Recently we talked to Chris Whalen who asserted that until we take a hard line on the debt ceiling, we will never be able to force the necessary restructuring on global debt, U.S. debt, banking reform, and all other underlying factors — from the healthcare system to the wars — until we actually call out the government or force a crisis on the government effectively to do with these things. To get another opinion, we talked to one of our favorite analysts on the subject, Barry Ritholtz of FusionIQ andThe Big Picture blog. Take a listen to the conversation here:
RUSH TRANSCRIPT
DYLAN: Welcome to Episode 52 of Radio Free Dylan, joining the show today, one of my favorites on the subject of money, investment, and banking system in America, Barry Ritholtz. He’s the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.” Check it out if you haven’t already. You can also check out his blog everyday; it is sensational. It is called the Big Picture at ritholtz.com, R-I-T-H-O-L-T-Z dot com, or you can follow him on Twitter @Ritholtz. And it’s nice to see you again.
BARRY: Good to see you.
DYLAN: Yesterday, we talked with Chris Whalen, or recently we talked to Chris Whalen who asserted that until we take a hard line on something like the debt ceiling, we will never be able to force the necessary restructuring on global debt, U.S. debt, banking reform, and all other underlying factors from the healthcare system to the wars, for that matter, until we actually call out the government or force a crisis on the government effectively to do with these things. Do you agree with that?
BARRY: Well, it’s a really interesting perspective, and, you know, every time I think, “Gee, I’m really getting too cynical,” I speak to a buddy like Chris and realize, “Wow, I’m not even remotely.” That’s a viewpoint that says, “Congress is so screwed up; Washington, DC is such a debacle.” The public likes being lied; they don’t want to make tough decisions that we need a full-blown crisis regardless of the consequences in order to get things done. And I hope he’s wrong. I understand where he’s coming from. The negative ramifications of the U.S. bumping up against its debt ceiling, not being able make payments on treasuries, on notes. You know, the U.S., it has – it’s called the exorbitant privilege, “the exorbitant privilege” of having the world’s reserve currency. There are certain obligations that go with that along with a number of benefits. We don’t make a payment; we miss something. It’s not like, “All right, I’ll pay Mastercard next month and I’ll be caught up.” You know, we already had the warning that there’s a negative outlook to the U.S. as AAA. Very desirable AAA rating is only 14 of 16 countries in the world that have that. The UK was put on a negative outlook 18 months ago and then upgraded not too long ago. The problem is their upgrade was based on austerity measures, which is now about to push Finland into recession. And that seems to be the disingenuous approach that a lot of people, not Chris, but a lot of people in DC have taken. Instead of being honest with the public, it’s a lot of scare tactics and the deficit is a great example of that.
DYLAN: The interesting thing is Chris uses the exact same point that you just used, which is the responsibility and the privilege and the reality, however you want to characterize it, of the fact that the U.S. dollar is the trading chip by which all things on the earth moved around –
BARRY: Any commodity, just everything
DYLAN: whatever it is.
BARRY: is measured against the dollar.
DYLAN: And so his argument is because we have that advantage, because our creditors, whether it’s the banks or China or anybody else or traders around the world, and I don’t mean financial traders, I mean trading partners around the world, have no alternative to the dollar as it stands right now no matter what. Back to the argument that that is the leverage by which, if you look at the colossal dysfunction in the debate around healthcare, in the debate around banking, in the debate around energy, in the debate around the wars, and the debate around international, and the debate around our trade policies, that we have to take advantage of the fact that we do have effectively this “too big to fail” status as a country to say, “You know what, we will not raise the debt ceiling and we’ll use the leverage of the fact that we’re too big to fail to force the restructure.”
