Tag Archives: Michael Hudson

2,181 Italians Pack a Sports Arena to Learn Modern Monetary Theory: The Economy Doesn’t Need to Suffer Neoliberal Austerity

By Michael Hudson

I have just returned from Rimini, Italy, where I experienced one of the most amazing spectacles of my academic life. Four of us associated with the University of Missouri at Kansas City (UMKC) were invited to lecture for three days on Modern Monetary Theory (MMT) and explain why Europe is in such monetary trouble today – and to show that there is an alternative, that the enforced austerity for the 99% and vast wealth grab by the 1% is not a force of nature.

Stephanie Kelton (incoming UMKC Economics Dept. chair and editor of its economic blog, New Economic Perspectives), criminologist and law professor Bill Black, investment banker Marshall Auerback and me (along with a French economist, Alain Parquez) stepped into the basketball auditorium on Friday night. We walked down, and down, and further down the central aisle, past a packed audience reported as over 2,100. It was like entering the Oscars as People called out our first names. Some told us they had read all of our economics blogs. Stephanie joked that now she understood how the Beatles felt. There was prolonged applause – all for an intellectual rather than a physical sporting event.

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Thousands Turn Out to Learn MMT in Italy

Banks Weren’t Meant to Be Like This. What Will their Future Be – and What is the Government’s Proper Financial Role?

By Michael Hudson
This article first appeared at FAZ

The inherently symbioticrelationship between banks and governments recently has been reversed. Inmedieval times, wealthy bankers lent to kings and princes as their majorcustomers. But now it is the banks that are needy, relying on governments forfunding – capped by the post-2008 bailouts to save them from going bankruptfrom their bad private-sector loans and gambles.

Yetthe banks now browbeat governments – not by having ready cash but bythreatening to go bust and drag the economy down with them if they are notgiven control of public tax policy, spending and planning. The process has gonefurthest in the United States. Joseph Stiglitz characterizes the Obamaadministration’s vast transfer of money and pubic debt to the banks as a “privatizingof gains and the socializing of losses. It is a ‘partnership’ in which onepartner robs the other.”[1]Prof. Bill Black describes banks as becoming criminogenic and innovating“control fraud.”[2]High finance has corrupted regulatory agencies, falsified account-keeping by“mark to model” trickery, and financed the campaigns of its supporters todisable public oversight. The effect is to leave banks in control of how theeconomy’s allocates its credit and resources.

If there is any silver lining totoday’s debt crisis, it is that the present situation and trends cannotcontinue. So this is not only an opportunity to restructure banking; we havelittle choice. The urgent issue is who will control the economy: governments,or the financial sector and monopolies with which it has made an alliance.
Fortunately, it is not necessary tore-invent the wheel. Already a century ago the outlines of a productiveindustrial banking system were well understood. But recent bank lobbying hasbeen remarkably successful in distracting attention away from classicalanalyses of how to shape the financial and tax system to best promote economicgrowth – by public checks on bank privileges.

How banks broke the social compact,promoting their own special interests
People used to know what banks did.Bankers took deposits and lent them out, paying short-term depositors less thanthey charged for risky or less liquid loans. The risk was borne by bankers, notdepositors or the government. But today, bank loans are made increasingly tospeculators in recklessly large amounts for quick in-and-out trading. Financialcrashes have become deeper and affect a wider swath of the population as debtpyramiding has soared and credit quality plunged into the toxic category of“liars’ loans.”
Thefirst step toward today’s mutual interdependence between high finance andgovernment was for central banks to act as lenders of last resort to mitigatethe liquidity crises that periodically resulted from the banks’ privilege ofcredit creation. In due course governments also provided public depositinsurance, recognizing the need to mobilize and recycle savings into capitalinvestment as the Industrial Revolution gained momentum. In exchange for thissupport, they regulated banks as public utilities.
Over time, banks have sought todisable this regulatory oversight, even to the point of decriminalizing fraud.Sponsoring an ideological attack on government, they accuse publicbureaucracies of “distorting” free markets (by which they mean markets free forpredatory behavior). The financial sector is now making its move to concentrateplanning in its own hands.
The problem is that the financialtime frame is notoriously short-term and often self-destructive. And inasmuchas the banking system’s product is debt, its business plan tends to beextractive and predatory, leaving economies high-cost. This is why checks andbalances are needed, along with regulatory oversight to ensure fair dealing.Dismantling public attempts to steer banking to promote economic growth (ratherthan merely to make bankers rich) has permitted banks to turn into somethingnobody anticipated. Their major customers are other financial institutions,insurance and real estate – the FIRE sector, not industrial firms. Debtleveraging by real estate and monopolies, arbitrage speculators, hedge funds andcorporate raiders inflates asset prices on credit. The effect of creating“balance sheet wealth” in this way is to load down the “real”production-and-consumption economy with debt and related rentier charges, adding more to the cost of living and doingbusiness than rising productivity reduces production costs.
Since 2008, public bailouts havetaken bad loans off the banks’ balance sheet at enormous taxpayer expense –some $13 trillion in the United States, and proportionally higher in Irelandand other economies now being subjected to austerity to pay for “free market” deregulation.Bankers are holding economies hostage, threatening a monetary crash if they donot get more bailouts and nearly free central bank credit, and more mortgageand other loan guarantees for their casino-like game. The resulting “too big tofail” policy means making governments too weak to fight back.
The process that began with centralbank support thus has turned into broad government guarantees against bankinsolvency. The largest banks have made so many reckless loans that they havebecome wards of the state. Yet they have become powerful enough to capturelawmakers to act as their facilitators. The popular media and even academiceconomic theorists have been mobilized to pose as experts in an attempt toconvince the public that financial policy is best left to technocrats – of thebanks’ own choosing, as if there is no alternative policy but for governmentsto subsidize a financial free lunch and crown bankers as society’s rulers.
The Bubble Economy and its austerityaftermath could not have occurred without the banking sector’s success inweakening public regulation, capturing national treasuries and even disablinglaw enforcement. Must governments surrender to this power grab? If not, whoshould bear the losses run up by a financial system that has becomedysfunctional? If taxpayers have to pay, their economy will become high-costand uncompetitive – and a financial oligarchy will rule.

The present debt quandary
The endgame in times past was towrite down bad debts. That meant losses for banks and investors. But today’sdebt overhead is being kept in place – shifting bad loans off bank balancesheets to become public debts owed by taxpayers to save banks and theircreditors from loss. Governments have given banks newly minted bonds or centralbank credit in exchange for junk mortgages and bad gambles – withoutre-structuring the financial system to create a more stable, less debt-riddeneconomy. The pretense is that these bailouts will enable banks to lend enoughto revive the economy by enough to pay its debts.
Seeing the handwriting on the wall,bankers are taking as much bailout money as they can get, and running, usingthe money to buy as much tangible property and ownership rights as they canwhile their lobbyists keep the public subsidy faucet running.
The pretense is that debt-strappedeconomies can resume business-as-usual growth by borrowing their way out ofdebt. But a quarter of U.S. real estate already is in negative equity – worthless than the mortgages attached to it – and the property market is stillshrinking, so banks are not lending except with public Federal HousingAdministration guarantees to cover whatever losses they may suffer. In anyevent, it already is mathematically impossible to carry today’s debt overheadwithout imposing austerity, debt deflation and depression.
This is not how banking was supposedto evolve. If governments are to underwrite bank loans, they may as well bedoing the lending in the first place – and receiving the gains. Indeed, since2008 the over-indebted economy’s crash led governments to become the majorshareholders of the largest and most troubled banks – Citibank in the UnitedStates, Anglo-Irish Bank in Ireland, and Britain’s Royal Bank of Scotland. Yetrather than taking this opportunity to run these banks as public utilities andlower their charges for credit-card services – or most important of all, tostop their lending to speculators and gamblers – governments left these banksoperating as part of the “casino capitalism” that has become their businessplan.
There is no natural reason formatters to be like this. Relations between banks and government used to be thereverse. In 1307, France’s Philip IV (“The Fair”) set the tone by seizing theKnights Templars’ wealth, arresting them and putting many to death – not onfinancial charges, but on the accusation of devil-worshipping and satanicsexual practices. In 1344 the Peruzzi bank went broke, followed by the Bardi bymaking unsecured loans to Edward III of England and other monarchs who died ordefaulted. Many subsequent banks had to suffer losses on loans gone bad to realestate or financial speculators.
By contrast, now the U.S., British,Irish and Latvian governments have taken bad bank loans onto their nationalbalance sheets, imposing a heavy burden on taxpayers – while letting bankerscash out with immense wealth. These “cash for trash” swaps have turned themortgage crisis and general debt collapse into a fiscal problem. Shifting thenew public bailout debts onto the non-financial economy threaten to increasethe cost of living and doing business. This is the result of the economy’sfailure to distinguish productive from unproductive loans and debts. It helpsexplain why nations now are facing financial austerity and debt peonage insteadof the leisure economy promised so eagerly by technological optimists a centuryago.
So we are brought back to thequestion of what the proper role of banks should be. This issue was discussedexhaustively prior to World War I. It is even more urgent today.

