I watched CNN's Fareed Zakaria GPS today as he had Michael Lewis (who I always like) and Tom Friedman, (whom I normally find boring and predictable) and this time even Friedman was saying that the solution is to cut back on what was promised and have everyone put skin in the game.
MICHAEL LEWIS, AUTHOR, "BOOMERANG" AND "THE BIG SHOT": That's the problem. They - they want public services and they don't want to pay for them. They want - they want to cheat the future for the present, and that's a - that is not just - that's not a financial problem, that's a cultural/moral problem.
ZAKARIA: Michael Lewis is a storyteller extraordinaire. Unfortunately for many of the characters, the stories he tells are non-fiction. And in his new book, "Boomerang," he's on a world tour of the world's disaster zone - financial disasters, that is. Among his stops, Iceland, Ireland, and Greece.
But now he's setting his sights closer to home, in fact at home. Lewis says his home State of California and others like it face the nightmare scenario.
Welcome, Michael Lewis.
LEWIS: Thanks for having me back.
ZAKARIA: So when you look at all these countries like Greece, Ireland, there's something you said or you write about that the cause of their problems was the same. Essentially too much cheap credit, too much easy - easy money, but the consequences were different. Why?
LEWIS: Well, this is absolutely right. The cause was the temptation of free money. That the banks ceased to do credit analysis. They became numb of the risk.
So once that happened, a lot of people could borrow money who shouldn't be able to borrow money. So the temptation gets created. And the cultures responded - the societies responded to the temptation in very different ways. And I think the answer to that is they're very different places.
ZAKARIA: So let's talk about the cultural consequences of this - of this easy credit. When you look at America, what does - what did we do with the easy money that reflects our national character?
LEWIS: You know, it's - there are two - there are two obvious sorts of events that are tied to the credit bubble. One is the way Wall Street went crazy. The way Wall Street basically systematically set about disguising what it was supposed to be revealing. Disguising risk rather than revealing risk. And - but the - and the way the financial sector basically abused the rest of society in a lot of ways.
But the other - the other thing that was - that was a by product of the easy money was the way public employee unions abused the - the governments they work for, in what my State of California is the perfect example. Public safety workers could cut deals with cities across the State of California and they're going to bankrupt the cities. Their deals that can never be fulfilled.
And if you look at the behavior, the patterns of behavior in American life, the patterns of behavior reflect this very - really almost sensational ability to ignore long-term considerations and long-term interests for the sake of the short term. I think that short termism is what is the thing that is most revealed by what we've gone through. That we have not - we've forgotten - we've forgotten about the long term.
ZAKARIA: You're absolutely right. When reading your - your kind of California, it's the politicians who are willing to make all these promises to state employees, but the cost of which are pushed off because it's pension and health care stuff which wouldn't show up on the books for two decades.
LEWIS: The future is undervalued. In all the - in all the calculations, the future is undervalued. And I think this notion alive in the land that we're just being misled. That that the problem is politicians.
ZAKARIA: Yes.
LEWIS: I think we get the democracy we deserve. And in California it's very hard to argue otherwise. We have essentially direct democracy. All big fiscal decisions are made by the people by plebiscite.
And the idea that somehow in that system that people aren't getting what they want - they are getting what they want, that's the problem. They want public services and they don't want to pay for them. They want to - they want to cheat the future for the present. And that's a - that is not just - that's not a financial problem. That's a cultural/moral problem.
ZAKARIA: So when you look at it, what you're describing in both Europe and the United States really, is the problem for democracy to impose any kind of short-term pain for long-term gain.
LEWIS: Right.
ZAKARIA: The kind of classic principle of the - of the gym, of the fitness club, right? Which is your no pain, no gain.
So how do you make it happen? I mean, is there - is there a path out for democracies?
LEWIS: I hate to say this, but what I think happens is the only way - the only way pain gets in - that solutions that are slightly painful get imposed are in times of great crisis. So I think the - a crisis is necessary in order for change to occur.
ZAKARIA: Didn't we - didn't we just have one?
LEWIS: Well, we had one. But what did we do? We took - we took morphine. And we essentially injected -
ZAKARIA: More easy money.
LEWIS: Yes. We did - we did what we could to avoid the pain. And so I think that's what happens. We just get to a bigger crisis. And that's what this story is about. It is -- it's a companion volume to the big short. It's saying that we are still in the same financial crisis because we didn't actually deal with it. What we did was we essentially nationalized our problems across the world. And now the question is are governments credible. The question before was, are the banks credible. The banks are now backed by the governments, so are the governments credible. At some point you get to an end game. And I think that's kind of what we're seeing. I mean, it's going to take years to play out, I bet.
ZAKARIA: But do you think the end game will take place at the local level in America?
