Heiner Flassbeck—the Fed moves to contain the collapse of 2008

Flassbeck recounts the issues that caused and deepened the financial catastrophe of 2008.  Why doesn't anything challenge the dollar?  Why didn't the Eurozone do a better job of containing the crises? etc.  Flassbeck claims the compared to Germany, the Fed didn't do SUCH a bad job of things.  This may sound counter-intuitive but recall, with Wolfgang Schäuble as their finance minister, it is almost impossible to imagine anyone doing a worse job. And so the Eurozone staggers on with Depression levels of unemployment.

Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I'm Paul Jay. And this is Reality Asserts Itself with Heiner Flassbeck. He joins us again in the studio.

Thanks for joining us.

Heiner worked at UNCTAD since 2000, and from 2003 to 2012 he was the director of the Division on Globalization and Development Strategies. Since January 2013, he's now the director of Flassbeck-Economics, a consultancy for global macroeconomic questions. And from 1988 to '98 he worked at the German Institute for Economic Research, and from '98 to '99 at the Federal Ministry of Finance in Bonn, where he was a vice minister responsible for international affairs, the E.U., and the IMF.

Thanks for joining us.

DR. HEINER FLASSBECK, FMR. DIRECTOR, UNCTAD DIVISION ON GLOBALIZATION AND DEVELOPMENT STRATEGIES: Thank you for having me.

JAY: So we're continuing our discussion about whether or not there's any rationality or reasonableness left in capitalism. You've used the phrase several times in the earlier segments if there were any reasonable capitalist, they would. And I'm questioning whether there are such things.

But let's dig in further to the crisis and unpack it a little bit. In an interview in 2008, you were asked whether you were surprised by the crisis at, and you said you were not surprised by the crisis; you were surprised how intense it was. But you also said you were surprised that the American dollar--you were expecting in the crisis the American dollar would go down significantly. And in fact it not only didn't go down; it went up. Everybody started buying American T-bills. So there's been prediction after prediction of the collapse of the American dollar and the American dollar isn't going to be the reserve system anymore. And I remember from '08 there was this really out-there prediction there. There was something--they were going to call it the amero or something. The whole American currency was going to collapse. I mean, none of that's happened. The opposite happened.

FLASSBECK: Yeah, that's right, and so far I was wrong. But the point is what I didn't expect is the weakness of Europe. Well, I predicted that something like the crisis would happen in Europe, because the reason for the crisis that led down in the beginning of the currency union in '99 already, --but nevertheless it was not clear in 2008 that Europe would fall into such a deep hole. And--and this is the most important thing--and this explains the weakness of the euro compared to the dollar, that European politics would be so weak and European politics would misunderstand the crisis, would mishandle the crisis, would mismanage the crisis in a way as it has happened, with austerity in the midst of a recession and things like that. So that was clearly beyond my imagination. I couldn't imagine that something like that would happen, that the German finance minister would say in the middle of the crisis, we need austerity, everybody needs austerity. This is really absurd.

But what we see now is a sortcertain of weakness of the dollar. But you're right,: it will never be so strong that the dollar will fall to levels that are no longer acceptable politically. And if it would, then there would be intervention by the central banks. We have seen it wentwhen the euro once touched 1.60 or so. Then there was really intervention, verbal intervention first, and then physical intervention, so to say, later on. So for the world currencies, the scenario cannot be such that there are big movements. And even if there are sometimes irrational and big movements, then the central banks will step in. We have seen it with the Swiss franc. Swiss franc was rising, rising, rising against the euro and the dollar, and then the Swiss central bank at a certain point stopped it just by intervening and by intervening up to today. It's now more than two years that they keep the Swiss franc at a rate of 1.20 to the euro. So they're-- and among the big currencies, these things do not happen anymore in a way that they would have happened, say, in the '80s--they still happened like that.

What we have seen, nevertheless, is we have seen huge movements in currencies that are absolutely irrational, namely, in emerging markets. If you look at the BRICS countries--Brazil, South Africa, Russia, even, and India--we have seen perverse movements of capital flowing into these countries, appreciating the currency, the so-called carry trades, where people are--.

JAY: This is where people can get money--big banks get money from the Fed at practically zero and then can loan it at four,4 or 5 five--in Turkey right now you can get 12 percent for that money.

FLASSBECK: Well, 10 percent, 12 percent in an emerging economy, which is absolutely absurd, because the losses are in the countries that are receiving the money, so to say. You're getting a lot of capital, but you pay for that a very high price because nobody can earn this [at this pace (?)][crosstalk]

JAY: But isn't this part of the reason, that in times of crisis, money heads to the American dollar?

FLASSBECK: That's right.

JAY: Just to finish, the point is that over the last few decades, the United States always finds a way to shift thea crisis somewhere else. A, and whether it's shifting it into Latin America, where it's giving these loans that were floating in the '70s that then went into crazy 20 percent interest rates. But one way or the other, are not all the economies now, or most of the economies in the world, they're in that American basket, and this global capitalism is managed by the United States, and they have to buy into it.? And I know there's talk about other kinds of currencies and the Chinese trading with Latin America and using their own currencies, and there's little bits of that, but the system seems so now dependent on American management that there just isn't another basket.

