Updated: added transcript
August 28, 2009
“Dress Rehearsal For Debt Peonage” with economist Dr. Michael Hudson on why the banks are returning the bailout money; bank fees and penalties; banks prefer default to foreclosure; debt as wealth; Obama’s Financial Regulatory Reform Proposal and its six major flaws; the deregulation-by centralization ploy; failure to reform the economy will lead to debt peonage. This audio archive will be available until Wednesday, September 9th 2009
Dress Rehearsal For Debt Peonage
Transcript of a Bonnie Faulkner Guns & Butter Radio interview with Dr. Michael Hudson
Originally broadcast on August 26, 2009 on KPFA-FM radio in Berkeley CA
“…the government made a charade, pretending that it was going to get some of the benefit from the bailout of Wall Street…”
Bonnie Faulkner: Dr. Michael Hudson is a financial economist and historian. He is president of the Institute for the Study of Long Term Economic Trends, a Wall Street financial analyst and professor of economics at the University of Missouri Kansas City. His 1972 book, SuperImperialism, the Economic Strategy of American Empire, is a critique of how the United States exploited foreign economies through the IMF and the World Bank. He is also the author of The Myth of Aid, and Global Fracture, the New Economic Order. Dr. Hudson has written many articles on the current global financial crisis. A few of his most recent articles that we discuss today are “Instead of Real Financial Reform, Obama Capitulates to Wall Street” “Bogus Solutions To The Financial Crisis: The Latest in Junk Economics” and “The IMF Collects Debt On Behalf of the World’s Largest Banks.”
Michael Hudson, welcome.
Michael Hudson: Thank you very much, Bonnie.
Bonnie Faulkner: The stock market is back up over 9,000, the Dow Jones Industrials, that is, are over 9,000. To what do you attribute this?
Michael Hudson: The government has given $13 trillion dollars to the financial sector. Now if you’re going to give $13 trillion to the financial sector, and flood the economy with money, obviously this is worth something. Essentially the stock market is rising to reflect the government giveaway.
Bonnie Faulkner: We’re reading that the banks that took the bailout money, that some of them are returning the bailout money, what’s with this?
Michael Hudson: When they originally got the giveaway from the government, the government made a charade, pretending that it was going to get some of the benefit from the bailout of Wall Street. You had Warren Buffet, for instance, make a loan to a number of Wall Street institutions and make a huge killing on it. The government also said “we have stock warrants that say that if your stock recovers and you don’t go bankrupt, since we rescued you, we want to get something like what Warren Buffet did.” But what they’re getting is about one tenth of what Warren Buffet did. The government has been utterly misleading and deceptive in terms of saying what it’s got. It says well “we’ve just been reimbursed by Goldman Sachs and we made an annualized return of 23%.” The average reader will say, 23%, that’s a lot of money. They don’t realize that not even a year has gone by, and the companies are saying wait a minute, instead of giving you a share of our profits and a share of the capital gains we’re getting, we want to repay you now at a very low price… so you will not get a share of the gains we have.
So they’re paying the government way ahead of schedule. The government is not using its option to hold the loan and get much more later. It’s essentially doing a giveaway to Wall Street in letting Wall Street buy shares on the cheap in itself… enabling the large companies to pay much larger bonuses. The administration’s aim is to increase, probably to double the size of the bonuses they can pay on Wall Street by giving a windfall gain to Goldman Sachs and Chase Manhattan and other firms by letting them cash in. letting their expenses stop now. In fact the most recent cash-in was saying well wait a minute, under th terms we negotiated which were so much better than the terms that Warren Buffet negotiated, if we go out and get private capital, and we can get private capital because you’ve given us $13 trillion dollars, of course we’re worth more, well you’re crowded out and you don’t get anything.
So it turns out that the money being repaid to the government shows how utterly corrupt the bailout money to these private companies was. There’s been a huge transfer of resources to Wall Street, and Wall Street wants to make sure it doesn’t have to repay the government for the gift that it’s got.
Bonnie Faulkner: I was just about to ask you what the deal is with the banks now claiming that they’re profitable, because we all thought they were bankrupt. Have they really become profitable?
