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Introduction

The idea of annulling debts nowadays seems so unthinkable that most economists and many theologians doubt whether the Jubilee Year could have been applied in practice, and indeed on a regular basis. A widespread impression is that the Mosaic debt jubilee was a utopian ideal. However, Assyriologists have traced it to a long tradition of Near Eastern proclamations. That tradition is documented as soon as written inscriptions have been found – in Sumer, starting in the mid-third millennium BC.

Instead of causing economic crises, these debt jubilees preserved stability in nearly all Near Eastern societies. Economic polarization, bondage and collapse occurred when such clean slates stopped being proclaimed.

(2) What were Debt Jubilees?

Debt jubilees occurred on a regular basis in the ancient Near East from 2500 BC in Sumer to 1600 BC in Babylonia and its neighbors, and then in Assyria in the first millennium BC. It was normal for new rulers to proclaim these edicts upon taking the throne, in the aftermath of war, or upon the building or renovating a temple. Judaism took the practice out of the hands of kings and placed it at the center of Mosaic Law.[1]

By Babylonian times these debt amnesties contained the three elements that Judaism later adopted in its Jubilee Year of Leviticus 25. The first element was to cancel agrarian debts owed by the citizenry at large. (Mercantile debts among businessmen were left in place.)

A second element of these debt amnesties was to liberate bondservants – the debtor’s wife, daughters or sons who had been pledged to creditors. They were allowed to return freely to the debtor’s home. (Slave girls that had been pledged for debt also were returned to the debtors’ households.) Royal debt jubilees thus freed society from debt bondage, but did not liberate slaves.

A third element of these debt jubilees (subsequently adopted into Mosaic law) was to return the land or crop rights that debtors had pledged to creditors. This enabled families to resume their self-support on the land and pay taxes, serve in the military, and provide corvée labor on public works.

Commercial “silver” debts among traders and other entrepreneurs were not subject to these debt jubilees. Rulers recognized that productive business loans provide resources for the borrower to pay back with interest, in contrast to consumer debt. This was the contrast that medieval Schoolmen later would draw between interest and usury.

Most non-business debts were owed to the palace or its temples for taxes, rents and fees, along with beer to the public ale houses and other payments to these institutions. Rulers initially were cancelling debts owed mainly to themselves and their officials. This was not a utopian act, but was quite practical from the vantage point of restoring economic and military stability. Recognizing that a backlog of debts had accrued that could not be paid out of current production, rulers gave priority to preserving an economy in which citizens could provide for their basic needs on their own land while paying taxes, performing their corvée labor duties and serving in the army.

Most personal debts were not the result of actual loans, but were accruals of unpaid agrarian fees, taxes and kindred obligations to royal collectors or temple officials. Rulers were aware that these debts tended to build up beyond the system’s ability to pay. That is why they cancelled “barley” debts in times of crop failure, and typically in the aftermath of war. Even in the normal course of economic life, social balance required writing off debt arrears to the palace, temples or other creditors so as to maintain a free population of families able to provide for their own basic needs.

As interest-bearing credit became privatized throughout the Near Eastern economies, personal debts owed to local headmen, merchants and creditors also were cancelled. Failure to write down agrarian debts would have enabled officials and, in due course, private creditors, merchants or local headmen to keep debtors in bondage and their land’s crop surplus for themselves. Crops paid to creditors were not available to be paid to the palace or other civic authorities as taxes, while labor obliged to work off debts to creditors was not available to provide corvée service or serve in the army. Creditor claims thus set the wealthiest and most ambitious families on a collision course with the palace, along the lines that later occurred in classical Greece and Rome. In addition to preserving economic solvency for the population, rulers thus found debt cancellation to be a way to prevent a financial oligarchy from emerging to rival the policy aims of kings.

Cancelling debts owed to wealthy local headmen limited their ability to amass power for themselves. Private creditors therefore sought to evade these debt jubilees. But surviving legal records show that royal proclamations were, indeed, enforced. Through Hammurabi’s dynasty these “andurarum acts” became increasingly detailed so as to close loopholes and prevent ploys that creditors tried to use to gain control of labor, land and its crop surplus.

Fast-forward to today’s world. The most recent financial clean slate was the 1948 Allied Currency Reform of Germany. Basic business debts were left in place, along with employer debts to employees. The population was allowed to keep minimum working balances. But the residue of debts was cancelled, on the logic that most were owed to former Nazis. Applauded as a “free market,” Germany’s economy was freed from the postwar debt legacy that had shackled it after World War I. The aftermath in 1948 left Germany’s economy effectively debt-free, paving the way for the Economic Miracle that followed.

(3) Social purpose of Debt Jubilees

The common policy denominator spanning Bronze Age Mesopotamia and the Byzantine Empire in the 9th and 10th centuries was the conflict between rulers acting to restore land to smallholders so as to maintain royal tax revenue and a land-tenured military force, and powerful families seeking to deny its usufruct to the palace. Rulers sought to check the economic power of wealthy creditors, military leaders or local administrators from concentrating land in their own hands and taking the crop surplus for themselves at the expense of the tax collector.

By clearing the slate of personal agrarian debts that had built up during the crop year, these royal proclamations preserved a land-tenured citizenry free from bondage. The effect was to restore balance and sustain economic growth by preventing widespread insolvency.

Babylonian scribes were taught the basic mathematical principle of compound interest, thereby increasing the volume of debt exponentially, much faster than the rural economy’s ability to pay,[2] an argument recently revived by Thomas Piketty, in Capital in the Twenty-First Century, (2014). That is the basic dynamic of debt: to accrue and intrude increasingly into the economy, absorbing the surplus and transferring land and even the personal liberty of debtors to creditors.

Debt jubilees were designed to make such losses of liberty only temporary. The Mosaic injunction (Leviticus 25), “Proclaim liberty throughout the land,” is inscribed on America’s Liberty Bell. That is a translation of Hebrew deror, the debt Jubilee, cognate to Akkadian andurarum. The liberty in question originally was from debt peonage.
To insist that all debts must be paid, regardless of whether this may bankrupt debtors and strip away their land and means of livelihood, stands at odds with the many centuries of Near Eastern clean slates. Their success stands at odds with the assumption that creditor interests should always take priority over those of the indebted economy at large.

(Republished from The Center for Economic Policy Research by permission of author or representative)
 
• Category: Economics, History • Tags: Consumer Debt, Debt, Financial Debt 
Outlook for the 1% (and the Democratic Party split), 2018
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Low interest rates, “quantitative easing,” and the mitigation of antitrust laws led to more mergers and acquisitions in 2017, but that’s only going to fuel greater wealth inequality and tighten the corporate grip on the political system, explains economist Michael Hudson.

GREGORY WILPERT: Welcome to The Real News Network. I’m Gregory Wilpert coming to you from Quito, Ecuador. The year 2017 is turning out to be another banner year for the centralization of capital, that is, according to an article in the Financial Times this week, “Global mergers and acquisitions exceeds three trillion dollars for the fourth straight year.” The article goes on to point out the following: Faced with the prospect of Amazon’s entry into the pharmacy business, the US’s biggest drugstore chain, CVS Health, agreed to acquire health insurer, Aetna for about $69 billion. Encroachment by Facebook and Netflix into sports, media and film production led Rupert Murdoch to sell most of his 21st Century Fox empire to Disney in a $66 billion deal.

