CLASS UNITY  |  TRANSCRIPT

L. Randall Wray | The 2008 Global Financial Crisis

Class Unity recently spoke with economist L. Randall Wray, one of the developers of Modern Money Theory (MMT), about the causes and political aftermath of the 2007-09 global financial crisis. Wray argues that the crash was not merely a sudden “Minsky moment,” but the culmination of a decades-long transition toward money-manager capitalism, financialization, securitization, layered debt, and pervasive fraud. He traces the dismantling of New Deal financial restraints, the growth of the mortgage-securitization machine, and the Federal Reserve and Treasury interventions that rescued the system without fundamentally changing it. The discussion also covers Basel III, systemically dangerous banks, regulation by function, debt cancellation, student loans, opposition to MMT, the pandemic response, inequality, productive capacity, climate policy, and the American political duopoly. The original Class Unity video, the accompanying Class Unity post, and Wray’s Levy Economics Institute profile provide the recording, further context, and access to his research and publications.

Class Unity: Hello, everyone, and welcome to another Class Unity speaker-series event. Class Unity is a Marxist organization that supports class politics here in the United States. We believe in class politics, not identity politics, and our ultimate aim is to help build a coalition that would establish a workers’ party in the United States. If you would like to support us, please consider donating or, even better, joining us; you can do either at classunity.org. Please also subscribe to our channel, click the like button, and share this event with your friends. Our political-education program promotes materialist analysis of politics, economics, and social issues, and our speaker series is part of that program.

For today’s main event, we will be speaking with Professor L. Randall Wray. He is Professor of Economics at the Levy Economics Institute of Bard College, one of the developers of Modern Money Theory, and the author of Making Money Work for Us. Professor Wray, thank you very much for speaking with us. Our group has read some of your articles about the 2008 global financial crisis. Could you begin by sharing your view of the crisis: what caused it, what role did the Federal Reserve’s bailout of financial institutions play, and what lessons should we have learned but did not?

Randall Wray: It was a long time ago—almost twenty years. Let me share my screen. I have a very brief PowerPoint that touches on each question you raised, and then we can discuss the details as much as you want and as much as I can remember.

Let us begin with an outline of the causes. When the crisis hit, everyone used the phrase “a Minsky moment.” There is some truth in that, but I think it is better to see the crisis as the final stage of Minsky’s stages-of-capitalism approach. It was not simply a moment; it was the endgame of a fifty-year transformation of our economy. The principal causes were the financialization of the economy, the layering of debt upon debt, and a liquidity problem at the top of a structure whose underlying condition was massive insolvency. The crisis also resulted from the shredding of New Deal reforms that had kept the financial system safe for a generation after World War II, from the bubbles and the Goldilocks economy under President Clinton, from the movement of the government budget toward surplus, and, finally, from fraud and the real-estate bubble.

What is the “Minsky moment” idea? Beginning in the 1960s, Minsky developed what is called the financial-instability hypothesis. Over the course of a cycle, the economy moves from a relatively robust and stable financial system toward an increasingly fragile one, finally resulting in a financial crisis. This built on Keynes’s General Theory, in which investment drives the business cycle, but the theory did not adequately explain how investment is financed. Minsky described his contribution as adding a financial theory of investment to Keynes’s investment theory of the cycle.

The economy passes through financial profiles. In the early postwar period, hedge finance dominated: borrowers could service their debts, make interest payments, and repay some principal. That was partly because the financial system was full of safe government bonds after World War II and contained little private-sector debt. It was also because everyone remembered the Great Depression and was reluctant to take major risks. Over time, Minsky argued, speculative positions would become more common. In a speculative position, borrowers can make interest payments but cannot repay principal, so they must expect their incomes to rise or must refinance. Finally, Ponzi positions emerge, in which borrowers cannot even make the interest payments without borrowing more. Debt then grows and can become explosive.

