Daily Archives: November 17, 2011

Some Modest Proposals for Reforming the U.S. Financial and Tax System

OnNovember 3, 2011, Alan Minsky interviewed me on KPFK’s program, “Building aPowerful Movement in the United States” in preparation for an Occupy L.A.teach-in. To clarify my points I have edited and expanded my answers from theinterview transcript.
AlanMinsky: I amjoined now by Michael Hudson. He is a distinguished research professor ofeconomics at the University of Missouri-Kansas City, and also is president ofthe Institute for the Study of Long Term Economic Trends. Welcome to the show,Michael.

MichaelHudson: Thankyou very much.

AlanMinsky: MichaelHudson is scheduled to address Occupy L.A. as part of a teach-in that includesWilliam Black and Robert Scheer, who will be moderating the panel that Michaelwill be on this weekend. Michael, I’m familiar with your work and I know thatyou are a big-picture economic thinker. This is definitely a movement that isasking the big questions about how the global economy and the national economyshould be re-organized. What would you say to the movement at large about howbest to organize a high-tech modern industrial economy in a way that wouldproduce more social and economic justice?
Americais being radicalized by coming to realize how radical Wall Street’s power grabis

MichaelHudson: TheOccupy Wall Street movement has many similarities with what used to be calledthe Great Awakening periods in America. Such periods always begin by realizinghow serious the problem is. So diagnosis is the most important tactic.Diagnosing the problem mobilizes power for a solution. Otherwise, solutionswill seem to come out of thin air and people won’t understand why they areneeded, or even the problems that solutions are intended to cure.

Thebasic problem today is that nearly everyone is in debt. This is the problem inEurope too. There are Occupy Berlin meetings, the Greek and Icelandic protest,Spain’s “Indignant” demonstrations and similar ones throughout the world.

Whendebts reach today’s proportions, a basic economic principle is at work: Debtsthat can’t be paid; won’t be. The question is, just how are they not going to be paid? People with student loans arenot permitted to declare bankruptcy to get a fresh start. The government orcollection agencies dock their salaries and go after whatever property they have.Many people’s revenue over and above basic needs is earmarked to pay thebankers. Typical American wage earners pay about 40 percent of their wages onhousing whose price is bid up by easy mortgage credit, and another 10 to 15percent for credit cards and other debt service. FICA takes over 13 percent,and federal, local and sales taxes another 15 percent or so. All this leavesonly about a quarter of many peoples’ paychecks available for spending on goodsand services. This is what is causing today’s debt deflation. And Wall Streetis supporting it, because it extracts income from the bottom 99% to pay the top1%.

Halfa century ago most economists imagined that the problem would be people savingtoo much as they got richer. Saving meant non-spending. But the problem hasturned out to be just the opposite: debt. Overall salaries have not risen indecades, so many people have borrowed just to break even. Instead of an era offree choice, very little of their income is available for discretionaryspending. It is earmarked to pay the financial, insurance and real estatesectors, not the “real” production and consumption economy. And now repaymenttime has arrived. People are squeezed. So when America’s saving rate recentlyrose from zero to 3 percent of national income, it takes the form of peoplepaying down the debts.

Manypeople thought that the way to get rich faster was to borrow money to buy homesand stocks they expected to rise in price. But this has left the economyfinancially strapped. People are feeling depressed. The tendency is to blamethemselves. I think that the Occupy Wall Street movement, at least here in NewYork, is like what has occurred in Greece and also in the Arab Spring. Peopleare coming together, and at first they may simply watch what’s going on. Onlookersmay come by to see what it’s all about. But then they think, “Wait a minute!Other people are having the same problem I’m having. Maybe it is not really myfault.”

Sothey begin to see that all these other people who have a similar problem in notbeing able to pay their debts, they realize that they have been financially crippledby the banks. It is not that they have done something wrong or are sore losers,as Herman Cain says. Something radically wrong with the system.

Fiftyyears ago an old socialist told me that revolutions happen when people just gettired of being afraid. In today’s case the revolution may grow nearer whenpeople get over being depressed and stop blaming themselves. They come to thinkthat we are all in this together – and if this is the case, there must besomething wrong with the way the economy is organized.

Gradually,observers of Occupy Wall Street begin to feel stronger. There is positive peerpressure to reinforce their self-confidence. What they intuitively feel is thatthe Reagan-Clinton-Bush-Obama presidencies have squeezed their lives. Theeconomy has become untracked.

