demonstations and strikes are our only meaningful recourse – might cost him his professorship, something which we simply cannot have, now can we? Here’s the question and the retort:

    BILL MOYERS: The perplexing question to me is whether or not you can reform a system that is so infiltrated by the money from the people who are benefiting from what’s going on, who have a vested interest, and use their money to promote that vested interest to make sure nothing changes.

    JAMES GALBRAITH: I think you can. I think the law is powerful. I think you cannot legalize financial fraud. You cannot fully conceal the tracks of financial fraud. You have to put the resources in to uncover it. You have to prosecute it. You have to give appropriate punishments, but we have a system, in this country, for doing that. It is a question of a decision to use the judicial resources that we have, to clean up the system.

    The law and the courts are the answer? I mean, really, what kind of legal cover do these vermin lack anyway? Why it’s precisely the protection of the legal system that these people have been able to count on! Galbraith’s academic chair at the University of Texas must exist in such rarified air that the fate of those defaulting on credit cards and mortgages seem as mere abstractions to him. How are the courts going to remedy the situation these folks face? I mean this country can’t even manage to try out-and-out torturers and war criminals, what are the courts going to do for those whose claims lack anything resembling the merit that these do? And this with nothing at all to say of how our justices get their appointments? Shame on you, James.

    1. Kevin de Bruxelles

      One only needs to consult Hobbes to see where the answer lies.

      In Leviathan, Hobbes contrasts two states for human society. The first being a state of nature which is described as perpetual war between individuals. The moral logic of the state of nature is that there is no right or wrong: “To this war of every man against every man, this is also consequent, that nothing can be unjust. The notion of right or wrong, justice and injustice have no place. Where there is no common power, there is no law: where there is no law, no injustices. Force and fraud, are in war the two cardinal virtues.” (13.13) And then Hobbes goes on to describe the moral logic of the state of nature: “And because the condition of man is a condition of war of every one against every one; in which case every one is governed by his own reason; and there is nothing he can make use of, that may not be a help unto him, in preserving his life against his enemies, it followeth, that in such a condition, every man has a right to every thing, even to another’s body. (14.4)

      In order to transcend the state of nature, men accede to a social contract with each other to submit to a sovereign and in the process establish a civil society. To Hobbes (later diminished by Locke) the sovereign is almost all powerful. His job is to keep the peace, to install laws and justice, and to coerce the population to live within the limits he sets. But the one of the few limiting factors on his subject’s duty to submit to the sovereign is “The obligation of subjects to the sovereign, is understood to last as long, and no longer, that the power lasteth, by which he is able to protect them. For the right men have by nature to protect themselves, when none else can protect them, can by no covenant be relinquished.” (21.21)

      What is clear is that in the United States, where the sovereign is the elected government, an elite segment of society, namely bankers and other extremely wealthy individuals, are playing by the old rules, the rules of the state of nature, and they are grabbing as much of the pie as they can. All this while the sovereign has at best lost the ability to resist this crime, or at worst, is actively complicit. But the vast majority of citizens are sitting by idly still thinking they live in a commonwealth with laws and justice.

      There are two ways out of this mess. Either the sovereign must start playing his role and start enforcing the law and justice for all, or alternatively the citizens must stop submitting to this sovereign, overthrow this system government, and start all over again to find a sovereign since living in a state of nature is not an option.

      Something along these lines should have been Galbraith’s answer but he didn’t have the courage to face the bleak reality we find ourselves in.


          The answer to your question is YES….! However, the American People broke the contract first….

          Best regards,


        2. Kevin de Bruxelles

          Wow, thanks for posting my comment on your blog. I tried to leave a comment over there but I it looks like I failed!

      1. Doug Terpstra

        Hobbes ‘state of nature’ echoes the dystopian nightmares of Ayn Rand (We the Living [Dead], Atlas Shrugged, and The Fountainhead)—Libertarian Darwinism on steroids. Tellingly, her submissive disciple, Alan Greenspan, nearly brought that hell to Earth, and Randianism is now enjoying a resurgence in the wake of the crisis. GQ has a good panning review of Rand and the Randroid cult at the following link:

        Indeed it seems we are on the threshold of revolution, hopefully peaceful, but post-Obama hope is waning. Government has clearly been captured, the bankster kleptocracy is in firm control, and we now have “taxation without representation”—legitimate grounds for patriotic revolt. Thus far, the propaganda mills have succeeded in their divide and conquer strategy to maintain power, but we are fast approaching a critical mass of recognition that the US government has lost its legitimacy. GW’s commentary and threads like this instill faith that all is not lost and a positive tipping point is near.

        1. Lavrenti Beria

          “Thus far, the propaganda mills have succeeded in their divide and conquer strategy to maintain power, but we are fast approaching a critical mass of recognition that the US government has lost its legitimacy.”

          Indeed. The fact that supposedly unbiased news programs such as PBS’s News Hour feature constructs such as the sterile Shields and Brooks reparte is itself symptomatic of the underlying pathology. Here, two views, supposedly alternative, are presented. One is clearly to consider these the entire range of opinion on any issue with questioning led by the mouse, Jim Lehrer. The entire thrust here is to showcase meaningless partisan advocacy while at the same time ignoring the more fundamentally presupposed comity that joins these two cretins at the hip. The effect is to strangle any truth that, in fact, the two are a unity and that anger respecting economic and political developments needs to be directed at them both simultaneously. The assertion of a Republican vs. Democrat division in such instances serves only to divert attention from the real culprit here which is this Republican/Democrat unity. And its most toxic success in recent times is to be seen in its ability to channel right side anti-system anger into “tea party” irrelevancies aimed solely at Obama. One day, the people will add 2 and 2 and its Katie bar the door.