As the system grows more fragile, a crisis occurs, but the “big bank”—the Federal Reserve—and “big government”—the Treasury—come to the rescue. Each successful rescue, however, encourages still greater risk. “Stability is destabilizing” is Minsky’s most famous formulation. Yet our crises since roughly 1980 do not fit this model very well. The thrift crisis, which I studied in detail, involved commercial real estate and developing-country debt. The global financial crisis replicated much of it on a scale perhaps a hundred times larger. Neither crisis was primarily about firms borrowing too much to undertake productive investment. The leveraged-buyout and junk-bond crisis associated with Michael Milken, the new-economy and Nasdaq bubbles of the 1990s, and the residential-real-estate, commodities, and stock-market bubbles that followed likewise did not arise from excessive productive investment. They therefore do not neatly fit the Minsky-moment version of the financial-instability hypothesis—a phrase Paul McCulley first used, I believe, in connection with Japan.

These crises do follow a pattern, and each is worse than the one before it. It is therefore more useful to look at Minsky’s later work—or his earliest work before the financial-instability hypothesis—in which he took a stages approach to the evolution of capitalism, similar to the view of his teacher Joseph Schumpeter. In the nineteenth century, commercial capitalism was dominated by commercial banks. Finance capitalism arose when investment projects became too expensive to fund through retained earnings, making investment banks the dominant institutions. This analysis resembles Rudolf Hilferding’s. Finance capitalism crashed in 1929 and was replaced by paternalistic capitalism, which Minsky also called managerial-welfare-state capitalism: government worked with labor unions and the largest corporations to plan the economy, while a social safety net was established.

Minsky warned in the 1950s that the relative stability of this arrangement would evolve into another form, which he called money-manager capitalism. Other critics have described something very similar. James K. Galbraith called it the predator state. Many people, especially those influenced by Marxism, call it the financialization of the economy. George W. Bush put a positive spin on it with the phrase “ownership society.” It has also been described as neoliberalism, neoconservatism, or shadow banking, as Paul McCulley called it.

The pattern is that stability breeds instability. Financial assets and liabilities accumulate; globalization and securitization expand. Minsky argued that globalization in its present form could not have occurred without securitization. We reached the strange situation in which the central bank of China owned U.S. home mortgages. Securitization spread the risk vector across the world by telling investors that they did not need to know anything about U.S. real-estate markets because they could buy diversified portfolios of mortgage-backed securities.

Many people describe the policy regime as deregulation or desupervision. More precisely, it was self-supervision, an approach promoted through the Basel agreements. The claim was that large, far-flung financial institutions were too complicated for anyone else to regulate and should therefore supervise themselves. That is what policy came down to.

The evidence illustrates Minsky’s stages. Commercial banks declined from about 60 percent of financial-institution assets to roughly 20 percent. Savings-and-loan institutions virtually disappeared after the thrift crisis. Managed money took up the slack and became the dominant form. Managed money includes university endowments, pension funds, and sovereign-wealth funds administered by professional money managers. The crucial point is that every manager must beat the average or lose clients, so each must continually push the envelope to increase earnings.

How do they increase earnings? They raise leverage ratios and layer debt upon debt. Financialization can be defined and measured in different ways, but one useful measure is the rising share of profits and value added accruing to the financial sector. Another is the financing of long-term assets and positions through short-term borrowing. In the global financial crisis, overnight commercial paper was a key trigger. Banks had to refinance their positions every morning; as soon as lenders suspected a bank might be in trouble, it could no longer refinance and could be dead in a single morning.

Before the crisis, the financial sector received about 40 percent of all corporate profits. Finance is supposed to be an intermediate input, not the final good. It is like the tire on a car: cars do not work without tires, but the tire maker should not receive 40 percent of the profits from producing cars. Yet that is effectively what the financial sector was doing.

We also saw a sharp increase in speculation. Just before the 1929 stock-market crash, the average holding period for stocks had fallen to one year, showing that speculators dominated the market even though many investors, such as elderly widows, rarely sold shares. The average holding period fell to roughly one year again before the global financial crisis. The Federal Reserve and Treasury supported the entire structure. Greenspan told market participants that they did not need to worry because “Uncle Greenspan” would bail them out. Bernanke called it the Great Moderation: central bankers were in control and would not allow anything bad to happen. Once you tell markets that, of course they will behave recklessly.