BARRY: Look, in the 17th century, Spain was too big to fail. They were the leading economy in the world, and they failed. And then in the 18th century, it was France, and then in the 19th century it was England and now the United Kingdom. And now the 20th century was the U.S. century, and here we are in the beginning of the 21st century. I don’t think there’s any nation on earth that’s too big to fail. And by the way, if you look at those countries, they’re in their post-Empire phase and they’re doing fine. It would be healthy, at least in my opinion, to put the U.S. in the post-Empire footing. There’s no reason why the U.S. defense budget has to be the equivalent of the next 20 countries in the world. That includes Russia, that includes China, that includes North Korea; combined, our defense budget is bigger than the next one. We’re providing defense services to Japan, we’re providing defense services to Europe.
DYLAN: Germany.
BARRY: Go down the list, Korea. There’s just we can’t afford that.
DYLAN: Isn’t that Chris’ point? We won’t deal with that problem.
BARRY: I’m sympathetic with that, but at a certain point, you know, we have – I don’t think we’ve had an honest, legitimate debate about the budget yet. It’s been Populist extremism run amuck, it’s been demagoguery. Let’s go through defense, let’s go through Social Security, let’s go through Medicare. Social Security is my favorite thing to talk about in terms of deficits because it’s been running at a surplus for decades and it can run for of surplus for another century. You have to raise retirement age. The retirement age that was put in place 80 years ago, you know, everybody’s lifespan has gone up dramatically; that has to adjust. That’s number one. Number 2, guys like you and I, we’re going to get means tested, we’re not going to quality for Social Security. I think we can live with that. And number three, you get capped at $106,000 and change a year. Once you hit that payroll number, you don’t pay any more taxes. So the joke is Warren Buffet or Bill Gates on January 1, they’re done paying into Social Security. There are some people advocating making it unlimited. Look, that’s going to double, that’s going to go to $250,000 and then maybe 10, 20 years from now it will go to $500,000. But you do those three things, you means test, you raise the retirement age, you take the cap. Social Security is good for centuries.
DYLAN: But what do you see as the – in other words, if Chris is – let’s say Chris is more a radical view which is they’re not going to do Social Security, they’re not going to do defense –
BARRY: They have too, though.
DYLAN: They’re not going to do banks unless they are forced to, and the only way to force them to is this. How do you see a pass to resolution on some of those issues absent a crisis catalyst of some sort.
BARRY: You know, he and I have talked about this and one of the – we had a conversation I want to say yesterday or Monday, I don’t remember what day it was. It was probably Monday. And we talked about this and I was astonished at how completely and totally – this was on the Ryan Plan whose numbers were put together by the Heritage Foundation, and it turned out that they’re completely full of shit. They cooked the books, they made it up, and the only reason anyone found this out is at the end of the Ryan forecast, unemployment drops to 2.8%. Unheard of, ridiculous. And when the Heritage Foundation was asked how you got to these numbers, they kind of stammered and [inaudible 07:24] and Chris and I talked about this and he says, “Now you’re aware of the Washington problem, which is everybody in DC is a paid liar.” And if – we’re not talking about a lawyer whose job it is to zealously defend his client in court –
DYLAN: Tobacco or whatever.
BARRY: What we’re talking about are people who you shoot sodium pentathol into them and they would say, “Oh yeah, of course there’s global warming. Of course we can manage the debt. Of course these tax cuts are expensive. Of course that 2.8% is nonsense, but I’m paid to bullshit, and I make a nice living doing it, so that’s what I do.” And it wasn’t that way several decades ago that the loyal opposition and honest and fair debate, that seems to have disappeared and I’m less cynical than Chris, I think what –
DYLAN: It doesn’t sound like it.
