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How the Bronze Age saved itself from debt serfdom
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There has been an explosion of discussion about whether to cancel student debts. Critics of the idea point out that wealthy people would be the main gainers, posing moral hazard. The debate has has quickly slipped into a discussion of modern economies and whether it was moral to cancel the debts of people who are in arrears, when some people have struggled to keep current on their payments.”

Bankers and bondholders love this argument, because it says, “Don’t cancel debts. Make everyone pay, or someone will get a free ride.”

Suppose Solon would have thought this in Athens in 594 BC. No banning of debt bondage. No Greek takeoff. More oligarchy Draco-style.

Suppose Hammurabi, the Sumerians and other Near Eastern rulers would have thought this. Most of the population would have fallen into bondage and remained there instead of being liberated and had their self-support land restored. The Dark Age would have come two thousand years earlier.

My book “And forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year (available on Amazon) is about the origins of economic organization ad enterprise in the Bronze Age, and how it shaped the Bible. It’s not about modern economies. But the problem is – as the reviewer mentioned – that the Bronze Age and early Western civilization was shaped so differently from what we think of as logical and normal, that one almost has to rewire one’s brain to see how differently the archaic view of economic survival and enterprise was.

Credit economies existed long before money and coinage. These economies were agricultural. Grain was the main means of payment – but it was only paid once a year, at harvest time. You can imagine how awkward it would be to carry around grain in your pocket and measure it out every time you had a beer.

We know how Sumerians and Babylonians paid for their beer (which they drank through straws, and which was cleaner than the local water). The ale-woman marked it up on the tab she kept. The tab had to be paid at harvest time, on the threshing floor, when the grain was nice and fresh. The ale-woman then paid the palace or temple for its advance of wholesale beer for her to retail during the year.

If the crops failed, or if there was a flood or drought, or a military battle, the cultivators couldn’t pay. So what was the ruler to do? If he said, “You owe the tax collector, and can’t pay. Now you have to become his slave and let him foreclose on your land.”

Suddenly, you would have had a slave society. The cultivators couldn’t serve in the army, and couldn’t perform their corvée duties to build local infrastructure.

To avoid this, the ruler simply cancelled the debts (most of which were owed ultimately to the palace and its collectors). The cultivators didn’t have to pay the ale-women. And the ale women didn’t have to pay the palace.

All this was spelled out in the Clean Slate proclamations by rulers of Hammurabi’s dynasty in Babylonia (2000-1600 BC), and neighboring Near Eastern realms. They recognized that there was a cycle of buildup of debt, reaching an unpayably high overhead, followed by a cancellation to restore the status quo ante in balance.

This concept is very hard for Westerners to understand. Yet it was at the center of the Old and New Testaments, in the form of the Jubilee Year – taken out of the hands of kings and placed at the center of Judaic religion. My book documents how this occurred.

When debts were cancelled in Babylonia and other Bronze Age Near Eastern realms, it would have been against their way of thinking to complain that some debtors were benefiting from being freed from debts that other people had paid. In the first place, all cultivators became debtors during the growing season, with payments for everything from agricultural inputs to beer at the local ale-house to be paid on the threshing floor at harvest time. So annulling such debts benefited the population at large.

With regard to individuals who had borrowed out of need, it was recognized that if some could not keep up, it was because they were poor or unable to do so. Mutual aid became the principle of helping people who were sick, widows who lost their husbands or other factors that obliged them to run up debts. Not to have helped such people would have deprived the community of their productive labor.

Conspicuously absent from ancient moral values is the modern “moral hazard” theory to play solvent individuals against debtors. The point of reference was what would happen if people were not forgiven their debts. How would this have affected the community as a whole?

The answer is that debtors unable to pay would have fallen into bondage to their creditor, working on his land, and ultimately have lost their own land. They therefore would not be available to work on their own land to grow crops to pay taxes and other obligations to the palace, or to provide corvée labor on public works, or serve in the military. Clean Slate proclamations were part of the community’s self-preservation.

