NOTE: A condensed interview appears in LEO’s May 7 print edition. Here is the whole interview, edited for clarity and grammar.
An unwritten journalistic axiom says we should ask “experts” for solutions. What would you recommend, Mr. Know-it-All? And yet, when I repeatedly pushed Kevin Phillips, the conservative thinker/author who has long preached common sense on socioeconomic and political matters, for something of the sort, he had bupkis.
To borrow a phrase from Simon Cowell, who flashes that little shit-eating hyphen of a grin whenever the American Idol audience boos him for being frank, “Sorry.”
Phillips will be at the main branch of the Louisville Free Public Library Thursday night to discuss his latest book, “Bad Debt.” It picks up where his 2006 book “American Theocracy” left off, sounding the alarm about the perilous confluence of radical religion and a dependence on oil and credit. You might’ve noticed lately that the financial world seems to be falling in on itself. Phillips says it’s been coming on since World War II.
LEO: Why do we behave counter to what we generally agree is common sense?
KEVIN PHILLIPS: People go with a dream, a false belief, a mania. It’s unhealthy for an economy to try to keep forcing the public into high levels of consumption when disposable family income has been, for many people, stagnant, and I understand that a lot depends on the consumer spending, but we shouldn’t have configured our economy to require so much outlay from so many people who can’t afford it.
LEO: I’d like you to differentiate — the banks and the more legitimate institutions are not at the core of the subprime crisis, right?
KP: Banks are frequently just one part of a holding company, and banks themselves can be in bank holding companies that can get into practically everything else, so it’s a rare bank that doesn’t have a credit card operation of some sort, and the credit card operations have been enormously profitable after they were deregulated some 10-15 year ago; they were allowed to charge high fees, high interest rates, really sort’ve anything you could get away with in the state where you were based would be acceptable, so several states promptly volunteered to sorta do anything they wanted. The whole extent to which the debt and credit business has become a really big thing in the united states is hooked up to the whole rampant consumerism, because obviously people in the credit business are interested in generating consumer demand and hooking consumers on things they can’t afford and it’s almost a deliberate practice. Why would you expect anything else from human nature when a company is making its money out of credit?
LEO: You’ve spent a lot of time over the years focused on economic issues. Are you dispassionate about it, or does it piss you off?
KP: I know a lot about it, and I’ve been watching this subject matter really for 20 years, in terms of books, and we have gone on to ever-higher levels of debt, rampant consumerism and financial expansion. Finance is now the single biggest element of the U.S. economy; it’s 20-21 percent of GDP, manufacturing is down to 12 percent. As I say, the debt and credit business is a giant that dominates the economy in a lot of ways.
LEO: Is this largely or solely an American problem?
KP: It’s much more here than anywhere else because of the extent to which the consumer society and consumerism got started here. Credit cards were widespread here before anywhere else. It’s clear that other countries are moving in that direction, but in terms of the intensity of it in the United States, it’s been building in a big way ever since World War II when you had a huge consumer demand after the war and rationing and limited availability of goods. So we’ve got 60 years of building up this incredible combination of consumer demand and consumers playing a huge role in debt getting bigger and bigger and debt trapping the consumers and slowly, but surely the percentage of average household income that goes to debt service keeps rising.
LEO: It’s so complex and they make things more and more complex. You kinda have fun in the book with the convoluted terms that the loans get tagged with …
KP: All the loans and all the different types of financial derivatives and instruments and it’s not regulated in any effective way anywhere.
LEO: It seems that’s just one more way of keeping us confused or blindly trusting or feeling like there’s nothing we can do about it.
KP: People in many ways feel there’s nothing they can do about it, but they’re certainly not blindly trusting. People disbelieve, and I think rightly, most of the U.S. economic statistics, they disbelieve we are on the right track — you’ve got now, 81 percent at this time who think the United States is on the wrong track. They disbelieve the politicians. But I certainly agree that it’s very hard to see the solution, and people who think there’s not much you can do about it can make a pretty plausible argument.
LEO: What should we be asking of John McCain, Hillary Clinton and Barack Obama right now?
KP: Start really discussing what’s happening to the American people instead of ditzing around and hinting at it and making big speeches, or big pronouncements that really don’t have a lot of nitty-gritty. They just brought out numbers today that consumer sentiment is at a 26-year low — you have to go back to 1982. You’ve got people talking about the biggest dip in housing since the 1930s. you’ve got perfectly respectable people in institutions talking about the biggest financial crisis since World War II. Well, I don’t recollect ever hearing McCain, Obama or Hillary Clinton talking about that. Little bits and pieces, sure, but one of the reasons they can’t talk about it is both political parties have been part of the evolution over the last 25 years, and they’re not entirely free to be honest.
