[R-G] [BillTottenWeblog] The Worsening Debt Crisis:

[Bill Totten]

Who Got Us into This Mess and What are the Real Political Options?

An Interview with Economist Michael Hudson

by Mike Whitney

www.counterpunch.com (September 08 2008)


Michael Hudson is a former Wall Street economist specializing in the
balance of payments and real estate at the Chase Manhattan Bank (now JP
Morgan Chase & Company), Arthur Anderson, and later at the Hudson
Institute (no relation). In 1990 he helped established the world's first
sovereign debt fund for Scudder Stevens & Clark. Dr Hudson was Dennis
Kucinich's Chief Economic Advisor in the recent Democratic primary
presidential campaign, and has advised the US, Canadian, Mexican and
Latvian governments, as well as the United Nations Institute for
Training and Research (UNITAR). A Distinguished Research Professor at
University of Missouri, Kansas City (UMKC), he is the author of many
books, including Super Imperialism: The Economic Strategy of American
Empire (new editon, Pluto Press, 2002).

Mike Whitney: On Friday afternoon the government announced plans to
place the two mortgage giants, Fannie Mae and Freddie Mac, under
"conservatorship". Shareholders will be virtually wiped out (their stock
already had plunged by over ninety per cent) but the US Treasury will
step in to protect the companies' debt. To some extent it also will
protect their preferred shares, which Morgan-Chase have marked down only
by half.

This seems to be the most sweeping government intervention into the
financial markets in American history. If these two companies are
nationalized, it will add $5.3 trillion dollars to the nation's balance
sheet. So my first question is, why is the Treasury bailing out
bondholders and other investors in their mortgage IOUs? What is the
public interest in all this?

Hudson: The Treasury emphasized that it was under a Sunday afternoon
deadline to finalize the takeover details before the Asian markets
opened for trading. This concern reflects the balance-of-payments and
hence military dimension to the bailout. The central banks of China,
Japan and Korea are major holders of these securities, precisely because
of the large size of Fannie Mae and Freddie Mac - their $5.3 trillion in
mortgage-backed debt that you mention, and the $11 trillion overall US
mortgage market.

When you look at the balance sheet of US assets available for foreign
central banks to buy with the $2.5 to $3.5 trillion of surplus dollars
they hold, real estate is the only asset category large enough to absorb
the balance-of-payments outflows that US military spending, foreign
trade and investment-capital flight are throwing off. When the US
military spends money abroad to fight the New Cold War, these dollars
are recycled increasingly into US mortgage-backed securities, because
there is no other market large enough to absorb the sums involved.
Remember, we do not permit foreigners - especially Asians - to buy
high-tech, "national security" or key infrastructure. The government
would prefer to see them buy harmless real estate trophies such as
Rockefeller Center, or minority shares in banks with negative equity
such as Citibank shares sold to the Saudis and Bahrainis.

But there is a limit on how nakedly the US Government can exploit
foreign central banks. It does need to keep dollar recycling going, in
order to prevent a sharp dollar depreciation. The Treasury therefore has
given informal assurances to foreign governments that they will
guarantee at least the dollar value of the money their central banks are
recycling. (These governments still will lose as the dollar plunges
against hard currencies - just about every currency except the dollar
these days.) A failure to provide investment guarantees to foreigners
would thwart the continuation of US overseas military spending! And once
foreigners are bailed out, the Treasury has to bail out domestic
American investors as well, simply for political reasons.


Whitney: Fannie and Freddie have been loading up on risky mortgages for
ages, under-stating the risks largely to increase their stock price so
that their CEOs can pay themselves tens of millions of dollars in salary
and stock options. Now they are essentially insolvent, as the principal
itself is in question. There was widespread criticism of this year after
year after year. Why was nothing done?

Hudson: Fannie and Freddie were notorious for their heavy Washington
lobbying. They bought the support of Congressmen and Senators who
managed to get onto the financial oversight committees so that they
would be in a position to collect campaign financing from Wall Street
that wanted to make sure that no real regulation would take place.

