Outsider in the world of economics takes a dim view of 'rotten' banks
The son of a legend has never tried to escape his heritage
Published 18/06/2009 | 00:00
THE American economist Jamie Galbraith is refreshingly open about the benefits and disadvantages of being the son of the nearest thing the economics profession has to a legend.
"I grew up knowing many of the giants," remembers the son who spent part his childhood in India when President John F Kennedy dispatched his friend G K Galbraith to New Dehli as ambassador.
"The thought that I could escape from this heritage never crossed my mind."
Still, the childhood experience of debating political and economic issues over the dinner table with the elite that ran the United States at the height of its powers has left Jamie Galbraith disillusioned by the calibre of today's economists.
"The economics profession is like a Brazilian indigenous tribe that has a proud heritage behind it but is now surviving in a rain forest with no memory of its own history," he rails before adding, in a typical Galbraithian touch, that he hopes his tirade is not offensive to Brazilian tribes.
Both father and son have made their reputations promoting a left-leaning economic philosophy that is often at odds with mainstream economics but tends to find favour in times of economic crisis.
Outsiders in the world of economics, they have influenced the debate in a series of provocative and influential books.
Jamie approvingly quotes his father who once told the 'Washington Post' that he felt "like the streetwalker who had just learned that the profession was not only legal but the highest form of municipal service" when President Nixon followed his advice and introduced price controls in 1971.
It is this appetite for jousting in the political arena that sets him aside from many other university-based economists. He has a low opinion of bankers and their role in the present economic crisis, arguing that fraud is endemic in the banking sector and many banks should be allowed to fail.
"There was a situation in which fraudulently originated loans were consciously extended on untenable terms because the lenders had no reason to care," he says.
"You had massive fraud in the extension of loans to borrowers who could not, or would not, document their incomes while houses were consciously appraised far beyond their values so as to maximise the banks' loans on terms that were untenable."
While declining to talk directly about the situation in Ireland, his comments have a deep resonance for taxpayers here who have bailed out Anglo Irish Bank and are being asked to continue funding the bank's operations.
"There are banks that were deeply rotten and those banks should be forced to recognise the losses that occurred rather than covering up the losses.
"The management should be replaced and there should be clean, thorough accounting so the taxpayers know what the extent of their liabilities are."
Galbraith, who likes Bill Black's 2005 classic 'The Best Way to Rob a Bank Is to Own One', insists that a bank's management must be culled before any bank can be reformed.
"The incumbent management will never give you a choice you have confidence in, because the incumbent management will never come clean," he says.
While cautioning that not all banks are rotten, Glabraith says no bank should be allowed to be "too big to fail" while also being allowed to take risks.
Retail banks which lend to the public and companies should be little more than utilities "and should be run as such" which means not taking any risk.
"Big banks are intrinsically too big and too dangerous to trust with the protection of deposits," he argues.
We have got to "recognise it is not good practice to have the financial sector in lead position driving the direction and pace of the economy because the tendency of that sector is towards instability," he says, looking into the future.
"You get a boom and bust of the kind we have been experiencing in the past 20 years."
While it is "unquestionable" that President Barack Obama's fiscal stimulus is working", Galbraith warns that unemployment will continue to rise and that this is a social tragedy.
"It means you are wasting a large proportion of the talent of the workforce.
"The unemployment rate is a much more important number than the gross domestic product."
The economist says he would not want to be in his mid-20s today because unemployment will really hit this age group, delaying or destroying the chance to form families or have children and gain the sort of work experience that sets people up for life.
It's a while since we've seen that here in Ireland but anybody who hit their 20s in the late 1980s will know exactly what he is talking about, having either experienced these problems themselves or seen others fail to marry or progress in their careers because of a lost decade.
Galbraith's solution is to make it easier for people to retire early by providing guaranteed healthcare to anybody over 55 years.
The economist is gloomy about the future unless "focussed, directed action" is taken to reduce carbon dioxide emissions.
The world now needs a period of 30 to 40 years of transforming growth to alter the way it produces green house gas or we face "deeply troubling, catastrophic climate change" within the lifetime of our children.
The solution, he suggests is "a cabinet level department of climate with a great deal of authority over transport" and other carbon-producing activities.
The suggestion is made with verve and vigour but also a touch of sadness.
One can't help thinking that deep down Galbraith fears that the world has largely ignored the collective advice of the two Galbraiths for almost a century now.