Salon Radio: David Cay Johnston on the bailout

The Pulitzer Prize-winning NYT reporter discusses the uncritical panic created around the financial crisis and the role journalists have played in that.

Published October 1, 2008 4:18PM (EDT)

In late 2007, David Cay Johnston -- the long-time, recently retired, Pulitzer Prize-winning investigative reporter for The New York Times -- released a book with this title: Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill). For obvious reasons, that book is more relevant now than ever.

I spoke with Johnston today about the pending bailout, the panic (and resulting acquiescence) that has been successfully injected into the American public, Johnston's very piercing critiques of the coverage of the financial crisis by his former colleagues in "journalism" (or, as he puts it, "by the actors who play the role of journalists on TV"), and the profound changes among both the journalistic culture and journalists themselves since he first became a reporter several decades ago. More than a week ago, as the crisis was unfolding, Johnston wrote a piece at admonishing journalists not to cover government claims uncritically, and at TNR a couple of days ago, he surveyed some of the coverage and detailed just how resoundingly that admonition was ignored.

I highly recommend this interview, as Johnston's observations about both the bailout and journalism are quite incisive and well-stated. It is roughly 20 minutes in length and can be heard by clicking PLAY on the recorder below. The transcript is here.

This interview can be heard by clicking PLAY on the recorder below:

Glenn Greenwald: My guest today is David Cay Johnston, who is the long-time Pulitzer Prize winning investigative reporter for The New York Times, just recently retired from there, and who also published a book at the end of 2007, the now very appropriately titled book: Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense, and Stick You with the Bill. David, thanks so much for taking the time to talk to me today.

David Cay Johnston: Thank you, Glenn.

GG: My pleasure. So, I want to begin with a piece that you wrote, actually last week, as the financial crisis was literally exploding, and you wrote at, at the Romanesko site, a place where lots of journalists talk to one another, and is a very popular site among professional journalists. And you essentially issued at the time an admonition in advance, about what the media should do and in particular what they should avoid in covering this financial crisis. And in particular, you said -- let's not make the same mistakes as were made with the run-up to the Iraq War, and the PATRIOT ACT that so eroded our credibility, in terms of how we cover this financial crisis.

What did you mean by that, and have those admonitions been largely followed in your view?

DJ: Well, what I meant was, the line I opened my piece was, "Journalists, start your skepticism." The core value of journalism, the first rule of a journalist is check it out. Just because the President of the United States says something doesn't make it so. And so my initial concern was, is there really a crisis going on, and if there is, let's hear the case - tell the government we want a comprehensive, comprehensible and clear explanation of what the problem is, and then journalists should begin questioning that, and checking things out, and cross-checking them, and then they should begin looking at the solution. We've been told there's only one solution. Well, a whole group of economists have come forward with solutions. I proposed one area that might help ease this crisis.

We've been seeing some of this. Some of the journalism has been better, some of it has been atrocious. And I'll give you an example of the fear-mongering I see going on now. Monday night, after the bail-out was rejected, Katie Couric opened up the CBS Evening News with the clerk reading the vote total, and said: "that sets off the biggest decline in stock prices ever." Well, it did not - it wasn't even close to the biggest decline. Brian Williams on the Nightly News said the very same thing - the worst single day drop ever. That's just wrong. And there's an enormous amount of just wrong reporting going on.

GG: Explain how that's wrong; explain in what regard that claim is inaccurate and misleading.

DJ: Because it is the biggest single day drop in numbers, but the index that they're using changes all the time. So it's irrelevant. It's the percentage change that matters. The Dow Jones Industrial Average, which is 30 out of 5 million companies in America, fell by less than 7%. Well, in 1987 it fell by more than 22%, right after 9/11 it fell by, I think it was about 8%. It is the percentage that matters, not the numbers in the index.

And what this does is it makes people think, this is the worst thing since the Great Depression. It's not. Banks fail, and we're going to have more banks fail because we have all these artificially inflated assets, and those assets must fall back to their real value, and this should not be a mystery to people who have been reading my stuff. I've been writing for years about this. I, in a book five years ago, called Perfectly Legal, said eventually these assets have to fall in value, and we will all be worse off for it. And that's including the rich, who, the very very super-rich, who are getting rich off this game of inflating assets.

