Michael Hudson and Ralph Nader: The Real Purpose of The Federal Reserve

Capitalism Kills

Image by Infinite Ache via Flickr

by Michael Hudson
Writer, Dandelion Salad
September 29, 2022

Ralph Nader Radio Hour on Sep 17, 2022

Ralph does a deep dive into the real purpose of the Federal Reserve and other aspects of the American economy with progressive economist, Michael Hudson.

Transcript

Tom Morello: I’m Tom Morello and you’re listening to the Ralph Nader Radio Hour.

Steve Skrovan: Welcome to the Ralph Nader Radio Hour. My name is Steve Skrovan, along with my co-host, David Feldman. Hello, David.

David Feldman: Hello, Steve.

Steve Skrovan: And of course, it’s not a show without the man of the hour, Ralph Nader. Hello, Ralph.

Ralph Nader: Hi everybody.

Steve Skrovan: Our featured guest today will be economist Michael Hudson. Many of you have been clamoring to have him on the show and we’ve taken heed. He’s a progressive economist who will join us to talk about the Federal Reserve, how American laws are pro-creditor and anti- debtor, stock buybacks, gambling, Wall Street transaction taxes and much more. It will be a view of the economy you normally don’t get in the establishment press. We’re also going to welcome back our resident constitutional scholar, Bruce Fein, to get his take on how a New Mexico elected official got removed from office because of his role in the January 6th insurrection. And we’re also going to talk about a letter from retired military leaders about rejecting Trumpism.

As always, somewhere in the middle, we’ll check in with our corporate crime reporter Russell Mokhiber, but first, the Fed is tightening our belt. Who among us is going to have to lose a few pounds? David?

David Feldman: Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends, a Wall Street financial analyst, as well as the author of several books including: Super-Imperialism: The Economic Strategy of American Empire …and forgive them their debts – Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year, and Finance Capitalism and its Discontents. Welcome to the Ralph Nader Radio Hour, Michael Hudson.

Michael Hudson: Well, it’s good to be here. Thanks for inviting me.

Ralph Nader: Thank you indeed, Michael. It’s long overdue. Let me start with debt, which you’ve written a lot about. There’s over $1.7 trillion outstanding student debt. There’s almost that much in terms of mortgage debt. There’s almost that much in terms of auto loan debt. And that doesn’t even begin to talk about the payday loan racket debt, so we’re talking trillions of dollars, as Senator Everett Dirksen said once, in another context, using billions, “a trillion here, a trillion there, and pretty soon it adds up to real money.” The drive is to get people not to use cash, check, or money order, and to do everything by credit card, debit card, and other multiplying payment systems. It impresses me as being a major controlling process. Once they suck you into the credit card gulag, they can penalize you, overcharge you, ruin your credit score, fine-prints you to huge disadvantage in the fine-print contracts.

In effect, they strip you of control over your own money to the extent you had it years ago when everything was cash, check, or money order. What’s your view of this drive to get rid of cash and checks and it’s driven by both banks, other corporations, and by the US Treasury, which doesn’t want you to receive an actual Social Security check. For example, they push you into a bank account or a Direct Express [prepaid debit card] system. So, give us the power strategy behind all this. And you think we’re going to go into an era, as 65% of the American people in the Gallup poll just said, where there’s no more cash or checks?

Michael Hudson: Well, I think you’ve asked two questions there. You begin by talking about the debt question, which is what I’ve written on much more than the electronic payment question. I want to begin with the debt question. The problem is, why do people have to go into debt so much in the first place? The problem, in my mind, isn’t simply that they use credit cards, except for the very high fees that are charged for the credit cards. The problem is their inability to keep current and have to run up increasing credit card debt. And right now, if you’re late on a credit card payment, or you’re downgraded because you haven’t paid your electric bill, your interest rate jumps from 19% all the way up to 29%.

And the funny thing is, one of the things that I do is go over the National Income and Product Accounts and the GDP accounts. And when credit card companies raise their interest rates to 29% per year, the government records this as an increase in GDP. They say this is an increase in financial services, so the service of increasing the interest that you have to pay and the penalties is adding to GDP instead of subtracting from your ability to spend your income on goods and services. And despite the fact that the newspapers and the Fed says we’re in inflation, right now, we’re actually still in a debt deflation for by far the bulk of American people.

More and more of the American people have to pay a debt service for what you’ve mentioned before–the credit card debt, the auto loans, the student loans, and the mortgage loans. And they have much less to spend on goods and services. And now that you have energy prices and food prices rising, they’re going to have even less. So that’s one of the reasons that the economy seems to move into an accelerated Obama depression. The economy never really recovered from Obama’s bailout of the banks in 2008. And the government and the Federal Reserve have been keeping the financial markets afloat by quantitative easing, but they really haven’t helped the population at large.

The second point you made is what about making all of these payments electronically? What that means is simply everybody can know exactly what you’re spending money on. They can get a marketing profile for you. Most of the drug sales and other sales are either done in cash or in Bitcoin. When the government says it wants to make sure that everyone is honest, it’s still letting all of the drug dealers use Bitcoin and all of these other cryptocurrencies to conceal what they’re doing. So really, the government is obliging people to pay 4% of anything they buy, which goes to the banks that own the credit card companies.

