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Finance as Warfare: The IMF Lent to Greece Knowing It Could Never Pay Back Debt

SHARMINI PERIES: The latest economic indicator showed that the Greek economy shrank by 0.4% in the last three months of 2016. This poses a real problem for Greece, because its lenders are expecting it to grow by 3.5% annually, to enable it to pay back on its bailout loan. Greece is scheduled to make a 10.5 billion euro payment on its debt next summer, but is expected to be unable to make that payment, without another installment from its $86 billion bailout.

A growing impasse between the International Monetary Fund, and the European Central Bank, Greece’s two main lenders, is threatening to push Greece into default, and pull out of the euro. Meanwhile, the Greece government told its lenders, that we now call “Troika” today, that it will not agree to any more austerity measures. Joining us today, to take a closer look at the Greek situation is Michael Hudson. Michael is a distinguished Professor of Economics, at the University of Missouri, Kansas City. He’s the author of many books, and the latest among them is, J is for Junk Economics: A Guide to Reality in the Age of Deception.

Thank you so much for joining us today, Michael.

MICHAEL HUDSON: It’s good to be here. But I take issue with one thing that you said. You said the lenders expect Greece to grow. That is not so. There is no way in which the lenders expected Greece to grow. In fact, the IMF was the main lender. It said that Greece cannot grow, under the circumstances that it has now.

What do you do in a case where you make a loan to a country, and the entire staff says that there is no way this country can repay the loan? That is what the IMF staff said in 2015. It made the loan anyway – not to Greece, but to pay French banks, German banks and a few other bondholders – not a penny actually went to Greece. The junk economics they used claimed to have a program to make sure the IMF would help manage the Greek economy to enable it to repay. Unfortunately, their secret ingredient was austerity.

Sharmini, for the last 50 years, every austerity program that the IMF has made has shrunk the victim economy. No jjunkecon austerity program has ever helped an economy grow. No budget surplus has ever helped an economy grow, because a budget surplus sucks money out of the economy. As for the conditionalities, the so-called reforms, they are an Orwellian term for anti-reform, for cutting back pensions and rolling back the progress that the labor movement has made in the last half century. So, the lenders knew very well that Greece would not grow, and that it would shrink.

So, the question is, why does this junk economics continue, decade after decade? The reason is that the loans are made to Greece precisely because Greece couldn’t pay. When a country can’t pay, the rules at the IMF and EU and the German bankers behind it say, don’t worry, we will simply insist that you sell off your public domain. Sell off your land, your transportation, your ports, your electric utilities. This is by now a program that has gone on and on, decade after decade.

Now, surprisingly enough, America’s ambassador to the EU, Ted Malloch, has gone on Bloomberg and also on Greek TV telling the Greeks to leave the euro and go it alone. You have Trump’s nominee for the ambassador to the EU saying that the EU zone is dead zone. It’s going to shrink. If Greece continues to repay the loan, if it does not withdraw from the euro, then it is going to be in a permanent depression, as far as the eye can see.

Greece is suffering the result of these bad loans. It is already in a longer depression today, a deeper depression, than it was in the 1930s.

SHARMINI PERIES: Yeah, that’s an important… at the very beginning of your answer here, you were making this very important point, is that although the lenders – this is the Eurozone lenders – had set a target of 3.5% surplus as a condition on Greece in order to make that first bailout loan. The IMF is saying, well, that’s not quite doable, 1.5% should be the target.

But you’re saying, neither of these are real, or is achievable, or desired, for that matter, because they actually want Greece to fail. Why are you saying that?

MICHAEL HUDSON: Because when Greece fails, that’s a success for the foreign investors that want to buy the Greek railroads. They want to take over the ports. They want to take over the land. They want the tourist sites. But most of all, they want to set an example of Greece, to show that France, the Netherlands or other countries that may think of withdrawing from the euro – withdraw and decide they would rather grow than be impoverished – that the IMF and EU will do to them just what they’re doing to Greece.

So they’re making an example of Greece. They’re going to show that finance rules, and in fact that is why both Trump and Ted Malloch have come up in support of the separatist movement in France. They’re supporting Marine Le Pen, just as Putin is supporting Marine Le Pen. There’s a perception throughout the world that finance really is a mode of warfare.

If they can convince countries somehow to adopt junk economics and pursue policies that will destroy themselves, then they’ll be easy pickings for foreign investors, and for the globalists to take over other economies. So, it’s a form of war.

SHARMINI PERIES: Right. Michael, you were saying that the newly appointed ambassador, Ted Malloch of the Trump administration to the European Union has suggested that Greece should consider leaving the European Union, or the euro in particular.

What do you make of this, and will this be then consistent with what Greece is suggesting? Because Greece has now said, no more austerity measures. We’re not going to agree to them. So, this is going to amount to an impasse that is not going to be resolvable. Should Greece exit the euro?

MICHAEL HUDSON: Yes, it should, but the question is how should it do it, and on what terms? The problem is not only leaving the euro. The problem really is the foreign debt that was bad debt that it was loaded onto by the Eurozone. If you leave the euro and still pay the foreign debt, then you’re still in a permanent depression from which you can never exit.

There’s a broad moral principle here: If you lend money to a country that your statistics show cannot pay the debt, is there really a moral obligation to pay the debt? Greece did have a commission two years ago saying that this debt is odious. But it’s not enough just to say there’s an odious debt. You have to have something more positive.

I’ve been talking to Greek politicians and Syriza leaders about what’s needed, and what is needed is a Declaration of Rights. Just as the Westphalia rules in 1648, a Universal Declaration that countries should not be attacked in war, that countries should not be overthrown by other countries. I think, the Declaration of International Law has to realize that no country should be obliged to impose poverty on its population, and sell off the public domain in order to pay its foreign creditors.

The Declaration would say that if creditors make a debt that cannot be repaid, the debt is by definition odious, so there is no need to pay it. Every country has the right not to pay debts that are unpayable except by bankrupting the country, and forcing it to sell off their public domain to foreign countries. That’s the very definition of sovereignty.

So, I’m hoping to work with politicians of a number of countries to draw up this Declaration of Debtor Rights. That’s what’s been missing. There’s an idea that if you withdraw from the euro, you can devalue your currency and can lower labor standards even further, wipe out the pensions, and somehow squeeze out enough to pay the debt.

So, the problem isn’t only the Eurozone. True, joining the euro meant that you’re not allowed to run a budget deficit to pump money into the economy to recover – like America has done. But the looming problem is that you have to pay debts that are so far beyond your ability to pay that you’ll end up like Haiti did after it rebelled after the French Revolution.

France said, sure, we’ll give you your independence, but you’ll have to reimburse us, for the fact that we no longer hold you as slaves. You have to buy your freedom. You can’t say slavery is wrong. You have to make us, the slaveholders, whole. So Haiti took this huge foreign debt to France after it got its independence, and ended up not being able to develop.

A few years after that, in 1824, Greece had a revolution and found the same problem. It borrowed from the Ricardo brothers, the brothers of David Ricardo, the economist and lobbyist for the bankers in London. Just like the IMF, he said that any country can afford to repay its debts, because of automatic stabilization. Ricardo came out with a junk economics theory that is still held by the IMF and the European Union today, saying that indebted countries can automatically pay.

Well, Greece ended up taking on an enormous debt, paying interest but still defaulting again and again. Each time it had to give up more sovereignty. The result was basically a constant depression. Slow growth is what retarded Greece and much of the rest of southern Europe.

So unless they tackle the debt problem, membership in the Eurozone or the European Union is really secondary.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002). His new book is: Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy (a CounterPunch digital edition). Sharmini Peries is executive producer of The Real News Network. This is a transcript of Michael Hudson’s interview with Sharmini Peries on the Real News Network.

(Reprinted from Michael-Hudson.com by permission of author or representative)
 
• Category: Economics • Tags: Counterpunch Archives, Eurozone, Greece, IMF 

An article by Robert Berke in oilprice.com, which describes itself as “The No. 1 Source for Oil & Energy News,” illustrates how interest groups control outcomes by how they shape policy choices.

Berke’s article reveals how the US intends to maintain and extend its hegemony by breaking up the alliance between Russia, Iran, and China, and by oil privatizations that result in countries losing control over their sovereignty to private oil companies that work closely with the US government. As Trump has neutered his presidency by gratuitously accepting Gen. Flynn’s resignation as National Security Advisor, this scheme is likely to be Trump’s approach to “better relations” with Russia.

Berke reports that Henry Kissinger has sold President Trump on a scheme to use the removal of Russian sanctions to pry President Putin away from the Russian alliance with Iran and China. Should Putin fall for such a scheme, it would be a fatal strategic blunder from which Russia could not recover. Yet, Putin will be pressured to make this blunder.

One pressure on Putin comes from the Atlanticist Integrationists who have a material stake in their connections to the West and who want Russia to be integrated into the Western world. Another pressure comes from the affront that sanctions represent to Russians. Removing this insult has become important to Russians even though the sanctions do Russia no material harm.

We agree with President Putin that the sanctions are in fact a benefit to Russia as they have moved Russia in self-sufficient directions and toward developing relationships with China and Asia. Moreover, the West with its hegemonic impulses uses economic relationships for control purposes. Trade with China and Asia does not pose the same threat to Russian independence.

Berke says that part of the deal being offered to Putin is “increased access to the huge European energy market, restored western financial credit, access to Western technology, and a seat at the global decision-making table, all of which Russia badly needs and wants.” Sweetening the honey trap is official recognization of “Crimea as part of Russia.”

Russia might want all of this, but it is nonsense that Russia needs any of it.

Crimea is part of Russia, as it has been for 300 years, and no one can do anything about it. What would it mean if Mexico did not recognize that Texas and California were part of the US? Nothing.

Europe has scant alternatives to Russian energy.

Russia does not need Western technology. Indeed, its military technology is superior to that in the West.

And Russia most certainly does not need Western loans. Indeed, it would be an act of insanity to accept them.

It is a self-serving Western myth that Russia needs foreign loans. This myth is enshrined in neoliberal economics, which is a device for Western exploitation and control of other countries. Russia’s most dangerous threat is the country’s neoliberal economists.

The Russian central bank has convinced the Russian government that it would be inflationary to finance Russian development projects with the issuance of central bank credit. Foreign loans are essential, claims the central bank.

Someone needs to teach the Russian central bank basic economics before Russia is turned into another Western vassal. Here is the lesson: When central bank credit is used to finance development projects, the supply of rubles increases but so does output from the projects. Thus, goods and services rise with the supply of rubles. When Russia borrows foreign currencies from abroad, the money supply also increases, but so does the foreign debt. Russia does not spend the foreign currencies on the project but puts them into its foreign exchange reserves. The central bank issues the same amount of rubles to pay the project’s bills as it would in the absence of the foreign loan. All the foreign loan does is to present Russia with an interest payment to a foreign creditor.

Foreign capital is not important to countries such as Russia and China. Both countries are perfectly capable of financing their own development. Indeed, China is the world’s largest creditor nation. Foreign loans are only important to countries that lack the internal resources for development and have to purchase the business know-how, techlology, and resources abroad with foreign currencies that their exports are insufficient to bring in.

This is not the case with Russia, which has large endowments of resources and a trade surplus. China’s development was given a boost by US corporations that moved their production for the US market offshore in order to pocket the difference in labor and regulatory costs.

Neoliberals argue that Russia needs privatization in order to cover its budget deficit. Russia’s government debt is only 17 percent of Russian GDP. According to official measures, US federal debt is 104 percent of GDP, 6.1 times higher than in Russia. If US federal debt is measured in real corrected terms, US federal debt is 185 percent of US GDP.http://www.paulcraigroberts.org/2014/07/08/deteriorating-economic-outlook/

Clearly, if the massive debt of the US government is not a problem, the tiny debt of Russia is not a problem.

Berke’s article is part of the effort to scam Russia by convincing the Russian government that its prosperity depends on unfavorable deals with the West. As Russia’s neoliberal economists believe this, the scam has a chance of success.

Another delusion affecting the Russian government is the belief that privatization brings in capital. This delusion caused the Russian government to turn over 20 percent of its oil company to foreign ownership. The only thing Russia achieved by this strategic blunder was to deliver 20 percent of its oil profits into foreign hands. For a one-time payment, Russia gave away 20 percent of its oil profits in perpetuity.

To repeat outselves, the greatest threat that Russia faces is not sanctions but the incompetence of its neoliberal economists who have been throughly brainwashed to serve US interests.

(Reprinted from PaulCraigRoberts.org by permission of author or representative)
 
• Category: Economics, Foreign Policy • Tags: Donald Trump, Neoliberalism, Russia 

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

While protestors and police are clashing on the inaugural parade route in Washington, D.C., the newly sworn-in President of the United States is lunching with the establishment in Washington — Some of the very people he called out in his inaugural address. Let’s have a look.

DONALD TRUMP: We are transferring power from Washington, D.C. and giving it back to you, the people.

CROWD: (applause)

DONALD TRUMP: For too long a small group in our nation’s capital has reaped the rewards of government while the people have borne the cost. Washington flourished but the people did not share in its wealth.

SHARMINI PERIES: On to discuss with me all of this is Michael Hudson. Michael has a new book out, “J is for Junk Economics: A Guide to Reality in the Age of Deception” (February 2017). Michael is a Distinguished Professor of Economics at the University of Missouri, Kansas City. Thanks for joining us, Michael.

MICHAEL HUDSON: Good to be here.

SHARMINI PERIES: So, Michael, that first, I think it’s the third or fourth paragraph in, where he really talks about the establishment, how it benefitted Washington, I would think you would have objection to that.

MICHAEL HUDSON: Well, the establishment he talked about wasn’t really Wall Street. He said, “When Washington got rich.” Bernie Sanders would have said, “When Wall Street got rich, the country didn’t.” So I think when Donald Trump says “Washington,” what he means is the government regulatory agencies. He’s going to cut them back. And what he means is that the IRS, the tax collectors, he’s going to cut them back by cutting taxes on all the Americans, meaning all of the 1% that are his Americans.

So, basically, you’re seeing a cutback in government. I’m sure you will see a cutback in the CIA and the NSA that are parts of the Democratic National Committee and their Hillary supporters. So I think there is going to be a fight within the foreign policy and the national security establishment. But I think that what Trump is really doing is going to be supporting the same 1% that President Obama and George Bush were supporting.

SHARMINI PERIES: Right. And that’s pretty evident with the cabinet he’s lining up, as well — the richest cabinet in U.S. history. And he’s actually taking from the very establishment in Washington, as well as Wall Street. So I’m sure it’ll be doubled down on, in terms of the kind of establishment we’re talking about.

Michael, President Trump said something very interesting about building America, and building America in his own image, I think. Let’s have a look at what he had to say.

DONALD TRUMP: We will build new roads and highways and bridges and airports and tunnels and railways all across our wonderful nation. We will get our people off of welfare and back to work rebuilding our country with American hands and American labor. We will follow two simple rules: Buy American and hire American.

SHARMINI PERIES: So, Michael, what does he mean by this kind of infrastructure building?

MICHAEL HUDSON: Well, he’s talked a lot about infrastructure and there are a lot of different ways of doing infrastructure. I don’t think his way will be the way that it was done a hundred years ago. The whole idea of the Republican Party in the 19th century was for the government to finance infrastructure, and especially transportation, to lower the cost of living and doing business. But I don’t think that’s what Trump is going to do, because he wants to cut back government spending and he wants to cut back taxation. So what I worry about is when he says, “I’m going to build infrastructure” is that it means that he’s going to create a huge trillion-dollar market for Wall Street’s high finance.

They’re going to fund infrastructure by bondholders, and through private-public partnership, rail lines and transportation lines. Who are going to be the beneficiaries of this, and who’s going to pay for it all? If the government doesn’t pay for it, it’s going to be the bondholders and Wall Street. And the question is what is the cost of this transportation going to be, and who will be the main beneficiaries?

A hundred years ago, it was to build free roads and it was to lower the cost of living. But the reverse is happening today. Take for example the New York City subway’s Second Avenue Line, which was just finished a couple of weeks ago. It calls for $10 billion for just six stations.

The way this was funded is for the Metropolitan Transport Authority that runs the subways to borrow $10 billion from Wall Street. It pays bondholders interest, and will meet this cost by raising subway fares for all the riders in New York. To the extent that the New York City and New York State subsidize it, they’re going to raise sales taxes here, and also income taxes. So New Yorkers are going to have to pay more for the subway.

Who are the beneficiaries?

The politicians say, “Well, the people along the transport lines are going to be the beneficiaries – people who live on Second Avenue and First Avenue and York Avenue, who had to take those crowded Lexington subways.” But the real beneficiaries are the landlords. The $10 billion that’s been spent on the Second Avenue subway is probably increasing their land values, the real estate values of real estate developers by from $10 to $20 billion.

Already, wage-earners who live on Second Avenue – the supposed beneficiaries – are complaining that they’re being told their rents are going to go up by a couple of hundred dollars a month. Now that these neighborhoods have more easy transport, that makes it more valuable. So they’re worried that they can’t afford to live there anymore. They worry that they will have to move to Queens, Westchester or outside of New York City.