At the same time, the moral opprobrium was felt toward creditors. They were blamed for impoverishing society at large by their selfishness. The Greeks called his hubris, money-love and wealth addiction. And rulers saw an independent creditor class turning its wealth into large landholdings of creating a rival power to the palace. In addition to cancelling debts owed to the palace, rulers thus restored widespread independence from large wealthy families whose economic interest lay in resisting royal Clean Slates. Large fortunes thus seem to have disappeared in Larsa and Babylonia around the 18th and 17th centuries BC. They didn’t have any President Obama to defend them from the “mob with pitchforks.” Hammurabi said that he was serving Shamash, the sun-god of justice. And Nanshe was a prototype for Greek Nemesis, punishing hubris and abusive wealth, protecting the poor and needy (already in 3rd-millennium Sumer).

The context for today’s debt overhead is one in which most debts are owed to private-sector banks, bondholders and other creditors. Also, not everyone is in debt – and society is rich enough to afford imposing a loss of status and self-reliance on large classes of debtors. Still, there is a logic in forgiving debts owed by the needy (but not by the wealthy).

Creditors argue, for instance, that if you forgive debts for a class of debtors – say, student loans – that there will be some “free riders.” Students freed from debt will benefit, while students who were able to carry and pay off their debts had to “meet their obligations.” It is further argued that if student debts are forgiven (or “junk mortgage” loans written down to fair real estate valuations), people will expect to have bad loans written off. This is called a “moral hazard,” as if debt writedowns are a hazard to the economy, and hence, immoral.

This is a typical example of Orwellian doublespeak engineered by public relations factotums for bondholders and banks. The real hazard to every economy is the tendency for debts to grow beyond the ability of debtors to pay. If large numbers of students remain liable to pay student loans without having obtained well enough jobs to pay, this will prevent them from being able to qualify for mortgage to buy a home and start a family. Many students today are obliged to keep living with their parents, and are unable to marry. The result is deepening economic austerity as a result of the debt overhead.

Meanwhile, defaults on student loans to for-profit colleges are projected as rising toward 40%. Is it worth it to say that to prevent giving these impecunious students a “free lunch,” it is worth keeping a large swath of the population poor and unmarried?

 
• Category: Economics • Tags: Consumer Debt, Debt 
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The aim of classical economics was to tax unearned income, not wages and profits. The tax burden was to fall on the landlord class first and foremost, then on monopolists and bankers. The result was to be a circular flow in which taxes would be paid mainly out of rent and other unearned income. The government would spend this revenue on infrastructure, schools and other productive investment to help make the economy more competitive. Socialism was seen as a program to create a more efficient capitalist economy along these lines.

I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show: The Vocabulary of Economic Deception. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trends, a Wall Street financial analyst and distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book Super-Imperialism: The Economic Strategy of American Empire is a critique of how the United States exploited foreign economies through the IMF and World Bank. His latest books are, Killing the Host: How Financial Parasites and Debt Destroy the Global Economy and J Is for Junk Economics – A Guide to Reality in an Age of Deception. Today we discuss J is for Junk Economics, an A to Z guide that describes how the world economy really works, and who the winners and losers really are. We cover contemporary terms that are misleading or poorly understood, as well as many important concepts that have been abandoned – many on purpose – from the long history of political economy.

BONNIE FAULKNER: Dr. Michael Hudson, welcome to Guns and Butter again.

MICHAEL HUDSON: It’s good to be back, Bonnie.

BONNIE FAULKNER: You write that your recent book, J Is for Junk Economics, a dictionary and accompanying essays,was drafted more than a decade ago for a book to have been entitled The Fictitious Economy. You tried several times without success to find a publisher. Why wouldn’t publishers at the time take on your book?

MICHAEL HUDSON: Most publishers like to commission books that are like the last one that sold well. Ten years ago, people wanted to read about how the economy was doing just fine. I was called Dr. Doom, which did very well for me in the 1970s when I was talking about the economy running into debt. But they wanted upbeat books. If I were to talk about how the economy is polarizing and getting poorer, they wanted me to explain how readers could make a million dollars off people getting more strapped as the economy polarizes. I didn’t want to write a book about how to get rich by riding the neoliberal wave dismantling of the economy. I wanted to create an alternative.

If I wanted to ride the wave of getting rich by taking on more debt, I would have stayed on Wall Street. I wanted to explain how the way in which the economy seemed to be getting richer was actually impoverishing it. We are in a new Gilded Age masked by a vocabulary used by the media via television and papers like The New York Times that are euphemizing what was happening.