BARRY: What I think – but these are just facts. You can make intelligent policy, you can’t discuss this unless you have the facts in front of you. I think what resolves this is getting the dirty money out of politics. And I’ve come to the conclusion that the only way to do that is a constitutional amendment mandating public funding of elections and you get Goldman Sachs out of politics and you get the rest of the bankers out politics –
DYLAN: And the unions and the health companies –
BARRY: And you get the unions out and you get – look, there was just something from – I mentioned it in the LinkFest today, the Center for Responsible Lending said the auto dealers managed to get exempt from the financial consumer finance board so that the extra fees and add-ons and undisclosed costs to auto loans are worth $25 billion a year in their pockets from the consumers not disclosed, not – it doesn’t meet any federal regulations because they’re out greasing the palms. Now, this is you would think that any politician that can’t get elected and on that sort of mom-and-pop Main Street issue, how can you not, and yet it manages the dirty money. So to me, to get to any of these issues, you have to get this money out of politics. And that may sound a little naïve, but everything I come back to, the bailouts, the tax cuts, the wars, all these things are only possible if you have dishonest, you know, P.J. O’Rourke called them a Parliament of Whores, and you can’t improve upon that. When people will do anything for money, you end up with the sort of financial problems we have today. If you don’t get the dirty money out of the system, you can’t get clean policy.
DYLAN: What do you think has been the barrier? Because what you just said, I think, is something that is largely easily understood. I think a kindergartner could understand that. I actually think it is largely perceived and, in many cases, believed by a huge percentage of the American people who’ve had even a more modest opportunity to look at these issues. And yet the Democrats, nowhere on that issue, the Republicans, nowhere on that issue, which that’s not surprising because they’re on the take, they’re the whores that we were referring to.
BARRY: That’s right.
DYLAN: But, also we are not seeing outside activists – I spend a lot of time talking about it; a couple of other folks do. But you don’t see the mainstream media saying the root of our evil is this, whether it’s Fox, MSNBC, or anybody else. You don’t see the New York Times or the Wall Street Journal saying the reason we’ve got this deficit, the reason we have this dysfunction, these wars, all the things you just talked about, is because of the dirty money. I think about the guy who’s an alcoholic with a drinking problem and his wife has left him and he’s having problems with his job and his kids don’t talk to him and all these different things, and he walks around saying, “Oh, I don’t know why my kids don’t talk to me. I can’t understand why my wife left me. I’m having a hard time at work.” And people, “Oh, if you work harder, maybe if you’re nicer to your wife,” or whatever, but no one actually gets the fact that, “Hang on a second, maybe if you didn’t drink a bottle of Jack Daniels every night, the problems that you’re having with your wife, your job, and your children might go away,” which is exactly your point. Maybe if you stopped drinking, in this case taking dirty money, everything from healthcare to defense would diminish.
BARRY: And the friends in your analogy are the enablers is what the 12-step folks call it, and when you mentioned the mainstream media, NBC, Fox, the whole run, when you – all the parties that are involved in this, you know, they’re grand enablers. There’s an old line, and I know I’m getting this wrong, which is, “It’s hard to convince a man of the truth when his livelihood depends on not believing that.” And so you have an entire universe of lobbyists, you have an entire universe of companies, of both media, and at a certain point once you figure out how it’s wired, how the system is wired, now you’re a defender of that system because while it may not work for the country, it works for you. So if you’re GE paying next to no taxes, if you’re – you know, there was just an article –
DYLAN: If you’re a union rep who has huge advantages in healthcare for your members but only as long as the employer-based system exists –
BARRY: That’s right.
DYLAN: Because if they get rid of the employer-based system, the union’s relevance to their members and their quality healthcare goes away because all of a sudden the recruiting vehicle –
BARRY: But that’s been going away naturally. That’s the great irony – you know, in the book, I mentioned the Chrysler bailout 1980, the big three or big two-and-a-half if we want to include Chrysler, they had a 75% market share of domestic cars sold in the U.S., of total cars sold domestically, and there was almost two million members. And here it is 30 years later, their market share has dropped way below 50% and we’re down to 300,000 UAW members, between 200,000 and 300,000. So despite the bailouts and despite this, unions are no longer the force they once were. I don’t get all bent out of shape about unions –
DYLAN: And I’m not – I was just making the point of their impact on the healthcare situation.
BARRY: Because to me they’re just – they’re such a relatively – right, they had an impact on the GM –
DYLAN: They kept employer-based healthcare.