  2. winterwarlock

    speed to disclosure is accelerating beyond expectations:

    It’s impossible to solve a problem by addressing symptoms.

    here’s the algorithm:

    natural selection – new families left alone to develop assets.
    end of secular bear to beginning of secular bull

    Family Law enabled – agency grown, credit extended, holding companies expanded to liquidate assets.
    secular bull to beginning of secular bear


    repeat until

    kids revolt in large numbers,
    develop quantum improvements. (YOU ARE HERE)

    Depression, record of History destroyed & re-written
    Family Law disabled.
    new developments rolled out.

    repeat entire procedure.

    Family LAw not only eliminates dissent; it also ensures that the cattle are programmed / bred for slaughter from the womb. If you haven’t noticed, they have been growing institutional childcare down to inception.

    As the articulator betwen environmental demand and human supply, new family formation is the self-adjusting mechanism of economics.

    They shorted the motor to run it backwards, and burned it out.

    The motor has to be replaced, and they obviously have no new motor. In the meantime, they are systematically liquidating all remaining assets, and the market-makers are priming the dead pump with their own funds (bull on low volume w a short squeeze).

  3. squanto

    Given our political system, those in power will always choose a quick fix over the hard, time-consuming work of a real solution. Hence Obama’s desperate attempt to reflate the status quo ante. In terms of willingness to resort to short-term expediency, Obama is not one iota different from Bush.

  4. gordon

    Though the post is primarily about the difficulties of reform, Prof. Galbraith’s comment that the Administration’s aim is to “… return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago…”
    directs us also to the Obama Administration’s outlook. That is interesting in itself, and also of course relevant to the reform issue.

    It has seemed to me now for a while that Pres. Obama’s whole political strategy has always been “back to Clinton”. That fits with Prof. Galbraith’s timeline of 5 or 10 years – more towards 10 than 5. For someone with such an outlook, the GFC is really an impossible distraction. As I recall, the Obama campaign avoided discussion of the growing crisis as long as possible, and on being elected the new Admin. showed no insight into the causes at all – and not even much interest. Policy has simply been directed at making the GFC “go away” so that the real agenda – a Clinton rerun – can be implemented.

    I think that Woodrow Wilson, on being elected just before WWI remarked that it would be a tragedy if his political programme were to be derailed by some catastrophe in foreign relations (this is from memory). I think Pres. Obama is in a similar situation, lamenting the tragedy of his programme being derailed by the GFC – unless, of course, it can be made to go away. Small chance of that, I suspect.

  5. Hugh

    I agree with Lavrenti. We know what many of the important reforms are. We aren’t seeing any of them. What ones we do see are weak, miss the point, and are gutted in Congress before they are enacted anyway. At the same time, we see trillions going to reflate bubbles. It’s been clear for a year now reform wasn’t going to happen under a Republican or Democratic Administration. Remember candidate Obama was a big supporter of th TARP. The real question we need to be asking is where we are heading in the absence of reform.

  6. dd

    “I think you cannot legalize financial fraud.”
    It’s already been done and it’s not fraud anymore. It’s legal.
    Where are we headed?
    Pretty easy. Mandates will support the scheme for another generation whether it’s “insurance” or “retirement” or “emissions.”

  7. emca

    “..where we are heading..”

    CIT has declared Bankruptcy. Guess they aren’t a large enough ‘systemic risk’ to bail-out – all those small and medium size U.S. companies they were lending to and not those humongous, FIRE side institutions we’ve learn to love (sic)over the past year.

  8. john c. halasz

    AFAICT, the only “solution” to the bankster bailout, monetary policy lollapalooza, asset reflation recovery scheme would be a general strike. But the American “people” are too ignorant, confused, and fearful, not to mention indoctrinated, to even consider such prospect.

  9. Kelli K

    Insightful discussion so far.

    I would add one thing. When we begin to see connections made between local/state problems and the ongoing crisis in the context of 2010 elections–then, and only then, can we begin to say that Americans have truly begun to wake up to the enormity of what they are facing.

    Unfortunately, I don’t see this yet. Here in Chicago I see rage, glaring inchoate rage at the disconnect between promises and reality. Rage that houses have plummeted in value, yet taxes continue to rise. But most will meekly continue to pay.

    We are not even close to boiling point. Yet.

  10. fresno dan

    “And the government is powerful. It has substantially succeeded at that, but you really have to think about, do you want to have a financial sector dominated by a small number of very large institutions, very difficult to manage, practically impossible to regulate, and ruled by, essentially, the same people and the same culture that caused the crisis in the first place.”

    It is a hard, if not insolvable problem, to figure out how to raise wages, or equivalently, raise the standard of living. I wonder if it will take us longer than the Japanese (O! that right, they haven’t figured it out)to realize that banks exist for the good of the economy, that debt is not wealth, and borrowing not income, and not that the economy exists for the benefit of the finance sector.

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