So there’s a giant windfall for the landlords, a give-away thanks to the subway that cost $10 billion, making $10-20 billion of “capital” (land-value) gains.

All this could have been financed by a windfall gains tax. If the subway and transportation, such as Mr. Trump wants to build throughout the United States, is going to increase the value of the rent of location for real estate landlords and developers, then there could have been a windfall gains tax. That would have captured all this $10 billion added value from the subway, to repay the MTA, the subway authority, for the cost of building it. But that hasn’t been done.

So what you have is the public paying for the 1% to benefit. That looks to me like the plan that Mr. Trump has. So when he says he wants to help all Americans, he means he wants to help all Americans in the 1% by really letting Wall Street get a huge debt from the 99% of the Americans. It’s just the opposite of what people believe.

The same fight is going on in Vancouver. They’re trying to spend about $6 billion in transportation up in Canada. How are they doing it? The transportation – the bus lines and train lines – are going to increase what already is the highest priced real estate in Canada. This promises to make a bonanza for the landlords. But they’re paying for this transportation by a 0.5% sales tax, that is going to cost consumers in Vancouver $250 million a year. So, again, the users of the transportation are having to pay, not the property owners along the route. They get the gains.

I think you could call this the Thorstein Veblen Law: that whenever there is a public expenditure on infrastructure, the benefits go to the absentee owners, the landlords. Civic improvement is basically a real-estate development.

So I think Mr. Trump wants to turn the U.S. economy into the kind of real estate development that has made him so rich in New York. It will make his fellow developers rich, and it will make the banks that finance this infrastructure rich, but the people are going to have to pay for it in a much higher cost for transportation, much higher cost for all the infrastructure that he’s proposing.

So I think you could call Trump’s plan “public investment to create private profit”. That’s really his plan in a summary, it looks to me.

SHARMINI PERIES: Right. And one interesting thing with the new administration coming in, and you have pointed to this, Michael, is that at least the good news here is that we’re not going to be going to war with Russia. Instead, I think we’re poking our finger in the eye of the Chinese government. Give us a sense of what your thoughts are on that.

MICHAEL HUDSON: Well, there’s been a whole argument in the administration between Kissinger and Brzezinski. Both these men say, “We’ve got to divide and conquer. If another country tries to go its own way and be independent of America, we’ve got to smash it up. We’ve got to break up Russia and break up China.”

The question is what do the neocons do first? Kissinger says that the long-term enemy is China, because they’re smarter and larger. So you want to pry Russia away. You want to do nice to Russia and tell President Putin, “Look, if you go with us, we’ll give you Ukraine, we’ll pull back NATO, but we want to pry you back towards Europe and away from China.”

Brzezinski, being Polish, hates Russia and wants to go with China. So he says, “No, no. We’ve got to continue to fight Russia and back the Hillary group within the CIA and National Security Agency.”

It looks like Trump is following the Kissinger group, trying to split up Eurasia by backing Russia. I don’t think he has a chance in succeeding in this, because Putin can say, “Look, America changes its policies so much we can’t depend upon you. Obama and Secretary Kerry have broken every agreement that they have made with us. The Clintons have broken every agreement. We can’t trust America anymore. You’ve forced us to rely on China and Iran.” And of course, China also is supporting Iran because of its oil investments there.

So I think the Trump administration will fail to break up Eurasia – to break up the Shanghai Cooperation Organization of Russia, China and Iran. At that point I think Trump may get angry and go back to the Hillary-type confrontation that looks very dangerous.

SHARMINI PERIES: What do you make of these allegations in terms of the intelligence agencies and the proximity of Trump and some of his aides in terms of their proximity to Russia?

MICHAEL HUDSON: I think the idea of proximity to Russia is fake. It’s a smear campaign, and President Putin has already warned Trump that this is an attempt by the Deep State, by the Russia haters, to threaten a coup d’etat.

I think one of the first things that Trump is going to do to roll back government is to clear out the fakers in the CIA – the people who’ve been faking or leaking these documents against him. He’s going to move against the fake news outlets, led by The New York Times and The Washington Post. They’re pushing unsubstantiated rumors. They’re claiming that it was Russia that somehow threw the election to Trump, instead of the leaks from the Democratic National Committee being leaks, not computer hacks.

So I think Trump is going to clean out the Democratic policy neocons from the CIA and NSA. That’s a good thing. I think he feels hostile enough toward Hillary after all of this. So a house-cleaning is probably the best thing that could happen.

The problem is, we don’t know whether the people he’ll bring in will just be mirror images on the other side, so that instead of being anti-Russian they’ll be anti-Chinese and have the same kind of fake news that they give to The New York Times and The Washington Post that they’ve been giving for the last few months. There’s certainly a crisis of real news reporting, a crisis of accusations. I’ve never seen anything like it.

SHARINI PERIES: All right. I thank you so much for joining us today, Michael. And we look forward a future analysis from you.

MICHAEL HUDSON: Well, it’s good to be here on such an important day.

SHARMINI PERIES: And thank you for joining us on The Real News Network.

(Reprinted from Michael-Hudson.com by permission of author or representative)
 
• Category: Economics • Tags: Donald Trump, Government Spending 
Real Vision Interview Transcript with Steve Keen

With two renegade economists in one room in London for 90 minutes you can expect some pretty controversial opinions about the current economic establishment. This film has all the makings of a Real Vision classic, as Steve Keen interviews professor and author, Michael Hudson, sharing their radical views and an extraordinary depth of knowledge.

Discussing the complacency and complicity of traditional economic models, as taught in universities and adopted by central banks, Michael and Steve take us on a journey from a solar system to a galaxy of thought, taking in the history of economics to solutions for the ongoing global depression

Video Link:

Steve Keen: Often you’ll see somebody who’s a public speaker – or back in the old days, a public speake, who’d start with saying, “Unaccustomed as I am to public speaking.” Well, this is literally true for me this time, because I’m Professor Steve Keen from Kingston University. And I’m very much unaccustomed to being on this end of the camera, because rather than being the interviewee, I’m being the interviewer for my good friend and fellow rebel economist, Michael Hudson.

Michael, for those who don’t know him, is one of the few who not only saw the crisis coming, but was warning about the fact that we were inevitably going to have one, courtesy of financializing capitalism. And his two most recent books – this is the penultimate, right? [Keen's comments and questions henceforth in italics]

Michael Hudson: Yes. Penultimate.

Penultimate book. Still, of course, available. The Bubble and Beyond , which I’ve read most of. And this one I haven’t started reading yet, but I’m under orders to read it by the end of the year. Killing the Host .

Yes.

So, Michael, give us a bit of background to these and let’s just have a rave.

All right. Well, Killing the Host will be published in German at the end of the month of November, and, basically, it’s a more popular version of The Bubble and Beyond. And it shows that when the financial sector takes over, it’s very much like a parasite in nature. And people think of parasites simply as taking the life blood of the host and draining the energy. But in order to do that, the parasite has to have an enzyme to take over the host’s brain. And the key thing in nature is they take over the brain, and they convince the host that the free luncher is actually part of the host’s own body, and even its baby to be protected. And that’s what the financial sector has done.

Classical economics was all about separating the rent-extracting sectors – landlords, monopolies, and finance – from the rest of the economy. And that was unearned income. It wasn’t necessary. And the whole idea of classical economics from Quesnay’s Tableau Economique to all the way through Adam Smith and John Stuart Mill was to look at the finance sector and the landlord sector and monopolies as unnecessary. You’re going to get rid of them. You’re going to tax away all the land’s rent or else nationalize the land. And you are going to have public enterprises as basic infrastructure so that they couldn’t be monopolized.

Well, you had a revolution against classical economics in the 1890s and 1900s, and the national income now – accounts make it appear as if the financial sector and the real estate sector and the monopolies – oil and gas – are all contributing to GDP. So a few months ago, you had the head of Goldman Sachs – Lloyd Blankfein – say, the Goldman Sachs managers are the most productive workers in the United States, because we make $22 million a year in salary, and we get bonuses. And that’s all considered as contributing to GDP. That’s the financial services that we’re providing $22 million per manager of financial services.

Now what they don’t realize is that this $22 million per manager in that Goldman Sachs extracts money from the rest of the economy. It’s a zero-sum game. And instead of adding to the GDP, you should have –

A subtraction.

Yes, you should have – all of this is overhead – unnecessary. And since 2008, the 99% of the population in America, and I think in most of Europe, too, have seen their incomes go down. But the 1% have had their financial and real estate incomes go up so much more that there is an illusion of growth. And what’s been growing is the tumor, not the actual economic body.

Yeah. And this is the – I mean, if you look back at Ricardo and look at his arguments for comparative advantage, which has become the one horse pony of neoclassical economics. Everything’s about specialization. And they’ve fallen for this whole pea and shell trick that Ricardo put there to get rid of the corn laws. But when you read it and see, why did he do it – and I know I can say this to you, because you’ve actually read Ricardo, and far more of the classicals than in fact I’ve read, which is I don’t think there’s anybody else in the world I can say that to, but you clearly have.

When Ricardo says why he designed that model, it was so that he could argue for the reduction in the price of corn, which would mean that no change to the real income for the workers, because they still have to get the corn to stay alive. But the price of corn would drop, which meant the money going to the landlords would fall. And that money would instead go to the capitalists, which were therefore enable you to continue growing and grow for longer than you would if all the money was wasted by the landlords and frivolous behavior.

So even that particular absolute core of neoclassical thinking came out of Ricardo’s attempt to get the money away from the rentier class and get it to the capitalists where the investment can occur.

Well, of course, he really wanted it to be to the banks. Ricardo was the bank lobbyist of his day. He went into parliament to be the arguer for the bank. His brothers, by the way, ran the capital firm. They underwrote the Greek debt after 1832 that bankrupted Greece already in the 19th century, just as the IMF and the Troika are doing today.

Ricardo, being the bank lobbyist – how did banks make their money back in Ricardo’s day? You still had a landlord class in England, so they didn’t make their money making mortgage loans. Banks made their money mainly in international trade and international financial transactions.

–and things like that.

And Ricardo thought that if you had a division of labor and everybody specializing, then banks would have this huge market in export-import trade and financing collections outstanding and basically currency swaps. And Ricardo’s example of comparative advantage was let Portugal only produce wine. Let England produce cloth. And in his example, Portugal comes out ahead.

And England does as well, because the –

Yes, but not as much as Portugal. So if other countries will agree to be hewers of wood and drawers of water and let the industrial companies industrialize, somehow the raw materials people will benefit. And, of course, that’s not what happened at all.

So when Ricardo fought against the landlord class represented by Malthus, he basically wanted England to have to buy all of its grain abroad, so the bankers would benefit not only from British industrial exports to Portugal and America, but also get the import trade in grain.

Malthus said, “Wait a minute, the landlords are very productive. We employ coachmen. We buy nice clothes. Who would be the servants? Who would hire all the servants, if it weren’t for us extracting all of the rent?” And he said, landlords also are able to put – if you have protectionism in high prices, landlords are going to improve the quality of the soil, and we’re going to make increased productivity, as we did during the Napoleonic Wars when there wasn’t trade.

Ricardo said that’s impossible here. He wrote at the time, when you had the greatest revolution in agricultural chemistry in history. You had Justus von Liebig. You had all of the increased fertilizers, mechanization. Ricardo said, you have the original indestructible powers of the soil. You cannot destroy the environment.

The Americans broke from all of this and said, wait a minute, you have the slavery system, and the cotton and tobacco planters are destroying the soil. In America, we had the term mining the soil. Soil depletion goes down. If you specialize the way Ricardo did, you deplete the soil, you deplete the environment.

And so it’s this Ricardian model – this narrow-minded tunnel vision that prevents economists today from looking at how the environment is being harmed by oil and gas specialization. They deny global warming. And, most of all, the worst environmental damage is debt pollution. The economic environment is being polluted by running into debt and, of course, that’s what banks produced.

And that’s what Ricardo was advocating for. He had a financial theory that said it’s impossible for any country to have a balance of payments problem. Impossible for any country to have a problem repaying the debt that we’re negotiating with them, because of automatic stabilizers. The magic of the marketplace will mean everybody can always adjust, everything adjusts.

And then, of course, you had the Irish potato famine, and you had Nassau William Senior saying – when he was told that a million Irishman had died, he said, that is not enough. Economics is about equilibrium. For them to have equilibrium, more than a million must die. That’s the equilibrium of the neoliberals today. It lives on.

I mean, I’ve read Ricardo’s principles, obviously. And where did you find – because what I see in Ricardo, when I read Ricardo is the arguments about reducing the money going to the landlords. You must have read much more to get the background on the banker history and so on than I’ve managed to read. Where would they have been in Ricardo?

Well, he wrote – there were two –

Collected works, you read the collected works?

Yes. Ricardo – there were two schools of monetary theory in England. After the Napoleonic Wars, what happened, they had a post-war deflation. They tried to return the price of gold to the original price. This is the same idea of deflation that wrecked the American economy from the Civil War through about 1890, crucifying the price of gold. You had deflation.

There were two schools of thought. There was the banking school that Ricardo headed, the lobbyist for the banks. And there was the currency school with Thornton and all sorts of other great people. The currency school said debt matters. Ricardo said debt doesn’t matter. So the arguments you’re having today all found their predecessor in the 1830s in the bank arguments.

Now this is not taught in any of the history of economic thought.

The history of economic thought isn’t taught anymore either.

That’s the problem. They take mathematics. And mathematics it’s all about taking the existing status quo for granted. And if you had a history of economic thought, you’d know that Adam Smith and the adversaries of Ricardo, and John Stuart Mill, their idea of a free market was a market free from rent, free from the banks, free from monopoly. But now when you have the Austrian School and Hayek’s talk about the free market, they mean free for the parasite. Free for the predatory.

They don’t they mean that half the time. They’re so caught up in their own ideology. But that is a huge part of it. And to them, it’s – in that classic sense, people think Smith is a free
market person as they define free market today. But when looking at Smith’s writing, he was in favor of limits on the rate of interest.

His logic was that if you have – people who are willing to pay well above the rate set by the King are likely to be profligates. Projectors and profligates he called them, and if you give money to them, they’re almost certain to have wasted it. If they want to pay that much for it, they must want it for nefarious purposes. Having the legal rate set slightly below a maximum rate set by the King, means that banks would have to give their money to people who would make productive investment of it. So he was in favor of control of interest.

Now his main rival – and you’d know better than I do on this front, too, but – one of his main-

Jeremy Bentham.

Jeremy Bentham. Bentham coming out saying, he sees – you probably remember how he expressed it about the crying shame of – he was trying to show – to save people from being accused of the crying shame of usury. And saying usury had a bad name, and the rate of interest should be set by the market, etc, etc.

It’s all free market. And the rate of interest I noticed on British credit cards of where I’m staying is 19%. In America, it’s 29% penalty rate. And banks make more money in penalties than they do in interest. After the interest rates hit 20% in 1980, all the usury laws were abolished in the United States. So it’s predatory.

Adam Smith also said something else about money. He said that wars should not be financed by borrowing from bonds. That was called Dutch finance, because the Dutch investors were the main bond buyers. And he said, if wars – like the military spending that England is doing today in NATO – if wars had to be financed by direct taxation, people would really feel the burden of war, instead of issuing bonds, where you have to add the interest onto a tax on necessities. And every war that England went in – and Book V of Adam Smith’s Wealth of Nations lists every single tax on every single – that was added with every new bond issue, pricing England out of the market.

And Adam Smith said, look, interest is a cost of doing business. And if you’re going to have all of these taxes and all of these interests, you’re not going to be able to be a competitive industrial market.

Which is the situation that we’re in again today.

Indeed.

By falling for – the financial sector. One thing that I’ve just written in – wrote my new book is called Can We Avoid Another Financial Crisis? So my little promo here. And as part of that I focus on the level of private debt to GDP as I know you do too. And I haven’t shown you this, yet, but you know the graph of American private debt to GDP. Going from very low in the 1860s up to 140% say roughly of GDP in the Great Depression. Plunging down and then rising again. And every time you look at the American data, there’s this tendency for the level of debt to rise compared to GDP.

I expected the same thing for England. When I plotted it, from 1880 through to 1980, it never exceeded 70% of GDP. And it was a series of humps and ups and downs, OK. But it never went past 75% of GDP. Maggie Thatcher gets elected. Within two years there’s this exponential – like watching a Saturn 5 take off, from about 65% of GDP to 200%.

She was the useful idiot for the banking class.

Yeah. And that’s where the cities come from here, which I’m sure are going to please many of our viewers to call them that way. But this city was enabled by Thatcher, coming really out of her reading of Hayek.

Well, you’re speaking so fast that I want to make sure that the audience gets to –

I’m faster than you?

What? I’m speaking fast, too? Well, I think we have to explain something to the viewers.