On the broadest level, Treasury Secretary Paulson has said that these
companies are being taken over in order to reflate the real estate
market. Fannie and Freddie were almost single-handedly supporting the
junk mortgage market that was making Wall Street rich.

The CEOs claimed to pay themselves for "innovation". In today's
Orwellian vocabulary financial "innovation" means the creation of
special rent-extracting privilege. The privilege was being able to get
the proverbial "free ride" (that is, economic rent) by borrowing at
low-interest government rates to buy and repackage mortgages to sell at
a high-interest markup. Their "innovation" lies in the ambiguity that
enabled them to pose as public-sector borrowers when they wanted to
borrow at low rates, and private-sector arbitrageurs when they wanted to
get a rake-off from higher margins.

The government's auditors are now finding out that their other
innovation was to cook the accounting books, Enron-style. As mortgage
arrears and defaults mounted up, Fannie and Freddie did not mark down
their mortgage holdings to realistic prices. They said they would do
this in a year or so - by 2009, after the Bush Administration's
deregulators have left office. The idea was to blame it all on Obama
when they finally failed.

But at the deepest level of all, the "innovation" that created a
rent-extracting loophole was the deception that making more and more
bad-mortgage loans could continue for a prolonged period of time. The
reality is that no exponential rise in debt ever has been able to be
paid for more than a few years, because no economy ever has been able to
produce a surplus fast enough to keep pace with the "magic of compound
interest". That phrase is itself a synonym for the exponential growth of
debt.


The Road to Debt Peonage

Whitney: In an earlier interview you said: "The economy has reached its
debt limit and is entering its insolvency phase. We are not in a cycle
but the end of an era. The old world of debt pyramiding to a fraudulent
degree cannot be restored." Would you expand on this in view of today's
developments?

Hudson: How long more and more money can be pumped into the real estate
market, while disposable personal income is not growing by enough to pay
these debts? How can people pay mortgages in excess of the rental value
of their property? Where is the "market demand" to come from?
Speculators already withdrew from the real estate market by late 2006 -
and in that year they represented about a sixth of all purchases.

The best that this weekend's bailout can do is to postpone the losses on
bad mortgage debts. But this is a far cry from actually restoring the
ability of debtors to pay. Mr Paulson talks about more lending to
support real estate prices. But this will prevent housing from falling
to levels that people can afford without running deeper and deeper into
mortgage debt. Housing prices are still way, way above the traditional
definition of equilibrium - prices whose carrying charges are just about
equal to what it would cost to rent over time.

The Treasury's aim is to revive Fannie and Freddie as lenders - and
hence as vehicles for the US economy to borrow from the foreign central
banks and large institutional investors that I mentioned above. More
lending is supposed to support real estate prices from falling quite so
far as they otherwise would - and in fact, the aim is to keep the debt
pyramid growing. The only way to do this is to lend mortgage debtors
enough to pay the interest and amortization charges on the existing
volume of debt they have been loaded down with. And since most people
aren't really earning any more - and in fact are finding their budgets
squeezed - the only basis for borrowing more is to inflate the price of
real estate that is being pledged as collateral for mortgage refinancing.

It is pure hypocrisy for Wall Street's Hank Paulson to claim that all
this is being done to "help home owners". They are vehicles off whom to
make money, not the beneficiaries. They are at the bottom of an
increasingly carnivorous and extractive financial food chain.

Nearly all real estate experts are in agreement that for the next year
or two, many of today's homeowners will find themselves locked into
where they are now living. Their situation is much like medieval serfs
were tied to their land. They can't sell, because the market price won't
cover the mortgage they owe, and they don't have the savings to pay the
difference.

Matters are aggravated by the fact that interest rates are scheduled to
reset at higher non-teaser rates for the rest of this next year and
2010, increasing the financial burden. You may remember that Alan
Greenspan recommended that homebuyers take out adjustable-rate mortgages
(ARMs) because the average American moves every three years. By the time
the mortgage interest rate jumped, he explained, they could sell to a
new buyer in this game of musical chairs - presumably with more and more
chairs being added all the times, and plusher ones to boot.