So that right here where I live in Queens, if you go to a restaurant, they will actually charge more if you have to use a credit card, to reimburse themselves for the fees they have to pay. And if I’m in Europe, in Germany, restaurants said they didn’t want to accept anybody’s Visa card. They wanted a debit card because they say that there’s one group that’s even a worse payer than indebted consumers, and that’s the credit card companies. They poke around in reimbursing the restaurants and other people.

So you pointed to a real problem. Basically, if money should be a public utility, just like the dollar bills in your pocket, probably the credit cards and the electronic payments should be a public utility. But instead, it’s privatized. It’s turned into a monopoly, and it’s a source of monopoly rents for the banks that really is unnecessary. There’s no cost really associated with raising the credit card rates. It’s just part of the privatization of activities that really should be public and not private.

Ralph Nader: Well, years ago Consumer Reports started an effort to put placards in retail stores on Main Street, U.S.A. saying we give discounts to cash buyers. It never really got off the ground because there’s so much propaganda, advertising/promotion by the creditors to get people in debt even when they don’t even have to be. But especially since there’s such low income, so much poverty, they get people in debt. There’s roofing companies in Washington, D.C. now saying, buy our services, no money down for four years. No money down for four years. Imagine what the fine print is like. Tell us about this conflict between creditors and debtors. It used to be a different kind of conflict than it is today. Illuminate that.

Michael Hudson: Well, the question is, why do people go into debt? And there are two kinds of credit. And this goes all the way back to the church theologians in the 14th century. Ancient societies didn’t have any different word for interest and usury. All that was developed to overcome the church’s banning of interest for a 1,000 years, certainly among the clergy. And then the European takeoff began. And after the Crusades it was obvious that some kind of credit was necessary to finance foreign trade. And some people benefited from credit, so the church said, all right, if you’re making a loan, the debtor gains from it, then it’s interest, then its mutual gain. And usury is when the borrower doesn’t really receive a gain but has to pay the interest out of income that they earned elsewhere.

According to that definition, almost all of the consumer debt in today’s world is usury. It’s not interest because the consumers don’t gain. The banking system’s product is debt. What it’s selling is debt. And how do you get people more and more in debt? Well, you make life more and more expensive essentially by privatizing it. And part of the problem is the shift in money and credit from a public utility into a private bank.

Banks don’t make money to finance economic growth. They don’t make loans for factories to be built. They create almost all of their money as mortgage debt or corporate takeover debt or a financial debt against collateral, against real estate or stocks and bonds. So none of that credit actually helps the economy grow. It just adds and adds up to the cost of doing business.

Compare the US system of privatized banking with what the Chinese system is. In China, the government controls the money supply. The government creates the money and steers the credit and if it does not the Bank of China is not going to make a corporate takeover loan. It’s not going to have an interest in loading real estate down with more and more debt. And in fact, in China, if an industrial company or real estate companies we’re seeing today can’t pay its debt, the government can write down debt because it’s not hurting any private creditor interest. It can write down debt that’s owed to itself.

In the United States, look at the problem with consumer debt and education debt that you’ve pointed out. The government can’t really write down that debt because that debt is owed to private creditors. And basically you have one to 10% of the creditors in the United States owning almost all of the stocks, all of the bonds. So the 10% hold the 90% in debt. And basically, that’s why the economy is polarizing. More and more money is being sucked up out of the consumer economy, out of the economy of production and consumption, and paid to the financial sector. And that basically has accelerated since 2008 with a quantitative easing. The role of the banks, especially of the central banks, is actually to promote inflation, but it’s the inflation of stock market and bond prices, the biggest bond rally in history, and real estate prices.

And instead of what the Federal Reserve is supposed to do, supporting full employment, its job is to make sure that there isn’t full employment, that there is a reserve army of the unemployed so that wages don’t rise. And when you have the current Federal Reserve head say, well, we’ve got to bring on a depression because with oil prices rising and inflation happening, there’s a danger that wage labor may try to catch up with inflation and ask for wages. And how do we prevent labor from asking for wages to keep up with the cost of living? Well, you make sure that there is enough unemployment that it’s somehow going to force them into work, and labor will compete with each other and hold wages down so that corporate profits can remain high enough to support stock market prices and the owners of the stock market, the 10%, are not going to lose their money; the 90% of labor will lose its money, but not the financial sector.

Ralph Nader: Let’s examine that for a moment. It’s obvious to anybody who pauses to contemplate what the game of the Federal Reserve is. Its budget is paid for by the banks. It doesn’t get appropriations from Congress. It’s run by the banks. The sections of the Federal Reserve in Dallas and Philadelphia, all those boards or bankers or other financial executives, and chairman of the Federal Reserve keeps saying that he wanted to keep interest rates low until recently in order to stimulate the economy. And I’d write him a letter and say, what are you talking about? First of all, you’re paying over 150 million savers, who have money market accounts and mutual funds and saving accounts, nothing–one-tenth of 1%. So they’re not going to have much money to spend in the economy. And second, you don’t even speak out against the huge interest rates of payday loan rackets, rent-to-own rackets, student loans that can range from 6% to 50%, 100%, on the rollovers, 400%. You’re not talking about that.

