You can’t bail out the banks, leave the debts in place, and rescue the economy. It’s a zero-sum game. Somebody has to lose. That’s what happened in 2009 when President Obama came in. He invited the bankers to the White House and he said, “I’m the only guy standing between you and the mob with pitchforks,” by which he meant the voters that he was bamboozling. He reassured the bankers. He said, “Look, my loyalty is to my campaign donors not to the voters. Don’t worry; my loyalty is with you.”

I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show: Rescuing the Banks Instead of the Economy. Dr. Hudson is a financial economist and historian. He is president of the Institute for the Study of Long-Term Economic Trend, a Wall Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book Super Imperialism: The Economic Strategy of American Empire is a critique of how the United States exploited foreign economies through the IMF and World Bank. His latest books are Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy and J Is for Junk Economics: A Guide to Reality in an Age of Deception. Today we discuss how the bank bailouts, not the crash, are killing the economy. Also, the concept of debt deflation, the magic of compound interest, the growth of the financial extraction FIRE sector, quantitative easing, tariffs, economic sanctions and isolationism.

BONNIE FAULKNER: Dr. Michael Hudson, welcome.

MICHAEL HUDSON: It’s good to be back after a few years.

BONNIE FAULKNER: Boy I’ll say. I’ve just read your article “The Lehman 10th Anniversary Spin as a Teachable Moment.” Obviously, 2018 is the tenth anniversary of the 2008 stock market crash. You immediately point out that today’s financial malaise is a result of the bank bailout not the crash. I think people might find this statement surprising since the claim is that the bailout saved the economy.

MICHAEL HUDSON: I think what the newspapers said was that the bailout saved the banks. To bankers, their banks are the economy. The problem is, you can’t save the banks and the economy. If you save the banks, you’re saving all the debt that people owe to the banks. And if you save all the debt that the people owe to the banks – and you foreclose on the millions of families that forfeited their homes in the mortgage crisis – if you leave the debts growing at compound interest, raise the debt equity ratios and the debt-to-income ratios, then the economy is going to shrink and shrink, and we’re in a slow crash. So in a sense the celebration over “Yes, we saved the banks” was correct last week, but people don’t realize that the economy cannot be saved unless there’s a bank crash.

That’s what Sheila Bair wrote in her memoir about her experience as the head of the Federal Deposit Insurance Corporation. She pointed out that Citibank was insolvent from losing all its net worth on bad gambles. She said it was the worst managed bank in America – as distinct from the just plain crooked banks and criminal banks like Countrywide, Bank of America and Wells Fargo. She said that there was plenty of theft by Citibank, but that all the insured depositors could have been reimbursed. No insured depositor would have lost money. But the stockholders and the bondholders that ran this gambling institution would have been wiped out. She said that Obama and Geithner really represented Citibank. Geithner was a protégé of Robert Rubin, the Secretary of the Treasury under President Clinton. She wrote that she found out, she was told, “It’s all about the bondholders.”

The problem is that Republican free-enterprise bankers discussing what happened ten years ago are saying, “Nothing to see here folks. Everything’s fixed now. We don’t have to do any regulation. Let the banks be free again.” Or, you have Democrats like Paul Krugman who cannot bring themselves to criticize what Obama did. A week ago, on September 14, Krugman showed himself to be a flack for the banks and for the Democrats’ donor class by writing that the Washington Beltway was crazy to believe that America had a debt problem. As I wrote in my article, he said that all you need is Keynesian policy to run a large enough budget deficit to spend enough money into the economy so that wage earners will have enough to pay the banks what they owe. I think this is the Democratic Party’s position: The role of wage earners is to make enough money so that all of their income over and above survival needs has to be paid for the banks. More and more income is needed to pay carrying charges as their debts keep rising.

Let me quote what Krugman wrote in The New York Times: “The purely financial aspect of the crisis was basically over by the summer of 2009.” But we’re still living in the rest of the financial crisis! The debt crisis is a financial crisis. He criticized the common-sense observation that I’m sure most of your listeners can realize right away: He referred to the “bizarre Beltway consensus that despite high unemployment and record low interest rates, debt, not jobs, is the real problem.” He says there’s no debt problem; it’s all just jobs, and if you pay people more, then they can pay the banks.