How classical economists hoped to modernizebanks as agents of industrial capitalism
Britain was the home of theIndustrial Revolution, but there was little long-term lending to financeinvestment in factories or other means of production. British and Dutchmerchant banking was to extend short-term credit on the basis of collateralsuch as real property or sales contracts for merchandise shipped(“receivables”). Buoyed by this trade financing, merchant bankers weresuccessful enough to maintain long-established short-term funding practices.This meant that James Watt and other innovators were obliged to raiseinvestment money from their families and friends rather than from banks.
It was the French and Germans whomoved banking into the industrial stage to help their nations catch up. InFrance, the Saint-Simonians described the need to create an industrial creditsystem aimed at funding means of production. In effect, the Saint-Simoniansproposed to restructure banks along lines akin to a mutual fund. A start wasmade with the Crédit Mobilier, founded by the Péreire Brothers in 1852. Theiraim was to shift the banking and financial system away from debt financing atinterest toward equity lending, taking returns in the form of dividends thatwould rise or decline in keeping with the debtor’s business fortunes. By givingbusinesses leeway to cut back dividends when sales and profits decline,profit-sharing agreements avoid the problem that interest must be paidwilly-nilly. If an interest payment is missed, the debtor may be forced intobankruptcy and creditors can foreclose. It was to avoid this favoritism forcreditors regardless of the debtor’s ability to pay that prompted Mohammed toban interest under Islamic law.
Attracting reformers ranging fromsocialists to investment bankers, the Saint-Simonians won government backingfor their policies under France’s Third Empire. Their approach inspired Marx aswell as industrialists in Germany and protectionists in the United States andEngland. The common denominator of this broad spectrum was recognition that anefficient banking system was needed to finance the industry on which a strongnational state and military power depended.

Germany develops an industrial bankingsystem
Itwas above all in Germany that long-term financing found its expression in theReichsbank and other large industrial banks as part of the “holy trinity” ofbanking, industry and government planning under Bismarck’s “state socialism.”German banks made a virtue of necessity. British banks “derived the greaterpart of their funds from the depositors,” and steered these savings andbusiness deposits into mercantile trade financing. This forced domestic firmsto finance most new investment out of their own earnings. By contrast, Germany’s“lack of capital … forced industry to turn to the banks for assistance,” notedthe financial historian George Edwards. “A considerable proportion of the fundsof the German banks came not from the deposits of customers but from thecapital subscribed by the proprietors themselves.[3]As a result, German banks “stressed investment operations and were formed notso much for receiving deposits and granting loans but rather for supplying theinvestment requirements of industry.”
Whenthe Great War broke out in 1914, Germany’s rapid victories were widely viewedas reflecting the superior efficiency of its financial system. To someobservers the war appeared as a struggle between rival forms of financialorganization. At issue was not only who would rule Europe, but whether thecontinent would have laissez faire or a more state-socialist economy.
In1915, shortly after fighting broke out, the Christian Socialistpriest-politician Friedrich Naumann published Mitteleuropa, describing how Germany recognized more than any othernation that industrial technology needed long‑term financing and governmentsupport. His book inspired Prof. H. S. Foxwell in England to draw on hisarguments in two remarkable essays published in the Economic Journal in September and December 1917: “The Nature of theIndustrial Struggle,” and “The Financing of Industry and Trade.” He endorsedNaumann’s contention that “the old individualistic capitalism, of what he callsthe English type, is giving way to the new, more impersonal, group form; to thedisciplined scientific capitalism he claims as German.”
Thiswas necessarily a group undertaking, with the emerging tripartite integrationof industry, banking and government, with finance being “undoubtedly the maincause of the success of modern German enterprise,” Foxwell concluded (p. 514).German bank staffs included industrial experts who were forging industrialpolicy into a science. And in America, Thorstein Veblen’s The Engineers and the Price System (1921) voiced the new industrialphilosophy calling for bankers and government planners to become engineers inshaping credit markets.
Foxwellwarned that British steel, automotive, capital equipment and other heavyindustry was becoming obsolete largely because its bankers failed to perceivethe need to promote equity investment and extend long‑term credit. They basedtheir loan decisions not on the new production and revenue their lending mightcreate, but simply on what collateral they could liquidate in the event ofdefault: inventories of unsold goods, real estate, and money due on bills forgoods sold and awaiting payment from customers. And rather than investing inthe shares of the companies that their loans supposedly were building up, theypaid out most of their earnings as dividends – and urged companies to do thesame. This short time horizon forced business to remain liquid rather thanhaving leeway to pursue long‑term strategy.
Germanbanks, by contrast, paid out dividends (and expected such dividends from theirclients) at only half the rate of British banks, choosing to retain earnings ascapital reserves and invest them largely in the stocks of their industrialclients. Viewing these companies as allies rather than merely as customers fromwhom to make as large a profit as quickly as possible, German bank officialssat on their boards, and helped expand their business by extending loans toforeign governments on condition that their clients be named the chiefsuppliers in major public investments. Germany viewed the laws of history asfavoring national planning to organize the financing of heavy industry, andgave its bankers a voice in formulating international diplomacy, making them“the principal instrument in the extension of her foreign trade and politicalpower.”
A similarcontrast existed in the stock market. British brokers were no more up to thetask of financing manufacturing in its early stages than were its banks. Thenation had taken an early lead by forming Crown corporations such as the EastIndia Company, the Bank of England and even the South Sea Company. Despite thecollapse of the South Sea Bubble in 1720, the run-up of share prices from 1715to 1720 in these joint-stock monopolies established London’s stock market as apopular investment vehicle, for Dutch and other foreigners as well as forBritish investors. But the market was dominated by railroads, canals and largepublic utilities. Industrial firms were not major issuers of stock.
In anycase, after earning their commissions on one issue, British stockbrokers werenotorious for moving on to the next without much concern for what happened tothe investors who had bought the earlier securities. “As soon as he hascontrived to get his issue quoted at a premium and his underwriters haveunloaded at a profit,” complained Foxwell, “his enterprise ceases. ‘To him,’ asthe Times says, ‘a successful flotation is of more importance than a soundventure.’”
Much thesame was true in the United States. Its merchant heroes were individualistictraders and political insiders often operating on the edge of the law to gaintheir fortunes by stock-market manipulation, railroad politicking for landgiveaways, and insurance companies, mining and natural resource extraction.America’s wealth-seeking spirit found its epitome in Thomas Edison’shit-or-miss method of invention, coupled with a high degree of litigiousness toobtain patent and monopoly rights.
In sum, neither British nor Americanbanking or stock markets planned for the future. Their time frame was short, andthey preferred rent-extracting projects to industrial innovation. Most banksfavored large real estate borrowers, railroads and public utilities whoseincome streams easily could be forecast. Only after manufacturing companiesgrew fairly large did they obtain significant bank and stock market credit.
What isremarkable is that this is the tradition of banking and high finance that hasemerged victorious throughout the world. The explanation is primarily themilitary victory of the United States, Britain and their Allies in the GreatWar and a generation later, in World War II.

