It is Time to put Money into the 'Real Economy'. Interview with Randall Wray

This interview with Randall Wray is part of the ongoing discussion on Beyond Economics Development Vol 52 no 3 leading up to the journal launch events in New York (29 October 2009) and The Hague (11 December 2009). 

Q: Many economists predicted the crisis was going to happen. What could have been done to prevent it?

A: Of course, as the Queen of England suggested, most economists did not see it coming. This is because the mainstream economics models are wrong. They presume that market processes are naturally stabilizing. However, many followers of Keynes, such as Minsky, recognize the inherent problems of the modern capitalist economy--its failures to provide for full employment, for sufficient equality of distribution, and for economic stability. If policymakers had recognized these faults, they could have designed a framework to promote stability. These would include a true, full employment programme (what Minsky called employer of last resort), a set of policies to promote greater equality (higher minimum wages, promotion of wage growth at the bottom of the income distribution, more power to labour unions), and policies to reduce financial speculation (prohibiting protected institutions such as insured banks and pension funds from buying risky assets).

Q:  What was the role of financial speculation in the unfolding of this crisis?

A: Just as it did in 1928-29, the self-regulated financial sector became the 'tail that wagged the dog'. Speculation as well as out-right financial (accounting) fraud was unleashed. Policymakers not only refused to constrain it, they actually promoted this (such as Chairman Greenspan's recommendation that households borrow against their home equity using risky adjustable rate mortgages). The economy became little more than a side-line to the bubbles. This was actually cheered by our 'regulators' such as Greenspan as well as Treasury Secretaries Rubin and Paulson. Larry Summers and Timmy Geithner also fuelled the speculation--not merely by allowing it to happen, but by actively promoting it.

Q: In your article you advocate for governments to pump more money into the economy. How will this help prevent another crisis? Doesn't it rather help save the system and create further crises in the future?

A: I want to be clear: we need to 'pump money' (spend) into the 'real economy' not into Wall Street. I would close down all of the 'too big to fail' financial institutions. I would withdraw the 'bailouts' and prosecute the crooks. What we need to spend for is to create jobs (providing income to finance consumption, rather than forcing households to use debt), to help homeowners refinance homes at better rates, and to rescue state and local governments (to protect public sector jobs and services). All of this would reduce the potential for future crises.

Q: In your article you also say that prospects for the rest of the world are worse than for the US. What can poorer countries do to come out of the crisis? What options do they have?

A: Much of the world will rely on the US to pull it out of recession. Unfortunately, many nations either will not and in some cases cannot pull themselves out without US recovery. Those that have given up sovereign currencies (adopting the Euro, or pegging to the dollar) cannot use fiscal policy on the necessary scale to ramp up their economies. China can do it, but as it is a net exporter, it will not be a huge help for the rest of the world. Over the longer term, I hope more countries will recognize that the key to 'decoupling' from the fate of the US is to develop their own economies, to achieve full employment through domestic demand. This is facilitated through use of a sovereign currency--which allows domestic fiscal and monetary policy space sufficient to achieve full employment at home. 

Interview by Laura Fano Morrissey  

Click here to read the abstract of Randall Wray's article in Development 52.3.


Randall Wray is Professor of Economics at the University of Missouri-Kansas City, Senior Research Associate at the Center for Full Employment and Price Stability, as well as visiting Scholar at the Jerome Levy Economics Institute of Bard College.