FULL TRANSCRIPT

DYLAN: Welcome to Episode 25 of Radio Free Dylan and this perhaps the most controversial pairing that we’ve had at this point, and two of the folks that I would say who have been not only the smartest but the most granular. They have been the most effective, not only at educating people like myself but I believe, educating our politicians and anybody who has taken the time or the interest to understand just how deep the dysfunction, corruption, fraud and distortions are in our banking system, in the relationship between our banking system and our government. And I am delighted to be able to not only welcome one of them but both of them into the same room.

I truly think that if you have an appetite to truly understand the core dysfunction at the root; whether it’s in the accounting domain or the incentives, the relationship between the government and the banking system, these two people are better informed and more effective at articulating it than any two that I know, not just me that would offer this endorsement. If you listened to our most recent podcast with Brad Miller, who serves obviously in our Congress out of North Carolina; when asked who he looks to for guidance to understand legislatively how to approach the American banking system, and of course, Congressman Miller made the point that so few of the people in our Congress in 2008 had a clue as to how the financial system had been constructed. Brad pointed to Josh Rosner and Yves Smith, and Josh and Yves join us.

Now, Josh is of course the Managing Director at Graham Fisher & Company and author of my favorite paper: 50 Years At 50 Basis Points, A Simple Solution to the Global Financial Stress. Although I don’t think it’s going to happen anytime soon. Yves Smith runs one of the most successful, most widely read by the most influential people in this country including Brad Miller, Naked Capitalism. She is also author of ECONNED: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism. And I am pleased to welcome both of you.

Before we get into this sort of root aspect of this, Josh, get us up to speed today as to where we stand in terms of the level of dysfunction in our current system.

JOSH: Well, we stand with the housing market that still has over 11 million homes that are going to ultimately have to be foreclosed, resold, modified, worked out. We have a government that has spent the better part of three years not really addressing either a holistic approach to helping keep borrowers in their homes or make sure that investors who owned mortgage-backed securities backed by those were protected from harm by the banks who service those and may also own second liens that they’re carrying at artificially high values. We’ve got a government that theoretically is investigating document fraud, robo-signing fraud, and origination issues and servicing fraud who, to my understanding, has really not done any granular investigation over mortgage loan files. There’s been very little discussion.

We’ve got 50 state AGs who are in the process of doing an investigation and looking for a settlement even though, again, there have been very few subpoenas. And my understanding is there’s been very little actual granular investigation of behaviors of the parties involved. And that’s where we are — which is a wonderful attempt to put lipstick on a pig as it’s said, and not really address the underlying problems which keeps our economy in peril and the ultimate costs of finally coming to resolution rising.

DYLAN: Yves, if you could connect the dots for us between the massive wave of unemployment in this country, the massive disruption in the housing market in this country, and the exquisitely high bonuses that continue to be collected at the top of America’s biggest banks.

YVES: Well you almost have to go back 30 years to see the roots. We used to have an economic system in which the primary goal of policy was to make sure that we had rising average worker wages, and things like growing trade deficits would have been seen as a cause for alarm because that would basically mean that US demand was leaking to employment overseas and not supporting US workers. It sort of started in the Carter administration, but it really came full board in the Reagan administration and has continued till today. That we now have a philosophy that anything that happened as a result of market activity is good and will somehow be rationalized.

In fact, Reagan, ironically, was nowhere as near as true to his doctrine as later presidents have been. When unemployment went over 8%, he in fact became quite alarmed and engaged in radical market interventions, among other things, to drive the dollar which was very high at the time back down. [5:00]

But what’s happened is we’ve had over the last 30 years what was first a gradual increase in consumer debt, and then a much more rapid increase in consumer debt starting in 1999, the curve goes parabolic, and it was primarily housing debt. And that was a solution for stagnant average worker wages that people were given more access to credit; and therefore, had improved lifestyles even though they actually weren’t in aggregate making — you know, were not making more money. And the problem with consumer debt is that it’s unproductive debt, X possibly investing in education. And effectively consumers hit the point where they could not — that it wouldn’t take much to put them into debt-service problems.

