>> "washington journal" continues. host: michael hirsh, chief correspondent at "national journal." thank you for being here. the book, "capital offense: how washington wiseman turned america's future over to wall street." you write that it is about how an idea that was good for big finance is good for america came to define this era and then spiraled completely out of control. guest: my basic idea is you can't explain the magnitude of what happened with the financial crisis and economic hangover that continues that we deal with in the headlines, just by writing books about wall street

and what a bunch of crazy traders did. something this huge and system, something that affected the entire financial system and then the economy happens over a much longer period of time. that is what i tried to explain. a narrative of the way back to the reagan era of how an ibm that free-market always work -- an idea, that free markets always work, when completely overboard. and particularly regarding financial markets that economists have always known be a bit differently. that was thrown overboard during this era. we'll see the period were wall street created ever more complex products. what people didn't understand what the crisis is these crazy cdo's, complex products billed out of subprime mortgage is, did not come out of nowhere. there was a long period of gestation over a decade which wall street firms were developing ever more complex products, taking assets and

repackaging and selling them. this was just the culmination. i tried to explain the whole thing and a whole narrative. host: you say wall street became the master of main street rather than the handmaiden. guest: one aspect of the economy there really hasn't been addressed or fixed at all. i think after two years of debate and discussion and this giant financial reform bill, which is in that wall street continues to dominate the time horizons of corporations, the way ceo's think -- not in the financial economy but the real economy. i think you can trace back a lot of our problems -- the hollowing out of the middle class -- to the way which wall street in its very short time horizons and the compulsion to speculate led it to a lack of concern about any other aspect of the economy. we got to the point over this three decade or so period where

the help of the economy even today -- where is the dow? it is not really true. it the health of the economy has a lot more to do with social equity and other concerns that were simply thrown overboard. host: what we take for granted when you talk about financial -- a gradual change about the way we think about money market and regulation, we just take for granted. guest: that is one of the things i tried to explain is how regulation, and oversight, not only was outpaced by where the markets were going but became kind of a fool's by occupation, and lost art. a very character driven there and tell a story of all of these individuals and one of these is a guy named jerry corrigan, president of the new york fed and early '90s, the first person in 1992 to warn about all of these off the book derivatives

and what were banks doing and did they know what they were doing. he was known as a plumber in the financial industry. he knew how the inner workings of the industry were conducted. he knew about back on payments and when banks were getting in trouble or not. what is interesting is how his way of thinking about markets was lost. this idea that markets would always correct themselves. the alan greenspan, said. you can depend on the markets to correct themselves and know what they were doing and we found that they didn't. but this regulatory art of jerry corrigan and others like him were lost. we got into this period in which regulation was ridiculed. there was no regulation at all. we only found that out at the very end, during the nadir of this crisis when all of a sudden everyone from treasury secretary hank paulson and the bush administration ben bernanke,

realize the financial system was something they no longer comprehended. and the extent that this sort of shadow banking crisis, these products that or off the books and not monitored, were sinking the system. that realization came far too late to do anything about it. host: michael hirsh writes in his book -- also lost was any sense, finance, would complete a least came to dominate economy rather than serve in this traditional role as a supplier of capital of the real economy of goods and service. talking about the serial major of the stock market versus concrete items and goods. guest: at some indefinable point things passed over -- rollicking venture capital market, which are good, which in most of the country's history, even though they occasionally go overboard that -- have been healthier

than the over regulated markets around the world -- to supplying capital to companies. the silicon valley, a lot of companies and the biotech boom benefited. at some point in the 1990's and the 2000's that passed over into what became simply the desire to speculate and pure gambling. we saw that with a lot of these over-the-counter derivatives, which are really simply side bets on what is going to happen to interest rates, what will happen to various economies. it became a giant casino. indeed, something even worse because, unlike in a casino when you know generally what the house of our on cracked or roulette, no one knew what odds were any longer so it was completely out of control. host: the book above " capital offense." talking to michael hirsh, chief correspondent at the national journal group and also served as

senior editor and national economics correspondent for newsweek, based in the washington bureau. you have seen him on the show before. the numbers to call if you want to join the conversation -- in your book, as we mentioned, you go back in time 30 years and look at the various administrations. you did a section on how things like a financial crisis we just experience. guest: it is important to do that and understand -- i don't demonize either side of the aisle. this is a show in which we hear from republicans and democrats on separate lines. i spend just as much time criticizing the clinton administration as i do the george w. bush administration. what you had was officialdom that came to buy into an idea