The US remained the most active region for mergers and acquisitions with $1.4 trillion in deals. The numbers of US deals struck in 2017 combined climbed above 12,400 for a record figure. The largest deal in 2017 has yet to be resolved as Broadcom pursues a hostile $130 billion bid for rival chip maker, Qualcomm. Joining me to analyze the causes and consequences of this massive centralization of capital in 2017 is Michael Hudson. Michael is a distinguished Research Professor of Economics at the University of Missouri/Kansas City. He’s author of several books. The most recent among them is J is for Junk Economics. Welcome back, Michael.

MICHAEL HUDSON: Good to be back here.

GREGORY WILPERT: So, what at heart is causing all of this frenetic activity for companies to gobble up one another and thereby creating and ever greater centralization of capital?

MICHAEL HUDSON: It’s part of the neoliberal strategy to inflate the wealth of the 1%, basically by inflating the stock market and the real estate and the bond prices. Central banks are pursuing quantitative easing that offers money at almost zero interest rates. At the same time, you have the tax system’s giveaways to the FIRE sector, capped by deregulatory policies that are encouraging mergers and acquisitions by dismantling the antitrust legislation that has been in place since the New Deal.

The tax giveaways in the Republican tax law two weeks ago enables companies that have kept hundreds of billions of their earnings tax-free in offshore banking enclaves and tax avoidance centers to now shift them to their head office accounts. (Most were kept in U.S. dollars all along, but in the name of “false flag of convenience” companies.) All this tax-avoidance money that has been accumulating since 2004 can now be replaced in the name of the head companies instead of their just-pretend foreign affiliates in these tax avoidance centers.

So the companies are going to be very cash-rich. They’ve anticipated most of this and you can look at these mergers and acquisitions as part of an arbitrage operation. If a hedge fund, a bank or large corporation can borrow at 1%, they can buy stocks that are yielding 10% or even more – or, for that matter, even less. They can get an arbitrage difference between the 1% they pay and the stocks whose dividends pay a higher rate of return, 5, 6, 7, 8, or 9%.

When you buy enough stocks to give you control of a target company, that’s called mergers and acquisitions or corporate raiding. Hedge funds have been doing this, as well as corporate financial managers. With borrowed money you can take over or raid a foreign company too. So, you’re having a monopolistic consolidation process that’s pushed up the market, because in order to buy a company or arrange a merger, you have to offer more than the going stock-market price. You have to convince existing holders of a stock to sell out to you by paying them more than they’d otherwise get.

But suppose you’re a company that doesn’t want to be bought out. Suppose you’re a corporation trying to defend yourself from this merger and acquisition movement. In that case, you do is what they’ve done since the 1980s: You take a poison pill, using your earnings to buy your own stock. Some companies even borrow to buy up their own stock, or they simply increase their dividend payouts so much that it pushes up the stock and leaves nothing in the corporate treasury to be raided by these raiders.

The upshot is that on the part of attackers and defenders alike, you have a process that bids up stock prices. Since the vast majority of stocks are owned by the 1%, and certainly by the 10%, the effect is to increase the wealth of the 1 to 10% in comparison to the wages the bottom 99% get. That basically is the financial and fiscal war in a nutshell.

GREGORY WILPERT: Just a quick question. You’re saying that low interest rates and quantitative easing are among the key factors here. But aren’t those policies also good for the bottom 90%? After all, it keeps interest rates low for ordinary borrowers, such as people who have mortgages or credit cards to pay off, and also helps keep unemployment low. What would be the alternatives if you don’t want to cause unemployment to go up by raising interest rates?

MICHAEL HUDSON: Why on earth would the 1% want to help the 99%? No, it hasn’t helped them at all.

If you’re a member of the 99%, you don’t get to borrow at 1%. Banks and hedge funds get to borrow at 1%. If you’re a credit card customer, you’re paying the same credit card rate as you’re always paying. And if you miss a payment, even to a utility company, your rate still goes up to 29% or whatever. And if the bank won’t lend to you, you still have to pay 50% or 100% or 500% to the payday loan people backed by JPMorgan Chase and other Wall Street banks as major customers. So no, the 99% have not benefited from quantitative easing. Quantitative easing is to benefit the financial sector, which means basically the 1%, not benefit the rest of the economy.

We’re living in a world that’s divided into two economies: the economy of the 1%, and the economy of the bottom 99%. I guess you could be more “centrist” and say the top 10% versus the bottom 90%. But there’s definitely a stratification at work here.

GREGORY WILPERT: The Financial Times quotes analysts who say that they expect mergers and acquisitions to accelerate even more in 2018. You touched on this when you mentioned the Republican tax reform. So would you basically agree that M&A will accelerate? What are some of the underlying causes for a further continuation of this process of centralization?

MICHAEL HUDSON: There are two underlying causes. For one thing, now that the Republicans are in power in the United States – and I don’t think it would matter if Hillary’s Democrats were in power – they’re not enforcing the antitrust regulations. What deterred a lot of mergers and acquisitions in the past was the threat of creating a monopoly, so the antitrust laws prevented you. But now they’re saying, you can make a monopoly, but make sure the 99% pay through the nose. You can make a monopoly and charge the 99% higher monopolized prices.

So, what you’re having is a rentier revolution. The aim of the 1% isn’t to make money by profits by employing labor. It’s to make economic rent. It’s to make monopoly rent, land rent and financial rent.

For instance, if you end internet neutrality and permit mergers of the big information technology corporations, that’s a form of rent seeking. It’s part of today’s political revolution.

(Republished from The Real News Network by permission of author or representative)
 
• Category: Economics • Tags: Neoliberalism, Wall Street 
Introduction to the German Edition
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In theory, the global financial system is supposed to help every country gain. Mainstream teaching of international finance, trade and “foreign aid” (defined simply as any government credit) depicts an almost utopian system uplifting all countries, not stripping their assets and imposing austerity. The reality since World War I is that the United States has taken the lead in shaping the international financial system to promote gains for its own bankers, farm exporters, its oil and gas sector, and buyers of foreign resources – and most of all, to collect on debts owed to it.

Each time this global system has broken down over the past century, the major destabilizing force has been American over-reach and the drive by its bankers and bondholders for short-term gains. The dollar-centered financial system is leaving more industrial as well as Third World countries debt-strapped. Its three institutional pillars – the International Monetary Fund (IMF), World Bank and World Trade Organization – have imposed monetary, fiscal and financial dependency, most recently by the post-Soviet Baltics, Greece and the rest of southern Europe. The resulting strains are now reaching the point where they are breaking apart the arrangements put in place after World War II.

The most destructive fiction of international finance is that all debts can be paid, and indeed should be paid, even when this tears economies apart by forcing them into austerity – to save bondholders, not labor and industry. Yet European countries, and especially Germany, have shied from pressing for a more balanced global economy that would foster growth for all countries and avoid the current economic slowdown and debt deflation.

 

Imposing austerity on Germany after World War I

After World War I the U.S. Government deviated from what had been traditional European policy – forgiving military support costs among the victors. U.S. officials demanded payment for the arms shipped to its Allies in the years before America entered the Great War in 1917. The Allies turned to Germany for reparations to pay these debts. Headed by John Maynard Keynes, British diplomats sought to clean their hands of responsibility for the consequences by promising that all the money they received from Germany would simply be forwarded to the U.S. Treasury.

The sums were so unpayably high that Germany was driven into austerity and collapse. The nation suffered hyperinflation as the Reichsbank printed marks to throw onto the foreign exchange also were pushed into financial collapse. The debt deflation was much like that of Third World debtors a generation ago, and today’s southern European PIIGS (Portugal, Ireland, Italy, Greece and Spain).

