>> guest: right. at some point, things passed over from venture capitol markets, which are good. which for most of the country and wall street history, even though they occasionally go over board, have been healthier than a lot of the over regulated markets elsewhere in supplying capitol to new ideas and new company. that was silicon valley. a lot of the companies in the biotech boom benefited. at some point in the 1990s, and 2000s, that impulse in what became the desire to speculate and gambling. we saw that which are side bets on what's going to happen to interest rates and various economies. and it became a giant casino, indeed something even worse than a casino. unlike in the casino where you
know what the house odds are, on the craps game, roulette game, here no one knew what the odds were. it was just completely out of control. >> host: the book "capitol offense" we're talking with author michael hirsch. she's also chief correspondent at the national of journal group. he's been a correspondent for "newsweek." you've probably seen him on the show before. the number to call if you want to join the conversation. and in your book you as we mention, you go back in time 30 years and look at the various administrations and give a reflection on how things led to the financial crisis we just experienced? >> guest: yeah. again, it's important to do that and to understand how, you know,
i don't demonize either side of the aisle since this is a show in which we hear from republicans and democrats on separate lines. i spend just as much time criticizing the clinton administration as i do the george w. bush administration. what you had was officials that came to buy into an idea that economist knew was false. financial markets can be left untouched. one the most fascinating figures to me in my narrative is larry summers. he just announced he's living as obama's economic advisor. he's truly one the greatest economist of his generation. winner of a very prestigious prize awarded to economist under 40. and he knew, sort of his own work in the 1980s had shown the fallacy of the idea that rational markets in finance.
and yet when he became a policymaker, first in the clinton administration under robert rubin, the treasury secretary, and later under obama, he, you know, became influenced by this idea that you could leave financial markets alone. in fact, there was one famous moment in 2005 at the height of the bubble just before things went bad at the retreat, that the central bankers hold every year, a small economist at the university of chicago presented a paper saying i think we might be in trouble. the banks are getting loaded with all of the risk. they don't seem to know how to handle it. summers got up and ridiculed, and called him a semilettite. he could not have been more wrong. oddly enough, there was the man that president obama chose not only as the chief economic
advisor, but the guy that would fix the system that summers had been helping to create. >> host: democrats line. hi there. >> caller: good morning. mr. hirsch, i'm not a trained economist. i've always been in the opinion in the middle '80s that the deregulation of the savings and loans was probably the seminal event that led to this eventual meltdown of the entire system. what would be your opinion? >> guest: no, you are absolutely right. i don't know if it's the central event, it is a key event. it's the first indication of what can happen when a subsection of the banking industry is left unregulated. just as importantly, it led to the securitizing of bad assets which was orchestrated by the government and the trust corporation to deal with the problem of all of the bankruptcy
s&les. so that's a key moment in history over the last couple of decades. but there are a lot of key moments that lead to a market that's out of control. and another one the key figures in my narrative who plays more of a heroic role, joseph stiglitz, who won the noble prize, who wrote a paper back in 1990, basically questioning, you know, the securitization phenomenon. is that going to lead lenders to be less response art the quality of the loans? of course, that was question that we saw answered in the most devastating way 18 years later when we realized, in fact, there were no standards any longer in terms of issues loans. there was no longer a relationship between the lender and borrower to ensure that loans were good or responsibly
made. because of the securitization phenomenon that separated the two, sort of like a divorced couple on two sides of the world that are connected by the most tenuous connection of alimony payment or something or interest payment in the case of these loans. and so that is getting back to the callers point. yes, that's a very, very key moment in the history of this phenomenon. >> host: michigan, where mike is joining us on the independent line. hi there. >> caller: good morning. mr. hirsch, i take great home barrage. i have comments. supposedly the electorate is upset about the bailout. they are going to vote republican. yet, they are going to vote for the same people who are nothing
but shills for wall street. that's what republicans are. shills for big business. supposedly the tea party is all upset. they are going to vote republican. >> host: to bring you back to the topic of the book, what should the obama administration do to help the economy and with what's happening on wall street? >> caller: well, if you look back to the clinton administration once again, from '92 to '94, you know, a lot of democrats lost their seats in the house, and passing the clinton stimulus bill, so to speak. it wasn't until '96 that the economy started picking up? what do people expect, the obama administration can wave a wand and wipe out six to eight years of bad malfeasance of the republican party? >> host: we'll end it there. >> guest: the caller makes good points. the clinton officials thought
