CJ Polychroniou: Barack Obama was elected in 2008 as president of the United States in a wave of optimism, but at a time when the country was in the full grip of the financial crisis brought about, according to Obama himself, by “the reckless behavior of a lot of financial institutions around the world” and “the folks on Wall Street.” Obama’s rise to power has been well documented, including the funding of his Illinois political career by the well-known Chicago real estate developer and power peddler Tony Rezko, but the legacy of his presidency has yet to be written. First, in your view, did Obama rescue the US economy from a meltdown, and, second, did he initiate policies to ensure that “reckless financial behavior” would be kept at bay?
Noam Chomsky: On the first question, the matter is debated. Some economists argue that the bank rescues were not necessary to avoid a serious depression, and that the system would have recovered, probably with some of the big banks broken up. Dean Baker for one. I don’t trust my own judgment enough to take a strong position.
On the second question, Dodd-Frank takes some steps forward — making the system more transparent, greater reserve requirements, etc. — but congressional intervention has cut back some of the regulation, for example, of derivative transactions, leading to strong protests [of] Frank. Some commentators, Matt Taibbi for one, have argued that [the] Wall Street-Congress conniving undermined much of the force of the reform from the start.
What do you think were the real factors behind the 2008 financial crisis?
The immediate cause of the crisis was the housing bubble, based substantially on very risky subprime mortgage loans along with exotic financial instruments devised to distribute risk, reaching such complexity that few understand who owes what to whom. The more fundamental reasons have to do with basic market inefficiencies. If you and I agree on some transaction (say, you sell me a car), we may make a good bargain for ourselves, but we do not take into account the effect on others (pollution, traffic congestion, increase in price of gas, etc.). These “externalities,” so called, can be very large. In the case of financial institutions, the effect is to underprice risk by ignoring “systemic risk.” Thus if Goldman Sachs lends money, it will, if well-managed, take into account the potential risk to itself if the borrower cannot pay, but not the risk to the financial system as a whole. The result is that risk is underpriced. There is too much risk for a sound economy. That can, in principle, be controlled by sound regulation, but financialization of the economy has been accompanied by deregulation mania, based on theological notions of “efficient markets” and “rational choice.” Interestingly enough, several of the people who had primary responsibility for these destructive policies were chosen as Obama’s leading economic policy advisers (Robert Rubin, Larry Summers, Tim Geithner and others) during his first term in the White House. Alan Greenspan, the great hero of a few years ago, eventually conceded quietly that he did not understand how markets work — which is quite remarkable.
There are also other devices that lead to underpricing risk. Government rules on corporate governance provide perverse incentives: CEOs are highly rewarded for taking short-term risks, and can leave the ruins to someone else, floating away on their “golden parachutes,” when collapse comes. And there is much more.
Didn’t the 2008 financial crisis reveal once again that capitalism is a parasitic system?
It is worth bearing in mind that “really existing capitalism” is remote from capitalism — at least in the rich and powerful countries. Thus in the US, the advanced economy relies crucially on the dynamic state sector to socialize cost and risk while privatizing eventual profit — and “eventual” can be a long time: In the case of the core of the modern high-tech economy, computers and the internet, it was decades. There is much more mythology that has to be dismantled if the questions are to be seriously posed.
Existing state-capitalist economies are indeed “parasitic” on the public, in the manner indicated, and others: bailouts (which are very common, in the industrial system as well), highly protectionist “trade” measures that guarantee monopoly pricing rights to state-subsidized corporations, and many other devices.