But homeowners can't move today, so they find themselves stuck with
rising interest charges on top of their rising fuel and heating and
electricity charges, transportation charges, food costs, health
insurance and even property taxes as these begin to catch up with the
rise in Bubble Prices.

The government has carefully avoided nationalizing the companies and
thereby taking them onto its own balance sheet. It has created a
"conservatorship" (a word that my spellchecker does not recognize). So
the bailout of Fannie and Freddie looks like the Republicans are trying
to play the financial just-pretend game simply until they leave office
in February, after which time they can blame the failure of the "miracle
of compound debt interest" on the incoming Democratic Congress.

So it's politics as usual: play for the short run. In the long run -
even next year - the real estate market will continue to drift down.


Whitney: The economic news keeps getting grimmer and grimmer, but you'd
never know it by listening to the politicians at the Republican
Convention. The only time the economy was brought up at all was in the
context of praise for free markets and globalization. The housing crash
and credit market meltdown were not mentioned. Could you tell us what
you think the rising unemployment numbers, falling consumer demand,
skyrocketing foreclosures and ongoing troubles in the credit markets
mean for America's future? Is this just a blip on the radar or are we in
the middle of a major retrenchment that will result in falling living
standards and a deep, protracted recession?

Hudson: The Republicans prefer to distract attention from how the Bush
regime has failed over the past eight years. If attention can be focused
on Iraq and terrorism, on personalities and style, serious discussion of
such matters may be crowded out. That's what the news media are for.

When politicians do talk about the economy, the basic strategy is to
fight the November election over who has the nicest dream for what
people would like to believe. Amazing as it seems, a large number of
Americans actually expect to have a good chance of becoming
millionaires. They're simply not looking at the debt side of the balance
sheet.

The most striking economic dynamic today is polarization between those
who live off the returns to wealth (finance and property extracting
interest and rent, plus capital gains as asset prices are inflated) and
those who live off what they can earn, struggling to pay the taxes and
debts they are taking on. The national income and product accounts - GNP
and national income - don't say anything about the polarization of
property, and doesn't include capital gains, which are how most wealth
is being achieved these days, not by actual direct investment to
increase the means of production as lobbyists for trickle-down economic
theory claim.

Here's how things look today: The richest one per cent of the population
receive 57.5 per cent of all the income generated by wealth - that is,
payment for privilege, most of it inherited. These returns - interest,
rent and capital gains - are not primarily a return for enterprise. They
are pure inertia, weighing down markets. They do not "free" markets,
except by providing a free lunch to the wealthiest families. The richest
twenty per cent of the population receives some 86 per cent of all this
income - that is, what actually is increasing household balance sheets.

What people still view as an economic democracy is turning into a
financial oligarchy. Politicians are looking for campaign support mainly
from this oligarchy because that is where the money is. So they talk
about a happy-face economy to appeal to American optimism, while being
quite pragmatic in knowing who to serve if they want to get ahead and
not be blackballed.

During the 1990s the bottom ninety per cent of the population tried to
catch up by going into debt to buy homes and other property. What they
didn't see was that an insatiable growth in debt is needed to keep a
real estate and finance bubble expanding. All this credit imposes
financial charges, which have been largely responsible for polarizing
wealth ownership so sharply in recent decades.

These debt charges have grown so heavy that debtors are able to pay only
by borrowing the interest that is falling due. They have been able to
borrow for the past few years by pledging real estate or other
collateral whose prices are being inflated by Federal Reserve policy.
The Treasury also contributes by giving tax favoritism, un-taxing
property and finance. This forces labor and tangible industrial capital
to pick up the fiscal slack, even as they are being forced to carry a
heavier debt burden.

Homeowners do not gain by this higher market "equilibrium" price for
housing. Higher prices simply mean more debt overhead. Rising price/rent
and price/earnings ratios for debt-financed properties, stocks and bonds
oblige wage earners to go deeper and deeper into debt, devoting more and
more years of their working life to pay for housing and to buy
income-yielding stocks and bonds for their retirement.

