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“Modern
Debt Peonage”?
Economic Democracy Is Turning Into a Financial
Oligarchy
An
interview with Michael Hudson, 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).
By Mike Whitney
0/09 "ICH" -- -"
-- - On Friday afternoon the government announced
plans to place the two mortgage giants, Fannie Mae and Freddie
Mac, under “conservatorship.” Shareholders will be virtually
wiped out (their stock already had plunged by over 90 per cent)
but the US Treasury will step in to protect the companies’ debt.
To some extent it also will protect their preferred shares,
which Morgan-Chase have marked down only by half.
This seems to be the
most sweeping government intervention into the financial markets
in American history. If these two companies are nationalized, it
will add $5.3 trillion dollars to the nation's balance sheet. So
my first question is, why is the Treasury bailing out
bondholders and other investors in their mortgage IOUs? What is
the public interest in all this?
Hudson: The
Treasury emphasized that it was under a Sunday afternoon
deadline to finalize the takeover details before the Asian
markets opened for trading. This concern reflects the
balance-of-payments and hence military dimension to the bailout.
The central banks of China, Japan and Korea are major holders of
these securities, precisely because of the large size of Fannie
Mae and Freddie Mac – their $5.3 trillion in mortgage-backed
debt that you mention, and the $11 trillion overall U.S.
mortgage market.
When you look at the balance
sheet of U.S. assets available for foreign central banks to buy
with the $2.5 to $3.5 trillion of surplus dollars they hold,
real estate is the only asset category large enough to absorb
the balance-of-payments outflows that U.S. military spending,
foreign trade and investment-capital flight are throwing off.
When the U.S. military spends money abroad to fight the New Cold
War, these dollars are recycled increasingly into U.S.
mortgage-backed securities, because there is no other market
large enough to absorb the sums involved. Remember, we do not
permit foreigners – especially Asians – to buy high-tech,
“national security” or key infrastructure. The government would
prefer to see them buy harmless real estate trophies such as
Rockefeller Center, or minority shares in banks with negative
equity such as Citibank shares sold to the Saudis and
Bahrainis.
But there is a limit on how
nakedly the U.S. Government can exploit foreign central banks.
It does need to keep dollar recycling going, in order to prevent
a sharp dollar depreciation. The Treasury therefore has given
informal assurances to foreign governments that they will
guarantee at least the dollar value of the money their central
banks are recycling. (These governments still will lose as the
dollar plunges against hard currencies – just about every
currency except the dollar these days.) A failure to provide
investment guarantees to foreigners would thwart the
continuation of U.S. overseas military spending! And once
foreigners are bailed out, the Treasury has to bail out domestic
American investors as well, simply for political reasons.
Fannie and Freddie have
been loading up on risky mortgages for ages, under-stating the
risks largely to increase their stock price so that their CEOs
can pay themselves tens of millions of dollars in salary and
stock options. Now they are essentially insolvent, as the
principal itself is in question. There was widespread criticism
of this year after year after year. Why was nothing done?
Hudson: Fannie
and Freddie were notorious for their heavy Washington lobbying.
They bought the support of Congressmen and Senators who managed
to get onto the financial oversight committees so that they
would be in a position to collect campaign financing from Wall
Street that wanted to make sure that no real regulation would
take place.
On the broadest level, Treasury
Secretary Paulson has said that these companies are being taken
over in order to reflate the real estate market. Fannie and
Freddie were almost single-handedly supporting the junk mortgage
market that was making Wall Street rich.
The CEOs claimed to pay
themselves for “innovation.” In today’s Orwellian vocabulary
financial “innovation” means the creation of special
rent-extracting privilege. The privilege was being able to get
the proverbial “free ride” (that is, economic rent) by borrowing
at low-interest government rates to buy and repackage mortgages
to sell at a high-interest markup. Their “innovation” lies in
the ambiguity that enabled them to pose as public-sector
borrowers when they wanted to borrow at low rates, and
private-sector arbitrageurs when they wanted to get a rake-off
from higher margins.