GG: Right. Now, one of the things you've seen over the past few days, as could be easily predicted, as a result of the fear-mongering over the drop in the Dow, is that there has been a shift in public opinion. I mean, I think public opinion early on was starting to coalesce against the bail-out. A lot of people were extremely skeptical, skeptical in the way that the people in the press weren't, and didn't quite know what to make of these claims, but there was clearly a lot of opposition. And by all accounts - although it's hard to know exactly what the extent of the shift is - there clearly has been, especially after the Dow plummeted that day, a greater acceptance on the part of the public of the need for something to be done, and perhaps even for this specific bail-out to be done.

Do you connect those two things, that is, the media's immediate embrace of this Great Depression narrative, that, oh, the stock markets just dropped, the worst day that it had since the Great Depression, and this shift in public opinion?

DJ: Perhaps. Literally, that will take time, and I'm sure there are sociologists who will go back and study that, and journalists who will write about it, but we did see something I think is terrific - whether you are in favor of this bail-out plan or not - that so many people contacted Congress. That tells you we haven't completely turned over and out-sourced to the economic elites, the political donor class, Washington, that people do think they can influence and affect their government.

One of the things that has begun to happen is people are saying, I don't get what the connection is. Banks are still sending me solicitations to borrow money. I personally had my bank call me and ask me about borrowing more money in the middle of this. Funny businesses have renegociated their notes. So there are lots of Wall St. people who are not on Wall St., saying, I'm sorry, I don't understand what's going on here. That's a real problem. The news media has been busy covering the edges of this. We must do this! We must attack Iraq! So what are the details questions around it? Instead of, what's the core problem? And then, what are the alternative solutions to this? That's what journalists should be doing. Being skeptical, so the public has a range of possible responses.

And by the way, we're not also covering going forward. We add $700B to the national debt, that's the equivalent of a one-time 55% income tax increase. That means there won't be money to fix the infrastructure which helps keep the economy running. There won't be money for senior citizens, to take care of the soldiers coming back from the war who survived because of modern medicine, and are going to be extraordinarily expensive to care for the rest of their lives.

GG: Right. Obviously, the way in which this public debate has been conducted is exactly the way that prior public debates have been conducted, including the ones about which you warned, such as the run-up to the Iraq War, the PATRIOT ACT, and all the other pieces of legislation that have drastically expanded government surveillance power. Which is to say, you begin with the unchallengeable premise that something extremely dangerous is threatening all of our interests, and you put the public in enough of a panic that these questions get shunted to the side. And once that core premise get implemented as unchallengeable conventional wisdom - and it has - it becomes very difficult to have any debate. Now, let me ask you...

DJ: It's exactly right. Just as we know, and there's lots of research that the market often adopts a herd mentality that's irrational. The news media, this great beast of the news media I've spent 40 years of my life in - it also has a herd mentality. And once there's the accepted narrative, even if it's completely false, everybody drops into this. And that's why at the beginning I tried to stimulate some discussion about, Stop. Stop folks. Think. Don't lose your head.

GG: Right. Let me ask you about that core premise. One of the questions that you posed early on, which is clearly the key question, is, and this is how you phrased it, "Are credit markets really about to seize up?" Now, I've read lots of economists who have been quite critical of the bail-out plan, and false premises, and everybody seems to agree that there is distress in the credit markets - I don't think anybody questions that. But there's a big leap required to acknowledge that to going and saying, there's going to be this massive contraction that going to cause a world-wide economic melt-down, and a return to the Great Depression. You've done some reporting on that issue about how severe the problems in the credit market are.

What are your views on that issue at the moment? Is the government claim about that exaggerated? Do we have time to craft alternative solutions, or is it as immediate and dire as the warnings suggest?

DJ: Let me deal with some pieces. First of all, there are other things the government can do to make sure that credit keeps flowing. We just have the government essentially guarantee all money market funds. Or we could rapidly expand other guarantees of banking. There are a number of steps the government can take and they haven't been taken. There will be a contraction in credit no matter what we do. Wall St. has assets that must deflate - there is no escaping that, and the pain is going to cost. And borrowing more money to pay off badly borrowed money, is a bizarre policy.

Secondly, there's a new study out by two economists with the International Monetary Fund. IMF policy. They published a study, in which they study 42 banking crises around the world over the last 37 years. And they concluded essentially this: bail-outs don't usually work; they often make things worse; and they are fundamentally a transfer of wealth from everybody to bankers and their customers. So, Congress should be saying, is there something else we can do in the short run to sort of patch this over and keep going forward? They're not asking that question. They're not even discussing that question.

And, do you see reporters on TV saying, excuse me, have you discussed other solutions to this, have you discussed if there's something short-term we could do 'till we sort this out? There's a basic question reporters should be asking. Does the Treasury Department have a list of all the banks in the country, and what they say are the face value of their illiquid assets? That would tell us real quickly if there's a problem concentrated in a handful of banks, or is it spread all over.