LEO: Some people would tell you a couple things, though: one, that this is the cost of doing business — we have to have these high-risk things to generate the sorts of revenues that we need, and also, that when it does go bad, rather than invoking “tough love” and letting the institutions sort it out themselves, there needs to be a bailout, which seems counterintuitive to anyone ever not behaving in the way that causes these problems. If you know you’re going to get bailed out, there’s less incentive to behave correctly.
KP: I think that’s exactly right. The whole bailout process, and here again we’re looking at something that started in the 1980s, has just been relentless. There are 10-12 bailouts you can cite. Of course they think they can get away with everything, and that’s why they try all these experiments that suggest that Wall Street has emerged with the casinos in Las Vegas. They wouldn’t have done that if they hadn’t had essentially bailouts and regulators that didn’t regulate, that basically sorta smiled and said, Well, we don’t want to crack down on that, we don’t want to stop a bubble when it’s blowing up, we don’t want to look at all the exotic mortgages because they’re probably good for the economy, and bingo, we get where we are now. Obviously, the regulation by Greenspan and the others was ineffective or negligent.
LEO: People tend to filter these things through their own political lens, and so possibly — and I’m generalizing here — but they may be skeptical about the warnings and say it’s only political hype. Does that hurt the efforts to fix it?
KP: Well, people don’t believe the politicians, but the politicians aren’t seriously discussing a lot of this; they pick little angles and they jump up and down. George W. Bush was on television this morning talking about the checks going out, and those checks are a piddling stuff compared with the housing market and the buildup of debt in oil, and there’s bush with his little checks. I mean, a man who’s rapidly closing in on the lowest job approval rating in American political history.
LEO: They’re out of touch with what’s really going on.
KP: Often they have a better idea than what they dare say, because if you’re a Democrat or Republican and you start screaming about the other party, well, the other party has a good comeback — it’s sorta like, “So’s your old man,” which is true.
LEO: That’s why people there’s not much difference between the parties.
KP: Well, that’s right, they take a lot of money from the same people.
LEO: Do you think there’s any way that self-regulation can work? Are the terms ethics and fairness too quaint and naive?
KP: I think we have a whole lot of money changing hands and a whole lot of business and financial practices that make that money, and they make it in ways that people don’t really want to discuss. There’s no substitute for more regulation than we have. You can’t assume that with these huge amounts of money on the table that you’re going to much besides a fair amount of self-dealing, especially when you have these bailouts and the permissive regulation, so that the financial sector basically feels it can do what it wants.
LEO: I think you’re saying you’re not that optimistic about meaningful reform?
KP: Not unless the dialogue and debate in this election really picks up comprehensiveness and seriousness. Everybody gives Obama credit for inspirational speeches, but I’d like to hear some inspirational analyses that he really wants to discuss what’s happening. Hillary, well, you know, her husband was there when they blew the trumpets for all the bubbles — the high-tech bubble, for all the financial deregulation. Democrats are getting even more money out of finance than the Republicans are. So, yeah, I’m not terribly convinced that they’re gonna do anything until they really have to.
LEO: Do you think this is symbolic of something more endemic — the rotting of the culture?
KP: I think we have entrenched interest groups that we are very difficult to deal with. We have a money politics which tends to mean that people with influence, if they’re not bought, they’re at least rented, and we have a huge difficulty in getting the media to discuss anything. So, overall, it’s not a very responsive system at the present time. Often that’s the case before serious crises force attention to problems, but when a crisis is that serious, whether it’s before the Civil War or the 1930s or in the 1980s or other similar situations, it’s pretty painful to have to go through it. It’d be better to pay some attention early on, but that doesn’t seem to be the way things work.
LEO: Where we would be if we weren’t in Iraq?
KP: We’d be a lot better off. It’s very clear that the invasion of Iraq and the occupation of Iraq was probably one of the dumbest strategic moves by an American president; part of their motivation was related to oil — Alan Greenspan has said that, and I think it’s quite right. If you look at what happened to the oil prices in the five years since the united States invaded, the trading range at the time of the invasion, OPEC was talking about a $22 to $28 band, the price was about $25. The futures briefly showed that the United States had a chance to knock the price of oil down by pumping out of Iraq. Well, they totally screwed that up. The occupation was ineffective, the country never should’ve been put together in the first place in 1919 and Bush never understood it was a three-way division that was gonna make life difficult. So the oil industry never got harnessed in Iraq, the Persian Gulf oil producers got disgusted with the United States, and the trading range for oil, which was $22 to $28 in 2003, is now, according to the little thing I see on my screen, is now $118. So we have for the first time in American history both a president and a vice president who come from the oil industry. Well, what a pair of talents. They’ve got the oil price up 500 percent. You could’ve picked two bums who could’ve done as well.