In March or April 2007, the Levy Institute held a conference attended by a member of the Federal Reserve Board of Governors and two Fed researchers. The researchers said there were no problems and no bubble in the residential-real-estate market. I and several other Levy researchers presented evidence that we were in the largest bubble human beings had ever seen. The Fed was either completely clueless or was trying to keep the boom going. We had the largest debt, equity, commodity, and real-estate bubbles in history, propped up by big government, the big bank, and securitization.

The basic idea of securitization is to pool debts, such as mortgages, and use them as collateral for securities. Clinton’s budget surpluses gave this a major boost. That may sound strange, but financial markets believed they did not have enough government debt. Clinton appeared on television and announced that the government would run surpluses for fifteen years and retire all federal debt for the first time since 1837. The audience stood and cheered, but financial markets panicked because government debt underlay the entire financial structure. Markets looked for a substitute and found mortgage-backed securities.

At first, the mortgages being securitized were those of stable middle-class homeowners in neighborhoods with rising prices. There was not nearly enough of that product, so the industry continually lowered its standards. It also tranched mortgage-backed securities to create many more products: riskier tranches for investors seeking higher returns, followed by synthetic securities that were essentially bets on the direction in which the underlying securities would move. Collateralized debt obligations and similar instruments supplied portfolios with products that could replace government bonds.

Underwriting standards deteriorated deliberately, from low-documentation loans to no-documentation loans and then to NINJA loans—no income, no job, no assets. Some of my students went online and found advertisements explicitly offering NINJA loans. Such a loan virtually has to be fraudulent. The new home-finance model was sold as more efficient because it eliminated the supposedly unnecessary loan officer and relied on credit scores and automated processes. In the old model, however, all that was needed was a loan officer, a bank teller, a home appraiser, and a public recorder; the lender then held the loan to maturity.

The supposedly more efficient Wall Street model required brokers, appraisers, lenders, servicers, the Mortgage Electronic Registration Systems, securitizers, credit raters, quantitative modelers, trustees, collateralized debt obligations and CDOs squared, credit-default swaps, monoline insurers, investors, traders, accountants, lawyers, and lender-processing services. When everything went bad, it also required robo-signers—sometimes barely trained young workers who signed documents under penalty of perjury while claiming to have seen records that did not exist—and document-recovery services. The model was “originate to distribute, pump and dump, foreclose, and resell.” Every step generated a fee, and almost all fees were paid before the homeowner made a single payment.

The model was not more efficient; it was vastly more expensive. It could not have been profitable on the basis of interest payments. Mortgages had to be written at 120 percent of property value in order to book all the fees up front. My colleague William K. Black has argued that the complexity was essential because accounting fraud was intrinsic to the arrangement, and complexity made the fraud difficult to see. Everyone was rewarded for throughput. The casino always won. We had roughly $10 trillion in homes and tens of trillions of dollars in bets on them. Foreclosure was inevitable and, in many cases, desirable for market participants who had bet on failure. Houses then had to be taken from their occupants and resold quickly in order to conceal the underlying fraud.

If you have read John Kenneth Galbraith’s The Great Crash 1929, you know that it contains a chapter called “In Goldman, Sachs We Trust,” describing what Goldman Sachs did before the 1929 crash. It reads almost exactly like the more recent story, in which Goldman Sachs was again heavily involved. The system repeated much of what had happened in the late 1920s.

The response was bailout and cover-up, with no criminal prosecutions of senior management. After I wrote some of the papers you read, Bill Black and I argued publicly with a Bank of America vice president who objected to our claim that the conduct was criminal and should be prosecuted. She was later prosecuted—the only senior figure I know of who was—but her conviction was overturned and she walked free.

The Obama administration enacted an $800 billion stimulus, and Obama said that the government had run out of money. Treasury officials claimed they could not provide more and that everything now depended on “Uncle Ben” Bernanke. Yet they knew $800 billion was inadequate. I was working with James K. Galbraith on a proposal he hoped to take to the Obama administration. While we were literally sitting in a room trying to choose a number, he received a call saying the package would be $800 billion. Why $800 billion? Because it was not $1 trillion, which Congress supposedly would never approve.