There’s no feeling at all within the Democratic Party that somehow the banks should have been subordinate to saving the economy. I think that is a major reason why Hillary lost the 2016 election. She kept saying, “Aren’t you better off today than you were eight years ago when Mr. Obama was elected?” Well, most people, especially in the Midwest, said, “No, we’re not better off. Are you kidding? We’ve lost our homes, employment’s down, our wages are lower, our pension funds are being seized. Of course we’re not better.” So more and more voters stayed home. Just today I was reading a survey that 55% to 85% of Americans say if there was a rerun of the 2016 election between Trump and Hillary they just wouldn’t vote, because both candidates were so bad.

So what you really have seen in this anniversary is not the discussion that you need to have: How are we going to deal with the next crisis to avoid bailing out the banks all over again? If we don’t bail out the banks, what’s the policy? How are we going to take over the insolvent banks – that means, take them public. Sheila Bair pointed out that if Citibank would have been taken over by FDIC it wouldn’t have made crooked loans, it wouldn’t have made junk mortgages. It wouldn’t have made corporate takeover loans, it wouldn’t have made loans to payday lenders, it wouldn’t have made derivative gambles. That’s not what public banks do.
That discussion somehow isn’t occurring. It’s not occurring because people don’t realize that in any economy – not only in America; you’re having the same thing in Europe – the volume of debt expands exponentially, by compound interest. All the debt that people owe keeps mounting up more and more arrears. And if you miss a payment on your credit card, or even if you miss a payment to the electric utility or any other monthly bills, your credit card’s interest rate goes up from 11 or 12% to 29%. All this accumulates up and up and up. And the result is that personal debt service relative to income is going up. Corporate debt service relative to income is going way up, and the share of government budgets that must be paid to bondholders is going up. That means that people don’t have enough money to go and buy the goods and services they produce.

MARC STEINER: Welcome to The Real News Network. I’m Marc Steiner. Great to have you with us once again.

On September 15, 2008, the financial meltdown began with the bankruptcy of the Lehman Brothers. That was 10 years ago. The shock waves that hit the economy threw 9 million families out of their homes who could not afford to pay their rising mortgages. So Congress and the president in the 1990s killed Glass-Steagall, written in 1933 to save us from the excesses of the financial industry. And then Congress gave us Dodd-Frank in the wake of the 2008 crisis that bailed out Wall Street, but not America. And now Trump seems to continue the process with killing Dodd-Frank and completely turning over the keys to Wall Street.

Our guest today says in part we must wipe out debt and not bail out the banks. So with that, let me welcome back to Real News Michael Hudson, research professor of economics at the University of Missouri Kansas City, and a research associate at the Levy Economics Institute at Bard College. His latest book is J Is for Junk Economics. Michael, welcome, good to have you with us.

MICHAEL HUDSON: Good to be here.

MARC STEINER: So let’s start there, with this whole idea of what we did wrong in 2008, why we got it wrong, and what we should have done, from your perspective.

MICHAEL HUDSON: Well, you’re talking about September 15. And last weekend, the 10-year anniversary, all that you read in The New York Times and other newspapers was a celebration: We did everything right. We bailed out the banks. There is very little discussion of the fact that this was a disaster for the economy. Nobody has related the fact that we bailed out the banks on their own terms to the fact the economy has not recovered. People simply talk about how slow the recovery has been since 2008.

To put this issue in perspective, almost all of the growth in GDP – the measure they look at – is taken the form of higher bank earnings, which they call financial services, meaning penalty fees, late fees, and interest rates over and above the banks’ cost of funds; and rising rents that homeowners would have to pay themselves if they rented instead of owned their homes. You mentioned 9 million homeowners lost their homes. They now have to rent. Rents are rising, debts are rising. Corporate debt, municipal debt, and student debt are way higher now than 2008.

Most of this is because of the way in which President Obama doublecrossed his voters and said, I’m not representing you, I’m representing my donors. He invited the bankers to the White House and said, don’t worry, folks, I’m the only guy standing between you and the mob with pitchforks. Just like Hillary called Donald Trump supporters “deplorables,” he called his supporters the mob with pitchforks. And he stuck it to them.

In my book Killing the Host you have Barney Frank saying that he got the agreement of Secretary of the Treasury Hank Paulson to write down the mortgages to realistic charges: namely, number one, what the mortgage borrowers could afford out of their income, and number two, the carrying charge of the mortgage would be the going rent rate, which is what mortgages historically have tended to approximate.