Michael Hudson: Yes, they have. There’s a difference between profits and capital losses. They had a huge capital loss. It had nothing to do with operating profit. You can be bankrupt and still make an income. They had worthless garbage, worthless fictitious mortgages and packages in their portfolios to back the deposits. They were able to take about two trillion dollars worth of these junk mortgages and exchange these at the Federal Reserve for actual treasury bonds. This was the famous trash for cash tradeoff. They were able to give their junk to the U.S. government, which now holds their junk. That has solved their balance sheet (problem). Meanwhile they’re very profitable. There was an article in the Financial Times today to the effect that banks are now making more money on late fees and penalties and overdrafts than they’re actually making in interest.
So they’re making money by increasing the cost structure of the American economy very strongly. The more they can increase the cost of doing business to American families and American companies, the higher their profits are. their profits are directly proportional to how much they can raise the cost of doing business and raise the cost of living to Americans. the government has said (to them) raise the cost to Americans by enough to make yourself profitable.
“…the new idea is to make money on the inability of the customer to pay. fees, and finally they turn to the government to get reimbursement…”
Bonnie Faulkner: That reminds me of a friend of mine, someone who I know who has a line of credit with one of the banks, it’s a small amount. He had been required on a minimum payment, this is a credit card, of 2% every month if he just wanted to pay the minimum. Now he’s just gotten a letter from Chase saying well, you’re going to have to pay the minimum of 5% a month, or pay this off. So I guess they can just change the rules any time they want.
Michael Hudson: Yes, that’s in the small print, that they’re allowed to change the rules, and if the person does not pay the 5%, then they have to pay very heavy late fees as well, and penalties. So Chase can collect a lot more money from the people that can’t pay. They collect more by what is called predatory finance, making sure that they charge more than the customer can pay. Their objective is to take every bit of income from the customer’s pocket and move it to Chase’s pocket, or Wall Street’s pocket. That’s their business plan.
Bonnie Faulkner: What you’re saying reminds me of something I read in the paper recently, about why the banks are not foreclosing on properties to get the thousand dollars or whatever they would get from the government to rewrite the mortgage, because if they just string along, they make more money off people going into default.
Michael Hudson: What they do is keep adding on late fees, so that when the default occurs, they can claim reimbursement for all of the late fees and nonpayments. Originally, banks made money off the interest people paid on money that they borrowed productively. The idea was that any profit or capital gain that the borrower gets, they turn over to the banks. But now the new idea is to make money on the inability of the customer to pay. fees, and finally they turn to the government to get reimbursement for the mortgage including all of the late fees and charges written into the mortgage.
Bonnie Faulkner: Exactly, and this explains why there aren’t more homes actually in foreclosure, because they don’t make as much money that way.
Michael Hudson: That’s right.
Bonnie Faulkner: Today’s new York Times reports “Guaranteed Bonuses Back on Wall Street,” and that Obama’s “pay czar,” a man named Feinberg wont be able to affect most of these multi billion dollar guaranteed bonuses. The NY Times article went on to describe what it called “talent wars” in which the banks, bidding up the salaries of derivatives traders, currency speculators and computer trading specialists, etc., so that the salaries on Wall Street, at the top at least, are not just staying where they were, but are increasing.
Michael Hudson: That’s right, the contract they’ve made with their traders gives them a guaranteed share of profits they make. Of course they’re not really profits, remember. If they were profits, they’d have to pay taxes on them. Traders don’t make profits, they make capital gains, which are taxed at only a fraction of what wage earners (must pay) get. Thus governments subsidize the traders, they subsidize the financial parasitism by saying we want the economy to stop producing industrial goods, to stop producing an income, we want the whole economy to operate on a basis of capital gains, of trading everything back and forth.
This is the post-industrial economy. You don’t have to produce anything, and to make sure that we make money by trading, we’re going to count all the trading profits as capital gains. Not only are they officially taxed at only half the rate as earned income, wages and profits, but if you take these gains and use them to buy yet more property, you don’t have to pay at all. As Leona Helmsley said, “Only the little people pay taxes.” Only labor and industry pay taxes, not Wall Street.
Bonnie Faulkner: Yes, her quote is one of my favorites of all time. Do you think she went to jail because she was telling the truth.
Michael Hudson: No, she went to jail because she falsified her reports. The fact is, had she handled things differently on an accounting basis, her principle was right. She was cheating on her tax returns, it was too embarrassing for the government not to throw her in jail. They did agree not to throw her husband in jail.
Bonnie Faulkner: According to your article “Instead of Real Financial Reform, Obama’s Plan Capitulates to Wall Street” you talk about a financial regulatory reform proposal of Obama’s that promotes Wall Street’s product, debt creation, at the expense of the economy at large, and lets financial chieftains continue to self-regulate the debt industry, and by the way, to keep all the profits from the past decades worth of fraudulent lending scot free. Does Obama’s plan make the Federal Reserve the sole regulator? What’s going on?