they were doing the right thing. certainly they, i've interviewed all of the key figures for the book, would maintain they wouldn't have let things get as out of head hand the 2000s during the george w. bush administration. maybe that's so. it's impossible to say. you know, it's just another important data point along the way. and i think, you know, his final point which is how do people expect in this current election environment that you are going to get back to where you were say in the high 90s. that's a very reasonable point. obama and the vice president are out there right now on the stump saying look, you know, we have created a lot of additional jobs. we have turned the economy around even though it's very slow growth and it feels like recession. we now have had four quarters of growth. out of the recessions, and this takes time. i would agree with that. something this deep and systemic, a crisis in which the
whole system was infected over a period of three decades. you simply don't come out of that in 18 months of this administration. unfortunately, it seems like that message is not being carried well with the electorate and you can have a lot of anger out there and the real possibility that the republican take over one or both of the houses. >> host: as you talk to the leading economist and were influential in forging the direction and you've also talked to politicians for this book. do they feel like divided government led to compromises that didn't work? for example, the stimulus package that was passed by congress under president obama's watch. some said we need much more. this is as much as we can get to get a couple of republicans on board. this is a reflection that compromise has bred problems or has the administration been able to really do what they wanted and get people on board? > guest: no there's a sense now that the obama
administration made too many compromises with a republican party and conservative movement which as we have seen has been taken over by more and more right leaning elements of the tea party movement. that they made too many compromises with a republican party that frankly has not addressed it's role in any of this. we continue to hear the fantasy from the right. these were government programs that led to the crisis fannie mae and freddie mac. there was an element in the crisis. just that. no more than that. and you don't hear the republicans dealing with the very real implications of effectively 30 years of runaway reaganism. which began as a healthy reaction to too much government. but like most revolutions over reached itself. and that was the problem here.
so you just don't hear a real discussion in washington about rethinking the proper balance between market and government, we are capitollists. but you have to have the right degree of government. we have all of this ranting across the divide. one the chris schisms of obama, he didn't realize that soon enough and sort of handed away too many things to the republicans, to centrist democrats who were captured by the lobby, without taking the fdr-type role and fix what needs to be fix. >> host: the author of "capitol offense." he's chief correspondent for "newsweek." >> caller: good morning. i had the comment about the
capitol requirements that the banks were required to keep. and i believe that fundamentally, that is the root of the problem. i don't think there any problem with derivatives or anything else. what really got the whole system on the wrong path is when the capital requirements for the bank were losened. that allowed the banks to become leveraged. that's the problem. and i lay that at the foot of the congress which allowed those capitol requirements to be reduced. >> guest: yeah. again, another very important part of the story. but there is this tendency in discussing the crisis to be a little bit like the blind men and the elephant. you are feeling one part of it. you are saying this must be
something or you are feeling another part of it. this must be something else. and not sort of getting your hands around the hull. and the caller is right. that was a moment when cap -- when banks were allowed to risk more and more of their capitol and get over leveraged and keep less and less of their own capitol staked in the securities that led to a lot of recklessness. and, you know, one the more interesting conversations and characters in my book is paul o'neil who few people remember was bush's treasury secretary. he was laughed out of the time. he wasn't robert rubin. but i went back to talk to him. a lot of his ideas sound pretty good. he was extremely skeptical of wall street. one the things he says, the 2,000-page financial reform bill, we could have done it in
two panels. one the pages would say that banks had to stake 20%, not the 7% that's being discussed internationally which is a substantial increase, but not enough, 20% of their capitol. that would make them responsible. because so much of their own money. at the same time, o'neil would say the would-be mortgage holders would need to put down 20% of their capitol if they wanted to buy a home. that would fix the problem. there's a great deal to what he says. it's practical sense. and so, yes, the reduction in capitol standards, as everyone recognized was the key problem. i think one the questions out there now is how much of a raising of those standards is necessary to prevent it from happening again? >> host: would you agree that the fate of glass-steagall set