In a pretense that the reparations and Inter-Ally debt tangle could be made solvent, a triangular flow of payments was facilitated by a convoluted U.S. easy-money policy. American investors sought high returns by buying German local bonds; German municipalities turned over the dollars they received to the Reichsbank for domestic currency; and the Reichsbank used this foreign exchange to pay reparations to Britain and other Allies, enabling these countries to pay the United States what it demanded.

But solutions based on attempts to keep debts of such magnitude in place by lending debtors the money to pay can only be temporary. The U.S. Federal Reserve sustained this triangular flow by holding down U.S. interest rates. This made it attractive for American investors to buy German municipal bonds and other high-yielding debts. It also deterred Wall Street from drawing funds away from Britain, which would have driven its economy deeper into austerity after the General Strike of 1926. But domestically, low U.S. interest rates and easy credit spurred a real estate bubble, followed by a stock market bubble that burst in 1929. The triangular flow of payments broke down in 1931, leaving a legacy of debt deflation burdening the U.S. and European economies. The Great Depression lasted until outbreak of World War II in 1939.

Planning for the postwar period took shape as the war neared its end. U.S. diplomats had learned an important lesson. This time there would be no arms debts or reparations. The global financial system would be stabilized – on the basis of gold, and on creditor-oriented rules. By the end of the 1940s the United States held some 75 percent of the world’s monetary gold stock. That established the U.S. dollar as the world’s reserve currency, freely convertible into gold at the 1933 parity of $35 an ounce.

It also implied that once again, as in the 1920s, European balance-of-payments deficits would have to be financed mainly by the United States. Recycling of official government credit was to be filtered via the IMF and World Bank, in which U.S. diplomats alone had veto power to reject policies they found not to be in their national interest. International financial “stability” thus became a global control mechanism – to maintain creditor-oriented rules centered in the United States.

To obtain gold or dollars as backing for their own domestic monetary systems, other countries had to follow the trade and investment rules laid down by the United States. These rules called for relinquishing control over capital movements or restrictions on foreign takeovers of natural resources and the public domain as well as local industry and banking systems.

By 1950 the dollar-based global economic system had become increasingly untenable. Gold continued flowing to the United States, strengthening the dollar – until the Korean War reversed matters. From 1951 through 1971 the United States ran a deepening balance-of-payments deficit, which stemmed entirely from overseas military spending. (Private-sector trade and investment was steadily in balance.)

 

U.S. Treasury debt replaces the gold exchange standard

The foreign military spending that helped return American gold to Europe became a flood as the Vietnam War spread across Asia after 1962. The Treasury kept the dollar’s exchange rate stable by selling gold via the London Gold Pool at $35 an ounce. Finally, in August 1971, President Nixon stopped the drain by closing the Gold Pool and halting gold convertibility of the dollar.

There was no plan for what would happen next. Most observers viewed cutting the dollar’s link to gold as a defeat for the United States. It certainly ended the postwar financial order as designed in 1944. But what happened next was just the reverse of a defeat. No longer able to buy gold after 1971 (without inciting strong U.S. disapproval), central banks found only one asset in which to hold their balance-of-payments surpluses: U.S. Treasury debt. These securities no longer were “as good as gold.” The United States issued them at will to finance soaring domestic budget deficits.

By shifting from gold to the dollars thrown off by the U.S. balance-of-payments deficit, the foundation of global monetary reserves came to be dominated by the U.S. military spending that continued to flood foreign central banks with surplus dollars. America’s balance-of-payments deficit thus supplied the dollars that financed its domestic budget deficits and bank credit creation – via foreign central banks recycling U.S. foreign spending back to the U.S. Treasury.

In effect, foreign countries have been taxed without representation over how their loans to the U.S. Government are employed. European central banks were not yet prepared to create their own sovereign wealth funds to invest their dollar inflows in foreign stocks or direct ownership of businesses. They simply used their trade and payments surpluses to finance the U.S. budget deficit. This enabled the Treasury to cut domestic tax rates, above all on the highest income brackets.

 
2017 compared to 1917
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Socialism a century ago seemed to be the wave of the future. There were various schools of socialism, but the common ideal was to guarantee support for basic needs, and for state ownership to free society from landlords, predatory banking and monopolies. In the West these hopes are now much further away than they seemed in 1917. Land and natural resources, basic infrastructure monopolies, health care and pensions have been increasingly privatized and financialized.

Instead of Germany and other advanced industrial nations leading the way as expected, Russia’s October 1917 Revolution made the greatest leap. But the failures of Stalinism became an argument against Marxism – guilt-by-association with Soviet bureaucracy. European parties calling themselves socialist or “labour” since the 1980s have supported neoliberal policies that are the opposite of socialist policy. Russia itself has chosen neoliberalism.

Few socialist parties or theorists have dealt with the rise of the Finance, Insurance and Real Estate (FIRE) sector that now accounts for most increase in wealth. Instead of evolving into socialism, Western capitalism is being overcome by predatory finance and rent extraction imposing debt deflation and austerity on industry as well as on labor.

Failure of Western economies to recover from the 2008 crisis is leading to a revival of Marxist advocacy. The alternative to socialist reform is stagnation and a relapse into neofeudal financial and monopoly privileges.

Socialism flowered in the 19th century as a program to reform capitalism by raising labor’s status and living standards, with a widening range of public services and subsidies to make economies more efficient. Reformers hoped to promote this evolution by extending voting rights to the working population at large.

Ricardo’s discussion of land rent led early industrial capitalists to oppose Europe’s hereditary landlord class. But despite democratic political reform, the world has un-taxed land rent and is still grappling with the problem of how to keep housing affordable instead of siphoning off rent to a landlord class – more recently transmuted into mortgage interest paid to banks by owners who pledge the rental value for loans. Most bank lending today is for real estate mortgages. The effect is to bid up land prices toward the point where the entire rental value is paid as interest. This threatens to be a problem for socialist China as well as for capitalist economies.

Landlords, banks and the cost of living

The classical economists sought to make their nations more competitive by keeping down the price of labor so as to undersell competitors. The main cost of living was food; today it is housing. Housing and food prices are determined not by the material costs of production, but by land rent – the rising market price for land.

In the era of the French Physiocrats, Adam Smith, David Ricardo and John Stuart Mill, this land rent accrued to Europe’s hereditary landlord class. Today, the land’s rent is paid mainly to bankers – because families need credit to buy a home. Or, if they rent, their landlords use the property rent to pay interest to the banks.

The land issue was central to Russia’s October Revolution, as it was for European politics. But the discussion of land rent and taxation has lost much of the clarity (and passion) that guided the 19th century when it dominated classical political economy, liberal reform, and indeed most early socialist politics.

In 1909/10 Britain experienced a constitutional crisis when the democratically elected House of Commons passed a land tax, only to be overridden by the House of Lords, governed by the old aristocracy. The ensuing political crisis was settled by a rule that the Lords never again could overrule a revenue bill passed by the House of Commons. But that was Britain’s last real opportunity to tax away the economic rents of landlords and natural resource owners. The liberal drive to tax the land faltered, and never again would gain serious chance of passage.

The democratization of home ownership during the 20th century led middle-class voters to oppose property taxes – including taxes on commercial sites and natural resources. Tax policy in general has become pro-rentier and anti-labor – the regressive opposite of 19th-century liberalism as developed by “Ricardian socialists” such as John Stuart Mill and Henry George. Today’s economic individualism has lost the early class consciousness that sought to tax economic rent and socialize banking.

The United States enacted an income tax in 1913, falling mainly on rentier income, not on the working population. Capital gains (the main source of rising wealth today) were taxed at the same rate as other income. But the vested interests campaigned to reverse this spirit, slashing capital gains taxes and making tax policy much more regressive. The result is that today, most wealth is not gained by capital investment for profits. Instead, asset-price gains have been financed by a debt-leveraged inflation of real estate, stock and bond prices.