Michael Hudson: People he’s appointed are the neoliberals from the Clinton administration, who were advocating the repeal of Glass-Steagal in 1999 and led to all of these problems. Essentially his lobbying team consists of Wall Street lobbyists. What Obama is being told is how do we de-regulate Wall Street so that the government has no power at all to regulate us or to tell us what we can do.
They’ve come up with a brilliant plan. All you need to do is take regulatory authority away from every government agency, and take regulatory authority away from every court, and put it in the hands of the Federal Reserve, and then put an ideological fanatic like (another) Alan Greenspan in charge of the Federal Reserve who refuses to regulate, just as Alan Greenspan refused to regulate. Wall Street, which for the last hundred years has been against all regulation, calling it socialism, thinks this is a wonderful idea. “Yes, yes!” they’re saying, “this is a wonderful idea! We want to be regulated by one financial authority!” because they know that the Federal Reserve’s role is to act as a lobbyists (in government) for the commercial ban king system, for Wall Street.
“Wall Street’s product is debt, and it makes its money off debt. It makes its money off collecting interest on debt in the first place, and then collecting predatory fees and late fees and payments and foreclosing when the debt can’t be paid.”
So by appointing Federal Reserve bank regulator, you’ve appointed (the industry’s) your own lobbyist as the self-regulator, which means a non-regulator. All you have to do is put someone like Ben Bernanke in charge of the Fed and the Fed will tell Wall Street “do whatever makes money, what’s good for you is good for the economy” even if it’s strangling the economy, even if it’s leading to higher unemployment, even if it’s de-industrializing the economy, and polarizing the economy between creditors and debtors.
Bonnie Faulkner: Now you mentioned Glass-Steagal, and in this article of yours, you point out that Paul Volkher was brought in as an economic advisor for Obama’s proposed reforms, and indeed the former Fed Chairman, Bernanke’s predecessor gave some good advice: reverse the repeal of Glass-Steagal. What happened with this?
Michael Hudson: He was brought in for window dressing, because people had respect for him. You want to bring in a group of people who are trotted out as advisors. Then you ignore everybody’s advice you don’t want to take. So obviously his advice is not being taken. In other words, investment banking is not the same thing as commercial banking. Commercial banking is supposed to be basically a public utility, not a means of financing and making money. Paul Volkher said these two things are just the opposite (of one another). As a matter of fact I had lunch last week with one of my old Chase Manhattan friends who used to work with Paul Volkher and he was reminding me of the differences in philosophy between our generation and the new generation that has come up which is somehow convinced that what’s good for Wall Street is good for the economy, although Wall Street’s product is debt, and it makes its money off debt. It makes its money off collecting interest on debt in the first place, and then collecting predatory fees and late fees and payments and foreclosing when the debt can’t be paid. This is a difference in generations by people who really didn’t ever grow up in an experience of a financial downturn.
Bonnie Faulkner: Since Ben Bernanke is the head of the Fed, should he be the sole regulator? Why would Wall Street want Ben Bernanke as its chief regulator?
“That’s just who you want regulating Wall Street. You want a blind policeman in charge.”
Michael Hudson: The reason why Wall Street wants Bernanke as a regulator would be clear if you looked back at what he wrote in 2004. He gave a speech that’s on the Fed website to the Eastern Economic Association called “the Great Moderation” and he also gave a speech to the Fed called ‘”the Great Moderation”. Now here, in 2004, he said that the period of the last twenty-five years, from 1979 to 2004 had been a great moderation, employment and output have never been so stable. Look at the balance sheet from 1979 to 2004. This is the greatest immoderation in American history. In 1979 you had the wealthiest one percent of the people, as I think I’ve said in your program before having 37% of the wealth. By 2004, they’d increased their share of America’s returns to wealth, that is interest, dividends, returns to capital gains to 57%, and its about twice that by now.
Bernanke has a blind spot. Although he’s nominally head of the Federal Reserve, which deals with finance, finance plays no role in his mind at all. In order to be head of the Federal Reserve, in order to have a financial regulatory position in the government, you have to ignore finance, you have to ignore debt, you have to assume that debt is not a problem, only a solution, and you have to assume that the financial sector adds to the national output, not acting as an overhead, absorbing wages and turning them into interest payments, absorbing corporate profits and diverting corporate capital away from investment into interest payments. You have to be blind to the effect of finance on the economy, and this blind spot goes all the way back to Ricardo, who was the lobbyist for the bank sector in England after the Napoleonic wars ended in 1815.