that economists knew was false, that financial markets could be left untouched. one of the most fascinating figures to me and my narrative is larry summers, who just announced recently he is leaving as obama's chief economic adviser. because larry summers is truly one of the great economist of his generation. the winner of the very prestigious prize awarded every two years to an economist under 40. and he knew -- some of his own work in the 1980's have shown the fallacy of the idea of rational markets in finance. and yet when he became a policy maker, first in the clinton administration under robert rubin, the treasury secretary, and then later under obama, he became influenced by this idea that you could leave the financial markets alone. there was one famous moment in 2005, the height of the bubble just before things went bad --

went bad, at a retreat in jackson hole that central bankers hold every year, when a smart compression -- economist presented a paper saying we might be in trouble, the banks are getting loaded with all of this risk and they don't seem to know how to handle it, and larry summers got up and sort of ridiculed him, basically called him a sandy-luddite and he could cobbling enough, this was the man that president obama chose, not only as chief economic adviser, but the man that would fix the same system that summers helped to create. host: richard from the villanova. democrat line. caller: i am not a trained economist, but i have always been of the opinion that the deregulation of savings and loans was the seminal event that

led to the eventual meltdown of the system. what is your opinion? guest: i do not know if it is the central event, but it is a key event. it is what can happen when a subsection of the banking industry is left unregulated. it also led to the securitized of bad assets, which was initially organized by the government, to deal with the problem of these bankrupt s&ls. key moments in the past couple of decades, but there are lots of key moments, that lead to a market that is out of control. joseph stickups if -- steiglitz,

who had been a longtime supporter of the markets, wrote a paper prickly question in the securitization phenomenon, where is that going to lead? will it lead to lenders being less responsible out the loans they were issuing? of course, that was a question that we sell answered in the most devastating sorts of ways, when we found there were no standards for lending, making sure that loans were made responsibly, because of this phenomenon. they were only connected by an interest payment. yes, that is a key moment in

this phenomenon. host: mike on the independent line, michigan. caller: i have several comments i want to make, but i disagree on with your comments about the clinton administration. i keep hearing that they are going to vote out days people in november, but they are just going to vote in these shills for wall street. these grass-roots organizations, the tea party, they are so upset, they are going to vote republican. host: what should the obama administration do at this point to help what is happening and to the economy, wall street?

caller: if you look back to the clinton administration, a lot of democrats lost their seats in the house. it was not until 1996 that the economy started to pick up. what do people expect of the obama administration, wave a magic wand and wipe out eight years of bad policies from the republican party? guest: your caller makes some good points. i do not want to demonize anybody. certain economists like robert rubin but they were doing the right thing. most people maintained that they would not have let things get out of hand as they did in the bush administration. that is hard to say, but that is another datapoint.

his final point, how people expect, in this current election environment, that you are going to get back to where you were in the high-growth areas, will be difficult. they are saying out there, we have turn the economy around, even though it is slow growth. even though it feels like a recession, we have been growing .teadily fo this sort of thing takes time. you simply do not get out of this sort of disaster in 18 months. it seems like that message, however, is not carrying well with the public. host: as you speak to leading

economists, those who are influential in forming the u.s. policy, do they feel like divided government led to compromises that did not work? for example, the stimulus package that was passed. some say that we need much more but this is as much as we can get in order to get some republicans are aboard. has the compromise bread problems, has the administration done what they wanted and what people aboard? guest: i think there is a sense the obama administration made too many compromises with a conservative movement, which as we have seen, has been taken over by more right wing-leading elements. that they made too many compromises with a republican party that has not addressed their role in any of this. we continue to hear the fantasy from the right that these were

government program that led to the crisis, fannie mae, freddie mac's were encouraging all these bad mortgages, and that was the source of the problem. they were an element, but no more. you do not hear the republican dealing with the real implications of affectively 30 years of runaway reaganism, which was have a healthy reaction to what was happening at the time, but had run its course. you do not hear a discussion in washington about rethinking the proper balance between markets and government. we are capitalists, we want market growth, but you need the right degree of growth as well. one of the criticisms of obama is he did not realize that soon

enough and handed to many things the way to republicans, centrist democrats, not taking a more fdr-type role and fixing what needed to be fixed. host: our guest is the chief correspondent for the national journal. the bill, republican line. -- let us go to bill, republican line. baltimore. caller: i have a question on the capital requirements that the banks were required to keep. i think that is the root of the problem. i do not think there is a problem with derivatives, securitization of assets. what really got the whole system on the wrong path was when the capital requirements

for the banks were losing. that allowed the banks to become extremely leveraged. that is the fundamental problem. i lay that at the foot of congress, who allowed those capital requirements to be reduced. guest: another important part of the story. there is a tendency in discussing the crisis to be a lot about like the blind man and the elephant. you are feeling one part of that -- this must feel like something else -- not getting your hands around the hole. -- the whole. banks were required to keep less and less of their own capital in

these instruments, which led to some recklessness. one character in my book, paul o'neill, president bush's treasury secretary, was left out of town at the time. he was not robert rubin. he was sort of the ill at ease in front of the camera, but i went back to talk to him, and a lot of his ideas sounded pretty good. he said, this venture reform bill that they just passed, we could have done it in two pages. one page would say that the banks would have to stake 25% -- not a 7% that we have now internationally -- 25% of their capital on any loan that they make. and then on page two, mortgage holders would need to put down