Debt expansion to buy property seems self-justifying as long as asset
prices are rising. This asset-price inflation is euphemized as "wealth
creation" by focusing on real estate, stock and bond prices - even as
disposable personal income and living and working conditions are eroded.

So to come back to your broad question, I don't see consumer demand
rising much, except by foreign tourists coming over and spending their
money as the dollar falls. Here in New York, foreign buyers are
supporting the real estate market. The Wall Street downturn already has
forced the city to postpone its promised property tax cuts and its
subway expansion. My wife and I just got our condo tax bill this week.
There was an explanatory note telling us that the only tax cuts will be
for commercial property owners. Residential property tax rates rise.

It gets worse. Without better transportation, wage earners will be
squeezed across the country. Higher gas prices, electricity, health care
and food are crowding out spending on output and forcing people into
even more debt. That's why arrears and defaults are rising. Even rents
are rising, despite falling real estate prices. This is because houses
under foreclosure can't be rented out, so millions of houses may be
taken off the market.


Whitney: What exactly do you mean by "modern debt peonage"?

Hudson: This is what happens when wage earners are obliged to turn over
all their income above basic subsistence needs to the FIRE sector -
mainly for debt service but also to pay for compulsory insurance and,
most recently, the tax burden that finance and property have shifted off
themselves.

The distinguishing feature about peonage is its lack of choice. It is
the antithesis of free markets. As I mentioned above, many families
today find themselves locked into homes that have negative equity. Their
mortgage debt exceeds the market price. These homes can't be sold -
unless the family can pay the difference to the banker who has made the
bad mortgage loan. The gap may exceed all the income the family earns in
an entire year - just as it was making on paper a price gain larger than
its annual take-home pay.

But what did all this matter, in retrospect, if the house was for
living, not for buying and selling? This dimension of use value was left
out of account by focusing on paper wealth.

In a nutshell, debt peonage is the other side of the coin in a rentier
economy. The negative equity we are seeing today is a key component of
debt peonage. It forces debt peons to spend their lives trying to work
their way out of debt. The more desperate they get, the more risks they
take, and the deeper they end up. In Kansas City, one of my students
wrote his class paper on how the immediate cause of many mortgage
defaults is gambling debt. Missouri has a lot of fundamentalist
Christians who think of God as watching carefully over them. Being good
people, they want to give God a chance to reward them for living an
honest life. So they go to the gambling boats that are moored along the
river. But the odds are against them, and it looks like Einstein was
wrong when he said that God doesn't play dice. Gambling - and much
financial speculation - is all about probability, and the odds are as
much against gamblers as they are against debtors. Being laws of nature,
the laws of probability are like the privilege of land ownership: a
gambling license provides the house with an opportunity to rake economic
rent off the top.


Debt deflation and the tax shift off finance and property onto labor

Whitney: In the short run it looks like slow growth and deflation will
be bigger problems than inflation. Commodities, including gold and oil,
are tumbling almost daily, while bank assets are being steadily
downgraded, foreclosures are soaring and the stock market is reeling.
The financial crisis that began in the real estate market has triggered
a boycott of structured products and is now rippling through the broader
economy.

The Federal Reserve has already dropped interest rates by 3.5 per cent
and has used up half its balance sheet ($450 billion) to shore up the
faltering banking system. But the situation keeps getting worse. The
banks have curtailed their lending, and consumer spending is off in
nearly every area. It looks like the Fed is out of ammo. Is it time to
consider fiscal alternatives to the present downturn, such as cutting
payroll taxes to give families more money to increase demand, or
initiating massive infrastructure projects?

Hudson: By "deflation" I assume you mean debt deflation - draining
purchasing power as a result of rising debt service and compulsory
insurance, plus the wage squeeze that the government praises for
"raising productivity" to "create wealth" for the CEOs who pay
themselves what they have cut back from labor's paycheck. There will be
less consumer spending - but even so, consumer prices may not come down
if the dollar resumes its fall, especially if monopoly pricing continues
to be permitted.