Let’s say that debt is equal to 100% of GDP, which it is at least in almost every country. Now, if countries are only growing at 1%, then if you pay interest at usually 5%, a country would have to grow 5% per year – the GDP – just to pay the interest. And if countries are growing at 1%, and the interest rate for average that everybody pays, about 5% or 6%, then you’re going to have the actual economy shrinking every year as there’s this siphoning off of interest. That’s what debt deflation is.

And that’s the situation that England is in. That is turning eurozone into a dead zone. And it’s the situation of the US economy. That all of the surplus is paid for interest – not to mention financial returns, capital gains, and economic rent to the landlord class and to the monopolies.

So no wonder the economy is shrinking. Nobody has enough money to buy what they produce anymore. So that’s why there are so many vacancies in storefronts in New York. Why stores are going out of business. Restaurants are going out of business. There’s a squeeze on.

Yeah. Can you – is that palpable in the States? Because in England it’s not quite so palpable.

Yes. Well, just imagine the average paycheck. I don’t know if it’s similar. In the United States, the big chunk off the top of every paycheck is for housing. Now in America almost all mortgages – 85% of mortgages are guaranteed by the government and banks will write a mortgage up to the limit of 43% of your total income.

So imagine, here’s a family that in order to have a home is either paying 43% of its income on a mortgage, or it’s paying that in rent. The average – average – rent in New York City of
$4,500 a month. Well, you can imagine if the average salary is about $80,000, do the math for yourself.

Now in addition to that, people have to pay maybe 10% more of their income to the banks for credit card debt, student loans, auto debt. And then also taken off the front of every paycheck is 15% of a forced saving of social security and medical care. So that’s taken off. And there’s about another 15% recombination of state and local and federal income taxes. And then you have the value-added taxes. So you add all that up. To the 43%, to 10% to the banks, maybe the 25% for taxes, you have only about 25% of the average paycheck that’s available to be spent on goods and services.

Now think of the circular flow. The whole of economics was founded by a doctor, Francois Quesnay in France that looked at a national income like the circulation of blood in the body. But you have this blood being drained – 75% of the circular flow now is drained for what we call the FIRE sector – finance, insurance, and real estate.

And the ironic thing is that’s actually the way it’s titled inside the American national accounts. When I first heard you say the fire sector, I thought it was a nice acronym, before I’d actually dived into the NIPA –

National Income and Product Accounts.

And there, lo and behold, it’s labeled the FIRE sector.

Yes.

And it’s quite – that was Copland’s work, wasn’t it to put that

Yup.

That was brilliant work when you look at it, because that’s the gold standard of the flow of funds to work out where the money flows actually go. And the crazy thing is that if it hadn’t been for Copeland, we probably would have this information at all, because according to conventional economics, money doesn’t matter. They completely ignore all that stuff.

And everything is productive.

Everything is productive. And this nonsense – I mean, at the same time, you and I are both trying to say, you cannot have a model of capitalism which doesn’t include money and banks and debt.

And debt. And people even who do talk about money, like the monetarists, don’t talk about debt.

Exactly.

And they don’t realize that money is debt. One person’s savings is somebody else’s –

The problem they make there is that they get to the stage of talking about money and debt in the same sense that Fisher beautifully described it back in the debt deflation theory of great depressions is that – no, actually, it was in Booms and Depressions and First Principles. He said, that a man-to-man debt – I’m going to use the sexist language of the ’90s, or maybe the sexist language of today now with Donald Trump.

A man-to-man debt doesn’t matter, because if one person pays down his debt to another person, then his spending power is fallen by the money he had to forego to pay the debt, but the person who receives the money as repayment of debt then has additional cash, and it’s like a seesaw. They balance each other out. The average level remains the level of the fulcrum, it doesn’t go up and down.

But when you include banks in there, and, of course, banks are the people who generate debt, it’s an elevator. It goes up or down. If they are increasing the amount of debt in the economy, then you’re both getting higher. But if you start repaying, you both start heading down towards the ground.

Well, another way of saying this – it’s said in America, the debt doesn’t matter because we owe it to ourselves.

That’s Paul Krugman’s classical cliche.

Right. And the question is who are we, and who are ourselves? The we is the 99%. The ourselves are the banks and the 1%. So when you say, wait a minute, white man –

But it is it goes beyond that because, again, if that was the mantra that we were borrowing from the wealthy people, there’d be no money creation involved. There’d be debt creation without money creation.

Yes.

And that’s the link that they haven’t got right. Whereas when you know that when banks – and this is where the Bank of England must deserve a big pat on the back from people like ourselves that they came out and publicly said, as a highly respected official organization, banks create money when they lend, and, therefore, as well as providing –

And that creates deposits. They create money by creating deposits. You go to – for the audience – you go into a bank, you borrow money, the bank credits your checking account, and adds to the loan. It’s done by a computer. It’s not somebody’s savings. It’s not a recycling of the savings.

And this is the hassle you and I are having. We’re both arguing in favor of things like debt abolition in some sense. People think, oh, if you write off debt, what about the poor lender. Lender’s being ripped off. And that’s seeing in the sense of a man-to-man debt. That if you lent me $100, and I didn’t repay you, I’ve stolen $100 that you had to earn. You had to save and put aside to have.

But when you take it from a bank, the bank is making an entry in the asset in increasing its assets, making an entry into liability side in giving you a deposit. It isn’t a money warehouse, it’s a money factory.

That’s right.

And that’s the interest in producing as much as it can, because by producing debt, that’s their means to make a profit.

Debt is the bank’s business – and you call that endogenous money, and that’s what you write about in your articles.

Yeah. But you go into the parasite side of things.

Well, there’s a strategy for all of this. I used to work for Chase Manhattan for many years. And I worked for other banks. I was a bank analyst, so I saw how it was done.

While I was working for the bank, I was taking my PhD At New York University. And the courses had this fantasy about how banks work. I would say, wait a minute, this is not how – here’s how banks actually work. Here’s what happens, and I used the example – I was the economist for the central bank for the savings banks – and pointed out the idea that – well, I won’t even get into the details, but I got a C minus, because –

You got a C minus?

Yes, a C minus, because it was explained to me exactly what Nobel Prize winner Paul Samuelson and others say, you don’t understand, Mr. Hudson. Economics is all about assumptions. It’s about whether the logic is internally consistent. What you’re saying may be realistic, but it’s not internally consistent with the body of mainstream economics that we’re talking. You have to suspend disbelief. You have to act – we’re in an as-if world. And I thought, my god this should be in the literature department as science fiction, not in an economics school.

Yeah. This is actually where I meant to get this. How did you become a rebel in economics? I know you’ve got a family background.

My family. I was born a rebel, basically – I was born in Minneapolis, which was the only city in the world where being a Trotskyist was a career advancement opportunity. My father was fighting against the Stalinist trade unions. As soon as America went to war was thrown in jail for advocating the overthrow of the government by force and violence – the Minneapolis 17 – because there was a deal between the mafia – the mobsters that wanted to take over the truckers union that was organized by Trotskyists of Minneapolis and the Stalinists that promised Roosevelt not to go have any labor strikes during World War II if they’d throw the Trotskyists in jail.

So your dad ended up in jail over that particular ruse by the mafia?

Yes. And so everybody I knew growing up – I thought the draft, and people were drafted, I thought everybody was going to jail. I didn’t know really there was a war on. I thought it was just a class war. I didn’t know it was actually a military war. You know I’m at three or four years old.

Well, I went to New York, thinking I was going to be – I inherited the copyrights of Leon Trotsky when his widow died.

You actually, this is one thing that you better mention here, who your godfather.

I don’t want to mention that.

OK, OK, all right.

Well, nobody was interested in these, so I had to get a job. I met the Chief Economist for General Electric, a man who had been. He was the most – in one evening, he was the most brilliant man I’d ever met. My friend Gavin –

How old are you at this stage? In your early 20s or?

I was 21 years old. And my friend Gavin MacFadyen had gone to school with his daughter, and said, you’ve got to meet this man. And he talked about how the change in the water level – in the sunspots and in the weather would affect the water levels in the Midwest and that would affect the autumnal drain, where the farmers had to draw money from the banks, from the east and almost all the crises almost always happened in October, because of the autumnal drain. And he described it and it was such a beautiful, aesthetic flow of funds that, believe it or not, I got into economics, because it was beautiful and aesthetic.

And Terence, I must have talked to him every day for an hour a day for 30 years. And he said he would work with me if I would read – he had made the first translation of a book that was banned almost all over the world. Banned in Russia. Banned in China. Karl Marx’s history of economic theories called his Theories of Surplus Value.

It was banned at the time, was it?

There was no English translation. It was the only thing that wasn’t translated, because it was Marx’s history of thought outlining how a national income account should be made. And by doing – he showed that what Russia took as its national income account was thinking only material labor is productive. And so Russia’s national income accounts were not based on Marx, they were based on Adam Smith. And so they did not want the history of economic thought really discussed.

So, indeed, I went into – I studied basically classical economics. And classical economics from Smith, Mill, the others, all sort of – Marx was the last classical economist. And he pushed it to the logical extreme, because his principle was that capitalism itself is revolutionary. Capitalism in order to do what we talked about at the beginning of the show-
- in order to get rid of the landlord class, in order to get rid of the idle rich, in order to get rid of the monopolies, in order to get rid of the banks and make that a public utility, that’s socialism. And the logical tendency of industrial capitalism is toward socialism. Well, that was a radical thought.

Well, it turned out that when I went to Wall Street first for savings banks and then at Chase, by about 1968, all of the leading – there were about four leading economists. And Lazard Freres and other companies. We’d all meet once a month on Thursdays at a Japanese noodle place.

And on one occasion I remember at 9:30 in the evening, we were all discussing Volume III of Capital –

Bloody hell, OK.

Where Marx discussed the interest and rentier money as an unnecessary faux frais, false cost of production. And then we broke out laughing, wouldn’t it be – what if people knew that we’re supposed to be the bank economists, and we all have a Marxist background, and here we are discussing Volume III of Capital.

When Terence translated – Terence McCarthy – translated the Theories of Surplus Value as A History of Economic Doctrines – he founded Langland Press to do it – the Stalinist operatives broke into the printing house and poured acid over all the plates of Volume II of it. The Volume III is in actually three parts, three volumes, I mean the Theories of Surplus Value is three volumes. So Terence is only able to publish the first volume, not the other two volumes. Then the Stalinists came out with another translation confusing value and price. And mistranslating it.

That’s actually the Progress Press volume. Because the volume, I’ve read the Theories of Surplus Value in the Progress Press edition, which is from the Russian edition. Now –

There was a bad Stalinist version through London & Wishart. But finally, Progress Press did come out with a very good scholars edition of all three.

All right, which is probably the one I’ve read.

And that’s good.

But they tried to stop it.

Initially. I mean, finally they figured nobody cares about Marxism anymore in Russia. If Russia would have known about – Russia’s really the only country that has no Marxist background at all. If they would have known about Marxism, they never would have privatized and fallen for neoliberalism in 1991.

Yeah, well again, the labor theory of value, I think was a magic contributor there, because that whole ideology became a huge part of the politics and the way they tried to organize industry as well. And to me the false vision that labor’s the only source of surplus.

But what they didn’t – what was the function of the labor theory of value. It was to isolate all those elements of price that were not an element of value. That were not necessary for value. And rent was the excess of price over intrinsic value.

Now that’s the principle that the national income accounts should be on. You want the basic cost value. What does it cost to produce the goods and services in the things that you need. And then everything that’s not necessary for this, that’s extractive – whether it’s land rent or natural resource rent or monopoly rent or financial returns – this is not actual cost. Because we know that you could have countries like Soviet Russia, America, China, and Japan all having the same technology, but having completely different relationships with
the financial and the real estate and the monopoly sector. And you need a technological core, and then you show how much is unnecessary, how much is institutional in nature.

Your point about the bank chief economists all sitting down discussing the third volume of Capital. Trying to imagine that happening today is just impossible. If they discussed the third volume of anything, it’d be the third volume of Mas-Colell. Micro-economic theory. The horizons of modern economists are so limited that if we talked – I just imagine if we actually bumped into a modern neoclassical, knowing the training they’ve gotten in an academic world these days. If we mentioned the classics, they would think we’re talking about –

Hayek.

Lucas and econometric problems in price inflation. Or Muth on the cobweb cycle.

Well, it wouldn’t even be that. When I worked for banks, until about the 1970s, banks really had a research department. I did actual research and statistics. After I left the bank, they changed the name to research and publications. And it was all public relations.

Law suit stuff.

Citibank led it all. It was all lobbying, and it was all fictitious stuff.

And at least when I was at the bank, I had to do a study once with the oil industry, and David Rockefeller said, we want you to tell us really what the facts are. We want to figure it out. I’m telling you, if we don’t like it, we won’t publish it, but write whatever you want. Don’t think you have to please us and whitewash this. Give us the facts.

This was actually one of the Rockefellers telling you this?

Yeah. David Rockefeller. And I met with the head of Standard Oil and Socony, New York, there. And so I was always given completely free reign. I had to code everything. They were just worried that the Senate might subpoena my documents, because -

Too much information.

And figure it out. They didn’t. They wanted to know. But it was actual research. Later – today, it’s all public relations from the bank, and you’re just not going to get anything. I think the Bank of England is the only really innovative central bank that I can think of.

Well, certainly in terms of central banks.

And I can’t think of – I mean the Federal Reserve is still so dominated by the neoclassical canon, you don’t get anything interesting out it.

A precondition for getting a job at the Federal Reserve is not understanding how the economy works. If they mention your name, and people say, oh, yes, Steve Keen, I’m sorry, you’re over qualified for the position.

Actually, I do know. I had some colleagues working in a couple of hedge funds who told me that they had a meeting with Bernanke once. And one of their female staff had just transferred from the hedge fund to working at the Central Bank and she came along for this meeting. And Bernanke was actually questioning her about the mechanics of money transfers because he didn’t know it. And you find – literally, she found herself – she thought she’d be talking to a superior she could learn a lot from, and she found the guy’s actually quizzing her about the actual mechanics of money transfers.

Yeah. That’s what happens when you go through a PhD, and you actually spend your time in school, instead of in the real world.

But you spent – where did you do your PhD at?

New York University, because all they wanted was my money, not my mind. And other universities they actually insist that you actually go along and agree with what they say. And New York University, the biggest private university in America is just a business – all they wanted was the money, and that’s what I wanted. So I actually learned everything I know about economics while working on Wall Street. But I got the union card, which is a PhD that you need in order to get the job.

And what was your PhD on?

Well, it was on Erasmus Peshine Smith, the leading American economist of the 19th century who developed the energy theory of GDP. He thought product was ultimately reducible to energy.

I agree with him. And I’ve got to show you some maths on that shortly.

Yes. He was the economy – in 1853, the year the Republican Party was created in America, his manual of political economy outlined the Republican policy for half a century. Protective tariffs. A national bank. And internal improvements. And this was the old Whig policy of Henry Clay.

Peshine Smith was the law partner of William Seward, who everybody had expected to be the presidential candidate. But by being so outspoken against slavery, they decided to get a gray figure. Someone nobody had ever heard of that was – they hoped would be completely mediocre. Abraham Lincoln.

Are you kidding?

He made William Seward secretary of state, and after Seward resigned, he made a trip around the world and went to Japan. And they said, we want to break away from England’s free trade policy. So he sent Peshine Smith over to be an advisor to the Mikado, who they waited till the British ambassador went on vacation, passed protective tariffs. And Smith went native and had a Japanese mistress and wore a sword when he went out in a kimono and everything and introduced protective industrial policy to Japan.

Which is what turned it from being a rural colony of totally feudal in 1868 through to an industrial super power that could challenge the Germans and the Russians in the First World War.

Yes, and in the process Smith broke up with the coolie trade. A Japanese ship stopped a coolie transporting Chinese coolies to America. The case went I think to Bismarck or some to referee, and it blocked the coolie trade between China and Peru.

China and Peru?

Yes. But that stopped it for the whole new world. The whole Western hemisphere. The ship was on – Maria Luz, I think it was, going to up Peru, and Smith stopped that.

He’s somebody I’ve never heard of.

There’s a reason – isn’t that surprising that the most important economists of the 19th century, who shaped American policy, nobody’s not only heard of not Peshine Smith, but there was a whole American school of economics. It’s very interesting.

America did something that has relevance for America for today. After the North won the Civil War, they thought how are we going to teach protectionist, non-Ricardian, non- Malthusian economics. And they say, most of the economic courses were taught at prestige universities, and most universities in America were founded by religious orders to train the priesthood. And the political economy course was taught in the seniorly years, you know, the final one, and it’s all, markets are great.

So the solution was that you can’t reform these academics. They’re hopelessly tunnel visioned. So America founded state colleges with a different faculty, new people teaching rational, protectionist economics, and the business schools. And the first business school professor was Simon Patten at the University of Pennsylvania, the Wharton School, which was funded by industrial protectionists. And so you had in America this whole body of theory that now has been whitewashed out of textbooks into a kind of Orwellian memory hole.