What’sbasically wrong is that the financial system is running the government. Foryears, Republicans and Democrats both have said that a strong government, carefulregulation and progressive taxation is the road to serfdom. The politicians andneoliberal economists who write their patter talk say, “Let’s take planning outof the hands of government and put it in the ‘free market.’” But every marketis planned by someone or other. If governments step aside, then planning passesinto the hands of the bankers, because of their key role in allocating credit.

Theproblem is that they have not created credit to finance industrial investmentand employment. They have lent for speculation on asset price inflation usingdebt leveraging to bid up housing prices, stock and bond prices, and foreignexchange rates. They have convinced borrowers that they can get rich on risinghousing prices. But this merely makes new homebuyers go deeper into debt to buya home. And when banks say that rising stock and bond prices are good for theeconomy, this price rise lowers the dividend or interest yield. This means thatpension funds and individuals have to save much more for retirement. Instead ofimproving their life, it makes them work harder and borrow more just to stay inplace.

Thebanking system’s alternative to “the road to serfdom” thus turns out to be a roadto debt peonage. This financial engineering turns out to be worse thangovernment planning. The banks have taken over the Federal Reserve and Treasuryand put their lobbyists in charge – men such as Tim Geithner and the others withties to Rubinomics dating from the Clinton administration, and especially toGoldman Sachs and other giant Wall Street firms. 
Sothe first thing to realize is something that is characteristic of all great reformmovements. Voters are not yet supporting a radical position to restructure thewhole system. But at least they are coming to see that small marginal reformswon’t work, or are simply trick promises, like President Obama’s promise thatbanks would renegotiate mortgages for homes in negative equity as part of the quid pro quo for the bailouts theyreceived from Treasury Secretary Geithner. There’s been no quid pro quo, merely talk.
Peoplesee that law enforcement is missing when it comes to the banks and Wall Street.So simply restoring the criminal justice system would be progress. It used tobe that if you ran a fraud, if you cheated people, if you lied on your incometax and falsified statistics, then you would be sent to jail. But the Obamaadministration has appointed Eric Holder to represent Wall Street. He has notthrown any bankers in jail, recognizing that they are the major campaigncontributors of the party, after all.
Whatis easiest for most people to accept is the idea of restoring the way theeconomy used to be more in balance – back when people earned income by beingproductive rather than getting rich by transferring other peoples’ savings andpublic giveaways into their own pockets. But what I sensed in New York wasanger not only at this economic problem, but the fact that the political systemis broken. There is no one to vote for as an alternative to pro-bankcandidates. So what began as anger has become a gathering awareness that Mr.Obama was simply fooling voters instead of leading the change he promised.That’s what politicians do, of course. But people hoped that he might bedifferent. That was the gullibility he played on. He has turned into thenightmare they thought they were voting against.
Movingto the right of the Republicans, he started his administration by appointingthe Simpson-Bowles Commission staffed by opponents of Social Security. Herecently followed that up by appointing the Congressional Super-committee ofTwelve to come out with an even more anti-Social Security, anti-Medicaid and anti-minorityposition that the Republicans could get away with. If they would have tried topass such a right-wing policy, the Democratic Congress would have refused topass it. But they don’t know how to deal with a Democratic president whoappoints Wall Street lobbyists to his cabinet and acts like Margaret Thatchersaying that There Is No Alternative (TINA) to making Social Securityrecipients, labor and minorities pay for Wall Street’s bad gambles and banklosses. He has helped Wall Street capture the government – on behalf of the 1%.
Theman whom Mr. Obama asked to be his mentor when he joined the Senate was Joe Lieberman.He evidently gave Obama expert advice about how to raise funds from thefinancial class by delivering his liberal constituency to his Wall Streetcampaign contributors. So the problem is not that President Obama is wellmeaning but inept – an idealist who just can’t fight the vested interests andinsiders. He’s thrown in his lot with them. In fact, he really seems to believethe right-wing, pro-Wall Street ideology – that the economy can’t functionwithout a financial system that guarantees “savers” (the top 1%) against loss,even when the bottom 99% have to pay more and more.
Andon a personal level, Mr. Obama knows that his fund raising comes mainly fromWall Street, and the only way to get this money is to sell out hisconstituency. You’ve got to give him enough credit to recognize this obviousfact.
Theupshot is that we now have a political nightmare. Yet Mr. Obama still seems tobe the best that the Democrats can offer! This is why I think the protestors aresaying they are not going to let the Democrats jump in front of the parade totry and mobilize support for their party. Like the Irish say: “Fool me once,shame on you. Fool me twice, shame on me.” They realize that the financialsystem is broken and that neither party is trying to do much about it. So thepolitical system has to be changed as well as the economic system.
Supposeyou were going to design a society from scratch. Would you create what we havenow? Or would you start, for instance, by reforming the most egregiousdistortions of campaign finance? As matters stand, Goldman Sachs has been ableto buy the right to name who is going to be Treasury Secretary. They selectedGeithner, who gave them $29 billion from A.I.G. just before he was appointed.It’s like that all down the line – in both parties. Every Democratic congressionalcommittee chairman has to pay to the Party a $150,000 to buy the chairmanship. Thismeans that the campaign donors get to determine who gets committee chairmanships.This is oligarchy, not democracy. So the system is geared to favor whoever cangrab the most money. Wall Street does it by financial siphoning and assetstripping. Politicians do it by getting money from the beneficiaries – the 1%.
Oncepeople realize that they’re being screwed, that’s a pre-revolutionarysituation. It’s a situation where they can get a lot of sympathy and support,precisely by not doing what The New York Times and the other paperssay they should do: come up with someneat solutions. They don’t have to propose a solution because right now thereisn’t one – without changing the system with many, many changes. So many thatit’s like a new Constitution. Politics as well as the economy need to berestructured. What’s developing now is how to think about the economic andpolitical problems that are bothering people. It is not radical to realize thatthe economy isn’t working. That is the first stage to realizing that a realalternative is needed. We’ve been under a radical right-wing attack – and needto respond in kind. The next half-year probably will be spent trying to spellout what the best structure would be.
Thereis no way to clean up the mess that the Democratic Party has become sincepolitics moved into Wall Street’s pockets. The Republicans also have become aparty of lobbyists. So it looks like there is no solution within the existentsystem. This is a revolutionary, radical situation. The longer that the OWSgroups can spend on diagnosing the problem and explaining how far wrong thesystem has gone, the longer the demonstrators can gain support by showing thatthey share the feelings everybody has these days – a feeling of beingvictimized. This is what is creating a raw material that has to potential toflower into political activism, perhaps by spring or summer next year.
Themost important message is that all this impoverishment and indebtedness isunnecessary. There is no inherent economic reason for things to be this way. Itis not really the way that “markets” need to work. There are many kinds ofmarkets, with many different sets of rules. So the important task is to explainto people how many possibilities there are to make things better. And of course,this is what frightens politicians, Wall Street lobbyists and the other membersof the pro-oligarchic army of financial raiders.
AlanMinsky: Well,let me ask you this – and of course, it is something of an intellectualspeculative game. Let’s say that it’s January 2013, and the radical progressivecandidate X, Dennis Kucinich or Bernie Sanders, is miraculously electedpresident, and Michael Hudson is the chief economic advisor. What would you do,given the opportunity with a favorable congress, to transform the Americaneconomy in ways that would produce policies you think would at least start tohelp break the grip that the financial sector has had in devastating theeconomy in terms of its performance for average households?
RestoreAmerica’s past prosperity and rescue the future from the financial grabbers