Your solution is indeed what is needed, and Mr Obama has promised to
raise the wage and salary limit subject to FICA withholding. I think
that an even better idea would be to go back to the original 1913 income
tax and exempt wages that merely cover subsistence. I would restore a
cut-off point at $102,000 in today's dollars, matching the terms of
America's 1913 income tax. People earning less would not have to file an
income-tax return at all.

This truly conservative idea would free income to be spent on improving
living standards. Instead, high income brackets and property are being
un-taxed today, and their tax savings are being spent mainly in making
loans that are used to bid up the price of wealth and luxury goods.

This is what the classical economists warned against, yet the tax shift
off property onto labor is being done hypocritically in their name. To
get the kind of free markets they advocated, taxes should fall on the
FIRE sector (finance, insurance and real estate) and monopolies, not
wages or bona fide industrial profits stemming from tangible capital
investment and employment.


Whitney: This June you wrote a groundbreaking paper for a recent
Post-Keynesian conference at the University of Missouri in Kansas City,
where you're an economics professor. Its title was "How the Real Estate
Bubble drives Home buyers into Debt Peonage". You earlier wrote a now
famous May 2006 Harpers cover story on debt peonage. Your Kansas City
paper produces charts showing how tax favoritism for real estate and
other clients for the banking and financial sector stimulates
asset-inflation, leading to massive equity bubbles like the one we are
currently experiencing in the housing market. Would you give us a brief
summary of your thesis?

Hudson: My paper explained how the money the tax collector gives up is
"freed" to be paid to banks as interest. This is the motto of real
estate investors: "Rent is for paying interest". The FIRE sector has
adopted a populist rhetoric to persuade homeowners to believe that
lowering the property tax will end up giving them more money. It seems
at first blush that this would happen. But in practice, new buyers - and
speculators - come into the market and pledge the tax cuts to bid up
housing prices all the more. The winner in this new anti-tax marketplace
is the buyer who pledges to pay the tax cut to the banks as interest on
a mortgage loan to buy the property.

As my paper describes:

"Tax favoritism for real estate, corporate raiders and ultimately for
bankers has freed income to be pledged to carry more and more debt,
which has been used to fuel asset-price inflation that raises the price
of home ownership, corporate stocks and bonds - but not to increase
production and output ... Shaping the marketplace to favor finance and
property over industry and labor does not create a 'free market'. It
favors the debt-leveraged buying and selling of real estate, stocks and
bonds, distorting markets in ways that de-industrialize the economy.
[And] shifting taxes off property and finance is more a distortion than
a virtue, unless debt leveraging is deemed virtuous.

"This is the tragedy of our economy today. Credit creation, saving and
investment are not being mobilized to increase new direct investment or
raise living standards, but to bid up prices for real estate and other
assets already in place and for financial securities (stocks and bonds)
already issued. This loads down the economy with debt without putting in
place the means to pay it off, except by further and even more rapid
asset-price inflation.

"This is largely the result of relinquishing planning and the
structuring of markets to large banks and other financial institutions;
political lobbyists have rewritten most of today's tax laws and
sponsored general public deregulation of the checks and balances that
were being put in place by the late 19th century. At that time, just
over a hundred years ago, it seemed that wealth - and banking - were
being industrialized, while landed wealth and monopolies would become
more socialized and their rents fully taxed. Instead of real estate
prices rising, the rental 'free lunch' would provide the basic source of
public finance. Technology and productivity would increase industrial
capital formation and raise labor's living standards. These policies
would free markets from rent extraction and also from taxes as the
fiscal burden was shifted back onto property.

"But this is not what has occurred. The financial system has used its
power to extract fiscal favors for real estate and to press for
deregulation of monopolies as the major source of its interest and
collateral for its loans."


Whitney: What do you think the positive effects would be of taxing
property rather than income and industrial profit?