You’re just talking about the interest rates that make the banks richer. Well, he never answered. He never answers. Chairman Powell never answers. So then I tried to get the press to cover it. Well, the press has these full-time reporters, New York Times, Washington Post, and Wall Street Journal, that just do official-source journalism. They’re like dittoheads, with few exceptions, they just report what the Federal Reserve says, and they don’t really point out that whether by ignorance or indentured status, Federal Reserve has been pretty incompetent over the years in terms of its own statutory purposes, which is to maintain steady employment and stability.

So here’s what I think some of our listeners want to find out about. Chairman Powell in this latest cycle, unleashed $9 trillion of quantitative easing. That’s an abstruse phrase for saying, okay, we’re going to print this money, Wall Street, and we’re going to buy bonds, government bonds, even corporate bonds and juice the liquidity of the market, which means juice stock market prices. Now, why does the Fed pursue that? Could they use $9 trillion for public infrastructure or don’t they have the authority? Is there any curb on how much the Fed can spend and how much debt to itself it can go into? Is it a total Wild West here? Enlighten us.

Michael Hudson: Well, the problem is that the Fed is a central bank. And the problem that you describe – of course the Fed could finance infrastructure, but that’s the kind of thing the U.S. Treasury normally would do. The Fed was created in 1913. Before that, all of the things that the Fed has done since then were already being done by the Treasury. So after there was a crisis in 1907, JP Morgan tried to bail out largely with their own fees; he said, we’ve got to take the monetary control away from government. We’ve got to really shift control of the economy and make it a centrally planned economy, but it has to be planned by the banks. So the Federal Reserve was created very explicitly.

The National Monetary Commission published the volume by David Tinley on the US Treasury saying that the Treasury was doing everything, but the Federal Reserve was created to shift control away from Washington into the monetary centers, New York primarily, but also Boston and Philadelphia and the Chicago Mercantile Exchange. The Treasury officials were not even allowed on the board of the Federal Reserve. The idea was to say, the Federal Reserve is working for the banks. And to make sure that most of the money created in the American economy will be created by the banks to enrich the customers of the banks, the large corporations, especially the monopolies, the real estate sector, which most bank money is for, and the Federal Reserve, by monopolizing the creation of credit, will not create social spending that the Treasury had been doing since the country was formed.

It was the Treasury that organized the internal improvements for America–the Erie Canal, the roads, all of the spending into the economy. And the Federal Reserve was created to stop social purpose spending by the government, by essentially cutting the Treasury out of the monetary management process. And that’s true, not only of the Federal Reserve in America, but of central banks all over the world. The role of central banks is to prevent the government from spending money on social programs and to support the commercial banks in lending money to inflate the asset markets–real estate primarily, also stocks and bonds to support private raids of corporations. And essentially, because the product is debt, to load the corporate sector down with debt, as in the junk bond take off. And the Federal Reserve has even been buying junk bonds so that owners of junk bonds will not lose. And that all began in 2008.

Sheila Bair, former chair of the (FDIC) Federal Deposit Insurance Corporation, said that the problem of the Federal Reserve’s support of the banks was you had the largest financial crime wave in history in the years leading up to 2008. And everybody knew that there was a crime wave. The newspapers reported the language had changed. You had new words in the English language, junk mortgage or NINA borrowers–no income, no jobs, no assets. And instead of writing down these junk mortgages to realistic market levels, which President Obama had promised to do and the Republicans were supporting, Obama left the debts in place and evicted almost nine million American families and supported the banks in this. And he did it by the quantitative easing to make sure that the real estate prices did not become more affordable to Americans.

Ralph Nader: We’re talking to Michael Hudson, a progressive economist of long standing. Michael, people hear this $9 trillion of juicing the stock market. They call it quantitative easing and the Federal Reserve prints it. And a thoughtful citizen would say 1) are there any limits? I mean, can the Federal Reserve print $100 trillion and give it to people around the country? And 2) when does the Federal Reserve ever get paid back? Can they just order the holders of Federal Reserve debt to pay off the debt; they can reverse the quantitative easing? I mean, what kind of monetary animal are we talking about here?

Michael Hudson: Well, first of all, when the Federal Reserve was given the right to engage in monetary support, it listed all the purposes for what the Federal Reserve could do. And then it added three words “and other purposes.” So when you say the Fed can do, we’re going to list all the things they can do, and then say, “and other purposes,” that means it can do whatever it wants without limit. And that indeed is what it’s done. The Federal Reserve doesn’t really create money. None of this $9 trillion appears as money creation. What it does is it’s been a swap agreement with the banks that lets the banks deposit their mortgages and their stocks and bonds, their packaged mortgages, with the Fed and have a deposit with the Fed that it can then use to lend out into the economy.

It’s sort of a travesty of the 100% Reserve plan that essentially the banks are not able to create credit, but the Federal Reserve enables the banks to create credit, saying whatever loan you make, you’ll just deposit it with us and ever since Obama, we’re going to pay you interest on this loan. We’ve never paid interest before, but now we will actually pay you interest so that you can make money on lending out, more money from us at the Fed than you’re going to make even on the loans that you make as long as you make the loans to buy stocks and bonds and real estate.