up the crisis? >> guest: yes. what the repeal of glass-steagall did was eliminate the fire walls. it was imposed in the 19 30s when it became clear that traditionals banks during the new deal were being federally ensured by the government began to behave recklessly. there's two cultures. traditional banking is very cautious. and investment banking and trading on wall street is very bold. the point is you don't want the cultures to mix. that's what people understand when they talk about the topics. it's really a question of human nature. what happened when glass-steagall was repealed, they called the citigroup authorization act, because it allowed them to become a conglomerate. it had commercial banks which in past crisis would go in and rescue the situation. they too became infected with
the behavior and all of these bad securities on their books. so you no longer had fire walls of any kind to prevent the conflict from spreading. and that's one reason why the whole system was in danger of going down. >> host: let's move on to charlie. independent caller in massachusetts. good morning, you are on the air with michael hirsch. >> caller: good morning. mr. hirsch, you are -- your book is dealing with what you are proposing what you call the main cause of the financial crisis. and i would like to question that thesis. your thesis seems to be deregulation was very instrumental in causing the crisis. and you have mentioned other things that came in and contributed to it. you said they all played their role. but one of the problems with the argument is it seems to me if
you look at ireland, for example, that's just one example, ireland didn't have a glass-steagall act, it certainly didn't have fannie mae or freddie mac, it couldn't have been in the cause. ireland is in very bad shape and in the same kind of trouble as a lot of our banks are. they simply had too many lending. so it seems fairly clear that the core of the problem is that lots and lots and lots of institutions basically bought the same securities, securities that are all tied to the price of houses. and when the price of housing went down, everybody rushed through the exit together. and so the real question in my mind is why did all of these people think that owning all of the securities was a good idea? >> guest: okay. well, because wall street asked them to do so.
including all of the european and asian banks and economies like ireland. the caller is right. different circumstances in europe. you have universal banking models who you don't have glass-steagall separation. you also have traditionally a lot more supervision and over sight of the kind of activities they were getting into. during this period, these banks as well, got involved in buying up a lot of these very dubious securities. and one the famous cases that we saw in recent months was the case involving goldman sachs. and the way it created the collateralized debt where the products built on the idea of mortgage assets. that was designed to fail. it was put together with bad mortgages or securities that were based on bad mortgages and designed to go down through. that sort seller is on that side of the transaction could win.
like john paulson. of course, on the other side of the transaction was among others a german bank that didn't seem to realize that it was being played. so you had a lot of things like this occurring at the hands of these super sophisticated wall street firms and, you know, remember the people who had that working with the so-called quantities. a lot of them were major league brains and physicists and scientists who were designing that no one could understand. so, it is true there were different circumstances. but it comes out of the same phenomenon and it comes out of wall street. >> host: james writes on twitter. -- that's james' opinion. is there a discussion amongst the folks that you talk about to about, about the dichotomy as
having to hold a hard mind, versus working with the industry. displg -- >> guest: look this is a line that obama has tried to walk very carefully on the tim geithner and larry summers. there's one key moment, in fact, when obama is hemming and hawing on taking a tougher stance against the bankers. back and forth. one day, yes, another day, he's saying per tim geithner we need to maintain the structure. we have to get the economy back on track. we need the bankers. they are having this debate over the volcker rule. we need to change the structure of the firms. we need to forbid them from doing the risky trading. obama is hemming and hawing on this.
they are having a discussion. this is just the time that wall street is announcing new record bonuses. two years after the crisis, according to my sources, obama is stunned. well, maybe we should do what paul volcker is saying. he's still hemming and hawing. joe biden sort of steps in. no, volcker is right. soon after that, obama does embrace volcker. okay. we're going to do what paul says. it's sort of too little too late. indication of how obama is divided on the question and getting conflicting advise. he's not really taking a stand, and not becoming franklin roosevelt, which is what some people thought he would be at the beginning of his administration. >> host: jeff, republican caller in englewood, florida.
