09.05.08
How the Chicago Boys Wrecked the Economy
RG mail
http://www.counterpunch.org/whitney08292008.html
CounterPunch August 29, 2008
An Interview with Michael Hudson
By Mike Whitney
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 & Co.), Arthur Anderson, and later at the Hudson
Institute (no relation). In 1990 he helped established the worlds
first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was
Dennis Kucinichs Chief Economic Advisor in the recent Democratic
primary presidential campaign, and has advised the U.S., 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 ed., Pluto Press, 2002)
Mike Whitney: The United States current account deficit is roughly
$700 billion. That is enough “borrowed” capital to pay the yearly $120
billion cost of the war in Iraq, the entire $450 billion Pentagon
budget, and Bush’s tax cuts for the rich. Why does the rest of the
world keep financing America’s militarism via the current account
deficit or is it just the unavoidable consequence of currency
deregulation, “dollar hegemony” and globalization?
Michael Hudson: As I explained in Super Imperialism, central banks in
other countries buy dollars not because they think dollar assets are a
good buy, but because if they did NOT recycle their trade surpluses
and U.S. buyout spending and military spending by buying U.S.
Treasury, Fannie Mae and other bonds, their currencies would rise
against the dollar. This would price their exporters out of dollarized
world markets. So the United States can spend money and get a free
ride.
The solution is (1) capital controls to block further dollar receipts,
(2) floating tariffs against imports from dollarized economies, (3)
buyouts of U.S. investments in dollar-recipient countries (so that
Europe and Asia would use their central bank dollars to buy out U.S.
private investments at book value), (4) subsidized exports to
dollarized economies with depreciating currency, and similar responses
that the United States would adopt if it were in the position of a
payments-surplus country. In other words, Europe and Asia would treat
the United States as its Washington Consensus boys treat Third World
debtors: buy out their raw materials and other industries, their
export plantations, and their governments.
MW: Economist Henry Liu said in his article “Dollar hegemony enables
the US to own indirectly but essentially the entire global economy by
requiring its wealth to be denominated in fiat dollars that the US can
print at will with little in the way of monetary penalties…..World
trade is now a game in which the US produces fiat dollars of uncertain
exchange value and zero intrinsic value, and the rest of the world
produces goods and services that fiat dollars can buy at “market
prices” quoted in dollars.” Is Liu overstating the case or have the
Federal Reserve and western banking elites really figured out how to
maintain imperial control over the global economy simply by ensuring
that most energy, commodities, and manufactured goods are denominated
in dollars? If that’s the case, then it would seem that the actual
“face-value” of the dollar does not matter as much as long as it
continues to be used in the purchase of commodities. Is this right?
Michael Hudson: Henry Liu and I have been discussing this for many
years now. We are in full agreement. The paragraph you quote is quite
right. His Asia Times articles provide a running analysis of dollar
hegemony.
MW: What is the relationship between stagnant wages for workers and
the current credit crisis? If workers wages had kept up with the rate
of production, isn’t it less likely that we would be in the jam we are
today? And, if that is true, than shouldn’t we be more focused on
re-unionizing the labor force instead looking for solutions from the
pathetic Democratic Party?
Michael Hudson: The credit crisis derives from the magic of compound
interest, that is, the tendency of debts to keep on doubling and
redoubling. Every rate of interest is a doubling time. No real
economys production and economic surplus can keep up with this
tendency of debt to grow faster. So the financial crisis would have
occurred regardless of wage levels.
Quite simply, the price of home ownership tends to absorb all the
disposable personal income of the homebuyer. So if wages would have
risen more rapidly, the price of housing would simply have risen
faster as employees pledged more take-home pay to carry larger
mortgages. Stagnant wages merely helped keep down the price of houses
to merely stratospheric levels, not ionospheric ones.
As for labor unions, they havent been any help at all in solving the
housing crisis. In Germany where I am right now, unions have sponsored
co-ops, as they used to do in New York City, at low membership costs.
So housing costs only absorb about 20% of German family budgets,
compared to twice that for the United States. Imagine what could be
done if pension funds had put their money into housing for their
contributors, instead of into the stock market to buy and bid up
prices for the stocks that CEOs and other insiders were selling.