I mean we had a time in the early 2000 — repeatedly, we had times in the early 2000s where these savings rate, household savings were zero to negative. That should have been an enormous red flag to policymakers and it was ignored. Instead, you saw Greenspan and later Bernanke rationalizing this saying, “Oh, it’s fine. The consumer balance sheets look okay.” That doesn’t solve the debt-service problem. That doesn’t solve the fact that people still have to find a way to pay, and if anything goes wrong they’re going to be in trouble.

DYLAN: Josh?

JOSH: Well, Susan, this is a bigger piece of the issue which is all of the legislation, all of the rule making, all of our policy goals have really been almost a full departure, 180 degree departure, from the traditional notion of the roots of our capitalist experiment, which is that we actually save for our economic freedom. And instead, what we’ve got is we’ve got a society where the regulatory process and the political process has created incentives for people to become indebted. And frankly, that’s been a 30-year process I think. I think Yves is right.

And it’s been supported by three secular trends that have been massive trends. Two of them came out of the inflation of the late ’70s, one of them is demographics. So we’ve got the largest generation in American history, the baby boom generation, who really was reaching their prime earning capacity coming out of the early 1980s recession; that boosted consumption. As the inflation of the ’70s, we saw wages being outstripped by asset prices. That gave a growth or an impetus to increase the move from one income families to two income families by necessity.

And the third is in the late ’70s we moved from the old-fashioned notion of charge cards and the old-fashioned notion of “you do not live beyond your means, you only borrow what you can pay back,” to consumer revolving credit. And if you look at the consumer flow of funds data, the Fed, it really takes off in the late 1970s. Those three secular trends have been supportive of consumption for the past 30 years. They all have reached their terminus. Now, we are on the other side of that. Democratization of credit is done, the baby boomers have gone from consumers to having to become generally net savers, and we’ve already got two incomes per family, and we’re losing those jobs moving back to one.

So what are we going to do from here? Are we going to continue to create incentives for people to live beyond their means, imperiling their financial future? But also making them “wards of the state” as they retire with no income and no savings, as example, the house, which is historically has been the largest savings asset for retirement and intergenerational wealth transfer asset, which is going to put the treasury at further peril when those people reach retirement — or are we going to create incentives and turn the incentives backwards from what they’ve been to create a society of people who can afford their own lives rather than binge on debt?

DYLAN: Yeah, and we’re going to get into the solution in a second block with Josh and Yves in just a second. But for now I want to focus a little bit more on the origins of the problem and specifically, Yves, how much of a variable has it been in the political culture where one seeks to basically spend more and tax less as a concept for keeping your own job. In other words, the ability for a politician to keep his or her job by empowering policies that allow people to raise their lifestyles while not doing anything to raise productivity and at the same time looking at how profitable that has been for the banking institutions to create that credit and insure that credit and speculate and gamble around that credit. Just how sinister is that combination of the profitability of credit gambling that was invented in the late ’90s under Bill Clinton and the political culture of giving people something to entertain themselves with — easy credit — while not demanding any productive use of capital? [10:00]

YVES: Well, you really saw the big shift happen in the 1990s. I mean that was the time when you saw much more aggressive and active financial lobbying, and a lot of it was simply not very visible to the public. For example, one fact that isn’t widely known is that we had a massive derivatives crisis in 1994. In fact, the losses across the financial system were actually bigger than in the 1987 crash, and there were a whole series of — there was at the time a whole series of investigations and some noise about derivatives reform. And this was well before the creation of credit default swaps which was the sort of centerpiece — one of the centerpieces of this crisis, and it all came to naught.