Many middle-class families owe most of their net worth to rising prices for their homes. But by far the lion’s share of the real estate and stock market gains have accrued to just One Percent of the population. And while bank credit has enabled buyers to bid up housing prices, the price has been to siphon off more and more of labor’s income to pay mortgage loans or rents. As a result, finance today is what is has been throughout history: the main force polarizing economies between debtors and creditors.

Global oil and mining companies created flags of convenience to make themselves tax-exempt, by pretending to make all their production and distribution profits in tax-free trans-shipping havens such as Liberia and Panama (which use U.S. dollars instead of being real countries with their own currency and tax systems).

The fact that absentee-owned real estate and natural resource extraction are practically free of income taxation shows that democratic political reform has not been a sufficient guarantee of socialist success. Tax rules and public regulation have been captured by the rentiers, dashing the hopes of 19th-century classical reformers that progressive tax policy would produce the same effect as direct public ownership of the means of production, while leaving “the market” as an individualistic alternative to government regulation or planning.

In practice, planning and resource allocation has passed to the banking and financial sector. Many observers hoped that this would evolve into state planning, or at least work in conjunction with it as in Germany. But liberal “Ricardian socialist” failed, as did German-style “state socialism” publicly financing transportation and other basic infrastructure, pensions and similar “external” costs of living and doing business that industrial employers otherwise would have to bear. Attempts at “half-way” socialism via tax and regulatory policy against monopolies and banking have faltered repeatedly. As long as major economic or political choke points are left in private hands, they will serve s springboards to subvert real reform policies. That is why Marxist policy went beyond these would-be socialist reforms.

 
It should be called the Leona Helmsley tax plan, only the little people will pay taxes
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S. Peries: It’s the Real News Network. I’m Sharmini Peries coming to you from Baltimore.

A general consensus is emerging that Trump’s tax plan, which he presented last Wednesday will benefit mostly the country’s upper classes and corporations. In fact the only people that got a tax increase are the poorest taxpayers. A quick scan of even business press headlines will reinforce what I’m saying. For example, Bloomberg writes, “Tax reform could open a huge loophole for wealthy Americans”, and the conservative magazines National Review has a headline that reads, “Congressional Republicans tax plan isn’t great for Trump suburbanites.” However Trump himself promised on Wednesday that he and the rich generally would not benefit from this plan. Here’s what he said.

D. Trump: Our framework includes our explicit commitment, that tax reform will protect low income and middle income households, not the wealthy and well-connected. They can call me all they want, it’s not gonna help. I’m doing the right thing, and it’s not good for me, believe me.

S. Peries: Joining us to analyze what Trump’s tax plan would mean for us is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri, Kansas City. He’s the author of several books, and the most recent among them is J Is For Junk Economics. Good to have you back, Michael.

M. Hudson: Good to be here, Sharmini.

S. Peries: Michael. Let’s cut to the chase here. Everyone seems to agree that this tax plan will benefit only the rich. Give us a sense of your main points of why you want to contest this tax plan is beneficial for all.

M. Hudson: Sure. It should be called the Leona Helmsley tax plan. Only the little people will pay taxes. But about the loopholes, the interesting thing is Trump said he wasn’t going to gain a penny, and he may have been telling the truth. That would be true if he’s already paying zero income tax. So his income tax rate is going to go from zero to zero.

That’s about the same for a lot of the biggest corporations in America. Apple, Google, Alphabet, these companies that have been taking all of their profits abroad, trillions of dollars, supposedly, that they’re holding abroad. They haven’t paid any U.S. taxes on this money, because they’ve held them nominally in a teeny little office in Ireland, or the Cayman Islands, claiming that they have to pay hardly any income tax at all.

The misrepresentation here is that Trump says that he can now bring all this money back from these offshore enclaves and tax avoidance zones. The reality is the money’s never been in these zones. It’s been in America all the time. Apple, Google and rich real estate companies simply hold all this “foreign” money in an American bank, but in the name of the foreign affiliate, an office registered in Panama or some other offshore enclave.

So there’ll be zero effect on the balance of payments, but it will lock in their zero rate, enabling them to have avoided taxes for over a decade. I think 2004 was the last such tax holiday. They’ll bring them all back now, without having to pay much tax at all.

S. Peries: Michael, another method that wealthy individuals and companies can use to avoid paying taxes is deducting investment expenses. Tell us how this works.

M. Hudson: If you look at the real estate sector’s loopholes, since World War II the National Income and Product Accounts (NIPA) report that real estate is hardly paying any income tax at all. If you own a building and you’re an absentee owner – not living there, not a homeowner, but absentee owners – they avoid paying any income tax because they don’t earn any reportable income. They pay interest, which is a tax-deductible expense, or they pretend – under the accounting rules that their lobbyists have bought from Washington – that the buildings actually are depreciating in value, even while the price is soaring. It’s going way up, they don’t have to pay an income tax. Then finally, when they die neither their estate nor their heirs have to pay any capital gains. The heirs get it without having to pay any tax.

The richest people have to pay an estate tax, but that’s being knocked out also. I think that everybody, as you pointed out, who’ve looked at the tax plan, says, “All the benefits are at the top. Where’s the benefit for the low-income people?”

Well, the wage earners are going to have to pay more tax. The minimum tax rate is actually raised from 10% to 12%. Also, people who live in Democratic states, New York, New Jersey, Maryland, California and so forth, will not be able to subtract the state and local taxes that they’ve been deducting from their taxable income all these years. So the tax rate for wage earners, for people who actually have to file tax forms and declare an income, is actually going to go up. The economy is going to be made poorer.

S. Peries: Now, Trump and his supporters argue that tax reductions will make the U.S. more competitive, and it will lead to more investment. In an earlier interview that we had with Dean Baker, he points out that historically this has not happened when taxes on corporations and on the wealthy were reduced. So if it does not lead to more investment, what do the corporations do with this additional untaxed income?

M. Hudson: They’re going to do the same thing they’ve done with 92% of corporate earnings in the last decade. They’re going to pay it out as higher dividends, pushing up the stock price, and most of all they’re going to use the money for stock buybacks. They’re going to buy back their stocks to raise the price. They are not going to invest.

The reason you would invest would be to sell more goods to the market and expand the economy. But most corporations, and certainly Wall Street, know that the game is over. The economy has not grown since 2008, except for the financial sector and the real estate sector. That is, except for the richest 5%. For 95% of Americans the economy has shrunk, just like it’s shrinking in Europe.

Corporations know this and say, “There’s only one thing we can do, now that the game is over and the economies are shrinking. We’re going to take the money and run. We’re going to pay all the tax cuts we get and give it to our stockholders.”

S. Peries: What are the consequences of this for us?

M. Hudson: It means the class war is back in business with a vengeance. But I don’t think it’s going to go through. There is no way that a group of Republican senators are really going to commit political suicide by actually voting for this plan, any more than they voted for Trump’s medical health plan revoking Obamacare.

What this is really doing politically though, is driving a stake through the heart of the Democratic party. The Democrats are so sure that the kerfuffle over this tax plan is going to backfire against the Republicans that the knives are out. They’re fighting like they’ve never fought before against the supporters of Bernie Sanders, against Elizabeth Warren. The Wall Street-Hillary, wing of the Democratic party says, “Now we’re going to win the election. We don’t need Bernie supporters. We don’t need the working class. We can form an even more right-wing party than Hillary had and what her program was.”

