American Economist James Galbraith Calls for the Bretton Woods System of Regulation
September 24, 2007 • 11:01AM

In an interview today in the French daily Liberation, James Galbraith, the son of deceased economist and Roosevelt collaborator, John Kenneth Galbraith, takes off his gloves against the markets and calls for specific measures for regulation, although remaining far from what is necessary to deal with this systemic crisis. Responding to a question on the fact that the "oracles" of the economy all say that the "fundamentals are good" and that the financial crash will not play out like in 1929, Galbraith says that "the same was said prior to the 1929 crisis. The twenties were years of full employment against a backdrop of insolent growth and of stock exchange speculation in the image of the 90s." "The current cycle is similar. Since 1995, the US is undergoing a period of growth fed by credit, financed by private debts of individuals and companies, first via an Internet bubble blown up through 'business plans' based on hot air, then via the real estate bubble financed through mortgage credit based on thievery."

Galbraith then attacks the helicopter liquidity policy carried out by the central banks, and calls for a deep reform of the capital markets. Since the current instability has not always existed! From 1950 to 1970, for instance, we hardly had that type of problem. There existed a system of public regulation which was rather strong. Since the 90s we have come back to the 20s, to a regulation through the market, and one sees what the result is: we go from bubble to bubble, from crash to crash.

To reform today, adds Galbraith is a bit like applying criminology to the economy: proofs must be assembled, causal chains must be investigated. As in the drug money laundering, the banks which are recycling or injecting funds in dubious institutions must be located. Investigations must be carried out against the rating agencies which didn't see anything coming and validated fraudulent financial instruments. A new independent regulation authority, sort of a health agency applied to banks and credits in order to avoid such traps closing in on us, must be created. Asked whether the crimes can be punished, Galbraith said that indeed, during the S and L crisis, about 1000 people had been prosecuted.

But the real alternative is the reestablishment of an equilibrium between where the private interests should not be more important over the public interest. Where regulation would be imposed in favor of the individuals, the small consumers of financial products, and not in favor of the big actors of the market. To the final question on whether he thinks Greenspan is right to predict a violent economic crisis, Galbraith says: He says the truth. He's no longer under constraints, he is no longer disguising his words.