Michael Hudson: "Greenspan saw his job as a cheerleader for
people who were able to get rich fast; sort of like a pilot fish
Mike Whitney Interviews Michael Hudson
29/08/08 "ICH" -- -- 1 Mike Whitney: The United States
current account deficit is roughly $700 billion. That is enough
"borrowed" capital to pay the yearly $120 billion cost of the
war in Iraq, the entire $450 billion Pentagon budget, and Bush's
tax cuts for the rich. Why does the rest of the world keep
financing America's militarism via the current account deficit
or is it just the unavoidable consequence of currency
deregulation, "dollar hegemony" and globalization?
Michael Hudson: As I explained in Super Imperialism, central
banks in other countries buy dollars not because they think
dollar assets are a “good buy,” but because if they did NOT
recycle their trade surpluses and U.S. buyout spending and
military spending by buying U.S. Treasury, Fannie Mae and other
bonds, their currencies would rise against the dollar. This
would price their exporters out of dollarized world markets. So
the United States can spend money and get a free ride.
The solution is (1) capital controls to block further dollar
receipts, (2) floating tariffs against imports from dollarized
economies, (3) buyouts of U.S. investments in dollar-recipient
countries (so that Europe and Asia would use their central bank
dollars to buy out U.S. private investments at book value), (4)
subsidized exports to dollarized economies with depreciating
currency, and similar responses that the United States would
adopt if it were in the position of a payments-surplus country.
In other words, Europe and Asia would treat the United States as
its Washington Consensus boys treat Third World debtors: buy out
their raw materials and other industries, their export
plantations, and their governments.
2 MW---Economist Henry Liu said in his article "Dollar
hegemony enables the US to own indirectly but essentially the
entire global economy by requiring its wealth to be denominated
in fiat dollars that the US can print at will with little in the
way of monetary penalties.....World trade is now a game in which
the US produces fiat dollars of uncertain exchange value and
zero intrinsic value, and the rest of the world produces goods
and services that fiat dollars can buy at "market prices" quoted
in dollars." Is Liu overstating the case or have the Federal
Reserve and western banking elites really figured out how to
maintain imperial control over the global economy simply by
ensuring that most energy, commodities, and manufactured goods
are denominated in dollars? If that's the case, then it would
seem that the actual "face-value" of the dollar does not matter
as much as long as it continues to be used in the purchase of
commodities. Is this right?
Michael Hudson: Henry Liu and I have been discussing this for
many years now. We are in full agreement. The paragraph you
quote is quite right. His Asia Times articles provide a running
analysis of dollar hegemony.
3 MW---What is the relationship between stagnant wages
for workers and the current credit crisis? If workers wages had
kept up with the rate of production, isn't it less likely that
we would be in the jam we are today? And, if that is true, than
shouldn't we be more focused on re-unionizing the labor force
instead looking for solutions from the pathetic Democratic
Michael Hudson: The credit crisis derives from “the magic of
compound interest,” that is, the tendency of debts to keep on
doubling and redoubling. Every rate of interest is a doubling
time. No “real” economy’s production and economic surplus can
keep up with this tendency of debt to grow faster. So the
financial crisis would have occurred regardless of wage levels.
Quite simply, the price of home ownership tends to absorb all
the disposable personal income of the homebuyer. So if wages
would have risen more rapidly, the price of housing would simply
have risen faster as employees pledged more take-home pay to
carry larger mortgages. Stagnant wages merely helped keep down
the price of houses to merely stratospheric levels, not
As for labor unions, they haven’t been any help at all in
solving the housing crisis. In Germany where I am right now,
unions have sponsored co-ops, as they used to do in New York
City, at low membership costs. So housing costs only absorb
about 20% of German family budgets, compared to twice that for
the United States. Imagine what could be done if pension funds
had put their money into housing for their contributors, instead
of into the stock market to buy and bid up prices for the stocks
that CEOs and other insiders were selling.
4 MW---When politicians or members of the foreign policy
establishment talk about "integrating" Russia or China into the
"international system"; what exactly do they mean? Do they mean
the dollar-dominated system which is governed by the Fed, the
World Bank, the IMF, and the WTO? Do countries compromise their
national sovereignty when they participate in the US-led
Michael Hudson: By “integrating” they mean absorbing, something
like a parasite integrating a host into its own control system.
They mean that other countries will be prohibited under WTO and
IMF rules from getting rich in the way that the United States
got wealthy in the 19th and early 20th centuries. Only the
United States will be permitted to subsidize its agriculture,
thanks to its unique right to grandfather in its price supports.