(Republished from TRNN by permission of author or representative)
 
• Category: Economics, Ideology • Tags: Donald Trump, Neoliberalism, Tax Cuts 
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Interview with Vlado Plaga in the German magazine FAIRCONOMY, September 2017.

Originally, you didn’t want to become an economist. How did it come that you changed your plans and digged so deep into economics?

I found economics aesthetic, as beautiful as astronomy. I came to New York expecting to become an orchestra conductor, but I met one of the leading Wall Street economists, who convinced me that economics and finance was beautiful.

I was intrigued by the concept of compound interest. and by the autumnal drain of money from the banking system to move the crops at harvest time. That is when most crashes occurred. The flow of funds was the key.

I saw that there economic cycles were mainly financial: the build-up of debt and its cancellation or wipe-out and bankruptcy occurring again and again throughout history. I wanted to study the rise and fall of financial economies.

But when you studied at the New York University you were not taught the things that really interested you, were you?

I got a PhD as a union card. In order to work on Wall Street, I needed a PhD. But what I found in the textbooks was the opposite of everything that I experienced on Wall Street in the real world. Academic textbooks describe a parallel universe. When I tried to be helpful and pointed out to my professors that the texbooks had little to do with how the economy and Wall Street actually work, that did not help me get good grades. I think I got a C+ in money and banking.

So I scraped by, got a PhD and lived happily ever after in the real world.

So you had to find out on your own… Your first job was at the Savings Banks Trust Company, a trust established by the 127 savings banks that still existed in New York in the 1960s. And you somehow hit the bull’s eye and were set on the right track, right from the start: you’ve been exploring the relationship between money and land. You had an interesting job there. What was it?

Savings banks were much like Germany’s Landesbanks. They take local deposits and lend them out to home buyers. Savings and Loan Associations (S&Ls) did the same thing. They were restricted to lending to real estate, not personal loans or for corporate business loans. (Today, they have all been turned into commercial banks.)

I noticed two dynamics. One is that savings grew exponentially, almost entirely by depositors getting dividends every 3 months. So every three months I found a sudden jump in savings. This savings growth consisted mainly of the interest that accrued. So there was an exponential growth of savings simply by inertia.

The second dynamic was that all this exponential growth in savings was recycled into the real estate market. What has pushed up housing prices in the US is the availability of mortgage credit. In charting the growth of mortgage lending and savings in New York State, I found a recycling of savings into mortgages. That meant an exponential growth in savings to lend to buyers of real estate. So the cause of rising real estate prices wasn’t population or infrastructure. It was simply that properties are worth whatever banks are able and willing to lend against them.

As the banks have more and more money, they have lowered their lending standards.

It’s kind of automatic, it’s just a mathematical law…

Yes, a mathematical law that is independend of the economy. In other words, savings grow whether or not the economy is growing. The interest paid to bondholders, savers and other creditors continues to accrue. That turns out to be the key to understanding why today’s economy is polarizing between creditors and debtors.

You wrote in “Killing the Host” that your graphs looked like Hokusai’s “Great Wave off Konagawa” or even more like a cardiogram. Why?

Any rate of interest has a doubling time. One way or another any interest-bearing debt grows and grows. It usually grows whenever interest is paid. That’s why it looks like a cardiogram: Every three months there’s a jump. So it’s like the Hokusai wave with a zigzag to reflect the timing of interest payments every three months.

The exponential growth of finance capital and interest-bearing debt grows much faster then the rest oft he economy, which tends to taper off in an S-curve. That’s what causes the business cycle to turn down. It’s not really a cycle, it’s more like a slow buildup like a wave and then a sudden jjunkecon vertical crash downward.

This has been going on for a century. Repeated financial waves build up until the economy becomes so top-heavy with debt that it crashes. A crash used to occur every 11 years in the 19th century. But in the United States from 1945 to 2008, the exponential upswing was kept artificially long by creating more and more debt financing. So the crash was postponed until 2008.

Most crashes since the 19th century had a silver lining: They wiped out the bad debts. But this time the debts were left in place, leading to a masive wave of foreclosures. We are now suffering from debt deflation. Instead of a recovery, there’s just a flat line for 99% of the economy.

The only layer of the economy that is growing is the wealthiest 5% layer – mainly the Finance, Insurance and Real Estate (FIRE) sector. That is, creditors living of interest and economic rent: monopoly rent, land rent and financial interest. The rest of the economy is slowly but steadily shrinking.

And the compound interest that was accumulated was issued by the banks as new mortgages. Isn’t this only logical for the banks to do?

Savings banks and S&Ls were only allowed to lend for mortgages. Commercial banks now look for the largest parts of the economy as their customers. Despite the fact that most economic textbooks describe industry and manufacturing as being the main part of economy, real estate actually is the largest sector. So most bank lending is against real estate and, after that, oil, gas and mining.

That explains why the banking and financial interests have become the main lobbyists urging that real estate, mining and oil and gas be untaxed – so that there’ll be more economic rent left to pay the banks. Most land rent and natural resource rent is paid out as interest to the banks instead of as taxes to the government.

So instead of housing becoming cheaper and cheaper it turns out to be much less affordable in our days than in the 1960s?

Credit creation has inflated asset prices. The resulting asset-price inflation is the distinguishing financial feature of our time. In a race tot he bottom, banks have steadily lowered the terms on which they make loans. This has made the eocnomy more risky.

In the 1960s, banks required a 25-30% down payment by the buyer, and limited the burden of mortgage debt service to only 25% of the borrower’s income. But interest is now federally guaranteed up to 43% of the home buyer’s income. And by 2008, banks were making loans no down payment at all. Finally, loans in the 1960s were self-amortizing over 30 years. Today we have interest-only loans that are never paid off.

So banks loan much more of the property’s market price. That is why most of the rental value of land isn’t paid to the homeowner or commercial landlord any more. It’s paid to the banks as interest.

(Republished from Counterpunch by permission of author or representative)
 
• Category: Economics • Tags: Neoliberalism 
Trump is Turning Against the White Working Class that Elected Him
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SHARMINI PERIES: It’s the Real News Network. I’m Sharmini Peries coming to you from Baltimore. The rise of stock prices in the US stock market could be an indication of economic growth and prosperity, but it could also be an indication of the concentration of wealth of the rich and powerful. Which is it? To answer that question, we need to look at other economic indicators. In the press conference that President Trump had just a few days ago announcing his new chief of staff, General John Kelly, Trump took the opportunity to give himself credit for the rising stock prices. Let’s listen.

DONALD TRUMP: We’ve done very well, lots of records created, John. You look at stock market, the highest it’s ever been. Unemployment, lowest in 17 years. Companies are doing tremendously well. Business spirit is the highest it’s ever been, according to polls. You look at the polls, the highest it’s ever been in the history of these polls. We’re doing very well. We have a tremendous base. We have a tremendous group of support. The country is optimistic.

SHARMINI PERIES: Well, on to talk about this with me today is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri, Kansas City. He is the author of The Bubble and Beyond and The Finance Capitalism and Its Discontents. His most recent books are J is for Junk Economics and Killing the Host: How Financial Parasites and Debt Bondage Destroyed the Global Economy. Good to have you back, Michael.

MICHAEL HUDSON: Good to be back, Sharmini.

SHARMINI PERIES: So Michael, if the stock prices are not increasing because of what Trump calls “high business spirit,” explain the rise in the stock prices.

MICHAEL HUDSON: Well, the answer’s quite simple. The question is, who is buying these stocks? It’s not individuals. It’s not even pension funds. It’s not the private sector. Almost all the stock purchases are bought back by corporations in share buybacks. In other words, companies are buying back their own stocks in order to push up the price because that’s how executives are paid. They’re not paid by increasing output or even increasing profits. They’re paid by how much they can push up the stock price, and there are two ways of doing this easily. One is to use earnings simply for share buybacks, buy your own stock and push it up, or you simply pay out the earnings in dividends.