Hudson: It would have two major positive effects. First, it would free
labor and industry from the tax burden. And by the same token, it would
require the economic rent currently used to pay interest and
depreciation to be paid instead as a property rent tax. This would free
an equivalent sum from having to be raised in the form of income and
sales tax. That was the classical idea of free markets. As matters stand
today, the tax subsidy for real estate and finance leaves more net
rental income to be capitalized into bank loans. This is a travesty of
the "free markets" that lobbyists for the banks and the wealthy in
general claim to advocate.

Replacing income and sales taxes by a land-rent "free lunch" tax would
make real estate prices more affordable, because the interest now "free"
to be paid to banks to support a high debt overhead would instead be
collected and used to lower the tax burden on labor and industry. This
would reduce the cost of production and living, I estimate by about
sixteen percent of national income.

Homeowners and renters would pay the same amount as they now do, but the
public sector would recapture the expense of building transportation and
other basic infrastructure out of the higher rental value this spending
creates. The tax system would be based on user fees for property,
falling on owners in a way that collects the rising value of their
property resulting from the rent of location, enhanced by public
transportation and other infrastructure, and from the general level of
prosperity, for which landlords are not responsible but merely are the
passive beneficiaries under current practice.

A Neo-Progressive fiscal policy would aim at recapturing the land's site
value created by public infrastructure spending, schooling and the
general level of prosperity. The debt pyramid would be much smaller, and
savings could take the form of equity investment once again. Slower
growth of debt, housing and office prices, and lower taxes on income and
sales would make the economy more competitive internationally.


Whitney: I'd like to expand on what you have said in your article and
you can correct me if I've got it wrong. You say that today's tax code
poses an obstacle to progressive political change, and puts more and
more power in the hands of bankers and speculators who profit from "boom
and bust" cycles. In other words, reworking the tax system has to be the
cornerstone of any progressive platform? Is this the bigger point you
are trying to make?

Hudson: It's certainly the tax point I want to make. But I think that my
most important point is the analysis of how the mathematics of compound
interest intrudes increasingly into the economy. The fiscal link is that
as finance strips more and more wealth, Wall Street converts its
economic power into political power. Its main aim is to free itself from
taxation - by shifting the burden onto labor.

One way to achieve this tax shift has been to re-define taxes as a "user
fee". This is what the Greenspan Commission did in 1983 when it imposed
heavy regressive taxation on labor via FICA wage withholding for Social
Security and Medicare instead of funding these programs out of the
general budget, to be paid for largely by the higher brackets. The
Social Security Trust Fund generated a heavy tax surplus, which was used
to cut tax rates on the upper wealth brackets.

The tax code's "small print" made commercial real estate free of having
to pay income tax by pretending that landlords were losing money on
their property as buildings depreciated - as if the land's rising site
value did not more than compensate. Most important, interest was treated
as a tax-deductible expense. This encouraged debt leveraging rather than
equity investment, creating an enormous market for bankers creating
credit and collecting interest on it.


Whitney: You say in your article that there's "a symbiosis between
finance, insurance and real estate" which is at the core of the Bubble
Economy. And that this creates "a feedback between bank credit and asset
prices. The quickest and easiest path to wealth is not to earn profits
by investing in industry, but to go into debt to ride the wave of
asset-price inflation. The result is a shift of wealth seeking away from
industry to financial maneuvering on credit to ride the wave of
asset-price inflation".

Is this financialization trend irreversible, or is there a way we can
revitalize America's industrial base? Should we consider nationalizing
the failing auto industry and putting people to work while we build
vehicles for the future?

Hudson: Nationalization may not be the answer as long as financial
interests have replaced the government as society's new central
planners. I fear that nationalization under today's political conditions
would mean "socializing the losses", having the government bear them and
then sell off the companies at the usual give-away price to new buyers
on credit, all to the benefit of Wall Street.

If there is any sector to be nationalized, it should be the FIRE sector
- finance, insurance and industry - along with taking basic
infrastructure back into the public domain by de-privatizing it. The
Progressive Era's plan that made America so rich and dominant a nation
was for the government to supply basic services such as railroads, phone
systems, the post office and roads or canals at cost or at a subsidy.
This lowered the price structure across the economic spectrum, enabling
the United States to undersell and out-produce other economies.