Obama said, no, I’m representing the bankers, not the debtors. He appointed bank lobbyists such as Tim Geithner as Secretary of the Treasury. Obama basically followed everything that President Clinton’s Secretary of the Treasury Rubin recommended to him. He was handed a list of the people that Wall Street wanted to appoint. And then he washed his hands of it. Instead of doing what normally happens in a crisis – writing down the debts, and writing off the bad savings and the bad loans as a counterpart to the debts, and taking over the insolvent banks – he kept the bad debts on the books.

There was a big argument in the administration. Surprisingly enough, the good guys were the Republicans in this. Sheila Bair was a Republican from the Midwest, and she said, look, Citibank is not only insolvent, it’s a basically a financial fraud organization. We should take it over. It doesn’t have any money. But Obama said, wait a minute, Geithner is a protege of Rubin, and he’s become head of Citigroup. We’ve got to bail out Citigroup. So what Obama did was take the banks that have been the most fraudulent, that have paid the largest amount of civil fines for financial fraud, and said, these are the banks we want to be the leaders. We’re going to make them the biggest banks, and we’re going to make them stronger. And we’re not going to forgive any loans. We’re going to leave the loans in place, unlike what’s happened for the last few hundred years and crashes.

So this crash of 2008 was not a crash of the banks. The banks were bailed out. The economy was left with all the junk mortgages in place, all the fraudulent debts. Then, to further help the banks recover, the Federal Reserve came in and pushed quantitative easing, lowering the interest rates so much that banks could make the widest profit they ever made in history – the margin between the lending rate on mortgages, 5-6 percent; student loans, 9 percent; credit card loans, 11-29 percent; and the banks’ borrowing charge, which is 0.1 percent. The banks became enormous profit centers, leading the stock market gains.

Over the weekend, the newspapers said, look at the wonderful success. The stock market’s up, the One Percent are richer than ever before. Let’s look at the good side of things. There was no analysis at all as to why the economy is not recovering, and whether this failure to recover is a backwash of the way in which the crisis was handled- by bailing out the banks, not the economy.

MARC STEINER: Let me take a step backwards here. First of all, very quickly for us, define quantitative easing.

MICHAEL HUDSON: Quantitative easing occurs when the Federal Reserve spent $4.3 trillion on buying the bad debts and the bank assets and creating bank reserves. Essentially it’s like printing money. You’ve heard the phrase ‘money-dropping helicopters.’ But the helicopters only fly over Wall Street. So the Federal Reserve created $4.3 billion on the accounts of the banks, and let the banks get through the fact that they’d made recklessly bad loans and suffered reckless losses. Sheila Bair, in her autobiography, wrote about how Citibank was the most mismanaged bank in America. Not quite as fraudulent as Countrywide or Bank of America, but simply incompetent by making bad gambles under Prince, who ran the thing. They were bailed out and then subsidized. The larger the fines for fraud, the more subsidy they got and the bigger they grew. Crime pays.

MARC STEINER: Let’s talk a bit about what could have been the alternative. To me that’s what is a gripping story we never wrestled with, nor talk about very much. Right?

MICHAEL HUDSON: Isn’t that amazing. Over the weekend, not a single paper that I know said that there were many alternatives at the time. The alternative that was talked about, mainly by Republicans, was to say, OK, these mortgages were fraudulently written. That’s why the whole media were using the word ‘junk mortgages.’ So we should write down the mortgage to the ability of mortgagee to pay, out of 25 percent of their income, or whatever. Or, the carrying charge of their mortgage would be the same that they could pay to rent. In other words, if someone’s paying $1200 a month in mortgage payments, but for $600 a month they could rent out the identical house next door, you reduce the mortgage to the realistic value. Because the banks hired crooked appraisers and their own crooked firms to do false valuations on these loans they made in order to sell them the gullible people, like German Landesbanks.

Wall Street did not let the Lehman Brothers crisis go to waste. The banks that have paid the largest fines for financial fraud are now much bigger and more profitable. The victims of their junk mortgage loans are poorer, and the economy is facing debt deflation.

Was it worth it? What was not saved was the economy.