>> caller: i was calling to make a comment from an earlier caller. he made the comment to makes a long time for the economy to come back. obama can't be to blame because it will probably come back. the way that obama is forcing things on us. which is no different than any other government. health care, he's forced us to take it. he didn't really care what the people wanted. that's my issue with obama, not so much what he's doing or not doing for the economy. >> guest: again, i think it's a very pertinent comment. i'm sort of also of the opinion that while health care needed to be addressed, clearly, it's a crisis in our economy. it was not the most pressing the crisis. i think it smacked a little bit of hubris, when he had only half
fixed the economy and clearly hasn't understood how deep and systemic. the problem with taking care of health care, he used up all of the political power. we need more stimulus and government intervention massachusetts become impossible because of the rebellion that was against big government that was figured by imposing health care reform when he did. i think it was a huge political miscalculation. >> host: michael hirsch, the author of "capitol offense," he's also chief correspondent with "national journal." when we talk about the change over time, the decisions that were made over decades that have led to the financial situation, as you mention, your book is very character driven. you look at the players, and the people that were brought into the circle of the white house throughout the circumstances.
why is it like larry summers and tim geithner came back. why did the obama bring them in rather than going to some of the folks that portray as the canaries in the coal mine. people who were saying we have some problems here? >> guest: it is one the enduring mysteries. one the people i quoted in my book, michael green berger, who was on the right side of the issue in the '90s. look, obama didn't run for president to fix the derivatives. this is not expertise. he's a brilliant man. he understand a lot of the gravity. i don't think he understand until he became president just how deep it was. i think he saw people like summers and geithner as fix it guys. his favorite metaphor. that's obama, they drove the car into the ditch. we needed to get it out of the ditch. larry summers was an expert
mechanic who was going to be able to haul it out of the ditch without realizing just how deep the ditch was because of some of summer's own handiwork in the '90s. of course, once you choose your top officials, it becomes difficult to walk that back. but certainly we are seeing some signs now that obama has realized summers is leaveing. the president recently named elizabeth warren as head of the new financial protection bureau which is really one the best parts of the new bill, new law. and she's certainly considered a very progressive voice as one person described her to me, she's one the few people in the administration who don't have robert rubin on her speed dial. robert rubin being the former treasury secretary who was the mentor to a lot of the officials. >> host: austin goals by.
we are hearing more about him. >> guest: he wasn't part of the process. very close aide to obama. the interesting roll that he played was that he was one the people that was nudged aside by larry summers. who at the beginning of the administration, obama was waxes about him. larry summer was the guy that was going to saying. goolsbee was one member. now summers is leaveing. goolsbee has come back as the chairman of the economic advisers. in the current interim before summers replacement has been named, he's the most prominent voice. he's a centrist economist who i think has been more with the volcker types, those who wanted to see a deeper fix, but is also
very cautious, i think in his advise. i don't expect to see a huge amount of change coming out of his new asen -- asen dent si. >> caller: hi, how are you doing? >> host: good thanks. >> caller: here are one the things. i have a landscaping company that i shut down last year. actually, the problem is not the housing crisis that started all of this. the problem starts way back with jobs. and the bottom line is, you know, i'm a democrat. i lean sort of more that way. sort of independent as well. i've voted for both republican and democrats along with ross perot. but the situation that i saw was that we kind of have a problem with bill clinton started the
free trade agreement with china and our economy lifted up and who we controlled by, you know, what market are we mostly controlled by today is, you know, the chinese market, and, you know, almost any product that's made in china. this is a lot of american jobs that we are talking about. along with the internet and the boom of technology. kind of sucked everything from the bottom out. then it goes up to the housing crisis where our money seemed to devaluate along with time and nobody seems to address the fact that part of the housing boom was the economy, i mean not the economy, the money devaluating. >> host: let's hear response from our guest. >> guest: there's a great deal to what he says. these are all important factors. there's no one factor. the caller brings up a really important point. which is that during this period
when we were sort of deferring to wall street and wall street's view of the economy, short term quarterly type gains over longer term strategic thinking, the phenomenon where by ceos of all of the major companies, fortune 500 companies became caught up in the idea that every time market capital and companies took a leap, they became obsessed with the stocks and options as the compensation packages. we were kind of ignoring who was happening to the job base. who was happening to our middle class. and it's not that free trade is bad. free trade is generally good. where there's nafta or the agreement with china. we weren't noticing that our middle class, industrial class was just being completely hollowed out. sustaining itself with the illusion of prosperity that was based on debt.
