Mar 16, 2014
Truthdig Radio: Meltdown in Our Casino Economy
Posted on Apr 21, 2011
Josh Scheer: No, no, myth No. 1, because myth No. 1 in your book is “they take our jobs,” right?
Avi Chomsky: Mm-hmm.
Josh Scheer: And, you know, I think that’s the big one too. It’s like, they’re taking my job, and it’s like no, they’re not …
Peter Scheer: Here’s the big one, it’s the last one, and why don’t we end on this. “Myth 21: The problems this book raises are so huge that there’s nothing we can do about them.” What can we do about them?
Josh Scheer: I want to say something quickly about the Dream Act, though. What do you think the likelihood of that passing is? Because there’s a lot of high school people that graduate high school and they should be rewarded that they’ve gone to school and they’re going to college and they’re doing good things, and they should be rewarded with citizenship, but that’s just my opinion. I don’t know.
Avi Chomsky: Right now, Congress doesn’t seem very likely to pass the Dream Act. There’s also been some state-level initiatives; they can’t do everything the Dream Act does; that is, at the state level the path to citizenship can’t be opened. What can be done at the state level is in-state tuition, and there’s currently 11 states that do offer the option of in-state tuition for students who are undocumented; the other states do not. So the possibility of pushing for in-state tuition at the state level is one. The Dream Act did not pass on its most recent attempt. I don’t think there’s a good chance of the Dream Act passing right now, but I do think it’s within the realm of the possible. That is, the legislation is still there; it’s something we can fight for, even if it’s not going to pass in this session. It’s not—talking about passing the Dream Act isn’t like talking about open borders. That’s clearly a utopian dream, is opening borders. The Dream Act is within the realm of the possible in the next few years, if not this year.
Peter Scheer: Thank you so much for joining us, Avi Chomsky.
Avi Chomsky: You’re so welcome.
Peter Scheer: She is a professor and the coordinator of Latin American studies at Salem State College in Massachusetts, and the author of “ ‘They Take Our Jobs!’: and 20 Other Myths About Immigration.” Go get a copy.
Peter Scheer: This is Truthdig Radio. I’m Peter Scheer with Bob Scheer, and we’re speaking with Tim Canova, professor of international economic law at Chapman University School of Law, and an early critic of financial deregulation. Welcome.
Tim Canova: Thank you.
Robert Scheer: I wanted to start off with something I heard you say recently … this casino capitalism that we’re talking about. And you were talking about the inflationary pressures, energy prices and the like. Can you comment on that?
Tim Canova: Yes. This is getting more attention overseas than it is in the United States, unfortunately. There’s a critique that a lot of the reason that oil prices and food prices have been going up is a result of commodity futures speculation. Michael Greenberger—who is now a law professor at the University of Maryland, and he had been a deputy director at the Commodity Futures Trading Commission when the CFTC was run by Brooksley Born during the 1990s, and so they were early critics of the deregulation of derivative instruments—Michael Greenberger has now been writing about this in particular. Under the Dodd-Frank Act, Congress has asked the CFTC to impose position limits to prevent any speculators from pushing up the price too much on futures contracts, on the price of futures in any kind of commodities, but that would include oil and food prices. And what we’ve seen—and there are many empirical studies now that are confirming this, including studies done by the Senate investigating committees—that the volume of futures contracts have just been increasing dramatically, and that the futures prices are way above what normal studies in supply and demand would suggest that the stock price, the daily price of these goods, should be. And yet the futures prices keep pushing up the stock prices.
Robert Scheer: And so how do you explain this? What’s going on? Are they just scamming the system, or … ?
Tim Canova: Well … I had mentioned it as an example of the casino economy, and it really is like a casino; it’s speculation, it’s betting on the future prices commodities. And they have an interest, if they’re betting that prices are going to rise, to keep betting in that direction. I think that there’s a bit of a herd mentality that’s involved, as well, where you see prices of oil going up and more and more market participants jump in to keep betting that the price will keep going up. So it becomes self-fulfilling. And of course that’s destabilizing; that could create a bubble.
Peter Scheer: What percentage of our economy is this kind of speculation casino capitalism?
Tim Canova: Well, when you look at the derivatives market, it’s just enormous. And I know, Bob, you’ve written about this as well. Derivatives are now measured in the trillions of dollars; I think the credit default swap market alone is estimated at between 50 and 80 trillion dollars, which is much larger than the entire annual global output. And it’s not just commodities that speculators are betting on; there’s now a very vibrant derivatives market in sovereign debt. And just a few weeks ago the Financial Times of London had a front-page story, how hedge funds were looking to increase their activity in credit default swap markets for domestic sovereign debt—the muni market, the market in municipal bonds.