Today’s financial malaise for pension funds, state and local budgets and underemployment is largely a result of the 2008 bailout, not the crash. What was saved was not only the banks – or more to the point, as Sheila Bair pointed out, their bondholders – but the financial overhead that continues to burden today’s economy.

Also saved was the idea that the economy needs to keep the financial sector solvent by an exponential growth of new debt – and, when that does not suffice, by government purchase of stocks and bonds to support the balance sheets of the wealthiest layer of society. The internal contradiction in this policy is that debt deflation has become so overbearing and dysfunctional that it prevents the economy from growing and carrying its debt burden.

Trying to save the financial overgrowth of debt service by borrowing one’s way out of debt, or by monetary Quantitative Easing re-inflating real estate, stock and bond prices, enables the creditor One Percent to gain, not the indebted 99 Percent in the economy at large. Therefore, from the economy’s vantage point, instead of asking how the banks are to be saved “next time,” the question should be, how should we best let them go under – along with their stockholders, bondholders and uninsured depositors whose hubris imagined that their loans (other peoples’ debts) could go on rising without impoverishing society and preventing creditors from collecting in any event – except from government by gaining control over it.

A basic principle should be the starting point of any macro analysis: The volume of interest-bearing debt tends to outstrip the economy’s ability to pay. This tendency is inherent in the “magic of compound interest.” The exponential growth of debt expands by its own purely mathematical momentum, independently of the economy’s ability to pay – and faster than the non-financial economy grows.

The higher the debt/income ratio rises, the more interest, amortization payments and late fees are extracted from the economy. The resulting debt burden slows the economy, causing defaults. That is what happened in 2008, and is accelerating today as debt ratios are rising for corporate debt, state and local debt, and student debt.

Neither legislators, academics nor the public at large recognize a corollary Second Principle following from the first: An over-indebted economy cannot be saved unless the banks fail. That means writing down the financial claims by the One to Ten Percent – in other words, the net debts owed by the 99 to 90 Percent. Wiping out bad debts involves writing down the “bad savings” that are the counterpart to these debts on the asset side of the balance sheet. Otherwise the economy will suffer debt deflation and austerity.

“Recovery” since 2008 has been much slower than earlier recoveries because debt deflation is siphoning off more and more personal and corporate income. To make matters worse, the bailout’s policy of Quantitative Easing to re-inflate asset prices has reduced rates of return for pension funds, insurance companies and employee retirement savings. This means that more state and local government income must be diverted to meet retirement commitments.

Something has to give, and it is not likely to be the savings of the donor class at the top of the economic pyramid. As a result, the economy at large is threatened with an exponentially expanding erosion of disposable income and net worth for most people and companies. Investment managers are warning of a financial meltdown, given today’s historically high price/earnings ratios for stocks and also for rental properties.

What is not acknowledged is that such a crisis is a precondition for today’s economy to recover from the rising debt/income and debt/GDP ratios that are burdening the United States, Europe and other regions. At least the United States has been able to monetize its budget deficits and subsidize banks to carry its rising debt overhead with yet new debt. The Eurozone has banned budget deficits of over 3 percent of GDP, imposing austerity that leaves the only response to over-indebtedness to be Greek-style austerity: depopulation, shrinking living standards, wipeouts of retirement income and pensions, mortgage defaults, shortening lifespans, and mass selloffs of public infrastructure to foreign financial appropriators.

None of this was spelled out in the September 15 weekend marking the tenth anniversary of Lehman Brothers’ failure and subsequent rescue of Wall Street. President Obama, Treasury Secretary Tim Geithner and their fellow financial lobbyists at the Federal Reserve and Justice Department are credited with saving “the economy,” as if their donor class on Wall Street was a good proxy for the economy at large. “Saving the economy from a meltdown” has become the euphemism for saving bondholders and other members of the One Percent from taking losses on their bad loans. The “rescue” is Orwellian doublespeak for expropriating over nine million indebted Americans from their homes, while leaving surviving homeowners saddled with enormous bubble-mortgage payments to the FIRE sector’s owners.

What has been put in place is not a restoration of traditional status quo, but a reversal of over a century of central bank policy. Failed banks have not been taken into the public domain. They have been enriched far beyond their former levels. The perpetrators of the collapse have been rewarded, not penalized for lending more than could possibly be paid by NINJA borrowers and speculators whose mortgage applications were doctored by systemic fraud at Countrywide, Washington Mutual, Bank of America, Citigroup and their cohorts.