What you don’t do if you want to increase the stock price is you don’t invest more in research, you don’t invest more in capital, you don’t hire more labor, and you don’t expand the markets. In other words, you give up. You say, ‘The economy’s reached an end. It’s not going to grow from here. We’re taking the money and running. We’re just going to use the earnings that we have to help the stockholders,’ so the stock market is actually the reverse of how the economy is doing.

SHARMINI PERIES: All right, Michael. This might be a little elementary for the big-time economist, but explain how the buying back of stock increases the money that they make.

MICHAEL HUDSON: The price of almost anything is a result of how many people are buying and how many people are selling. What’s happened is basically the individuals and the private sector is selling the stocks. Normally this would push down stocks, and the reason it’s selling is most investors think, ‘Wait a minute. The reason stock prices have gone up is because the Federal Reserve has flooded the economy with low-interest money and people are borrowing at 1% in order to buy stocks that are yielding 5 or 6% and they’re pocketing the difference.’

But now, everybody thinks, ‘Wait a minute. This is going to come to an end. The Federal Reserve says it’s going to raise interest rates. Same thing in the European Central Bank and the Bank of England.’ They expect higher interest rates are going to push down stock prices because it’s not going to pay people to borrow to buy stocks anymore. Most investors today are looking for the stock markets to make a big decline. They don’t want to hold them.

Who is going to want to buy stocks that are going to go down in price? The answer is the corporations are going to buy it because the stock managers aren’t penalized if they make a bad investment. If the stock price goes way down, the company loses because they had a huge loss on its shares that it bought back, but the managers of the company clean up. They’re paid the bonus because they’re paid according to how much money they can push in to buying up their own stock to support the price. If you say you’re going to pay a high price for anything, that’s going to raise the price and they’re pouring the corporate earnings into their own stocks, not into investment.

SHARMINI PERIES: Why are companies paying out high dividends rather than reinvesting their profits in order to generate, say, long-term income?

MICHAEL HUDSON: For two reasons: They see the economy isn’t really growing for the 99% of the people. Here in New York, street after street, there are for-rent signs. The small businesses are going out of business. Bookstores are going out of business. Restaurants are going out of business. They realize that the whole boom that’s occurred from World War II to 2008 is over. They’re not going to invest, but most of all, they’re buying back the stocks simply to benefit the people who run the companies, the chief financial officers and the CEOs. The whole way in which the remuneration of CEOs is paid, gigantic remuneration according to the stock price, is actually hurting industrial capitalism.

These companies have been turned into financial entities. You should no longer think of them really as industrial entities. Corporations make money financially, not by producing goods and services.

SHARMINI PERIES: Right, and Michael, could you explain why suddenly we see big mergers going on? For a while there there seemed to be a hiatus in terms of these kinds of big mergers, but recently we’ve seen Amazon merging with Whole Foods, some of the major media companies, if not already, are considering mergers. Why is this going on right now?

MICHAEL HUDSON: Two reasons: One is there is still a lot of low-interest credit available for them. Companies can simply borrow from banks that borrow from bondholders at low-interest rates and buy another company and create a monopoly. In the past they couldn’t do this because they were afraid of anti-monopoly legislation. Today, you have four or five companies controlling almost every major industry. Think of the airlines, think of cable TV, think of the phone companies, think of information technology. They’re all being monopolized and there are no more anti-monopoly rules, and so what they’re trying to get isn’t really profits.

The national income statistics call them profits, but they’re really monopoly rent. They’re rent way in excess of normal profits because they’re whatever the market can bear, and if you have cable TV by what used to be Time Warner, and now you’ve seen all your cable prices going up, or your IT prices going up, or your airline prices going up, that’s because monopolies are now the way to squeeze out money. You don’t have to invest more. You don’t have to make capital investment. You don’t have to employ labor, even. All you have to do is use your monopoly privileges that you’ve bought with borrowed money.

SHARMINI PERIES: Finally, in terms of Trump’s economic plans, how do these trends, these mergers and stock prices going up, affect the very people that voted for Trump, the white working class in particular?

(Republished from TRNN by permission of author or representative)
 
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Introduction

These proverbs were collected by my father, Carlos Hudson, during the time he was jailed under the Smith Act in 1941, ostensibly for “Advocating the overthrow of the government by force and violence,” It was called the “gag act” because it put a gag on what one could read or say. Guilt was determined by whether one had the works of Lenin and Trotsky on one’s bookshelf.

The Stalinists urged the death penalty for the Smith Act, not realizing that it would be used against them after World War II.

The Minneapolis 17 who were convicted had taken the lead in organizing the Teamsters Union and the great Minneapolis General Strike of the mid-1930s. (The story is told in Charles Rumford Walker’s American City.) Minnesota’s governor, Floyd B. Olson, said “I hope the capitalist system goes straight to hell.” Roosevelt’s Attorney General, Biddle, wrote in his biography that the one thing that he was ashamed about was having framed up the Minneapolis 17, because by no threat were they really a danger. The deal was a political favor to AFL head Daniel Tobin who opposed my father’s pressure to organize the teamsters within the CIO, and to the mafia that was eager to take over the Teamsters Union and had always had great sway within the Democratic Party.

My father’s crime was calling in the National Guard to protect the strikers from the police and thugs who had been hired as strike breakers to beat up the Teamsters and their supporters. His party name was Jack Ranger, and so I was nicknamed “The son of the Lone Ranger” as a kid. His major writing was the pamphlet “Next: A Labor Party.” He also wrote articles on the Minneapolis strikes for the Nation.

Minneapolis was the only city in the world that was under Trotskyist leadership — where, as one reporter put it a few years ago, being a Trotskyist was a career advancement opportunity.

My father had graduated from the University of Minnesota business school with an MBA in 1929 and hoped to become a millionaire in Latin American mining. But then the stock market crash and depression occurred, and he discovered that capitalism wasn’t fair. He read widely, and joined Jim Cannon’s Socialist Workers Party, the Trotskyist party.

I knew most of his fellow felons growing up as a little boy. I remember visiting him in jail, and everyone singing the Internationale and other songs to fan the flames of discontent.

After 1945 he followed Max Shachtman’s Independent Socialist League, and Max became a mentor of mine. Other members of the Minneapolis 17 who moved to Chicago was the group’s lawyer, Al Goldman, who spent much of his life trying to track down who killed his two German colleagues Emma Goldman and Karl Liebknecht. Al Russell also often visited from New York. Dad’s former cellmates helped me acclimatize when I moved to New York in 1960. So here, as in statist Russia, prisons were indeed the University of the Revolution.

My father said that his year in jail was the happiest year of his life. (He wasn’t much of a “people person.”) He was assigned to the library, where he collected the proverbs in this collection. After we moved to Chicago, he stenciled many proverbs on each wall of our house, from the living room down to the bathrooms.

He also compiled a dictionary of everything that Lenin and Trotsky had said about virtually every political subject. As a teenager, my friend Gavin MacFadyen and I used to sit down in the basement (where the banned books and pamphlets were kept in the 1950s) and pore over the index cards with these maxims. This was a great help in our Social Science classes at the University of Chicago’s Laboratory School. (Gavin was expelled for being a bit too attentive to what we learned.) Unfortunately, this collection somehow got lost in Dad’s move down to Florida when he retired from his position as editor of Dental Abstracts. He had edited Traffic World, but the FBI came around to his boss and asked why they had hired a Marxist. His boss was about to accuse others of Communism, so Dad was fired. But the American Dental Association, which hired him as an editor, said that they didn’t care about his politics, and he worked happily there for perhaps 20 years. (He died at the age of 95 in 2003.)