The regression toward burdensomeunproductive debts after World War I
The development of industrial creditled economists to distinguish between productive and unproductive lending. Aproductive loan provides borrowers with resources to trade or invest at aprofit sufficient to pay back the loan and its interest charge. An unproductiveloan must be paid out of income earned elsewhere. Governments must pay warloans out of tax revenues. Consumers must pay loans out of income they earn ata job – or by selling assets. These debt payments divert revenue away frombeing spent on consumption and investment, so the economy shrinks. Thistraditionally has led to crises that wipe out debts, above all those that areunproductive.
In the aftermath of World War I theeconomies of Europe’s victorious and defeated nations alike were dominated bypostwar arms and reparations debts. These inter-governmental debts were to payfor weapons (by the Allies when the United States unexpectedly demanded thatthey pay for the arms they had bought before America’s entry into the war), andfor the destruction of property (by the Central Powers), not new means of production. Yetto the extent that they were inter-governmental, these debts were moreintractable than debts to private bankers and bondholders. Despite the factthat governments in principle are sovereign and hence can annul debts owed toprivate creditors, the defeated Central Power governments were in no position to dothis.
And among the Allies, Britain ledthe capitulation to U.S. arms billing, captive to the creditor ideology that “adebt is a debt” and must be paid regardless of what this entails in practice oreven whether the debt in fact can be paid. Confronted with America’s demand forpayment, the Allies turned to Germany to make them whole. After taking itsliquid assets and major natural resources, they insisted that it squeeze outpayments by taxing its economy. No attempt was made to calculate just howGermany was to do this – or most important, how it was to convert this domesticrevenue (the “budgetary problem”) into hard currency or gold. Despite the factthat banking had focused on international credit and currency transfers sincethe 12th century, there was a broad denial of what John MaynardKeynes identified as a foreign exchange transferproblem.
Never before had there been anobligation of such enormous magnitude. Nevertheless, all of Germany’s politicalparties and government agencies sought to devise ways to tax the economy toraise the sums being demanded. Taxes, however, are levied in a nation’s owncurrency. The only way to pay the Allies was for the Reichsbank to take thisfiscal revenue and throw it onto the foreign exchange markets to obtain thesterling and other hard currency to pay. Britain, France and the otherrecipients then paid this money on their Inter-Ally debts to the United States.
AdamSmith pointed out that no government ever had paid down its public debt. Butcreditors always have been reluctant to acknowledge that debtors are unable topay. Ever since David Ricardo’s lobbying for their perspective in Britain’sBullion debates, creditors have found it their self-interest to promote adoctrinaire blind spot, insisting that debts of any magnitude could be paid.They resist acknowledging a distinction between raising funds domestically (byrunning a budget surplus) and obtaining the foreign exchange to payforeign-currency debt. Furthermore, despite the evident fact that austeritycutbacks on consumption and investment can only be extractive,creditor-oriented economists refused to recognize that debts cannot be paid byshrinking the economy.[4]Or that foreign debts and other international payments cannot be paid indomestic currency without lowering the exchange rate.
The more domestic currency Germanysought to convert, the further its exchange rate was driven down against thedollar and other gold-based currencies. This obliged Germans to pay much morefor imports. The collapse of the exchange rate was the source ofhyperinflation, not an increase in domestic money creation as today’screditor-sponsored monetarist economists insist. In vain Keynes pointed to thespecific structure of Germany’s balance of payments and asked creditors tospecify just how many German exports they were willing to take, and to explainhow domestic currency could be converted into foreign exchange withoutcollapsing the exchange rate and causing price inflation.
Tragically, Ricardian tunnel visionwon Allied government backing. Bertil Ohlin and Jacques Rueff claimed thateconomies receiving German payments would recycle their inflows to Germany andother debt-paying countries by buying their imports. If income adjustments didnot keep exchange rates and prices stable, then Germany’s falling exchange ratewould make its exports sufficiently more attractive to enable it to earn therevenue to pay.
Thisis the logic that the International Monetary Fund followed half a century laterin insisting that Third World countries remit foreign earnings and even permitflight capital as well as pay their foreign debts. It is the neoliberal stancenow demanding austerity for Greece, Ireland, Italy and other Eurozoneeconomies.
Banklobbyists claim that the European Central Bank will risk spurring domestic wageand price inflation of it does what central banks were founded to do: financebudget deficits. Europe’s financial institutions are given a monopoly right toperform this electronic task – and to receive interest for what a real centralbank could create on its own computer keyboard.
But why it is less inflationary forcommercial banks to finance budget deficits than for central banks to do this?The bank lending that has inflated a global financial bubble since the 1980shas left as its legacy a debt overhead that can no more be supported today thanGermany was able to carry its reparations debt in the 1920s. Would governmentcredit have so recklessly inflated asset prices?

How debt creation has fueled asset-priceinflation since the 1980s
Banking in recent decades has notfollowed the productive lines that early economic futurists expected. As notedabove, instead of financing tangible investment to expand production andinnovation, most loans are made against collateral, with interest to be paidout of what borrowers can make elsewhere. Despite being unproductive in theclassical sense, it was remunerative for debtors from 1980 until 2008 – not byinvesting the loan proceeds to expand economic activity, but by riding the waveof asset-price inflation. Mortgage credit enabled borrowers to bid up propertyprices, drawing speculators and new customers into the market in theexpectation that prices would continue to rise. But hothouse credit infusionsmeant additional debt service, which ended up shrinking the market for goodsand services.
Under normal conditions the effectwould have been for rents to decline, with property prices following suit,leading to mortgage defaults. But banks postponed the collapse into negativeequity by lowering their lending standards, providing enough new credit to keepon inflating prices. This averted a collapse of their speculative mortgage andstock market lending. It was inflationary – but it was inflating asset prices,not commodity prices or wages. Two decades of asset price inflation enabledspeculators, homeowners and commercial investors to borrow the interest fallingdue and still make a capital gain.
This hope for a price gain madewinning bidders willing to pay lenders all the current income – making banksthe ultimate and major rentier incomerecipients. The process of inflating asset prices by easing credit terms andlowering the interest rate was self-feeding. But it also was self-terminating,because raising the multiple by which a given real estate rent or businessincome can be “capitalized” into bank loans increased the economy’s debtoverhead.
Securities markets became part ofthis problem. Rising stock and bond prices made pension funds pay more topurchase a retirement income – so “pension fund capitalism” was coming undone.So was the industrial economy itself. Instead of raising new equity financingfor companies, the stock market became a vehicle for corporate buyouts. Raidersborrowed to buy out stockholders, loading down companies with debt. The mostsuccessful looters left them bankrupt shells. And when creditors turned theireconomic gains from this process into political power to shift the tax burdenonto wage earners and industry, this raised the cost of living and doingbusiness – by more than technology was able to lower prices.

The EU rejects central bank money creation,leaving deficit financing to the banks
So the plan has backfired. When“hard money” policy makers limited central bank power, they assumed that publicdebts would be risk-free. Obliging budget deficits to be financed by privatecreditors seemed to offer a bonanza: being able to collect interest forcreating electronic credit that governments can create themselves. But now,European governments need credit to balance their budget or face default. Sobanks now want a central bank to create the money to bail them out for the badloans they have made.
For starters, the ECB’s €489 billionin three-year loans at 1% interest gives banks a free lunch arbitrageopportunity (the “carry trade”) to buy Greek and Spanish bonds yielding ahigher rate. The policy of buying government bonds in the open market – afterbanks first have bought them at a lower issue price – gives the banks a quickand easy trading gain.
How are these giveaways lessinflationary than for central banks to directly finance budget deficits androll over government debts? Is the aim of giving banks easy gains simply toprovide them with resources to resume the Bubble Economy lending that led totoday’s debt overhead in the first place?

Governmentscan create new credit electronically on their own computer keyboards as easilyas commercial banks can. And unlike banks, their spending is expected to servea broad social purpose, to be determined democratically. When commercial banksgain policy control over governments and central banks, they tend to supporttheir own remunerative policy of creating asset-inflationary credit – leavingthe clean-up costs to be solved by a post-bubble austerity. This makes the debtoverhead even harder to pay – indeed, impossible.
So we are brought back to the policyissue of how public money creation to finance budget deficits differs from issuinggovernment bonds for banks to buy. Is not the latter option a convoluted way tofinance such deficits – at a needless interest charge? When governmentsmonetize their budget deficits, they do not have to pay bondholders.
I have heard bankers argue thatgovernments need an honest broker to decide whether a loan or public spendingpolicy is responsible. To date their advice has not promoted productive credit.Yet they now are attempting to compensate for the financial crisis by tellingdebtor governments to sell off property in their public domain. This “solution”relies on the myth that privatization is more efficient and will lower the costof basic infrastructure services. Yet it involves paying interest to the buyersof rent-extraction rights, higher executive salaries, stock options and otherfinancial fees.
Most cost savings are achieved byshifting to non-unionized labor, and typically end up being paid to theprivatizers, their bankers and bondholders, not passed on to the public. Andbankers back price deregulation, enabling privatizers to raise access charges.This makes the economy higher cost and hence less competitive – just theopposite of what is promised.
Banking has moved so far away fromfunding industrial growth and economic development that it now benefitsprimarily at the economy’s expense in a predator and extractive way, not bymaking productive loans. This is now the great problem confronting our time.Banks now lend mainly to other financial institutions, hedge funds, corporateraiders, insurance companies and real estate, and engage in their ownspeculation in foreign currency, interest-rate arbitrage, and computer-driventrading programs. Industrial firms bypass the banking system by financing newcapital investment out of their own retained earnings, and meet their liquidityneeds by issuing their own commercial paper directly. Yet to keep the bankcasino winning, global bankers now want governments not only to bail them outbut to enable them to renew their failed business plan – and to keep thepresent debts in place so that creditors will not have to take a loss.
This wish means that society shouldlose, and even suffer depression. We are dealing here not only with greed, butwith outright antisocial behavior and hostility.
Europe thus has reached a criticalpoint in having to decide whose interest to put first: that of banks, or the“real” economy. History provides a wealth of examples illustrating the dangersof capitulating to bankers, and also for how to restructure banking along moreproductive lines. The underlying questions are clear enough:
  • Have banks outlived their historical role, or can they be restructured tofinance productive capital investment rather than simply inflate asset prices?
  • Would a public option provide less costly and better directed credit?
  • Why not promote economic recovery by writing down debts to reflect the abilityto pay, rather than relinquishing more wealth to an increasingly aggressivecreditor class?

Solving the Eurozone’s financialproblem can be made much easier by the tax reforms that classical economistsadvocated to complement their financial reforms. To free consumers andemployers from taxation, they proposed to levy the burden on the “unearnedincrement” of land and natural resource rent, monopoly rent and financialprivilege. The guiding principle was that property rights in the earth,monopolies and other ownership privileges have no direct cost of production,and hence can be taxed without reducing their supply or raising their price,which is set in the market. Removing the tax deductibility for interest is theother key reform that is needed.
A rent tax holds down housing pricesand those of basic infrastructure services, whose untaxed revenue tends to becapitalized into bank loans and paid out in the form of interest charges.Additionally, land and natural resource rents – along with interest – are theeasiest to tax, because they are highly visible and their value is easy toassess.
Pressure to narrow existing budgetdeficits offers a timely opportunity to rationalize the tax systems of Greeceand other PIIGS countries in which the wealthy avoid paying their fair share oftaxes. The political problem blocking this classical fiscal policy is that it“interferes” with the rent-extracting free lunches that banks seek to lendagainst. So they act as lobbyists for untaxing real estate and monopolies (andthemselves as well). Despite the financial sector’s desire to see governmentsremain sufficiently solvent to pay bondholders, it has subsidized an enormouspublic relations apparatus and academic junk economics to oppose the taxpolicies that can close the fiscal gap in the fairest way.