The government’s auditors are
now finding out that their other innovation was to cook the
accounting books, Enron-style. As mortgage arrears and defaults
mounted up, Fannie and Freddie did not mark down their mortgage
holdings to realistic prices. They said they would do this in a
year or so – by 2009, after the Bush Administration’s
deregulators have left office. The idea was to blame it all on
Obama when they finally failed.
But at the deepest level of all,
the “innovation” that created a rent-extracting loophole was the
deception that making more and more bad-mortgage loans could
continue for a prolonged period of time. The reality is that no
exponential rise in debt ever has been able to be paid for more
than a few years, because no economy ever has been able to
produce a surplus fast enough to keep pace with the “magic of
compound interest.” That phrase is itself a synonym for the
exponential growth of debt.
The Road
to Debt Peonage
In an earlier interview
you said: “The economy has reached its debt limit and is
entering its insolvency phase. We are not in a cycle but the end
of an era. The old world of debt pyramiding to a fraudulent
degree cannot be restored.” Would you expand on this in view of
today’s developments?
Hudson: How
long more and more money can be pumped into the real estate
market, while disposable personal income is not growing by
enough to pay these debts? How can people pay mortgages in
excess of the rental value of their property? Where is the
“market demand” to come from? Speculators already withdrew from
the real estate market by late 2006 – and in that year they
represented about a sixth of all purchases.
The best that this weekend’s
bailout can do is to postpone the losses on bad mortgage debts.
But this is a far cry from actually restoring the ability of
debtors to pay. Mr. Paulson talks about more lending to support
real estate prices. But this will prevent housing from falling
to levels that people can afford without running deeper and
deeper into mortgage debt. Housing prices are still way, way
above the traditional definition of equilibrium – prices whose
carrying charges are just about equal to what it would cost to
rent over time.
The Treasury’s aim is to revive
Fannie and Freddie as lenders – and hence as vehicles for the
U.S. economy to borrow from the foreign central banks and large
institutional investors that I mentioned above. More lending is
supposed to support real estate prices from falling quite so far
as they otherwise would – and in fact, the aim is to keep the
debt pyramid growing. The only way to do this is to lend
mortgage debtors enough to pay the interest and amortization
charges on the existing volume of debt they have been loaded
down with. And since most people aren’t really earning any more
– and in fact are finding their budgets squeezed – the only
basis for borrowing more is to inflate the price of real estate
that is being pledged as collateral for mortgage refinancing.
It is pure hypocrisy for Wall
Street’s Hank Paulson to claim that all this is being done to
“help home owners.” They are vehicles off whom to make money,
not the beneficiaries. They are at the bottom of an increasingly
carnivorous and extractive financial food chain.
Nearly all real estate experts
are in agreement that for the next year or two, many of today’s
homeowners will find themselves locked into where they are now
living. Their situation is much like medieval serfs were tied to
their land. They can’t sell, because the market price won’t
cover the mortgage they owe, and they don’t have the savings to
pay the difference.
Matters are aggravated by the
fact that interest rates are scheduled to reset at higher
non-teaser rates for the rest of this next year and 2010,
increasing the financial burden. You may remember that Alan
Greenspan recommended that homebuyers take out adjustable-rate
mortgages (ARMs) because the average American moves every three
years. By the time the mortgage interest rate jumped, he
explained, they could sell to a new buyer in this game of
musical chairs – presumably with more and more chairs being
added all the times, and plusher ones to boot.
But homeowners can’t move today,
so they find themselves stuck with rising interest charges on
top of their rising fuel and heating and electricity charges,
transportation charges, food costs, health insurance and even
property taxes as these begin to catch up with the rise in
Bubble Prices.