The blind spot is inherent in the Chicago school of Milton Friedman and the University of Chicago monetarists. It seems ironic that a school that should calls itself monetarist and free market actually doesn’t have any role for debt at all. It imagines that money and debt really reflect the economy’s earning power.
So in their analysis, of the value of an asset, you take the earnings, the income that it can pay, and you capitalize it at the current rate of interest and you say “How much can I borrow against that amount of income. How much can you borrow against a corporation that earns a certain rate of profit. How much can you borrow against some real estate that earns so much over taxes, and whatever banks will lend, they define as wealth. So you define wealth in terms of how much a bank will lend, and how much of this can be turned into interest and rents for Wall Street. Of course if all the of the national surplus is turned into interest, there’s no money for rising living standards, there’s no money for increased capital investment, and the economy goes into depression, just as we’re going into.
That blind spot is a precondition for (being appointed) head of the Fed. Bernanke is a well-meaning fool, he doesn’t know what he’s talking about. That’s just who you want regulating Wall Street. You want a blind policeman in charge.
Bonnie Faulkner: Are you saying that Ben Bernanke defines wealth as debt?
“…we’re living through a transition from democracy to oligarchy and the oligarchy wants the money for itself, not for the people.”
Michael Hudson: He defines wealth as how much an entity can borrow, which is debt; in other words, its debt-bearing capacity.
Bonnie Faulkner: A quick follow-up on Paul Volkher. I’ve heard him roundly criticized for when he was head of the Fed of course took interest rates up to twenty, twenty-two percent and the claim has been made that that caused the de-industrialization of the United States. Do you agree with that?
Michael Hudson: It certainly stopped capital investment, because nobody can invest when you have to pay twenty-two percent. What he did was a response to the Vietnam war. the United States was running a huge balance of payments deficit, it was running a large inflation, and if he hadn’t done that, raise the interest rates, living standards would have risen in this country. Raising interest rates to crisis levels was critical in order to prevent American living standards from rising.
The government believes that the key to economic management is to reduce living standards so there will be more money for the corporations and companies to pay the banks. That’s the working business plan of the US government.
Bonnie Faulkner: That’s interesting, because I was just about to ask you why the government would not want living standards to go up.
Michael Hudson: Because politicians respond to the campaign contributors they have, and the campaign contributors are Wall Street, the Finance, Insurance and Real Estate (FIRE) industries, and they want the economic surplus for themselves. They don’t want it to go to labor. Essentially we’re living through a transition from democracy to oligarchy and the oligarchy wants the money for itself, not for the people.
Bonnie Faulkner: Well, yes that makes sense, because if living standards went up, then we’d be having the money to spend on ourselves and not them.
Michael Hudson: That’s correct.
Bonnie Faulkner: Getting back to your article on Obama’s new financial regulatory reform proposal, you write that this financial regulatory reform that Obama is proposing has six major flaws. Do you want to talk about some of those flaws? You say that one of the flaws is the failure to give meaningful teeth to fraud reduction. And you talk about the consumer financial products agency, and I guess we’ve talked about that with regard to the credit cards.
Michael Hudson: It’s more than that. When Obama bailed out Wall Street, he thought, “are the people really going to take this, we have to give something ostensibly to protect the victims of predatory finance. As long as we’re giving $13 trillion to predatory finance we have to give something to its victims, so he said, not only am I doing the biggest giveaway in history, not only am I tripling American’s federal debt to Wall Street, but I am setting up an agency to protect consumers from predatory finance.
But all that was was a proposal. Immediately the financial lobbies got in there and said don’t give this any teeth, make sure that they don’t have any power , so everybody, especially the Wall Street Journal is saying we’ll go along with the giveaway to Wall Street, but we don’t want any agency to protect consumers on this.. The belief now is that nobody’s going to be around to protect consumers.
Bonnie Faulkner: Another flaw that you saw in Obama’s regulatory reform proposal was the failure to reverse the shift to pro-creditor bankruptcy laws.