BARRY: They had – absolutely, there’s not doubt they had an impact on that. The thing that I find most disappointing about the era we live in is the lack of leadership. So there was just something on about Donald Trump talking about birthers and you know forget Trump and his hair or whatever that thing on his head is, but I want to see some adult step up and say, “Look, we have a lot of real important problems facing us; this is a nonissue,” if you want – and Bobby Jindal actually came close. I’m like, “Wow, this is going to be an adult conversation,” and then at the last minute he sort of back away and says, “You know I take the President at his word.” No, no, no, step up and lead and say, “This is bullshit, let’s talk about we still have high unemployment, we still have a tremendous amount of leverage in the system, we still have a huge housing problem, let’s fix this. And if you’re going to focus on that, you’re wasting time and energy that could be put to better use.” And, you know, the Democrats also have not really stepped up and led on a lot of these issues. It’s enormously disappointing that there is no Ronald Reagan, there is no John F. Kennedy. For a moment it looked like Obama was going to possibly rise to that mantled, but that moment seems to have passed. So to me, from a political perspective, and I’m an independent; I throw rocks at both sides. It’s disappointing that there’s not even anybody to root for. And so, again, I try not to be cynical.
DYLAN: I agree.
BARRY: What Chris said I think is really cynical, “Hey, let it all blow up and we’ll worry about fixing – picking up the pieces afterwards.” I think Alan Greenspan, by the way, said something very serious before the – similar before the dot-com collapse in 2000, “Oh, it’s easy to clean up after.” I think the costs and the ramifications of cleaning up, allowing the debt ceiling to lapse, would be really, really substantial. And what happened in ’95 was a drop in the bucket. It’s a whole different universe today. I don’t think it is even comparable. It would be really, really damaging.
DYLAN: What would happen?
BARRY: What would happen? All right, so the AAA rating would be put at risk, which means we’re now funding a huge deficit, a huge ongoing debt, which by the way has been ballooning for three decades. This isn’t anything new. This exploded and in fact, the fascinating about Reagan’s era is he reduced the deficit pretty dramatically by raising taxes. You know, he had huge tax cut, especially the top rate was almost 90%, brought the way down, and then slowly brought things up in order bring in more revenue. I think he was the last serious Republican that was willing to say, “Hey, sometimes, you know, it it’s not just spending; it’s income also. You’ve got to raise –“ you know, they called them revenue enhancers, taxes were a dirty word, but they actually did it. You don’t see that going on anymore. And the Democrats are nearly as bad as the Republicans in terms of – I give Obama credit for saying we have to raise taxes on the highest earners. But if we were really adults, if we were going to have a mature conversation, you would look at the United States versus the rest of the western world and say, “Hey, we have amongst the lowest net taxes and yet we’re spending more than everybody else; it’s time for some shared sacrifice, everybody has to kick in a little more, everybody has to consume a little less in terms of government services, and that’s how you get the deficit under control. This, “I don’t want to cut anything and I don’t want to raise taxes and let’s magically fix the deficit” is silly and it’s childlike and we really need to move past that.
DYLAN: You referenced this earlier, the disingenuous Solution of austerity where, “Oh, we’ve got this big deficit, so what we’ll do is we’ll just cut social spending, which is a minute percentage of what our spend is to begin with, we won’t address healthcare reform, we won’t address a major global defense overhaul and reduction, we won’t address entitlements like Social Security; we will simply reduce social spending ala England ”
BARRY: And Ireland, and by the way –
DYLAN: What’s wrong with that?