Whitney: We are now in Year Two of the so-called credit crisis, what
Bloomberg News calls "the worst financial crisis since the Depression".
More and more pundits are pointing at the Fed's monetary policies as the
source of the troubles. Surprisingly, even the New York Times has joined
in the finger pointing by admitting that Greenspan played a central role
in the housing bubble.

Here's what The New York Times recently said: "Who's to blame? In the
estimation of many economists, it starts with the Federal Reserve. The
central bank lowered interest rates following the calamitous end of the
technology bubble in 2000, lowered them more after the terrorist attacks
of September 11 2001, and then kept them low, even as speculators began
to trade homes like dot-com stocks. Meanwhile, the Fed sat back and
watched as Wall Street's financial wizards engineered diabolically
complicated investments linked to mortgages, generating huge amounts of
speculative capital that turned real estate into a conflagration."

How would you characterize Greenspan's part in the present crisis?

Hudson: He was its cheerleader, with backup from the University of
Chicago and a slew of right-wing think tanks. Mr Greenspan gave all this
trickle-down economics a patina of rationale and also a rhetoric
pretending that the financial bubble was helping homeowners rather than
mortgage lenders and Wall Street. His role was to translate Ayn Rand
propaganda into populist euphemism.

The role of a financial cheerleader is to confuse the economic issues,
above all by depicting running into debt as "debt leverage" to
accelerate "wealth creation". Looking backward, we now can see that this
was really debt creation. When Mr Greenspan spoke about wealth, he
didn't mean the kind that Adam Smith referred to in The Wealth of
Nations - tangible means of production. Mr Greenspan meant balance-sheet
financial claims on this wealth in the form of stocks, bonds and
property claims. Adam Smith said that to count these monetary forms of
wealth alongside the actual land and capital of Britain would be double
counting. For Greenspan, the liabilities side of the economy's balance
sheet - what its producers owed to financial and property owners -
became the only kind of wealth he really cared about.

This inside-out perspective was largely responsible for
de-industrializing, downsizing and outsourcing the US economy. Mr
Greenspan's idea of "free markets" was simply to deregulate them -
covertly, to be sure, by appointing non-regulators to the government's
key regulatory positions. This resulted in asset stripping, which
created some conspicuous billionaires (corporate raiders, re-christened
as "shareholder activists" these days) and hence won the praise of Mr
Greenspan for ostensibly playing a positive role in "wealth creation".

The bottom line is that the economic vocabulary was turned into
double-think.


The Political dimension

Whitney: I have no background in economics, and never had any particular
interest in the topic. My frustration with the direction of the country
- particularly the Iraq war and the dismantling of civil liberties - led
me to search for answers in places that I never otherwise would have
looked. Now I am convinced that the war in Iraq and the rapid shift
towards a police state here in America are logical corollaries of the
economic polarization that has its root in policies that are
fundamentally flawed and serve the narrow interests of corporatists,
bankers and other vested interests.

Hudson: With regard to your abhorrence of economics, some of my best
students at the New School withdrew from the discipline as they found
that it wasn't addressing the problems they were most concerned about.
The field has been sterilized by more than a generation of Chicago
School intolerance.

The economics profession does not seem to be amenable to reform along
the lines that would get you interested in it. It has become mainly a
rhetorical gloss to depict financial oligarchy as if it were populist
economic democracy. Many people have tried to expand its scope, and have
failed. Thorstein Veblen made an attempt a century ago, his analysis -
basically, classical political economy - was exiled to the academic
sub-basement of sociology. Economists preferred to put on blinders when
it came to looking at wealth distribution and the classical distinction
between "earned" and unearned" (that is, parasitic) income. Just while
sex was becoming un-repressed, wealth distribution became the new
politically incorrect topic to discuss.

In the old movies about invaders from outer space such as The Thing,
there usually was a near-sighted scientist who said, "Let's try to
reason with it. It's smarter than we are, because it's come in a flying
saucer with all that great technology." The monster from outer space
then would simply whack the man aside, killing him brutally.