MW: When politicians or members of the foreign policy establishment
talk about “integrating” Russia or China into the “international
system”, what exactly do they mean? Do they mean the dollar-dominated
system which is governed by the Fed, the World Bank, the IMF, and the
WTO? Do countries compromise their national sovereignty when they
participate in the US-led economic system?
Michael Hudson: By integrating they mean absorbing, something like a
parasite integrating a host into its own control system. They mean
that other countries will be prohibited under WTO and IMF rules from
getting rich in the way that the United States got wealthy in the 19th
and early 20th centuries. Only the United States will be permitted to
subsidize its agriculture, thanks to its unique right to grandfather
in its price supports. Only the United States will be free from having
to raise interest rates to stabilize its balance of payments, and only
it can devote its monetary policy to promoting easy credit and
asset-price inflation. And only the United States can run a military
deficit, obliging foreign central banks in dollar-recipient countries
to give it a free ride. In other words, there is no free lunch for
other countries, only for the United States.
Other countries do indeed give up their national sovereignty. The
United States never has adjusted its economy to create equilibrium
with other countries. But to be fair, in this respect only the United
States is acting fully in its own self-interest. The problem is
largely that other countries are not playing the game. They are not
acting as real governments. It takes two to tango when one party gets
a free ride. Their governments have become enablers of U.S. economic
aggression.
MW: What do you think the Bush administration’s reaction would be if a
smaller country, like Switzerland, had sold hundreds of billions of
dollars of worthless mortgage-backed securities to investment banks,
insurance companies and investors in the United States? Wouldn’t there
be litigation and a demand that the responsible parties be held
accountable? So, how do you explain the fact that China and the EU
nations, that were the victims of this gigantic swindle, haven’t
boycotted US financial products or called for reparations?
Michael Hudson: International law is not clear on financial fraud.
Caveat emptor is the rule. Foreign investors took a risk. They trusted
a deregulated U.S. financial market that made it easiest to make money
via financial fraud. Ultimately, they put their faith in neoliberal
deregulation at home as well as in the United States. England is now
in the same mess. The accountability was supposed to lie with U.S.
accounting firms and credit rating agencies. Foreign investors were so
ideologically blinded by free market rhetoric that they actually
believed the fantasies about self-regulation and self-regulating
markets tending toward equilibrium rather than the real-world tendency
toward financial and economic polarization.
In other words, most foreign investors lack a realistic body of
economic theory. The United States could simply argue that they should
take responsibility for their bad investments, just as U.S. pension
funds and other investors are told to do.
MW: The Congress recently passed a bill that gives Treasury Secretary
Henry Paulson the unprecedented authority to use as much money as he
needs to keep Fannie Mae and Freddie Mac solvent. Paulson assured the
Congress that he wouldn’t need more than $25 billion but, the 400 page
bill allows him to increase the national debt by $800 billion. How
will the Fannie/Freddie bailout affect the dollar and the budget
deficit? Are interest rates likely to skyrocket because of this
action?
Michael Hudson: The Fed can flood the economy with money, Alan
Greenspan-style, to prevent interest rates from skyrocketing. Nobody
really knows what will happen to FNMA and Freddie Mac, but it looks
like the mortgage and financial crisis will get much, much worse over
the coming year. We are just heading into the storm where
adjustable-rate mortgages (ARMs) are scheduled to reset at higher
rates, and where U.S. banks have to roll over their existing debts in
a market where foreign investors fear that these banks already have no
net worth left.
So the principle here is Big fish eat little fish. Wall Street will be
bailed out, and banks will be allowed to earn their way out of debt as
they did after 1980, by exploiting retail customers, above all
credit-card customers and individual borrowers. There will be a lot of
bankruptcies, and people will suffer more than ever before because of
the harsh pro-creditor bankruptcy law that Congress passed at the
behest of the bank lobbyists.
MW: A few months ago, the Wall Street Journal ran an editorial which
said that they could imagine two nightmare scenarios if the current
credit crisis was not handled properly; either there would be a run on
the dollar causing a sudden plunge in its value, or the unexpected
failure of a major financial institution could send the stock market
crashing. Last week, the former head of the IMF Kenneth Rogoff
triggered a sell-off on Wall Street when he said, “Were not just going
to see mid-sized banks go under in the next few months, were going to
see a whopper; were going to see a big one one of the big investment
banks or big banks.” What happens if Rogoff is right and Merrill, Citi
or Lehman go belly up? Is that enough to send the stock market
freefalling?