Wow. And in some ways we’re reproducing the same struggles today.

Yes. And you can’t do it through the universities –

Again, I can’t – being at Kingston University, which is one of the recently converted polytechnics here. Way down the bottom of the picking order of the English university system. The same applies to the University of Missouri, Kansas City, for the modern monetary theory group. The New School, where all the – University of Utah. That’s where the non-orthodox thinkers are.

Whereas the top universities are reproducing the religion. And the thing is this is quite a successful strategy when you’re fighting an ideological war. But it’s not a successful strategy when you’re trying to manage a capitalist economy. And, unfortunately, they’re trying to do both at once. And, of course, what that leads to is the debt deflation episode we’re seeing now. Because according to the theories of this high priesthood, such things can’t happen.

Yes, reality doesn’t exist.

So we’ve got the same thing happening again now. That this high priesthood dominates the Cambridges and the Oxfords and the MITs and so on. And they’re like the religious colleges you were talking about in the 19th century. And then the approach – the groups that are critical of theory – not necessary critical of capitalism, in fact, because you’d say they’re trying to achieve capitalism, rather than the feudal system that the financial sector is taking us towards.

We’re all forced to teach in the low-rank universities, where the priests don’t want to work. And we find ourselves in badly funded institutions, poor administrations, poor locations, and the students, who don’t know any better, think that they’re going to get a better education by going to the top places, so we don’t necessarily get the good students, unless they themselves also revolt like we ended up doing ourselves.

Right. And what they get is an expensive Andy Warhol instead of a Durer.

Yeah. And with Andy Warhol, it’s just a photograph, guys, he didn’t really do any art to draw them.

So it is such a pain, because in this sense we’re seen as critics of capitalism. And as you said, like your father being thrown in jail and things like that. That sort of thing is we’re traitors, we’re the ones who are trying to bring capitalism down. But what we’re really trying to say is unless you control the financial sector, the financial sector will bring capitalism down.

Will control you. Yeah. You own the banks or the banks will own you. You own the public-
and that’s what mayor Tom Johnson of Cleveland, Ohio, said a century ago. If you don’t own the public utilities and the transport system and the streetcar system, the public utilities are going to own you.

Yeah. And that’s what ended up happening.

Yes, and Dennis Kucinich, who was a later mayor tried to prevent it, and the banks all tried to gang up on him and said, look, if you privatize the electric utilities, we’ll push you for governor. We’ll make your career. Privatize, and if you don’t, we’ll smash you. And Dennis said, I’m not going to privatize it. I’m going to save Cleveland the price in electricity, and they got rid of him. And it was 25 years later, they realized he was right all along, they elected him to Congress. And pushed him for the presidency.

But he didn’t get there.

He wasn’t the tallest candidate.

That’s a problem, isn’t it. He’s actually – the visuals are – if only he was the height of his wife, he might have had a chance of success.

Yes, they did give her as much visual as they could.

You and I are both campaigning for debt abolition?

Yes.

What you think our odds are, now after the last 10 years?

There are a lot of problems – people are realizing that it seems unthinkable to cancel the debts, but it’s also people have an avoidance of thinking, what happens if you don’t cancel the debts.

Exactly.

If you don’t cancel the debts, they’re going to keep growing, and all of the growth and national income is going to go to the creditors. And so the fact is that the debts aren’t owed to the we – to the 99%. The debts are owed to the 1%. 1% of the population has 75% of the financial assets. So and all of this – their growth has occurred since 1980. So what you’re doing is – the question is, who are you going to save? The economy or the banks?

And when President Obama came in, he promised that he was going to write down the debts. The mortgage debts to – especially the junk mortgages – to the actual real value of the homes that the junk mortgage people had taken out. Or and set the debt service – the money you have to pay every month to pay the mortgage, amortization, and principal, and interest to what the normal rental value of this would be.

Well, of course, as soon as he was elected, he dropped it all. He invited the bankers to the White House and said, boys, I’m the only guy standing between you and the pitchforks out there. Don’t worry, I can deliver my constituency to you.

So, basically, the Democratic Party broke its voters into a black constituency, a women’s constituency, a LSGBQ constituency, and they’re all for Wall Street. Instead of saving the economy, Obama bailed out and saved the banks by keeping the debts in place. And once
you have to pay that, it’s curtains. And so the end – everybody’s going to end up in Greece. Greece is where you’re going, if you’re don’t.

Unless you abolish the debts.

Yeah.

Yeah. There was that mortgage reset policy.

But it wasn’t policy – it was only in paper. Banks didn’t do it.

I think about what three – from what I understand about 300 people actually had their mortgages reset.

Yeah. It was all just a fiction.

Out of about 50, 60 million.

10 million. It was all fraudulent.

There was a particular individual as well I think who was involved in that, who was quite useless, the head of the organization as well. You might not know that particular detail. But again, even the person was put in charge of it was against the whole concept of debt writing off to begin with.

Well, no, you had the SIG Inspector General write a very good memoir as soon as he left, saying how Tim Geithner at the Treasury undercut everything that he was trying to do. And Sheila Bair head of the deposit insurance organization also explained how she was just sabotaged by the fact that Obama put all of the Wall Street lobbyists in charge of the Treasury and the Justice Department, so no banker would go to jail, because it was the bankers’ lobbyist who was the head of the Justice Department and as people.

And regarding the debt cancellation, people think it’s – how do you do it in the modern time. It’s impossible. Well, there is a perfect debt cancellation that should be the model. And that’s the German economic miracle of 1848. They canceled –

1848 or 1948?

1948.

1948, yeah.

Did I say, 18? That was the revolutions that didn’t go far enough, a century earlier.

That’s the one. Sorry, I thought you were getting your centuries mixed up.

Yes, I do that all the time.

Well, in 1948, because most of the debts were owed to the Nazis, people who had been Nazis in the war. All of the debts were annulled except for the debts that employers owed their workers, labor debts. And everybody had a minimum working – you could keep your minimum working balance up to a given amount. So they did a debt cancellation that was the German economic miracle. That was the free market.

But the trouble is this time around – look, if you go back to the original debt cancellation back in the time of the Sumerian civilization, because another part of your background is an archaeological focus. And just a bit of personal curiosity, how did that come about? Because as well as doing your research on 19th century economists we should have learned from and didn’t, you also got involved in archaeological research about the origins of money and culture.

Well, in 1979, there was – I was an advisor to UNITAR, the United Nations Institute for Training and Research for about three years. And I was writing a whole series of reports on the fact that the third world debt couldn’t be paid. This was just before Mexico –

Which year was this? 1970?

1982.

OK. I was doing similar work in Australia for the Freedom from Hunger campaign. Curious.

Well, we had a meeting in Mexico, organized by the Mexican president, who’d wanted to be head of the UN and thought if he had UNITAR come. So you know I gave the position of the rest of the staff. And I’d brought along a whole group, including some radical Canadians, including Kari Polanyi, was there.

Daughter of?

What?

Kari Polanyi?

Yes, the daughter of Karl Polanyi.

Right. OK.

Or Kari Polanyi. And so I gave my speech and saying that the debts couldn’t be paid. It turned the reparteur was, I suspect, a CIA plant, who gave the summary of my speech, saying that it would be hard, but third world could pay the debt.

I stood up and said, I’m pulling out the American delegation. I insist on an apology from the President of Mexico for this. This is a willful and malicious falsification of everything I’ve said by a lobbyist for the US banks and for the government. There was a riot. And then they tried to beat up all of the Americans they could find.

In this conference?

In Mexico City. I had a girlfriend who was part of a Dadaist painters group that was having a ballet, and I hid out, literally, on the ballet stage, while they were trying to look for me to beat up in Mexico. So I realized that debt cancellation was very political. And I just said, I’m going to write a history of debt cancellation.

And so I – it took me about a year to go back through the medieval times to Rome and to Greece, to Solon’s debt cancellations.

This is reading at this stage, rather than doing archaeological research?

Reading. So I went back – I had just moved down to Wall Street from where I was living to the Tribeca, one block from the World Trade Center. And then I got all of a sudden, there were references in the Jewish jubilee year to the Babylonians

But there was no economic history of Babylonia. So I begun to read about Sumer and Babylonia. And I found that every new ruler for thousands of years – from 2,500 BC down to about 500 BC – would start their reign by abolishing all of the debts owed to the palace and temples, all of the consumer debts. Not the business debts. The business debts – silver debts – were left in place. But the personal debts – the usury – that were paid in grain would be annulled.

When there was a failure of grain and people – the debtor’s, the harvesters, the citizens couldn’t pay their debts, the ruler would proclaim a clean slate. The word the rulers used in Babylonian was andurarum. And that’s the word that in Hebrew, deror, used for the Jubilee year. in Leviticus 25.

Then I did more reading, and I realized that when you know what these words mean, when Jesus gave his first sermon, reported in Luke 4 – the first sermon that he gave. He unrolled the scroll to Isaiah and said, I have come to proclaim the year of the Lord. The year of the Lord was the word for deror, for debt cancellation. And what he’d said was I’ve come to insist in abolishing the debts. And his rival was the chief rabbi of the pharisees, and who said who had the prose book – the small print, every debtor to borrow money had to sign, I will not insist on my rights to have the debts canceled in the jubilee year.

So I wrote a book – a history of this – by about, I think, 1988 and 1990, and submitted it to a university press. They submitted it in a right wing Assyriologist that said, it’s impossible to cancel the debts, because if you cancel the debts, no one would lend you money.

Take it in the first place.

But the problem – most debts didn’t arise from borrowing money. Most debts arise just like they do for the third world countries today. From not paying a bill. You ran up – if you were a Babylonian, during the crop year, you’d go to the bar, to the ale woman, and you’d – and we have all this on record. And you’d have put it on the tab, and they’d keep a tab for how much you would owe for the beer you drank to be paid on the threshing floor when the harvest was in. And if there was a failure in the harvest, or if there were just a new ruler wanting to restore balance in the economy, they would – the debts wouldn’t have to be paid.

Well, they actually had a model – a number of models in Sumer and in Babylonian times. We have the economic models taught to the students in 1800 BC. They’re more sophisticated than any model used today except for yours. Because the model had on the one hand compound interest. And we have the test exercises. How long does it take a debt to double? Any interest rate is a doubling time. Well, it took five years to double it 20%, which was –

Linear. Compound. Yeah.

Back then. And there was no compound interest. You couldn’t let the debt compound.

But it doubles in five years. How long does it take to quadruple? 10 years. How long does it take to multiply 64 times? The answer is 30 years. So you can see that –

It was simply unsustainable. It was obviously unsustainable.

Now in addition to doing the debt, they had what is the growth of a herd. And then they had growth of output. And it was an s-curve, just like almost every curve of whether it’s refrigerators or television sets or iPhones –

Which is the saturation point.

It’s always an S-curve. So they had the s-curve, they had the compound interest growing through it. And you can see that at a certain point, the debts mount up in excess of the ability to pay.

Now modern theory – mathematical theory – says, wait a minute, equilibrium means everybody can pay. There’s no unpayably high debt. And they don’t see what for 2000 years was basic principles of rulership in Mesopotamia. The Greeks know it. This is what really should be taught.

Well, I was when I was teaching money and banking at the New School in the ’60s and ’70s, I couldn’t fit it into the curriculum. And that was why I stopped teaching. I thought the whole curriculum didn’t have room for debt and rent and the kind of things that I wanted to talk about finance. I had a big following of students, but they weren’t the core courses in the curriculum there.

And same thing with Kansas City. When the graduates, who learn what you and I are talking about money, graduate, they can’t get jobs, because jobs are conditional upon being able to publish in prestigious economic reviews, and they’re all controlled by University of Chicago and by neoliberals.

And the genius of Chicago free market theory is you can’t have a free market Chicago style unless you have a totalitarian state that will prevent any alternative to the theory. When they went to Chile, Harberger is said to have sat in a hotel room saying, here are the professors you have to kill. Pinochet and the American embassy said, here are the labor leaders you have to kill. And here are the intellectuals you have to kill.

You cannot have a free market neoliberal style unless you are willing to either kill or exile or suppress or censor any alternative to your theory, because the theory doesn’t work. It’s fiction. It’s junk economics.

Well, what we find – this is what I found is quite intriguing right now, because the mainstream actually do believe in their theory. They actually – they genuinely –

Useful idiots.

Useful – and they also believe that their theory is a good way to manage the system. So what they’ve had by the purge they’ve managed to achieve – not quite as drastically as Chile, thank god – but the purge they managed to achieve in intellectual economics to make them just that the sole mainstream and knock out any alternative arguments meant that they took over economic policy as well as economic theory. And pushing it forward led them to the financial crisis that they could not see coming, because they didn’t even include the variables that cause the financial system in their models.

That’s right.

Now what you’re seeing 10 years after the crisis is, finally, some awareness coming through that our models are completely at variance with the real world.

Well, my next book is called J is for Junk Economics. And I’m going to have that out in December. I’m just correcting the page proofs now. But I’m juxtaposing our reality economics to their junk economics.

But as to where – I mean, will we succeed? I mean the classic thing is you and I are both fighting for realism. Now realism with an edge, because we’ve seen the impact of unrealism right back from Roman times forward to now. But capitalism needs realism to function. But it doesn’t need realism to maintain its ideology.

But they put the propogandist in charge of the planners. It’s just like the banks. It’s as if the banks are run by the public relations people who have this patter talk about debt is good for you, debt will make you rich. And it’s one thing to have them there to advertise for the people – the usual Orwellian deception. But you have to have somebody who knows what’s happening.

At the same time.

And they don’t have any one who knows.

That sense of you need someone like you – you need two bank research units. One for like yours giving the actual information to the Rockefellers of what’s actually happening and the other public relations for the public.

Yes, that’s what they need. Yes, but they don’t.

But the reality is they got rid of the back one. And what I find amusing about all the conspiracy theorists – the right wing and left wing conspiracy theorists that see this all being like a Rothschild plot and stuff like that. They think the banks are operating with you in the back room and the public relations people in the front. But no, they’ve got the public relations people in the front and in the back. And, therefore, giving completely misleading advice about how the system works.

That’s it.

It’s worse than think, funnily enough.

This is what Thorstein Veblen called educated incapacity or trained incompetence. You’re trained not to understand the reality when it comes up.

You have – you’re the only person I can think of who’s read far more of the literature than I’ve read. When you read, when you did read, what did you do? Did you take massive written notes of everything and have stacks?

I haunted the bookstores. I’m a little older than you. So in the ’60s – I mean, I knew all of the book dealers, and I’d ask – I had to get the books that Marx talked about and the history of economic theories. But I also asked, are there any other sort of strange books? I’d – what’s this book here? And I’d found books by people who’d nobody ever heard of. Like A Clue to the Economic Labyrinth by Michael Flursheim. Great books. And I found the American protectionists. I found Peshine Smith.

That’s how you discovered him before you did your PhD.

Yeah. I couldn’t have discovered him after I did the PhD about him.

No way.

So I found Calvin Colton and Alexander Everett and Henry Clay and Henry Carey and Simon Patten and all these books that – what are these books. And so, I said, if you, let me know more. And I was the only guy who bought them. Most people wanted first editions of Adam Smith. And I was the only guy that wanted –

All the obscure texts that they had all the same.

Yeah.

Have you still got that collection?

No, I had to sell it. I decided when I moved – once I got this feeling that I wanted to write on debt cancellation, I mean I sold my art collection. Most of it was burgled, actually, and I never got it back – the money from the insurance company. But I sold the books, because I’d read them already. And, essentially, thought I’d rather have my own free time than have the books. So, essentially, I sold what I had, had my free time to do the studies, and, I mean, I ended up OK. But I can’t carry the books around. That would be like a shell.

What about what about the notes? Did you take massive handwritten notes? Have you got those? Or you typed?

Yes. I typed up notes on everything. Yes.

OK. So you’ve those sitting somewhere.

I’ve got all the notes that I took.

Because when I read your books, that’s what I find. The voluminous references. And what look like in anybody else, they’d be in footnotes, if they existed at all, because they couldn’t be, because nobody else has read as much as you’ve read of the literature. But then you just find this – you put it together in your brain in a way that – like we’re going through this talk right now, I’m sure people watching and thinking, how the hell does he recall all this stuff. And it’s an amazingly organized structure of knowledge, far broader than any modern economist actually accumulates.

And it’s really because I always had an end in mind. The first discussion that I had with Terence McCarthy, who got me into economics was to realize that the debts couldn’t be paid. And he told me if I read tried to read everything ever written on usury, I still couldn’t
read it during my lifetime. But he said the big problem of our time is the debt. They don’t realize that –

So he was inspiration for that particular ?

Yes.

What about your – l mean, the line, every time I use it, I say my good friend Michael Hudson’s line is. I embellish it a bit. I’m saying, the debts that can’t be repaid won’t be repaid. And what I add is all you have to work at is how you’re not going to repay them. Which is it.