Informally, Dad also edited the pacifist Liberation magazine, whose mailing address was our house on Dorchester in Hyde-Park Kenwood (about a block or so from where Obama’s house now is.) Along with Sidney Lens, he became an advocate of Rev. A. J. Muste.

FBI men would often appear at the house and ask him questions like where his loyalty would lie in case of an atopic war with China. Also, they liked to set up cameras across the street and take pictures of us when we left the house. When neighbors would ask them what the fuss was all about, they would say, “Don’t you know who lives there …?” They didn’t mention the proverbs book. I got used to coming home and sometimes finding two crew-cut FBI men in the living room with my father, up-dating their files on him. (Later, Gavin got copies of the FBI files, and they were filled with wrong information from obviously bad informers. It was comical in retrospect.)

When I joined the Hudson Institute (no relation, except that we were both named after the river, which an ancestor of mine discovered) in 1972, Herman Kahn asked me whether there was any reason I couldn’t get a security clearance for when he took me to the White House and military think tanks. I told him about Dad’s conviction, and he said not to worry — the government knew that I wasn’t soft on Stalinism. (Herman collected many Schachtmanites around him.)

Many years after compiling these proverbs, Dad added a preface to say that over time, he had come to the conclusion that Trotsky’s economic program would have turned out along much the same lines as Stalin’s. When talking to socialists he became a libertarian, although when talking to most people he remained a socialist.

About 15 years ago Gavin produced an hour-long documentary and interview with Dad, discussing his work with Trotsky in Mexico. (Dad’s sister, my aunt Jeri Hudson de Leon, was married to a Mercedes dealer in Mexico City at the time, so my parents stayed with her while working with Trotsky, along with other Minneapolis activists.) But Gavin’s colleagues have not been able to find just where he put the CD, and I don’t remember his giving me a copy after we screened it in London.

When I went to Russia in 1994, I was brought to the house of some researchers who were reading the then-recently released files on Trotsky. They said that one thing puzzled them: Did he really have an affair with Frieda Kahlo?

I phoned Dad from their Moscow house. Dad got worried that the phones were being tapped and that I’d get in trouble, but I said that all the Russians really cared about those days was money, not old politics. So he laughed and laughed and said that, yes, he used to drive Trotsky back and forth to see Frieda.

Huck (“Michael”) Hudson

A

Behind the able man there are able men. Chinese

Pierce the abscess.
(i.e. come to the point.) Bantu

An abscess heals when opened.
(i.e. peace comes by sharing your troubles with another.) Bantu

Abundance causes poverty. German

Abundance creates daintiness. Italian

Abundance is a friendly fellow, he is loved by big and small. Semitic

The abuse of a thing is no argument against its use. Latin

It is honorable to be accused by those who deserve to be accused. Latin

The pig which is once seen in the crevice of the fence is accused of all faults. Finnish

He who accused too many accuses himself.

Acorns were good till corn was discovered. Latin

One does not sleep to sleep, but to act. German

(Republished from Michael-Hudson.com by permission of author or representative)
 
• Category: History • Tags: Communism, Leon Trotsky 
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As published in Harper’s Magazine.

Two years before the 2008 Wall Street crash that toppled the global economy into deep recession, Harper’s Magazine published a dark prophecy of what was to come. In “The New Road to Serfdom,” economist Michael Hudson laid out how millions of Americans had taken on huge debts to buy houses on the presumption that they could later sell them at a profit. “Most everyone involved in the real estate bubble so far has made at least a few dollars,” he wrote. “But that is about to change. The bubble will burst, and when it does the people who thought they would be living the easy life of a landlord will soon find out that what they really signed up for is the hard servitude of debt serfdom.” As the twenty million people who lost their homes discovered, Hudson got it entirely right.

Today, unemployment is at record lows, and the stock market is at record highs. Allegedly, we have recovered from the disaster. I talked to Hudson, Distinguished Professor of Economics at the University of Missouri-Kansas City and the author, most recently, of J is For Junk Economics, A Guide to Reality in an Age of Deception, about his pre-crash prediction, and what he now sees in our future.

Let’s start with your 2006 Harper’s article. What did you see happening at that point?

It was very clear that more and more of everybody’s income had to go to buying a house. Housing prices were soaring, and the reason wasn’t because of population growth. And it wasn’t because people were getting richer. It’s because a house is worth whatever a bank is going to lend against it, and banks were lending more and more money against houses and pushing people further and further into debt so that basically they had to spend almost their entire working life to pay off the price of getting a home. People thought they were getting richer as house prices were going up, but while the sellers were getting richer, the people who had to buy the house had to pay a larger and larger proportion of their income.

When I first went to work on Wall Street in the 1960s, the rule of thumb in banks was you’d lend people enough money so that they could afford to pay the mortgage fully out of only one quarter of their income. In other words, banks wouldn’t lend if the cost of carrying a mortgage was over 25 percent of what they earned. The balance had to be written off in 30 years, so at the end of their working life 30 years later people would own the home free and clear.

All of that had changed by the mid 2000s. Banks were lending almost 100 percent of the mortgage. You didn’t have to put down 20 percent of the purchase price as you had to in the 1960s. You didn’t have to save up any money to buy a house. Banks would lend you money regardless of whether you could pay it or not. They would lend money up to 40 percent of your income or even 50 percent of your income.

You could just see that mortgage debt was going up so much that, instead of making the economy richer by people living in homes that were building up their net worth in terms of assets, it was making them more and more indebted. More and more money was being paid by wage earners and the middle class to the banks, and the economy was polarizing. You could see that this was not only going to break, but once there was a break it was going to leave a whole residue of debt that was going to shrink the economy. Indeed, that’s what I forecast was going to happen in 2008.

As you predicted and as happened, people just couldn’t pay anymore and the thing collapsed. You could’ve made a lot of money out of this. Did you?

No, I couldn’t. I could only make money if someone would’ve lent me a billion dollars, like they lent to Mr. Paulson [the Wall Street operator who made billions out of the housing crash] to bet against it. I’m a professor and a book writer. They’ll only lend you money if they can grab the assets, and I’m somebody that doesn’t have many assets, except a big collection of economics books.

Have you ever heard of someone sitting on Wall Street who read Harper’s in May 2008 and acted appropriately?

I don’t think they needed me. If they’re on Wall Street, they didn’t need me to tell them that the economy is going to collapse. They all knew it was going to collapse. That was in the language of “liar’s loans” and “NINJAs.” It was pretty obvious what was going on. It’s just the media didn’t talk about it because the media was giving handouts from Alan Greenspan saying that it’s not possible for there to be a real estate collapse, it’s only local. The media are cheerleaders for the stock market. Whenever it goes up they celebrate, even if it goes up because there’s a short squeeze on speculators. The media have not done a good job in educating the American public.

Has that improved in the time since the crash? Did they learn anything?

No. If anything, it’s gone down, because the media have all been in a financial squeeze, and they’re getting pretty inexperienced editors, reporters.

At least you have the satisfaction, if that’s the word, of events proving you correct. But we’ve supposedly now recovered from that disaster. Have we?

No, we haven’t at all recovered. That’s why Hillary lost the election. She said, “Look at how much better you are since 2008. Obama has saved you.” Trump said, “Wait a minute. Look at how bad you are. You’re not saved.” Everybody thought, “Who are you going to believe, your eyes or Hillary?” We haven’t recovered at all. Obama saved the banks and Wall Street, not the economy. From 2008 until today, the economy has grown by 2 percent, but the top 5 percent of the economy have got all of that growth. The economy isn’t recovering.