So if this doesn’t appear in the money supply itself; it’s all done technically in a swap agreement where the bank will make, let’s say, a takeover loan. And how does it get the money without reserve? Well, it’ll take its packaged mortgages, or its credit card loans or whatever, or its junk mortgage loans, and deposit them with the Federal Reserve, and it’ll use the Federal Reserve deposit and it will be as if a regular depositor walked into the bank and lent them enough money to make the loan. So it’s all done with a technicality that the Federal Reserve is very careful not to explain to people how the system works and it’s not really taught in the monetary textbooks. You really have to work in the field to follow it day by day.

There are some sites that follow it, like Wall Street On Parade (A Citizen Guide to Wall Street) goes into the nitty-gritty. And Randy Wray at the Levy Institute did a whole study of quantitative easing where he actually subpoenaed and got access to the $29 trillion worth of loans that the Fed kept making. And what the Fed did in 2008, as a result of the junk mortgages and of the wave of financial fraud, Citibank was broke. It was insolvent. And yet the Federal Reserve, through Tim Geithner, who was a protégé of the Citibank’s head, Robert Rubin, who had been Secretary of the Treasury under Clinton, made sure that the most crooked banks were kept in business by the Fed — Citibank, Bank of America, Countrywide—these were the worst offenders and the government could have taken them over, bailed out all of the insured depositors, and turned them into public banks that would have enabled Citibank and others to make loans for the kind of thing that you just mentioned, for public infrastructure.

Ralph Nader: At lower prices too.

Michael Hudson: Yeah, that’s the whole point.

Ralph Nader: I’m sure some of our listeners’ eyes are glazing over, so they’re going to like what I’m going to invite you to discuss next, which is the following: The Republicans have an economic agenda in electoral campaigns. It’s very simple to understand, Michael. It basically is 1. lower taxes 2. deregulate 3. let the free market reign 4. strengthen our military budgets and 5. confirm conservative judges. And that is very understandable to millions of voters.

Michael Hudson: Yep.

Ralph Nader: What isn’t understandable is what they mean by that, namely 1) lower taxes for the rich and the multinational corporations, not so much for the rest of us. 2) deregulating corporate crime, fraud, and abuse. 3) it’s not a free market; there’s no such thing as a free market in this country other than maybe a tween-run lemonade stand, because free markets can’t exist with monopolies, with small business franchise one-way agreements with corporate crime, with corporate welfare subsidies, with deceptive and lying advertisements. Those destroy free markets and many more that I’ve put out in a paper called “Rebutting Free Market Fundamentalism”.

Strengthening the military budget? We know what that’s all about. That’s the military industrial complex and the constant weapons sales on empire abroad that you’ve written about. Conservative judges? Not really. They’re corporate judges. That’s the main criteria, that they support corporate power over human individual rights as consumers, labor, environmental, health, etcetera. Now, I’ve read interviews of you, Michael Hudson. Let me tell you, I’m a patient reader. You believe in massive sequential reasoning lathered by facts. And the more sequential, the more you lose the audience and they can’t follow you.

So I’m going to put a question to you that probably no one has put to you. Drop the use of the word neoliberalism, which progressives always use, including Chris Hedges. And I say, Chris, do you know anybody around the country who works with their hands or their computers, who know what neoliberalism means? In one of your interviews, you gave numerous definitions, which were hard to remember. What you really mean by neoliberalism is corporate domination of our political economy from A to Z. I know you can spell it out. How are you going to overcome the communication problem?

Progressive economists don’t use simple statements as what they’re for. They don’t say, “We’re for taxing the rich and the corporations.” They say, “We’re for fair taxation.” They use the word providers for the drug companies and health insurance companies, as if they’re philanthropic organizations instead of sellers, not to mention gougers. They use the words white-collar crime instead of corporate crime. How do you overcome this? This is a tough question for you to ask. If you were to counteract the Republican agenda that I just mentioned and compress it the way they do and make it understandable and motivational for the workers, how would you do it?

Michael Hudson: Well, I think you’ve caught me. I’m a hopeless academic. And the fact that I talk largely to other academics or to people who are working in the field. So you’re right, it’s corporate. I’m not sure why you call this Republican. It’s bipartisan. It’s the Democrats. What you’ve described as the Republican program is everything President Biden believes in. If the Democratic…

Ralph Nader: But the Republicans hijack better than the Democrats. They hijacked free trade, went against corporate—they’ve hijacked patriotism. They’ve hijacked the Bible. They hijacked the flag. They hijack everything. And so they blur that distinction.

Michael Hudson: Well, blurring is part of why I use a jargon word. And jargon is used because it is technical.

There’s one reason that I hesitate to use the word corporate, because there are two kinds of corporations, because there are two kinds of economies. If you say corporate, most people at least think of corporations that manufacture things. They may be monopolies, but they still manufacture. But the neoliberalism means the financial corporations. And I want to focus really on the fact that, where the financial line, which America has been following since the 1980s, the Reagan and Thatcher line, has been not an industrial corporate line. We deindustrialized. It is corporate, but it’s corporate financial that is shrinking the economy. At least the idea of industrial corporations was when they make a profit, they reinvest it in making even more companies and selling even more, and at least you get an expanding economy. I’m trying to explain why the American economy is shrinking and not expanding.