In fact, one of the chief industry lobbyists, Mark Brickell, actually drafted some of the subsequent legislation around derivatives. I mean that was when you really saw the embedding of industry lobbyists in the legislative process in a much more fundamental way. And as a consequence, we’ve had — you’re correct to say that we’ve had legislative policies that have favored financialization. You know, we saw to some degree in the ’80s, as Josh correctly points out, to the inflation sort of overdoing the banks need to have better ways to respond to changes in interest rates. That was something banks just had not been equipped to do in the sort of old heavily regulated regime. But they went way further than what was necessary to respond to that. And then it accelerated in the ’90s with the sort of no regulation — you know, light to no regulatory policy as the bias which allows banks to create very complicated products that frankly the users of them; both the retail users of those products, as well as, even sophisticated institutional users don’t really understand.

The other part of this sort of bias we’ve had in policy has been — has sort of unwittingly allowed for corporations to become effectively, net savers. The other part that isn’t told is the normal way we like to think of an economy working is that how households save because households need to save for retirement and the business sector is supposed to invest. And that’s why we don’t — you know, there is a sort of reflexive response to government running deficit because the fear is that it’s crowding out the private sector. But the flipside is that the private sector isn’t doing its job. It’s acting like a proper capitalist society. Then you actually need government to deficit spend because otherwise you’ll have the economy start to contract.

And in fact, we have seen big corporations in the United States since the 2000s become net savers. And even though small businesses have, to some degree taken up the slack, they’re just not stable enough enterprises. They’re the first — they’re the canaries in the coal mine when there is a downturn. So that’s part of why we have such a bad unemployment picture now is that big companies have not become drivers of employment. They have continued — they have shed jobs basically from the mid ’90s onward.

DYLAN: How much of this in your view Josh is criminal?

JOSH: Not a lawyer, don’t play one on TV. In terms of the behaviors? Look, I think it’s become so embedded in the process. Interestingly, Yves points out Mark Brickell as one of the creators of legislation. He came out of one of the big banks, and yet he helped draft some of the derivatives language. We should go one step further because it answers your question. He was then later nominated to become the head of OFHEO which was the regulator of Fannie and Freddy, okay, who, oh by the way, would have been the head of the largest users of financial derivatives, who was out of the banks, and therefore was very favorable to treatment of derivatives, okay.

So it’s criminal? Well, I think the system is corrupt. Criminal versus corrupt are two different things. I think we have as we hear from so many, including ironically so many in the international financial community, the IMF which I think is starting to have a more realistic view of the problems in the US. We have become almost a traditional third world relationship between our financial sector and our government sector. Which is that they are so enmeshed with each other that the separation of the two is necessary, but it’s almost impossible to effect at this point.

DYLAN: Unfortunately, Yves, as we all know when you go down the third world pathway of integrating the captains of finance, in this case, with the government and then they act collectively in the interest of their own self preservation, that frequently comes at the expense of the vast majority of the people who populate that country in the form of either diminished wages, no housing, no jobs, rising food prices, rising energy prices, and an ever expanding percentage of the population that’s being exposed to that which is a classic third world corrupt, again, crony capitalist architecture. [15:00]

JOSH: Which we’re watching, by the way, right now. So we’re starting to have a discussion about what are we going to do about the GSEs going forward, Fannie and Freddie? And the industry, the banks, who for a decade argued that Fannie and Freddie having this special relationship with the government and implied government guarantee was wrong, have now ceded the discussion. They are the only voices in the room.

You’ve got the Financial Services Roundtable, The Center for American Progress, the New York Fed, Mortgage Bankers Association; all of them putting forward positions which are very supportive of a bank view that there needs to not be an implied government guarantee of some part of the mortgage market, but it needs to be explicit. And that the gatekeepers ultimately need to be the private industry, i.e., largely the banks; which is neither good it seems for the public nor for the investors, but they are the only voices being heard in Washington. They are the only voices in the room in Washington. And that actually really needs to be part of the discussion because — frankly it sounds great to the public that there is a mortgage market that’s explicitly guaranteed. But then why would we have to have private intermediaries that are taking the advantage of that?

