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Michael Hudson: Free Money Creation to Bail Out Financial Speculators, but not Social Security or Medicare

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By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College

Financial crashes were well understood for a hundred years after they became a normal financial phenomenon in the mid-19th century. Much like the buildup of plaque deposits in human veins and arteries, an accumulation of debt gained momentum exponentially until the economy crashed, wiping out bad debts – along with savings on the other side of the balance sheet. Physical property remained intact, although much was transferred from debtors to creditors. But clearing away the debt overhead from the economy’s circulatory system freed it to resume its upswing. That was the positive role of crashes: They minimized the cost of debt service, bringing prices and income back in line with actual “real” costs of production. Debt claims were replaced by equity ownership. Housing prices were lower – and more affordable, being brought back in line with their actual rental value. Goods and services no longer had to incorporate the debt charges that the financial upswing had built into the system.

Financial crashes came suddenly. They often were triggered by a crop failure causing farmers to default, or “the autumnal drain” drew down bank liquidity when funds were needed to move the crops. Crashes often also revealed large financial fraud and “excesses.”

This was not really a “cycle.” It was a scallop-shaped a ratchet pattern: an ascending curve, ending in a vertical plunge. But popular terminology called it a cycle because the pattern was similar again and again, every eleven years or so. When loans by banks and debt claims by other creditors could not be paid, they were wiped out in a convulsion of bankruptcy.

Gradually, as the financial system became more “elastic,” each business recovery started from a larger debt overhead relative to output. The United States emerged from World War II relatively debt free. Downturns occurred, crashes wiped out debts and savings, but each recovery since 1945 has taken place with a higher debt overhead. Bank loans and bonds have replaced stocks, as more stocks have been retired in leveraged buyouts (LBOs) and buyback plans (to keep stock prices high and thus give more munificent rewards to managers via the stock options they give themselves) than are being issued to raise new equity capital.

But after the stock market’s dot.com crash of 2000 and the Federal Reserve flooding the U.S. economy with credit after 9/11, 2001, there was so much “free spending money” that many economists believed that the era of scientific money management had arrived and the financial cycle had ended. Growth could occur smoothly – with no over-optimism as to debt, no inability to pay, no proliferation of over-valuation or fraud. This was the era in which Alan Greenspan was applauded as Maestro for ostensibly creating a risk-free environment by removing government regulators from the financial oversight agencies.

What has made the post-2008 crash most remarkable is not merely the delusion that the way to get rich is by debt leverage (unless you are a banker, that is). Most unique is the crash’s aftermath. This time around the bad debts have not been wiped off the books. There have indeed been the usual bankruptcies – but the bad lenders and speculators are being saved from loss by the government intervening to issue Treasury bonds to pay them off out of future tax revenues or new money creation. The Obama Administration’s Wall Street managers have kept the debt overhead in place – toxic mortgage debt, junk bonds, and most seriously, the novel web of collateralized debt obligations (CDO), credit default swaps (almost monopolized by A.I.G.) and kindred financial derivatives of a basically mathematical character that have developed in the 1990s and early 2000s.

These computerized casino cross-bets among the world’s leading financial institutions are the largest problem. Instead of this network of reciprocal claims being let go, they have been taken onto the government’s own balance sheet. This has occurred not only in the United States but even more disastrously in Ireland, shifting the obligation to pay – on what were basically gambles rather than loans – from the financial institutions that had lost on these bets (or simply held fraudulently inflated loans) onto the government (“taxpayers”). The government took over the mortgage lending guarantors Fannie Mae and Freddie Mac (privatizing the profits, “socializing” the losses) for $5.3 trillion – almost as much as the entire national debt. The Treasury lent $700 billion under the Troubled Asset Relief Plan (TARP) to Wall Street’s largest banks and brokerage houses. The latter re-incorporated themselves as “banks” to get Federal Reserve handouts and access to the Fed’s $2 trillion in “cash for trash” swaps crediting Wall Street with Fed deposits for otherwise “illiquid” loans and securities (the euphemism for toxic, fraudulent or otherwise insolvent and unmarketable debt instruments) – at “cost” based on full mark-to-model fictitious valuations.