He wanted me to study that. And that’s why he wanted me to work on Wall Street. And from the very beginning, my focus was on the ability to pay debt and the financial side – looking at the financial system and the flow of funds, and so everything that I was reading, I was organizing.

You know, every economic theory begins with a conclusion and they work back from the conclusion is what kind of logic is going to lead to this.

Exactly.

It’s a reverse of – it’s not empirical. So the is free market people said, how can we tell people that a lower wages are good.

Make a model that the free market gets to equilibrium.

How can we tell people that austerity is good for you? Well, what assumptions are necessary to believe the IMF austerity plan –

Is going to work.

Is good, and all the IMF riots are bad. And so they have the fictitious line of reasoning that they engineer for that. And I was free of that.

And partly because of my political background, I always – I had to go to a school where we had to read Mein Kampf in class. This was the University of Chicago Lab School.

You had to read Mein Kampf in class?

Yes. The Social Science teacher had a sign over his board, “Give them all what the Rosenbergs got.” And I thought he meant communists. But he meant Jews. And in the class, he would call me a commie. But we had a real Stalinist in the class. Danny Landau. And he called me a fascist. And for the first time – the only time in my life I was the voice of reason in the middle.

I converted the class into Trotskyism. Recruited what became basically the leadership of the Young People’s Socialist League, and the Trotskyists, and my friends. And that was the time in my life when I was right in – that was my idea of being in the middle – a centrist.

Yeah. And this is as a school student, like 16?

It still seems realistic to me and this should be the center. So that was my radicalizing high school experience, where I realized – everybody should have a schooling experience where the teacher is in authority and completely so wrong that all of the students know that it’s all full of bullshit, and they lose their trust in authority, and they realize they have to think for themselves. If education did its job, it would be a radicalizing experience by giving you these incompetents and accusers.

I had a similar – like I benefited from a similar sort of thing in some ways. There were two teachers in particular I can think who did exactly what you’re talking about, unintentionally of course. I went to a Marist Brothers school. And there was one teacher who was so duplicitous in his treatment.

My class was sort of divided into the tough side and the brain side. I was the chief of the brain side, and there was a tough gang as well. And he let us have discussions, which he tried to try to chair. And we just got more and more verbal and vocal in our discussions. It began talking about haircuts, and the pill, et cetera, et cetera, and much more progressive. And he told the class we could say whatever we like, it would never go outside the room.

Then one day he was ill, and a replacement teacher came inside. And we’re having our usual conversation just like the other guy was there. And suddenly this guy explodes, I heard what a blasphemous lot your class was, but I didn’t believe it, and now I know. And he’s admonishing us, you could feel these two groups just come together and think that asshole blew our cover.

And he came in the next day, and there was just a wall of 64 kids – we were known as the 32-32 fighting each other. You said you wouldn’t say what we spoke about inside this
room. He had to be replaced inside a Catholic school. The next day, he was removed as our school teacher. We got somebody else.

So that was the same sort of thing, experiencing. And it made you think outside the confines. And what I find weird, because that’s again what I – that’s who I am and that’s who you are as well. And yet you find yourself surrounded by people who follow this stuff. And to me this comes down to trying to understand why does it happen.

I believe people – we see ourselves as critical and curious, wanting to know how things work creatures compared to animals that don’t actually think at all. But I think what we are-
we’re belief systems. We see something. We try to get a belief system that explains how something functions. And we become wedded to the belief system.

And when we share a belief system that makes us extremely powerful against other forces, versus actual lions on the Serengeti or whatever else. We can take on any other species. But now we find ourselves in a world we’ve created out of our belief systems, where the main threat to our existence are those very belief systems. And you and I are now trying to break through that one over debt.

Yup. One friend of mine taught sociology at the University of Chicago. And he was trying to tell them, there is such a thing is that a belief system, and there is the orthodox point of view, and I forget the Veblen term he used. And one of the students said, yes, that’s what we’ve come here to learn.

The brainwashed yes.

I know. I know.

We want to rise.

Again, like even on the radical side. I had a lot of friends who were Marxists. In my student days, I was leading the revolt at Sydney University over the teaching of economics back in 1973 as an undergrad student, just because I regarded the neoclassical stuff as total nonsense, but having abandoned that and having abandoned Catholic religion, as well, I didn’t go to Marx as somebody that I wanted to get a new religion from. I wanted to read Marx and understand the logic of his thinking.

And I was very much skeptic about the labor theory of value. I wanted a serious convincing and that made sense, because I was looking at all these cranes on the skyline of Sydney in

1973, and I was thinking, I just can’t imagine they’re not adding value somehow to output. But that’s a long –

Of course they are. I wish they would have called it the rent theory of price.

Yeah, that would be better. But what – some years later, on the bus I met one of this old Marxist mob, we’d actually kicked in the door of the vice chancellor’s office, you know, at one of our little demos once. And we’re just having a personal conversation, like you and I are having to some extent now about how we got our orientations in life. And he talked about being a school student. And he said, I remember the day that I found Marx. And I thought – I didn’t say it, but I thought to myself, that’s exactly how somebody would say, I found Jesus. He went from one belief system to another belief system.

I find the situation worse in academia. In Wall Street, they know my background. They knew all of our backgrounds. They didn’t care. All they cared about in Wall Street was whether we were right or not and could make good forecasts. And because I could make good forecasts, I did very well.

In the university, they didn’t care at all whether we knew reality. All they wanted to know was are we part of your ideological gang. You know the theme that you have for the ‘on our side’. And no reality. And so I found much more academic freedom on Wall Street than I ever found in the university.

Well, that’s a similar thing that I’m now going through. I’ve been battling through the university sector all the way through my life. That’s where of I’ve done, my battling was there. And you’re right. What I find now, people would expect – that my academic colleagues think, nobody in the finance sector would talk to somebody like Keen, because he’s such a critic of the finance sector. That’s where I get most of my invitations. Because, again, they want people who can actually remove the veil.

These other people want to see what’s to happening.

They want to see what’s actually happening.

Yeah, because there’s money involved.

Yeah. It’s serious stuff. This is actually matters.

Yeah, and these other people – once you get tenure, you don’t have to think anymore.

So it’s a priesthood thing. Because the irony now is that priesthoods have been actually taken over the running of capitalism. And you and I – again the thing that I find frustrating about being critics of bad theory, rather than critics of the system itself fundamentally is that people – when the system is working OK, people think the people who are wearing the mantle of experts must know how it functions. So they don’t bother about economics. They’d rather watch football and want to talk about football and talk about grid iron and soccer than talk about economics. Only after a crisis occurs, do they start talking about economics.

So you and I are lucky in that sense to be alive during a financial crisis, because we have many predecessors. Minsky and Gottlieb being the two most important recent ones who died before.

Well, Minsky was also a Marxist. I mean he didn’t talk about it, but his children told me he gave them Capital – that was the first thing he gave them to read.

You’re talking to Alan.

Yeah.

What’s your Alan story?

Well, just- I don’t have a particular Alan story –

Well, my particular one is actually on this very issue. Because Alan was telling me how he and his father had a usual sort of father-son schism that tends to occur quite regularly, and he didn’t want to study economics. But in his 30s he got more interested and went to his dad finally and said, you know, what book would you recommend me to read first to get into economics.

And he said his dad went into his study, and he came out with a book, and he said, this is the first one you should read. And it says volume one of Das Kapital. And, of course, Minsky couldn’t admit that in academic circles, because it was the McCarthy experience.

Well, no. He told me that he was radicalized at the University of Chicago by the vice president candidate with Norman Thomas on the socialist – Maynard Krieger. And Krieger used to be over at our house a lot. I mean this is part of the group that I grew up around for that. While he and his wife and his children you know will talk to me about Marxism, the Levy Institute and the people around Minsky are sort of embarrassed about that, because they’re trying to cover it up. But that was – he also followed Volume III of Capital.

So people who look at our show, they should read Volume III not only have Capital, but Book III of Theories of Surplus Value.

Well, that’s the – I mean, I was with them when I got my beginning in academia I was doing – my master’s thesis which was on Marx’s theory of value, because I believed Marx’s dialectics contradicted the labor theory of value, and so I – I found that in the Capital Volume I, I found where I saw the contradiction occurring. And though Marx’s theory was far richer than the labor theory of value. It was a –

Whole theory of society.

Yeah. But I then had to go back and read everything Marx wrote from 1844 through to third volume of Capital in chronological order.

But you know the Theories of Surplus Value Marx had meant to be the first volume of Capital, and he summarized that in his critique of political economy, which was his sort of summary of the history of economic thought.

It’s supposed to be a six volume set, and, actually, in that sense Capital as published is one book –

And international. A whole – international trade. So it was enough to me that I wrote that, that was my first big volume in what I taught.

But that’s again, this is one reason I want to get history of economic thought back into universities once more, because that’s not only the – we’re talking about people that wouldn’t even turn up in any history of thought the modern crowd would even consider doing. Their history began in 1973 so far as they’re concerned.

But this richness that you get out of reading history of economic thought doesn’t let you get trapped in any of the particular eddies that you see people getting trapped in. Not just, I’m not just talking about neoclassicals here. I’m talking about some of the other –

A theory of society.

Yeah.

And there’s another reason for that – that all reformers – the classical economists were reformers. They wanted to free industrial capitalism from feudalism. They wanted to get rid of the landlords who’d conquered the land. They wanted to get rid of the monopolists.

And all of the reformers, including you and me, look at the – we have a picture of the overall economy, because we’re showing how something whether it’s bad or good will affect the overall economy. The anti-reformers have something in common – a methodology.

And the methodology is a very narrow minded. Only look at the market as the whole economy. Only look at individuals. So an individual will borrow from another individual.

Not a systemic.

Not looking at banks. Not looking at how the flow of interest and financial gains and capital gains do not appear in the national income. And yet that’s what the name of the game is capital gains, making asset price inflation. We look at the whole economy. But the Austrian School, the Chicago School, the Neoclassical School, the neoliberals carve things up only as how individuals make their money. And that’s really the difference.

Once you can get students to adopt this narrow, tunnel-visioned methodology, they’re not going to see what you and I are talking about, which is the whole society. And that’s what all of the classical economists were talking about. Pro and con. From Smith, Malthus, and Ricardo – they had a great debate between Malthus and Ricardo. It was something that took me a long time to get through. John Stuart Mill. And it all led to Marx. And that traumatized.

I’m going to finish –ask one question if I can, which I think is important. What’s your method for debt abolition? How would you go about reducing the debt?

You’d have to do it on a case-by-case. In Greece’s case, I would have simply called the – Greece’s problem was foreign debt – official government debt. I would have said, this is odious debt. We’re not going to pay it. You, the IMF, knew that we couldn’t pay.

However, the debt is about $50 billion. The Lagarde list of kleptocrats holding accounts in Switzerland just happened to be what we owe. Take that money, folks. But you’re not going to get it from us, because this was simply theft.

For domestic debt, it would depend on a situation. I know you have a plan, and your plan is mathematically logical. The question is how to get it politically, and you almost have to play it by ear when the political situation comes up. But you realize that if you cancel the debts, they’re going to be – the counter to that, is oh, gee, you’re going to give some people a free lunch. And what about all of the poor people that have saved. And you see quite rightly that you have to give some compensation to people who’ve saved up to a middle class degree. But not an exorbitant degree. And I think you’ve worked it out.

So we’re common on the modern debt jubilee?

Yes, we’re common.

Sounds good. Let’s go have dinner then.

(Reprinted from Real Vision by permission of author or representative)
 
• Category: Economics, Ideology • Tags: Classical Economics, Debt, Wall Street 

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

And we’re unpacking some economic mythologies here with Michael Hudson who joins us in our Baltimore studio. Thank you so much for joining us Michael.

MICHAEL HUDSON: Good to be here.

PERIES: Michael has a new book out, J Is for Junk Economics: A Survivor’s Guide to Economic Vocabulary in an Age of Deception. Michael, so let’s continue our discussion about the various myths that are out there that we need to be aware of in order to understand the economy. Part of the problem is ordinary people, partly some because of this terminologies that you described so well in your book is led to feel that the economy is so abstract, its removed from them. They’re not engaged in it. It’s all about the stock market or the housing market or what the big banks are doing. But we are very active agents in the economy everyday. So in that sense, the real estate market is the only thing that seems to be somewhat real for people because people do buy and sell their house and sometimes its foreclosed on them and they have to move out. They have to then rent somebody else’s house that’s owned by somebody else. So, let’s talk about the real estate market and how it’s mythologies for us.

HUDSON: People have the idea that when house prices go up, somehow everybody’s getting richer. And it’s true that the entry to the middle class for the last hundred years has been to be able to own your own home. From about 1945 to mid-1980, families were able to ride a wave of rising house prices. They thought they were all getting richer. Then prices went even higher up between about 2001 to 2008 as Allan Greenspan flooded the economy with money – that is, credit (peoples’ debt to the banks). People still had the idea that just like their parents got rich off of rising housing prices and were able to put them through school and give they a better life, now they’re getting richer.

What they don’t realize is that the reason house prices go up isn’t simply because population grows or nature makes them go up. There are two factors. One, the public sector pays a lot of money on infrastructure. It builds new schools and parks and roads and sewer systems. Every time it builds a new transportation system, property goes up. When New York City built a subway in on 2nd Avenue, property prices are going up there. So, you have the public sector spending money on transportation. Taxpayers have to pay but the landlords all benefit and their taxes don’t go up.

But most of all, think what a house is worth. It is worth whatever a bank is going to lend against it. The fact is that none of us have enough money to pay down cash for a house. All of us have to take out a mortgage and how much we can pay and whether we can outbid the next guy who’d like that house would be, who’s going to borrow the most money?

When I became an adult in the 1960’s there was a rule of thumb. Families could borrow up to where the mortgage would absorb 25% of their income. They would get a 30-year mortgage that, at the end of 30 years, would pay itself off and they would owe nothing. Then, when they left the job market after having worked for 30 years, they would own their home outright, free and clear.

By 2008 matters had changed drastically. Banks were lending 99% and even 100% mortgage. So you could get a house for nothing. Just sign the 100% mortgage, and in many cases you didn’t even have to pay any interest, or take any of your income for 3 years. That is why housing prices rose. It wasn’t because property was worth more. It wasn’t because people were earning more and population was rising. Housing prices were going up because banks were making junk mortgages. It was all on credit.

Was this really making home buyers richer? Was it helping create a middle class? The proportion of the population owning their homes did rise – but after 2008 it plunged back down when foreclosure time arrived and the Obama Administration re-negged on its promises to write down junk-mortgage debts to realistic prices and carrying charges that reflected actual rental values.

The result was that instead while house prices were going up, they didn’t think about the fact that their debt was going up proportionally. All their increased house price was matched by the increased debt that people were taking on. Instead of paying 25% of their income on the mortgage, which was the rule in 1960’s, the government today, in 2016, will provide a Federal Housing Authority guarantee for mortgages that absorb up to 43% of the borrower’s income. That’s a huge, historically unprecedented ratio, 43%. It’s made the bank rich, not homeowners.

In Germany where I was last month, the average rent is between 10 and 15% of family income. There are very low prices there, for historical reasons. So ask yourself how can you expect American factory workers to compete with German factory workers, when you have to pay 43% of your income for a mortgage and they have to pay only 15% of their income. There’s no way you can compete. So instead of making the U.S. economy richer by housing prices going up, it’s actually made the economy less competitive, leading to more unemployment.

Of course there’s one other facto that makes housing prices go up. That’s property tax cuts.

This is a radical change, and it has helped banks much more than homeowners. Every economy in the world before about 1800 used to depend primarily on the land tax. Ever since the Stone Age, Bronze Age and classical antiquity, the land tax was what was the basis of taxation. That was the criterion for citizenship in Greece and Rome. Governments financed themselves by taxing the land. After William the Conqueror conquered England in 1066, a few years later he had the Domesday Book written up to calculate how much rent tax everyone had to pay on their land.

Water, all of this tax was privatized. The Revolt of the Barons sought to privatize the rent tax instead of making land a public utility.

Fast forward to today. In the United States since the Reagan administration, there’s been a steady cut in the real estate tax. At first glance, many homeowners think that this saves them money and helps the middle class get richer. What they don’t realize is that when the real estate taxes are cut, that leaves more rental value of the land available for new buyers to pledge to pay the banks in interest. The basic principle is that rent is for paying interest. This is true in commercial real estate as well as residential real estate.

Bankers know that every time there’s a property tax cut, they can make a larger mortgage loan against that property. The result is that instead of paying taxes, new homeowners pay interest to the bank. The higher interest payment absorbs the tax cut.

Meanwhile since they’re not paying taxes on real estate, the government – local governments especially – find themselves in a budget squeeze. They’re not getting the real estate tax revenue as before, especially California with its Proposition 13. So, they have to find the tax revenue elsewhere – for instance, by sales taxes on what con summers buy. Some cities and states impose an income tax on labor. But they don’t tax dividends or Wall Street.