Subsequent data showed that the Federal Reserve spent and lent about $29 trillion to turn the crisis around. The recipients included the largest American banks, some of the largest foreign banks, and foreign central banks. The figures I am showing here cover only private banks; foreign central banks received roughly 40 percent of the $29 trillion. What were policymakers trying to do? They were saving money-manager capitalism.

I cannot discuss every detail of Dodd-Frank because I never took it very seriously. Nothing in it was likely to make a fundamental difference. What happened is clear: policymakers rebooted the system. There has been no major structural change, and we remain as vulnerable as we were before the crisis. I will stop there and take your questions.

Class Unity: Thank you for that. If you have a question for Professor Wray, please raise your hand or add yourself to the stack. I would like to begin with a recent headline quoting Jamie Dimon as saying that it is “time to fight back” against regulation. He appeared to be referring to capital requirements, card payments, and open banking in connection with the Basel III endgame. I do not know how directly that relates to the regulations you were discussing, but could you comment on it?

Randall Wray: He is pushing back. Regulators had already reduced the proposed increase in capital requirements for the biggest banks from 19 percent to 9 percent, and now Dimon is saying that he will not accept even that. These banks are called systemically important, but, as Bill Black always says, they are really systemically dangerous. That is why regulators want to increase their capital ratios.

One of Dimon’s arguments is that the risk categories are ridiculous. They are extremely complicated, and some of the ways in which risk is treated can certainly be debated. I do not know the current categories well, but I wrote about Basel II around fifteen years ago. Even a requirement described as a 4 percent capital ratio is actually risk-adjusted: the amount depends upon the risk class into which each asset is placed. As I argued then, that immediately invites institutions to game the system by holding the riskiest asset within every permitted class in order to obtain a higher return. Dimon may therefore have a legitimate point about particular risk classes and inconsistencies in the liquidity rules. Those details should be negotiated and improved.

He also argues that banks and shadow banks receive different treatment. That is true and has been a problem for forty or perhaps sixty years. We regulate according to institutional type. Commercial banks, investment banks, and entities such as money-market mutual funds are regulated differently even when they perform the same function. Minsky always argued that regulation should follow function. Any institution issuing something that resembles a deposit should be treated the same way: it can receive FDIC insurance, but regulators will specify the assets it may hold.

Across the past sixty years, regulated banks sometimes have the advantage; then shadow banks invent a new product and acquire the advantage. Regulated banks go to their regulators and ask to do the same thing so that they can compete. If regulators refuse, the banks go to court and usually win, because the law says they should be allowed to undertake activities “closely related” to banking. Almost any business can be described that way. Goldman Sachs, for example, wanted to corner the aluminum market. It bought aluminum warehouses, withheld shipments, and tried to raise the price—at one point Budweiser reportedly could not obtain enough aluminum for its cans. Goldman nevertheless prevailed with the argument that warehouse ownership improved its knowledge of the aluminum futures and financial markets. By that reasoning, there is almost nothing a bank cannot do.

The only way to stop this jockeying is to define what banks and shadow banks may do and prevent shadow banks from issuing deposit-like liabilities outside the same regulatory framework. Money-market mutual funds had assets of at least $4 trillion or $5 trillion before the global financial crisis and competed directly with bank deposits. The crisis began with a run in that market, and Treasury had to guarantee the funds.

Silicon Valley Bank likewise had insured deposits but mostly uninsured ones. When a run began, Treasury guaranteed those too. This arrangement gives the biggest banks an enormous advantage. If a nonprofit needs to hold half a million dollars on deposit, it will choose a large bank because it knows that the Federal Reserve and Treasury will never permit a very large bank to fail, even if they let smaller ones fail. Large banks may pay slightly more interest on uninsured deposits, and they do not pay FDIC premiums on them. Silicon Valley Bank paid no premiums on most of its deposit base for years; when the crisis arrived and the uninsured deposits were protected, premiums across the system had to rise to help cover the rescue.