A euphemism is a rhetorical trick to make a bad phenomenon look good. If a landlord gets rich by gentrifying a neighborhood by exploiting tenants and forcing them out, that’s called wealth creation if property values and rents rise. If you can distract people to celebrate wealth and splendor at the top of the economic pyramid, people will be less focused on how the economy is functioning for the bottom 99%.

BONNIE FAULKNER: Can you describe the format of J Is for Junk Economics – A Guide to Reality in an Age of Deception as an A-to-Z dictionary with additional essays? It seems to me that this format makes a good reference book that can be picked up and read at any point.

MICHAEL HUDSON: That’s what I intended. I wrote it as a companion volume to my outline of economic theory, Killing the Host, which was about how the financial sector has taken over the economy in a parasitic way. I saw the vocabulary problem and also how to solve it: If people have a clear set of economic concepts, basically those of classical economics – value, price and rent – the words almost automatically organize themselves into a worldview. A realistic vocabulary and understanding of what words mean will enable its users to put them together to form an inter-connected system.

I wanted to show how junk economics uses euphemisms and what Orwell called Doublethink to confuse people about how the economy works. I also wanted to show that what’s called think tanks are really lobbying institutions to do the same thing that advertisers for toothpaste companies and consumer product companies do: They try to portray their product – in this case, neoliberal economics, dismantling protection of the environment, dismantling consumer protection and stopping of prosecution of financial fraud – as “wealth creation” instead of impoverishment and austerity for the economy at large. So basically, my book reviews the economic vocabulary and language people use to perceive reality.

When I was in college sixty years ago, they were still teaching the linguistic ideas of Benjamin Lee Whorf. His idea was that language affects how people perceive reality. Different cultures and linguistic groups have different modes of expression. I found that if I was going to a concert and speaking German, I would be saying something substantially different than if I were speaking English.

Viewing the economic vocabulary as propaganda, I saw that we can understand how the words you hear as largely propaganda words. They’ve changed the meaning to the opposite of what the classical economists meant. But if you untangle the reversal of meaning and juxtapose a more functional vocabulary you can better understand what’s actually happening.

BONNIE FAULKNER: You write that “the terms rentier and usury that played so central a role in past centuries now sound anachronistic and have been replaced with more positive Orwellian doublethink,” which is what you’ve begun to explain. In fact, your book J is for Junk – A Guide to Reality in an Age of Deception is all about the depredation of vocabulary to hide reality, particularly the state of the economy. Just as history is written by the victors, you point out that economic vocabulary is defined by today’s victors, the rentier financial class. How is this deception accomplished?

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

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

BONNIE FAULKNER: Dr. Michael Hudson, welcome.

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

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

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

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

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

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

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

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

 
• Category: Economics, Ideology • Tags: Banks, Financial Bailout, Wall Street 
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MARC STEINER: Welcome to The Real News Network. I’m Marc Steiner. Great to have you with us once again.

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

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

MICHAEL HUDSON: Good to be here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 
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Introduction and Transcript:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 
• Category: Economics • Tags: Debt, Federal Reserve, Unemployment, Wall Street 
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The recently elected neoliberal government of Mauricio Macri has decided to seek a $50 billion IMF credit line, which will only enable more capital flight for the upper class and greater unpayable debt for the rest of the population, says the economist Michael Hudson.

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

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

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

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

MICHAEL HUDSON: Good to be back, Sharmini.

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

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

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

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

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

 

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

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

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

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

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

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

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

 

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

 

It doesn’t have to be this way

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

The Hudson Report is a weekly series produced by Left Out with the legendary economist Michael Hudson. Every episode we cover an economic or political issue that is either being ignored—or hotly debated—that week in the press.

In this episode, Paul Sliker speaks with Michael Hudson about the economic and political implications of the International Monetary Fund’s $50 billion loan to Argentina, which is the largest IMF credit line in history. You can find the audio version here.

http://democracyatwrkleftout.libsyn.com/the-hudson-report-argentina-gets-biggest-imf-loan-in-history

Paul Sliker: Michael Hudson welcome back to the Hudson report.

Michael Hudson: It’s good to be back. Much has happened while I was away for a few weeks.