The result is that if you are a wage earner, they tax your wage withholding, impose excise taxes and sales taxes on the things people buy. Not houses, not stocks and bonds, not the things that rich people buy, but the things that the middle class and the working class buy. They end up with the tax burden. And landlords get richer, especially commercial property owners.

What this tax shift means is that housing prices have been pushed up by shifting taxes off real estate, off the Donald Trumps of the world, onto homeowners, renters and consumers – the people who are not millionaires. But most people don’t realize why prices for real estate are going up. Most of all, they don’t realize that they’re not really better off if the price housing goes up, if their debt goes up even more. They didn’t anticipate that in 2008, housing prices would plunge and the debts would remain in place. Suddenly many families found themselves in what economists call negative equity. That’s the position that 10 million American families were in when they were foreclosed upon after 2008.

And just now, as soon as the election was over in November, foreclosure rates have gone up sharply. It’s as if Wall Street has said, “Okay, we got the suckers to vote, now we’re going to slam and begin foreclosing on them like anything. That’s exactly what’s happening in New York where I live. Foreclosure rates way up. You’re seeing a transfer of property from debtors to creditors.

PERIES: And Donald Trump in his interview on 60 Minutes on Sunday with Lesley Stahl said the first thing he’s going to do, he has a bill waiting which is going to cut taxes. So what does he mean by this,and what will it mean for us?

HUDSON: Nobody knows what it means because we don’t know whether he’s just going to turn the presidency over to the Republican Party’s lobbyists to write the bill. The implication is that when he talks about cutting taxes, being a narcissist he means cutting taxes for himself. He doesn’t mean cutting taxes on most people. There may be a small token tax cut for other people, but a big cut in the taxes on the highest wealth brackets. So, you can be sure that his constituency is going to get the biggest tax cuts. Not your constituency that watches this show.

PERIES: Here you’re talking about Wall Street getting more tax cuts?

HUDSON: Right.

PERIES: All right Michael, thank you so much for joining us.

HUDSON: Good to be here.

PERIES: And thank you for joining us on the Real News Network

(Reprinted from TRNN by permission of author or representative)
 
• Category: Economics • Tags: Real Estate, Taxes 

SHARMINI PERIES, TRNN: Welcome back to the Real News Network. I’m Sharmini Peries coming to you from Baltimore.

Today I’m being joined in our Baltimore studio by economist Michael Hudson. Michael has a new book out J is for Junk Economics: A Survivor’s Guide to Economic Vocabulary in an Age of Deception. Michael is a distinguished Research Professor of Economics at the University of Missouri, Kansas City. Thanks so much for joining us Michael.

MICHAEL HUDSON: Good to be here in your Baltimore studio.

PERIES: Thank you. So Michael, in the first segment we spoke more generally in terms of how people are misled through our policy makers in Washington in particular. But give us some specific examples of some of the terms used to mislead us.

HUDSON: Well take the word capital gains. When most people think about capital gains, they have an image of industry growing and innovation taking place. There’s an indication as if somehow when real estate and housing prices go up, everybody’s getting richer. When stock prices go up, the economies got richer. So Hillary Clinton was able to say, look at how the stock market soared in the last 8 years thanks to Mr. Obama.

Well the stock market has soared, but not the employees working for these companies. Most of the capital gains don’t reflect what the textbooks say. The textbooks say that a company is worth whatever it’s expected future earnings are. So the reason stocks are going up and bonds are going up and real estate prices are rising again is that rents are going up, profits are going up and the economy is expanding. It’s as if and everybody is getting richer. But thay’s not why the stock market has gone up.

The stock market has gone up since 2008 in America, Europe and all over the world because central banks have flooded the economy with new money. They didn’t create this money to hire workers. They didn’t create it to build infrastructure, they didn’t create money to invest in the economy. They didn’t create the money to pay off the mortgages of people who had junk mortgages and were exploitive. They didn’t create the money to write of student loans. All the money that was created, every penny, was created to give to the banks – to the Wall Street banks at 0.1% interests to create reserves at the Federal Reserve so that the banks could then lend out money. And what did they do? Who did they lend it to?

For one thing, they lent to corporate raiders. So part of the reason the stock market has gone up is that corporate raiders have borrowed very inexpensively, at say 1% or a bit more from a bank, and bought companies whose dividend rates are 3% or 4 or 5%. They’re after what’s called the arbitrage, the difference in the two rates. So you take over a company with borrowed money. As a result of paying interest to the banks and this borrowed money, you don’t have to pay income tax on it because this is counted as a cost of doing business, not as a cost of takeover.

The first thing they do is tighten working condition. They work labor harder. They let the labor force go. When people retire, they don’t hire new workers. They just work the remaining workers all the more. So, what’s happened isn’t a new investment. It’s just the opposite. It’s disinvestment. It’s asset stripping. What creates the stock market going up is not capital formation. It’s asset stripping. When Donald Trump calls that wealth creation, it means his wealth – meaning the money he’s been able to make. But that money has been made by making the economy poorer.

So, when people talk about the economy, they have to realize that it’s actually money layers. Not everybody is a millionaire working on Wall Street. Some people actually have to work for paychecks and out of their paychecks they have to pay rising healthcare costs, rising money to the banks, rising debt service. They have to borrow more money just to break even. Their rents are going way up to larger portions of their income.

So, what people are actually left with to spend is maybe 25 to 30% of their income on goods and services, after paying taxes and after paying the FIRE sector (Finance, Insurance, Real Estate). Whether it’s housing insurance or mortgage insurance. So there’s an idea of distracting people. Don’t think of your condition. Think of how the overall economy is doing. But don’t think of the economy as an overall unit. Think of the stock market as the economy. Think of the rich people as the economy. Look at the yachts that are made. Somebody’s living a lot better. Couldn’t it be you?

Well they don’t explain is why it’s not you. The reason “they” are living better is what used to be called a transfer payment. Something that is not really earned, but is just a transfer of income, like from a rent when a landlord raises the rent, all of a sudden for the same house. Nobody’s invested more. Nobody’s saying “Oh, your rent’s going up by about $50 a month this month. No that’s a transfer payment.” But you just have to pay more. The landlord didn’t do anything to earn that more money. He just found that he’s able to squeeze more money out of you.

Squeezing money out of you to pay a rentier class – that was a word that used to be used 100 years ago. The rentiers were people who lived on rents. They were coupon clippers, they were landlords, they were the idle rich who inherited money. Somehow you have even the words widows and orphans. People say you have to provide large capital gains, meaning debt financed asset price inflation, so that the widows and orphans can survive. The widows and orphans that are referred to are wealthy people living on trust funds. Or they’re living on alimony. Or they’re living on inherited wealth. People forget that before 1900, widows and orphans used to be poor people. We’re talking Charles Dickens type novels. Widows and orphans were the people who needed welfare. They weren’t the millionaires.

So today when people talk about widows and orphans, they mean millionaires. When they talk about the low interest rates that capitalists aren’t making to get rich enough, that’s really hurting the pension funds. Our hearts bleed for the workers. But their hearts aren’t really bleeding for the workers. They’re trotting out pension funds as their factotums to say, “Make the pension funds richer.” And behind them is the fact that 75% of all the stocks and bonds are really owned by just a small percentage of the American population they’re really talking about themselves.

So, you have the economic vocabulary turning into vocabulary of deception. So, I go over what this vocabulary is and what the concepts are and I also talk about what the original concepts were in classical economics. Everyone from Adam Smith, John Stewart Mill, they were all reforms. What they wanted to reform was getting rid of this parasitic landlord class that had conquered England in 1066 and it’s the heirs of the military warlords who ended up taking the land and making everybody pay them and all of their descendants just for having been conquered.

You can see the carry-over of this today. The rent that people have to pay, the money they have to pay the banks instead of having a public option. That’s the price they still have to pay for being conquered. The group that I’m working with is trying to promote a public option. We’re trying to promote public banking that would provide credit cards, banking services, basic vanilla services at a fraction of the price that Chase Manhattan or Citibank or Bank of America charge.

Most of these charges that people pay are economically unnecessary. There’s no real cost behind them. There’s no real value behind them. So, they’re what the classical economist called empty pricing. Prices with no real cost value. What they called rent and fictitious capital. Capital claims on junk mortgage borrowers. The pretense is that all these debts can be paid but it’s all fictitious, because everybody knows – at least on Wall Street everybody knows – that many debts can’t be paid. Somebody has to default, and Wall Street’s plan is to make the government reimburse the banks, like the bailouts that happened in 2008, so that they don’t lose. “Let’s pass all of the loss onto the tax payers without changing the banks, without throwing our guys in jail even though these were fraudulent mortgages.”

PERIES: And the government itself doesn’t pay its debt.

HUDSON: That’s right. The whole idea is that it doesn’t. At least if it does pay the debt, it only pays the wealthy bondholders, not Social Security recipients or pensioners.

There are two kinds of debts that governments have. They have a debt to the bondholders and they do pay that. They have a debt to Social Security recipients. Hillary promised her Wall Street backers that she was going to cut back Social Security. She was going to cut back social spending, Social Security and medical care, so that the government would have enough money to pay her backers on Wall Street. So she was indeed Obama’s legacy, standing for Wall Street.

A stand in is a politician who can deliver her constituency to her Wall Street backers. That’s what a politician does in America. You get a constituency; you make them believe your promises, and then you turn them over to your financial campaign backers. That’s what politics has become and that’s as much an art of deception as economics is.

PERIES: Now Donald Trump is proposing to spend trillions of dollars on infrastructure development. That sounds very good. Of course, in the immediate future that means jobs for people. But what is the problem with that kind of infrastructure development in the long term and what kind of plan is he thinking of when he’s talking about infrastructure development?

HUDSON: There are many ways of building infrastructure. The way Donald Trump would like, would be to spend a hundred million dollars building a new bridge in the highway. Then he would like to sell it, privatize it to a private buyer like himself, for 10 million dollars. So the government would spend a huge amount of money that could’ve been used for a free bridge or a free road. He’ll then sell it for 10 million dollars to a private owner, who will put up a toll booth and charge money for coming across, and make a mint.

This is what happened in England under Margaret Thatcher. This is called Thatcherism and it’s what destroyed the English economy. It’s what’s destroying the European economy and turning Europe into a dead zone. Alternatively, you could do infrastructure in the way of a subsidy to the economy at large instead of to a special interest. A classical infrastructure program would be for the government to indeed pay for rebuilding this. But the whole idea of what made America rich in the 19th century was the government developed infrastructure and provided its services freely to the population. If you begin to charge people for bridges, for roads and for parking meters as in Chicago, and for everything else that’s being privatized, you’re going to have even higher costs of living. Wages will have going to go up, and it will be even harder to compete with foreign countries and to make exports, because nobody can afford to pay the prices that the American workers have to pay in export competition with Asia or even Europe or Germany.

Germany doesn’t have all of these costs. It has very low rental charges, at least in the East. Maybe 10-15% of their income – higher in Western Germany, but not 40% as we have here. Low-priced public health, a free autobahn to drive on. Donald Trump wants essentially to raise the cost of living for everybody and give the public domain away to his Republican backers, and essentially leave the whole country unemployed – but the 1% is going to be very, very rich.

PERIES: Right. Now let’s go back to some specific examples in terms of the kind of infrastructure Donald Trump wants to build. He wants to build new airports. He says our airports are outdated. He wants to build new roads and new bridges, and build a wall over the US-Mexico border. All of these are considered infrastructure. In the past we’ve been told that public-private partnerships are a good thing. It even sounds good, public-private partnerships for the betterment of society. But it really isn’t. In terms of myth making, where does this take us?

HUDSON: What’s called a public partnership is really a one-way partnership. The private sector tells the government what to do. The costs are born by the government, which bears all the risks. The profits go to the private sector. It really means we’re creating an opportunity for banks to make a killing on making loans. All this will be financed by bank credit. Banks or bond holders are going to be paid high interest rates.

The government could create this money the same way banks do. The government has computer keyboards, which is how a bank creates money. They could create their own money without having to pay interest to anyone. They could charge the airlines for the cost, or they could provide the airports more freely. But public partnerships are designed to quadruple or quintuple the actual costs of doing business, and pretend that this is in the public interest instead of just in that of the banks and the corporate insiders the banks are willing to lend money to.

Investigative journalists looked at just one horror story after another of private public partnerships in London’s railroads. Look at what England did with water. Public Private partnership for water make people now pay huge amounts just to get it, which used to be free. The transportation quality goes down, while the price goes way up. So the partnership is a very exploitative. We’re not talking about an equal partnership. We’re talking about a dominant/submissive sadomasochistic partnership.

PERIES: Then the point you were making is the government can print all the money they want if they want to invest it in infrastructure and own that infrastructure. It can make money to then pay back the treasury if it needs to. But instead they’re going to borrow from these banks and bondholders, and then be indebted. So is this kind of debt a bad thing?

HUDSON: Well the debt is bad when you have to repay it. All new money is a kind of debt. All money is created on a computer nowadays. You can look at it in terms of a balance sheet. When you go into a bank and want a loan, the bank will give you a bank deposit and you’ll sign a promissory note. The bank has an asset and you have a debt to the bank. You can spend your deposit any way you want, but the bank charges money for this.

The government can do the same thing. The Treasury can just mint a 1 trillion dollar platinum coin, for instance. Give it to the Federal Reserve and the Fed can issue notes against it. You could call it whatever you want. It’s all constitutional because you can assign any price level you want to a coin. All such money is just created artificially.

So, it’s a monopoly, it’s a legal privilege. For thousands of years, from Mesopotamia through Greece and Rome, money was created by the temples to make sure that it was honest money. But it was privatized after over thousands of years, and now banks charge for something that the government can do for free.

PERIES: Michael, for Donald Trump and the Republicans, they are against creating debt aren’t they?

HUDSON: No. They know that most people are afraid of going into debt. Because if you go into debt, you actually have to repay it. Government debt doesn’t have to be repaid. If you repaid government debt, there wouldn’t be any more money. What they’re really looking for is that the way to cut debt their way is by cutting the deficit – and what they want to cut above all is Social Security. They want to a sort of downsize it. Hillary wanted to put FICA wage withholding into the stock market, and to pay less social spending. Her backers wanted less medical care. They want to spend less money on the 95% of the population so that all the money gets spent on the top 5%.

So, they’re really against what debt is spent for. They’re against democratic debt. They’re against democracy. What they really want is oligarchic debt which used to be state socialism. Government will only give money to the banks. They’re all for the kind of debt that is the bank bailout in 2008. They’re all for giving money to Wall Street. They’re all for giving subsidies to Donald Trump for building his buildings in New York and enabling him to make a killing. They’re just against giving debt to the workers or to the middle class or to the cities or to anyone who’s not one of the 5%.

PERIES: Alright so this is the kind of austerity plan that Paul Ryan?

HUDSON: Austerity is the word.

PERIES: Is he trying to promote that he wants Donald Trump to sign onto.

HUDSON: Right.

PERIES: Alright Michael I thank you so much for joining us today. And thank you for joining us on the Real News Network.

Michael Hudson’s new book J is for Junk Economics will be released on January 20.

(Reprinted from TRNN by permission of author or representative)
 
• Category: Economics • Tags: Donald Trump, Wall Street 
It’s Time for the Clintons, Rubin to Go – and Soros too

In the week leading up to last Tuesday’s election the press was busy writing obituaries for the Republican Party. This continued even after Donald Trump’s “surprising” victory – which, like the 2008 bank-fraud crash, “nobody could have expected.” The pretense is that Trump saw what no other politician saw: that the economy has not recovered since 2008.

Democrats still seem amazed that voters are more concerned about economic conditions and resentment against Wall Street (no bankers jailed, few junk mortgages written down). It is a sign of their wrong path that party strategists are holding onto the same identity politics they have used since the 1960s to divide Americans into hyphenated special-interest groups.

Obviously, the bottom 95 Percent realize that their incomes and net worth have declined, not recovered. National Income and Federal Reserve statistics show that all growth has accrued to just 5 percent of the population. Hillary is said to have spent $1 billion on polling, TV advertising and high-salaried staff members, but managed not to foresee the political reaction to this polarization. She and her coterie ignored economic policy as soon as Bernie was shoved out of the way and his followers all but told to join a third party. Her campaign speech tried to convince voters that they were better off than they were eight years ago. They knew better!

So the question now is whether Donald Trump will really a maverick and shake up the Republican Party. There seems to be a fight going on for Donald’s soul – or at least the personnel he appoints to his cabinet. Thursday and Friday saw corporate lobbyists in the Republican leadership love-bombing him like the Moonies or Hari Krishna cults welcoming a new potential recruit. Will he simply surrender now and pass on the real work of government to the Republican apparatchiks?