LEWIS: In America I do. And I'll tell you why. Because the way the end game plays out financially, you can see it in Europe.
That what happens is a country gets itself into actual fiscal trouble. And the markets get scared and the market raise the interest rates they charge the country, which exacerbates the fiscal trouble. And then you get the vicious spiral and you never get out and that's what Greece is in right now. I mean, if they had to go borrow money in the open markets, they'd be paying 70 percent. They can't afford that.
Here the markets are telling us what's going to happen. The U.S. Treasury gets downgraded by Standard and Poor's and you would think the treasury bonds would fall. That people would demand a greater rate of interest from U.S. - from the U.S. Treasury to lend it money.
Instead, people panic and they buy U.S. treasuries because they are still relatively the most risk less thing. And it a fight to safety goes to treasuries. That tells you that at the federal level we're going to be able to finance ourselves probably for a while no matter how badly we behave. That it's going to take a while before we enter a vicious cycle. I mean, decade.
But at the local level, all it takes is a single Wall Street analyst to go on "60 minutes." Meredith Whitney did this. For a few minutes and suggest there might be some defaults. And there is a stampede out of municipal bonds and the - and the rate of interest charged to municipalities goes through the roof.
So the way the European sort of vicious cycle reprises itself in America is at the level of local finance. I think that's right.
ZAKARIA: Well, on that cheery note, Michael Lewis, thank you very much. "Boomerang" and of course "Money Ball" in theaters everywhere. We will be back.
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TOM FRIEDMAN, COLUMNIST, NEW YORK TIMES: Don't tell me we're going to get out of here with just hocus-pocus and - give me the truth. People want to know is what's (ph) the scale of the problem.
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ZAKARIA: Tom Friedman, the Pulitzer Prize-winning columnist for "The New York Times" spends a lot of time thinking about America's problems and solutions to those problems. He joins me now.
Thanks for joining me, Tom.
FRIEDMAN: Great to be here, Fareed.
ZAKARIA: Tom, you have a new book, "That Used to Be Us." And the phrase comes from something Obama said and I think so many people feel that way when you read about the biggest bridge, the tallest building. You know, I began my book with a similar idea that you - all the stuff used to be American.
And now we sort of take it for granted that we're not going to build the biggest bridge. Again, we can't even repair the Washington Subway elevators. Tell that story about the Washington Subway.
FRIEDMAN: Well, I had come back from a conference in Tianjin, China, which is at this amazing Conference Center with multiple escalators in every corner, huge ones. And I came back to Bethesda, Maryland, where I live, and called Michael. My co-author, Michael Mandelbaum, his wife got online and I was telling his wife about this conference. And she said, have you been to our subway stop lately because both escalators have been under repair for six months. And, you know, basically, you know -
ZAKARIA: Which is as long as it had taken roughly to build the entire conference center in China.
FRIEDMAN: Actually, yes. Almost the exact same amount of time China took to build a conference center was taking us to repair two escalators with 21 stairs each.
And our book is not about China, Fareed, you know? As you know, it's really it's about America. And we firmly believe China can succeed and we can succeed. And, by the way, China can fail and we can succeed. What China does doesn't really matter. It's not what we do and what we don't do.
You know, whenever people hear the title of the book, they'll ask Michael and me, "That Used to Be Us." Does it have a happy ending? And we always tell people, well, it does. It does. We just don't know whether it's fiction or nonfiction.
So, you know, we're - we're not falling behind China. We're not falling behind Brazil. We've gotten into the situation, Fareed, because we've gotten away from our formula for success.
The thing that got us here, this great public/private partnership that was built on five pillars - education, educating people to use whatever the technology was from the supercomputer to the cotton gin in its day, infrastructure, having the world's best infrastructure. Third, having the most open immigration policy to attract the world's most energetic and innovative, you know, immigrant. Fourth, having the best rules to incentivize capital formation and investment. And last, government-funded research to push out the boundaries of science so our entrepreneurs can pluck off the best flowers.
ZAKARIA: And why did it happen? So why did you go from a situation in the 1950s where the State of California had the best public education system in the world, K through the PhD programs through the University of Berkeley, the best highways, the best public parks, you know, the best quality of life. California with -
FRIEDMAN: Correct.
ZAKARIA: -- I remember growing up in India, California was utopia.
FRIEDMAN: That's right.
ZAKARIA: It was the future.
FRIEDMAN: Now it is again for America and in a different kind of way.
ZAKARIA: Now you look at it and California spends four times as much I believe on prisons as it does on its education budget.
FRIEDMAN: Well, you know, we gave way from that greatest generation which believed in save and invest to baby boomer generation. My generation, yours, that believed in borrow and spend. And did not have what my friend, Doug Simon, calls the sustainable values. Do things in ways that sustain, but instead had situational values. Do whatever the situation allows.
