The Progressive metaphorically sat down with economist Glen Weyl, Junior Fellow at the Harvard Society of Fellows and visiting researcher at the Toulouse School of Economics in France. Glen earned his M.A. and PhD. in economics from Princeton. His research recently turned to anti-trust law after spending a summer helping the Justice Department develop a model of the credit card industry. Since then, he has been working on trying to predict the effects of mergers and other invterventions like price control and net neutrality.

Ross Raffin: What's something that you have been seeing in the media about the economic crisis that you think people are being misinformed about.

Glen Weyl: Well, I don't know whether it is misinformation, but let me tell you something I think has been underreported. One thing is that there has been an enormous consolidation in the banking industry over the last year because the government has been trying to shore up the banking system and in the process they have encouraged a lot of mergers between what are thought to be stronger and weaker banks so as to protect weaker banks, and I think that is very dangerous for a few reasons. First of all, there are now three banks that control over 50% of the deposits in the United, and they have many times as many assets as the Federal Reserve system does. Purely from a competition perspective this is very worrying and will be bad for consumers. Perhaps more importantly, there is a huge incentive for banks now to get very large so the government will be forced to bail them out if they fail. It's really perverse that we've been giving them that incentive and encouraging them to merge. We're just piling more and more risk onto the government. Worst of all, I think, is that it's very hard for the government to regulate banks that are much larger and potentially more powerful than they are because the merger between all these banks makes it very easy for banks to marshal all their resources to persuade regulators and the government to treat them in the way that is profitable for them rather than what is best for the public.

RR: And you don't think this is at all helped by Obama and the Fed trying to extend Resolution Authority and other regulatory measures?

GW: Well, I think the problem is that they haven't done, as of yet, anything to break up the banks or to directly take control of them so that they would be able afterwards to break them up. I was in the fall advocating nationalization of the banks when there were still some assets as well as liabilities to nationalize. Now, basically, nationalization just means paying off all the banks' creditors rather than actually getting control of a functioning economic institution. So we've gotten ourselves into a bit of a mess. I think back in the fall we should have manned up and nationalized leading financial institutions and now they are basically insolvent so it is pretty problematic. Another thing that I think has been underreported on is ways that we might try to regulate the innovation of new financial products. A lot of the proposals floating out there have been about creating a clearinghouse for these things or so forth, but I actually think there has been way too much innovation and new financial products and that just in the same way we regulate medicine that is innovative but potentially dangerous, we should also consider a pre-approval process for new innovative financial products.

RR: So then, considering that nationalization won't be a great option now, what would you say would be a more beneficial course of action?

GW: The most important thing to me by far is to get the banks lending again rather than the government doing all the lending. Currently, what's been going on is the government and Federal Reserve have been the primary suppliers of credit in the economy rather than banks. The problem is that the government really doesn't have the resources to do a good job of making those loans. If you nationalize the banks you would have a whole team of bond analysts and loan officers to decide who to give money to but as it stands they are just having to do it in a pretty blind way. The Federal Reserve just doesn't have people on its staff who have experience with that and so I really worry that we will start to make very poor loans and get ourselves into the sort of trap the Japanese did. Part of the banking system is failing, is that making more and more bad loans won't grow the economy and really just creates another crisis a few years down the road.

RR: That's a good segway to another subject I wanted to talk about. It is pretty common in the media to make connections between this crisis and the Great Depression, but what are some basic differences?

GW: I think there are a few issues to think about which makes it different though not necessarily either better or worse. One issue is that it is very hard to predict exactly how severe the current downturn is going to be...The original crash of the stock market in 1929 didn't immediately precipitate a completely disastrous depression, but a combination of factors following it: poor responses by policy makers, the breakdown of the international trade system, the forming of collusive cartels with the support of the government under FDR by certain companies, and the contraction of monetary policy. A lot of things were poor policy and so forth but it is hard to predict what all this follow on affect of something like this will be...there is a basic problem that...we have a huge amount of debt, and we are going into more and more debt as a result of the enormous amount of spending that is taking place right now and that eventually is going to come home to roost in some fashion. If we continue borrowing at the rates we are now we will owe something like 120 or 130 percent of GDP by the end of the next decade, by about 2020, and that is simply a level that no wealthy nation has ever been able to sustain. The adjustment to these things could in principle come from our interest rates gradually rising, but in the past they have almost always come from a very disruptive crisis like Argentina suffered in the 2000s and what that would mean in a country as powerful and large as the United States is hard to predict but it could be potentially quite catastrophic.

RR: Were we trying to restart credit lines in the Great Depression like we are now or was our fiscal spending during the Great Depression aimed at something more direct like just lowering unemployment?

GW: I think that the truth is that, during the Great Depression, they weren't really thinking a lot about fiscal policy. They ended up doing some of that just to give people work, but they weren't really explicitly thinking in a Keynesian framework. Right now I view there as really being three things we are trying to do. One is that we are trying to get people to spend more because we don't think people are buying enough. Second, in a related way, we are trying to get people to employ more people. Third, we are trying to get the banks lending. I think those are really the three problems that face us, and I think that in indirect ways the government tried to do that during the Great Depression, but I think policy is directly targeted more at the three aims nowadays. I think all three are important, different economists disagree about the relevance and importance of those things, and I think one really important thing to keep in mind is that just the US restarting our spending is unlikely to be enough to get the world going again. We are tremendously in debt and that can't last forever so other people need to start purchasing things from us so we can pay off the debt that we owe to them. The problem is that poor countries have gone through periods when they started borrowing and buying things from the US where there were crises in these countries like Argentina, Brazil, and the East Asian Countries. And you know, once burned, twice cautioned. They don't want to start borrowing again and financing the world economy. So we need to find some way to make those countries feel comfortable buying from the US. I mean it really makes no sense for us to be borrowing from them as we have been. It's like a 70 year old man borrowing a bunch of money from a college student. These people are poor, they have low rates of education, and they need to develop, and they need to borrow from us to do that. And then they can repay us in our retirement by helping us finance that and it makes no sense for us as we are about to go into retirement, borrowing from all of these people who should be focused on development instead of lending money to us.

RR: Let's say you were in charge on the eve of the crisis, when the stock market very visibly fell. In retrospect, knowing what you know now, what actions would you have immediately taken.

GW: Well I probably would have taken the action that I recommended taking then which was to, through the capital requirements we had, nationalize the major banks that couldn't raise enough private capital. I would force, in a coordinated way, their creditors to take something of a reduction in the amount owed. I would have forced the banks to keep lending. I would have made it impossible for them to lobby the government. I probably would have replaced their leadership. I would have taken a much more immediately interventionist approach than what was taken...

RR: So now that we are at this point where we are giving banks all this money, do you think there are really any practical steps the government could take? If you could offer advice for what to do now what would it be?

GW: I think any further aid should be made conditional on [banks] lending money. That is not what the Obama plan seems to be. It seems to be that we are going to take the assets off their balance sheets and give the money to private investors to help do that. But we are not going to get any guarantees from them about lending in exchange for that and I think that is a raw deal. I think the reason we are preserving the banks is that we think the bank is better than the government at making loans...and given that we should get our end of the bargain in exchange for keeping them alive.

RR: The financial sector now owns a lot of bank assets. When we are trying to change capital requirements for banks as opposed to the financial sector, is it less effective?

GW: The problem is that there is no distinction between a bank and a non-bank these days. People like Goldman Sachs have a very crucial role in the whole financial sector, and they should be treated as such. There is really no difference between the role that they serve and the role that banks serve because they are of equal importance to the world economy and should be regulated as such.