MichaelHudson: Thereare two stages to any kind of a transformation. The first stage is simply to startre-applying the laws and the taxes that the Bush and Obama administrations havestopped applying. You don’t want Wall Street to be able to put its industrylobbyists in charge of making policy. So the first task is to get rid ofGeithner, Holder and the similar pro-financial administrators whom Obama hasappointed to his cabinet and in key regulatory positions. This kind of clean-uprequires election reform – and that requires a reversal of the Supreme Court’srecent Citizens United ruling that enables a financial oligarchy to lock in itscontrol of American politics.
Oneof the first things that is needed – and only a President could do it – wouldbe to demand a new Supreme Court. This is what Roosevelt threatened, and itworked. You make them an offer they can’t refuse. If this can be done only byexpanding the number of court justices, then you nominate ones who are notradicals on the right – judges who will reverse the 19th-centuryruling that corporations are the same as people and indeed have even morerights (and certainly more campaign money) than people have. You then move to cleanup the corruption of the legal system that has protected financial crooks insteadof sending them to jail. Financial fraud has effectively been decriminalized,at least by Wall Street’s largest campaign contributors.
Butthis is really Bill Black’s area. I’m only going to talk about financial andtax reforms here, because they are the easiest to understand and ultimately themost immediate task.
Preventmonopoly price gouging. Bring bank charges in line with the real cost of doingbusiness.
Whatis needed today is more than just going back to the past ideals. After all, thegood old class warfare was not so rosy either. But at least the Progressive Erahad a program to subordinate finance to serve industry and the rest of theeconomy. The problem is that its reformers never really had a chance to carryout the ideas that classical economists outlined.
Theclassical idea of a free market economy was radical in its way – precisely bybeing natural and thus getting rid of unnatural warping by special privilegesfor absentee landlords and banks. This led logically to socialism, which is whythe history of economic thought has been dropped – indeed, excluded – fromtoday’s academic curriculum. What is needed is to complete the direction ofchange that World War I interrupted and that the Cold War further untracked.After 1945 you didn’t hear anything any more about what John Maynard Keynescalled for at the end of his General Theory in 1936: “euthanasia of the rentier.” But this was the great fightfor many centuries of European reform, and it even was the path along whichindustrial capitalism was expected to evolve. So let me begin with what wasdiscussed back in the 1930s, trying to recover the Progressive Era reforms.
Settingup a more fair banking and financial system requires changing the taxfavoritism as well, which I will discuss below. There are a number of good proposalsfor reform. One of the easiest and least radical is set up a public option forbanking. Instead of relying on Bank of America or Citibank for credit cards,the government would set up a bank and offer credit cards, check clearing andbank transfers at cost.
Theidea throughout the nineteenth century was to create this kind of publicoption. There was a Post Office bank, and that could still be elaborated toprovide banking services at cost or at a subsidized price. After all, in Russiaand Japan the post office banks are the largest of all!
Thelogic for a public banking option is the same as for governments providing freeroads: The aim is to minimize the cost of living and doing business. On mywebsite, michael-hudson.com, I have posted an article just published in the American Journal of Economics and Sociologyon Simon Patten. He was the first professor of economics at the Wharton BusinessSchool. He spelled out the logic of public infrastructure as a “fourth” factorof production (alongside, labor, capital and land). Its productivity is to bemeasured not by how much profit it makes, but by how much it lowers theeconomy’s price structure.
Providinga public option would limit the ability of banks to charge monopoly prices forcredit cards and loans. It also would not engage in the kind of gambling thathas made today’s financial system so unstable and put depositors’ money atrisk. Ideally, I would like to see banks act more like the old savings banksand S&Ls. In fact, the most radical regulatory proposal I would like to seeis the Chicago Plan promoted in the 1930s by the free marketer Herbert Simon. Thisis what Dennis Kucinich recently proposed in his National Emergency EmploymentDefense Act of 2011 (NEED).
Thismay seem radical at first glance, but how else are you going to stop the banksfrom their mad computerized gambling, political lobbying and creating creditfor corporate raiders to borrow and pay their financial backers by emptying outpension funds and cutting back long-term investment, research and development?
Theguiding idea is to take away the banks’ privilege of creating credit electronicallyon their computer keyboards. You make banks do what textbooks say they aresupposed to do: take deposits and lend them out in a productive way. If thereare not enough deposits in the economy, the Treasury can create money on itsown computer keyboards and supply it to the banks to lend out. But you wouldrewrite the banking laws so that normal banks are not able to gamble or playthe computerized speculative games they are playing today.
Theobvious way to do this is to reinstate the Glass-Steagall Act so that theycan’t gamble with insured deposits. This way, speculators would bear the burdenif they lost, not be in a position to demand “taxpayer liability” bythreatening to collapse the normal vanilla banking system. AbolishingGlass-Steagall opened the way for Wall Street to organize a protection racketby mixing up peoples’ deposits with bad gambles and with the growth of debtsway beyond the ability to be paid.
Tosum up, the idea is to shape markets so as to steer the banks to lend foractual capital formation and to finance home ownership without credit inflationthat simply bids up prices for homes as well as for other real estate, stocks,and bonds.
Taxreform needs to back up and reinforce financial reform