It's much like the Terminator from the future. "It doesn't feel
compassion. It doesn't feel pain. You can't reason with it", says the
movie's hero. "All it does is kill".

This is the task the Chicago Boys have taken on in their defense of
financialized markets as being "free". You can't reason with them.
Reason is not their job. They are not there to be fair.

But to achieve its censorial role, today's economic orthodoxy pretends
that markets work in a fair way to provide everyone with opportunity -
something like a sperm with a chance to inherit a billion dollars from a
Russian kleptocrat or American real estate magnate or Wall Street
operator. To promote this worldview, one needs to craft a rhetoric
pretending that markets are "free", not leading to serfdom. One has to
pretend that is government regulation of the kleptocrats that is leading
to serfdom rather than protecting the population from predatory finance.

Regarding your concern with the police state and, ultimately military
aggression that is required to promote "free markets" at gunpoint,
Pinochet-style, empire building always has gone hand in hand with
impoverishing the population of the imperial center as well as its
periphery. For starters, empires and wars don't pay, at least not in
modern times. At best, it is like the war in Iraq - a vehicle for the
Bush administration to channel billions of "missing" dollars to its
campaign supporters, to recycle back into new Republican campaign
funding. The economy at large is taxed as imperialism turns into asset
stripping.

A second and more purely political dimension of imperial warfare is to
distract the attention of voters away from economic issues, by appealing
to their nationalism and chauvinism.

Hobson's theory of imperialism was that the domestic population lacked
the income to consume what it produced, so that producers had to seek
out foreign markets. This led to war. But today, the "postindustrial"
mode of imperialism is more about recycling wealth to produce capital
gains, mainly by globalizing and privatizing the Bubble Economy. The
most important markets for "wealth creation" are not for goods and
services, but for real estate and financial assets. So we are brought
back to your initial questions today, about how Fannie Mae and Freddie
Mac will sponsor more sales of mortgage-backed securities.


Whitney: I think your article offers a straightforward way to avoid
disaster and to transform society by changing the tax code so that it
strengthens the middle class and levels the playing field between "the
haves and the have-nots". But how can this be achieved without breaking
your ideas into snappy sound-bytes and building a broad-based grassroots
movement devoted to working class issues and economic justice? Is there
a way to make these transformative social changes without starting a
third political party; an American Labor Party perhaps?

Hudson: If the incoming Democratic administration proves to be more of
the same, pressure will indeed arise to create a new party. More often
economic reform has come from the top, but I don't see it from the
Republicans, given their corruption. Within the Democratic Party the
question is whether the Wall Street Democratic Leadership Committee (who
gave us Gore and Lieberman after the Clintons) will continue to impose
its stranglehold.

Any real improvement will need an educational campaign to prepare the
ground for making economic reform the centerpiece of major elections.
This educational role often has been filled by third parties. In the
1890s, for instance, the main Progressive Era campaigning occurred
outside of the Democrats and largely outside of the Republicans as well.

_____

Michael Hudson is a former Wall Street economist specializing in the
balance of payments and real estate at the Chase Manhattan Bank (now JP
Morgan Chase & Company), Arthur Anderson, and later at the Hudson
Institute (no relation). In 1990 he helped established the world's first
sovereign debt fund for Scudder Stevens & Clark. Dr Hudson was Dennis
Kucinich's Chief Economic Advisor in the recent Democratic primary
presidential campaign, and has advised the US, Canadian, Mexican and
Latvian governments, as well as the United Nations Institute for
Training and Research (UNITAR). A Distinguished Research Professor at
University of Missouri, Kansas City (UMKC), he is the author of many
books, including Super Imperialism: The Economic Strategy of American
Empire (new edition, Pluto Press, 2002). He can be reached via his
website, mh at michael-hudson.com

Mike Whitney lives in Washington state. He can be reached at:
fergiewhitney at msn.com

http://www.counterpunch.com/whitney09082008.html



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