Michael Hudson: Not necessarily. Citibank would be nationalized, then
sold off. The principle should be that if a bank is too big to fail,
it should be broken up.
This should start with a repeal of the Clinton Administrations repeal
of Glass-Steagall.
As for Lehman, that would be given the Bear Stearns treatment, and
also sold off probably to a hedge fund. Merrill is much larger, but it
also could be parceled out, I suppose. The stock markets financial
index would plunge, but not necessarily industrial stock prices.
MW: According to MarketWatch: “In the three months from April to June,
banks posted their second worst earnings performance since 1991….
Earnings for the quarter totaled just $5 billion, compared with $36.8
billion a year ago, a decline of 86.5%.” Also, according to a front
page article in the Wall Street Journal: “financial institutions will
have to pay off at least $787 billion in floating rate notes and other
medium term obligations before the end of 2009.” How are the banks
going to pay off nearly $800 billion ($200 billion by December!) when
they only earned a measly $5 billion in the quarter!?! And how in the
world is the Federal Reserve going to keep the banking system
functioning when earnings can’t even cover current liabilities? Do the
banks have some secret source of revenue we don’t know about or is the
system headed for disaster?
Michael Hudson: The traditional way to pay debt is with yet MORE debt.
The interest due is simply added on to the principal, so that the debt
grows exponentially. This is the real meaning of the magic of compound
interest. It means not only that savings left to accumulate interest
keep on doubling and redoubling, debts do to, because the savings that
are lent out on the asset side of the creditors balance sheet (today,
that of Americas wealthiest 10%) become debts on the liabilities side
of the balance sheet (the bottom 90%).
The banks dont have a secret source of revenue. Its right out in the
open. They will take their junk mortgages to the Federal Reserve and
borrow the money at full face value. The government will be left with
the junk.
It then can either take over the bank, as the Bank of England did with
Northern Rock when it went bankrupt early this year, or it can let the
bank earn money by stiffing its customers some more.
MW: From 2000 to 2006, the total retail value of housing in the United
States doubled, going from roughly $11 trillion to $22 trillion in
just 6 years. For the last 200 years, housing has barely kept pace
with the rate of inflation, usually increasing 2 to 3% per year. The
Federal Reserve’s low interest rates were the main cause of this
unprecedented housing bubble and, yet, ex-Fed chief Alan Greenspan
still denies any responsibility for what “The Economist” calls “the
largest bubble in history”. Did Greenspan understand the problems he
was creating with his “loose” monetary policies or was there some
ulterior motive to his actions?
Michael Hudson: He simply didnt care about the problem. He saw his job
as a cheerleader for people who were able to get rich fast. These
always had been his major clients in his years on Wall Street, and he
saw himself as their servant sort of like a pilot fish for sharks.
Mr. Greenspans idea of wealth creation was to take the line of least
resistance and inflate asset prices. He thought that the way to enable
the economy to carry its debt overhead was to inflate asset prices so
that debtors could borrow the interest falling due by pledging
collateral (real estate, stocks and bonds) that were rising in market
price. To his Ayn-Rand view of the world, one way of making money was
as economically and socially productive as any other way of doing so.
Buying a property and waiting for its price to inflate was deemed as
productive as investing in new means of production.
Ever since his days as co-founder of NABE (the National Association of
Business Economists), Greenspan has long looked only at GNP and the
national balance sheet as an economic indicator, being value-free.
This is his intellectual and conceptual limitation. He wanted to
provide a way for savvy investors to get rich, and the easiest way to
get rich is to be passive and get a free lunch. His ideology led him
to believe the free market ideology that the financial sector would be
self-regulating and hence would act honestly. But he opened the
floodgates to financial crooks. His set of measures did not
distinguish between Countrywide Financial getting rich, Enron getting
rich, or General Motors or industrial companies expanding their means
of production. So the economy was being hollowed out, but this didnt
appear in any of the measures he looked at from his perch at the
Federal Reserve.
So just as journalists and the mass media proclaim every market
downturn as surprising and unexpected, he was as clueless as a lemming
running headlong over the cliff. Its an inherent instinct for
free-market boys.