There are many reasons to rethink how we treat banks, but the best response to institutions that are systemically dangerous is to get rid of them. Chase should be broken up or shut down. Do not merely raise its capital ratio; say that it is too dangerous to exist. We should not permit a bank with $3 trillion to $5 trillion in assets. Set a cap. Unfortunately, if the Democrats win, Jamie Dimon may become Treasury secretary; if the Republicans win, it may be John Paulson, who made a billion dollars after Goldman Sachs allowed him to select mortgages for a security that he then bet against. Either way, we are in trouble.

Class Unity: On that note, the political entrenchment of the banks is remarkable. The interpenetration of the state and Wall Street reaches the point at which the same people lead both sets of institutions. During the election, many people have used the word “fascism” in relation to Trump. If that is fascism, what should we call a situation in which banks effectively control the institutions meant to regulate them? This may be an impossible question, but you discuss reforms and measures to which the left should at least aspire. How might we reimagine a political intervention when none has emerged during the past decade? My second question is how you understand the connection, if any, between 2008 and the pandemic shutdown and the way the Federal Reserve and Treasury handled it.

Randall Wray: You may have to remind me of the second question. Let me first say what should be done. It is probably impossible to reform the financial system after you have saved it. When Roosevelt came into office, his first act was to close all the banks. He called it a bank holiday, which sounded better than saying that all banks were being shut down. He put Jesse Jones in charge of deciding which ones could reopen. The closures began on a Friday; by Monday, nearly half of the banks, if I remember correctly, were permitted to reopen. Jones demanded resignation letters from the heads of the remaining banks and kept the letters in his desk, ready to use. Many banks were closed, while others were placed under new management and turned around. In the end, Treasury made money on the operation. That financial result is not the most important thing, but it was politically useful.

The financial system was restored to its proper place: relatively unimportant and safe. It remained that way for a generation. The lesson is that reform must occur during the crisis. If you save the institutions first, reform will not happen. Obama might have been a good president, but he reversed the order. He took advice from Tim Geithner and Hank Paulson and chose to save the worst institutions. The United States lost many banks both through failure and through consolidation, leaving the system even more concentrated—the exact opposite of what was needed.

What should be done in a crisis? First, regulate by function so that institutions receive the same treatment when they do the same thing. Protect consumers above all. Institutions such as Goldman Sachs should not be allowed to exploit ordinary people or manipulate critical parts of the economy, such as the supply of aluminum. Protect both consumers and the productive economy from institutions that are dangerous.

Under U.S. law, a bank is an institution that accepts deposits and makes loans, and it needs a charter to do those things. In exchange for that charter, require it to keep every asset on its balance sheet. Do not allow it to market and move its assets off the balance sheet; make it hold the loans it originates. That would reduce danger, simplify the system, and make banks easier to supervise.

We also need narrowly focused, inclusive institutions whose purpose is to serve their customers. Roughly 25 percent of Americans remain unbanked. We could bring everyone into the banking system through institutions resembling the old savings and loans and small local banks, or through public banks, state banks, and postal savings banks. The United States once had both postal savings banks and thrifts serving that purpose.

Private equity is another major danger. It is buying up rental properties and making housing scarcer, so it must be constrained. We should also prohibit especially dangerous financial products. Why should someone be allowed to buy a credit-default swap, profit from another party’s failure, and then act to help cause that failure? People are now betting on election outcomes, and the bets themselves may influence the elections. We also permit insurance arrangements that should be illegal, including life-insurance policies through which companies bet on the early deaths of their employees—sometimes called “dead-peasant insurance.” Entire categories of such bets should be outlawed.

Finally, eliminate the distinction between insured and uninsured bank deposits. If an institution is a bank, all its deposits should be insured and it should pay premiums on all of them. A $250,000 limit sounds generous if one thinks only about a household, but nonprofits and businesses must routinely hold far more. The Silicon Valley Bank depositors were firms with very large balances. If their money is in a bank, it should be insured and the bank should pay for that insurance.

What was the second question? I have forgotten it.

Class Unity: It was a separate question, so we can return to it. Let’s go to the next.

Our group spoke with Michael Hudson recently, and debt cancellation and jubilees came up. You also mentioned the job guarantee, or employer-of-last-resort proposal. How would debt cancellation fit alongside a job guarantee and the institutional reforms you have described? Would either approach accomplish much by itself, or are all of them necessary as a package? Setting aside the lack of political will, do we have to wait for another crisis before undertaking any of these reforms?