DYLAN: Aren’t there really just two, theoretically in a purest view, Yves, only two ways to run a banking system? Either you have a state run banking system that has no accounting standards and no capital requirements, but it is run by the government and they decide to ratchet up or diminish credit based on the political views of whoever is in charge; again, versions of it in China and other countries — or you can have a private banking system in which there are accounting standards, and there is integrity for capital, and the bankers are responsible for the management of the risk in that capital? And what Josh just described, and what I have been observing for a few years now, is we appear to have the worst of all worlds in that we have a state run banking system with no accounting standards for which private individuals collect the compensation for running. Is that a fair characterization?

YVES: Well, there actually is a third. There actually is at third model, and we had a version of that in America after the Depression. Unfortunately, to your point, we have basically made a decision in advanced economies that we do not let banking systems fail. And we used to have the idea of a bank be much more narrowly defined in terms of an institution that took deposits from the public. That used to – if you had asked somebody in 2005 if we would have a government bailing out, firms like Goldman Sachs and Morgan Stanley, they would have looked at you cross-eyed. They would have thought that was the most deranged thing you could ever have posited.

But we’ve now thrown the safety net under a whole bunch of activities because they’ve now been deemed, some of them not correctly, to be essential to the functioning of the economy. What happed is we shifted a lot of activity — a lot of activity was shifted from traditional banks into credit markets, and then when those credit markets started to fail, we wound up backstopping them.

But back to your point of what are alternatives — the alternative is to regular banks like utilities. We used to regulate financial institutions extremely aggressively, and the result was that bankers didn’t make very much money, and you didn’t see this brain drain we have of talent from mathematics and the sciences to Wall Street. I mean if you look at the relationship of banker pay, financial services industry pay, to the pay from industry up through — ironically, up through about 1990, it was — sorry, the early 1980s, it was on a par. Literally, with the deregulation you saw in the 1980s, you start to see the pay levels and financial services move up in relationship to that of other things you can do in the economy. And the gap has just become wider and wider and wider, and this is across all financial services not just the people on the top.

DYLAN: But isn’t that as they would argue because they create a lot more value for Americans than anybody else?

JOSH: No. It’s because they actually use more.

YVES: No. The best debunking of that comes from a paper that I say everybody ought to read. The one stop shooting of that comes in a paper from the bank of England of all folks by a fellow named Haldane, called “The 100 Billion Dollar Question” when he says, “Well, we have a financial crisis. They seem to happen about every 20 years. And the cost of this last financial crisis was at least one times global GDP. Some people say it’s high as five times, but let’s just stick – lets be conservative and stick with the one times global GDP because that’s how much it costs in terms of not — all the unemployment and the other natural effects that we’ve seen.”

DYLAN: Sure.

YVES: Well, we should really tax the banks for what these losses cost. That’s what economics said you should do. If we were to tax the largest banks for the cost of the global financial crisis, over 20 years, it would cost over $1.5 trillion a year. The market capitalization of the biggest banks of the world is less than that. That says that they actually destroy value on a massive basis — massive. They are net value destroyers. They are extractive. They are not productive in their current form. [20:12]

DYLAN: Quickly and then I am going to take a break. We’ll come back. All right. Let me take a quick break here. We’re going to come back with what we can do about this. If you, again, weren’t alarmed a few minutes ago when you started listening to this, I hope you are alarmed now because it’s only through coming to truly understand how corrupt the relationship between everybody from the White House in this country, the Democratic and Republican leadership, and the heads of the financial institutions who are preserving themselves at the expense of American fairness, prosperity, and future generations and absent intervention collectively by the people outside of the political process. It has been made very clear by Barack Obama and his cabinet and everybody in Democratic-Republican leadership they have very little to no intention of doing anything other than to continue to lie about this and cover it up. Unfortunately, with modern communication being what it is, I suspect that that’s going to be a gross miscalculation on their part in time.

We take a break. We’re back with Josh Rosner and Yves Smith right after this.

[PART II]

DYLAN: We’re back with Josh Rosner and Yves Smith. Josh, the Managing Director of Graham Fisher. Yves runs the incredible financial blog, Naked Capitalism, author of “ECONNED: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.” Yves was just telling us, Josh, that the mathematics when you talk about the necessary subsidies that are paid into the financial system to pay off the gambling debts that are incurred in this financial crisis, that the math works out that this a massive extraction of wealth, from not just the American people but the people of the earth, that is basically being conducted in collaboration with the American government who receives, by the way, 40% of its political donations from the financial services industries. It’s as if the drug dealers in Mexico are buying off the Mexican government.