LEO: That serves some interests, though, right?
KP: No, it really doesn’t. The American oil companies basically have been cut out of most of the new opportunities in global oil, because the rise of state-owned oil companies in Asia, Africa, Latin American, they control most of the resources and they don’t want to cut in Exxon or Chevron or Conoco. So it’s no triumph for the oil industry to have this boob in the White House, and they’ve called for effective strategies. Conoco was one, Marathon another. I’ve got a thing in the book in chapter 5, the energy chapter, where it talks about the demand from the oil companies for a serious strategy. They know, after seven years, that this guy isn’t exactly the second coming of Albert Einstein, and you’ve gotta have something that works. And they’re not happy with the status quo because they can’t expand globally anymore.
LEO: It’s kind of interesting to speculate about what the breaking point is, for a gallon of gas, where the average person will get so angry that something changes. In Louisville, for example, we don’t have mass transit beyond our bus system.
KP: I think there is gonna be some impact. There really wasn’t much impact in the previous two summers. This time I think there will be because you’ve got the collapsing home prices and the consumer confidence surveys show a horrible number. People are losing confidence in where their money is gonna come from, so they’re gonna pay a lot more attention to the costs of gassing up than they did in 2006 and 2007. That’s another problems that the politicians face, because between prices at the pump and collapsing home values and all kinds of other things, your friendly neighborhood congressman has to watch it.
LEO: What remedy do you see?
KP: Well, I’m not sure I see a lot of remedies. I think we’re paying now for mistakes that got the show on the road back in the 70s and 80s and the permissiveness of regulation for the last 20 years has let this problem grow enormously significant. It’s like debt in the united States has become the highest level relative to GDP in American history — 340 percent of GDP. It’s like a leaning tower of Pisa that may or may not go over, and the bricks falling out may or may not turn into something bigger. They should’ve paid attention to this instead of having a bipartisan bunch of happy talk on the strength of the economy and the American way and all this self-congratulatory stuff about how strong we were, because it looks at the moment like strong is not the right word.
LEO: You are not sounding optimistic even in the long term.
KP: Well, I think that the long term may be 30-40 years from now when we come out from the sort of unique framework of supporting a global currency, global diplomacy, a commitment to being the policeman of the world, this huge military presence in the Middle East, the enormous amount of money that we spend on things that are costing us friends and respect all over the world, the collapsing dollar, the fact that the cost of importing oil, probably within a year or two could close in on half a trillion dollars a years — it’s $400 trillion this year — there isn’t any reason to be particularly optimistic. It’s gonna be so hard for the politicians to jump out of the mindset they’ve been in and confront the new realities that we’ll have to believe they can do it when we see it. I’m gonna be 68 on my next birthday, and I don’t expect these people to transiencd their parties and their language and their propaganda very easily.
LEO: Do you see any way to change that equation between the percentage of GDP in finances and manufacturing? Can we get back to making enough stuff here?
KP: No, I think it’s impossible. We could get to something better than we are now, and a weak dollar helps, although it’s murderous in other ways, but basically the United States has lost too many types of industry to be able to rebuild and even go back to the 1970s or 1980s. you’ve just had a huge decline in the range of things we produce. Some of them we still do pretty well, but so many things have to be brought in that the expensiveness of that is a given, I think.
LEO: I’ve heard Bill Clinton make a persuasive case for generating jobs through alternative energy research and production. Is that too sanguine?
KP: I would say that’s unreal. You have to assume that with the increasing doubt about global oil supply, and the sense that a number of countries — the United States, India and China all have significant coal resources, there’s likely to be a push on to coal. But the whole notion of being able to experiment on all kinds of expensive and renewable forms of energy, there’s gonna be too much competition for that energy in the next five years to be able to lose our preoccupation with oil and natural gas and coal and play games with wind and geothermal and so forth. There are countries that can probably do that, but we have an energy structure that’s built around he fact that the U.S. had the biggest oil industry in the world through the 1970s and our transportation systems, our residential sprawl, all kinds of things are geared to that. You’re not gonna be able to get cars burring some form of oxygen or hydrogen, you’re not gonna be able to provide electricity for Southern California with wind, that’s just unreal. Maybe they can get some of this stuff significantly on-stream 12-15 years out, but the crisis in American energy and the need to deal with global warming in a way that’s gonna be at cross-purposes with energy, this duality is not far ahead of us.
LEO: So the day of reckoning is here, but we don’t know what we’re gonna do.
KP: Yeah, we don’t know how big the reckoning is. Everybody’s starting to sense there’s a real problem, but the likelihood is that in terms of economic awareness of what the problems’ gonna turn out to be and how deep, for housing and energy and debt, I think we’re only in the second or third inning.