Today I am pleased to present a double feature on economic policy. Michael Hudson leads off with an explanation of economic policy as a social cost to the working class, and I follow up with an explanation that US economic policy is an act of national suicide.
A couple of definitions: A rentier economy is one in which monopolization or concentration of ownership permits profit without contributing to the welfare of society. Economic rent consists of payments or a rise in value of an asset in excess of its contribution to output or the cost of bringing it into production. An example of economic rent is a taxpayer financed road or transportation system. The rise in land values constitute economic rents, unearned income or wealth unrelated to any activity of the property owner.
The Fed’s Austerity Program to Reduce Wages
For Wall Street and neoliberal economic policymakers, the solution to price inflation is to push the economy into recession. Rising unemployment reduces aggregate demand. Thus, inflation is brought under control by forcing workers out of their jobs.
This class-war doctrine is the prime directive of neoliberal economics. The Federal Reserve and IMF are are the operating arms for impoverishing the masses. Whether it is Janet Yellen at the Treasury, the Federal Reserve, or the financial press, discussion of today’s U.S. inflation is framed in a way that avoids blaming the 8.2 percent rise in consumer prices on the Biden Administration’s New Cold War sanctions on Russian oil, gas and agriculture, or on oil companies and other sectors using these sanctions as an excuse to charge monopoly prices as if America has not continued to buy Russian diesel oil, as if fracking has not picked up and as if corn is not being turned into biofuel. There has been no disruption in supply. We are simply dealing with monopoly rent by the oil companies using the anti-Russian sanctions as an excuse that an oil shortage will soon develop for the United States and indeed for the entire world economy.
Covid’s shutdown of the U.S. and foreign economies and foreign trade also is not acknowledged for disrupting supply lines and raising shipping costs and hence import prices. The entire blame for inflation is placed on wage earners, and the response is to make them the victims of the coming austerity, as if their wages are responsible for bidding up oil prices, food prices and other prices resulting from the crisis. The reality is that they are too debt-strapped to be spendthrifts and haven’t enough disposable income after debt service to drive up prices.
The Fed’s Junk Economics of What Bank Credit Is Spent On
The pretense behind the Fed’s recent increase in its discount rate by 0.75 percent on June 15 (to a paltry range of 1.50% to 1.75%) is that raising interest rates will cure inflation by deterring borrowing to spend on the basic needs that make up the Consumer Price Index and its related GDP deflator. But banks do not finance much consumption, except for credit card debt, which in the United States is now less than student loans and automobile loans.
Banks lend almost entirely to buy real estate, stocks and bonds, not for consumer purchases of goods and services. Some 80 percent of bank loans are real estate mortgages, and most of the remainder are loans collateralized by stocks and bonds. The main price effect of less bank credit and higher interest rates is on asset prices – deterring borrowing to buy homes and arbitragers and corporate raiders from buying stocks and bonds. So the main price effect of less bank credit and higher interest rates is to reduce stock and bond prices and demand for home mortgages. Home ownership takes a large hit.
Rolling Back Middle-Class Home Ownership
The most immediate effect of the Federal Reserve’s credit tightening will be to reduce America’s home-ownership rate. This rate has been falling since 2008, from nearly 68 percent to just 61 percent today. The decline got underway with President Obama’s eviction of nearly ten million victims of junk mortgages, mainly black and Hispanic debtors. That was the Democratic Party’s alternative to writing down fraudulent mortgage loans to realistic market prices, and reducing their carrying charges to bring them in line with market rental values. The indebted victims of this massive bank fraud were made to suffer, so that Obama’s Wall Street sponsors could keep their predatory gains and receive massive bailouts. The costs of the fraud fell on the banks’ customers, not on the banks and their stockholders and bondholders.
The effect of discouraging new home buyers by raising interest rates is to lower home ownership – the badge of being middle-class. The Fed’s policy of raising interest rates will increase the interest charges that prospective new home buyers will have to pay, pricing the carrying charge of mortgages out of reach for some families. This follows the preceding run up in housing prices that is characteristic of a financialized economy. In short, the United States is turning into a landlord economy.
Real estate is being transferred from the middle class to private capital companies that turn homes into rental properties. Higher interest rates will not affect housing purchases by private capital companies, because they buy for all cash to receive returns as landlords just as the landed aristocracy did in England. Within another decade the nation’s home ownership rate may fall from 61 to 50 percent (and homeowners’ equity even lower), thus turning the the United States into a rentier economy.
How Much Economic Austerity Can a Debt-burdened Society Stand?
While home ownership rates have fallen, a decade of the Fed’s Quantitative Easing has increased its subsidy to those who hold troubled financial securities from \$800 billion to \$9 trillion – the rise in the Fed’s balance sheet during the QE period–of which the largest amount of rescued bad investments has been packaged home mortgages. This has kept housing prices from falling and becoming more affordable for home buyers. The Fed’s support of asset prices saved large insolvent banks from going under, but allowed smaller banks and the dispossessed homeowner to bear the cost. Sheila Bair of the FDIC singled out Citigroup, along with Countrywide, Bank of America and the other usual suspects as the beneficiaries of their own fraud.. The working population is not considered to be too big to fail. Its political weight is small by comparison to that of Wall Street banks and other FIRE-sector beneficiaries.
Lowering the discount rate to only about 0.1 percent enabled the banking system to make a large gains by making mortgage loans at around 3.50 percent. The banks kept credit-card rates high – 19% — and made money on penalty fees for late payment. America’s wealthiest One Percent, and indeed the top 10 Percent, vastly increased their wealth in stocks, while the bond market had the largest boom in history. But most Americans have not benefitted from this run up in asset prices, because most stocks and bonds are owned by only the wealthiest layer of the population. The Fed is all in favor of asset-price inflation. But For most American families, corporations and government at all levels, the financial boom since 2008 has entailed a growing debt burden. Many families face insolvency as Federal Reserve policy now aims to create unemployment. Now that the Covid moratorium on the evictions of renters behind in their payments is expiring, the ranks of the homeless are rising.