JOSH: It’s not as if.

DYLAN: It is.

JOSH: It is. And in fact one of the things that’s interesting is we have these notions of, well, the banking system is so important or the banks are so important or these institutions are systemically significant. Let’s actually stop, step back, and drill down on that for a quick second. The historic role of banks were, going back to the middle ages, to aggregate the capital within a society through deposit taking and allocate that capital for productive ends, i.e., the development of the society.

DYLAN: Farming, whatever it might have been.

JOSH: Exactly. And so there was the value and the understanding and the creation of a central banking community; and the central bank’s job was really to say, “Look, we’ve got capital. We’ve got allocation of capital. The bankers have a special role in our society. They should have a right to earn a fair return for their activity of aggregating and allocating capital. But they also have a social responsibility in that — to make sure that the capital is allocated to productive uses.”

DYLAN: And thus, they get massive subsidies from the government and all the rest of it.

JOSH: Historically correct. What we are talking about is over the past 20 years with deregulation, with the growth of what had previous or prior to this crisis been the emergence of capital markets; what we saw is the banks actually became less and less important because what used to be held in deposits at the banks, ended up being moved over to your pension account, moved over to your market account, to your stock account. And so where the banks historically managed your money and aggregated and allocated it, you became more in control of that.

DYLAN: But the interesting thing is that the bank was both a warehouse or was a holder of risk effectively. So it would make this allocation to the farm, to the factory, whatever it is, and then the risk would reside inside the bank. What you’re describing is an environment where now the banks could transfer the risk of default to the capital markets, to the investors –

JOSH: Well, no, no, no, no. I’m not even going to securitization yet. What I’m saying is the banks used to have your deposits and over the past 20 years, you ended up moving your deposits to Fidelity, to Wellington, to Putnam, to the large asset management complexes.

DYLAN: Understood.

JOSH: Okay. And the bank’s role, therefore, was greatly diminished in terms of the aggregation and allocation of capital. As the bankers decided that they were going to do more and more balance sheet lending, which is when we saw the consolidation of investment banks into banks, they felt that they didn’t even need the traditional higher value, higher margin intellectual capital advisory businesses where they would do advisory on M&A, mergers and acquisitions, et cetera. All of that ended up going to the buy side. And so we’ve got a central banking community that doesn’t even understand that the banks ended up, because of the fact they were low-margin players, ended up having to take more and more risk to make up for the loss of importance that they had in their core roles. They became nothing more than utilities to the aggregators and allocators of capital, the big asset managers, and so they needed to take more and more risk. [25:26]

We don’t really need the traditional or I should say the new-fangled version of the one stop bank supermarket that we had. It failed, and the banks today really have the ability to be put back in their traditional role of deposit takers, narrow banking. Okay. And, so the notion that they’re so vitally important to “the system,” we keep hearing the bank say, “But if you don’t have large globally capable banks, then we won’t be able to do investment banking deals for large banks.” We used to have very small investment banks, and they would syndicate deals.

DYLAN: Isn’t that what they used to call the syndicate desk?

JOSH: That’s exactly right.

DYLAN: Isn’t that why there were all those little names on the prospectus?

JOSH: On the bottom of prospectus.

DYLAN: That was funny.

JOSH: And so we can and we should recognize that the proper role for the banks and the investment banks is back in narrow banking. And even in terms of the investment banking, we don’t need global banks to achieve those ends.

DYLAN: Can we talk, Yves, for a second about the President of the United States and his Treasury Secretary? What is your view of how the president and the Treasury Secretary have managed their custody over American finance and financial regulation?