Itis too early to forecast whether banks or governments will emerge victoriousfrom today’s crisis. As economies polarize between debtors and creditors,planning is shifting out of public hands into those of bankers. The easiest wayfor them to keep this power is to block a true central bank or strong publicsector from interfering with their monopoly of credit creation. The counter isfor central banks and governments to act as they were intended to, by providinga public option for credit creation.

[1] Joseph E. Stiglitz,“Obama’s Ersatz Capitalism,” The New YorkTimes, April 1, 2009
[2] http://neweconomicperspectives.org, and The Best Way to Rob a Bank is to OwnOne (2005).
[3] George W. Edwards, The Evolution of Finance Capitalism (NewYork: 1938):68.
[4] I review the literaturefrom the 1920s, its Ricardian pedigree and subsequent revival by the IMF andother creditor institutions in Trade,Development and Foreign Debt: A History of Theories of Polarization v.Convergence in the World Economy (1992; new ed. ISLET 2010). I provide thepolitical background in SuperImperialism: The Economic Strategy of American Empire (New York: Holt,Rinehart and Winston, 1972; 2nd ed., London: Pluto Press, 2002),

Geithner’s Ploy: Saving U.S. Banks at Taxpayer Expense, Once Again

By Michael Hudson

U.S. and foreign stockmarkets continue to zigzag wildly in response to expectations about whether theeuro can survive, in the face of populations suffering under neoliberalausterity policies being imposed on Ireland, Greece, Spain, Italy, etc. Here’sthe story that I’m being told by Europeans regarding the recent turmoil inGreece and other European debtor and budget-deficit economies. (The details arenot out, as the negotiations have been handled in utter secrecy. So whatfollows is a reconstruction.)

In autumn 2012, it became apparentthat Greece could not roll over its public debt. The EU concluded that debtshad to be written down by 50 percent. The alternative was outright default onall debt. So basically, the solution for Greece reflected what had happened toLatin American debt in the 1980s, when governments replaced existing debts andbank loans with Brady bonds, named for Reagan Treasury Secretary Nicolas F.Brady. These bonds had a lower principal, but at least their payment was deemedsecure. And indeed, their payments were made.

This write-down seemed radical, butEuropean banks already had hedged their bets and taken out default insurance.U.S. banks were the counterparties to much of this insurance.

In December (?) 2011, a quartercentury after Mr. Brady, Mr. Obama’s Secretary Geithner went to Europe met withEU leaders to demand that Greece make the write-downs voluntary on the part ofbanks and creditors. He explained that U.S. banks had bet that Greece would notdefault – and their net worth position was so shaky that if they had to pay ontheir bad gambles, they would go broke.
As German bankers have described thesituation to me, Mr. Geithner said he would kill the European banks andeconomies if they did not agree to take it on the chin and suffer the lossesthemselves – so that U.S. banks would not have to pay off on the collateralizeddefault swaps (CDOs) and other gambles for which they had collected billions ofdollars.

Europeans were enraged. But Mr.Geithner made a deal. OK, he finally agreed: The White House would indeedpermit Greece to default. But America needed time.

He agreed to open a credit line fromthe Federal Reserve Bank to the European Central Bank (ECB). The Fed wouldprovide the money to lend to banks during the interim when European governmentfinances faltered. The banks would be given time to unwind their defaultguarantees. In the end, the ECB would be the creditor. It – and presumably theFed – would bear the losses, “at taxpayer expense.” The U.S. banks (andprobably the European ones too) can avoid taking a loss that would wipe outtheir net worth.

What really are the details? What wedo know is that U.S. banks are pulling bank their credit lines to Europeanbanks and other borrowers as the old ones expire. The ECB is stepping in tofill the gap. This is called ‘providing liquidity,’ but it seems more to be acase of providing solvency for a basically insolvent situation. A debt thatcan’t be paid, won’t be, after all.

Geithner’s idea is that what workedbefore will work again. When the Federal Reserve or Treasury picks up a bankloss, they simply print government debt or open a Federal Reserve bank depositfor the banks. The public doesn’t view this as being as blatant as simplyhanding out money. The government says it is “saving the financial system,”without spelling out the cost at “taxpayer expense” (not that of the banks!).

It’s a giveaway.

Europe’s Transition From Social Democracy to Oligarchy

By Michael Hudson
This article was first published by Frankfurter Allgemeine Zeitung, Dec. 3, 2011, as “Der Krieg der Banken gegen das Volk.