Randall Wray: We do not have to wait for a crisis or achieve comprehensive reform before doing many useful things. Firms already have debt relief: it is called bankruptcy, and I think it works reasonably well. When I first taught in a business school, I was told that people who become millionaires had, on average, gone bankrupt five times before doing so. We let firms and wealthy entrepreneurs escape debt. Yet student loans and home mortgages—the two kinds of debt most likely to be held by ordinary people—have been made extraordinarily difficult to discharge. We should make bankruptcy relatively easy for regular people, and it should not destroy the rest of their lives. Businesses are allowed to use it and move on. Donald Trump went on to become president after repeated bankruptcies.

The Levy Institute has published a major report on student-debt relief and its benefits for society as a whole. Private student loans should be eliminated. If higher education is to be financed through debt, the loans should come from the government and resemble the British model. Repayment could last no more than ten years and take no more than 5 or 10 percent of a borrower’s income. Someone earning less than, say, $40,000 would make no payment. Once a graduate became successful, payments would begin, but after ten years the obligation would end, even for someone whose profession had required half a million dollars of education.

Far better would be a public system in which college is free, as it is in many countries. Admittedly, the American mix of public and private institutions makes that transition complicated. I teach at an expensive private college, and it is not obvious that the federal government should simply be asked to pay $65,000 per student for attendance at Bard. Those issues would have to be resolved.

Class Unity: We have studied your economics in our reading groups. Among people who consider themselves critics of capitalism—Marxists, socialists, and others—we often encounter resistance or outright hostility toward analyses of financialization, the FIRE sector, Keynesian economics, and especially MMT. One example is Doug Henwood’s attack on MMT in Jacobin. Why do you think there is so much opposition on the left to MMT and Keynesian economics, or to the idea of a specifically financial form of capitalism?

Randall Wray: I am not sure I know the answer. Before MMT became prominent, I thought Doug Henwood was fairly aligned with the work we were doing at the Levy Institute and with Post-Keynesian economics, so I have never understood the complaint.

Perhaps the problem is a caricature of MMT: the government can afford anything, so full employment will be easy, everything will be fine, and we need not worry about anything. That is not our argument. We say only that the problem is not economic in the narrow sense of affordability. All the political problems remain, and they are enormous. But when a president says, as Obama did, “We would like to do more, but we have run out of money,” everyone should stand up and say that this is false. Give us the real reason. Say that your Wall Street handlers do not like the proposal, and then perhaps we can elect a president who is not beholden to Wall Street. But the reason cannot be that the federal government has run out of money. MMT’s task is to eliminate that excuse.

People who contribute to MMT also have many other interests. Some focus more on politics; others concentrate on the problems of developing countries. I have spoken in many South American countries, and in every one the central problem is not really economics. It is that the elite does not want the economy to improve for most of the population. Unfortunately, the United States is becoming more like a developing country than like other wealthy nations. We do not want the bottom half—or perhaps the bottom two-thirds—of the population to enjoy a better standard of living. That is a political choice, not an economic limitation.

The United States plainly possesses the productive capacity, knowledge, and resources to eliminate poverty, homelessness, and lack of medical care quickly. Why do we not do it? Politicians claim that we do not have the money, but that is not the true constraint, and I think most of them understand that.

For twenty-five years, we have sat down with elected representatives or their economists and explained MMT and the job guarantee. They often respond, “I understand, but I cannot possibly say that in public.” John Yarmuth was the first prominent politician I encountered who openly told the truth. As the Democratic chair of the House Budget Committee, he invited me to testify. Beforehand, I met him in his office; he understood the analysis completely and said that the Democrats were discussing all of it and understood it too. He eventually began saying it publicly, although he then did not run again. I do not know whether those facts were connected—perhaps he felt free to speak because he knew he was retiring.