GG: Now, all of that relates to what we were just talking about, which is the way that this panic mode of this impending doom drowns out every meaningful question, including the question of, even if you've become convinced that doom is around the corner, will this plan actually solve things, or even make them better? is there a chance they can make things worse?

The reason why those questions haven't been asked is because, from the beginning, even Congress, when they held their vaunted hearing, only heard from people, as I think you've suggested, who advocate the Paulson plan. There were the Bush officials there, from the Fed, who believe in this plan, and we never have heard about the prospect that other plans could potentially, less draconian plans could actually work better.

And I want to ask you about this, in relation to that point, which is: obviously, one of the things we're doing in enacting this plan is vesting great discretion in the Treasury Secretary - less discretion than he originally demanded, but still vast discretion - who, for a long time, until very recently, was the CEO of Goldman Sachs, and you've said there are some questions, vital questions that any rational person ought to be asking, let alone a good journalist, about how the whole Goldman Sachs connection is playing into what has happened over the last 10 days to two weeks. What are those questions, and how do they impact your assessment to whether this bail-out plan is a good idea?

DJ: Well, who is the leading company inventing and promoting these toxic products, and getting people into them? Goldman Sachs, and it was at the time that Henry Paulson was running Goldman Sachs that this was going on. So, even if you assume his heart is pure and all he is doing here is what he thinks is the best thing to do for the republic, you have to look at where he came from.

Now, they allowed a Goldman competitor to fail, Lehman, the only firm that they said they would nothing for. Then, they decided to rescue AIG, the insurance company, on the too big to fail theory -- who owes Goldman $20B, half its net worth? AIG. And who is the only non-government person in the room, according to The New York Times, when they made that decision? The current chairman of Goldman.

With the Secretary will now be imbued with the power to buy assets - he doesn't have to have auctions; he doesn't have to pay the lowest possible price. He can even buy assets from foreign governments and foreign central banks, so we're going to have American taxpayers bailing out Dutch banks and Luxembourg banks. There's no question being raised about, hey, these guys all were running huge off-shore operations, to not pay taxes in the US; they didn't run to the government of Bermuda and the Cayman Islands for help; they ran to the government whose system they abused. Why aren't we saying a condition of getting in the bailout is, you will, within five years, repatriate all your assets and pay taxes on them from the Cayman Islands and Bermuda. No-one's even mentioned that except me. And one tax lawyer that I know.

In buying assets, the Secretary does not have to buy a single asset from Goldman to rescue Goldman. All he has to do is buy assets from parties who, if they defaulted, would bring Goldman down. We ought to have a requirement that the counter-party be disclosed in every one of these cases so we make sure this isn't a bail-out of Goldman by its former chairman. Those are the kind of fundamental integrity questions that aren't on the table, and by the way, that oversight board - it has five members. One of them is the Treasury Secretary, who supposed to oversee his own operations; but there's no inspector general.

GG: Right. There's one, then you have the Federal Reserve chairman, you have the SEC commissioner, and two other executive branch officials. That's the conception of oversight that we have.

DJ: Glenn, there's one other problem here. I've watched some journalists actually ask questions that I posted at the Romanesko's web-site and others and turned on the TV and seen my questions being asked, so I know they're influencing what's happening. And then, I see these wishy-washy answers, and because the journalists that you see every day aren't specialists and haven't done their homework to get up to speed on this, they don't know what to do. They just go, that's the answer, and they go to the next question.

Journalism involves cross-examination of people. And these people you're seeing on TV, many are actors who play journalists on television, at fees of the kind that actors earn. They don't know how to pursue; they don't know how to follow up. And finally, this cowing of the news media, this orchestrated 30 year campaign to intimidate and cow the media. How dare you ask this sort of question? How dare you look into the background of this person may have her finger on the Button? That's hand and effect.

It hasn't cowed me, but I assure you it has cowed an enormous number of reporters. Journalists who used to confront politicians in person or on the phone. I have myself said to public officials, in one incident that was caught on tape years ago, when I was at the LA Times. "Senator, will you stop lying to the Los Angeles Times." This was to a state senator. You'd get fired for that today.