Paul Sliker: Michael, Argentina recently agreed to a $50 billion loan from the International Monetary Fund. That’s the largest ever in IMF history. It is supposed to run for 36 months. Argentina began talks with the IMF last month, after three central bank rate hikes. Despite pushing borrowing costs above 40%, this failed to stop the fall in the peso, which has now fallen by 25% against the US dollar this year.

This agreement brings back a dark history for most Argentinians regarding the IMF’s role there during their devastating economic crisis in 2001-2002. The IMF imposed severe austerity measures, as usual. That’s its basic anti-labor policy, so Argentina’s decision to return to the IMF has triggered huge national protests over the past few weeks.

Despite this being the biggest loan in IMF history, we don’t really hear anything about it in the US media, except for the typical brief reporting in the financial press. There’s no real political or economic analysis of this especially on the Left, which one would think would be more sympathetic to the Global South, as well as countering IMF austerity philosophy.

Before we get into the current massive deal with the IMF – you are one of the world’s leading experts on IMF and World Bank loans. When you were at Chase Manhattan Bank’s economic research department, your role was a balance of payments specialist, and your task was to establish the payment capacity of Argentina, Brazil and Chile. To give people a general understanding of the historical context leading up to what’s going on today, can you give us some history about the last Argentine economic crisis in the early 2000s, and the IMF’s role at that time?

 

Michael Hudson: The reason there is so little discussion of Argentine or other Third World debt problems is that hardly anybody studies balance of payments (BOP) any more. There’s no course in balance-of-payments accounting or even in National Income and Product Accounts (NIPA) at any U.S. university. The right-wing Chicago School propagandists keep claiming that if a country’s currency is depreciating, it must be because its prices are going up. But that gets the line of causality inside out. For debtor countries such as Argentina or other Latin American countries, the balance of payments has little to do with domestic prices, domestic wage rates or domestic cost of production. The balance-of payments – and hence, the exchange rate – is swamped by debt service.

Debt service is paid on what’s called Capital Account. Politically, government debt denominated in dollars is run into by these countries to cover their trade deficit that results from structural factors, such as their agreement not to grow their own food but to rely on U.S. grain exports, and to let U.S. investments in their countries avoid paying taxes. These are structural factors, not wage and price factors.

Argentina is the poster child for countries that have totally screwed up their economy. Their predatory right-wing oligarchy has managed to steer their country from the most prosperous in the world in the late 19th century to one of the the poorest and most debt-strapped countries. This is a political problem. But the oligarchy blames labor and says that it has to be paid even less.

In 1990, I helped organize the first Third World bond fund. It was issued by Scudder, Stevens & Clark. At that time in 1989-1990 Argentina was paying 45% per year on dollar bonds. Brazil was paying the same. Now just imagine: 45% a year. That doubles your money in two years! No country can possibly pay that for long. But it was clear that the Argentine dictatorship – bolstered by a US-backed assassination program against labor leaders, land reformers and left-wing professors – would continue paying for at least five years. So that was the fund’s time frame.

Despite these high interest rates, we weren’t able to sell the bond fund to any American or any Europeans. But Merrill Lynch, which underwrote the bond fund, sold all its shares in Latin America. The fund was organized and the Dutch West Indies, so it was an offshore fund. Americans (including myself) were not allowed to buy it.

So who did buy it? The bond buyers turned out to be the wealthiest families in Brazil and in Argentina. I think I’ve discussed this before on your show. Argentina’s foreign debt was owned almost entirely by the domestic Argentine oligarchy – the very richest class. They moved their money out of domestic currency into dollars, buying dollar bonds because they knew that they were going to authorize the high interest being paid – to themselves, masquerading as “Yankee dollars”.

This is the oligarchy that followed the 1973 US-Chilean military coup that assassinated Allende and installed Pinochet. The US mounted a mass assassination and terrorism campaign throughout Latin America. In Argentina it was called the Dirty War. The Americans came in and applied the Chicago School economic principle that you can only have a free market if you’re willing to assassinate labor leaders, land reformers and university professors. Tens of thousands of Argentine reformers were tortured and killed to put the oligarchy in power and slash taxes on high incomes. Their tax laws make Donald Trump look like a moderate. And like most financial elites, they took the money and ran, putting their takings offshore in Argentina dollar bonds. Politically they denounced Yankee bondholders for forcing huge debt payments at 45% a year driving the currency down, but the wealthiest families themselves were the “Yankees” who were actually collecting. The real American Yankees simply didn’t trust the Argentines!