Only the United States will be free from having to raise
interest rates to stabilize its balance of payments, and only it
can devote its monetary policy to promoting easy credit and
asset-price inflation. And only the United States can run a
military deficit, obliging foreign central banks in
dollar-recipient countries to give it a free ride. In other
words, there is no free lunch for other countries, only for the
Other countries do indeed give up their national sovereignty.
The United States never has adjusted its economy to create
equilibrium with other countries. But to be fair, in this
respect only the United States is acting fully in its own
self-interest. The problem is largely that other countries are
not “playing the game.” They are not acting as real governments.
It takes two to tango when one party gets a free ride. Their
governments have become “enablers” of U.S. economic aggression.
5 MW---What do you think the Bush administration's
reaction would be if a smaller country, like Switzerland, had
sold hundreds of billions of dollars of worthless
mortgage-backed securities to investment banks, insurance
companies and investors in the United States? Wouldn't there be
litigation and a demand that the responsible parties be held
accountable? So, how do you explain the fact that China and the
EU nations, that were the victims of this gigantic swindle,
haven't boycotted US financial products or called for
Michael Hudson: International law is not clear on financial
fraud. Caveat emptor is the rule. Foreign investors took a risk.
They trusted a deregulated U.S. financial market that made it
easiest to make money via financial fraud. Ultimately, they put
their faith in neoliberal deregulation – at home as well as in
the United States. England is now in the same mess. The
“accountability” was supposed to lie with U.S. accounting firms
and credit rating agencies. Foreign investors were so
ideologically blinded by free market rhetoric that they actually
believed the fantasies about “self-regulation” and
self-regulating markets tending toward equilibrium rather than
the real-world tendency toward financial and economic
In other words, most foreign investors lack a realistic body of
economic theory. The United States could simply argue that they
should take responsibility for their bad investments, just as
U.S. pension funds and other investors are told to do.
6 MW---The Congress recently passed a bill that gives
Treasury Secretary Henry Paulson the unprecedented authority to
use as much money as he needs to keep Fannie Mae and Freddie Mac
solvent. Paulson assured the Congress that he wouldn't need more
than $25 billion but, the 400 page bill allows him to increase
the national debt by $800 billion. How will the Fannie/Freddie
bailout affect the dollar and the budget deficit? Are interest
rates likely to skyrocket because of this action?
Michael Hudson: The Fed can flood the economy with money, Alan
Greenspan-style, to prevent interest rates from skyrocketing.
Nobody really knows what will happen to FNMA and Freddie Mac,
but it looks like the mortgage and financial crisis will get
much, much worse over the coming year. We are just heading into
the storm where adjustable-rate mortgages (ARMs) are scheduled
to reset at higher rates, and where U.S. banks have to roll over
their existing debts in a market where foreign investors fear
that these banks already have no net worth left.
So the principle here is “Big fish eat little fish.” Wall Street
will be bailed out, and banks will be allowed to “earn their way
out of debt” as they did after 1980, by exploiting retail
customers, above all credit-card customers and individual
borrowers. There will be a lot of bankruptcies, and people will
suffer more than ever before because of the harsh pro-creditor
bankruptcy law that Congress passed at the behest of the bank
7 MW---A few months ago, the Wall Street Journal ran an
editorial which said that they could imagine two nightmare
scenarios if the current credit crisis was not handled properly;
either there would be a run on the dollar causing a sudden
plunge in its value, or the unexpected failure of a major
financial institution could send the stock market crashing. Last
week, the former head of the IMF Kenneth Rogoff triggered a
sell-off on Wall Street when he said, "We’re not just going to
see mid-sized banks go under in the next few months, we’re going
to see a whopper; we’re going to see a big one — one of the big
investment banks or big banks." What happens if Rogoff is right
and Merrill, Citi or Lehman go belly up? Is that enough to send
the stock market freefalling?
Michael Hudson: Not necessarily. Citibank would be nationalized,
then sold off. The principle should be that if a bank is “too
big to fail,” it should be broken up.
This should start with a repeal of the Clinton Administration’s
repeal of Glass-Steagall.
As for Lehman, that would be given the Bear Stearns treatment,
and also sold off – probably to a hedge fund. Merrill is much
larger, but it also could be parceled out, I suppose. The stock
market’s financial index would plunge, but not necessarily
industrial stock prices.