20% of their capital to buy a home. he said that would fix the problem. what he says makes practical sense. so yes, the reduction of capital standards, as everyone recognizes, was a key problem. one of the problems out there now is how much of a raising of the standards is necessary to prevent this from happening again? host: a tweet from a viewer -- guest: what the repeal of glass- steagall did was remove all of the fire wall that existed in the financial industry. that was enacted when it became clear, that when banks, as part of a new deal, were being injured by the government, began to behave recklessly, like investment banks.

there was a lot of risky behavior happening on wall street. you do not really what those two to mix. when glass-steagall was repealed, -- which some people call the citigroup conglomeration act -- would have been traditional islands of safety, they also became infected by this risk-taking behavior and that securities on their books. so you no longer had fire walls of any kind to prevent a host: unnecessary. good morning, charlie. you are on with michael hirsch.

caller: your book is dealing with what you are proposing as the main cause of the financial crisis. i would like to question -- your thesis seems to be, deregulation was instrumental in causing the crisis. you have mentioned other things that contributed to it. one of the problem with your argument, it seems to me, if you look at ireland, as one example, they did not have a glass-steagall act. certainly, they did not have fannie mae, freddie mac. ireland is in bad shape, they simply had too much lending.

it seems fairly clear that the core of the problem is lots of institutions basically bought the same security, which were tied to the price of housing. the question in my mind is why did these people think owning all the securities was a good idea? guest: because wall street induced them to do so, these european, asian banks. you are right, and different circumstances, you have universal banking model where you do not have a glass-steagall separation. but you also had, traditionally, a lot of supervision and oversight over the activities they were getting

into. these banks also got involved in buying up these dubious securities. one of the most famous cases we saw in recent months involve goldman sachs. it created a collateralized debt obligation, these complicated instruments built on mortgage assets, which were designed to fail. made up of securities that were based on bad mortgages, designed to go down, so that short sellers on that side of the transaction could win. of course, on the other side of the transaction was, among others, a german bank that did not seem to realize it was being played for a patsy. so you had a lot of things like this occurring at these wall street firms. these so-called quants were

former physicist that were simply creating products that no one could understand. it is true, there were different circumstances, but it comes down to the same phenomenon, and it comes from wall street. host: james on twitter says -- that is his opinion, but is there a discussion among the folks you talk to about a dichotomy between having a hard line between the alley on wall and needing to work with the industry? guest: he has had to walk a fine line. it has been the subject of internal debate in the administration, which i go into in my book. there is a key moment when obama

is hemming and hawing about taking a tougher stance on these bankers, -- and the kind of goes back and forth. some days he is really frustrated with them, other days, tim geithner is saying that we need to get some of them under control. then you have paul volcker saying that we need to forbid them from doing this risky trading. obama is hemming and hawing, over this, over a year. this is just at the time when wall street is announcing new record bonuses. two years after the crisis, they are awarded themselves these bonuses. according to my records, obama is stunned by this behavior and is considering what paul volcker is saying.

eventually, obama and raises paul volcker and does what he says. but it is sort of too little, too late. he has been divided on this question, has been getting conflicting advice. he has not been becoming franklin roosevelt, as some people thought he would be. host: next phone calls. caller: i was just making a comment. there was an earlier caller who said it takes a long time for the economy to come back. obama is probably not to blame. my issue with obama and his administration is the way he is forcing things on us, which is no different than any government in the past 30 years.

health care, he has forced us to take it. he did not care what people wanted. that is my issue with obama, not what he is or is not doing for the economy. guest: i think that is a very pertinent comment. i am also of the opinion, that while health care needed to be addressed, clearly it is a crisis in the economy, was not the most pressing crisis. i think it smacked with a bit of hubris that they were going to had onlys on when they die taken on have of the economy. the problem taking on health care when he did, he sort of used his political capital. now we need more stimulus, more government intervention, but it is politically impossible because of this rebellion over

big government. i think it was a political mess copulation. host: michael hirsch is the author of "capital offense." he is also the chief correspondent with "national journal. when we talk about the decision that were made over decades that had led to the financial situation we are in, as you mentioned in your book, it is very character-driven. these characters were brought into the inner circle of the white house. why is it that people like larry summers and tim geithner came back? they were the month responsible for early, failed policies, so why did obama go back to them instead of the people that you described as the canaries in the coal mine, the people who had identified some of the problems? guest: one of the people i quoted in my book, a former