Altogether, the post-2008 crash saw some $13 trillion in such obligations transferred onto the government’s balance sheet from high finance, euphemized as “the private sector” as if it were the core economy itself, rather than its calcifying shell. Instead of losing on their bad bets, bad loans, toxic mortgages and outright fraudulent claims, the financial institutions cleaned up, at public expense. They collected enough to create a new century’s power elite to lord it over “taxpayers” in industry, agriculture and commerce who will be charged to pay off this debt.

If there was a silver lining to all this, it has been to demonstrate that if the Treasury and Federal Reserve can create $13 trillion of public obligations – money – electronically on computer keyboards, there really is no Social Security problem at all, no Medicare shortfall, no inability of the American government to rebuild the nation’s infrastructure. The bailout of Wall Street showed how central banks can create money, as Modern Money Theory (MMT) explains. But rather than explaining how this phenomenon worked, the bailout was rammed through Congress under emergency conditions. Bankers threatened economic Armageddon if the government did not create the credit to save them from taking losses.

Even more remarkable is the attempt to convince the population that new money and debt creation to bail out Wall Street – and vest a new century of financial billionaires at public subsidy – cannot be mobilized just as readily to save labor and industry in the “real” economy. The Republicans and Obama administration appointees held over from the Bush and Clinton administration have joined to conjure up scare stories that Social Security and Medicare debts cannot be paid, although the government can quickly and with little debate take responsibility for paying trillions of dollars of bipartisan Finance-Care for the rich and their heirs.

The result is a financial schizophrenia extending across the political spectrum from the Tea Party to Tim Geithner at the Treasury and Ben Bernanke at the Fed. It seems bizarre that the most reasonable understanding of why the 2008 bank crisis did not require a vast public subsidy for Wall Street occurred at Monday’s Republican presidential debate on June 13, by none other than Congressional Tea Party leader Michele Bachmann – who had boasted in a Wall Street Journal interview two days earlier, on Saturday, that she

voted against the Troubled Asset Relief Program (TARP) “both times.” … She complains that no one bothered to ask about the constitutionality of these extraordinary interventions into the financial markets. “During a recent hearing I asked Secretary [Timothy] Geithner three times where the constitution authorized the Treasury’s actions [just [giving] the Treasury a $700 billion blank check], and his response was, ‘Well, Congress passed the law.’ …With TARP, the government blew through the Constitutional stop sign and decided ‘Whatever it takes, that’s what we’re going to do.’”

Clarifying her position regarding her willingness to see the banks fail, she explained:

I would have. People think when you have a, quote, ‘bank failure,’ that that is the end of the bank. And it isn’t necessarily. A normal way that the American free market system has worked is that we have a process of unwinding. It’s called bankruptcy. It doesn’t mean, necessarily, that the industry is eclipsed or that it’s gone. Often times, the phoenix rises out of the ashes.

There were easily enough sound loans and assets in the banks to cover deposits insured by the FDIC – but not enough to pay their counterparties in the “casino capitalist” category of their transactions. This super-computerized financial horseracing is what the bailout was about, not bread-and-butter retail and business banking or insurance.

It all seems reminiscent of the 1968 presidential campaign. The economic discussion back then between Democrat Hubert Humphrey and Republican Richard Nixon was so tepid that it prompted journalist Eric Hoffer to ask why only a southern cracker, third-party candidate Alabama Governor George Wallace, was talking about the real issues. We seem to be in a similar state in preparation for the 2012 campaign, with junk economics on both sides.