Ralph Nader: Because it’s making money from money from money? Is that what you call financialization? It doesn’t produce anything real?

Michael Hudson: Well, not only making money from money, it’s making money by loading the economy down with debt. All money is a form of debt on the other side of the balance sheet. And I know you’re going to say, once I say balance sheets, people’s eyes glaze over, because thinking in terms of balance sheets, one person’s saving is another person’s debt. And that means one person’s debt is another person’s saving. I’m trying to deal with how can the American economy cope with the fact that there’s so much money from debt, as you began this show by mentioning, the only way you can write down the debt is to write down somebody else’s savings, and those savings are the savings of the 10%. Maybe we can figure out a new vocabulary to use for this, because you’re right, the vocabulary shapes how people think about problems, and I haven’t invented new terms, but maybe we can figure out something to distinguish the really predatory financial sector from the equally predatory corporate sector, but they’re predatory in different ways.

Ralph Nader: There’s another wrinkle, too, Michael, to engaging in massive sequential thinking. You don’t get on the mass media because you’re talking in paragraphs. You’re talking long tracks of argument and analysis. So you never get on TV or radio. You’ve got to learn how to talk in short pitches. Now, I’ll give you an example. $7 trillion has been, in effect, blown away from any productive use in stock buybacks in the last 10 years. Stock buybacks used to be considered by the Securities Exchange Commission, as you know, as stock manipulation and prohibited, except on certain circumstances. But Reagan opened the floodgates in 1982. Now stock buybacks mean that all the surplus profits from consumer buying of these corporations, like Apple, Intel, and General Electric and so on, the management doesn’t have any productive use for it. They want to enrich themselves by buying back their stock, increasing the metrics for their executive compensation, and laughing all the way to the bank. They’re not putting this money into productive enterprise. They’re not putting it into bolstering the pension plans of their workers or increasing wages. They’re not putting in research and development. Apple is not putting in recycling this horrific contaminating waste from its discarded computers and iPhones.

I don’t think Marx would ever have anticipated that the pile of cash would be so massive that the capitalists wouldn’t know what to do with it other than to buy back their stock. What is your take on this unbelievable stock buyback? I mean, in one year recently, Apple bought back $90 billion of their stock, which was more than the combined budgets of the Department of Labor, the FDA, the Auto Safety Agency, on and on, $90 billion with a B, just one company. That, by the way, would have more than paid for all the tuition of college students that year at public universities, and they would have had a lot leftover. And that decision was not made by the shareholders of Apple. That decision was made by Tim Cook, who is now paying himself with a rubber stamp board of directors $833 a minute. A minute, Michael, $833 a minute on a 40-hour week. What’s your analysis of stock buybacks, which are bleeding the economy? That’s the consumers’ dollar there.

Michael Hudson: It’s not only bleeding the economy, it’s bleeding Apple and the other stock market. Look at what’s happened. The stock market has plunged by about 10% this year. Think of all these companies that have bought their stock at high prices, and now the stocks have lost 10% of their value–huge losses. So when they pushed up the stock, stocks were pushed up for a moment for the year that they were spending all of this money just buying stock instead of actually investing in tangible, productive means of production.

This money that they put into the stock is not the same thing as an investment in factories or equipment or research and development, because if Apple would have put this money in research and development and factories, those factories and research would still be there. But the stock that Apple bought at high prices has all been erased because stocks go down as well as go up, and all that money has just poof! gone absolutely nowhere. So the whole system that you’re describing only makes very short-run gains, not long-term.

That’s really the problem with the financial sector. Financial managers are short-term managers. They’re not long-term managers. They’re paid by how much they increase stock prices in a given year. They’re using their earnings to buy back the stocks. And many companies, during the run up in recent years, have actually borrowed from banks to buy their own stock. They said, wait a minute, our stocks are paying 3%, we can borrow at less than 1% and buy our stock and make money on it. So now that the stock prices have fallen, the debts still remain in place. And now these companies that have done exactly what you’ve described, and bought back their stock instead of building, are stuck with the debts for money that’s gone poof.

Ralph Nader: What’s your take on gambling? We now bet on the future instead of build the future. It’s involving low-income people. It’s a regressive tax. You don’t have to go to Las Vegas or Atlantic City, you can do it right out of your iPhone. Sports gambling is moving big now to corrupt the sports industry even more. What’s the analytic take on the massive expansion of gambling, which was usually stalled by organized religion until they started organized bingo games in church basements? It is now a major factor in the capitalist economy.

Michael Hudson: Well, the important thing about gambling is the casino always wins, and the second important thing is that there’s always a loser for every winner. And if you’re gambling on the stock market or on derivatives, the insiders–especially the crooks–always end up the winners. And the honest people who think they understand what’s happening, because their worldview doesn’t acknowledge how cynical the economy really is, end up the losers.

Take the big gamble on junk mortgages and Goldman Sachs by Mr. Paulson in 2008; he gambled that the junk mortgages weren’t going to be paid, and so this was what you call the derivatives market. The derivatives market is, I think, a quadrillion dollars. Right now there’s so many…it’s a huge superstructure of gambles over which way are interest rates going to go, which way are stock prices going to go. Well, most of the counterparties on the other side of Goldman Sachs were German savings banks, local banks that really idealized what was happening in America. They were cheated.