The recurring lesson is that leaders cannot lead. They need someone else to get out in front. Once a position becomes safe to state, politicians will be willing to state it. We are therefore trying to build a large public—voters, media, and others—who understand the argument and will hold politicians accountable, making it safe for them to tell the truth. We remain a long way from that point. Even Bernie Sanders would not say it publicly, although Stephanie Kelton was his chief economic adviser and discussed these matters with him constantly. He understood, but he still could not say it.

Class Unity: We also had another question about the pandemic. How was Federal Reserve policy during and after the 2008 crisis continuous with what happened during the pandemic?

Randall Wray: There is a good side and a bad side. The good side is that the Federal Reserve learned how to prevent another 1929. It goes in without limit. Mario Draghi said to do whatever it takes: if it takes $29 trillion, spend and lend $29 trillion. If it requires breaking the Federal Reserve Act and doing things that are illegal, as the Fed did in 2008, it will do them.

That may mean a new Great Depression is almost impossible. Minsky collected a number of his essays in a book titled Can “It” Happen Again? His original answer was no, but in the 1980s he began to think that it might happen again because the financial system had become so dangerous. After the global financial crisis, however, the Fed learned how to stop such a collapse. When Silicon Valley Bank and two other banks failed, officials acted very quickly. The intervention was effective: they contained the crisis before it spread through the system.

Financial analysts—including a friend of mine who is a very strict monetarist and extremely conservative—have calculated that the banking system may still have roughly $2 trillion in negative capital, although conditions have improved. The problem lies mostly in the largest banks, owing to commercial real estate and to losses on mortgage-backed securities and Treasury securities following the Fed’s interest-rate increases. A security yielding 1 or 3 percent loses a great deal of market value when rates rise sharply.

This creates a potentially dangerous situation, but the Fed will not allow the banks to collapse. It takes the assets onto its own books and lends against bonds as if they were worth their original face value, even though they are not. The Fed itself therefore sustains massive accounting losses, but a government institution is different from a private bank. This is a legacy of the global financial crisis: if you intervene on a sufficiently large scale, you can prop up the financial system and keep it operating. Then you hope that the economy, and gradually the banks, will recover.

Class Unity: Would you describe the global financial crisis in the United States as a depression, or was it a recession?

Randall Wray: It was a recession, not a depression. The pandemic recession was the quickest and deepest recession we have experienced, while the global financial crisis lasted for years and spread around the world. Europe suffered even more than the United States because of the euro’s design and the constraints on national fiscal policy; countries could rely only on the European Central Bank and could not adequately rescue their own economies. The United States did something, although we had a jobless recovery and conditions remained bad for a long time.

During the pandemic, the United States spent $5 trillion with no “pay-for.” No one proposed financing it through a matching tax increase or spending reduction. Policymakers simply spent $5 trillion, which demonstrates that they understand the government cannot run out of its own money.

Class Unity: How sustainable is this dynamic? Can the Fed keep pumping money into the financial system? Where do you see this going over the next year or two—or five or ten years?

Randall Wray: It has added to the problem of inequality. My colleague Pavlina Tcherneva has a famous graph showing that in every recovery since 1960, a larger share of income growth has gone to the top 1 percent, the top tenth of 1 percent, or the top 10 percent—however one divides it, more goes to the top. That process continues. We may see a convicted felon become the next president because people are angry. Sustaining the financial sector creates an enormous political problem. Finance receives a very large share of profits, the share of income going to wages has fallen, rents have risen, and inequality has increased.

The United States is falling behind the rest of the developed world and behind China in the things that matter. We can find the money to save the financial system, but we are losing the ability to produce for our own population and compete in international markets. The financial sector is not interested in those tasks because it can make more money from finance than from financing production. How can we expand productive capacity and care for our population when the financial system does not want to do it? That is the central problem.

Class Unity: If I understand you correctly, the United States can keep the economy basically stable over the medium term, but people will become increasingly impoverished and the economy will lose productive power relative to its international rivals.

Randall Wray: I do not like the word “rivals.” I do not regard other countries that way, although both Democrats and Republicans commonly describe China as a rival. We should work with China. We must try to save the planet, and we cannot do it without international cooperation. We need to work with China, Russia, India, Brazil, and others.