The government has carefully
avoided nationalizing the companies and thereby taking them onto
its own balance sheet. It has created a “conservatorship” (a
word that my spellchecker does not recognize). So the bailout of
Fannie and Freddie looks like the Republicans are trying to play
the financial just-pretend game simply until they leave office
in February, after which time they can blame the failure of the
“miracle of compound debt interest” on the incoming Democratic
Congress.
So it’s politics as usual: play
for the short run. In the long run – even next year – the real
estate market will continue to drift down.
The economic news keeps
getting grimmer and grimmer, but you’d never know it by
listening to the politicians at the Republican Convention. The
only time the economy was brought up at all was in the context
of praise for free markets and globalization. The housing crash
and credit market meltdown were not mentioned. Could you tell us
what you think the rising unemployment numbers, falling consumer
demand, skyrocketing foreclosures and ongoing troubles in the
credit markets mean for America’s future? Is this just a blip on
the radar or are we in the middle of a major retrenchment that
will result in falling living standards and a deep, protracted
recession?
Hudson: The
Republicans prefer to distract attention from how the Bush
regime has failed over the past eight years. If attention can be
focused on Iraq and terrorism, on personalities and style,
serious discussion of such matters may be crowded out. That’s
what the news media are for.
When politicians do talk about
the economy, the basic strategy is to fight the November
election over who has the nicest dream for what people would
like to believe. Amazing as it seems, a large number of
Americans actually expect to have a good chance of becoming
millionaires. They’re simply not looking at the debt side of the
balance sheet.
The most striking economic
dynamic today is polarization between those who live off the
returns to wealth (finance and property extracting interest and
rent, plus capital gains as asset prices are inflated) and those
who live off what they can earn, struggling to pay the taxes and
debts they are taking on. The national income and product
accounts – GNP and national income – don’t say anything about
the polarization of property, and doesn’t include capital gains,
which are how most wealth is being achieved these days, not by
actual direct investment to increase the means of production as
lobbyists for trickle-down economic theory claim.
Here’s how things look today:
The richest 1 per cent of the population receive 57.5 per cent
of all the income generated by wealth – that is, payment for
privilege, most of it inherited. These returns – interest, rent
and capital gains – are not primarily a return for enterprise.
They are pure inertia, weighing down markets. They do not “free”
markets, except by providing a free lunch to the wealthiest
families. The richest 20 per cent of the population receives
some 86 per cent of all this income – that is, what actually is
increasing household balance sheets.
What people still view as an
economic democracy is turning into a financial oligarchy.
Politicians are looking for campaign support mainly from this
oligarchy because that is where the money is. So they talk about
a happy-face economy to appeal to American optimism, while being
quite pragmatic in knowing who to serve if they want to get
ahead and not be blackballed.
During the 1990s the bottom 90
per cent of the population tried to catch up by going into debt
to buy homes and other property. What they didn’t see was that
an insatiable growth in debt is needed to keep a real estate and
finance bubble expanding. All this credit imposes financial
charges, which have been largely responsible for polarizing
wealth ownership so sharply in recent decades.
These debt charges have grown so
heavy that debtors are able to pay only by borrowing the
interest that is falling due. They have been able to borrow for
the past few years by pledging real estate or other collateral
whose prices are being inflated by Federal Reserve policy. The
Treasury also contributes by giving tax favoritism, un-taxing
property and finance. This forces labor and tangible industrial
capital to pick up the fiscal slack, even as they are being
forced to carry a heavier debt burden.
Homeowners do not gain by this
higher market “equilibrium” price for housing. Higher prices
simply mean more debt overhead. Rising price/rent and
price/earnings ratios for debt-financed properties, stocks and
bonds oblige wage earners to go deeper and deeper into debt,
devoting more and more years of their working life to pay for
housing and to buy income-yielding stocks and bonds for their
retirement.
Debt expansion to buy property
seems self-justifying as long as asset prices are rising. This
asset-price inflation is euphemized as “wealth creation” by
focusing on real estate, stock and bond prices – even as
disposable personal income and living and working conditions are
eroded.