YVES: Well, my personal view is that despite the fact that Obama gets up and occasionally makes comments about – very supportive comments of banks, that he really does not have much interest in those issues. That he – and I am not saying that to defend him in the slightest because you show up as your president, a disaster happens on your watch, it would be the same to say if a pacifist president showed up and a war happened, he better take interest in the war. Instead it appears that Obama significantly delegated — not significantly — pretty much completely abdicated his financial policy to a Larry Summers, protégé of Bob – well, both were protégés of Bob Rubin, Larry Summers and Geithner. And Geithner is very much a status quo, don’t rock the boat; everything he learned about banking, he learned from the banks. He has never been – the closest he has come to being a financial markets person is through his time at the New York Fed, and the New York Fed gets all of its information from the major dealer banks.

DYLAN: Right.

YVES: So he’s always — he has grown up being fed — being educated by the very largest financial institutions in the world, and he’s emerged – the kindest you can say about the policies they’ve implemented is that they are a classic victim of what William Buda, a former central banker, calls cognitive regulatory capture. They honestly believe what Wall Street — the best interpretation you can have, and I suspect this is charitable, but the best interpretation is that he’s drunk the industry Kool-Aid. He honestly believes the nonsense they feed him — which makes him actually quite dangerous. You know, somebody who is sincerely deluded is much more dangerous than somebody who is cynical and knows that they are talking a line that is politically convenient.

DYLAN: Your opinion of the Treasury, the White House and political leadership on both sides of the aisle, Josh?

JOSH: Yeah, so they are wonderful at actually talking about how they intend to resolve the crisis. At the same time I had a meeting at the White House towards the end of last year in which we had discussions about the need to force or recognize the problems with second leins and the fact that the –

DYLAN: Explain what that is quickly.

JOSH: Well, we’ve got a lot of borrowers who are under water in their homes. We’ve got a lot of borrowers who frankly, if we offered them principal write downs or if we were to expand and support let’s say the FHA short refi program which is to say re-underwrite borrowers to a 30-year fixed rate mortgage — an LTV of 97% — because that could qualify for FHA, FHA’s underwriting standards, and we do a principal write down that could keep a borrower in their home and get them back to performing. That would be a worthy outcome I would think in most people’s eyes. Now interestingly as much as we talk about Wall Street –

DYLAN: Including for the lender.

JOSH: Well, so, that’s where it’s going to go. So we talk about Wall Street in this monolithic view, and I would suggest we stop using that word the way we do because when we talk about Wall Street, we forget that there’s investors, buyers and sellers of securities who by the way are fiduciaries to the people who’s money they manage, and they tend to manage our money. They manage pension assets, they manage – okay that’s very different than the banks, the banks are a little more than weapons suppliers in a war. [30:03] Okay. That’s what we are talking about when we say Wall Street. So the mortgage backed investor who owns the –

DYLAN: Your pension fund.

JOSH: — who owns the pool of mortgages that would actually be exposed to the losses of that principal write down program I just discussed, they actually – they really understand that a 30% loss on a principle write down that gets the borrower to re-perform, is better than the 70%+ loss that they will end up taking on a foreclosure.

So why isn’t that happening? Why isn’t the federal government supporting that happening? Why isn’t the administration actively courting that as a solution? And it seems pretty clear that the reason is that the banks, who service those mortgages for that investor, also own second lien mortgages on their own balance sheet which is a home equity line of credit, a closed-end second lien of subordinated interest that they are carrying at artificially high values in many cases.

DYLAN: But they are basically pretending is worth something when it is not.

JOSH: Right, now let’s nail that down. If your first mortgage — if your property is under water, in other words, you have no equity or negative equity in your house, how can your subordinated mortgage, your subordinated lien on that home have any equity in it? Okay now it’s a call option. If your home price starts appreciating or your income goes through the roof, maybe at some point it will be worth something again. But the banks are carrying these at very high values. Why? Because those mortgages tend to be more like credit cards, you only have to make the minimum payment due. And so they get to carry this current even though the truth is it’s unclear that you are going to continue to pay that as a borrower.

So the White House seemed hellbent on supporting the bank’s fiction of their overall second lien positions.

DYLAN: Accounting fraud.