Climate catastrophe is the most important problem we face, and no country can solve it alone. The rich, developed world created most of the damage and possesses the capacity to provide developing countries with what they need to grow without continuing to destroy the planet. Every developed country used fossil fuels, and developing countries will use them too because that is the easiest and cheapest path unless we cooperate to supply alternative energy.

Yes, people in the United States will suffer if our productive capacity falls further behind that of the developed world. The Biden administration moved in the right direction, but its program was too small and much of the available funding had not yet been taken up. We are falling behind both the deadlines for reversing climate damage and the productive capacity that China has built. I do not say this because I want China to be a rival; China can supply a large part of the world with its output. All industrialized countries should nevertheless move toward green production and expand their capacity so that together we can change the planet’s trajectory.

Class Unity: In your talk and papers, you suggest that the current problem is not simply technical or economic. It is political, and only policy can save us from another event like the 2007-09 global financial crisis. It is a question of political will and agency. Do you think there are groups or individuals powerful enough—and whose interests are not served by the current duopoly or geopolitical situation—who might have an incentive to break out of it and move things in a new direction?

Randall Wray: There are certainly people in green industries who would benefit, but they also genuinely want to change things. I do not know Alexandria Ocasio-Cortez personally, but I know people who work with her, and I have promoted and advised her work. There are elected officials who know what they are doing and who have good goals and strategies. I am not directly involved in their political operations.

Around 2014, I served on Bernie Sanders’s financial advisory committee, as did Stephanie Kelton, and I think that is how she came to work for him. Bernie is tremendous. I believe he would have won a fair election, but we know what happened during the primary. There are individuals with potential, but electoral politics is not an area in which I can claim expertise or much influence. When I am asked to testify, I do it; when I can meet with a politician, I do that.

I once met with Dennis Kucinich together with Pavlina Tcherneva. He may have had the quickest mind I have ever encountered. We entered his office, and he asked what the job guarantee was. We gave him a twenty-five-second summary. He said, “I’ve got it. We’ll do it.” He called in an assistant and instructed him to begin drafting a job-guarantee bill, then sent him out and continued talking with us. He was brilliant. Of course, his district was redrawn, and he could no longer win.

Politics is difficult and often depressing, and I have no special advice about how to do it. But do not accept dishonest answers, and do not keep supporting candidates simply because the parties give them to you. Demand something better. Polling on the policies Americans want reads like a progressive wish list. YouGov polling of young people has found overwhelming support for a job guarantee. The policies we want already command majority support; politicians simply do not offer them, presumably because campaign funders do not rank them highly.

We must somehow elect candidates like Bernie Sanders, who did not depend on large donors, or Ocasio-Cortez, who can raise enough money from voters to win. Ideally, money would be removed from politics, but that cannot be done until candidates capable of changing the rules begin winning elections.

Most Americans are unhappy with both major-party choices. The sitting president was historically unpopular and withdrew from the race. Even many people planning to vote for Trump are unhappy with him but more unhappy with the Democratic candidate; many Democrats are likewise unhappy but will vote for Harris because they oppose Trump.

I would like to see several parties with a realistic chance of winning elections. Breaking the duopoly would be valuable because a serious candidate currently has to run through one of two parties. No law or constitutional provision requires a two-party system. The two parties prefer it because each knows exactly what it is competing against and needs to be only slightly to the left or right of the other. Neither has to offer much that people want; it only has to offer its half of the electorate a little more than the other party does. The lack of competition helps explain why we do not get good policy.

My strategy is to vote for a third party wherever it is safe to do so. I have been fortunate to live mostly in strongly Democratic states, where such a vote does not affect the presidential outcome, and I have never felt guilty about voting for Jill Stein. I spoke with her for two hours and advised her on student debt; I liked many of her positions. Someone in a swing state, where a third-party vote might help elect Trump, may reasonably feel differently. But I would like legitimate third parties to have a chance of winning. Third parties already succeed in some local and state elections. If that can grow, we will have an opportunity to break the duopoly.

Class Unity: We can end there; we are at time. Thank you very much, Professor Wray, for your talk and this very interesting discussion. Thank you to everyone who came.

Randall Wray: Okay, thanks.