So to come back to your broad
question, I don’t see consumer demand rising much, except by
foreign tourists coming over and spending their money as the
dollar falls. Here in New York, foreign buyers are supporting
the real estate market. The Wall Street downturn already has
forced the city to postpone its promised property tax cuts and
its subway expansion. My wife and I just got our condo tax bill
this week. There was an explanatory note telling us that the
only tax cuts will be for commercial property owners.
Residential property tax rates rise.
It gets worse. Without better
transportation, wage earners will be squeezed across the
country. Higher gas prices, electricity, health care and food
are crowding out spending on output and forcing people into even
more debt. That’s why arrears and defaults are rising. Even
rents are rising, despite falling real estate prices. This is
because houses under foreclosure can’t be rented out, so
millions of houses may be taken off the market.
What exactly do you mean
by “modern debt peonage”?
Hudson: This is
what happens when wage earners are obliged to turn over all
their income above basic subsistence needs to the FIRE sector –
mainly for debt service but also to pay for compulsory insurance
and, most recently, the tax burden that finance and property
have shifted off themselves.
The distinguishing feature about
peonage is its lack of choice. It is the antithesis of
free markets. As I mentioned above, many families today find
themselves locked into homes that have negative equity.
Their mortgage debt exceeds the market price. These homes can’t
be sold – unless the family can pay the difference to the banker
who has made the bad mortgage loan. The gap may exceed all the
income the family earns in an entire year – just as it was
making on paper a price gain larger than its annual take-home
pay.
But what did all this matter, in
retrospect, if the house was for living, not for buying and
selling? This dimension of use value was left out of account by
focusing on paper wealth.
In a nutshell, debt peonage is
the other side of the coin in a rentier economy. The negative
equity we are seeing today is a key component of debt peonage.
It forces debt peons to spend their lives trying to work their
way out of debt. The more desperate they get, the more risks
they take, and the deeper they end up. In Kansas City, one of my
students wrote his class paper on how the immediate cause of
many mortgage defaults is gambling debt. Missouri has a lot of
fundamentalist Christians who think of God as watching carefully
over them. Being good people, they want to give God a chance to
reward them for living an honest life. So they go to the
gambling boats that are moored along the river. But the odds are
against them, and it looks like Einstein was wrong when he said
that God doesn’t play dice. Gambling – and much financial
speculation – is all about probability, and the odds are as much
against gamblers as they are against debtors. Being laws of
nature, the laws of probability are like the privilege of land
ownership: a gambling license provides the house with an
opportunity to rake economic rent off the top.
Debt
deflation and the tax shift off finance and
property onto labor
In the short run it
looks like slow growth and deflation will be bigger problems
than inflation. Commodities, including gold and oil, are
tumbling almost daily, while bank assets are being steadily
downgraded, foreclosures are soaring and the stock market is
reeling. The financial crisis that began in the real estate
market has triggered a boycott of structured products and is now
rippling through the broader economy.
The Federal Reserve has
already dropped interest rates by 3.5 per cent and has used up
half its balance sheet ($450 billion) to shore up the faltering
banking system. But the situation keeps getting worse. The banks
have curtailed their lending, and consumer spending is off in
nearly every area. It looks like the Fed is out of ammo. Is it
time to consider fiscal alternatives to the present downturn,
such as cutting payroll taxes to give families more money to
increase demand, or initiating massive infrastructure projects?
Hudson: By
“deflation” I assume you mean debt deflation – draining
purchasing power as a result of rising debt service and
compulsory insurance, plus the wage squeeze that the government
praises for “raising productivity” to “create wealth” for the
CEOs who pay themselves what they have cut back from labor’s
paycheck. There will be less consumer spending – but even so,
consumer prices may not come down if the dollar resumes its
fall, especially if monopoly pricing continues to be permitted.