JOSH: Well, you can’t say fraud, but certainly accounting questions — because there are problems in the accounting rules that allow them to justify it as such.

YVES: And there are another set of issues too which is as the regulators are giving what they call forbearance. So the fact that the — this is to get back to your point Dylan of incestuousness. The fact that the regulators are allowing them to get away with these marks is also is a justification for validating this. And the magnitude — the reason for the treasury and the administration playing so hands off, is that the magnitude of these losses would be so great is it would put them way below regulatory compliance. They would have to go back into the TARP. I mean this would –

JOSH: Probably more importantly, it would actually put egg on their face, demonstrating that the stress test that they presented to us last March, March of 2009 was –

DYLAN: A fraud.

JOSH: Yeah, at very least it was a nonsensical exercise to artificially boost confidence in something that wasn’t worthy of our public confidence.

DYLAN: But I guess this is my question — and you kind of addressed this I guess, Yves. There’s only two ways to look at this — either because I am somebody whose history is as a financial reporter, somebody who has spent a lot of time talking to people like yourselves and other people in the financial industry for a couple of decades. But I am not a financial maestro. I couldn’t run a bank. I am not – I couldn’t run the New York Federal Reserve. I do not have the level of sophistication or expertise –

JOSH: I could argue you could run New York Fed but that’s a whole other –

DYLAN: Thank you. but the point is I don’t – while I view myself as somebody who is attentive, intelligent and clearly invested in understanding this, I don’t view myself nor do I view by the way my staff on the show at MSNBC who has none of my financial prior history and now has a very thorough understanding of this financial structure that you are both describing; they are smart kids who are ambitious to learn and understand, but they didn’t go to Harvard Business School, they don’t have ambitions to run a bank, they understand what the two of you are describing as sort of ambitious and hard working 27, 28, 29 year olds here in New York.

And so as I look not only at my own ability to digest a lot of what the two of you described. But if I look at those who have far less sophistication than I have, far less of a history than I have, that are new to me and this is people that were assigned to me when I came to work at MSNBC and NBC when I go out on the road and talk to people. They’ve spent a little time. They’ve read on your blog. They’ve read some of Josh’s writing. They’ve read perhaps The Big Short from Michael Lewis where there has been plenty of literature published and plenty of talk about this.

They understand what you are describing that the pensions were used to create this credit casino, that the banks are covering this whole thing up, and that the government is doing nothing about it. In fact in some ways I feel like the only people who claim to not understand it is the President of the United States, the Treasury Secretary and his Economic Advisors whether it is Bill Daley, Gene Sperling now or whether – excuse me or whether it was Larry Summers before. [35:04]

And so either myself and my staff and my colleagues are geniuses who are able to pick up incredibly sophisticated financial content and should be running the central banking system or there is a conscious denial of the facts, starting with the President of the United States, that is creating a disastrous and incredibly perilous economic structure for the current and future reality in this country. Is that unfair Josh?

JOSH: No, or there is another option which is they really genuinely believe that given time and given patience, the banks will be able to grow out of their problems, and so all they have to do is forebear and hope that they can actually –

DYLAN: Wait it out.

JOSH: — grow — wait it out. Now the problem with that is: one, we’ve seen that that didn’t work very well for Japan. Two, as a percentage of GDP, the losses here are far larger. Three, as we talked about before, we had three very strong secular tailwinds that supported consumption and economic growth and frankly healthy levels of economic inflation for the past 30 years. We now have some disinflationary trends as we’re on the other side of the democratization of credit, two-income households, baby boomers moving into retirement, and the likelihood of us being able to play that “kick the can down the road” and grow out of it is a very unlikely scenario and puts us in an incredibly precarious situation where the largest generation in American history is going to become dependent upon the Treasury a decade from now for Social Security, Medicare, Medicaid because they don’t have savings. They’ve depleted their savings at the same time as our foreign creditors are starting to tell us to reign back on our debt binge spending. And that puts us into a very dangerous future if we don’t address it now of looking a lot like the crisis that we’re seeing in Europe.