BARRY: Well, first of all, if you look at those economies, they’re doing really poorly. You know, the fascinating thing, this has become an anti-Keynes – John Maynard Keynes was a brilliant economist and actually stock trader in the ‘20s, ‘30s, ’40, and the monetarists who rose up in opposition to him – I think a lot of people misunderstand Keynes. And what Keynes said is, “During an economic expansion, the government should be cutting spending and raising taxes and running a balanced budget.” But when you go into a real bad recession, well, that’s when the government should cut taxes and raise spending and substitute for the lack of government and consumer spending to sort of smooth that cycle out instead of having these high peaks and deep valleys. You’re going to make it a little softer and a little easier to bear. The problem is the way it’s been implemented over the past 50 years is while we increase spending and cut taxes when things were bad, but we never took it back when things were good. So no one wants to do the hard thing, and again, this is a lack of a mature conversation. The first person who started cutting spending and raising the taxes, his opponents would go crazy on him and that person would never get reelected again. So all we have are people who increase spending and cut taxes but never do anything to legitimately balance the budget. Forget NPR or Planned Parenthood, that’s 1/1000th of a percent of the overall budget. You know, what John Dillinger said is he robs banks because that’s where the money is. So in order to balance the budget, you have to raise taxes, because that’s where the money is, you have to cut the defense spending, you have to cut Social Security, you have to cut Medicare, but do it in a way that makes sense, and we haven’t had that conversation yet.
DYLAN: You write wonderfully on a regular basis on your blog, the Big Picture at ritholtz.com. Among some of your recent posts, you talk about Europe’s relationship with the banks and bailout relative to our own, and I want to read a little bit of this to the folks. You say, “In nations where bankers and their creditors were allowed to go belly up, the populace seems to be more satisfied with the outcome, and the politicians are mostly managing to retain their jobs. Tiny Iceland seems to be the only country that got this right,” and then you get into how Iceland obviously did a debt restructuring. Europeans are slowly figuring your right, that they got royally screwed by bankers, assuming bank debt, taking responsibility for bankers recklessness is simply not in the public’s interest. I wonder when American will reach the same conclusion. Don’t you think Americans have largely reached this conclusion? Maybe our politicians and our media has not.
BARRY: I’m not sure. I’m not sure. I go back and forth on this. You know, for a brief moment when the Tea Party first erupted, I thought that was a huge pushback against the bailout.
DYLAN: Me, too.
BARRY: And then somehow they got Jiu-Jitsu’d and it became something else entirely.
DYLAN: [cross-talking 20:32]
BARRY: I guess. And, you know, whatever your perspective on gay rights are, clearly it had nothing to do with the crisis, the financial crisis, and it has nothing to do with fixing – although some people in California have argued that if you legalize gay marriage it would cause a surge of economic activity, but the reality is –
DYLAN: Household formation in San Francisco.
BARRY: Yeah, it’s – but the reality is there was this glimmer and it was just completely derailed. And, you know, the Democrats and the Republicans jointly are part of the problem. I was hoping that that was –
DYLAN: But that doesn’t speak to the people. In other words, do you believe that the people – I mean this is obviously conjecture on our part, but do you believe that – you’re asserting that the people of Iceland, that the people of Western Europe –
BARRY: And Ireland, and Norway.
DYLAN: – and all the rest of it understand that the bankers screwed them, that they’re running a scam, and they’re not going to tolerate it, that the bank is there to serve the economy, that the country is not there to serve the banks.
BARRY: There’s a very different political debate that takes place in Europe. First of all, it’s a much older society than the United States, so it’s a little more mature. What I’ve found – you know, I was always taught that you never discussed religion or politics in the United States. In Europe, you could sit down with people of opposite political views and everybody will agree, at least more or less on the same facts, and the debate is more on philosophy and theory and if we do this, this will happen, no, if we do this, that will happen, and it’s just far more cosmopolitan and sophisticated than the crazy –
DYLAN: Fear-mongering.
BARRY: Yeah. Can I tell you something? I get emails everyday, you know, the Jews caused the credit crisis. I get that stuff constantly. And before that, I used to get my all-time favorite comment is an unspeakable word cause the credit crisis that came up on the blog. And it’s easy enough to screen that stuff out and not have it show up, but that’s the level of discourse. And in Europe, those are Arian extremists that aren’t part of the political debate. The debate, the conversations, the discussion is just a whole different level of sophistication. It’s very buzzword, bumper sticker based. There isn’t a lot of independent thought. You know, talk radio and talk television drive a ton of the conversation. I used to just see the same emails, it’s phrased ever so slightly different, over and over from different people, and it’s clear someone heard something that may or may not have been true, they repeated it and it was comforting for them so these things sort of went viral. You know, there’s a positive side to intelligence spreading through the internet, and the negative side is dumb things seem to find a home, and especially if there’s a cute buzzword involved, catch on. And so you get just mad, insane, foolishness, and –
DYLAN: Does this not get us back to Chris Whalen? Because of all these things, we must – or does it make your point which is you better not create a crisis because you have such a stupid or unsophisticated political debate that if you create a crisis, you’ll get a solution that is the worst solution you could every imagine because it will be the Jews fault, or whatever. In other words, instead of actually – the crisis, instead of catalyzing the sort of debate you just discussed in Europe, will catalyze a madness.