Today’seconomic problem is systemic. This is what makes any solution so inherentlyradical. In changing part of the economic system, you have to adjusteverything, just as when a doctor operates on a human body. Financial reformrequires tax reform, because much of the financial problem stems from the tax shiftoff real estate and finance onto labor and industry. Taxes are the business ofCongress, not the President or his advisors, but I assume that  your question really concerns what I thinkthe economy needs.

Themost obvious fiscal task that most people understand – and support – is to restorethe progressive tax system that existed before 1980, and especially before theClinton and Bush tax cuts. It used to be that the rich paid taxes. Now theydon’t. But the key isn’t just income-tax rates as such. What needs to berecognized is the kind of taxes thatshould be levied – or how to shift them back off labor onto property where theywere before the 1980s. You need to restore the land taxes to collect the “freelunch” that is not really “free” if it is pledged to pay the banks in the formof mortgage interest.
Overthe past few decades the tax system has been warped more and more by banklobbyists to promote debt financing. Debt is their “product,” after all. Asmatters now stand, earnings and dividends on equity financing must pay muchhigher tax rates than cash flow financed with debt. This distortion needs to bereversed. It not only taxes the top 1% at a much lower rate than the bottom99%, but it also encourages them to make money by lending to the bottom 99%. The result is that the bottom 99% have becomeincreasingly indebted to the top 1%. The enormous bank debt attached to realestate does not reflect rising rents as much as it reflects the tax cuts onproperty. Wall Street lobbyists have backed Congressional leaders who haveshifted taxes onto consumers via sales taxes and income taxes, as well as FICApayroll withholding. This ploy treats Social Security and Medicare as “userfees” rather than paying them out of the overall budget – and financed out ofprogressive taxation on the top 1%. If wage earners pay more in FICA, you canbe sure that the wealthy get a tax cut.
Thisanti-progressive tax shift is largely responsible for the richest 1% doublingtheir share of income. It also has led to the 99% having to pay banks what theyused to pay the tax collector. They pay interest rather than taxes. If I wereeconomic advisor, I would explain just how this works – which is what I alreadytry to do on my website. In a nutshell, the tax shifts since World War II haveleft more and more of the land’s site value to be capitalized into interestpayments on bank loans. So the banks have ended up with what used to be takenby landowners. There is no inherent need for this. It doesn’t help the economy;it merely inflates a real estate bubble. Economic growth and employment wouldbe much stronger if income tax rates were lowered for most people. Propertyowners and speculators would pay. There would be less free lunch and more“earned” income.
TheObama Administration has proposed the worse of both worlds – getting rid of thetax deductibility of interest for homeowners. This would squeeze them, withoutscaling down the bank debts that have absorbed the cuts in property taxes. SoMr. Obama is sponsoring yet another anti-consumer proposal to make the bottom99% pay for government – while using government funds to subsidize the banksand bail out their bad bets.
Whatneeds to be done is to remove the tax deductibility of interest for investorsin general. This tax favoritism is a subsidy for debt financing – and the mainproblem that the U.S. economy faces today is over-indebtedness. A good policywould aim at lowering the debt overhead. Debt leveraging should be discouraged,not encouraged.
Speculatorshave borrowed largely to make capital gains. They originally were taxed asnormal income in the 1913 income tax. The logic was that capital gains build upa person’s savings, just as earning an income does. But the financial and realestate interests fought back, and today there is only a tiny tax on capitalgains – a tax that sellers don’t have to pay if they plow their money intoanother property or investment to make yet moregains! So when Wall Street firms, hedge funds, and other speculators avoidpaying normal taxes by saying that they don’t “earn” money but simply makecapital gains, this is where a large part of today’s economic inequality lies.
Iwould tax these asset-price gains (mainly land prices) either at the fullincome-tax rate or even higher. The wealthy 1% make their gains in this way,claiming that they don’t really “earn” income, so they shouldn’t have to paytaxes as if they are wages or profits. But that’s precisely the problem: Whywould you want to subsidize not earningincome, but merely making money by speculating – and then demanding that thegovernment bail you out if you make a capital loss when your speculations gobad, on the logic that you have tied up most peoples’ normal bank deposits inthese gambles? This is what exists today. And it is why people think the systemis so unfair. Most of the super-rich families have made their fortunes byinsider dealing and financial extraction, not by being productive. They are not“job creators” these days. They have become job destroyers by demanding austerityto squeeze out more money from a shrinking economy to pay themselves.
Manypeople – especially homeowners – are sucked into thinking that low capitalgains taxes make them rich, and that high property prices leave them with lessto spend. But this turns out not to be the case once the process works its waythrough the economy. These workings need to be more widely explained.
