Interview with Vlado Plaga in the German magazine FAIRCONOMY, September 2017.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MICHAEL HUDSON: Good to be back, Sharmini.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Introduction

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Huck (“Michael”) Hudson

A

Behind the able man there are able men. Chinese

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

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

Abundance causes poverty. German

Abundance creates daintiness. Italian

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

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

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

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

He who accused too many accuses himself.

Acorns were good till corn was discovered. Latin

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

As published in Harper’s Magazine.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So are we heading for another explosion comparable to 2008?

Students usually don’t think of themselves as a class. They seem “pre-class,” because they have not yet entered the labor force. They can only hope to become part of the middle class after they graduate. And that means becoming a wage earner – what impolitely is called the working class.

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

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

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

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

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

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

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

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

From debt peons to wage slaves

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

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

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

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

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

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

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

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