8 MW---According to MarketWatch: "In the three months
from April to June, banks posted their second worst earnings
performance since 1991.... Earnings for the quarter totaled just
$5 billion, compared with $36.8 billion a year ago, a decline of
86.5%." Also, according to a front page article in the Wall
Street Journal: "financial institutions will have to pay off at
least $787 billion in floating rate notes and other medium term
obligations before the end of 2009."
How are the banks going
to pay off nearly $800 billion ($200 billion by December!) when
they only earned a measly $5 billion in the quarter!?! And how
in the world is the Federal Reserve going to keep the banking
system functioning when earnings can't even cover current
liabilities? Do the banks have some secret source of revenue we
don't know about or is the system headed for disaster?
Michael Hudson: The traditional way to pay debt is with yet MORE
debt. The interest due is simply added on to the principal, so
that the debt grows exponentially. This is the real meaning of
“the magic of compound interest.” It means not only that savings
left to accumulate interest keep on doubling and redoubling,
debts do to, because the savings that are lent out on the
“asset” side of the creditor’s balance sheet (today, that of
America’s wealthiest 10%) become debts on the “liabilities” side
of the balance sheet (the “bottom 90%”).
The banks don’t have a secret source of revenue. It’s right out
in the open. They will take their junk mortgages to the Federal
Reserve and borrow the money at full face value. The government
will be left with the junk.
It then can either take over the bank, as the Bank of England
did with Northern Rock when it went bankrupt early this year, or
it can let the bank “earn” money by stiffing its customers some
9 MW---From 2000 to 2006, the total retail value of
housing in the United States doubled, going from roughly $11
trillion to $22 trillion in just 6 years. For the last 200
years, housing has barely kept pace with the rate of inflation,
usually increasing 2 to 3% per year. The Federal Reserve's low
interest rates were the main cause of this unprecedented housing
bubble and, yet, ex-Fed chief Alan Greenspan still denies any
responsibility for what "The Economist" calls "the largest
bubble in history". Did Greenspan understand the problems he was
creating with his "loose" monetary policies or was there some
ulterior motive to his actions?
Michael Hudson: He simply didn’t care about the problem. He saw
his job as a cheerleader for people who were able to get rich
fast. These always had been his major clients in his years on
Wall Street, and he saw himself as their servant – sort of like
a pilot fish for sharks.
Mr. Greenspan’s idea of “wealth creation” was to take the line
of least resistance and inflate asset prices. He thought that
the way to enable the economy to carry its debt overhead was to
inflate asset prices so that debtors could borrow the interest
falling due by pledging collateral (real estate, stocks and
bonds) that were rising in market price. To his Ayn-Rand view of
the world, one way of making money was as economically and
socially productive as any other way of doing so. Buying a
property and waiting for its price to inflate was deemed as
productive as investing in new means of production.
Ever since his days as co-founder of NABE (the National
Association of Business Economists), Greenspan has long looked
only at GNP and the national balance sheet as an economic
indicator, being “value-free.” This is his intellectual and
conceptual limitation. He wanted to provide a way for savvy
investors to get rich, and the easiest way to get rich is to be
passive and get a free lunch. His ideology led him to believe
the “free market” ideology that the financial sector would be
self-regulating and hence would act honestly. But he opened the
floodgates to financial crooks. His set of measures did not
distinguish between Countrywide Financial getting rich, Enron
getting rich, or General Motors or industrial companies
expanding their means of production. So the economy was being
hollowed out, but this didn’t appear in any of the measures he
looked at from his perch at the Federal Reserve.
So just as journalists and the mass media proclaim every market
downturn as “surprising” and “unexpected,” he was as clueless as
a lemming running headlong over the cliff. It’s an inherent
instinct for free-market boys.
10 MW---The housing market is freefalling, setting new
records every day for foreclosures, inventory, and declining
prices. The banking system is in even worse shape;
undercapitalized and buried under a mountain of downgraded
assets. There seems to be growing consensus that these problems
are not just part of a normal economic downturn, but the direct
result of the Fed's monetary policies. Are we seeing the
collapse of the Central banking model as a way of regulating the
markets? Do you think the present crisis will strengthen the
existing system or make it easier for the American people to
assert greater control over monetary policy?
Michael Hudson: What do you mean “failure”? Your perspective is
from the bottom looking up. But the financial model has been a
great success from the vantage point of the top of the economic
pyramid looking down? The economy has polarized to the point
where the wealthiest 10% now own 85% of the nation’s wealth.
