Recent interview with John Kenneth Galbraith:|
The Observer: Would you generally approve of the way he [Greenspan] has conducted
monetary policy at the Fed?
Galbraith: Absolutely not. There should have been far more warning about the
speculative splurge on Wall Street and the extent of citizen participation. That
was the mistake that the Federal Reserve made in the Twenties, and the mistake
that it has made again now.
And the reason for it is simple: you cannot warn against a speculative splurge
without taking responsibility for what happens thereafter; no head of the Federal
Reserve wants to be held responsible for a dip in the stock market. Once or twice
he has got close to saying that, and he certainly knows it. But nothing appeals so
much to a central banker as personal caution.
One thing is wonderfully clear - when trouble comes on Wall Street, the blame
will all be passed to Indonesia, Malaysia and maybe Japan. Wall Street insanity
- let me use a slightly milder expression, Wall Street 'speculative error' - now has
a perfect cover.
The Observer: If you look at the return on capital in the G11 countries, it has
been rising pretty consistently since 1982. But clearly the graph can't continue up
forever. Do you think we might be at a turning point now?
Galbraith: Profits have been very high and growing. But returns from owning
common stock, particularly in the major companies, have actually gone down to
nominal levels. Dividend income of major stocks is almost insignificant. To own
common stock that has a wonderful capital value and no income is a slight
anomaly that only the better financial minds can explain.
The Observer: With reference to Schumpeter and the Schumpeterian correction,
to what extent do you think that we just have to go through the inferno?
Galbraith: We could move much more aggressively than we are doing to clean
up the situation, to make sure that we have common honesty in the operation of
all these mutual funds, for example. One always worries that there may be some
relationship between what a mutual fund is doing with its investors' money and
what the participants in the fund are doing with their personal funds.
There have been some cases of that in the newspapers recently. In the US we
now have far more mutual funds than there is intelligence, perhaps integrity, to
handle them. They are the bridge between the innocent and the eventual loss.
This is a time when we should tighten, and be very certain about, the quality of
our bank regulation. There should be strong warnings against investment in
high-interest bonds. Nothing calls for more concern than the revival of the junk
bond; while the problem of regulation is a bit difficult, we should look with some
concern on this whole mergers and acquisitions binge.
But having said all that, I would emphasise again that the sequence of
speculative boom and its result is part of the market system (one cannot now use
the word capitalism) and has been for hundreds of years. The market system has
its considerable accomplishments, but one should never ignore its downside.
The Observer: Do you think we are going to come back to a point when some
kind of Bretton Woods system is needed, and some control of capital?
Galbraith: One of our stronger points is that in consequence of the existing
Bretton Woods system - if properly financed - we have a structure for easing what
the financial community loves to call a correction.
We should always bear in mind that, as is happening now in East Asia, the
peculiar genius of the IMF is to bail out those most responsible, and extend the
greatest hardship to the workers, who are not responsible, who are innocent
The Observer: Do you believe, and have you ever believed, there is any truth in
the 'new paradigm' idea?
Galbraith: When you see reference to a new paradigm, you should always, under
all circumstances, take cover. Because ever since the great tulip mania in 1637
[when 'investors' bid up the price of bulbs to astronomical levels, even devising a
system of call options on tulips they didn't actually own], speculation has always
been covered by a new paradigm. There was never a paradigm so new and so
wonderful as the one that covered John Law and the South Sea Bubble - until
the day of disaster.
The Observer: Would you agree that we should be worrying less about inflation
now than we should have worried 10 or 20 years ago?
Galbraith: You have to divide the situation in the US from that in the United
Kingdom. In the US, we've managed to combine very high employment (or very
low unemployment), with relatively stable prices. On the other hand, here in the
UK, inflation has been a somewhat more pressing problem. We Americans have
managed to put aside Phillips [the economist famous for the Phillips curve,
describing the trade-off between inflation and unemployment]; but he's still
relevant here. When all is said and done, the labour movement and the problem
of the wage-price spiral is still stronger in the UK than it is in the US.