The easiest way to understandEurope’s financial crisis is to look at the solutions being proposed to resolveit. They are a banker’s dream, a grab bag of giveaways that few voters would belikely to approve in a democratic referendum. Bank strategists learned not torisk submitting their plans to democratic vote after Icelanders twice refusedin 2010-11 to approve their government’s capitulation to pay Britain and theNetherlands for losses run up by badly regulated Icelandic banks operatingabroad. Lacking such a referendum, mass demonstrations were the only way forGreek voters to register their opposition to the €50 billion in privatizationsell-offs demanded by the European Central Bank (ECB) in autumn 2011.
The problemis that Greece lacks the ready money to redeem its debts and pay the interestcharges. The ECB is demanding that it sell off public assets – land, water andsewer systems, ports and other assets in the public domain, and also cut backpensions and other payments to its population. The “bottom 99%” understandablyare angry to be informed that the wealthiest layer of the population  is largely responsible for the budgetshortfall by stashing away a reported €45 billion of funds stashed away inSwiss banks alone. The idea of normal wage-earners being obliged to forfeittheir pensions to pay for tax evaders – and for the general un-taxing of wealthsince the regime of the colonels – makes most people understandably angry. Forthe ECB, EU and IMF “troika” to say that whatever the wealthy take, steal orevade paying must be made up by the population at large is not a politicallyneutral position. It comes down hard on the side of wealth that has beenunfairly taken.
A democratictax policy would reinstate progressive taxation on income and property, andwould enforce its collection – with penalties for evasion. Ever since the 19thcentury, democratic reformers have sought to free economies from waste,corruption and “unearned income.” But the ECB “troika” is imposing a regressivetax – one that can be imposed only by turning government policy-making over toa set of unelected “technocrats.”
Tocall the administrators of so anti-democratic a policy “technocrats” seems tobe a cynical scientific-sounding euphemism for financial lobbyists orbureaucrats deemed suitably tunnel-visioned to act as useful idiots on behalfof their sponsors. Theirideology is the same austerity philosophy that the IMF imposed on Third Worlddebtors from the 1960s through the 1980s. Claiming to stabilize the balance ofpayments while introducing free markets, these officials sold off exportsectors and basic infrastructure to creditor-nation buyers. The effect was todrive austerity-ridden economies even deeper into debt – to foreign bankers andtheir own domestic oligarchies.
Thisis the treadmill on which Eurozone social democracies are now being placed.Under the political umbrella of financial emergency, wages and living standardsare to be scaled back and political power shifted from elected government totechnocrats governing on behalf of large banks and financial institutions.Public-sector labor is to be privatized – and de-unionized, while SocialSecurity, pension plans and health insurance are scaled back.
Thisis the basic playbook that corporate raiders follow when they empty outcorporate pension plans to pay their financial backers in leveraged buyouts. Italso is how the former Soviet Union’s economy was privatized after 1991, transferringpublic assets into the hands of kleptocrats, who worked with Western investmentbankers to make the Russian and other stock exchanges the darlings of theglobal financial markets. Property taxes were scaled back while flat taxes wereimposed on wages (a cumulative 59 percent in Latvia). Industry was dismantledas land and mineral rights were transferred to foreigners, economies driveninto debt and skilled and unskilled labor alike was obliged to emigrate to findwork.
Pretendingto be committed to price stability and free markets, bankers inflated a realestate bubble on credit. Rental income was capitalized into bank loans and paidout as interest. This was enormously profitable for bankers, but it left theBaltics and much of Central Europe debt strapped and in negative equity by2008. Neoliberals applaud their plunging wage levels and shrinking GDP as asuccess story, because these countries shifted the tax burden onto employmentrather than property or finance. Governments bailed out banks at taxpayerexpense.
Itis axiomatic that the solution to any major social problem tends to create evenlarger problems – not always unintended! From the financial sector’s vantagepoint, the “solution” to the Eurozone crisis is to reverse the aims of theProgressive Era a century ago – what John Maynard Keynes gently termed“euthanasia of the rentier” in 1936.The idea was to subordinate the banking system to serve the economy rather thanthe other way around. Instead, finance has become the new mode of warfare –less ostensibly bloody, but with the same objectives as the Viking invasionsover a thousand years ago, and Europe’s subsequent colonial conquests:appropriation of land and natural resources, infrastructure and whatever otherassets can provide a revenue stream. It was to capitalize and estimate suchvalues, for instance, that William the Conqueror compiled the Domesday Bookafter 1066, a model of ECB and IMF-style calculations today.
Thisappropriation of the economic surplus to pay bankers is turning the traditionalvalues of most Europeans upside down. Imposition of economic austerity,dismantling social spending, sell-offs of public assets, de-unionization oflabor, falling wage levels, scaled-back pension plans and health care incountries subject to democratic rules requires convincing voters that there isno alternative. It is claimed that without a profitable banking sector (nomatter how predatory) the economy will break down as bank losses on bad loansand gambles pull down the payments system. No regulatory agencies can help, nobetter tax policy, nothing except to turn over control to lobbyists to savebanks from losing the financial claims they have built up.
What banks wantis for the economic surplus to be paid out as interest, not used for risingliving standards, public social spending or even for new capital investment.Research and development takes too long. Finance lives in the short run. Thisshort-termism is self-defeating, yet it is presented as science. Thealternative, voters are told, is the road to serfdom: interfering with the“free market” by financial regulation and even progressive taxation.
Thereis an alternative, of course. It is what European civilization from the 13th-centurySchoolmen through the Enlightenment and the flowering of classical politicaleconomy sought to create: an economy free of unearned income, free of vestedinterests using special privileges for “rent extraction.” At the hands of theneoliberals, by contrast, a free market is one free for a tax-favored rentierclass to extract interest, economic rent and monopoly prices.
Rentier interests present their behavioras efficient “wealth creation.” Business schools teach privatizers how toarrange bank loans and bond financing by pledging whatever they can charge forthe public infrastructure services being sold by governments. The idea is topay this revenue to banks and bondholders as interest, and then make a capitalgain by raising access fees for roads and ports, water and sewer usage andother basic services. Governments are told that economies can be run moreefficiently by dismantling public programs and selling off assets.
Neverhas the gap between pretended aim and actual effect been more hypocritical.Making interest payments (and even capital gains) tax-exempt deprives governmentsof revenue from the user fees they are relinquishing, increasing their budgetdeficits. And instead of promoting price stability (the ECB’s ostensiblepriority), privatization increases prices for infrastructure, housing and othercosts of living and doing business by building in interest charges and otherfinancial overhead – and much higher salaries for management. So it is merely aknee-jerk ideological claim that this policy is more efficient simply becauseprivatizers do the borrowing rather than government.
Thereis no technological or economic need for Europe’s financial managers to imposedepression on much of its population. But there is a great opportunity to gainfor the banks that have gained control of ECB economic policy. Since the 1960s,balance-of-payments crises have provided opportunities for bankers and liquidinvestors to seize control of fiscal policy – to shift the tax burden ontolabor and dismantle social spending in favor of subsidizing foreign investorsand the financial sector. They gain from austerity policies that lower livingstandards and scale back social spending. A debt crisis enables the domesticfinancial elite and foreign bankers to indebt the rest of society, using theirprivilege of credit (or savings built up as a result of less progressive taxpolicies) as a lever to grab assets and reduce populations to a state of debtdependency.
Thekind of warfare now engulfing Europe is thus more than just economic in scope.It threatens to become a historic dividing line between the past half-century’sepoch of hope and technological potential to a new era of polarization as afinancial oligarchy replaces democratic governments and reduces populations todebt peonage.
For so boldan asset and power grab to succeed, it needs a crisis to suspend the normalpolitical and democratic legislative processes that would oppose it. Politicalpanic and anarchy create a vacuum into which grabbers can move quickly, usingthe rhetoric of financial deception and a junk economics to rationalizeself-serving solutions by a false view of economic history – and in the case oftoday’s ECB, German history in particular.
A central bank that is blocked from acing like one
Governmentsdo not need to borrow from commercial bankers or other lenders. Ever since theBank of England was founded in 1694, central banks have printed money tofinance public spending. Bankers also create credit feely – when they make aloan and credit the customer’s account, in exchange for a promissory notebearing interest. Today, these banks can borrow reserves from the governmentcentral bank at a low annual interest rate (0.25% in the United States) andlend it out at a higher rate. So banks are glad to see the government’s centralbank create credit to lend to them. But when it comes to governments creatingmoney to finance their budget deficits for spending in the rest of the economy,banks would prefer to have this market and its interest return for themselves.
Europeancommercial banks are especially adamant that the European Central Bank shouldnot finance government budget deficits. But private credit creation is notnecessarily less inflationary than governments monetizing their deficits(simply by printing the money needed). Most commercial bank loans are madeagainst real estate, stocks and bonds – providing credit that is used to bid uphousing prices, and prices for financial securities (as in loans for leveragedbuyouts).
Itis mainly government that spends credit on the “real” economy, to the extentthat public budget deficits employ labor or are spent on goods and services. Ifgovernments avoid paying interest by having their central banks printing moneyon their own computer keyboards rather than borrowing from banks that do thesame thing on their own keyboards. (Abraham Lincoln simply printed currencywhen he financed the U.S. Civil War with “greenbacks.”)
Bankswould like to use their credit-creating privilege to obtain interest forlending to governments to finance public budget deficits. So they have aself-interest in limiting the government’s “public option” to monetize itsbudget deficits. To secure a monopoly on their credit-creating privilege, bankshave mounted a vast character assassination on government spending, and indeedon government authority in general – which happens to be the only authoritywith sufficient power to control their power or provide an alternative publicfinancial option, as Post Office savings banks do in Japan, Russia and othercountries. This competition between banks and government explains the falseaccusations made that government credit creation is more inflationary than whencommercial banks do it.
Thereality is made clear by comparing the ways in which the United States, Britainand Europe handle their public financing. The U.S. Treasury is by far theworld’s largest debtor, and its largest banks seem to be in negative equity,liable to their depositors and to other financial institutions for much largersums that can be paid by their portfolio of loans, investments and assortedfinancial gambles. Yet as global financial turmoil escalates, institutionalinvestors are putting their money into U.S. Treasury bonds – so much that thesebonds now yield less than 1%. By contrast, a quarter of U.S. real estate is innegative equity, American states and cities are facing insolvency and mustscale back spending. Large companies are going bankrupt, pension plans arefalling deeper into arrears, yet the U.S. economy remains a magnet for globalsavings.
Britain’seconomy also is staggering, yet its government is paying just 2% interest. ButEuropean governments are now paying over 7%. The reason for this disparity isthat they lack a “public option” in money creation. Having a Federal Reserve Bankor Bank of England that can print the money to pay interest or roll overexisting debts is what makes the United States and Britain different fromEurope. Nobody expects these two nations to be forced to sell off their publiclands and other assets to raise the money to pay (although they may do this asa policy choice). Given that the U.S. Treasury and Federal Reserve can createnew money, it follows that as long as government debts are denominated indollars, they can print enough IOUs on their computer keyboards so that theonly risk that holders of Treasury bonds bear is the dollar’s exchange ratevis-à-vis other currencies.
Bycontrast, the Eurozone has a central bank, but Article 123 of the Lisbon treatyforbids the ECB from doing what central banks were created to do: create themoney to finance government budget deficits or roll over their debt fallingdue. Future historians no doubt will find it remarkable that there actually isa rationale behind this policy – or at least the pretense of a cover story. Itis so flimsy that any student of history can see how distorted it is. The claimis that if a central bank creates credit, this threatens price stability. Onlygovernment spending is deemed to be inflationary, not private credit!