JOSH: Yves you get the last word as we wrap this up. Can it be addressed?

YVES: In theory it could be. In practice it gets to the point you were saying about how embedded — what amounts to these financial oligarchs are. I don’t see the political will and we see in it — frankly –

DYLAN: But it could be done?

YVES: I mean it could be done. What it takes is –

DYLAN: Technically if we resurrected Tony Roosevelt.

YVES: What we have in the – the funniest thing about the Depression is that we wound up through a disorganized process of having that write down. You had banks fail. You had a lot of people’s credit fail individually and the result was that you had a lot of credit writedowns. And it was an incredibly disruptive process. You had overshoot on the downside. But we’ve had other economies where they had a much more organized process towards realizing — recognizing the losses. You know the poster child of that is what they did in the Nordic states when they had a very bad financial crisis in the early 1990s, and they went through and they forced the banks to write down the debts. They threw out management. They set up asset management companies to try to have not just orderly work outs — but actually for some of the loans — they even had the authority to extend new credit to borrowers when they thought the borrowers were viable. So this wasn’t just a liquidation process.

DYLAN: Just to be very clear Josh, the way you would solve this would be to reduce the debt principal write downs –

JOSH: On the housing side.

DYLAN: — on the housing side –

JOSH: Correct.

DYLAN: — and break out the financial institution or in some way resolve these large banks that are in control of our government.

JOSH: ”Too big to fail” has to end. More importantly we’d like to think of ourselves as the broadest deepest markets in the world. We like to think of ourselves as the leader in rule of law and the leading capitalist player. Well, capitalism says that when an institution is bankrupt, you have the opportunity to move assets from weak hands to stronger hands. We had this discussion at the beginning about nationalizing the banks. The FDIC nationalizes banks for a living. You do a good bank-bad bank resolution. You keep the good assets of it and the good parts of it, and you essentially wipe out the bad. We are unwilling to recognize that that’s the process that some of our big banks will have to go through as we do recognize it’s not nationalizing; that some of them will still remain quite unhealthy and there’s value there, but you need to recognize the losses so that what comes out the other side is viable and healthy and not saddled with the problems of that unhealthy side of the institution.

DYLAN: On a spiritual level, on a psychological level, on a physical level, it is a lack of resolve.

JOSH: Absolutely.

YVES: Yes.

DYLAN: Both resolve in political leadership, and literally, resolve in resolving or resolution for the banking system and our diminished character as men, our diminished character as women; our lack of resolve is really what’s at the heart of it. [40:17]

JOSH: And the saddest part is that those people who claim most loudly to believe in free markets and the ability of markets to function and resolve crisis are the ones who have demonstrated the least willingness to rely on those traditional tenets of capital structure, bankruptcy resolution and Adam Smith’s invisible hand.

DYLAN: As grim and atrocious as all of this information is, as dirty our laundry may be, I remain an optimist, in so far as, I believe the degree to which this is understood today is substantially higher than it was a year ago or two years ago. I believe the understanding will only continue to escalate until the noose of the truth, if you will, is so tight around our political leaders and our banking leaders that they are forced into a position in where resolve can be exhibited and this country can be free.

Once again I thank both of you for being teachers for myself and for being advocates for the truth and helping to shine a way forward for not just people like myself in the media but for our political leaders and elsewhere, as those with good intentions seek to try to find a road forward for something for which many people do not see that road. And I think that the two of you are most instrumental in shining the flashlight into the dark and murky forest of this problem and showing people in fact that there is another way; that there is a path, that is, not to close your eyes and to hide under the bed and hope that it goes away.

And the more that people can understand that and see that there is another path and a path that leads to more freedom, more prosperity, more equality and more opportunity for more people in this country, I believe the easier it will be for this change to happen and for the resolve necessary in the characters of our souls and the resolve in the function of our financial institutions to take hold.

Josh Rosner thank you so much, Graham Fisher and Yves Smith from Naked Capitalism thank you both so much for your time today.

JOSH: Thanks for having us.

YVES: Thank you.