senior regulator, said this to me. obama did not run for president to fix derivatives. this was not his area of expertise. he is a brilliant man, he certainly understand the gravity of the problem, but he did not understand until he became president just how deep it was. he saw people like summers and tim geithner as fix-it guys. i think he assumed that they would be able to fix it, considering they were partly responsible for it. certainly, we are seeing some signs that obama has realized,

as sommers is leaving -- the president recently named elizabeth warren the head of this consumer panetta protection bureau, which is a great part of this new law. she is certainly considered a very progressive voice. she is one of the few people in the it ministration that does not have robert rubin on her speed dial, the former treasury secretary, who was the mentor to a lot of these current officials. host: austan goolsbee, talk to me about him. guest: the interesting role that he played was he was one of these people that was sort of nudge aside by larry summers, who at the beginning of the administration, obama was waxing poetic over.

goolsbee ended up being relegated to a council of economic advisers. now larry summers is leaving, and he is coming back as the chairman of the council of economic advisers. he is a centrist economist, who i think, has been more with the paul volcker-pipes, those that wanted to see a deeper fix, but is also cautious in his advice. so i do not expect a huge amount of change. host: wesley. germantown, maryland. democratic caller. caller: here are some of the things that i have seen in the past few years. i have a landscaping company

that i had to shut down last year. the problem is not the housing crisis that started this. the problem started with jobs. the bottom line is, i am a democrat, sort of independent as well. i have voted for both republicans and democrats, along with ross perot. the situation that i saw, bill clinton started the free-trade agreement with china, the economy lifted, and today what market are we most controlled by? the chinese market, almost every product is made in china. this is a lot of american jobs

we are talking about. that kind of stopped everything from the bottom up, and then that went to the housing crisis. our home of the use started to devaluate. -- values started to devaluate. guest: these are all important factors, there is not one factor, but you bring up a good point. during this time, when we were deferred to wall street, their view of the economy, short-term, quarterly-type games over long- term, strategic thinking. all of our fortune 500 companies became caught up in this idea

that any time market cap took a leap, they should get a generous slice of it, they became obsessed with having stock options. we were ignoring what was happening to the job base, what was happening to the middle class. it is not that free trade is bad. free trade is generally good, and most of these agreements are ok, but we were not noticing that our middle-class was being completely hollowed out, sustaining itself with the illusion of prosperity that was based on taking on more debt. part of it was the debt that the banks for issuing as part of the subprime phenomenon, and it was all tied together, and then we realized, what happened to the middle class? it cannot sustain itself anymore in this restricted,

austere environment. where are the jobs? that is where we are now. one of my criticisms is, going back to the early 1990's, with all the glorification of globalization and financial markets, what the clinton the administration was boasting -- there was no protection for the middle-class. host: talking about the 1990's, late 1990's, were you have robert rubin and alan greenspan, an odd pair representing both sides of the political aisle. they were able to make things happen because it looked like there was political unity. you say in your book --

guest: and that was the consensus that was achieved. clinton ran as a centrist democrat but he was always a little bit skeptical of wall street. he wanted to be fdr in his political impulses, but he was persuaded that assuaging the bond market, stock market was the way to go. he sort of famously declared, what is going on here, we are here to make the bond market happy? then his head by the james carville said, when i want to be reborn, i want to come back as the bond market so i can be all- powerful. so you had this environment where rubin and greenspan were persuade people of this, and at

the time, they were seen as the greatest team in economic history. all timidly, what inspired me to write this book was it -- ultimately, what inspired me to write this book was the characters. seeing their reputation crashing down to earth. these guys were the best and brightest. how did they turn out to have such clay feet? i thought that was a fascinating story. host: charles, a republican in georgia. caller: good morning. i have a couple of comments. historically, you may disagree with them, but talking about financial advisers, regarding

the resolution to pull out our savings and loans. if you look at the interest rates, historically, compared to the 15% range when carter was in, the responsibility of the government is to control the money supply. carter allowed inflation to get way out of control. if you look at a historical time line, there has been a decrease in interest rates, to where we are now. guest: interest rates are artificially low right now because the federal reserve is

trying to facilitate the recovery. there are a lot of issues here. one of the first character of focus on is milton friedman, the great economist, whose concept were influential, but paul volcker, the fed chairman quashed a lot of that carter- era inflation. he found the money supply was not working as an effective regulatory tool. so there are a lot of questions regarding interest rates, it is all complex, but the bottom line is, they are being kept as low as they are, partly by the government policy, partly

because we conti "national journal." thank you for being here journal." thank you for being here journal."