When Scudder went around and talked to US investors in 1990, they said that the Argentinian politicians are crooks, and were not going to invest in a kleptocracy whose intention was to cheat us just like they cheat their own people!

Now, fast forward to 2001. The IMF came in and followed US Defense Dept. and State Department directions to support the oligarchy and its terrorists. The CIA feared that otherwise Argentina might have a democracy as the wave of “free market” assassinations had died down.

The IMF staff saw that it was obvious that Argentina was unable to take on any more debt. Nonetheless, they lent Argentina enough money so that the wealthiest Argentines could have a high enough exchange rate for the Argentine peso to take their money out of the country and move into dollars. It was a huge subsidy for capital flight out of Argentina into dollar-denominated Argentine debt to the IMF and other bondholders.

 
• Category: Foreign Policy • Tags: Argentina, IMF 
The Hudson Report
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Left Out, a podcast produced by Paul Sliker, Michael Palmieri, and Dante Dallavalle, creates in-depth conversations with the most interesting political thinkers, heterodox economists, and organizers on the Left.

The Hudson Report is a new weekly series produced by Left Out with the legendary economist Michael Hudson. Every episode we cover an economic or political issue that is either being ignored—or hotly debated—that week in the press.

Paul Sliker: Michael Hudson welcome back to The Hudson Report.

Michael Hudson: It’s good to be back. I’m just home from China, getting over jetlag.

Paul Sliker: You recently gave a paper at Peking University about the economy and what sorts of policies they should implement and what to avoid.

But Michael, because we only have a short amount of time in these weekly segments, I want to look specifically at housing in China, and then compare that to what’s going on here in the U.S. In your speech you argued that China’s most pressing policy challenge is to keep down the cost of housing and that the policies best suited to avoid what you call the “neo-rentier disease.” Can you give us a picture of what’s going on currently with housing in China, and then explain what you mean by “neo-rentier disease” and how the Chinese can avoid it.

Michael Hudson: To put this in international perspective, you could say that international competition is based on labor’s cost of living in each country. The most important expense in every country’s cost of living today is housing. What makes a country competitive in manufacturing or other sectors comes down to how much it costs to pay for housing.

20 or 30 years ago only 10 percent to 12 percent of one’s income had to go for housing. That’s about the ratio in Germany today. But in America today it’s over 40 percent in the big cities. It’s also over 40 percent in London, and and it’s rising throughout Europe. But this is not a force of nature. It doesn’t have to be this way. It’s largely because banks have found that they can do to housing the same thing they’ve done to education: Housing is an excuse to get people into debt.

The most important way to get people into debt for housing is to take control of the government with your lobbyists to un-tax housing. The property tax is way less than the rise in land prices. That leaves the rising rental value available to be paid to the banks. The reason why housing prices are going up is because a house is worth whatever a bank will lend. And they are lending more and more, to enable new borrowers to bid up property prices.

You’d think that China would have learned this by looking at the West, or at least by reading Volume 3 of Capital. In fact the Peking University meeting, the Second World Conference on Marxism, David Harvey gave the opening and closing speech. His point was that the Chinese should read Volume III of Capital to understand why and how the volume of debt and credit grows exponentially. As banks get richer and richer, the One Percent get richer. They need to nurture more and more markets for their credit and debt creation. So they lend on easier and easier terms, at a rising proportion of the home’s value. So it’s bank credit that has been inflating the price of housing.

David Harvey asked how China can let the price of housing go up so high in Shanghai (the most privatized city) that almost everybody who has a house is a millionaire. How can China expect to remain competitive in exporting industrial products when the cost of housing is so high?

Unfortunately, his talk and mine were almost the only economic talks at the meeting in Peking. As one of the Russian attendees pointed out to me, “Marxism” is the Chinese word for politics. “Marxism with Chinese characteristics” means to doing what they want politically. But economically they’ve sent their students to the United States, to attend business schools to learn how U.S. financial engineering practices.

