Six Questions for James Galbraith on the Financial Crisis and the Bailout

[billyoc]

By Ken Silverstein

James K. Galbraith teaches economics at the Lyndon B. Johnson School of
Public Affairs, the University of Texas at Austin, where he directs the
University of Texas Inequality Project, an informal research group.
Galbraith has authored several books, among them The Predator State: How
Conservatives Abandoned the Free Market and Why Liberals Should Too. I
recently asked him six questions about the unfolding financial crisis
and the resulting reaction from Washington, D.C. This interview was
edited for length and clarity.


1. It’s hard to get a handle on the scope of the crisis? Just how big of
a problem are we looking at?

If you’re on Wall Street you’re sitting in the middle of a disaster, and
one of your own making. Wall Street took these toxic subprime loans from
places like Countrywide and sold them to pension funds and sovereign
wealth funds, keeping what they couldn’t sell in their own portfolios.
Now those loans can’t be marketed. They’re not all utterly worthless but
no one knows the value of the stuff and so the markets have seized up.
That’s a big problem for the Wall Street firms involved in the crisis,
some of which are basically bankrupt; the problem for the rest of the
economy is that the driving motor of economic expansion–the extension of
credit from the private sector to homeowners through mortgage and lines
of credit–has dried up, and housing values are going to continue to
fall. The Treasury Department buying up subprime loans won’t fix that.
It will prevent the absolute elimination of the companies, but it won’t
change the fact that the value of your home has fallen and now you owe
more on it than it’s worth. And nothing has being done to address that
yet; it will be the next administration’s problem.

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http://www.harpers.org/archive/2008/09/hbc-90003600