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.