Shanghai is where Milton Friedman and the Chicago Boys came in the 1970s and early 80s, because the Chinese government worried that if western Marxists came over, they would tend to interfere with domestic Chinese politics. So actually, China had less exposure to foreign Marxian economics than to U.S.-style neoliberal teaching.

I gave the same basic talk in neighboring Tianjin, which is a more interesting city in many ways. It’s where Chou En-Lei went to school. Talking to women students (about 80 percent of the economics students were women, because it’s considered a social science there) about how they planned to get an apartment, I was told that they would have to marry a boy whose parents gave him an apartment. I didn’t meet any male student who said he would have to marry a woman with her own apartment. It’s a male’s role to have an apartment for his wife. So if you can’t find a guy with his own apartment this is not going to lead to a happy married life, and there may be no marriage at all.

Some of the students that I talked to three years ago are graduating now, but are still not married. So I asked where they were going to live. One of the problems I found out – in addition to what we just talked about – was that in order to prevent a rural exodus to the big cities, people from the provinces or from small towns are not allowed to get a passport to live in these cities. They’re only allowed to buy apartments in their home town. China is trying to prevent overcrowding and the development of slums. As a result, in order to get an apartment the student decided to teach at a university or the high school that provides its own housing.

So China’s corporations, public universities and other institutions are doing much what the Russian Soviets did: Employers provide their own workers with housing.

Meanwhile, you’ve had a move in the last three years under President Xi against corruption. The way they’ve moved against corruption is to put in a bureaucracy to prevent it. That is a natural step in any country. The bureaucracy has put a short lease on what governments can spending. So most universities, if they have big conferences, need a private-sector participant to share in the cost, especially if they bring people over from abroad. At the worse, this shifts corruption from the public sector to the private sector.

Meanwhile, there’s a shift going on in China now, and the political attitude of the students I talked to is quite different from what it was a decade ago, when students really thought that they could change the country and get rid of corruption. OK, they’ve cracked down on corruption. They put in bureaucracy. But now they’re faced with a problem that their students have all been sent to America to study economics and come back and ask “How do we get a free market?”

I couldn’t believe that students in China were asking me about a free market. But that idea led President Xi a few months ago to say they’re thinking of letting in American and European banks. Well, I think this would be a disaster. If you let in the American and foreign banks, their product is debt! What are they going to lend money for?

The answer is that they’re going to lend more money to buy apartments than other Chinese banks are willing to lend. That’s how banks increase their market share – a race to the bottom, into deeper and deeper debt. The new banks will lend on easier terms, with lower down payments. That provides buyers with even more credit to bid up the price of real estate. The effect will be to start pricing China out of the market.

 
• Category: Economics • Tags: China, Housing 
The West’s Finance-Capitalist Road
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May 5-6, 2018 Lecture
Second World Marxism Conference
Peking University, School of Marxist Studies

Volumes II and III of Marx’s Capital describe how debt grows exponentially, burdening the economy with carrying charges. This overhead is subjecting today’s Western finance-capitalist economies to austerity, shrinking living standards and capital investment while increasing their cost of living and doing business. That is the main reason why they are losing their export markets and becoming de-industrialized.

What policies are best suited for China to avoid this neo-rentier disease while raising living standards in a fair and efficient low-cost economy? The most pressing policy challenge is to keep down the cost of housing. Rising housing prices mean larger and larger debts extracting interest out of the economy. The strongest way to prevent this is to tax away the rise in land prices, collecting the rental value for the government instead of letting it be pledged to the banks as mortgage interest.

The same logic applies to public collection of natural resource and monopoly rents. Failure to tax them away will enable banks to create debt against these rents, building financial and other rentier charges into the pricing of basic needs.

U.S. and European business schools are part of the problem, not part of the solution. They teach the tactics of asset stripping and how to replace industrial engineering with financial engineering, as if financialization creates wealth faster than the debt burden. Having rapidly pulled ahead over the past three decades, China must remain free of rentier ideology that imagines wealth to be created by debt-leveraged inflation of real-estate and financial asset prices.

Western capitalism has not turned out the way that Marx expected. He was optimistic in forecasting that industrial capitalists would gain control of government to free economies from unnecessary costs of production in the form of rent and interest that increase the cost of living (and hence, the break-even wage level). Along with most other economists of his day, he expected rentier income and the ownership of land, natural resources and banking to be taken out of the hands of the hereditary aristocracies that had held them since Europe’s feudal epoch. Socialism was seen as the logical extension of classical political economy, whose main policy was to abolish rent paid to landlords and interest paid to banks and bondholders.