TheClinton Administration balanced the U.S. Government budget in the late 1990s,yet the Bubble Economy was exploding. On the other hand, the Federal Reserveand Treasury flooded the economy with $13 trillion in credit to the bankingsystem credit after September 2008, and $800 billion more last summer in theFederal Reserve’s Quantitative Easing program (QE2). Yet consumer and commodityprices are not rising. Not even real estate or stock market prices are beingbid up. So the idea that more money will bid up prices (MV=PT) is not operatingtoday.
Commercialbanks create debt. That is their product. This debt leveraging was used formore than a decade to bid up prices – making housing and buying a retirementincome more expensive for Americans – but today’s economy is suffering fromdebt deflation as personal income, business and tax revenue is diverted to paydebt service rather than to spend on goods or invest or hire labor.
Muchmore striking is the travesty of German history that is being repeated againand again, as if repetition somehow will stop people from remembering whatactually happened in the 20th century. To hear ECB officials tellthe story, it would be reckless for a central bank to lend to government,because of the danger of hyperinflation. Memories are conjured up of the Weimarinflation in Germany in the 1920s. But upon examination, this turns out to bewhat psychiatrists call an implanted memory – a condition in which a patient isconvinced that they have suffered a trauma that seems real, but which did notexist in reality.
Whathappened back in 1921 was not a case of governments borrowing from centralbanks to finance domestic spending such as social programs, pensions or healthcare as today. Rather, Germany’s obligation to pay reparations led theReichsbank to flood the foreign exchange markets with deutsche marks to obtainthe currency to buy pounds sterling, French francs and other currency to paythe Allies – which used the money to pay their Inter-Ally arms debts to theUnited States. The nation’s hyperinflation stemmed from its obligation to payreparations in foreign currency. No amount of domestic taxation could haveraised the foreign exchange that was scheduled to be paid.
Bythe 1930s this was a well-understood phenomenon, explained by Keynes and otherswho analyzed the structural limits on the ability to pay foreign debt imposed without regard for the ability to pay out ofcurrent domestic-currency budgets. From Salomon Flink’s The Reichsbank and Economic Germany (1931) to studies of theChilean and other Third World hyperinflations, economists have found a commoncausality at work, based on the balance of payments. First comes a fall in theexchange rate. This raises the price of imports, and hence the domestic pricelevel. More money is then needed to transact purchases at the higher pricelevel. The statistical sequence and lineof causation leads from balance-of-payments deficits to currency depreciationraising import costs, and from these price increases to the money supply, not the other way around.
Today’s“free marketers” writing in the Chicago monetarist tradition (basically that ofDavid Ricardo) leaves the foreign and domestic debt dimensions out of account.It is as if “money” and “credit” are assets to be bartered against goods. But abank account or other form of credit means debt on the opposite side of thebalance sheet. One party’s debt is another party’s saving – and most savingstoday are lent out at interest, absorbing money from the non-financial sectors of the economy. The discussion isstripped down to a simplistic relationship between the money supply and pricelevel – and indeed, only consumer prices, not asset prices. In their eagernessto oppose government spending – and indeed to dismantle government and replaceit with financial planners – neoliberal monetarists neglect the debt burdenbeing imposed today from Latvia and Iceland to Ireland and Greece, Italy, Spainand Portugal.
Ifthe euro breaks up, it is because of the obligation of governments to pay bankersin money that must be borrowed rather than created through their own centralbank. Unlike the United States and Britain which can create central bank crediton their own computer keyboards to keep their economy from shrinking orbecoming insolvent, the German constitution and the Lisbon Treaty prevent thecentral bank from doing this.
Theeffect is to oblige governments to borrow from commercial banks at interest.This gives bankers the ability to create a crisis – threatening to driveeconomies out of the Eurozone if they do not submit to “conditionalities” beingimposed in what quickly is becoming a new class war of finance against labor.
Disabling Europe’s central bank to deprive governments of the power tocreate money
Oneof the three defining characteristics of a nation-state is the power to createmoney. A second characteristic is the power to levy taxes. Both of these powersare being transferred out of the hands of democratically electedrepresentatives to the financial sector, as a result of tying the hands ofgovernment.
Thethird characteristic of a nation-state is the power to declare war. What ishappening today is the equivalent of warfare – but against the power of government! It is above all a financial modeof warfare – and the aims of this financial appropriation are the same as thoseof military conquest: first, the land and subsoil riches on which to chargerents as tribute; second, public infrastructure to extract rent as access fees;and third, any other enterprises or assets in the public domain.
Inthis new financialized warfare, governments are being directed to act asenforcement agents on behalf of the financial conquerors against their owndomestic populations. This is not new, to be sure. We have seen the IMF andWorld Bank impose austerity on Latin American dictatorships, African militarychiefdoms and other client oligarchies from the 1960s through the 1980s.Ireland and Greece, Spain and Portugal are now to be subjected to similar assetstripping as public policy making is shifted into the hands ofsupra-governmental financial agencies acting on behalf of bankers – and therebyfor the top 1% of the population.
Whendebts cannot be paid or rolled over, foreclosure time arrives. For governments,this means privatization selloffs to pay creditors. In addition to being aproperty grab, privatization aims at replacing public sector labor with anon-union work force having fewer pension rights, health care or voice inworking conditions. The old class war is thus back in business – with afinancial twist. By shrinking the economy, debt deflation helps break the powerof labor to resist.
Italso gives creditors control of fiscal policy. In the absence of a pan-EuropeanParliament empowered to set tax rules, fiscal policy passes to the ECB. Acting onbehalf of banks, the ECB seems to favor reversing the 20th century’sdrive for progressive taxation. And as U.S. financial lobbyists have madeclear, the creditor demand is for governments to re-classify public socialobligations as “user fees,” to be financed by wage withholding turned over tobanks to manage (or mismanage, as the case may be). Shifting the tax burden offreal estate and finance onto labor and the “real” economy thus threatens tobecome a fiscal grab coming on top of the privatization grab.
Thisis self-destructive short-termism. The irony is that the PIIGS budget deficitsstem largely from un-taxing property, and a further tax shift will worsenrather than help stabilize government budgets. But bankers are looking only atwhat they can take in the short run. They know that whatever revenue the taxcollector relinquishes from real estate and business is “free” for buyers topledge to the banks as interest. So Greece and other oligarchic economies aretold to “pay their way” by slashing government social spending (but notmilitary spending for the purchase of German and French arms) and shiftingtaxes onto labor and industry, and onto consumers in the form of higher userfees for public services not yet privatized.
In Britain,Prime Minister Cameron claims that scaling back government even more alongThatcherite-Blairite lines will leave more labor and resources available forprivate business to hire. Fiscal cutbacks will indeed throw labor out of work,or at least oblige it to find lower-paid jobs with fewer rights. But cuttingback public spending will shrink the business sector as well, worsening thefiscal and debt problems by pushing economies deeper into recession.
Ifgovernments cut back their spending to reduce the size of their budget deficits– or if they raise taxes on the economy at large, to run a surplus – then thesesurpluses will suck money out of the economy, leaving less to be spent on goodsand services. The result can only be unemployment, further debt defaults andbankruptcies. We may look to Iceland and Latvia as canaries in this financialcoalmine. Their recent experience shows that debt deflation leads toemigration, shortening life spans, lower birth rates, marriages and familyformation – but provides great opportunities for vulture funds to suck wealthupward to the top of the financial pyramid.
Today’seconomic crisis is a matter of policy choice, not necessity. As PresidentObama’s chief of staff Rahm Emanuel quipped: “A crisis is too good anopportunity to let go to waste.” In such cases the most logical explanation isthat some special interest must be benefiting. Depressions increaseunemployment, helping to break the power of unionized as well as non-unionlabor. The United States is seeing a state and local budget squeeze (asbankruptcies begin to be announced), with the first cutbacks coming in thesphere of pension defaults. High finance is being paid – by not paying theworking population for savings and promises made as part of labor contracts andemployee retirement plans. Big fish are eating little fish.
Thisseems to be the financial sector’s idea of good economic planning. But it isworse than a zero-sum plan, in which one party’s gain is another’s loss.Economies as a whole will shrink – and change their shape, polarizing betweencreditors and debtors. Economic democracy will give way to financial oligarchy,reversing the trend of the past few centuries.
IsEurope really ready to take this step? Do its voters recognize that strippingthe government of the public option of money creation will hand the privilegeover to banks as a monopoly? How many observers have traced the almostinevitable result: shifting economic planning and credit allocation to thebanks?
Even ifgovernments provide a “public option,” creating their own money to financetheir budget deficits and supplying the economy with productive credit torebuild infrastructure, a serious problem remains: how to dispose of theexisting debt overhead now acts as a deadweight on the economy. Bankers and thepoliticians they back are refusing to write down debts to reflect the abilityto pay. Lawmakers have not prepared society with a legal procedure for debtwrite-downs – except for New York State’s Fraudulent Conveyance Law, callingfor debts to be annulled if lenders made loans without first assuringthemselves of the debtor’s ability to pay.
Bankers donot want to take responsibility for bad loans. This poses the financial problemof just what policy-makers should do when banks have been so irresponsible inallocating credit. But somebody has to take a loss. Should it be society atlarge, or the bankers?
It is not aproblem that bankers are prepared to solve. They want to turn the problem overto governments – and define the problem as how governments can “make themwhole.” What they call a “solution” to the bad-debt problem is for thegovernment to give them good bonds for bad loans (“cash for trash”) – to bepaid in full by taxpayers. Having engineered an enormous increase in wealth forthemselves, bankers now want to take the money and run – leaving economies debtridden. The revenue that debtors cannot pay will now be spread over the entireeconomy to pay – vastly increasing everyone’s cost of living and doing business.
Whyshould they be “made whole,” at the cost of shrinking the rest of the economy? Thebankers’ answer is that debts are owed to labor’s pension funds, to consumerswith bank deposits, and the whole system will come crashing down if governmentsmiss a bond payment. When pressed, bankers admit that they have taken out riskinsurance – collateralized debt obligations and other risk swaps. But theinsurers are largely U.S. banks, and the American Government is pressuringEurope not to default and thereby hurt the U.S. banking system. So the debttangle has become politicized internationally.
Sofor bankers, the line of least resistance is to foster an illusion that thereis no need for them to accept defaults on the unpayably high debts they haveencouraged.  Creditors always insist thatthe debt overhead can be maintained – if governments simply will reduce otherexpenditures, while raising taxes on individuals and non-financial business.
The reason whythis won’t work is that trying to collect today’s magnitude of debt will injurethe underlying “real” economy, making it even less able to pay its debts. Whatstarted as a financial problem (bad debts) will now be turned into a fiscalproblem (bad taxes). Taxes are a cost of doing business just as paying debtservice is a cost. Both costs must be reflected in product prices. Whentaxpayers are saddled with taxes and debts, they have less revenue free tospend on consumption. So markets shrink, putting further pressure on theprofitability of domestic enterprises. The combination makes any countryfollowing such policy a high-cost producer and hence less competitive in globalmarkets.
Thiskind of financial planning – and its parallel fiscal tax shift – leads towardde-industrialization. Creating ECB or IMF inter-government fiat money leavesthe debts in place, while preserving wealth and economic control in the handsof the financial sector. Banks can receive debt payments on overly mortgagedproperties only if debtors are relieved of some real estate taxes. Debt-strappedindustrial companies can pay their debts only by scaling back pensionobligations, health care and wages to their employees – or tax payments to thegovernment. In practice, “honoring debts” turns out to mean debt deflation and general economic shrinkage.
Thisis the financiers’ business plan. But to leave tax policy and centralizedplanning in the hands of bankers turns out to be the opposite of what the pastfew centuries of free market economics have been all about. The classicalobjective was to minimize the debt overhead, to tax land and natural resourcerents, and to keep monopoly prices in line with actual costs of production(“value”). Bankers have lent increasingly against the same revenues that freemarket economists believed should be the natural tax base.
Sosomething has to give. Will it be the past few centuries of liberal free-marketeconomic philosophy, relinquishing planning the economic surplus to bankers? Orwill society re-assert classical economic philosophy and Progressive Eraprinciples, and re-assert social shaping of financial markets to promotelong-term growth with minimum costs of living and doing business?