Most gambling is a process of cheating by the casinos or by the big players of the casinos who know what they’re doing against people who don’t know what they’re doing. So it’s not really like gambling on a sports game unless you’re fixing the sports game, like the Black Sox or gambling on fixing a football game for points, or a basketball game. So if you try to make money by gambling, first of all, that doesn’t really produce any goods and services. Secondly, it’s always meant to be a tax on the poor people. And already in the 17th and 18th century, governments began to issue… it was the governments who did the lotteries as a means of raising money from the lower classes instead of taxing the wealthy people who either were on the winning side of insiders or stayed away from gambling altogether. You think of the WC Fields movie, when somebody is playing poker and somebody said, “Is this game honest?” And I think Fields said, “Not the way we play it, no. “Well, that’s the gambling. So basically, it’s a cost on the lower classes. And in Kansas City, where I was lecturing at UMKC, as you pointed out, one of the students there did a study of who is it that’s going bankrupt in the housing market? And it turns out that almost all the bankruptcies in the Kansas City housing market were people who had gone to the local gambling boat that was right in the river there. And they were so desperate, they said, I know the odds are against me. I know I probably won’t win, but there is no way that I can break even now. I’m not earning enough money to pay the mortgage. The only way that I can possibly pay is a one in a million chance of winning something. And if there is a God and God loves me, He’s going to help me up pay the mortgage.

Ralph Nader: A very important and unrecognized point. Then there’s the other gambling called Wall Street. Back in the 1930s, John Maynard Keynes warned presciently that more and more Wall Street activity is going to speculation rather than productive investment. You can imagine what it’s like now. And if you’re an individual and you win something in the casino, you got to pay taxes on it. Wall Street doesn’t have a tax on Wall Street transactions. What’s your view on that? There’s been an effort by groups to raise $300 billion with a B with a two-tenths of 1% tax on stocks, bonds and derivatives. And the Democrats and the Republicans opposed it. It was proposed in the New York State legislature and it was proposed in Congress; it never went anywhere. What’s your view on taxing stock transactions?

Michael Hudson: They should be taxed at the highest rate, of course, not the lowest rate. But this is exactly what you call by the eyes glaze over word, “carried interest”, meaning gambling profits or arbitrage; we’re dealing with eyes glaze over words again. This was all in Biden’s originally proposed program that was just planned. But the Democrats are always careful to have at least four or five Republicans running on the Democratic ticket and they know that they can depend on Senator Sinema and Senator Manchin to act as good Republicans and make sure that the Democrats cannot really tax this gambling money, but at least they can get public relations credit for pretending to try.

Ralph Nader: Has your analysis extended to the legal handcuffs called the fine-print contracts? If you look at a lot of the abuses of power, they’re all rooted in fine-print contracts that people do not consent to. They sign on a dotted line or they click on; even teenagers and tweens are required to do that on the internet. And I’ve seen very little progressive economists pay attention to contract peonage, contract servitude, which is worse than it’s ever been in American legal history. Underneath all these rackets are the contracts that say, oh, you agreed to this, you consented to this. And it has destroyed the pillar called freedom of contract in our country. What’s your view of that? And why haven’t there been more economists concentrating on that?

Michael Hudson: Well, I’m so glad you brought that up. That really is important. Probably the worst abusers that I can think of are the credit card companies and the financial companies that say that if they cheat you and you protest against this, you’re not allowed to sue them in court. You have to go to arbitration. Well, who are the arbitrators? They are people who are elected whose electoral campaigns or appointment is financed by the financial sector itself or the real estate sector itself. And they know that if a real estate company or a credit card company or a health insurance company is cheating somebody, that if they rule on the side of the victim, they’re not going to be reassigned to this very lucrative position they have. So the arbitrator is in a conflict of interest, always siding with the abuser, not with the victim.

This is really very important, but people think, well, how do they think about this problem that you described? Then
once you describe it, they know what it is, and what category does that fall into? Somehow they don’t have a category to put things in, and we’re back into the language problem and the semantic problem. But you’re right, this is an absolutely important point and you’re probably the best person of all in a position to popularize it and to try to do something about it. But it is such a stranglehold and such a lucrative stranglehold.

Ralph Nader: It’s such an embedded lever of commercial power.

Michael Hudson: It legitimizes fraud.

Ralph Nader: Consumers and workers that the lawmakers don’t want to touch it. We tried to do this in the legislature in Illinois, and nobody wants to touch it, in part because people have grown up accepting it. They just take it as a natural order of things. When someone tells me they bounced the check and we’re charged $35 for something that costs a few pennies to the bank, I ask if the person agreed to that. And the response is invariably, They said I did. It’s almost a kind of peonage, a kind of feudalism that has been sanctioned by the law schools as well and the law professors.