The $4.3 trillion that could have been used to save debtors was given to the banks and Wall Street firms whose recklessness and outright fraud caused the crisis. The Federal Reserve “cash for trash” swaps with insolvent banks did not restore normalcy or the status quo ante. What occurred was a financial revolution by stealth, reversing the traditional responsibility of creditors to make prudent loans.

Quantitative Easing saved creditors and the largest stockholders and bondholders by lowering the interest rates by enough to make it profitable for new loans to inflate asset prices on credit. This revived the value of collateral backing bank loans and bondholdings. “Saving” the economy in this way actually sacrificed it. That is why our “recovery” is only “on paper,” a result of calculating GDP to include bank earnings and hypothetical homeowner windfalls as rents are soaring.

Among Democrats, the most extreme tunnel vision denying that debt is a problem comes from Paul Krugman: Writing that “The purely financial aspect of the crisis was basically over by the summer of 2009,”[1] he criticized what he called the “bizarre Beltway consensus that despite high unemployment and record low interest rates, debt, not jobs, was the real problem.”

Introduction and Transcript:

Left Out, a podcast produced by Paul Sliker, Michael Palmieri, and Dante Dallavalle, creates in-depth conversations with the most interesting political thinkers, heterodox economists, and organizers on the Left.

In this episode of The Hudson Report, we speak with Michael Hudson about the implications of the flattening yield curve, the possibility of another global financial crisis, and public banking as an alternative to the current system.

‘The Hudson Report’ is a Left Out weekly series with the legendary economist Michael Hudson. Every week, we look at an economic issue that is either being ignored—or hotly debated—in the press that week.

Paul Sliker: Michael Hudson welcome back to another episode of The Hudson Report.

Michael Hudson: It’s good to be here again.

Paul Sliker: So, Michael, over the past few months the IMF has been sending warning signals about the state of the global economy. There are a bunch of different macroeconomic developments that signal we could be entering into another crisis or recession in the near future. One of those elements is the yield curve, which shows the difference between short-term and long-term borrowing rates. Investors and financial pundits of all sorts are concerned about this, because since 1950 every time the yield curve has flattened, the economy has tanked shortly thereafter.

Can you explain what the yield curve signifies, and if all these signals I just mentioned are forecasting another economic crisis?

Michael Hudson: Normally, borrowers have to pay only a low rate of interest for a short-term loan. If you take a longer-term loan, you have to pay a higher rate. The longest term loans are for mortgages, which have the highest rate. Even for large corporations, the longer you borrow – that is, the later you repay – the pretense is that the risk is much higher. Therefore, you have to pay a higher rate on the pretense that the interest-rate premium is compensation for risk. Banks and the wealthy get to borrow at lower rates.

Right now what’s happened is that the short-term rates you can get by putting your money in Treasury bills or other short-term instruments are even higher than the long-term rates. That’s historically unnatural. But it’s not really unnatural at all when you look at what the economy is doing.

You said that we’re entering into a recession. That’s just the flat wrong statement. The economy’s been in a recession ever since 2008, as a result of what President Obama did by bailing out the banks and not the economy at large.

Since 2008, people talk about “look at how that GDP is growing.” Especially in the last few quarters, you have the media saying look, “we’ve recovered. GDP is up.” But if you look at what they count as GDP, you find a primer on how to lie with statistics.

The largest element of fakery is a category that is imputed – that is, made up – for rising rents that homeowners would have to pay if they had to rent their houses from themselves. That’s about 6 percent of GDP right there. Right now, as a result of the 10 million foreclosures that Obama imposed on the economy by not writing down the junk mortgage debts to realistic values, companies like Blackstone have come in and bought up many of the properties that were forfeited. So now there are fewer homes that are available to buy. Rents are going up all over the country. Homeownership has dropped by abut 10 percent since 2008, and that means more people have to rent. When more people have to rent, the rents go up. And when rents go up, people lucky enough to have kept their homes report these rising rental values to the GDP statisticians.

If I had to pay rent for the house that I have, could charge as much money as renters down the street have to pay – for instance, for houses that were bought out by Blackstone. Rents are going up and up. This actually is a rise in overhead, but it’s counted as rising GDP. That confuses income and output with overhead costs.

