Location: You paint a pretty grim portrait of the financial services sector and its present role in the American economy. You write about the recent economic bubbles, including the housing bubble: ‘As for the financial sector’s behavior in such circumstances, surely there must be some applicable variation of Lord Acton’s famous thesis about the greater the power, the greater the abuse and corruption.’ What parts of the financial services sector are so corrupt and so prone to abuse?
Mr. Phillips: It would be the huge amount of debt that was undertaken by the financial sector for purposes of future amount of leverage; the huge amount of gathering of resources, I think it’s fair to say, by the mortgage-lending sector so that they had money on hand to come up with all the exotic mortgages; then the third aspect would be the elements of securitization that came to the fore in the last six to eight years, with particular emphasis, I suppose, on collateralized debt obligations, the mortgage-backed securities and some of the other related games, like the asset-backed commercial paper and some of the asset-backed securities.
You write toward the end of the book that New York will lose ground as an international financial center, falling behind London. Can you put a timeline on that decline?
Well, first of all, nobody would agree as to whether New York is ahead of London or London is ahead of New York with any great reliability. …
But let’s hypothesize that, as of 2006, they were exactly equal. And I would say that some of the burden New York would take on that would be a problem would have to do with, for one, the export of financial products. Some of the people in the financial sector have talked about the importance of financial products as, effectively, exports; and that would include various forms of corporate debt. … [Foreigners] seem somewhat less interested in debt instruments recently; not hard to figure why. So I think it’s fair to say the sale of tainted financial products has been a black eye for the U.S.
A recurring theme in Bad Money is the movement of the American economy from literally manufacturing things to a reliance on securitization and trading of debt. Why is it such a bad thing for the economy to move from manufacturing to financial services?
Because it’s not established that it’s a reliable modernization. One of the things I’ve gotten into in several of the books … was taking the views of various economists on the extent to which you could rely on a sort of postindustrialism as a sort of way to run a national economy; a number of economists have pursued that and come to the conclusion that you could wind up doing that sort of thing successfully if you were Liechtenstein or the Cayman Islands and what have you, but there wasn’t any evidence that the leading power could effect that transformation.
The reverse, of course, would speak back a hundred years ago of how London moved in the direction, that it was sort of the financial and commercial adviser to the world, but that didn’t work out. … Even in the mid-1920s, the British were so concerned with getting the pound back up. The idea was that having a strong pound would be important for the city of London; it was not an asset for the resurgence of British manufacturing. They thought that didn’t matter; they thought that the future of Britain lay in the financial services, so a strong currency would help.
Well, the currency didn’t stay strong and financial services didn’t stay strong; and they wound up, essentially, in the bag in terms of financial circumstances by the time World War II was finished. … In other words, Britain ceased to be the leading world economic power. My guess is, if we stay with finance dominant, we will cease to be the leading world economic power.
As for the housing market, do you think the policymakers and the elected officials deliberately created the housing boom?
Yes. Now, is that something that was done with the full notion of its fallibility? No, I wouldn’t say so.
But I think one of the conclusions you could fairly reach … is that [former Federal Reserve Chairman Alan] Greenspan, in his previous incarnation as chairman of the President’s Council of Economic Advisers in the 1970s, was a great student of what happened within the U.S. economy. And then in his early stage as chairman of the Federal Reserve in the late 1980s, again, he saw a housing boom in 1988 and 1989, saw the extent to which housing prices climbed, before any bubble popped. …
That was sort of something he kind of kept in the back of his mind; and when the securities market bubble popped in 2000 and 2001, there was this look to see where they could get the stimulus to replace the loss of the roughly $7 trillion in assets that had gone out of the wealth pattern because of the loss in the stock market. Where could you replace this? Where could you create new wealth to make up for the slippage? And an obvious area was housing.
Finally, as far as the last three candidates for president, do you have a particular favorite?
I have one type of favorite and another type of favorite.
Sentimentally, I’d like to see John McCain have his day. I certainly would’ve supported him in 2000 if he’d gotten the nomination; I admired anybody with the foresight to say that the country deserved better than George W. Bush. I think it did. He says things about speculators and people in the financial sector, that maybe they don’t get the attention they should; I think he recognizes quite a bit of this fallibility.
Having said that, he indicates himself he doesn’t know too much about economics; and when he comes up with the sort of Republican Holy Grail, which is you will balance the budget at the same time you will cut spending and reduce taxes, and if you can’t come up with anything more than that, then I don’t think you’re up to the enormous challenge that the economy’s going to pose.
Now, Obama’s interesting because I think he understands a lot of the things that have gone astray and understands how elements of the Democratic Party have been complicit in this. For instance, he attacked the deregulation that occurred under Bill Clinton. …
Now, how far is he willing to go? He’s got advisers clearly willing to go far when they’re not operating as his spokesmen. How far that’s going to go if Obama gets in, I don’t know. He has a lot of financial [services] support. … You’d probably assume that Obama has at least, if not feet of clay, several toes that are of clay. I think, at least, he’d be experimental and would come to it with an awareness that it was a bipartisan failure.
But has he laid out anything bold in terms of his comments; has he said, ‘We can’t afford to have this change in the economy continue’? I’d like to see somebody say we should try to halt our financial sector once you get rid of the abuses and everything we’ve seen in terms of leverage and securitization that nobody understands.