Transcript: Thom talks Michael Kirk about "The Warning". Will the markets crash again? 19 October 2009

Thom Hartmann: Welcome back to our program, Thom Hartmann here with you. You know, we get a lot of books and videos pitched to us to go on the show here, I mean literally a lot, we get about a cubic foot, sometimes two cubic feet of mail a day. And at least half of it is books and CDs. And it’s very rare that I pop one into my CD player and within 10 minutes am so mesmerized that I have to sit, I’m stuck in the chair for the hour. And that’s what happened to me with this Frontline report. It’s called "The Warning", it’s going to play tomorrow on PBS stations all across the country, 9 pm eastern time is the official time of playing, although some PBS stations delay things and move things around, it’s up to the individual stations, but that’s the official time. And uh, Frontline is produced out of WGBH in Boston, it’s one of the shows that PBS carries. And the producer, Michael Kirk is with us. And of this particular Frontline, Michael welcome to the show.

Michael Kirk: Thank you Thom, nice to be here.

Thom Hartmann: I gotta tell ya, you produced an astounding video and I hope every single one of my viewers will go out of their way to DVR it or be there in time to watch it tomorrow night on Frontline, on PBS. Um, it’s titled “The Warning.” What is the warning?

Michael Kirk: Well, the warning was issued first in the Clinton administration, the 2nd half of the Clinton administration, and essentially the warning is that at the time, the 27 trillion dollar over-the-counter derivatives market was a time bomb that was fixing to explode some time in the economy and that at its heart, if the bomb went off, was what they called systemic risk, that is that lots of big banks and lots of other companies and eventually the American economy could be tied to the collapse of that market. The time bomb happened and operated inside what they called the Black Box. That is, the government didn’t know anything about the trades, the deals, who was involved, or the amounts of money.

Thom Hartmann: In derivatives.

Michael Kirk: In derivatives.

Thom Hartmann: The black box was the OTC derivatives. And the hero of this movie is Brooksley Born who is a woman who was the head of the Federal agency that oversees the trading of derivatives.

Michael Kirk: You know is there ever, we all know a woman like Brooksley Born in her late 60s now, then in her mid 50s. Somebody who was first in her, pioneer kind of woman who was first in her class at Stanford law school, the first woman ever to be the head of the Law Review, constantly fighting the good fight along the way against a, you know, the white male establishment.

Thom Hartmann: Well, she was fighting against three specific men, really. She was fighting against Larry Summers, Robert Rubin and Alan Greenspan, and you make that point over and over and over again in the movie. This committee to save the world, the guy who was the Treasury Secretary under the Clinton administration, the guy who was the chief financial advisor for Clinton and the guy who was, Robert Rubin was Treasury Secretary, Larry Summers was his Chief Financial Advisor, and Alan Greenspan was head of the Fed. And these three guys did not want there to be regulation of anything, particularly over the counter trade in derivatives. And when Brooksley Born came forward and, with a plan to actually regulate these things which would have prevented the disaster that we’re experiencing right now, they actually got Congress, along with Phil Gramm, to pass a law, the Commodity Futures Modernization Act, stripping her and her agency of all power.

Michael Kirk: Yes, astonishingly actually, that actually nobody that we talked ever remembers a moment where inside an administration there would be this kind of a food fight that would result in something so profound as a complete lack of regulation. Of course that has to go, that has to do with the power of Greenspan and Rubin at that time.

Thom Hartmann: Right, and the frightening ability, apparently that Summers had, to just kick people’s ass and you know, terrify them.

Michael Kirk: He was the heavy guy.

Thom Hartmann: He was the enforcer.

Michael Kirk: Yeah, exactly.

Thom Hartmann: We’re talking with Michael Kirk, he’s the producer of the PBS Frontline documentary which is going to be playing tomorrow night on PBS stations nationwide titled “The Warning.” And the warning by Brooksley Born that a disaster was looming. And now we have had the disaster and frankly today in the Financial Times, Wolfgang Münchau is editorializing on the editorial page, um, he says, he’s talking about how we haven’t fixed any of this, we haven't made any changes. All we’ve done is reinflate the bubble with trillions of government dollars and here’s one, two sentences, one paragraph from this and I’d like to get your thoughts on this, Michael Kirk.

He says there’s two possible scenarios. He says, "The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets". In other words, another major recession. Stock market crash. "Alternatively", he said, "central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by" a great "depression and" a massive "deflation". Here we have, you know, one of the world's leading economists and editorialists for the Financial Times, the author of "Wall Street Revalued" and other books, basically saying we’ve got two choices. Either another serious recession or the mother of all great depressions. And again, he’s pointing to the failure of the Obama administration to do what Brooksley Born was begging the Clinton Administration to do.

Michael Kirk: Well exactly, and I talked to her the other day, because as you may know, Barney Franks' committee is right in the middle of hearings right now about the very derivatives she was warning about, and the word was, hey they’re gonna pass this and it’s going to start to wend it’s way up. Well the window for moments when there was an impetus or an impulse to regulate may be closing anyway and the stuff that’s coming out of Franks' committee is being very much kind of tailor made and left open with gigantic loop holes for the financial lobby industry which is five or six lobbyists for every congressman. There's that need, according to Born, to do something about this, that moment is passing and real trouble, she says, lies ahead. And most of the people that I have interviewed, this is the third film I’ve made about the economy, in the last year, almost everybody I interviewed continues to be more worried than I read about in the newspaper.

Thom Hartmann: Yeah. I have been following this very carefully and for many years and, well, for the better part of five years I’ve been on this show, saying we’re gonna see the DOW at 5,000. We’re gonna see, because it’s gotta unwind, I mean there’s another piece in today’s Financial Times about the P/E ratio and right now the stock market, if you just use good old fashioned P/E ratios, or good old fashioned Q. Your basic ways of metrics of measuring what stocks are really worth, based on what companies are really worth, the stock markets, at this moment, overvalued by 35 to 40%. So if it’s at 10,000 that means it should go to 7,000 or 7500. And uh, or maybe even 6,000. And that’s assuming that there’s no panic reaction, that’s assuming that there’s no fallout. And of course the fallout can drive it down to 3,000. And that’s the warning. I think, frankly that’s the secondary warning of the piece that you’re airing tomorrow night on PBS titled “The Warning.” Not to put words in your mouth, Michael, your thoughts on that? In the minute we have remaining?

Michael Kirk: Well, I think it really is a moment where it’s worth heeding Brooksley Born’s warning and the others who know about this who lived through 1998, lived through Long-Term Capital Management's collapse, see the corollary to what happened with Lehman brothers and what happened with the credit markets last fall, know that what is happening right now is very tenuous, and that it’s time for at least some transparency in the market so we know that the market that was 27 trillion when Borne was doing it and went to 600 trillion dollars last fall, doesn’t again get completely, go into that black box so that we don’t know what’s going to happen. We need to know, it seems to me and it seems to her, and that’s really the warning.

Thom Hartmann: And I think the important, you know, to put those numbers into context. 600 trillion dollars in over the counter black box lousy derivatives being traded when the entire GDP of the entire planet is only 65 trillion. So it’s 10 times the GDP of the planet. And that’s a huge risk. Michael Kirk, PBS.org/Frontline the website. Frontline is the program. “The Warning” tomorrow. Michael, thank you for being with us.

Michael Kirk: You’re more than welcome, Thom.

Transcribed by Suzanne Roberts, Portland Psychology Clinic.

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