The other great jump in GDP has been people paying more money to the banks as penalties and fees for arrears on student loans and mortgage loans, credit card loans and automobile loans. When they fall into arrears, the banks get to add a penalty charge. The credit-card companies make more money on arrears than they do on interest charges. This is counted as providing a “financial service,” defined as the amount of revenue banks make over and above their borrowing charges.

The statistical pretense is that they’re taking the risk on making loans to debtors that are going bad. They’re cleaning up on profits on these bad loans, because the government has guaranteed the student loans including the higher penalty charges. They’ve guaranteed the mortgages loans made by the FHA – Fannie Mae and the other groups – that the banks are getting penalty charges on. So what’s reported is that GDP growth is actually more and more people in trouble, along with rising housing costs. What’s good for the GDP here is awful for the economy at large! This is bad news, not good news.

As a result of this economic squeeze, investors see that the economy is not growing. So they’re bailing out. They’re taking their money and running.

If you’re taking your money out of bonds and out of the stock market because you worry about shrinking markets, lower profits and defaults, where are you going to put it? There’s only one safe place to put your money: short-term treasuries. You don’t want to buy a long-term Treasury bond, because if the interest rates go up then the bond price falls. So you want buy short-term Treasury bonds. The demand for this is so great that Bogle’s Vanguard fund management company will only let small investors buy ten thousand dollars worth at a time for their 401K funds.

The reason small to large investors are buying short term treasuries is to park their money safely. There’s nowhere else to put it in the real economy, because the real economy isn’t growing.

What has grown is debt. It’s grown larger and larger. Investors are taking their money out of state and local bonds because state and local budgets are broke as a result of pension commitments. Politicians have cut taxes in order to get elected, so they don’t have enough money to keep up with the pension fund contributions that they’re supposed to make.

This means that the likelihood of a break in the chain of payments is rising. In the United States, commercial property rents are in trouble. We’ve discussed that before on this show. As the economy shrinks, stores are closing down. That means that the owners who own commercial mortgages are falling behind, and arrears are rising.

Also threatening is what Trump is doing. If his protectionist policies interrupt trade, you’re going to see companies being squeezed. They’re not going to make the export sales they expected, and will pay more for imports.

Finally, banks are having problems of they hold Italian government bonds. Germany is unwilling to use European funds to bail them out. Most investors expect Italy to do exit the euro in the next three years or so. It looks like we’re entering a period of anarchy, so of course people are parking their money in the short term. That means that they’re not putting it into the economy. No wonder the economy isn’t growing.

Dante Dallavalle: So to be clear: a rise in demand for these short-term treasuries is an indication that investors and businesses find too much risk in the economy as it stands now to be investing in anything more long-term.

The recently elected neoliberal government of Mauricio Macri has decided to seek a $50 billion IMF credit line, which will only enable more capital flight for the upper class and greater unpayable debt for the rest of the population, says the economist Michael Hudson.

SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.

For several months now. Argentines have been taking to the streets to protest against neoliberal austerity measures of President Mauricio Macri. The most recent such protest took place on July 9 on Argentine’s Independence Day. There have also been three general strikes thus far. In the two years since he took office, President Macri has laid off as many as 76,000 public sector workers, and slashed gas and water and electricity subsidies, leading to a tenfold increase in prices in some cases.

The government argues that all this is necessary in order to stem inflation and the decline of the currency’s value. Last month, Macri received the backing of the International Monetary Fund. The IMF agreed to provide Argentina with a $50 billion loan, one of the largest in its history. In exchange, the Macri government will deepen the austerity measures already in place.

Joining me now to analyze Argentina’s economic situation and its new IMF loan is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri Kansas City. Welcome back, Michael.

MICHAEL HUDSON: Good to be back, Sharmini.

SHARMINI PERIES: Michael, why is it that Argentina needs such a huge credit line from the IMF?

MICHAEL HUDSON: For precisely the reason that you explained. Its neoliberal policy aims at rolling back the wage increases and employment that Mrs. Kirschner, the former president, achieved. So it’s part of the class war to shrink the economy. To lower wages, you have to cut back business so as to cut back employment. Like almost all IMF loans, the purpose is to subsidize capital flight out of Argentina before this austerity occurs, so that wealthy Argentinians can take their money and run before the currency collapses.