Formany years families got rich as the price of their home rose. But they also gotmuch deeper in debt. The real estate bubble was debt-financed. A property isworth whatever a bank will lend against it. The end result of “easy lending”and tax distortions to favor interest-bearing debt is that most families own asmaller and smaller proportion of their homes’ value – and have to pay risingmortgage debt service. This doesn’t really make them better off. The job of apresident or economic advisor should be to explain how this game works, sopeople can get off the debt treadmill. The economy will shrink if it doesn’tlower its debt overhead.
Iwould close down tax avoidance in offshore banking centers by treating offshoredeposits by Americans as “earned but hoarded” income and tax it at 90%. Yourestore the rates of the Eisenhower administration when the country had themost rapid debt growth that it had. You reinstate criminal penalties forfinancial fraud and tax evasion by misrepresentation. But the tax avoiders areasking the Obama administration to do just the opposite: to declare a “taxholiday” to “induce” them bring this offshore money home – by not taxing it atall! This kind of giveaway should be blocked. Tax avoiders among the top 1%should be penalized, not rewarded.
TheBush-Obama administration has promoted “neoliberal” tax and financial policiesthat have reversed a century of Progressive Era reforms. The past 30 years havesuffered a radical transformation of tax policy and financial policy. So ittakes an equally deep response to undo their distortions and put the Americaneconomy back on track. The guiding idea is simply to restore normalcy. TheProgressive Era that emerged from classical economics understood the economicbenefits of taxing unearned wealth (“rent extraction”) at the top of theeconomic pyramid, provide basic infrastructure services at cost rather thancreating fiefdoms for privatizers to install tollbooths and make their gainstax-exempt. Radical neoliberalism has reversed this. It has vastly multipliedthe debts owed by the bottom 99% to the top 1%.
Thisis leading to debt peonage and what really is neo-feudalism. We are seeing akind of financial warfare that is as grabbing as the old-style militaryconquests. The aim is the same: the land, basic infrastructure, and use of thegovernment to extract tribute.
Afinancial Clean Slate
Torestore the kind of normalcy that made America rich, most important long-termpolicy would be to recognize what is going to be inevitable for every economy. Debtsneed to be written down – and the politically easiest way to cut through thetangle is to write them off altogether. That would free the bottom 99% fromtheir debt bondage to the top 1%. It would be a Clean Slate, starting over –and trying to do things right this time around. The creditors have not used thebanking system to make America more productive and richer. They have used it asa vehicle to reduce the population to debt serfdom.
Adebt write-down sounds radical and unworkable, but it’s been done since WorldWar II with great success. It is the program the Allies carried out in theGerman economy in that country’s 1947 currency reform. This was the policy thatcreated Germany’s Economic Miracle. And America could experience a similarmiracle.
Anyeconomy would benefit from cancelling the bad debts that have been built up.Keeping them on the books will handcuff the economy and cause debt deflation bydiverting income to pay debt service rather than to spend on goods andservices. We are going into a new economic depression – not just a “GreatRecession” – because most spending is now on finance, insurance and realestate, not on goods and basic services. So markets are shrinking, andunemployment is rising. That is what will happen if debts are not written down.
Thiscan be done either by a Clean Slate across the board, or it can be done moreselectively, by applying what’s been New York State law since before the Revolution,going back to when New York was still a colony. I’m referring to the law of fraudulent conveyance. Thislaw says that if a creditor lends to a borrower without having any idea how thedebtor can pay in the normal course of business, without losing property, theloan is deemed to be fraudulent and declared null and void.
Applyingthis law to defaulting homeowners would free the homes that are in negativeequity throughout the country. It would undo the fraudulent loans that bankshave made, the trick loans with exploding interest rates, balloon mortgages andso forth. It also would free debt-strapped companies from being forced to selloff their parts to make their corporate raiders rich.
Asan associated law, pension funds should be first in line in any bankruptcy, notat the end of the line as they now are. Current practice lets companies replacedefined-benefit programs with defined contribution programs – where all that employeesknow is how much is taken out of their paychecks each month, not what they willbe receiving when they retire. Only the managers have protected their pensionswith special contracts and golden parachutes. This is the reverse of whatpension plans were supposed to do.
EmployeeStock Option Plans (ESOPs) also are being looted. This is what has recentlyhappened at the Chicago Tribune by Sam Zell, who borrowed money and repaid itby looting the Tribune’s ESOP. A fraudulent conveyance law applied at thenationwide level would stop this. People like Zell are looters, and so are thebankers behind him. This is the class warfare that is being waged today. Andthe war is being won by the 1% – while pushing the American economy intodepression.