taking on more and more debt. okay? and part of that was all of this debt that banks were issuing as part of the subprime phenomenon. and it was all tied in together. that's what's come crashing to earth. all of the sudden we realize my god. what happened to the american middle class? well, it's all by gone. and it can't sustain itself with debt anymore in the much more restricted austere environment. where are the jobs? 9.6 that could go up to 10%. where are the new jobs going to come from? this is what the clintonites and others going back with all of the glorification and financial markets what they were simply giving short shrift to. there was no protection at all for our middle class. >> host: you talk about the early '90s and moving into the late '90s with rubin and
greenspan. how they were interesting, odd, but enduring pair representing both sides of the political aisle. they were able to sort of make things happened because it looks sort of like there was political unity. you say that in keeping with the times, if history bruised a bronze age and iron age, this could be called the age of capital -- >> guest: right. that was the consensus that was achieved. clinton is a democrat. he was skeptical of wall street. he wanted to be fdr in his political impulses. but he was persuaded that the bond market was the way to go. he sort of infamously declared at a couple of points in the
early discussions in the '90s, you know, what's going on here. we're just here to make the bond market happy and his advisor sort of said when i get reborn, i want to be reborn as the bond market. because i can be all powerful. you saw the phenomenon where rubin and greenspan were persuading everyone of this. and they were at the time, seen as the greatest team, you know, in american economic history. greatest fed chairman, the greatest history secretary, as he said when he left office. and ultimately, what inspired me to write this book was the characters. was seeing these guys that i had written about in such positive tones in the '90s. myself was part of this. this -- seeing the reputation just crashing to earth. how does that happen? how do guys that are the best and the brightest, you know, turn out to have such clay feet? i thought that was a really fascinating story. it's the story that i wanted to
tell. >> guest: one last caller. charles, in georgia. welcome. >> caller: good morning. >> host: hi. >> caller: i've got a couple of comments. one is -- and i didn't say that earlier on. historicically, -- historically, and you may disagree, you talk to the financial advisors, they will say there are three events. my comment came from an earlier comment about the resolution of trust about playing out the savings and loans that was kind of a stalwart in all of this. gets into the 15% range when carter was in the federal government's primary responsibility is control the money supply. and i think carter let it get out of hand when you let inflation get way up there and if you look on the historical
timeline from then and the steady decrease in interest rates all the way down to know they are below the 3% save money that people and such should be receiving. >> guest: -- >> host: let's get a response from our guess. >> guest: interest rates are low. as a way of helping them get out of the prolonged after recession, since technically we are out of recession. there are a lot of issues here. one of my characters spend the first two chapters, milton friedman, the great economist who was concept was influential. but the guy who really sort of dropped monitorrism, which is control of the money supply is sort of the only way of regulating the economy was paul volcker, the fed chairman who squashed a lot of that carter-era inflation and was lotted for it.
because he found that controlling the money supply wasn't really working as an effective regulatory tool. so there are a lot of factors involved in the question of where interest rates are. the bottom line, they are being kept as low as they are now partly because of the economic trough. >> host: author of "capitol offense." thank you for being with us. >> guest: thank you, libby. >> michael hirsch is "newsweek" correspondent. to find out more, search his name.