The law professors never defended their own law students who are embedded in these contracts with up to 9% interest–the student loan contracts. I tried to get the law professors mobilized and got a few, but most of them just went along as if it was the natural order of things. But there can never be a free-market economy without contractual freedom. Never mind all the other corrosions of free markets that I mentioned earlier. Without freedom of contract, without the ability to have a free meeting of the minds, no fine-print chains, there’s no such thing as a free market. If you ever get into a debate with a conservative on the free market, you hit the ball out of the ballpark and it’s over if they do not denounce contractual peonage, which now affects labor, consumers, tenants, children, and of course, it spills over into government procurement as well.

I want to turn this over to Steve and David, I’m sure you’re eager to ask Michael Hudson some questions here. I’ll leave you with this thought, Michael. You need to lead a plain language movement among progressive economists. Go ahead, Steve.

Michael Hudson: And you can say I’m not the person to lead it.

Ralph Nader: Find somebody who is. Steve?

Steve Skrovan: Yeah, Professor Hudson, do we need the Federal Reserve? Is there anything good about it?

Michael Hudson: We don’t need it at all. Everything the Federal Reserve did used to be done by the Treasury. An article I published is on my website published in India summarizing David Kinley’s book on the US Treasury. There’s no Federal Reserve in China. The Treasury does everything. The Federal Reserve’s job is to prevent the Treasury from spending on social purposes and to keep monetary control and centralized planning in Wall Street and the financial centers to benefit the financial sector and its major clients, not the economy. So I don’t think there should be central banks at all. Every country should have money creation and credit as a public utility and therefore under the Treasury, not the Central Bank. They are the opponents of democracy.

Ralph Nader: I take you’re for the public banking movement and postal banking?

Michael Hudson: Yes. Yes, Ellen Brown has been done very good work on that.

Ralph Nader: Ellen Brown was on this program earlier. Go ahead, David.

David Feldman: We’re trying to figure out whether or not this is a recession. And at the top of the show you were saying that interest that banks charge factors into our GDP. These yardsticks seem arbitrary. How should we measure growth and how should we measure inflation?

Michael Hudson: There’s nothing arbitrary about them. There’s an enormous lobbying effort that has been going on for all 50 years that I’ve been working as an economist to shape GDP, to include more and more financial fraud and monopoly rent, and to say that there’s no such thing as unearned income, that everybody earns whatever they make. And if you’re a billionaire, it’s that you provided a productive service that has increased GDP. Well, to do that, they’ve had to distort the idea of GDP so it really means gross national cost. It doesn’t distinguish between productive and unproductive consumption or between wealth and overhead. So more and more overhead, and all of the money that people pay for debt, is counted as an increase in GDP.

The COVID crisis has been wonderful for GDP because it’s caused more and more payment for medical insurance and getting sick. If you get sick and go to the doctor, you’re adding to GDP. If there is a depression on and your apartment is burgled and robbed, you’re fixing things up, that’s in addition to GDP.

Ralph Nader: If you pollute the air, you contribute to the GDP.

Michael Hudson: The cleanup costs, of course, are contribute. There’s no distinction between production and overhead.

Ralph Nader: Let me ask you this question. It occurred to me reading your materials, Michael Hudson. What is your message or messages to your economists who are your peers? The professors who are teaching economics and the business economists? You might have separate messages for both.

Michael Hudson: No, I have no message for economists. I don’t talk to economists. I talk to thinking people. I talk to foreign government people. I talked to politicians, I talk to many people, but I’ve stopped talking to economists.

Ralph Nader: What if you were invited to an auditorium full of economists and you had to address them, what would you say?

Michael Hudson: I’d say there’s a COVID epidemic, I’m afraid I really can’t come. What’s the point of talking to them? I stopped teaching economics basically because there was no way that I could fit what I’m talking about—the financial sector, and debt, and economic history—into the curriculum. And when all the things that you’ve been talking about, quite correctly about the contracts and the other, there’s nowhere to fit this into the curriculum that is part of the economic curriculum. Now that they’ve excluded economic history, they don’t talk about the history of economic thought anymore, so you don’t even have the concept of economic rent and unproductive labor and unproductive credit. So basically, I talk to governments and foreign journalists quite a bit.

Ralph Nader: Let’s ask you the question in another way. What do you think of the way students in the United States are taught economics in undergraduate and business schools?

Michael Hudson: I don’t think it helps them at all. I didn’t learn really anything in my getting a PhD in economics because I was working in Wall Street. And I got, I think a C+ in money and banking because the professor didn’t understand how money and banking worked. And when I tried to explain it to him, he said, but that’s not what’s in the textbook. What do you mean money is debt! And my basic theme is you can’t… that America is moving into a depression because of the debt–that people owe so much debt–that is growing faster than the economy. And if you don’t write down the debt, people are going to be squeezed more and more and more. Well, there’s nowhere to fit that in because economists talk about the real economy. They say debt doesn’t matter because we owe it to ourselves. But who’s the we, and who are ourselves?

The we, who owe the debt are the 90%. The ourselves are the 10%. Distribution of wealth and income doesn’t really come into the economic models that are taught either at the undergraduate or even in the graduate economics courses, except it was at the University of Missouri at Kansas City where we were teaching modern monetary theory. But everybody sort of dispersed stuff from there.

Ralph Nader: What about the University of Massachusetts Economics Department, Amherst?