Aspart of the rules to define what constitutes “fraudulent” or irresponsiblelending, mortgage debt service should be reduced to the rate that FDIC headSheila Bair recommended: 32 percent. The problem with debt write-downs, ofcourse, is that when you cancel a debt, you also cancel some party’s savings onthe other side of the balance sheet. In this case, the banks would have to giveup their claims. But this is what used to happen in financial crashes. Whendebts go bad, so do the loans. So the government is radical in saying thatAmerica’s debts will be kept on the book, but it will create new public debt togive to Wall Street for its own debts that have gone bad as a result of itsreckless lending.
Thebanks obviously would prefer to bankrupt millions of homeowners than to takeeven a penny’s loss. Their fight to make the government pay for their bad debts– while keeping the debts of the bottom 99% on the books – explains why therichest 1% of Americans have doubled their share of income and the returns towealth in the last thirty years. That’s inequitable. Their accumulation offinancial savings has not taken the form of tangible capital investment infactories or other enterprises to employ labor. It’s looted labor’s savings andgot employees so deep into debt that they’re “one paycheck away fromhomelessness.” They’re afraid to go on strike, because they would miss amortgage payment or an electric utility payment, and their credit-card interestrates would jump to 29 percent. They’re even afraid to complain about workingconditions today, because they’re afraid of getting fired.
Thiswasn’t formerly the case. It is the result of “financial engineering” thatshould be reversed. There’s no reason to treat the savings that the top 1% havegot in this predatory way as being sacrosanct. Their gain – their increase infinancial wealth, in bonds, savings and ownership of bank loans – equals thedebts that have been imposed on the bottom 99%. This is the basic equation thatneeds to be more widely understood. It is not an equilibrium equation. Atleast, it won’t be political equilibrium when people start to push back.
Weare seeing a financial grab for special privilege and for political power touse the government to subsidize the top 1% at the expense of the bottom 99%, byscaling back social spending, Social Security, Medicare, Medicaid and federalrevenue sharing with the states. The Treasury and Federal Reserve have printednew debt to give to Wall Street – some $13 trillion and still counting sinceLehman Brothers went under in September 2008. Tim Geithner and Hank Paulsonused the crisis as an opportunity to give enormous U.S. debt to Wall Street.That’s more radical than reversing this to restore the economy’s financialstructure to the way it used to be. If you don’t restore it, you’ve replacedeconomic democracy with financial oligarchy.
Theway to reverse this power grab is to reverse the giveaways by cancelling thebad debts that have been loaded onto the economy. That is the only way torestore balance and prevent the polarization that has occurred. The problem isthat savings by the top 1% have been used in a parasitic, extractive manner. Ithas been lent to the bottom 99 percent to get them deeper and deeper into debt.So they “owe their soul to the company store,” as the song Sixteen Tons put it.“You get a day older, and deeper in debt.”
Thegovernment itself has become more indebted, most recently by the $13 trillionin new debt printed and given to the banks to make sure that no financialgambler need surfer a loss. At the same time the Obama administration did this,it claimed that a generation in the future, the Social Security system may be$1 trillion in deficit. And that, Mr. Obama says, would cause a crisis – andnot leave enough to continue subsidizing his leading campaign contributors. Soin view of this new debt creation – while moving debts to consumers and SocialSecurity contributors to the bottom  ofthe list – if you are going to reverse the bad-debt polarization that we’vereached today, it is necessary to do more than simply reinstate progressivetaxation and shift the tax system so that you collect predatory unearned income– what the classical economists call economic rent. The burdensome debts needto be written off.
Thisprobably will take half a year to get most people to realize and accept theidea is to reconstitute the system by lending for productive purposes, notspeculation and rent-seeking opportunities. You want to stop the banks fromlobbying for monopolies to create a market for leveraged buy-outs of theseopportunities – and of course also for real estate speculation and outrightgambling.
WallStreet has orchestrated and lobbied for a rentieralliance whose wealth is growing at the expense of the economy at large. It isextractive, not productive. But this fact is concealed by the national incomeand product accounts reporting financial and other FIRE sector takings as“earnings” rather than as a transfer payment from the economy at large – from the 99% – to the 1% of Americanswho have got rich by making money off finance, monopolies and absentee realestate rent-seeking.
Itis not really radical to resist Wall Street’s financial attack on America.Resistance is natural – and so is a reversal of the savings they have built upby indebting the rest of the economy to themselves. They have taken their moneyand run, stashing it offshore in tax-avoidance islands, in Switzerland, Britainand other havens. Shame on the political hacks who defend this and who attackOccupy Wall Street simply for resisting the financial sector’s own radicalpower grab and shifted taxes off themselves onto the bottom 99%.
Privatizationis an asset grab masquerading as full employment policy