conversation. could you start by telling us how you -- you are a historian of japan, both imperial and historical japan? how is it you came to write the book? what gave you the idea to make those linkages? >> guest: well, in this case, i think it was the moment that all of us remember exactly where we were. it was 9/11. and i happened to at that time in vermont, in rural vermont, 9/11 occurred. i saw it in a store and in a little town. then the newspapers came out, the local newspapers and both newspapers had headlines saying infamy. i work on japan. i've written on world war ii, pearl harbor, japan after the war, and of course infamy is the
pearl harbor word. sudden, everywhere the word "infamy" was coming up. if you go back and look at all of the newspaper headlines that came out in september 11, september 12, september 13, i would say 10 to 15% used the word infamy or president roosevelt's famous phrase, a day which will live in infamy. they would use the whole phrase. there was the immediate association with japan, stab in the back, treasury. -- treachery. we started talking about the attacks. japan was pulled in, even though it was nothing to do with pearl harbor. then you began to get things like we will never forget there
was a billboard outside of chicago, for example, and on one side it had december 7, on the other side, it had september 11. and in the middle, we will never forget. nobody needed a footnote to understand that. pearl harbor, 9/11. we will always remember these dates. which is true. there was a great sense of revenge. we will pull together. and, of course, if you thought about it, and what was very clear at the time, there were real similarities. the surprise, the shock, and the fact that when pearl harbor happened, president roosevelt was presiding over a very divided country. isolationist, people who felt we should do more in the war in europe, and when 9/11 occurred, president bush was just beginning an administration after an election that had really fractured the country.
and so the country pulled together on both occasions. so this was the first thing where people were using japan, and al qaeda, the poor japanese, you know, they had tried for so many decades since pearl harbor. six decades or five decades since the end of the war to be our good friend. suddenly, boom, here it is again. remember pearl harbor. but the second thing that came very quickly on the heels of that infamy was what a colossal failure of intelligence on the part of the united states. so you had another level there where how could americans have been caught by surprise in this manner? and then you started to get other people coming in with different things. nonwestern country. nonchristian culture.
nonwhite peoples have attacked us. you began to get into the rhetoric of the class of civilizations once again. this is a great clash of civilizations. clash of cultures. and i found it interesting. because you could see why it was happening. there were all sorts of problems with it. and the problems got more complicated when suddenly 9/11 and it's great simple, the word -- the world trade center made news. now i've written a lot on world war ii. i've worked on the war. and i come from the japanese side. but i've also worked on the atomic bombs as you have in great depth. and i've seen it from many perspectives. to me, ground zero was a world war ii term.
and ground zero meant ground zero were hiroshima, nagasaki. that's where we began using it. if you went back to the first test of the atomic bomb in new mexico in 1945, for years, there was a little wooden sign saying ground zero. we always used that word for ground zero meant hiroshima, nag -- nagasaki. i kept waiting for somebody to say ground zero, weapons of mass destruction, where had the word come from? of course, it came from world
war ii and weapons of mass destruction terrify us. come out of that experience. but no one made the connections. it was as if we had just taken it. there was no way of thinking about the original ground zero. and then you began to have the language of terror bombing. now any historian of world war ii just routinely has used the word terror bombing for world war ii. and it occurs primarily in conjunction with the anglo-american air war first in europe, then finally in japan. that culminates in hiroshima and nagasaki. in modern war, you must destroy
the morale of the enemy. that's one the weapons of war. you destroy the industry, the armies, the morale of the enemy. it became standard operating procedure in world war ii to deliberately target densely populated urban areas. we tend to think of hiroshima, nagasaki if we think of them at all in isolation. but that was the culmination of a campaign that began against germany and then was carry out by the americans in japan that targeted over 60 japanese cities before the atomic bombs. but that kind of thinking of terror bombing in terms of what we do in our modern war, it's part of the culture of our