The loan will indebt Argentina so much that its currency will continue to go down and down, chronically wrecking the economy. That’s what the IMF does. That’s its business plan. It makes a loan to subsidize capital flight, emptying out the economy of cash, leading the currency to collapse, as it has recently collapsed. As soon as the $50 billion was expended, wasted in letting wealthy Argentinians take their pesos, convert them into dollars, move them offshore – to the United States, to England, to the Dutch West Indies, and offshore banking centers – then they let the currency collapse.

The IMF model’s basic assumption, which it’s announced for the last 50 years, is that when you depreciate a currency, what you’re really lowering is the price of labor. Raw materials and capital have an international price. But when a currency goes down, it makes imports much more expensive, and that causes a price umbrella over the cost of living. Labor has to pay a higher domestic price for grain, food, oil and gas, andfor everything else.

So what Macri has done is to agree with the IMF to wage class war with a vengeance. Devaluation leaves Argentina so hopelessly indebted that it can’t possibly repay the IMF loan. So what we’re seeing is a replay of what happened in 2001.

SHARMINI PERIES: Exactly. I was going to ask you, now, that was only 17 years ago, Michael. Argentinians do have memory here. They know what happened. They experienced it as well. Now, that was back in 2001 during the economic crisis when unemployment had increased so dramatically. That country went through a series of presidents and went through a series of crises. And we saw images very similar to what we have seen in, in Greece not too long ago. Now, tell us more about that history. What exactly happened during that crisis, and then eventually how did Nestor Kirschner relieve the economy and come out of that crisis?

MICHAEL HUDSON: Well, the IMF staff said, “Don’t make the loan. There’s no possible way Argentina can pay it. It’s all going to be made to the oligarchy for capital flight. You’re giving the IMF money for crooks, and you’re expecting the Argentine people to have to pay.” So Argentina very quickly was left broke.

Although that was 17 years ago, for the last 17 years the IMF has had a slogan: “No more Argentinas.” In other words, they said, they were never going to make a loan that is only given to oligarchs for capital flight. That’s what happened when it lent to Ukraine, to the Russian kleptocrats, and to the Greek banks to move offshore. Yet here again, we’re having a replay.

After Mrs. Kirschner came in, it was obvious to everybody, as it had been to the IMF staff (many of whom had resigned) that Argentina couldn’t pay. So about 80 percent of Argentina’s bondholders agreed to write down the debt to something that could be paid. They saw that either it’s a total default because they can’t pay, or they would write it down very substantially to what could be paid, because the IMF really made an incompetent – not incompetent, but outright corrupt – insider deal.

Unfortunately, the oligarchy had a fatal clause put in the original bond issue, saying that Argentina would agree to U.S. arbitration under U.S. law if there was any dispute. Well, after the old Argentine bonds depreciated in price – the bonds that were not renegotiated as part of the 80 percent – you had vulture funds buy them up. Especially Paul Singer, the Republican campaign donor who tends to buy politicians along with foreign government bonds. He sued, demanding 100 percent on the dollar, not the 40 cents or whatever they’d settled for. The case was assigned to the senile, dying Judge Griesa in New York City. He who said there was something about a clause that said investors have to be treated symmetrically. Argentina had said, “That’s fine, we’ll pay the other 20 percent the same as what the 80 percent of all agreed to. The majority rules.” But Griesa said, “No, you have to pay the 80 percent all the money that the 20 percent demands. That’s symmetry.” He let the hedge funds win. That set Argentina on the road to go bankrupt again, wreck the government, and bring back the oligarchy.

That ruling caused turmoil. The United States State Department set out to support the oligarchy by doing everything it could to destabilize Argentina. The Argentine people voted in a government that was supported by the United States, hoping it would be nice to them. I don’t know why foreign countries think that way, but they thought maybe if they voted neoliberal, the United States would agree to forgive some of its debt.

Well, that’s not what neoliberals do. Macri did just what you said at the beginning of the program. He announced that he was going to cut employment, stop inflation by making the working class bear all of the costs, and would borrow – actually, it was the largest loan in IMF history – the $50 billion to enable the Argentine wealthy class to move its money offshore. That’s what the IMF does.

SHARMINI PERIES: Right. So let’s imagine you are given the opportunity to resolve this issue. How would you advise the Argentine government in terms of what can they do to stabilize the economy, given the circumstances they’re facing right now?

It doesn’t have to be this way