Your solution is indeed what is
needed, and Mr. Obama has promised to raise the wage and salary
limit subject to FICA withholding. I think that an even better
idea would be to go back to the original 1913 income tax and
exempt wages that merely cover subsistence. I would restore a
cut-off point at $102,000 in today’s dollars, matching the terms
of America’s 1913 income tax. People earning less would not have
to file an income-tax return at all.
This truly conservative
idea would free income to be spent on improving living
standards. Instead, high income brackets and property are being
un-taxed today, and their tax savings are being spent mainly in
making loans that are used to bid up the price of wealth and
luxury goods.
This is what the classical
economists warned against, yet the tax shift off property onto
labor is being done hypocritically in their name. To get the
kind of free markets they advocated, taxes should fall on the
FIRE sector (finance, insurance and real estate) and monopolies,
not wages or bona fide industrial profits stemming from tangible
capital investment and employment.
This June you wrote a
groundbreaking paper for a recent Post-Keynesian conference at
the University of Missouri in Kansas City, where you’re an
economics professor. Its title was “How the Real Estate Bubble
drives Home buyers into Debt Peonage.” You earlier wrote a now
famous May 2006 Harpers cover story on debt peonage.
Your Kansas City paper produces charts showing how tax
favoritism for real estate and other clients for the banking and
financial sector stimulates asset-inflation, leading to massive
equity bubbles like the one we are currently experiencing in the
housing market. Would you give us a brief summary of your
thesis?
Hudson: My
paper explained how the money the tax collector gives up is
“freed” to be paid to banks as interest. This is the motto of
real estate investors: “Rent is for paying interest.” The FIRE
sector has adopted a populist rhetoric to persuade homeowners to
believe that lowering the property tax will end up giving them
more money. It seems at first blush that this would happen. But
in practice, new buyers – and speculators – come into the market
and pledge the tax cuts to bid up housing prices all the more.
The winner in this new anti-tax marketplace is the buyer who
pledges to pay the tax cut to the banks as interest on a
mortgage loan to buy the property.
As my paper describes:
“Tax favoritism for real
estate, corporate raiders and ultimately for bankers has
freed income to be pledged to carry more and more debt,
which has been used to fuel asset-price inflation that
raises the price of home ownership, corporate stocks and
bonds – but not to increase production and output. ...
Shaping the marketplace to favor finance and property over
industry and labor does not create a ‘free market.’ It
favors the debt-leveraged buying and selling of real estate,
stocks and bonds, distorting markets in ways that
de-industrialize the economy. [And] shifting taxes off
property and finance is more a distortion than a virtue,
unless debt leveraging is deemed virtuous.
"This is the tragedy of our
economy today. Credit creation, saving and investment are
not being mobilized to increase new direct investment or
raise living standards, but to bid up prices for real estate
and other assets already in place and for financial
securities (stocks and bonds) already issued. This loads
down the economy with debt without putting in place the
means to pay it off, except by further and even more rapid
asset-price inflation.
This is largely the result
of relinquishing planning and the structuring of markets to
large banks and other financial institutions, political
lobbyists have rewritten most of today’s tax laws and
sponsored general public deregulation of the checks and
balances that were being put in place by the late 19th
century. At that time, just over a hundred years ago, it
seemed that wealth – and banking – were being
industrialized, while landed wealth and monopolies would
become more socialized and their rents fully taxed. Instead
of real estate prices rising, the rental ‘free lunch’ would
provide the basic source of public finance. Technology and
productivity would increase industrial capital formation and
raise labor’s living standards. These policies would free
markets from rent extraction and also from taxes as the
fiscal burden was shifted back onto property.
But this is not what has
occurred. The financial system has used its power to extract
fiscal favors for real estate and to press for deregulation
of monopolies as the major source of its interest and
collateral for its loans.”
What do you think the
positive effects would be of taxing property rather than income
and industrial profit?