That’s why when the Department of Labor statistics gave the most recent employment figures, everybody commented, “It’s very interesting. Employment is up, but wages are continuing to fall.” It’s all minimum wage work. The debt ratio for most families is rising, not falling, especially for student debt, for mortgage debt, for automobile debt. The default rate is continuing to rise.

Last time around it was housing debt or housing loans that blew everything up. Have the loans you just mentioned been turned into speculative packages similar to the infamous collateralized debt obligations [securities based on housing loans] of yesteryear?

The difference between today’s packaged student and auto loans compared to those toxic junk mortgage loans is that the buyers recognize the risks involved. No ratings agencies are going to stick AAA labels on consumer debt where arrears and defaults are soaring. They are unlikely even to package student debt from for-profit “universities” or technical schools with bona fide institutions. Every investor knows that students are NINJAs – No income, No jobs, and no assets.

[But] you could say that the whole stock market is a kind of a ponzi scheme, because $4.3 trillion has been provided to the banks by the Federal Reserve in quantitative easing to keep the interest rates down. So if you’re a good bank customer, you can borrow from the bank at 2 percent, you can borrow to take over a company or to buy stocks or to buy risky bonds that are yielding more, and you can make an arbitrage. That is, you can make in dividends or interest more than you have to pay.

So are we heading for another explosion comparable to 2008?

(Republished from Michael-Hudson.com by permission of author or representative)
 
• Category: Economics • Tags: Banks, Donald Trump, Housing 
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Students usually don’t think of themselves as a class. They seem “pre-class,” because they have not yet entered the labor force. They can only hope to become part of the middle class after they graduate. And that means becoming a wage earner – what impolitely is called the working class.

But as soon as they take out a student debt, they become part of the economy. They are in this sense a debtor class. But to be a debtor, one needs a means to pay – and the student’s means to pay is out of the wages and salaries they may earn after they graduate. And after all, the reason most students get an education is so that they can qualify for a middle-class job.

The middle class in America consists of the widening sector of the working class that qualifies for bank loans – not merely usurious short-term payday loans, but a lifetime of debt. So the middle class today is a debtor class.

Shedding crocodile tears for the slow growth of U.S. employment in the post-2008 doldrums (the “permanent Obama economy” in which only the banks were bailed out, not the economy), the financial class views the role industry and the economy at large as being to pay its employees enough so that they can take on an exponentially rising volume of debt. Interest and fees (late fees and penalties now yield credit card companies more than they receive in interest charges) are soaring, leaving the economy of goods and services languishing.

Although money and banking textbooks say that all interest (and fees) are a compensation for risk, any banker who actually takes a risk is quickly fired. Banks don’t take risks. That’s what the governments are for. (Socializing the risk, privatizing the profits.) Anticipating that the U.S. economy may be unable to recover under the weight of the junk mortgages and other bad debts that the Obama administration left on the books in 2008, banks insisted that the government guarantee all student debt. They also insisted that the government guarantees the financial gold-mine buried in such indebtedness: the late fees that accumulate. So whether students actually succeed in becoming wage-earners or not, the banks will receive payments in today’s emerging fictitious “as if” economy. The government will pay the banks “as if” there is actually a recovery.

And if there were to be a recovery, then it would mean that the banks were taking a risk – a big enough risk to justify the high interest rates charge on student loans.

This is simply a replay of what banks have negotiated for real estate mortgage lending. Students who do succeed in getting a job hope to start a family, or at least joining the middle class. The most typical criterion of middle-class life in today’s world (apart from having a college education) is to own a home. But almost nobody can buy a home without getting a mortgage. And the price of such a mortgage is to pay up to 43 percent of one’s income for thirty years, that is, one’s prospective working life (in today’s as-if world that assumes full employment, not just a gig economy).

Banks know how unlikely it is that workers actually will be able to earn enough to carry the costs of their education and real estate debt. The costs of housing are so high, the price of education is so high, the amount of debt that workers must pay off the top of every paycheck is so high that American labor is priced out of world markets (except for military hardware sold to the Saudis and other U.S. protectorates). So the banks insist that the government pretends that housing as well as education loans not involve any risk for bankers.

The Federal Housing Authority guarantees mortgages that absorb up to the afore-mentioned 43 percent of the applicant’s income. Income is not growing these days, but job-loss is. Formerly middle-class labor is being downsized to minimum-wage labor (MacDonald’s and other fast foods) or “gig” labor (Uber). Here too, the fees mount up rapidly when there are defaults – all covered by the government, as if it is this compensates the banks for risks that the government itself bears.

 

From debt peons to wage slaves

In view of the fact that a college education is a precondition for joining the working class (except for billionaire dropouts), the middle class is a debtor class – so deep in debt that once they manage to get a job, they have no leeway to go on strike, much less to protest against bad working conditions. This is what Alan Greenspan described as the “traumatized worker effect” of debt.

Do students think about their future in these terms? How do they think of their place in the world?

Students are the new NINJAs: No Income, No Jobs, No Assets. But their parents have assets, and these are now being grabbed, even from retirees. Most of all, the government has assets – the power to tax (mainly labor these days), and something even better: the power to simply print money (mainly Quantitative Easing to try and re-inflate housing, stock and bond prices these days). Most students hope to become independent of their parents. But burdened by debt and facing a tough job market, they are left even more dependent. That’s why so many have to keep living at home.

The problem is that as they do get a job and become independent, they remain dependent on the banks. And to pay the banks, they must be even more abjectly dependent on their employers.

It may be enlightening to view matters from the vantage point of bankers. After all, they have $1.3 trillion in student loan claims. In fact, despite the fact that college tuitions are soaring throughout the United States even more than health care (financialized health care, not socialized health care), the banks often end up with more education expense than the colleges. That is because any interest rate is a doubling time, and student loan rates of, say, 7 percent mean that the interest payments double the original loan value in just 10 years. (The Rule of 72 provides an easy way to calculate doubling times of interest-bearing debt. Just divide 72 by the interest rate, and you get the doubling time.)

A fatal symbiosis has emerged between banking and higher education in America. Bankers sit on the boards of the leading universities – not simply by buying their way in as donors, but because they finance the transformation of universities into real estate companies. Columbia and New York University are major real estate holders in New York City. Like the churches, they pay no property or income tax, being considered to play a vital social role. But from the bankers’ vantage point, their role is to provide a market for debt whose magnitude now outstrips even that of credit card debt!

Citibank in New York City made what has been accused of being a sweetheart deal with New York University, which steers incoming students to it to finance their studies with loans. In today’s world a school can charge as much for an education as banks are willing to lend students – and banks are willing to lend as much as governments will guarantee to cover, no questions asked. So the bankers on the school boards endorse bloated costs of education, knowing that however much more universities make, the bankers will receive just as much in interest and penalties.

It is the same thing with housing, of course. However much the owner of a home receives when he sells it, the bank will make an even larger sum of money on the interest charges on the mortgage. That is why all the growth in the U.S. economy is going to the FIRE sector, owned mainly by the One Percent.

 
• Category: Economics • Tags: Student Debt 
Michael Hudson
About Michael Hudson

Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of The Bubble and Beyond (2012), Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971).

ISLET engages in research regarding domestic and international finance, national income and balance-sheet accounting with regard to real estate, and the economic history of the ancient Near East.

Michael acts as an economic advisor to governments worldwide including Iceland, Latvia and China on finance and tax law.