Meanwhile, the economy is still suffering from the Obama administration’s failure to alleviate the debt overhead by seriously making banks write down junk mortgages to reflect actual market values and the capacity to pay. Foreclosures are still throwing homes onto the market, pushing real estate further into negative equity territory while wealth concentrates at the top of the economic pyramid. No wonder Republicans are able to shed crocodile tears for debtors and attack President Obama for representing Wall Street (as if this is not equally true of the Republicans). He is simply continuing the Bush Administration’s policies, not leading the change he had promised. So he has left the path open for Congresswoman Bachmann to highlight her opposition to the Bush-McCain-Obama-Paulson-Geithner giveaways.

The missed opportunity

When Lehman Brothers filed for bankruptcy on September 15, 2008, the presidential campaign between Barack Obama and John McCain was peaking toward Election Day on November 4. Voters told pollsters that the economy was their main issue – their debts, soaring housing costs (“wealth creation” to real estate speculators and the banks getting rich off mortgage lending), stagnant wage levels and worsening workplace conditions. And in the wake of Lehman the main issue under popular debate was how much Wall Street’s crash would hurt the “real” economy. If large banks went under, would depositors still be safely insured? What about the course of normal business and employment?

Credit is seen as necessary; but what of credit derivatives, the financial sector’s arcane “small print”? How intrinsic are financial gambles on collateralized debt obligations (CDOs, “weapons of mass financial destruction” in Warren Buffett’s terminology) – not retail banking or even business banking and insurance, but financial bets on the economy’s zigzagging measures. Without casino capitalism, could industrial capitalism survive? Or had the superstructure become rotten and best left to “free markets” to wipe out in mutually offsetting bankruptcy claims?

Mr. Obama ran as the “candidate of change” from the Bush Administration’s war in Iraq and Afghanistan, its deregulatory excesses and giveaways to the pharmaceuticals industry and other monopolies and their Wall Street backers. Today it is clear that his promises for change were no more than campaign rhetoric, not intended to limit a continuation of the policies that most voters hoped to see changed. There even has been continuity of Bush Administration officials committed to promoting financial policies to keep the debts in place, enable banks to “earn their way out of debt” at the expense of consumers and businesses – and some $13 trillion in government bailouts and subsidy.

History is being written to depict the policy of saving the bankers rather than the economy as having been necessary – as if there were no alternative, that the vast giveaways to Wall Street were simply “pragmatic.” Financial beneficiaries claim that matters would be even worse today without these giveaways. It is as if we not only need the banks, we need to save them (and their stockholders) from losses, enabling them to pay and retain their immensely rich talent at the top with even bigger salaries, bonuses and stock options.

It is all junk economics – well-subsidized illogic, quite popular among fundraisers.

From the outset in 2009, the Obama Plan has been to re-inflate the Bubble Economy by providing yet more credit (that is, debt) to bid housing and commercial real estate prices back up to pre-crash levels, not to bring debts down to the economy’s ability to pay. The result is debt deflation for the economy at large and rising unemployment – but enrichment of the wealthiest 1% of the population as economies have become even more financialized.

This smooth continuum from the Bush to the Obama Administration masks the fact that there was a choice, and even a clear disagreement at the time within Congress, if not between the two presidential candidates, who seemed to speak as Siamese Twins as far as their policies to save Wall Street (from losses, not from actually dying) were concerned. Wall Street saw an opportunity to be grabbed, and its spokesmen panicked policy-makers into imagining that there was no alternative. And as President Obama’s chief of staff Emanuel Rahm noted, this crisis is too important an opportunity to let it go to waste. For Washington’s Wall Street constituency, the bold aim was to get the government to save them from having to take a loss on loans gone bad – loans that had made them rich already by collecting fees and interest, and by placing bets as to which way real estate prices, interest rates and exchange rates would move.

After September 2008 they were to get rich on a bailout – euphemized as “saving the economy,” if one believes that Wall Street is the economy’s core, not its wrapping or supposed facilitator, not to say a vampire squid. The largest and most urgent problem was not the inability of poor homebuyers to cope with the interest-rate jumps called for in the small print of their adjustable rate mortgages. The immediate defaulters were at the top of the economic pyramid. Citibank, AIG and other “too big to fail” institutions were unable to pay the winners on the speculative gambles and guarantees they had been writing – as if the economy had become risk-free, not overburdened with debt beyond its ability to pay.