Hudson: It
would have two major positive effects. First, it would free
labor and industry from the tax burden. And by the same token,
it would require the economic rent currently used to pay
interest and depreciation to be paid instead as a property rent
tax. This would free an equivalent sum from having to be raised
in the form of income and sales tax. That was the classical idea
of free markets. As matters stand today, the tax subsidy for
real estate and finance leaves more net rental income to be
capitalized into bank loans. This is a travesty of the “free
markets” that lobbyists for the banks and the wealthy in general
claim to advocate.
Replacing income and sales taxes
by a land-rent “free lunch” tax would make real estate prices
more affordable, because the interest now “free” to be paid to
banks to support a high debt overhead would instead be collected
and used to lower the tax burden on labor and industry. This
would reduce the cost of production and living, I estimate by
about 16 percent of national income.
Homeowners and renters would pay
the same amount as they now do, but the public sector would
recapture the expense of building transportation and other basic
infrastructure out of the higher rental value this spending
creates. The tax system would be based on user fees for
property, falling on owners in a way that collects the rising
value of their property resulting from the rent of location,
enhanced by public transportation and other infrastructure, and
from the general level of prosperity, for which landlords are
not responsible but merely are the passive beneficiaries under
current practice.
A Neo-Progressive fiscal policy
would aim at recapturing the land’s site value created by public
infrastructure spending, schooling and the general level of
prosperity. The debt pyramid would be much smaller, and savings
could take the form of equity investment once again. Slower
growth of debt, housing and office prices, and lower taxes on
income and sales would make the economy more competitive
internationally.
I’d like to expand on
what you have said in your article and you can correct me if
I’ve got it wrong. You say that today’s tax code poses an
obstacle to progressive political change, and puts more and more
power in the hands of bankers and speculators who profit from
“boom and bust” cycles. In other words, reworking the tax system
has to be the cornerstone of any progressive platform? Is this
the bigger point you are trying to make?
Hudson: It’s
certainly the tax point I want to make. But I think that my most
important point is the analysis of how the mathematics of
compound interest intrudes increasingly into the economy. The
fiscal link is that as finance strips more and more wealth, Wall
Street converts its economic power into political power. Its
main aim is to free itself from taxation – by shifting the
burden onto labor.
One way to achieve this tax
shift has been to re-define taxes as a “user fee.” This is what
the Greenspan Commission did in 1983 when it imposed heavy
regressive taxation on labor via FICA wage withholding for
Social Security and Medicare instead of funding these programs
out of the general budget, to be paid for largely by the higher
brackets. The Social Security Trust Fund generated a heavy tax
surplus, which was used to cut tax rates on the upper wealth
brackets.
The tax code’s “small print”
made commercial real estate free of having to pay income tax by
pretending that landlords were losing money on their property as
buildings depreciated – as if the land’s rising site value did
not more than compensate. Most important, interest was treated
as a tax-deductible expense. This encouraged debt leveraging
rather than equity investment, creating an enormous market for
bankers creating credit and collecting interest on it.
You say in your article
that there’s “a symbiosis between finance, insurance and real
estate” which is at the core of the Bubble Economy. And that
this creates a “a feedback between bank credit and asset prices.
The quickest and easiest path to wealth is not to earn profits
by investing in industry, but to go into debt to ride the wave
of asset-price inflation. The result is a shift of wealth
seeking away from industry to financial maneuvering on credit to
ride the wave of asset-price inflation.”
Is this financialization
trend irreversible, or is there a way we can revitalize
America’s industrial base? Should we consider nationalizing the
failing auto industry and putting people to work while we build
vehicles for the future?
Hudson: Nationalization
may not be the answer as long as financial interests have
replaced the government as society’s new central planners. I
fear that nationalization under today’s political conditions
would mean “socializing the losses,” having the government bear
them and then sell off the companies at the usual give-away
price to new buyers on credit, all to the benefit of Wall
Street.