Never before have the bottom 90% been so highly indebted, so
dependent on the wealthy. From their point of view, their power
has exceeded that of any time in which economic statistics have
You have to realize that what they’re trying to do is to roll
back the Enlightenment, roll back the moral philosophy and
social values of classical political economy and its culmination
in Progressive Era legislation, as well as the New Deal
institutions. They’re not trying to make the economy more equal,
and they’re not trying to share power. Their greed is (as
Aristotle noted) infinite. So what you find to be a violation of
traditional values is a re-assertion of pre-industrial, feudal
values. The economy is being set back on the road to debt
peonage. The Road to Serfdom is not government sponsorship of
economic progress and rising living standards; it’s the
dismantling of government, the dissolution of regulatory
agencies, to create a new feudal-type elite.
The former Soviet Union provides a model of what the neoliberals
would like to create. Not only in Russia but also in the Baltic
States and other former Soviet republics, they created local
kleptocracies, Pinochet-style. In Russia, the kleptocrats
founded an explicitly Pinochetista party, the Party of Right
Forces (“Right” as in right-wing).
In order for the American people or any other people to assert
greater control over monetary policy, they need to have a
doctrine of just what a good monetary policy would be. Early in
the 19th century the followers of St. Simon in France began to
develop such a policy. By the end of that century, Central
Europe implemented this policy, mobilizing the banking and
financial system to promote industrialization, in consultation
with the government (and catalyzed by military and naval
spending, to be sure). But all this has disappeared from the
history of economic thought, which no longer is even taught to
economics students. The Chicago Boys have succeeded in censoring
any alternative to their free-market rationalization of asset
stripping and economic polarization.
My own model would be to make central banks part of the
Treasury, not simply the board of directors of the rapacious
commercial banking system. You mentioned Henry Liu’s writings
earlier, and I think he has come to the same conclusion in his
Asia Times articles.
11 MW---Do you see the Federal Reserve as an economic
organization designed primarily to maintain order in the markets
via interest rates and regulation or a political institution
whose objectives are to impose an American-dominated model of
capitalism on the rest of the world?
Michael Hudson: Shirley you jest! The Fed has turned
“maintaining order” into a euphemism for consolidating power by
the financial sector and the FIRE sector generally (Finance,
Insurance and Real Estate) over the “real” economy of production
and consumption. Its leaders see their job as being to act on
behalf of the commercial banking system to enable it to make
money off the rest of the economy. It acts as the Board of
Directors to fight regulation, to support Wall Street, to block
any revival of anti-usury laws, to promote “free markets” almost
indistinguishable from outright financial fraud, to
decriminalize bad behavior – and most of all to inflate the
price of property relative to the wages of labor and even
relative to the profits of industry.
The Fed’s job is not really to impose the Washington Consensus
on the rest of the world. That’s the job of the World Bank and
IMF, coordinated via the Treasury (viz. Robert Rubin under
Clinton most notoriously) and AID, along with the covert actions
of the CIA and the National Endowment for Democracy. You don’t
need monetary policy to do this – only massive bribery. Only
call it “lobbying” and the promotion of democratic values –
values to fight government power to regulate or control finance
across the world. Financial power is inherently cosmopolitan
and, as such, antagonistic to the power of national governments.
The Fed and other government agencies, Wall Street and the rest
of the economy form part of an overall system. Each agency must
be viewed in the context of this system and its dynamics – and
these dynamics are polarizing, above all from financial causes.
So we are back to the “magic of compound interest,” now expanded
to include “free” credit creation and arbitraging.
The problem is that none of this appears in the academic
curriculum. And the silence of the major media to address it or
even to acknowledge it means that it is invisible except to the
beneficiaries who are running the system.
Michael Hudson is a
former Wall Street economist specializing in the balance of
payments and real estate at the Chase Manhattan Bank (now JP
Morgan Chase & Co.), Arthur Anderson, and later at the Hudson
Institute (no relation). In 1990 he helped established the
world’s first sovereign debt fund for Scudder Stevens & Clark.
Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the
recent Democratic primary presidential campaign, and has advised
the U.S., Canadian, Mexican and Latvian governments, as well as
the United Nations Institute for Training and Research (UNITAR).
A Distinguished Research Professor at University of Missouri,
Kansas City (UMKC), he is the author of many books, including
Super Imperialism: The Economic Strategy of American Empire (new
ed., Pluto Press, 2002
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