BARRY: By the way, I don’t think the Europeans are any smarter than the Americans in general. I think the extremists in America seem to have found a certain resonance and are louder than their numbers suggest. So I want to make it clear, it’s not that Europeans are smarter or more mature than Americans, they’ve just over the years learned how to do the sort of debate, and look, World War II was fought on their front porch, so they’ve learned how to deal with the real crazies, and they marginalize the extremists. In the United States, we don’t marginalize extremists; they’re right there at the table with everybody else. So to go to Chris, look, I think Chris’ analysis is thoughtful, I just haven’t reach the point of maximum cynicism where I say, “You know, you’ve got to crash the bus off the cliff before we can rebuild it.” And that’s kind of the argument he’s making is if you don’t throw the whole system out of whack you’ll never be able to rebuild this. But that goes back to the dirty money. So let’s say he’s right. Let’s say we crash through debt ceiling, everything falls apart, so what are we going to have? It’s going to be put together by Goldman Sachs and Citigroup and –
DYLAN: Health insurers.
BARRY: Right. Look at who’s controlling D.C. That’s not the group I’m willing to have rebuild the system, especially since they were so opportunistic and did such a great job during the crisis. You know, the same people who captured trillions of dollars from the government are very likely to put together a system that is a corporatocracy, not a democracy. It’s a government for the corporation, not for the people, and that’s my concern. Until you fix campaign finance, the people at the controls just aren’t trustworthy. They’re being sold to the highest bidder so why do I want to wreck the system and let AIG and Goldman rebuild it. That’s not to your or my advantage. That’s not to 99% of the public’s advantage.
DYLAN: Barry Ritholtz, the Big Picture is the blog, ritholtz.com, on Twitter at ritholtz, R-I-T-H-O-L-T-Z, and, again, the book, “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.” It’s always a pleasure, Barry. Thank you.
BARRY: Thanks for having me.
DYLAN: And we’ll be back right after this.
DYLAN: Welcome back to Radio Free Dylan. I want to leave you with one more comment from Barry because I think it’s incredibly relevant and necessary to understand what is going on here. And Barry references an old market strategist, Art Cashin who works at UBS, and it goes like this. He says, “UBS’s Art Cashin directs us to the economist Buttonwood column for an interesting take after the S&P downgrade. The debt in our system, going back to 2008 or beyond, has not been eliminated, and has merely been moved from the banks to the taxpayer. It’s three years since Bear Stearns was pushed into the arms of JPMorgan and the fundamental debt problem hasn’t been resolved. The debt has been moved around, but not eliminated. This is undoubtedly bought time, and I quite understand the point made frequently by my colleague, that government and central banks have acted to protect workers from losing their jobs and to prevent consumption from collapsing. In this, they have had a fair degree of success. But the debt is still there. It must either be eliminated by growth, inflation, the devaluation of our currency, or default. The U.S. has better growth prospects than most European nations and has the exorbitant privilege (as Barry said earlier) of issuing debt in the world’s reserve currency, which keeps its cost down. But it resembles one of those Greek myths when the hero’s power is accompanied by a curse, in this case a political system that is not designed for serious deficit cutting, a point made by S&P.” I thank you for listening to us today and spending some of your day with me. It’s a privilege to have that opportunity. My name is Dylan Ratigan and that will do it for Radio Free Dylan today and we’ll talk to you next time.
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