MW: The housing market is freefalling, setting new records every day
for foreclosures, inventory, and declining prices. The banking system
is in even worse shape; undercapitalized and buried under a mountain
of downgraded assets. There seems to be growing consensus that these
problems are not just part of a normal economic downturn, but the
direct result of the Fed’s monetary policies. Are we seeing the
collapse of the Central banking model as a way of regulating the
markets? Do you think the present crisis will strengthen the existing
system or make it easier for the American people to assert greater
control over monetary policy?
Michael Hudson: What do you mean failure? Your perspective is from the
bottom looking up. But the financial model has been a great success
from the vantage point of the top of the economic pyramid looking
down. The economy has polarized to the point where the wealthiest 10%
now own 85% of the nations wealth. Never before have the bottom 90%
been so highly indebted, so dependent on the wealthy. From their point
of view, their power has exceeded that of any time in which economic
statistics have been kept.
You have to realize that what theyre trying to do is to roll back the
Enlightenment, roll back the moral philosophy and social values of
classical political economy and its culmination in Progressive Era
legislation, as well as the New Deal institutions. Theyre not trying
to make the economy more equal, and theyre not trying to share power.
Their greed is (as Aristotle noted) infinite. So what you find to be a
violation of traditional values is a re-assertion of pre-industrial,
feudal values. The economy is being set back on the road to debt
peonage. The Road to Serfdom is not government sponsorship of economic
progress and rising living standards; its the dismantling of
government, the dissolution of regulatory agencies, to create a new
feudal-type elite.
The former Soviet Union provides a model of what the neoliberals would
like to create. Not only in Russia but also in the Baltic States and
other former Soviet republics, they created local kleptocracies,
Pinochet-style. In Russia, the kleptocrats founded an explicitly
Pinochetista party, the Party of Right Forces (Right as in
right-wing).
In order for the American people or any other people to assert greater
control over monetary policy, they need to have a doctrine of just
what a good monetary policy would be. Early in the 19th century the
followers of St. Simon in France began to develop such a policy. By
the end of that century, Central Europe implemented this policy,
mobilizing the banking and financial system to promote
industrialization, in consultation with the government (and catalyzed
by military and naval spending, to be sure). But all this has
disappeared from the history of economic thought, which no longer is
even taught to economics students. The Chicago Boys have succeeded in
censoring any alternative to their free-market rationalization of
asset stripping and economic polarization.
My own model would be to make central banks part of the Treasury, not
simply the board of directors of the rapacious commercial banking
system. You mentioned Henry Lius writings earlier, and I think he has
come to the same conclusion in his Asia Times articles.
MW: Do you see the Federal Reserve as an economic organization
designed primarily to maintain order in the markets via interest rates
and regulation or a political institution whose objectives are to
impose an American-dominated model of capitalism on the rest of the
world?
Michael Hudson: Surely, you jest! The Fed has turned maintaining order
into a euphemism for consolidating power by the financial sector and
the FIRE sector generally (Finance, Insurance and Real Estate) over
the real economy of production and consumption. Its leaders see their
job as being to act on behalf of the commercial banking system to
enable it to make money off the rest of the economy. It acts as the
Board of Directors to fight regulation, to support Wall Street, to
block any revival of anti-usury laws, to promote free markets almost
indistinguishable from outright financial fraud, to decriminalize bad
behavior and most of all to inflate the price of property relative to
the wages of labor and even relative to the profits of industry.
The Feds job is not really to impose the Washington Consensus on the
rest of the world. Thats the job of the World Bank and IMF,
coordinated via the Treasury (viz. Robert Rubin under Clinton most
notoriously) and AID, along with the covert actions of the CIA and the
National Endowment for Democracy. You dont need monetary policy to do
this only massive bribery. Only call it lobbying and the promotion of
democratic values values to fight government power to regulate or
control finance across the world. Financial power is inherently
cosmopolitan and, as such, antagonistic to the power of national
governments.
The Fed and other government agencies, Wall Street and the rest of the
economy form part of an overall system. Each agency must be viewed in
the context of this system and its dynamics and these dynamics are
polarizing, above all from financial causes. So we are back to the
magic of compound interest, now expanded to include free credit
creation and arbitraging.
The problem is that none of this appears in the academic curriculum.
And the silence of the major media to address it or even to
acknowledge it means that it is invisible except to the beneficiaries
who are running the system.
Michael Hudson can be reached via his website, mh@michael-hudson.com
Mike Whitney lives in Washington Dtate. He can be reached at:
fergiewhitney@msn.com