The stock market thinks so! On Wednesday it soared almost by 300 points, and repeated this gain on Thursday, setting a DJIA record! Pharmaceuticals are way up, as higher drug prices loom for Medicaid and Medicare. Stocks of the pipelines and major environmental polluters are soaring, from oil and gas to coal, mining and forestry, expecting U.S. environmental leadership to be as dead under Trump as it was under Obama and his push for the TPP and TTIP (with its fines for any government daring to impose standards that cost these companies money). On the bright side, these “trade” agreements to enable corporations to block public laws protecting the environment, consumers and society at large are now presumably dead.

For now, personalities are policy. A problem with this is that anyone who runs for president is in it partly for applause. That was Carter’s weak point, leading him to cave into Democratic apparatchiks in 1974. It looks like Trump may be a similar susceptibility. He wants to be loved, and the Republican lobbyists are offering plenty of applause if only he will turn to them and break his campaign promises in the way that Obama did in 2008. It would undo his hope to be a great president and champion of the working class that was his image leading up to November 8.

 

The fight for the Democratic Party’s future (dare I say “soul”?)

In her Wednesday morning post mortem speech, Hillary made a bizarre request for young people (especially young women) to become politically active as Democrats after her own model. What made this so strange is that the Democratic National Committee has done everything it can to discourage millennials from running. There are few young candidates – except for corporate and Wall Street Republicans running as Blue Dog Democrats. The left has not been welcome in the party for a decade – unless it confines itself only to rhetoric and demagogy, not actual content. For Hillary’s DNC coterie the problem with millennials is that they are not shills for Wall Street. The treatment of Bernie Sanders is exemplary. The DNC threw down the gauntlet.

Instead of a love fest within the Democratic Party’s ranks, the blame game is burning. The Democrats raised a reported $182 million dollars running up to the election. But when Russ Feingold in Wisconsin and other candidates in Michigan, Minnesota and Pennsylvania asked for help. Hillary monopolized it all for TV ads, leaving these candidates in the lurch. The election seemed to be all about her, about personality and identity politics, not about the economic issues paramount in most voters’ minds.

Six months ago the polls showed her the $1 billion spent on data polling, TV ads and immense staff of sycophants to have been a vast exercise in GIGO. From May to June the Democratic National Committee (DNC) saw polls showing Bernie Sanders beating Trump, but Hillary losing. Did the Democratic leadership really prefer to lose with Hillary than win behind him and his social democratic reformers.

Hillary doesn’t learn. Over the weekend she claimed that her analysis showed that FBI director Comey’s reports “rais[ing] doubts that were groundless, baseless,” stopped her momentum. This was on a par with the New York Times analysis that had showed her with an 84 percent probability of winning last Tuesday. She still hasn’t admitted that here analysis was inaccurate.

What is the Democratic Party’s former constituency of labor and progressive reformers to do? Are they to stand by and let the party be captured in Hillary’s wake by Robert Rubin’s Goldman Sachs-Citigroup gang that backed her and Obama?

If the party is to be recaptured, now is the moment to move. The 2016 election sounded the death knell for identity politics. Its aim was to persuade voters not to think of their identity in economic terms, but to think of themselves as women or as racial and ethnic groups first and foremost, not as having common economic interests. This strategy to distract voters from economic policies has obviously failed.

It did not work with women. In Florida, only 51 percent of white women are estimated to have voted for Hillary. It didn’t even work very well in ethnic Hispanic precincts. They too were more concerned about their own job opportunities.

The ethnic card did work with the blacks (although not so strongly; fewer blacks voted for Hillary than had showed up for Obama). Under the Obama administration for the past eight years, blacks have done worse in terms of income and net worth than any other grouping, according to the Federal Reserve Board’s statistics. But black voters were distracted from their economic interests by the Democrats’ ethnic-identity politics.

This election showed that voters have a sense of when they’re being lied to. After eight years of Obama’s demagogy, pretending to support the people but delivering his constituency to his financial backers on Wall Street. “Identity politics” has given way to the stronger force of economic distress. Mobilizing identity politics behind a Wall Street program will no longer work.

If we are indeed experiencing a revival of economic class consciousness, who should lead the fight to clean up the Democratic Party Wall Street leadership? Will it be the Wall Street wing, or can Bernie and perhaps Elizabeth Warren make their move?

There is only one way to rescue the Democrats from the Clintons and Rubin’s gang. That is to save the Democratic Party from being tarred irreversibly as the party of Wall Street and neocon brinkmanship. It is necessary to tell the Clintons and the Rubin gang from Wall Street to leave now. And take Evan Bayh with them.

 

The danger of not taking this opportunity to clean out the party now

The Democratic Party can save itself only by focusing on economic issues – in a way that reverses its neoliberal stance under Obama, and indeed going back to Bill Clinton’s pro-Wall Street administration. The Democrats need to do what Britain’s Labour Party did by cleaning out Tony Blair’s Thatcherites. As Paul Craig Roberts wrote over the weekend: “Change cannot occur if the displaced ruling class is left intact after a revolution against them. We have proof of this throughout South America. Every revolution by the indigenous people has left unmolested the Spanish ruling class, and every revolution has been overthrown by collusion between the ruling class and Washington.”[1]Paul Craig Roberts, “The Anti-Trump Protesters Are Tools of the Oligarchy,” November 11, 2016. Otherwise the Democrats will be left as an empty shell.

Now is the time for Bernie Sanders, Elizabeth Warren and the few other progressives who have not been kept out of office by the DNC to make their move and appoint their own nominees to the DNC. If they fail, the Democratic Party is dead.

An indication of how hard the present Democratic Party leadership will fight against this change of allegiance is reflected in their long fight against Bernie Sanders and other progressives going back to Dennis Kucinich. The past five days of MoveOn demonstrations sponsored by Hillary’s backer George Soros may be an attempt to preempt the expected push by Bernie’s supporters, by backing Howard Dean for head of the DNC while organizing groups to be called on for what may be an American “Maidan Spring.”

Perhaps some leading Democrats preferred to lose with their Wall Street candidate Hillary than win with a reformer who would have edged them out of their right-wing positions. But the main problem was hubris. Hillary’s coterie thought they could make their own reality. They believed that hundreds of millions of dollars of TV and other advertising could sway voters. But eight years of Obama’s rescue of Wall Street instead of the economy was enough for most voters to see how deceptive his promises had been. And they distrusted Hillary’s pretended embrace of Bernie’s opposition to TPP.

The Rust Belt swing states that shifted away from backing Obama for the last two terms are not racist states. They voted for Obama twice, after all. But seeing his support Wall Street, they had lost faith in her credibility – and were won by Bernie in his primaries against Hillary.

Donald Trump is thus Obama’s legacy. Last week’s vote was a backlash. Hillary thought that getting Barack and Michelle Obama to campaign as her surrogates would help, but it turned out to be the kiss of death. Obama egged her on by urging voters to “save his legacy” by supporting her as his Third Term. But voters did not want his legacy of giveaways to the banks, the pharmaceutical and health-insurance monopolies.

Most of all, it was Hillary’s asking voters to ignore her economic loyalty to Wall Street simply to elect a woman, and her McCarthy-like accusations that Trump was “Putin’s candidate” (duly echoed by Paul Krugman). On Wednesday, Obama’s former Ambassador to Russia, Michael McFaul tweeted that “Putin intervened in our elections and succeeded.” It was as if the Republicans and even the FBI were a kind of fifth column for the KGB. Her receptiveness to cutting back Social Security and steering wage withholding into the stock market did not help – especially her hedge fund campaign contributors. Compulsory health-insurance fees continue to rise for healthy young people rise as the main profit center that Obamacare has offered the health-insurance monopoly.

The anti-Trump rallies mobilized by George Soros and MoveOn look like a preemptive attempt to capture the potential socialist left for the old Clinton divide-and-conquer strategy. The group was defeated five years ago when it tried to capture Occupy Wall Street to make it part of the Democratic Party. It’s attempt to make a comeback right now should be heard as an urgent call to Bernie’s supporters and other “real” Democrats that they need to create an alternative pretty quickly so as not to let “socialism” be captured by the Soros and his apparatchiks carried over from the Clinton campaign.

References

[1] Paul Craig Roberts, “The Anti-Trump Protesters Are Tools of the Oligarchy,” November 11, 2016.

 

In 2012 a conference was held on Thorstein Veblen in Istanbul. It was sponsored by a socialist labor union, the Chamber of Electrical Engineers. We were asked why not focus on Marx. My answer was that Marx had died a generation earlier, and the major critique of finance capitalism had passed to Veblen. This book (from which my following remarks are excerpted) is a series of essays, including by myself and another NC friend, Michael Perelman.

Edited excerpt from Michael Hudson and Ahmet Oncu, eds., Absentee Ownership and its Discontents: Critical Essays on the legacy of Thorstein Veblen (ISLET 2016, $35). [Just published.]

Simon Patten recalled in 1912 that his generation of American economists – most of whom studied in Germany in the 1870s – were taught that John Stuart Mill’s 1848 Principles of Political Economy was the high-water mark of classical thought, and nationalizing monopolies or regulating their prices to reflect actual production costs. However, Patten added, Mill’s reformist philosophy turned out to be “not a goal but a half-way house” toward the Progressive Era’s reforms, above all either nationalizing land or fully taxing it, and either nationalizing monopolies or at least regulating their prices to bring them in line with actual production costs. Mill was “a thinker becoming a socialist without seeing what the change really meant,” Patten concluded. “The Nineteenth Century epoch ends not with the theories of Mill but with the more logical systems of Karl Marx and Henry George.” But George was only a muckraking journalist and anti-academic, so the classical approach to political economy evolved above all through Thorstein Veblen.

Like Marx and the rising socialist agitation, Veblen’s ideas threatened what he called the “vested interests.” What made his analysis so disturbing was what he retained from the past. Classical political economy had used the labor theory of value to isolate the elements of price that had no counterpart in necessary costs of production. Economic rent – the excess of price over this “real cost” – is unearned income. It is an overhead charge for access to land, minerals or other natural resources, bank credit or other basic needs that are monopolized.

HudsonBook This concept of unearned income as an unnecessary element of price led Veblen to focus on what now is called financial engineering, speculation and debt leveraging. The perception that a rising proportion of income and wealth is an unearned “free lunch” formed the take-off point for him to put real estate and financial scheming at the center of his analysis, at a time when mainstream economists were dropping these areas of concern. Veblen’s exclusion from today’s curriculum is part of the reaction against classical political economy’s program of social reform. By the time he began to publish in the 1890s, academic economics was in the throes of a counter-revolution sponsored by large landholders, bankers and monopolists denying that there was any such thing as unearned income. The new post-classical mainstream accepted existing property rights and privileges as a “given.” In contrast to Veblen’s argument that the economy was all about organizing predatory schemes, this approach culminated in Milton Friedman’s Chicago School defense the pro-rentier argument: “There is no such thing as a free lunch.”

This blunt denial rejected th e preceding three centuries of classical value and price theory, along with its policy conclusions promoting taxation of land and other natural endowments, and financial reform. Dropped from view was rentier overhead in the form of predatory and unproductive forms of wealth seeking. The post-classical mainstream treats all income as “earned,” including that of rentiers. Lacking the classical concepts of unproductive labor, credit or investment, today’s textbooks describe income as a reward for one’s contribution to production, and wealth is being “saved up” as a result of someone’s productive investment effort, not as an unearned or predatory free lunch.

This shift in theory has shaped the seemingly empirical National Income and Product Accounts to indulge in a circular reasoning that treats recipients of rent and interest as providing a service, an economic contribution equal to whatever rentiers receive as “earnings.” There are no categories for unearned income or speculative asset-price gains.

Veblen described the largest sectors of the economy where quick fortunes were made as being all about organizing rent-seeking opportunities to obtain income without real cost. He viewed psychological utility as social in character. In contrast to food or other satiable bodily needs characterized by diminishing marginal utility – e.g., from eating food and becoming satiated – his concept of conspicuous consumption emphasized the insatiable drives to raise one’s social status.

The desire for consumer goods was characterized by fads for the most pricey goods as trophies of one’s wealth. The result was the mercenary vulgarity of wealthy Babbitts turning culture into an arena for shifting fashion, all to impress others with similar shallow sensitivities. The largest factor defining status was the neighborhood where one’s home was located. Housing was not simply a basic living space as “use value.” It established one’s position in society, duly enhanced by civic boosterism, public subsidy and infrastructure spending.

“The Great American Game”: Real Estate

Describing real estate as being “the great American game,” Veblen focused on how future prices were enhanced over present values by advertising and promotion. “Real estate is an enterprise in ‘futures,’ designed to get something for nothing from the unwary, of whom it is believed by experienced persons that ‘there is one born every minute.’” Farmers and other rural families from the surrounding lands look “forward to the time when the community’s advancing needs will enable them to realise on the inflated values of their real estate,” that is, find a sucker “to take them at their word and become their debtors in the amount which they say their real estate is worth.” The entire operation, from individual properties to the town as a whole, is “an enterprise in salesmanship,” with collusion being the rule.

Retailers in small towns collude to exploit farmers, a practice broken by the spread of mail order catalogues. But monopoly power is achieved most rigorously in local banking.

Most loans are for mortgages to inflate land prices. “And the banker is under the necessity –‘inner necessity,’ as the Hegelians say – of getting all he can and securing himself against all risk, at the cost of any whom it may concern, by such charges and stipulations as will insure his net gain in any event.”

Land prices were rising in larger cities as a result of overall prosperity and the easier availability of mortgage financing, while public spending on roads, subway and bus systems, parks, museums and other prestigious activities were organized to enhance neighborhood values.

Such practices prompted Veblen to criticize Clark and also Marshall for ignoring the “pecuniary” financial dimension of life. This was a glaring error of omission in the new mainstream, along with monopolies and large real estate frauds started in colonial times, highlighted by the Yahoo land fraud early in the Republic, and capped by the railroad land grants. As Henry Liu describes how Veblen emphasized the predatory role of high finance:

“Veblen put forth a basic distinction between the productiveness of ‘industry’ run by skilled engineers, which manufactures real goods of utility, and the parasitism of ‘business,’ which exists only to make profits for a leisure class which engages in ‘conspicuous consumption’. The only economic contribution by the leisure class is ‘economic waste’, activities that contribute negatively to productivity. By implication, Veblen saw the US economy as being made inefficient and corrupt by men of ‘business’ who deviously put themselves in an indispensable position in society.”

Veblen against academia turned business Veblen criticized academic economists for having fallen subject to “trained incapacity” as a result of being turned into factotums to defend rentier interests. Business schools were painting an unrealistic happy-face picture of the economy, teaching financial techniques but leaving out of account the need to reform the economy’s practices and institutions.

In a conclusion recalling Veblen’s Higher Education in America, Herman Kahn describes how peer pressure leads experts to accept explanations that deviate from accepted concepts: Educated incapacity often refers to an acquired or learned inability to understand or even perceive a problem, much less a solution. The original phrase, “trained incapacity,” comes from the economist Thorstein Veblen, who used it to refer, among other things, to the inability of those with engineering or sociology training to understand certain issues which they would have been able to understand if they had not had this training.

Kahn adds that this phenomenon occurs especially “at leading universities in the United States – particularly in the departments of psychology, sociology, and history, and to a degree in the humanities generally. Individuals raised in this milieu often have difficulty with relatively simple degrees of reality testing.” The problem is greatest in economics, of course.

From Marx to Veblen

Early (and most non-Marxist) socialism aimed to achieve greater equality mainly by taxing away unearned rentier income and keeping natural resources and monopolies in the public domain. The Marxist focus on class conflict between industrial employers and workers relegated criticism of rentiers to a secondary position, leaving that fight to more bourgeois reformers. Financial savings were treated as an accumulation of industrial profits, not as the autonomous phenomenon that Marx himself emphasized in Volume 3 of Capital.

Headed by Lenin, Marx’s followers discussed finance capital mainly in reference to the drives of imperialism. The ruin of Persia and Egypt was notorious, and creditors installed collectors in the customs houses in Europe’s former Latin American colonies. The major problem anticipated was war spurred by commercial rivalries as the world was being carved up.

It was left to Veblen to deal with the rentiers’ increasingly dominant yet corrosive role, extracting their wealth by imposing overhead charges on the rest of society. The campaign for land taxation and even financial reform faded from popular discussion as socialists and other reformers became increasingly Marxist and focused on the industrial exploitation of labor.

Veblen described how the rentier classes were on the ascendant rather than being reformed, taxed out of existence or socialized. His Theory of Business Enterprise (1904) emphasized the divergence between productive capacity, the book value of business assets and their stock-market price (what today is called the Q ratio of market price to book value).

He saw the rising financial overhead as leading toward corporate bankruptcy and liquidation. Industry was becoming financialized, putting financial gains ahead of production. Today’s financial managers use profits not to invest but to buy up their company’s stock (thus raising the value of their stock options) and pay out as dividends, and even borrow to pay themselves.

Hedge funds have become notorious for stripping assets and loading companies down with debt, leaving bankrupt shells in their wake in what George Ackerlof and Paul Romer have characterized as looting.