AlanMinsky: I haveone final question for you. Would you support programs that are put forwardsimilar to what Randy Wray, an associate of yours, suggests in terms ofgovernment employment projects to guarantee full employment?

MichaelHudson: Yes, ofcourse I approve. In fact, it was I who introduced Randy, Pavlina Tchernova andothers to Dennis Kucinich’s staff to help write his full-employment proposalalong these lines. My first caveat is to warn against letting the Obamaadministration turn these projects into a military giveaway. I think Randy andI are in agreement with that.
Mysecond caveat is to prevent this full-employment program from creating a laterprivatization giveaway to Wall Street – that is, infrastructure that thegovernment will sell off to the ruling party’s major campaign contributors forpennies on the dollar. This is what Public/Private Partnerships have become, aspioneered in England under Margaret Thatcher and Tony Blair. Wall Street isrubbing its metaphoric hands and saying, “That’s a great idea! Let thegovernment pay for infrastructure and spend a billion dollars on a bridge – andthen sell it to us for a dollar.” The “us” may not be the banks themselves, buttheir customers, who will borrow the money and pay the banks an underwritingcommission as well as interest on the money they use to buy what the governmentis privatizing.
Thepretense is that privatization is more efficient. But privatizers add oninterest and financial fees, high executive salaries and bonuses, and turn theroads into toll roads and other infrastructure into neofeudal fiefdoms tocharge monopolistic access fees for people to use. This is what has happened inChicago when it sold off its sidewalks to let bankers finance parking meters inexchange for a loan. Chicago needed this loan because the financial lobbyistsdemanded that it cut taxes on commercial real estate and on the rich. So thefinancial sector first creates a problem by loading the economy down with debt,and then “solves” it by demanding privatization sell-offs under distressconditions.
Thisis happening not only in America, but in Greece and other countries under theinsistence of Europe’s bank lobbying organization, the European Central Bank.That’s why there are riots in Athens. So the financial war against society isnot only being waged here, but throughout the world.
Toanswer your question about how best to promote full employment, the aim shouldbe to invest public money in a way that the Republicans and Democrats cannot laterturn around and privatize the capital investment at a giveaway price. So I amall on favor of public infrastructure spending as long as you have safeguardsagainst the financial fraud and giveaways to insiders of the sort that that thecurrent administration is sponsoring. The privatizers and their banks would liketo install tollbooths on new bridges and get a free ride to turn America into atollbooth economy. But that’s really another story.