Michael Hudson: That’s right, for almost a decade the banks have pushed what ended up in the 2005 Bankruptcy Act, which greatly increases the difficulty of individuals wiping out their debt for bankruptcy. The government is trying to make it impossible for consumers and homeowners and wage earners and homeowners to ever get free of debt by bankruptcy. Only the rich people can get rid of their debts. They get rid of their debts by turning it over to the public sector and making the government pay.
But consumers are not supposed to get rid of their debt, so essentially if you can’t pay your debt we’re moving into a society of what I call debt peonage. If you buy a house and you can’t pay the mortgage, the proposals in the Wall Street Journal last Friday were that the government can come after you for your entire life. You have to live in a kind of debtors prison for the rest of your life in a Dickensian way, except that you’re able to stay at home instead if in prison to cut the public costs, but you have to turn over all of your income to the creditors to pay for the junk mortgage you’ve signed into, the fraudulent practices of the last five years.
Bonnie Faulkner: I was going to ask you to elaborate on what debt peonage would look like in this country, but I guess you’ve kind of done that…
Michael Hudson: Debt peonage is when all of the surplus over and above basic needs goes to pay creditors.
“The financial sector realizes that it’s broken the American economy, it’s time to take the money and run.”
Bonnie Faulkner: That’s a good definition…
Michael Hudson: In other words, you’re able to live, but all the surplus you produce, all that you earn, anything companies earn over and above break even costs has to go to pay the interest to the financial sector. It’s what happened to the Roman empire and the result was the dark ages. The problem is that creditors live in the short run, and they tend to be parasites. It’s just like in nature you have parasites. As they tend to have evolved in good Darwinian style they usually end up helping the host.
A good parasite will say, I want to take the host’s blood and nourishment but I have to do something to help the host, I have to help it digest food or find new sources of nourishment. An intelligent parasite in nature doesn’t take so much from the host that it kills the host because then it wouldn’t be able to have any more nourishment. it wants to keep the host going. But at the very end of the process when the host is about to die, then the parasite lays the eggs which hatch and devour the host. That’s the end stage. We’re at this final stage of the credit cycle now. The financial sector realizes that it’s broken the American economy, it’s time to take the money and run. That’s the stage of the financial economy we’re into. We’re in the bailout stage,( where they) take the money and run.
Wall Street’s just trying to get the government to take its trash for cash as much as possible, to give it the bailout, and then it’s moving that money abroad as quickly as it can to buy resources abroad, to buy foreign companies, to buy foreign debt, to buy foreign raw materials, to speculate in oil and copper and steel markets, to drive up the prices.
Essentially you’re having the financial sector jump ship, realizing it’s killed the American economy, and figure out how much it can carve up the economy as it takes whatever it can from (the wreckage of) the economy.
Bonnie Faulkner: What do you think this place is going to look like once they jump ship?
Michael Hudson: I’m dealing with two countries which are sort of the wave of the future, Iceland and Latvia, that have so much debt beyond their ability to pay that the result for one thing is emigration. A lot of Icelanders are emigrating, The people in Iceland and Latvia are running down their savings accounts in order to try to keep trying pay the interest on their houses that are falling in price. They’re trying to keep up living standards although their family members are being laid off. First of all they dissipate the savings they have, paying them out to creditors, and finally to survive they’re leaving the country. So you have depopulation, falling birth rates, rising death rates.
The IMF has gone to Latvia which is the most seriously indebted of the post-Soviet economies, and saying you have too many people who are using medical care. They’ve just cut back the hospital budget by 50%, they’re saying you have to let the old people die. They’ve cut back the schooling by 50%. They say you cannot afford to educate your population. If you want an education, you must leave the country. They’re saying essentially that Latvians have to cut their population by one third in the next couple of years.
Same thing for Iceland. One third of you have to lose your houses, have them plowed under, one third of your people have to emigrate, in order to pay essentially what we foreign investors want. We want your geothermal resources, we want your hydroelectric dams. We don’t want the people. You have to run a budget surplus, not pay unemployment insurance, not industrialize, not invest, you have to cut your education and medical cost so that whatever you, the government extract from your economy you have to pay creditors. That’s the dress rehearsal for the United States.
Bonnie Faulkner: If we’re all going to try and emigrate, where will we go?
Michael Hudson: I don’t know.
Part 2 of Dress Rehearsal For Debt Peonage Will Appear in Black Agenda Report next week. To listen to the entire one hour interview on line, click the flash player below.
[Listen] Black Agenda Report
Michael Hudson: Learning About Financialization the Hard Way (counterpunch)
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