In emphasizing how financial “predation” was hijacking the economy’s technological potential, Veblen’s vision was as materialist and culturally broad as that of Marxists, and as rejecting of the status quo. Technological innovation was reducing costs but breeding monopolies as the Finance, Insurance and Real Estate (FIRE) sectors joined forces to create a financial symbiosis cemented by political insider dealings – and a trivialization of economic theory as it seeks to avoid dealing with society’s failure to achieve its technological potential.

The fruits of rising productivity were used to finance robber barons who had no better use of their wealth than to reduce great artworks to the status of ownership trophies and achieve leisure class status by funding business schools and colleges to promote a self-congratulatory but deceptive portrayal of their wealth-grabbing behavior.

Significance of Veblen for Today

As the heirs to classical political economy and the German historical school, the American institutionalists retained rent theory and its corollary idea of unearned income. More than any other institutionalist, Veblen emphasized the dynamics of banks financing real estate speculation and Wall Street maneuvering to organize monopolies and trusts. Yet despite the popularity of his writings with the reading public, his contribution has remained isolated from the academic mainstream, and he did not leave a “school.” The rentier strategy has been to make rent extraction invisible, not the center of attention it occupied in classical political economy. One barely sees today a quantification of the degree to which overhead charges for rent, insurance and interest are rising above the cost of production, even as this prices financialized economies out of world markets.

The narrowing of Chicago-style monetarism and neoliberalism has left the economics discipline in much the state that Max Planck applied to physics from Maxwell to Einstein: “Progress occurs one funeral at a time.”

The old conservatives die off, freeing the way for more progressive successors to take the steering wheel. But what makes today’s economics different is that it actually would help to look backward, to the epoch before the financial sector and its allied rentier interests hijacked the discipline. The most systematic analysis of this process was that of Veblen nearly a century ago. It remains sufficiently relevant that Marxists and more heterodox critics have incorporated his theorizing into their worldview.

(Reprinted from Michael-Hudson.com by permission of author or representative)
 
• Category: Economics • Tags: Rentier, Thorstein Veblen 
Articles based on a 2012 Istanbul conference on Thorstein Veblen

HudsonBook Preface

The Global Financial Crisis since 2008 has left in its wake the most severe economic downturn since the Great Depression. Governments and entire national economies have been sacrificed to save the financial sector and its major clients. Bailing out banks, bondholders and Wall Street brokerage houses – the institutions whose mismanagement, over-lending and outright fraud led to the crash – has widened economic polarization and caused fiscal strains.

This has led many countries to reconsider the character of macroeconomic management – and behind it, the body of economic and political theory guiding today’s societies. What seemed at first glance to be a systemic policy failure of mainstream economics is coming to be seen as not so much a failure as part of an orchestrated class to protect financial wealth and its allied rentier sectors. Economic policy has passed out of the hands of elected democratic government to central banks and other government agencies controlled by financial planners and the rentier class behind them. Their post-crisis management has enabled these interests to gain control of a large swath of the pubic domain of debtor countries, along with industries and real estate in the creditor nations themselves.

The Communist Manifesto’s classic dictum that “the executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie” no longer seems to be an exaggeration, but it may be updated to describe modern governments above all as committees to subsidize and rescue the banking and financial sector, which has become the manager and central planner of today’s global economy.

The effect is to post-industrialize society, subordinating the forces of industrial capitalism to an extractive (and increasingly concentrated) financial superstructure consolidating its power by bank loans, bond and stock ownership – turning the rest of society into debtors, renters and buyers of monopolized goods and services.

What remains in dispute is just who comprises the today’s managerial class and where its policy program is leading. The present collection of essays trace how Thorstein Veblen described the way in which the mid-19th century’s industrial capitalism was becoming centered on what today is called the Finance, Insurance and Real Estate (FIRE) sector. Each author in this volume discusses the character of today’s capitalism, and how and why the capitalist class remains politically dominant despite the fact that it repeatedly fails to fulfill the requirements of economic leadership it claims to fulfill. Together, these papers contribute to a better understanding of “capital in the twenty first century,” to use the phrase that has become popular following Thomas Piketty’s best seller.

Veblen made numerous contributions to a diverse set of fields. Not surprisingly, he has been considered by some to be an economist, and by others a sociologist. To others he seemed broadly to be an anthropologist, political or cultural theorist. The authors of the current collection view him as a critic of “the established order of business,” continuing in the tradition of classical political economy to analyze the often dysfunctional modern world that, in his mind, required a restructuring.

Unlike today’s neoclassical economics, classical political economists distinguished between earned and unearned income, that is, the types of income accruing to productive and unproductive labor and investment respectively. The labor theory of value found its counterpart in the “rent theory” of prices. This distinction between intrinsic cost-value and market price (with economic rent reflecting the margin of price over value) provided a basis for analyzing the ownership of wealth and other special privileges to extract income without creating real value by producing goods and services.

The policy conclusion of this classical approach was that material wealth adding to overall well-being could be augmented only by productive investment. By the same token, a subset of unproductive rentier property and financial claims was extractive rather than productive – and hence, was a form of economic overhead, not real wealth. This was the essential theme of classical rent theory, which Veblen continued at a time when the economics mainstream was denying the distinction between rent extractors and industrial investors.

Pursuing the logic of classical rent theory, Veblen investigated the consequences of concentrating ownership in the hands of an evolving capitalist class. He described “absentee ownership” as the “latest stage of capitalism” and “the new order of business” at the outset of the twentieth century. “It may be said, of course, and perhaps truthfully, that the absentee owners of the country’s industrial equipment,” he wrote, “come in for a disproportionate share of the ‘national dividend,’ and that they and their folks habitually consume their share in superfluities; but no urgent moral indignation appears to be aroused by all that.”

This class of absentee owners comprised a new aristocracy. Like their feudal counterparts, they did not directly manage the means of production or other assets, which took on the form mainly of corporate bonds and stock. Real estate investment was largely for speculative purposes to obtain price gains, while the stock market likewise aimed increasingly at making purely financial gains.

For Veblen, absentee ownership as the latest stage of capitalism consisted of three pillars: “the mechanical system of industry, the price system, and the national establishment.” This tripartite social organization was centered on the financial sector, whose major business concern was to create industrial monopolies while gaining control of national politics. Veblen called these monopolists and political deep state the “vested interests.” The credit system was the core of the financial sector, which was employed to gain unearned income on behalf of these vested interests.

The result was bifurcation between the super rich absentee owners and the underlying population, whose survival has increasingly come to depend on credit, i.e., debt on the liabilities side of the balance sheet. In Veblen’s words, capitalism in the form of absentee ownership works in such a way that “the country’s assets should, at a progressively accelerated rate, gravitate into the ownership, or at least into the control, of the banking community at large.”

In view of Veblen’s argument that engineers would play a major or even the most progressive role in society, this book is significant largely because it is the product of an international conference on Veblen’s legacy organized by the Chamber of Electrical Engineers of Turkey in 2012 in Istanbul. It is hard to imagine such an attempt by an engineering association in any other country. We therefore are grateful to Chairman Cengiz Göltaþ of the 43rd Board of Governors of the Chamber of Electrical Engineers of Turkey, and to all other members of the 43rd Board for their support of the conference. Our thanks also go to Chairman Hüseyin Yeþil of the 44th Board of Governors and all other members of the 44th Board and Chairman Orhan Örücü of the Center for Continuing Education of the Chamber of Electrical Engineers for their support and interest in our project. And for their continued assistance throughout the project we would like to thank the Chamber members Oylum Yýldýr and Emre Metin. We would like to extend our heartfelt thanks to Sidney Plotkin for generously sharing his fine expertise with us in the preparation of the conference, Veblen, Capitalism and Possibilities for a Rational Economic Order, Istanbul, Turkey, 2012. We also would like to thank all the people who delivered papers or acted as moderators and chairs of sessions. In inviting some speakers, Sabri Öncü played a critical role. We are grateful to him for his valuable contributions to the success of our conference. Finally, we would like to express our genuine thanks to Ertuðrul Karabulut for his meticulous work in designing the cover and preparing the book for publication.

 
• Category: Economics • Tags: Thorstein Veblen 

The IMF foretells of vulnerable banks in US and EU while enabling unsustainable debt-leveraging, says economist Michael Hudson.

KIM BROWN, TRNN: Welcome to The Real News Network. I’m Kim Brown, in Baltimore. With the worst of the great recession, supposedly, behind us, economic analysts still see signs that we’re not yet completely out of the woods. A new report released Wednesday by the International Monetary Fund shows that some banks in the United States and Europe may not be strong enough to survive another downturn, even with States assistance.

Joining us from New York is Michael Hudson. Michael is a Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His latest book is Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. Michael, thanks again for joining us.

MICHAEL HUDSON: Its good to be here. But we can’t get out of the woods.

BROWN: Okay, let’s get into that. The IMF report on financial stability says, in spite of banks being stronger now than before the economic crisis of 2007-2008, about twenty-five percent of US banks and about a third of European banks are too weak to even benefit from a potential rise in interest rates and any recovery aid, should the global economy take a downward turn. But before we get into any specific questions about the health of banks, Michael, are we still in a recession or are we firmly in a recovery now?

HUDSON: We are not in a recovery and we’re not really in a traditional recession. People think of a business cycle, which is a boom followed by a recession and then automatic stabilizers revive the economy. But this time we can’t revive. The reason is that every recovery since 1945 has begun with a higher, and higher level of debt. The debt is so high now, that since 2008 we’ve been in what I call, debt deflation. People have to pay so much money to the banks that they don’t have enough money to buy the goods and services they produce. So there’s not much new investment, there’s not new employment (except minimum-wage “service” jobs), markets are shrinking, and people are defaulting. So many companies can’t pay their banks.

The banks’ product is debt. They try to tell customers that “debts are good for you,” but the customers can’t afford any more debt, so there’s no way the banks can continue their current business plan. In fact, there’s no way that banks can be paid everything that they’re owed. That’s what the IMF doesn’t follow through its analysis, by saying, “Look, the banks are broke because the financial system is broke; and the financial system is broke because the whole idea of trying to get rich by running into debt doesn’t work.”

It was a false model. So really, we’re at the end of long cycle that began in 1945, loading the economy with debt. We’re not going to be able to get out of it until you write down the debts. But that’s what the IMF believes is unthinkable. It can’t say that, because it’s supposed to represent the interest of the banks. So all the IMF can say is to wring their hands over the fact that the banks won’t make money even if there is a recovery.

But there really isn’t a recovery, and no signs of it on the horizon, because people have to pay the banks. It’s a vicious circle – or rather, a downward spiral. Basically, the IMF economists are just throwing up their hands and admitting that they don’t know what to do, given the limits of their tunnel vision.

BROWN: Well, Michael, help us figure out why growth has been so weak over these past eight to six years or so.

HUDSON: If you take the average family budget – and I’ve said this on your show many times –we can go through the numbers. If you have to pay about forty to forty-three percent of your income for housing, you also have to pay fifteen percent of your paycheck for the FICA for Social Security wage withholding. You have to pay medical care, you have to pay the banks for your credit card debt, student loans. Then you only have about twenty-five or thirty-five percent, maybe one-third of your salary to buy goods and services. That’s all.

The problem here is that the way you get a job is with a company that sells goods and services. The companies aren’t hiring, because consumers don’t have enough money to buy the goods and services.

We’re in a chronic debt-deflation. There’s no way we can recover unless you write down the debts. And that’s what the IMF basically is implying (and it was explicit regarding Greece), but its not spelling it out, because that’s not what can be said in polite company.

BROWN: Michael the headline from MarketWatch about this IMF report, it reads, “Forget too big to fail. The big concern is banks too weak to survive.” If big banks almost capsized the global financial system, are weaker banks actually better for consumers?

HUDSON: Banks that are very narrow and do what banks used to do (before President Clinton abolished Glass-Steagall in 1999). Small banks that lend to consumers are fine. Most banks – with Deutsche Bank at the top of the spectrum here – have decided that they can’t make money lending to barrowers anymore, so they’re going to the second business plan: They lend money to casino capitalists. That is, to people who want to gamble on derivatives.

A derivative is a bet on whether a stock, or a bond or a real estate asset, is going to go up or down. There’s a winner and a loser. It’s like betting on a horserace. So the biggest bank lending for gambles – not for real production, not for investment, but just for gambles – was Deutsche Bank. Borrowers borrowed from Deutsche Bank to gamble.

What’s the best gamble in the world, right now? Its betting that Deutsche Bank stock is going to go down. Short sellers borrowed money from their banks to place bets that Deutsche Bank stock is going to go down. Now, it’s wringing its hands and saying, “Oh the speculators are killing us.” But it’s Deutsche Bank and the other banks that are providing the money to the speculators to bet on credit.

BROWN: Michael, the IMF report says that in the Eurozone, if the Eurozone governments could help banks dump their bad loans, it would have a positive effect on bank capital. What would be the effect on consumers in the EU economy, at large, if banks were able to just dump these bad loans?

HUDSON: Its really very simple mathematics. You have to abolish pension plans. You have to abolish social spending. You have to raise taxes. You have to have at least fifty percent of the European population emigrate, either to Russia or China. You would have to have mass starvation. Very simple. That’s the price that the Eurozone thinks is well worth paying. It’s the price that it thought Greece is worth paying. To save the banks, you would have to turn the entire Eurozone into Greece.

You’ll have to have the governments sell off all of their public domains; sell off their railroads, sell off their public land. You’ll essentially have to introduce neo-feudalism. You’ll have to roll the clock of history back a thousand years, and reduce the European population to debt slavery. It’s as simple a solution as the Eurozone has imposed on Greece. And it’s a solution that the leaders and the banks are urging for responsible economists to promote for the population at large.

BROWN: Let’s talk about the other little nugget of information released by the IMF about debt. Global debt has now reached about a hundred and fifty-two trillion dollars. This includes government debt, household debt, non-financial firms’ debt. What does all this debt mean for the global financial system and for everyday people here, Michael?

HUDSON: It means that the only way people can repay the debt is by cutting their living standards very drastically. It means agreeing to shift their pension plans from defined benefit plans – when you know what you’re going to get – into just “defined contribution plans,” where you put money in, like into a roach motel, and you don’t know what’s coming out.

To save the banks from making losses that would wipe out their net worth, you’ll have to get rid of Social Security. It means that you’ll essentially have to abolish government and turn it over to the banking system to run, with an idea that the role of governments is to extract income from the economy to pay to the bondholders and the banks.

When you say “paying the banks,” what they really mean is paying the bank bondholders. They are basically the One Percent. What you’re really seeing right now in the IMF report, in this growth of debt, is the One Percent of the population owns maybe three-quarters of all this debt. This means that there’s a choice: Either you can save the economy, or you can save the One Percent from losing a single penny.

Every government, from the Obama administration right through to Angela Merkel, the Eurozone and the IMF, promise to save the banks, not the economy. No price is too high to pay to try to make the financial system go on a little bit longer. But ultimately it can’t be saved, because of the mathematics that are involved. Debts grow and grow. And the more they grow, the more they shrink the economy. When you shrink the economy, you shrink the ability to pay the debts, so it’s all an illusion that the system can be saved. The question is, how long are people going to be willing to live in this illusion?

BROWN: That was my next question for you. Not only how long are people going to be able to live in this illusion, but how much longer is this illusion actually sustainable before we see another collapse of economies around the world? Is this something that is impending, that we should just be expecting to come, we should be readying ourselves for this?

HUDSON: We’re still in the collapse that began after 2008. There’s not a new collapse, there hasn’t been a recovery. Wages for the ninety-nine percent have gone down, steadily, since 2008. They’ve gone down especially for the bottom twenty-five percent of the population. This means that they’ve gone down especially for Blacks and Hispanics and other blue-collar workers. Their net worth has actually turned negative, and they don’t have enough money to get by.

In fact, one of the big consulting firms just did a study of the millennials. Ernst and Young did a study and they found seventy-eight percent of millennials are worried about not having enough good paying job opportunity to pay off their student loans. Seventy-four percent can’t pay the health care if they get sick. Seventy-nine percent don’t have enough money to live when they retire. So, already, we’re having a whole generation that’s coming on, not only here but also in Europe, that isn’t able to get good-paying jobs. The only way it can live the life they were promised is if they have rich enough parents who have given them a trust fund.

BROWN: We’ve been speaking with Michael Hudson. Michael is a Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His latest book is Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. Michael, you said you had another book coming out, is that right?

HUDSON: Yes, later this month. It’ll be J is for Junk Economics. And it’s a review of why the economists promise that somehow we’ll recover. Why this is basically junk, and why in order to be an economist these days, you have to participate in this fairytale that somehow we can recover and still make the banks rich. And it is a fairytale. J is for Junk Economics is about why it won’t work.

BROWN: Coming to a bookstore, near you, later this year. Michael, we appreciate you lending your time and expertise to us, as always. Thank you.

HUDSON: It was good to be here.

BROWN: And thank you for watching The Real News Network.

(Reprinted from The Real News Network by permission of author or representative)
 
• Category: Economics • Tags: Banking Industry, IMF 
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.