At least in the most badly indebtedcountries, European voters are waking up to an oligarchic coup in which taxationand government budgetary planning and control is passing into the hands ofexecutives nominated by the international bankers’ cartel. This result is theopposite of what the past few centuries of free market economics has been allabout.

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.

Iceland’s New Bank Disaster

By OlafurArnarson, Michael Hudson and Gunnar Tomasson*

Theproblem of bank loans gone bad, especially those with government-guaranteessuch as U.S. student loans and Fannie Mae mortgages, has thrown into questionjust what should be a “fair value” for these debt obligations. Should “fairvalue” reflect what debtors can pay – that is, pay without going bankrupt? Oris it fair for banks and even vulture funds to get whatever they can squeezeout of debtors? 

Theanswer will depend largely on the degree to which governments back the claimsof creditors. The legal definition of how much can be squeezed out is becominga political issue pulling national governments, the IMF, ECB and otherfinancial agencies into a conflict pitting banks, vulture funds anddebt-strapped populations against each other.
Thispolarizing issue has now broken out especially in Iceland. The country is nowsuffering a second round of economic and financial distress stemming from thecollapse of its banking system in October 2008. That crisis caused a huge lossof savings not only for domestic citizens but also for international creditorssuch as Deutsche Bank, Barclay’s and their institutional clients.
Stuckwith bad loans and bonds from bankrupt issuers, foreign investors in the old bankssold their bonds and other claims for pennies on the dollar to buyers whose websites described themselves as “specializing in distressed assets,” commonlyknown as vulture funds. (Persistent rumors suggest that some of these areworking with the previous owners of thefailed Icelandic banks, operating out of offshore banking and tax havens and currentlyunder investigation by a Special Prosecutor.)
Atthe time when those bonds were sold in the market, Iceland’s government owned100% of all three new banks. Representing the national interest, it intendedfor the banks to pass on to the debtorsthe write-downs at which they discounted the assets they bought from the oldbanks. This was supposed to be what “fair value” meant: the low marketvaluation at that time. It was supposed to take account of the reasonableability of households and businesses to pay back loans that had becomeunpayable as the currency had collapsed and import prices had risenaccordingly.
TheIMF entered the picture in November 2008, advising the government toreconstruct the banking system in a way that “includes measures to ensure fairvaluation of assets [and] maximize asset recovery.” The government createdthree “good” new banks from the ruins of its failed banks, transferring loansfrom the old to the new banks at a discount of up to 70 percent to reflecttheir fair value, based on independent third party valuation.
Thevultures became owners of two out of three new Icelandic banks. On IMF advicethe government negotiated an agreement so loose as to give them a huntinglicense on Icelandic households and businesses. The new banks acted much asU.S. collection agencies do when they buy bad credit-card debts, bank loans orunpaid bills from retailers at 30% offace value and then hound the debtors to squeeze out as much as they can, byhook or by crook.
These scavengers of the financial system arethe bane of many states. But there is now a danger of their rising to the topof the international legal pyramid, to a point where they are in a position tooppress entire national economies.
Iceland’s case has a special twist. By lawIcelandic mortgages and many other consumer loans are linked to the country’ssoaring consumer price index. Owners of these loans not only can demand 100% offace value, but also can add on the increase in debt principal from theindexing. Thousands of households face poverty and loss of propertybecause of loans that, in some cases, have more than doubled as a result of thecurrency crash and subsequent price inflation. But the IMF and Iceland’sGovernment and Supreme Court have affirmed the price-indexation of loan principaland usurious interest rates, lest the restructured banking system come togrief.
Thisis not what was expected. In 2009 the incoming “leftist” government negotiatedan agreement with creditors to relate loan payments to the discounted transfervalue. On IMF advice, the government handedover controlling interest in the new banks to creditors of the old banks. Theaim was to minimize the cost of refinancing the banking system – but not todestroy the economy. Loans that were transferred from the old banks to the newafter the 2008 crash at a discount of up to 70% to reflect their depreciatedmarket value. This discount was to be passed on to borrowers (households and smallbusinesses) faced with ballooning principal and payments due to CPI indexing ofloans.
Butthe economy’s survival is not of paramount interest to the aggressive hedgefunds that have replaced the established banks that originally lent to theIcelandic banks. Instead of passing on the debt write-downs to households andother debtors, the new banks are revaluing these loan principals upward. Theirdemands are keeping the economy in a straight jacket. Instead of debtrestructuring taking place as originally hoped for, the scene is being set fora new banking crisis.
Somethinghas to give. But so far it is Iceland’s economy, not the vulture funds. With theIMF insisting that the government abstain from intervention, the government’sapproval rating has plunged to just 10% of Icelanders for floundering so badlywhile the new owners call the shots.
TheNew Banks have written off claims on major corporate debtors, whose continuedoperations have ensured their role as cash cows for the banks’ new vultureowners. But household debts acquired at 30 to 50 percent of face value havebeen re-valued at up to 100 percent. The value of owners’ share equity hassoared. The Government has not intervened, accepting the banks’ assertion that theylack the resources to grant meaningful debt relief to households. So unpayablyhigh debts are kept on the books, at transfer prices that afford a windfall tofinancial predators, dooming debtors to a decade or more of negative equity.
Withthe preparatory work done, the time has come for the Vultures to cash inthrough re-sale of New Bank equity shares by yearend. The New Banks have kepttheir corporate cash cows afloat while window-dressing owners’ equity withunrealistic valuations of consumer debts that cannot be paid, except at thecost of bankrupting the economy.
Thereis a feeling that Iceland’s government has been disabled from acting as anhonest broker, as bank lobbyists have worked with Althing insiders – now backedby the IMF – to provide a windfall for creditors.
Theproblem becoming a global one. Many European countries and the United States facecollapsed banks and derailed banking systems. How are the IMF and ECB torespond? Will they prescribe the Icelandic-type model of collaboration betweenGovernment and hedge funds? Or should the government be given power to resist driveby vulture funds to profiteer on an international scale, backed byinternational sanctions against their prey?
The policy danger now facing Europe