A century ago there was an almost universal belief in mixed economies. Governments were expected to tax away land rent and natural resource rent, regulate monopolies to bring prices in line with actual cost value, and create basic infrastructure with money created by their own treasury or central bank. Socializing land rent was the core of Physiocracy and the economics of Adam Smith, whose logic was refined by Alfred Marshall, Simon Patten and other bourgeois economists of the late 19th century. That was the path that European and American capitalism seemed to be following in the decades leading up to World War I. That logic sought to use the government to support industry instead of the landlord and financial classes.

China is progressing along this “mixed economy” road to socialism, but Western economies are suffering from a resurgence of the pre-capitalist rentier classes. Their slogan of “small government” means a shift in planning to finance, real estate and monopolies. This economic philosophy is reversing the logic of industrial capitalism, replacing public investment and subsidy with privatization and rent extraction. The Western economies’ tax shift favoring finance and real estate is a case in point. It reverses John Stuart Mill’s “Ricardian socialism” based on public collection of the land’s rental value and the “unearned increment” of rising land prices.

Defining economic rent as the unnecessary margin of prices over intrinsic cost value, classical economists through Marx described rentiers as being economically parasitic, not productive. Rentiers do not “earn” their land rent, interest or monopoly rent, because it has no basis in real cost-value (ultimately reducible to labor costs). The political, fiscal and regulatory reforms that followed from this value and rent theory were an important factor leading to Marx’s value theory and historical materialism. The political thrust of this theory explains why it is no longer being taught.

By the late 19th century the rentiers fought back, sponsoring reaction against the socialist implications of classical value and rent theory. In America, John Bates Clark denied that economic rent was unearned. He redefined it as payment for the landlords’ labor and enterprise, not as accruing “in their sleep,” as J. S. Mill had characterized it. Interest was depicted as payment for the “service” of lending productively, not as exploitation. Everyone’s income and wealth was held to represent payment for their contribution to production. The thrust of this approach was epitomized by Milton Friedman’s Chicago School claim that “there is no such thing as a free lunch” – in contrast to classical economics saying that feudalism’s legacy of privatized land ownership, bank credit and monopolies was all about how to get a free lunch, by exploitation.

The other major reaction against classical and Marxist theory was English and Austrian “utility” theory. Focusing on consumer psychology instead of production costs, it claimed that there is no difference between value and price. A price is whatever consumers “choose” to pay for commodities, based on the “utility” that these provide – defined by circular reasoning as being equal to the price they pay. Producers are assumed to invest and produce goods to “satisfy consumer demand,” as if consumers are the driving force of economies, not capitalists, property owners or financial managers.

Using junk-psychology, interest was portrayed as what bankers or bondholders “abstain” from consuming, lending their self-denial of spending to “impatient” consumers and “credit-worthy” entrepreneurs. This view opposed the idea of interest as a predatory charge levied by hereditary wealth and the privatized monopoly right to create bank credit. Marx quipped that in this view, the Rothschilds must be Europe’s most self-depriving and abstaining family, not as suffering from wealth-addiction.

These theories that all income is earned and that consumers (the bourgeois term for wage-earners) instead of capitalists determine economic policy were a reaction against the classical value and rent theory that paved the way for Marx’s analysis. After analyzing industrial business cycles in terms of under-consumption or over-production in Volume I of Capital, Volume III dealt with the precapitalist financial problem inherited from feudalism and the earlier “ancient” mode of production: the tendency of an economy’s debts to grow by the “purely mathematical law” of compound interest.

Any rate of interest may be thought of as a doubling time. What doubles is not real growth, but the parasitic financial burden on this growth. The more the debt burden grows, the less income is left for spending on goods and services. More than any of his contemporaries, Marx emphasized the tendency for debt to grow exponentially, at compound interest, extracting more and more income from the economy at large as debts double and redouble, beyond the ability of debtors to pay. This slows investment in new means of production, because it shrinks domestic markets for output.

 
• Category: Economics, Ideology • Tags: Debt, Housing, Marxism, Neoliberalism, Rentier 
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.