If there is any sector to be
nationalized, it should be the FIRE sector – finance, insurance
and industry – along with taking basic infrastructure back into
the public domain by de-privatizing it. The Progressive Era’s
plan that made America so rich and dominant a nation was for the
government to supply basic services such as railroads, phone
systems, the post office and roads or canals at cost or at a
subsidy. This lowered the price structure across the economic
spectrum, enabling the United States to undersell and
out-produce other economies.
We are now in Year 2 of
the so-called credit crisis, what Bloomberg News calls “the
worst financial crisis since the Depression.” More and more
pundits are pointing at the Fed’s monetary policies as the
source of the troubles. Surprisingly, even the New York
Times has joined in the finger pointing by admitting that
Greenspan played a central role in the housing bubble.
Here’s what The New
York Times recently said: “Who’s to blame? In the
estimation of many economists, it starts with the Federal
Reserve. The central bank lowered interest rates following the
calamitous end of the technology bubble in 2000, lowered them
more after the terrorist attacks of Sept. 11, 2001, and then
kept them low, even as speculators began to trade homes like
dot-com stocks. Meanwhile, the Fed sat back and watched as Wall
Street’s financial wizards engineered diabolically complicated
investments linked to mortgages, generating huge amounts of
speculative capital that turned real estate into a
conflagration.”
How would you
characterize Greenspan's part in the present crisis?
Hudson: He was
its cheerleader, with backup from the University of Chicago and
a slew of right-wing think tanks. Mr. Greenspan gave all this
trickle-down economics a patina of rationale and also a rhetoric
pretending that the financial bubble was helping homeowners
rather than mortgage lenders and Wall Street. His role was to
translate Ayn Rand propaganda into populist euphemism.
The role of a financial
cheerleader is to confuse the economic issues, above all by
depicting running into debt as “debt leverage” to accelerate
“wealth creation.” Looking backward, we now can see that this
was really debt creation. When Mr. Greenspan spoke
about wealth, he didn’t mean the kind that Adam Smith referred
to in The Wealth of Nations – tangible means of
production. Mr. Greenspan meant balance-sheet financial claims
on this wealth in the form of stocks, bonds and
property claims. Adam Smith said that to count these monetary
forms of wealth alongside the actual land and capital of Britain
would be double counting. For Greenspan, the liabilities side of
the economy’s balance sheet – what its producers owed to
financial and property owners – became the only kind of wealth
he really cared about.
This inside-out perspective was
largely responsible for de-industrializing, downsizing and
outsourcing the U.S. economy. Mr. Greenspan’s idea of “free
markets” was simply to deregulate them – covertly, to be sure,
by appointing non-regulators to the government’s key regulatory
positions. This resulted in asset stripping, which created some
conspicuous billionaires (corporate raiders, re-christened as
“shareholder activists” these days) and hence won the praise of
Mr. Greenspan for ostensibly playing a positive role in “wealth
creation.”
The bottom line is that the
economic vocabulary was turned into double-think.
The
Political dimension
I have no background in
economics, and never had any particular interest in the topic.
My frustration with the direction of the country – particularly
the Iraq war and the dismantling of civil liberties – led me to
search for answers in places that I never otherwise would have
looked. Now I am convinced that the war in Iraq and the rapid
shift towards a police state here in America are logical
corollaries of the economic polarization that has its root in
policies that are fundamentally flawed and serve the narrow
interests of corporatists, bankers and other vested interests.
Hudson: With
regard to your abhorrence of economics, some of my best students
at the New School withdrew from the discipline as they found
that it wasn’t addressing the problems they were most concerned
about. The field has been sterilized by more than a generation
of Chicago School intolerance.