AlanMinsky: MichaelHudson, I want to thank you for joining us on KPFK.

Michael Hudson
:Thanks a lot, Alan.

What the eurozone needs is functional finance

By Fadhel Kaboub.
(Also featured in the Financial Times)

Sir, The eurozone’s obsession with “sound finance” is the root cause of today’s sovereign debt crisis. Austerity measures are not only incapable of solving the sovereign debt problem, but also a major obstacle to increasing aggregate demand in the eurozone. The Maastricht treaty’s “no bail-out, no exit, no default” clauses essentially amount to a joint economic suicide pact for the eurozone countries.

The eurozone needs a functional finance approach to economic policy, which requires that the European Central Bank, as the monopoly issuer of the currency, acts as a lender of last resort to allow the expansion of aggregate demand through government spending. The ECB’s refusal to use its firepower is what is driving eurozone bond yields to unsustainable levels. The ECB can easily purchase Italian debt to lower yields, but such action would constitute a violation of Article 123 of the European Union treaty. Unfortunately, the likelihood of a swift political solution to amend the EU treaty is highly improbable. Therefore, the most likely and least painful scenario for Italy (Greece, Portugal, Spain etc) is an exit from the eurozone combined with partial default and devaluation of a new national currency.It has been fascinating to watch the entire world turned upside down during the past few weeks over the eurozone’s self-inflicted economic pain – the same pain that so many developing countries have suffered under the Washington consensus austerity measures and sound finance principles.

The takeaway lesson is that financial sovereignty and adequate policy co-ordination between fiscal and monetary authorities are the prerequisites for economic prosperity. In the end, what matters is not the level of the deficit or the national debt, but rather their effects on employment, price stability and economic growth.

Dr. Fadhel Kaboub, Assistant Professor of Economics, Denison University, Granville, OH, US