Just do it, the Nike commercial, that's us, Fareed. I give you $1 million mortgage even though you only have $10,000 in income and it's a subprime mortgage, and all I ask is can you fog up a knife? I just do it because the situation says I can. We got into a values decline.
Secondly, we misinterpreted the end of the Cold War. We thought it was a victory. It was a great victory, of course. We thought it was a victory that meant we could put our feet up. When in fact, what it did was unleash two billion people just like us with the same aspirations to connect, collaborate and compete. OK.
And then thirdly, tragically after 9/11, we had to spend a decade chasing the losers from globalization called al Qaeda and the Taliban, rather than the winners called India, China, and Brazil.
And you put it all together and the net result is if you look at that great formula for success that got us here - education, infrastructure, immigration, rules and government-funded research, the arrow is pointing down today, Fareed, on all five.
And that's why the only way out of our problem, we keep debating this economic crisis, wherein jobs, we need jobs. Of course we need jobs, but it's not a three-year-old crisis, Fareed. It didn't start in 2008. It started 20 years ago.
And that's why I've been writing. We have a choice now. We can have a hard decade or a bad century that is either we kind of roll up our sleeves now and get back to our formula for success, which is going to take some hard work, and take some cutting because we made promises we can't keep. It's going to take taxing, because we need more revenue because it's going to take investing in that formula for success.
Either we do that over the next decade in which case I think we'll be fine. Or I think we're just going to limp into the 21st century.
ZAKARIA: How do you - how do you make the politics of that work? Because I mean, western politics and American politics the last 30 or 40 years has really been about politicians promising voters more stuff.
FRIEDMAN: Right.
ZAKARIA: More benefits, more health care, more better - you know, better pensions. If you look at the way in which local politicians get elected is they promise state employees fatter and fatter pensions and health care, which busts the budget but not that year -- in the out years when they're out of office.
So this whole mechanism by which politics works in this country is all about promising people stuff. Everything you're talking about is taking stuff away.
FRIEDMAN: That's right.
ZAKARIA: Reducing benefits, raising taxes. Because all of this is getting the situation back under control.
FRIEDMAN: Right. Can we do that in a democratic system? I don't know. I think - I hope we test it, though, Fareed. OK. I think that - well, if we don't, you see, the market or Mother Nature's going to do it for us basically.
And, you know, when we do it, when we make the reforms ourselves, that's like going to a dentist. You have Novocaine, he takes out your rotten tooth. When the market does it, it's like having a caveman do your dental work with stone tools. The tooth will come out. OK. And so the market will adjust here. OK. But there will be blood all over the floor and a few other teeth will come out, too. So we're going to eventually have to decide because if we don't do it, the market will do it for us.
Now, what we argue in the book is that basically, look, you know, I think it's unfortunate the president is going down this track of attacking millionaires and whatnot. Look, millionaires should pay their taxes just like everybody else. And I don't think that's the way, Fareed.
I think the only way to do it is with a program, OK, for basically cutting, taxing and investing, that has the following components - first of all, people have to believe it's at the scale of the problem. Don't tell me we're going to get out of here with this hocus-pocus. Give me the truth. People want to know is what's (ph) the scale of the problem.
Two, they have to believe that it's politically androgynous. That it takes the best Republican ideas and Democratic ideas. Three, they have to believe it's fair. Everybody's going to pay. The millionaires are going to pay, but everyone's going to pay something.
We're all in this together and we all got in this together. And just because you make $250,000 or $244,000 or $251,000 or $50,000 or $20,000, everybody should pay something. Everyone contributed to World War II. Everyone's got to dig out of this hole.
And lastly, Fareed, in my view, it needs to be aspirational. Where's the aspiration? It's about making us great. Keeping us great. And to me the aspirational message for the president is it's obvious. We think what Cape Canaveral was to America in the 1960s, America should be to the world today.
What was Cape Canaveral? It's a place we launched our moon shots. Well, it's a different world now. We're not going to get to the next plateau by launching one moon shot anymore. We're going to get there by becoming the platform where everyone in the world wants to come and launch their moon shot.
That's our vision for America that we identify ourselves as the place where everyone comes to start something, create something, collaborate with something, heal something. That's how you get people to come here to start things. And if people start things, enough things here, then the butcher, the baker, and the candlestick maker will all have work, too.
But if we don't do that, if we sit around saying I'm going to take it out of your hide, you know, or you've got more than me, I'll take it out of his hide, it's not aspirational, it's not at the scale of the problem. It wouldn't work, and we'll limp into the 21st century.
ZAKARIA: Tom Friedman, always a pleasure.
FRIEDMAN: Thank you, Fareed. |