The economics profession does
not seem to be amenable to reform along the lines that would get
you interested in it. It has become mainly a rhetorical gloss to
depict financial oligarchy as if it were populist economic
democracy. Many people have tried to expand its scope, and have
failed. Thorstein Veblen made an attempt a century ago, his
analysis – basically, classical political economy – was exiled
to the academic sub-basement of sociology. Economists preferred
to put on blinders when it came to looking at wealth
distribution and the classical distinction between “earned” and
unearned” (that is, parasitic) income. Just while sex was
becoming un-repressed, wealth distribution became the new
politically incorrect topic to discuss.
In the old movies about invaders
from outer space such as The Thing, there usually was a
near-sighted scientist who said, “Let’s try to reason with it.
It’s smarter than we are, because it’s come in a flying saucer
with all that great technology.” The monster from outer space
then would simply whack the man aside, killing him brutally.
It’s much like the
Terminator from the future. “It doesn’t feel compassion. It
doesn’t feel pain. You can’t reason with it,” says the movie’s
hero. “All it does is kill.”
This is the task the Chicago
Boys have taken on in their defense of financialized markets as
being “free.” You can’t reason with them. Reason is not their
job. They are not there to be fair.
But to achieve its censorial
role, today’s economic orthodoxy pretends that markets work in a
fair way to provide everyone with opportunity – something like a
sperm with a chance to inherit a billion dollars from a Russian
kleptocrat or American real estate magnate or Wall Street
operator. To promote this worldview, one needs to craft a
rhetoric pretending that markets are “free,” not leading to
serfdom. One has to pretend that is government regulation of the
kleptocrats that is leading to serfdom rather than protecting
the population from predatory finance.
Regarding your concern with the
police state and, ultimately military aggression that is
required to promote “free markets” at gunpoint, Pinochet-style,
empire building always has gone hand in hand with impoverishing
the population of the imperial center as well as its periphery.
For starters, empires and wars don’t pay, at least not in modern
times. At best, it is like the war in Iraq – a vehicle for the
Bush administration to channel billions of “missing” dollars to
its campaign supporters, to recycle back into new Republican
campaign funding. The economy at large is taxed as imperialism
turns into asset stripping.
A second and more purely
political dimension of imperial warfare is to distract the
attention of voters away from economic issues, by appealing to
their nationalism and chauvinism.
Hobson’s theory of imperialism
was that the domestic population lacked the income to consume
what it produced, so that producers had to seek out foreign
markets. This led to war. But today, the “postindustrial” mode
of imperialism is more about recycling wealth to produce capital
gains, mainly by globalizing and privatizing the Bubble Economy.
The most important markets for “wealth creation” are not for
goods and services, but for real estate and financial assets. So
we are brought back to your initial questions today, about how
Fannie Mae and Freddie Mac will sponsor more sales of
mortgage-backed securities.
I think your article
offers a straightforward way to avoid disaster and to transform
society by changing the tax code so that it strengthens the
middle class and levels the playing field between “the haves and
the have-nots.” But how can this be achieved without breaking
your ideas into snappy sound-bytes and building a broad-based
grassroots movement devoted to working class issues and economic
justice? Is there a way to make these transformative social
changes without starting a third political party; an American
Labor Party perhaps?
Hudson: If the
incoming Democratic administration proves to be more of the
same, pressure will indeed arise to create a new party. More
often economic reform has come from the top, but I don’t see it
from the Republicans, given their corruption. Within the
Democratic Party the question is whether the Wall Street
Democratic Leadership Committee (who gave us Gore and Lieberman
after the Clintons) will continue to impose its stranglehold.
Any real improvement will need
an educational campaign to prepare the ground for making
economic reform the centerpiece of major elections. This
educational role often has been filled by third parties. In the
1890s, for instance, the main Progressive Era campaigning
occurred outside of the Democrats and largely outside of the
Republicans as well.
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. He can be reached via his website,
mh@michael-hudson.com
Mike Whitney lives in
Washington state. He can be reached at:
fergiewhitney@msn.com
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