NYO: It seems like now more than ever, this could be a win-win situation for somebody both in terms of political capital, and in terms of the climate required for one to actually succeed in that situation. And yet—again, this is knowingly naive—but nobody’s going through with it.
ES: It’s hard to finally close that loop. The institutional presence of the rating agencies—not to be excessively cynical…
NYO: It seems excessive cynicism is the realistic approach, here.
ES: Well, the status quo has its own momentum. Think how many localities and entities have received rating agencies work that have permitted them to access the markets. They receive the triple-A. They show up on Capitol Hill saying “Don’t take away this stamp of approval. We would never be able to get the teachers pension fund from Alabama to buy us, if we didn’t have this stamp of approval. So we need it.”
NYO: Enter lobbying dollars.
ES: Yeah, yeah. But it’s a shame. ‘Cause I think the reliance on the rating agencies was—as we all now know—one of the critical errors that permitted the bubble to inflate.
NYO: After the bubble inflated and popped, and after S&P recieves scrutiny over their sovereign debt rating, do you think, moving forward, that the mistakes made in the past could be repeated again with the ratings agencies?
ES: The mistakes inevitably will be repeated again.
NYO: Taking a different form.
ES: In a slightly different form. And it’s just a question of how long until it happens again.
NYO: Like Mark Twain says: “The past doesn’t repeat itself but…
ES: …it rhymes.” The best little book on this ever was Galbraith’s A Short History of Financial Euphoria. Galbraith gets it right. We keep doing it historically ‘cause debt and leverage are so addictive. As a narcotic, they get into our blood stream. We can’t get rid of them. So we’ve learned the lesson. The metaphor I used to use is that it’s like getting a speeding ticket. You learn the lesson for some period of time but then 20 miles down the road, 30 miles down the road, your foot starts going back down on the accelerator. It’s a question of for how long we’ve learned the lesson.
NYO: Is this something just inherent in human nature that can’t be controlled? On one hand, controlling it would really be sticking a deep hand in the free market, but on the other hand, if you leave it unattended to do this again, the only people we have to blame are ourselves.
ES: Which I think we know. The regulatory structure worked pretty well from the Depression until the mid-’80s, when we did have a slightly more aggressive approach to regulating leverage in those sectors that could cause enormous harm. Not without problems here and there. The answer is when we have some brake that can be applied to leverage and risk in that regard, we can do okay. When we take our foot off that brake, inevitably the bubbles re-emerge.
NYO: It seems like the foot’s coming off the break again. It’s only been two years.
ES: Well, let’s see what happens. It’s what makes life interesting, right? It’s what keeps a journalist in business. It’s what keeps prosecutors in business. ‘Makes it more fun.