Michael Hudson: Well, for a long time they did have a course in Marxist economics. So yes, they were teaching Marxist economics there. But most people who study Marx don’t really get much beyond Volume 1. And their idea of capitalism is corporations hiring labor to produce goods that you sell at a profit. But Volumes 2 and 3 of Capital (Das Kapital) that Marx wrote really was saying, well, one thing that capitalism did is revolutionary. It’s going to get rid of the financial sector and it’s going to get rid of the landlord sector because that’s overhead. That’s the cost that we don’t need. And Marx is very optimistic. He thought that finance was going to be industrialized. And instead, you have industry being financialized.

Things have gone exactly the opposite, but in a way that Marx described in Volume. 3 of Capital, where he said “The financial sector and debt grows by purely mathematical laws, exponentially much faster than the economy can grow. Thank heavens that the industrial capitalists are going to end all of this.” And that seemed to be happening in Germany of his day. But World War I changed the whole trajectory, and I don’t think there’s any economics department in the country that really focuses on this. In the courses that I teach in China at the global university and others, we talk about this, but not in the American universities.

Ralph Nader: In conclusion, Michael Hudson, what are the top three of your books that you’d like your listeners to read of your many books and publications?

Michael Hudson: Well, the classic was Super-Imperialism: The Economic Strategy of American Empire, which I’ve just issued in a third edition, which explains American foreign policy and why other countries are de-dollarizing. The sequel to that is the most recent book that just came out a few months ago, The Destiny of Civilization, where it’s a review—it’s really a history of economic thought showing how if civilization has a choice, and it’s really between socialism and barbarism; it’s really between letting the financial sector do essentially what happened in Rome and lead to a new dark ages.

Or you’re going to prevent the financial oligarchy from developing by taking money as a public utility in credit into the public domain. So that book, and then ‘…and forgive them their debts’ is how for 3,000 years, society was able to have resilience by wiping out the consumer debts when they grew. Every Bronze Age ruler, when they took the throne, in Mesopotamia and Egypt, would cancel the debts. And that was the original core of Christianity. Jesus’s first sermon, He had come back to defend the Jubilee year against the wealthy, the Pharisees and the rabbinical group that said no, no, we can’t cancel the debts, that would hurt the creditors. So essentially, it’s how religion originally was all in favor of writing down debts, not of sanctifying debts, which occurred once Christianity was sort of founded in the 4th century when it became the Roman state religion and supported the Roman creditor and landowning class.

Ralph Nader: The value of historical context, most people don’t know we had usury laws that were abolished by corporate lobbyists in the 1970s, state after state after state. We’re out of time, unfortunately. How would people reach you if they wanted to, Michael?

Michael Hudson: Well, I have a website, michael-hudson.com, and I have all of my articles and interviews, including this one, that will be on the website and they can reach right through on the website, and I have a Patreon group.

Ralph Nader: Can you repeat that again slowly?

Michael Hudson: The website is michael-hudson.com. And on that site, I also have a Patreon group, and all of my articles and interviews are on that site.

Ralph Nader: Thank you very much again, Michael.

Michael Hudson: Thank you so much for inviting me. I really appreciate it.

Ralph Nader: You’re welcome.


Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of A Philosophy for a Fair Society (2022), The Destiny of Civilization (2022), …and forgive them their debts (2018), J is for Junk Economics (2017), Killing the Host (2015), The Bubble and Beyond (2012), Super Imperialism: The Economic Strategy of American Empire (1968 & 2003 & 3rd Edition 2021), Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy (1992 & 2009) and of The Myth of Aid (1971), amongst many others. He can be reached via his website Michael Hudson, mh@michael-hudson.com. Originally published Sept. 26, 2022.

From the archives:

Michael Hudson: A Short History of Inflation in Modern Times

The Financial Industry Is A Lot Bigger Than A Giant Vampire Squid, by Pete Dolack

Michael Hudson: The Nature of Financialization and Neoliberalism, Interviewed by Eric Draitser

Michael Hudson: Finance Capitalism’s Self-Destructive Nature

Capitalism Is Working As Intended: The Madness of Capitalist Inequality, by Pete Dolack

Rents Will Continue To Rise As Long As Housing Remains A Capitalist Commodity, by Pete Dolack

Chris Hedges: The Nature of Neoliberalism and its Consequences

Neoliberalism: The Economic Model: Origins, Theory, Definition (2005)

12 thoughts on “Michael Hudson and Ralph Nader: The Real Purpose of The Federal Reserve

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  8. Ever since getting marginalized, chastised and condemned by the progressive dems the past 20 years, Ralph has joined the anybody but Reps. zeitgeist. I miss the old take no prisoners Ralph.

    The three policy pillars of neoliberalism are not complicated:

    1. privatization of the public sphere,
    2. deregulation of the corporate sector,
    3. and the lowering of income and corporate taxes, paid for with cuts to public spending.

    All of the above was the embodiment of Carter, Biden, Clintons, Obama and the vast majority of all the democrats who were experts at installing neoliberal policies and legislation too numerous to list here.

    There’s nothing worse than being “gaslit” by a bunch of people who say they care about you while simultaneously stabbing you in the back and telling you the knife is wielded by those damn Republicans.

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