You can’t bail out the banks, leave the debts in place, and rescue the economy. It’s a zero-sum game. Somebody has to lose. That’s what happened in 2009 when President Obama came in. He invited the bankers to the White House and he said, “I’m the only guy standing between you and the mob with pitchforks,” by which he meant the voters that he was bamboozling. He reassured the bankers. He said, “Look, my loyalty is to my campaign donors not to the voters. Don’t worry; my loyalty is with you.”
I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show: Rescuing the Banks Instead of the Economy. Dr. Hudson is a financial economist and historian. He is president of the Institute for the Study of Long-Term Economic Trend, a Wall Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book Super Imperialism: The Economic Strategy of American Empire is a critique of how the United States exploited foreign economies through the IMF and World Bank. His latest books are Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy and J Is for Junk Economics: A Guide to Reality in an Age of Deception. Today we discuss how the bank bailouts, not the crash, are killing the economy. Also, the concept of debt deflation, the magic of compound interest, the growth of the financial extraction FIRE sector, quantitative easing, tariffs, economic sanctions and isolationism.
BONNIE FAULKNER: Dr. Michael Hudson, welcome.
MICHAEL HUDSON: It’s good to be back after a few years.
BONNIE FAULKNER: Boy I’ll say. I’ve just read your article “The Lehman 10th Anniversary Spin as a Teachable Moment.” Obviously, 2018 is the tenth anniversary of the 2008 stock market crash. You immediately point out that today’s financial malaise is a result of the bank bailout not the crash. I think people might find this statement surprising since the claim is that the bailout saved the economy.
MICHAEL HUDSON: I think what the newspapers said was that the bailout saved the banks. To bankers, their banks are the economy. The problem is, you can’t save the banks and the economy. If you save the banks, you’re saving all the debt that people owe to the banks. And if you save all the debt that the people owe to the banks – and you foreclose on the millions of families that forfeited their homes in the mortgage crisis – if you leave the debts growing at compound interest, raise the debt equity ratios and the debt-to-income ratios, then the economy is going to shrink and shrink, and we’re in a slow crash. So in a sense the celebration over “Yes, we saved the banks” was correct last week, but people don’t realize that the economy cannot be saved unless there’s a bank crash.
That’s what Sheila Bair wrote in her memoir about her experience as the head of the Federal Deposit Insurance Corporation. She pointed out that Citibank was insolvent from losing all its net worth on bad gambles. She said it was the worst managed bank in America – as distinct from the just plain crooked banks and criminal banks like Countrywide, Bank of America and Wells Fargo. She said that there was plenty of theft by Citibank, but that all the insured depositors could have been reimbursed. No insured depositor would have lost money. But the stockholders and the bondholders that ran this gambling institution would have been wiped out. She said that Obama and Geithner really represented Citibank. Geithner was a protégé of Robert Rubin, the Secretary of the Treasury under President Clinton. She wrote that she found out, she was told, “It’s all about the bondholders.”
The problem is that Republican free-enterprise bankers discussing what happened ten years ago are saying, “Nothing to see here folks. Everything’s fixed now. We don’t have to do any regulation. Let the banks be free again.” Or, you have Democrats like Paul Krugman who cannot bring themselves to criticize what Obama did. A week ago, on September 14, Krugman showed himself to be a flack for the banks and for the Democrats’ donor class by writing that the Washington Beltway was crazy to believe that America had a debt problem. As I wrote in my article, he said that all you need is Keynesian policy to run a large enough budget deficit to spend enough money into the economy so that wage earners will have enough to pay the banks what they owe. I think this is the Democratic Party’s position: The role of wage earners is to make enough money so that all of their income over and above survival needs has to be paid for the banks. More and more income is needed to pay carrying charges as their debts keep rising.
Let me quote what Krugman wrote in The New York Times: “The purely financial aspect of the crisis was basically over by the summer of 2009.” But we’re still living in the rest of the financial crisis! The debt crisis is a financial crisis. He criticized the common-sense observation that I’m sure most of your listeners can realize right away: He referred to the “bizarre Beltway consensus that despite high unemployment and record low interest rates, debt, not jobs, is the real problem.” He says there’s no debt problem; it’s all just jobs, and if you pay people more, then they can pay the banks.
There’s no feeling at all within the Democratic Party that somehow the banks should have been subordinate to saving the economy. I think that is a major reason why Hillary lost the 2016 election. She kept saying, “Aren’t you better off today than you were eight years ago when Mr. Obama was elected?” Well, most people, especially in the Midwest, said, “No, we’re not better off. Are you kidding? We’ve lost our homes, employment’s down, our wages are lower, our pension funds are being seized. Of course we’re not better.” So more and more voters stayed home. Just today I was reading a survey that 55% to 85% of Americans say if there was a rerun of the 2016 election between Trump and Hillary they just wouldn’t vote, because both candidates were so bad.
So what you really have seen in this anniversary is not the discussion that you need to have: How are we going to deal with the next crisis to avoid bailing out the banks all over again? If we don’t bail out the banks, what’s the policy? How are we going to take over the insolvent banks – that means, take them public. Sheila Bair pointed out that if Citibank would have been taken over by FDIC it wouldn’t have made crooked loans, it wouldn’t have made junk mortgages. It wouldn’t have made corporate takeover loans, it wouldn’t have made loans to payday lenders, it wouldn’t have made derivative gambles. That’s not what public banks do. That discussion somehow isn’t occurring. It’s not occurring because people don’t realize that in any economy – not only in America; you’re having the same thing in Europe – the volume of debt expands exponentially, by compound interest. All the debt that people owe keeps mounting up more and more arrears. And if you miss a payment on your credit card, or even if you miss a payment to the electric utility or any other monthly bills, your credit card’s interest rate goes up from 11 or 12% to 29%. All this accumulates up and up and up. And the result is that personal debt service relative to income is going up. Corporate debt service relative to income is going way up, and the share of government budgets that must be paid to bondholders is going up. That means that people don’t have enough money to go and buy the goods and services they produce.