GG: Right. So it's not really even a question of individual journalists who have been bullied into being more deferential, as the McCain campaign recently said that they wanted reporters to be, but it's actually the media organizations as a whole, have become --

DJ: It's a culture. It is this culture that has gone to, on the one hand, government is the problem, is accepted by many, many people mindlessly, Ronald Reagan's line; and yet at the same time we're not supposed to challenge and criticize the government? I'm sorry, that the business I got into and I'm still in. To be fundamentally skeptical and challenge the government, and when I started out as a reporter in the 60s, the first value I was taught was, I was doing county government, in Santa Cruz, California. You are there to protect the public purse. You're to make sure these guys don't spend one penny of the public's they don't have to spend, and they don't spend any of it making themselves rich. That value, where is it in this case?

GG: Well, you referred earlier to that fact the people who play, the actors who play journalists on the TV are paid like actors. Isn't there a much greater identification between these leading journalists on television and the political and financial establishment than there was 30 years ago? Aren't they part of the establishment that they're now...

DJ: Yes. One of the other changes -- remember that if you were born after 1960, which means you became an adult in 1981, all you've known is Reaganism. You don't know what went on before. You don't know how much better off the middle class was, that we didn't have homeless people in the streets like we do today. You have no experience with that. And people didn't have nearly as much debt as they do. At the same time, journalists used to be amateurs, and I mean that in the classic sense of that word, that you were a respected authority on something. Today, many journalists know virtually nothing; they come from relatively privileged backgrounds, certainly not from harsh gravel blue collar backgrounds, and they identify with the establishment. And therefore why would they be fundamentally critical of it, from their background?

That's a real core problem about the class and particularly the people who are at the top in television.

GG: And you certainly see the by-product of that. Last question: as you know, I did a lot of work on the FISA and telecom amnesty issue, which was being pushed by the same establishment, the same set of corporate lobbyists who wanted this legislation - very much in their interest - and there was a moment where it looked like it was going to be derailed, as a result of public anger. Lots of people celebrated. They came back, they tinkered with the bill a tiny little bit, and the establishment and the corporate lobbyists ended up prevailing.

Do you see the same thing happening here? Do you think that a slightly modified version of failed the other day is about to pass as a fait accompli, or do you think there's a prospect that it can be derailed at this point?

DJ: You've identified one of the great political tricks of our era. Whether you believe we should have this bail-out or not, it's very clear what's going on here. You make a minor change in something to appeal to a small constituency, you then claim you have really reformed this and fixed it to solve the problems, and then you get 90% of the bad stuff that you wanted. And these are issues that will always be here. Whether it's the government spying on you, or how the government spends your tax dollars, these are issues of which a free people must be vigilant about at all times if they wish to remain free.

GG: Indeed. And so, it sounds as though you believe, although it's hard to say for sure, that a bail-out plan of the type that just recently failed, and not that far away from the plan Paulson originally proposed, is imminent, and that this donor class, as you called it the other day, at the end of the day will probably prevail. Is that--

DJ: It's interesting. It will pass the Senate and it will pass the Senate overwhelmingly. What will be interesting to see is whether those relatively small number of Democrats and big majority of Republicans in the House stick by their guns. I assure you that right now, carrots and sticks are being heavily applied to anybody who's on the margin, and they've only got to move 16 votes to get this thing passed. Think about that. Sixteen votes in the House change, will indebt us beyond belief. Four or five years ago I broke the story in The New York Times that Bush administration killed a plan for $12 million of additional spending to go after Osama bin Laden's money, so we could trace any effort by him,

GG: That's 12 million with an 'm', right?

DJ: With an 'm', that's exactly right. And the Bush administration killed this proposal, saying, the American taxpayer could not afford this burden. I kid you not. You can go read my story in The New York Times about in March 2004. The American taxpayer cannot bear this burden. Well, the cost of borrowing $700 billion would equal in the interest every three hours. Twelve million dollars in interest every three hours. So, we can't afford to try and make sure we trace Osama bin Laden's money, if he tries to set up another plot - which he's surely doing - but we can afford $700B to bail out Wall St. That is a very, very curious public policy.

GG: Yeah, this whole bail-out, this immediate panic and the bail-out plan that is essentially being rammed down everybody's throat is revealing of how our system works I think on essentially every level, most of which you've just described. David Cay Johnston, thanks so much for taking the time to talk to me about it. It was very interesting, and I appreciate it.

DJ: Glenn, thank you very much and I hope your listeners go read Free Lunch, which has a lot more about this.

GG: Absolutely, and I will link to it too, and it obviously has particular resonance this week, so I hope they do as well.

DJ: Thank you.

GG: Thanks David.

[Transcript courtesy of Thames Valley Transcribe]

By Glenn Greenwald

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