JUAN GONZALEZ: To talk more about the housing and financial crisis, we turn now to Paul Craig Roberts. He is a former Assistant Secretary of the Treasury Department in the Reagan administration and a former associate editor of the Wall Street Journal. He has taught at Georgetown University and Stanford and is the author of many books, including Supply-Side Revolution: An Insider’s Account of Policymaking in Washington.

Welcome to Democracy Now!

PAUL CRAIG ROBERTS: Thank you.

JUAN GONZALEZ: What about this issue of the government’s bailout being aimed primarily at the financial institutions rather than the homeowners who — and the defaults that are at the root of the crisis?

PAUL CRAIG ROBERTS: Yes. Well, it suggests that the bailout is either incompetence or fraud, because the problem, according to the government, is the defaulting mortgages, so the money should be directed at refinancing the mortgages and paying off the foreclosed ones. And that would restore the value of the mortgage-backed securities that are threatening the financial institutions. If the value was restored, the crisis would be over. So there’s no connection between the government’s explanation of the crisis and its solution to the crisis.

JUAN GONZALEZ: But one of the things we’ve often heard now increasingly in recent weeks is that these are homeowners who were irresponsible, took on loans that they could not afford to pay. And, in fact, there’s been increasing suggestions that it’s been those who were advocating, groups like ACORN and Fannie Mae and Freddie Mac that were trying to expand homeownership in a reckless fashion, that helped create this increasing number of defaults.

PAUL CRAIG ROBERTS: Well, I have no doubt that that accounts for some part of it, but that’s not the entire problem. And, of course, it is a worthwhile endeavor to expand homeownership. But the problem is that some of the mortgages were fraudulent. Others are hit with interest rate escalator clauses that the people may not have known about, and these adjustable rates push up rates. And the whole thing was based on Alan Greenspan’s easy-money policy, which pushed interest rates so low that it created a housing boom. And so, a lot of people were given 100 percent mortgages, because the rise in the housing price was expected to provide the equity. So, it goes way beyond just trying to expand homeownership to groups that perhaps were not normal risk, you know, the normal type of mortgage risk.

AMY GOODMAN: Paul Craig Roberts, the piece you’ve written, one of them, asks, “Has deregulation sired fascism?” What do you mean?

PAUL CRAIG ROBERTS: Well, the original Paulson plan was to give the Secretary of the Treasury $700 billion with no accountability and give him complete control over the financial system. And that, of course, is state capitalism or fascism. If you control the financial system, you control the economy. And so, that was my way of pointing out the dramatic sort of power that was said to be necessary to stem a crisis that, in my view, could be fixed just by refinancing mortgages, like they did during the Great Depression.

AMY GOODMAN: Who is driving this? Who framed this bailout? And explain exactly who it is who benefits right now.

PAUL CRAIG ROBERTS: Well, what the bailout does is it takes troubled financial instruments off the balance sheet of the banks and puts them on the balance sheet of the taxpayer at the US Treasury. So it’s a bailout of the financial institutions whose recklessness caused the problem. And as I’ve already said, it does not address the problem. It only addresses the problem of the banks. So the foreclosures and the defaulting mortgages will continue as the economy worsens, and yet nothing is being done to stabilize that default rate or to stop these foreclosures. So the money is essentially being poured into the coffers of Washington’s financial donor base.

JUAN GONZALEZ: In some of your articles, you reject a view by some Democrats that this is the end result of a deregulatory fever that began in the Reagan administration, and you point to a more recent aspect of this. And you point specifically to decisions that were made during the Clinton administration and the current Bush administration in 1999, 2000 and 2004. Could you elaborate on what those particular key decisions that were made?

PAUL CRAIG ROBERTS: Yes. First, just let me say the Reagan administration didn’t do any financial deregulation.

In 1999, in the Clinton administration, they repealed the Glass-Steagall Act. This was the Depression-era legislation that separated commercial from investment banking. In 2000, they deregulated all derivatives. And in 2004, Hank Paulson, the current Treasury Secretary, who at the time was chairman of Goldman Sachs, he convinced the Securities and Exchange Commission to remove all capital requirements for investment banks, and thus they were able to drive up their profits by amazing leverage. For example, when Bear Stearns finally went under, it had $33 in debt for every dollar in equity. So this is an amazing leverage. And it’s amazing that all reserves against debt would have been removed by the Securities and Exchange Commission. So, the whole thing is reckless beyond imagination. Now, they claim that they had new mathematical models that assessed risk and that they didn’t need these reserves. Well, that was all a bunch of hooey, as we now see.

AMY GOODMAN: Paul Craig Roberts, you write the US is not a superpower; the US is a financially dependent country that foreign lenders can close down at will. What do you mean?

PAUL CRAIG ROBERTS: Well, the savings rate in the United States is zero. The government is running large budget deficits. And these deficits are financed by foreigners who lend the money. The daily operation of the United States government is financed by the Chinese, Japanese, the OPEC sovereign wealth funds. This is not the financial position of a superpower. The same with American consumption. We consume about $800 billion a year more than we produce. We have an enormous trade deficit. And this has to be financed by foreigners, as well.

So the holdings of dollar-denominated assets, including United States Treasury’s, Fannie Mae, Freddie Mac bonds, in foreign hands is enormous. And they could exert, if they wish, dramatic control over American policy just by calling up Washington and asking if they wanted to buy these things back — of course, with no money to buy them with. And if they were to — they don’t even have to dump them. If they just stopped financing the budget deficit, the government in Washington would have to resort to printing money, like Weimar Germany. So, this is not a strong position.

AMY GOODMAN: And the connection of war to what’s going on today?

PAUL CRAIG ROBERTS: Well, we clearly cannot afford a war that costs us a minimum — an out-of-pocket current cost of $200 billion a year. We can’t afford a defense budget, which is some — or military spending budget — it’s got nothing to do with defense — of somewhere around $700 billion a year. These are beyond our means. We don’t finance that deficit. It’s very strange, Amy, because it’s the foreigners who are financing our wars. It’s the foreigners who are financing the military spending.

So, the United States is going to lose the dollar as reserve currency if it doesn’t show the world that it’s prepared to take action to reduce the budget deficit to zero, to balance it, and to do something to reduce the enormous trade deficit. Otherwise, the outpouring of dollars has become so excessive that it will knock the dollar off its reserve currency role.

AMY GOODMAN: Paul Craig Roberts, we’re going to have to have a part two next week. I want to thank you for being with us, former Assistant Secretary of the Treasury in the Reagan administration and former associate editor of the Wall Street Journal. He has written many books, including Supply-Side Revolution: An Insider’s Account of Policymaking in Washington.