Here in New York, where I live there are whole blocks down 8th Street or Broadway or 5th Avenue or Madison Avenue with more and more stores empty and for rent, because the stores are going out of business. Restaurants especially are going out of business. The big chains that have been going out of business, as you’ve seen—not only Toys R Us but the whole slew of the big global and American chains are going out. People do not have enough money to buy goods and services anymore. All of this is celebrated as “Saving the banks” instead of “Destroying the economy.” This is Orwellian Doublethink.
It’s as if keeping the debts in place instead of writing them down was a victory for the economy. The reality is that it was only a victory of the banks and their bondholders. The economy at large is going to keep limping along until it does what every other economy has done in similar conditions – write down the debts. If it doesn’t write them down, you can look at what’s happened in Greece as our future: more and more austerity.
The first debts to be wiped out are going to be what companies and states owe for pension payments. You’ll see pensions wiped out, and you’ll see Social Security scaled back. The vice is going to be tightening financially on people. That should be what people are talking about when they talk about the disaster of 2008
The first thing Obama did when he was elected was to send a list of recommended cabinet positions to Rubin at Citicorp. So Citicorp got to name the cabinet. Of course, it wasn’t going to accept anyone who would regulate it, or any people in Justice who would throw a banker in jail. That’s the crisis. It’s a political crisis now that is tearing America apart. But it’s not a crisis that’s being talked about in the press.
BONNIE FAULKNER: You indicated that unless debts are canceled, the economy will suffer debt deflation and austerity. Could you remind everyone what is meant by the term debt deflation?
MICHAEL HUDSON: I have a chapter on that in my book Killing the Host. The term debt deflation was coined in the 1930s by Irving Fisher. He said when the debts are left in place and people are losing their jobs, corporate employment is shrinking and wages are not growing, the debts tend to grow and grow. That means more and more of people’s income is diverted to pay banks instead of paying for goods and services. So what’s happened today is, people think of prices as the price that they pay for consumer goods and that’s the consumer price index. But the Federal Reserve had a choice. It created $4.4 trillion worth of credit and gave it all to Wall Street. Not a penny was given to the economy at large. The aim was to support asset prices for the real estate and other collateral backing bank loans.
So there’s been a huge creation of money to support the banks to enable them to keep the debts – including the bad debts and the fraudulent debts – in place. But this $4.3 trillion could have been used to write down the debts. It could have been used to buy the excess mortgages, to write down the bank mortgages to realistic values so they wouldn’t be junk mortgages, but realistic mortgages. They could have lowered the cost of housing for people on mortgage. They could have essentially freed much of the economy from debt. And your listeners can imagine: If you didn’t have to pay your credit card debt, your student loan debt and your mortgage debt or your other debts to the bank, think of how much better your life would be. Think of all the things you could spend your money on. You’d buy more, and you wouldn’t be so badly squeezed.
This was the road that could have been taken. But you can’t bail out the banks, leave the debts in place and rescue the economy too. Somebody has to lose. That’s what happened in 2009 when President Obama came in. He invited the bankers to the White House and – I give all the quotations in my book – he said, “I’m the only guy standing between you and the mob with pitchforks.” Hillary called her voters “the deplorables,” but Obama called them “the mob with pitchforks.” He meant the voters he was bamboozling when he assured the bankers and promised them that his loyalty was to his campaign donors not the voters. He fronted for them when he looked at his supporters and Democratic voters, and called them “the mob with pitchforks.” And he treated them that way.
The people he put in place were so pro-Wall Street that he then put in place the second big deflationary ploy, ObamaCare, the Republican healthcare privatization plan to financialize health care, eating further into labor’s take-home pay.
People don’t realize that a large portion of the politicians elected as Democrats are actually Republicans running as Democrats. They’re called Blue Dogs, such as Claire McCaskill of Missouri, Manchin of West Virginia, Heidi Heitkamp etc. Under Obama the Democratic Party would only promote quasi-Republicans to run as Democrats. They tried to purge the party of anyone who was pro-labor or pro-Bernie. You can see what they did to Bernie, and what they’ve continued to do with him. They’ve made sure that it is impossible for voters to select the 2020 Democratic candidate, because they’ve turned over most of the convention’s nominating power to non-elected representatives. They don’t get to vote until the second ballot, to be sure, but the second ballot will happen if nobody gets 50% on the first ballot and there are going to be so many people running that of course no candidate is going to get 50% on the first ballot. So the Democratic Party has been captured by the same Wall-Street people that put in Presidents Clinton and Obama.
To answer your questio, people’s credit card balances are going to keep accruing interest, their student loans are not going to be cancelled, their mortgage charges are going up as interest rates rise, and its going to be a slow crash. People are having to struggle. More than half of Americans, according to the Federal Reserve, cannot raise $400 in an emergency. They are literally one paycheck away from homelessness or disaster or losing their house or missing a credit card payment that will increase their interest rates from 11% to 29%.
Click for Full Text!