Robert Scheer: So, what’s basically happening is we’re in the hands of gamblers. And we no longer have these captains of industry that make money by producing better cars, or figuring out better products, or so forth; they’re people who can push pieces of paper, you know, people like Robert Rubin, who specialized in sort of fraudulent risk assessment and, you know, on the margins. And these seem to be the people we’re training in our business schools and our law schools. Now, you’re a distinguished law professor. What’s going on with the academic world? What are we turning out?
Tim Canova: I think there’s probably no better demonstration of what’s going wrong in the economy as in the Academy Award-winning documentary film, “Inside Job,” which shows the pervasive conflicts of interest that occur at the business schools and economics departments at the most elite universities in the country. So it explains some of what’s going wrong in the economy. But I think beyond the conflicts of interest, you have a real orthodoxy in the establishment, in the economy. And that orthodoxy really is that Washington consensus. It’s a bias towards market solutions; it’s an inability to see where markets are manipulated. So there’s a lot of self-interest among academics to stay in that mind-set.
Peter Scheer: As we record this on Monday, Standard & Poor’s has just lowered the credit outlook for the United States of America from stable to negative. Can you explain what that means and what the implications are?
Tim Canova: Well, Standard & Poor’s, Moody’s and Fitch are the three big credit rating agencies. And they really have cartel-like powers, you could say. They were heavily implicated, they were a big part of the problem in giving investment-grade triple A ratings to mortgage-backed securities that ended up turning toxic; they became the toxic mortgage-backed securities. And Dodd-Frank, the financial reform act that was passed last year, really didn’t do much to change how the credit rating agencies operate. When you look at just the boards of directors of each of these credit rating agencies, it looks like a who’s who of international bankers. So on the one hand, before the financial collapse, you could look at their behavior and see that they were rubber-stamping toxic mortgages, because that was in their own interest and the interests of the investment banks that were paying them. If nothing’s really changed, it is suspect why we would consider their ratings of sovereign debt to be sacrosanct at this point. What they’ve done by downgrading or, you know, threatening the triple-A grading of U.S. treasury debt is to basically be intervening themselves in some of the most important policy questions that we’re facing today. And there’s no reason to really conclude that their assessment of the situation is accurate. The response of the markets, of course, when news came of the—Standard & Poor’s decision, was that the stock markets started dipping. But the bond markets and the dollar have not gone down; quite the opposite. So you can make an argument that investors understand that the U.S. can always print more dollars; there’s not really any credit risk; people know they’re going to get paid back their dollars. It’s just whether the dollars they get paid back will have fallen in value. And that’s really not the business of rating agencies, to be involved in that. If the U.S. was ever stripped of its triple-A rating, it’s really questionable whether there would be a flight from the dollar anyway. Probably most investors and funding managers would, I would think they might abandon the credit-rating agencies themselves, rather than dollar investments. At the end of the day, the treasury market is still the largest, most liquid bond market in the world.
Peter Scheer: And we should say, just to be clear, that S&P did not downgrade the U.S. credit triple-A rating, but they did revise the outlook.
Robert Scheer: Yeah, let me ask you. You mentioned the movie “Inside Job,” and you’re—you know, again, I get back—you’re a professor at a law school, a distinguished law school. And when people study long and hard to become economics professors and top lawyers, and then they go work for—you know, just to think about it in layman terms, for these swindlers. They help them evade the law, they help laws be written that are awful; they give economic advice that turns out to be disastrous for most people. So what has happened to the whole notion of objectivity and fairness and responsibility in this academic world? Do we teach ethics at all?
Tim Canova: Well, I think it’s not just the academic world, it’s the markets as well. I don’t think there’s been much real accountability since the financial collapse. In the markets, you can look at the biggest market players, the biggest investment banks and hedge funds that helped bring on the collapse, and they’re the ones who are doing better than ever. They’ve been propped up by the taxpayer and by the Federal Reserve. But that bailout has also propped up vested interests within the economy. When you look at, really, the elite institutions, you’re looking at people who’ve made their careers by cheering on this free market ideology. And they haven’t recanted, and they’re tenured at the end of the day. And they have a vested interest in things continuing the way they are. So there’s been very little accountability since the collapse. I do think within the economy, you do have voices—but I’m sorry to say, like mine, they’re mostly in the wilderness—that have been warning about the impending collapse and critiquing what has happened since the collapse. But I’m afraid they’re rather few and far between.
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