Aneconomic crisis is the financial equivalent of military conquest. It is anopportunity for financial elites to make their property grab as ForeclosureTime arrives. It also becomes a political grab to make real the financialclaims that had become uncollectible and hence largely fictitious“mark-to-model” accounting. Populist rhetoric is crafted to mobilize thewidespread financial distress and general discontent as an opportunity to turnlosers against each other rather than at the creditors.
This is the point at which all the years offinancial propaganda pay off. Neoliberals have persuaded the public to believethat banks are needed to “oil the wheels of commerce” – that is, provide the creditbloodstream that brings nourishment to the economy’s moving parts. Only undersuch crisis conditions can banks collect what has become a fictitious buildupof debt claims. The overgrowth of mortgage debt, corporate debt, student loans,credit-card debt and other debts are fictitious because under normalcircumstances there is no way for them to be paid.
ForeclosureTime is not sufficient, because much property has fallen into negative equity –about a quarter of U.S. real estate. And for Ireland, market value of realestate covers only about 30% of the face value of mortgages. So Bailout Timebecomes necessary. The banks turn over their bad loans to the government inexchange for government debt. The Federal Reserve has arranged over $2 trillionof such bank-friendly swaps. Banks receive government bonds or central bankdeposits in exchange for their bad debts, accepted at face value rather than at“mark-to-market” prices.
Atleast in the United States and Britain, the central bank can print as much domesticcurrency as is necessary to pay interest and keep these government bondsliquid. Public agencies then take on the position of creditor vis-à-vis debtorsthat can’t pay.
Thesepublic agencies then have a choice. They may seek to collect the full amount(or at least, as much as they can get), as in the case of Fannie Mae andFreddie Mac in the United States. Or, the government may sell the bad debts tovulture funds, for a fraction of their face value.
After the September 2008 crash, Iceland’s governmenttook over the old, collapsed, banks and created new ones in their place.Original bondholders of the old banks off-loaded the Icelandic bank bonds inthe market for pennies on the dollar. The buyers were vulture funds. Thesebondholders became the owners of the old banks, as all shareholders were wipedout. In October, the government’s monetary authority appointed new boards tocontrol the banks. Three new banks were set up, and all the deposits, mortgagesand other bank loans were transferred to these new, healthier banks – at asteep discount. These new banks received 80 percent of the assets, the oldbanks 20 percent.
Then,owners of the old banks were given control over two of the new banks (87% and95% respectively). The owners of these new banks were called vultures not onlybecause of the steep discount at which the financial assets and claims of theold banks were transferred, but mainly because they already had bought controlof the old banks at pennies on the dollar.
Theresult is that instead of the government keeping the banks and simply wipingthem out in bankruptcy, the government kept aside and let vulture investorsreap a giant windfall – that now threatens to plunge Iceland’s economy intochronic financial austerity. In retrospect, none of this was necessary. Thequestion is, what can the government do to clean up the mess that it hascreated by so gullibly taking bad IMF advice?
Inthe United States, banks receiving TARP bailout money were supposed tonegotiate with mortgage debtors to write down the debts to market prices and/orthe ability to pay. This was not done. Likewise in Iceland, the vulture fundsthat bought the bad “old bank” loans were supposed to pass on the debtwrite-downs to the debtors. This was not done either. In fact, the loanprincipals continued to be revalued upward in keeping with Iceland’s uniqueindexing designed to save banks from taking a loss – that is, to make sure thatthe economy as a whole suffers, even suffering a fatal austerity attack, sothat bankers will be “made whole.” This means making a windfall fortune for thevultures who buy bad loans on the cheap.
Isthis the future of Europe as well? If so, the present financial crisis willbecome the great windfall for vulture banks, and for banks in general. Whereasthe past few centuries have seen financial crashes wipe out the savings andcreditor claims (bonds, bank loans, etc.) that are the counterpart to baddebts, today we are seeing the bad debts kept on the books, but the banks andbondholders that provided the bad loans being made whole at taxpayer expense.
Thisis not how economic democracy was expected to work during the 19th-centurydrive for Parliamentary reform. And by the early 20th century,social democratic and labor parties were supposed to take the lead in movingbanking and credit along with other basic infrastructure into the publicdomain. But today, from Greece to Iceland, governments are acting as enforcersor even as collection agents on behalf of the financial sector – as the OccupyWall Street movement expresses it, the top “1%,” not the bottom 99%.
Icelandstands as a dress rehearsal for this power grab. The IMF and Iceland’sgovernment held a conference in Reykjavik on October 27 to celebrate theostensible success in their reconstruction of Iceland’s economy and bankingsystem.
Inthe United States, the crisis that Obama Chief of Staff Rahm Emanuel celebratedas “too good to let go to waste” will be capped by scaling back Social Securityand Medicare as soon as the autumn Doomsday Clock runs down and theCongressional Super-Committee of 12 (with President Obama holding the 13thvote in case of a tie) gets to agree to make the working population pay WallStreet for its bad loans. The Greek austerity plan thus serves as a dressrehearsal for the U.S. – with the Democratic Party playing the role ascounterparts to Greece’s Socialist Party that is sponsoring austerity, andexpelling labor union leaders from its ranks if they object to the granddouble-cross.

*Olafur Arnarson is an author and columnist atPressan.is. Michael Hudson is Prof. of Economics at UMKC. Gunnar Tomasson is aretired IMF advisor.

Wall Street vs. Greece: G20 Opens as Greek PM Pushes for Referendum on Bailout and Austerity Measures

Michael Hudson  ”Polls report that 66 percent of the Greeks do want to stay in the eurozone. They want to stay in the euro. So, by trying to rephrase the question in a way that will get a “Yes” vote, they avoid asking the really important question: Do you Greeks want to push yourselves into a decade of depression and impose austerity? Do you vote to sell off the public domain, sell off the Athenian water supply, sell off your islands, sell off your mineral rights in the sea, sell off even the Parthenon—do you want to do that so that French banks and American bond insurers will not lose money?”

Don’t Let Him Get Away With It

The Politics of Deception

By Michael Hudson
(Cross-posted from Counterpunch)

The seeds for President Obama’s demagogic press conference on Thursday were planted last summer when he assigned his right-wing Committee of 13 the role of resolving the obvious and inevitable Congressional budget standoff by forging an anti-labor policy that cuts Social Security, Medicare and Medicaid, and uses the savings to bail out banks from even more loans that will go bad as a result of the IMF-style austerity program that Democrats and Republicans alike have agreed to back.

The problem facing Mr. Obama is obvious enough: How can he hold the support of moderates and independents (or as Fox News calls them, socialists and anti-capitalists), students and labor, minorities and others who campaigned so heavily for him in 2008? He has double-crossed them – smoothly, with a gentle smile and patronizing patter talk, but with an iron determination to hand federal monetary and tax policy over to his largest campaign contributors: Wall Street and assorted special interests’ cash. The Democratic Party’s Rubinomics and Clintonomics core operators, plus smooth Bush Administration holdovers such as Tim Geithner, not to mention quasi-Cheney factotums in the Justice Department.

President Obama’s solution has been to do what any political demagogue does: Come out with loud populist campaign speeches that have no chance of becoming the law of the land, while more quietly giving his campaign contributors what they’ve paid him for: giveaways to Wall Street, tax cuts for the wealthy (euphemized as tax “exemptions” and mark-to-model accounting, plus an agreement to count “income” as “capital gains” taxed at a much lower rate).

So here’s the deal the Democratic leadership has made with the Republicans. The Republicans will run someone from their present gamut of guaranteed losers, enabling Mr. Obama to run as the “voice of reason,” as if this somehow is Middle America. This will throw the 2012 election his way for a second term if he adopts their program – a set of rules paid for by the leading campaign contributors to both parties.

President Obama’s policies have not been the voice of reason. They are even further to the right than George W. Bush could have achieved. At least a Republican president would have confronted a Democratic Congress blocking the kind of program that Mr. Obama has rammed through. But the Democrats seem stymied when it comes to standing up to a president who ran as a Democrat rather than the Tea Partier he seems to be so close to in his ideology.

So here’s where the Committee of 13 comes into play. Given (1) the agreement that if the Republicans and Democrats do NOT agree on Mr. Obama’s dead-on-arrival “job-creation” ploy, and (2) Republican House Leader Boehner’s statement that his party will reject the populist rhetoric that President Obama is voicing these days, then (3) the Committee will wield its ax to cut federal social spending in keeping with its professed ideology.

President Obama signaled this long in advance, at the outset of his administration when he appointed his Deficit Reduction Commission headed by former Republican Sen. Simpson and Rubinomics advisor to the Clinton administration Bowles to recommend how to cut federal social spending while giving even more money away to Wall Street. He confirmed suspicions of a sellout by reappointing bank lobbyist Tim Geithner to the Treasury, and tunnel-visioned Ben Bernanke as head of the Federal Reserve Board.

Yet on Wednesday, October 4, the president tried to represent the OccupyWallStreet movement as support for his efforts. He pretended to endorse a pro-consumer regulator to limit bank fraud, as if he had not dumped Elizabeth Warren on the advice of Mr. Geithner – who seems to be settling into the role of bagman for campaign contributors from Wall Street.

Can President Obama get away with it? Can he jump in front of the parade and represent himself as a friend of labor and consumers while his appointees support Wall Street and his Committee of 13 is waiting in the wings to perform its designated function of guillotining Social Security?

When I visited the OccupyWallStreet site on Wednesday, it was clear that the disgust with the political system went so deep that there is no single set of demands that can fix a system so fundamentally broken and dysfunctional. One can’t paste-up a regime that is impoverishing the economy, accelerating foreclosures, pushing state and city budgets further into deficit and forcing cuts in social spending.

The situation is much like that from Iceland to Greece: Governments no longer represent the people. They represent predatory financial interests that are impoverishing the economy. This is not democracy. It is financial oligarchy. And oligarchies do not give their victims a voice.

So the great question is, where do we go from here? There’s no solvable path within the way that the economy and the political system is structured these days. Any attempt to come up with a neat “fix-it” plan can only be suggesting bandages for what looks like a fatal political-economic wound.

The Democrats are as much a part of the septic disease as the Republicans. Other countries face a similar problem. The Social Democratic regime in Iceland is acting as the party of bankers, and its government’s approval rating has fallen to 12 percent. But they refuse to step down. So earlier last week, voters brought steel oil drums to their own Occupation outside the Althing and banged when the Prime Minister started to speak, to drown out her advocacy of the bankers (and foreign vulture bankers at that!).

Likewise in Greece, the demonstrators are showing foreign bank interests that any agreement the European Central Bank makes to bail out French and German bondholders at the cost of increasing taxes on Greek labor (but not Greek property and wealth) cannot be viewed as democratically entered into. Hence, any debts that are claimed, and any real estate or public enterprises given sold off to the creditor powers under distress conditions, can be reversed once voters are given a democratic voice in whether to impose a decade of poverty on the country and force emigration.

That is the spirit of civil disobedience that is growing in this country. It is a quandary – that is, a problem with no solution. All that one can do under such conditions is to describe the disease and its symptoms. The cure will follow logically from the diagnosis. The role of OccupyWallStreet is to diagnose the financial polarization and corruption of the political process that extends right into the Supreme Court, the Presidency, and Mr. Obama’s soon-to-be notorious Committee of 13 once the happy-smoke settles from his present pretensions.