FLASSBECK: Yeah, but, you see, this silly point, so to say, the silly point that I have to make is that the American management of the crisis was much better than the European management. So this was besides the point.

JAY: But it's also easier for them to do, too, given that it's their currency.

FLASSBECK: Well, no, Europe could do the same kind of policies. The euro has been a strong currency, despite it was not really competing [with] the dollar in terms of reserve currency. But it was strong enough to do autonomous policy in Europe.

JAY: In fact, the Fed helped European banks.

FLASSBECK: Yeah, but for a time. But the management, the overall management of the U.S. was superior to the euro management. That's absolutely sure, because, well, Europe, it's difficult to find decisions for among 28 countries and things like that, and the German leadership was not very good, and so on. So there were many reasons for that. But tThis was not a natural thing, from in my view; i. In my view, it was not a natural thing. Iin 2008, with the crisis originating in the United States, with most of the trouble originating here in this country and not in Europe or elsewhere or in emerging markets, it was not natural that the United States would, so to say, be able to distribute part of the burden to the rest of the world. But the management was quite good, despite all the criticism. They had a huge program to stabilize the economy in the first round, and the Fed was incredibly pragmatic in overcoming all the dogmas of monetarism and things like that and going into the fight against deflation, which was, in the end, not successful in the way that I would say you are back on a sustainable growth path--that is not the point--but at least in avoiding a further slowdown and avoiding a big slump and avoiding a depression.

JAY: And so the Fed has been--what they call quantitative easing--shoveling trillions of dollars into the banks and making them look solvent and giving them practically free money. Although I don't think anywhere near as much got invested into the real economy as supposedly was the objective here, it did seem to create a kind of bottom on the fall in the recession. You know, the Great Recession didn't become the great depression, as people say. But how long can that mechanism work? I mean, essentially, creating money and making the banks look way more solvent than they really are, according to most people. But how long does this mechanism keep working?

FLASSBECK: Well, it can--you see it. You can see it in the stock markets. What the main effect that the Fed did was a bit in the housing market in the United States. It stabilized the housing markets, because people are buying houses again and because mortgages are very cheap. But the major effect was, so to say, a wealth effect, creating wealth, perceived wealth in equities.

JAY: The stock market bubble.

FLASSBECK: The stock market bubble. And this stock market bubble is the big burden, so to say, for this whole kind of policies. If it is going to burst--and it can burst every moment, so to say, because everybody knows that it is a bubble and that there is no real growth behind it--if that is going to happen, then we are really in trouble, because then the whole effect, so to say, will disappear in one moment, the whole effect of the stabilization. And then a quickthe question comes again.: So what is really stabilizing these economies--? And then I have to come back to my point, namely, to say you need incomes policy, you need wage stabilization. You cannot go on with this imbalance in the labor market.

JAY: And we're going to dig into that more, but just to get this one point nailed, 'cause if the market does crash and people don't believe this bubble any longer, the Fed's kind of out of tools. I mean, they've already got interest rates at historic--how much lower can interest rates go?

FLASSBECK: No, then it's over. Then it's over. They cannot do any more. That was the last instrument, so to say, the last weapon that they had. The last [trap (?)] that they have is to create wealth, perceived wealth, and in the hope that the people who own the equities feel richer, and feeling richer would incentivize them to spend more. But, well, we know the rich people are not the main spenders in the economy, but the mass of the people has to spend. And so it has very limited effect at this moment in of time. The only thing that it has done is people have reduced a bit their savings ratio. Income growth is not back on a growth trajectory.

So there is really--in my opinion, we're still on a stagnative mode. We have a little bit of growth, which is not self-sustaining, which is not automatically coming, coming into quarter-to-quarter increases. We have a kind of stagnation still even in the United States.

JAY: So if this is kind of smoke and mirrors--China looks at this, India looks at this, I mean, I think all the countries of the world look at this--why isn't there a more serious attempt to get off the U.S. dollar as the reserve system and create something else? If everyone--I mean, wouldn't all these places think that this crash is coming sooner than later and they're looking at this American stock market bubble and such?

FLASSBECK: Yeah, but you see, Europe was a chance to overcome this kind of thinking in national compartments, so to say. But with the failure of Europe, the developing countries--look at Latin America. There were attempts to think about monetary coordination. In Asia they were starting to think about monetary coordination, thinking about an Asian monetary fund and things like that. This all has gone, because [of] the failure of Europe. I think this is the--if you don't have that model anymore, if it's shown that this model does not work politically, for, in my view, purely political reasons it does not work, then how could you convince people in Latin America, very diverse governments, to come together and talk about monetary coordination? I've been working on that. I have done a report on monetary coordination in Latin America, . bBut it all failed in the end. Nothing came of it.

JAY: You couldn't find your reasonable capitalists.

FLASSBECK: No, and not even reasonable politicians. That is sometimes--for that you need politicians who are reasonable and sit together and really discuss seriously a kind of coordination of monetary policies. But that's very difficult now. No, tThey don't.

JAY: Okay. In the next segment of our interview, we're going to dig more and this issue of the need for higher wages and the relationship of wages to the crisis. So please join us on Reality Asserts Itself on The Real News Network with Heiner Flassbeck. more