Making the government to absorb their losses – instead of recovering the enormous salaries and bonuses their managers had paid themselves for selling these bad bets – required a cover story to make it appear that the economy could not be saved without the Treasury and Federal Reserve underwriting these losing gambles. Like the sheriff in the movie Blazing Saddles threatening to shoot himself if he weren’t freed, the financial sector warned that its losses would destroy the retail banking and insurance systems, not just the upper reaches of computerized derivatives gambling.

How America’s Bailouts Endowed a Financial Elite to rule the 21st Century

The bailout of casino capitalists vested a new ruling class with $13 trillion of public IOUs (including the $5.3 trillion rescue of Fannie Mae and Freddie Mac) added to the national debt. The recipients have paid out much of this gift in salaries and bonuses, and to “make themselves whole” on their bad risks in default to pay off. An alternative would have been to prosecute them and recover what they had paid themselves as commissions for loading the economy with debt.

Although there were two sides within Congress in September 2008, there was no disagreement between the two presidential candidates. John McCain ran back to Washington on the fateful Friday of their September 26debate to insist that he was suspending his campaign in order to devote all his efforts to persuading Congress to approve the $700 billion bank bailout – and would not debate Mr. Obama until that was settled. But he capitulated and went to the debate. On September 29 the House of Representatives rejected the giveaway, headed by Republicans in opposition.

So Mr. McCain did not even get brownie points for being able to sway politicians on the side of his Wall Street campaign contributors. Until this time he had campaigned as a “maverick.” But his capitulation to high finance reminded voters of his notorious role in the Keating Five, standing up for bank crooks. His standing in the polls plummeted, and the Senate capitulated to a redrafted TARP bill on October 1. President Bush signed it into law two days later, on October 3, euphemized as the Emergency Economic Stabilization Act.

Fast-forward to today. What does it signify when a right-wing cracker makes a more realistic diagnosis of bad bank lending better than Treasury Secretary Geithner, Fed Chairman Bernanke or other Bush-era financial experts retained by the Obama team? Without the bailout the gambling arm of Wall Street would have collapsed, but the “real” economy’s everyday banking and insurance operations could have continued. The bottom 99 percent of the U.S. economy would have recovered with only a speed bump to clean out the congestion at the top, and the government would have ended up in control of the biggest and most reckless banks and AIG – as it did in any case.

The government could have used its equity ownership and control of the banks to write down mortgages to reflect market conditions. It could have left families owning their homes at the same cost they would have had to pay in rent – the economic definition of equilibrium in property prices. The government-owned “too big to fail” banks could have told to refrain from gambling on derivatives, from lending for currency and commodity speculation, and from making takeover loans and other predatory financial practices. Public ownership would have run the banks like savings banks or post office banks rather than gambling schemes fueling the international carry trade (computer-driven interest rate and currency arbitrage) that has no linkage to the production-and-consumption economy.

The government could have used its equity ownership and control of the banks to provide credit and credit card services as the “public option.” Credit is a form of infrastructure, and such public investment is what enabled the United States to undersell foreign economies in the 19th and 20th centuries despite its high wage levels and social spending programs. As Simon Patten, the first economics professor at the nation’s first business school (the Wharton School) explained, public infrastructure investment is a “fourth factor of production.” It takes its return not in the form of profits, but in the degree to which it lowers the economy’s cost of doing business and living. Public investment does not need to generate profits or pay high salaries, bonuses and stock options, or operate via offshore banking centers.

But this is not the agenda that the Bush-Obama administrations a chose. Only Wall Street had a plan in place to unwrap when the crisis opportunity erupted. The plan was predatory, not productive, not lowering the economy’s debt overhead or cost of living and doing business to make it more competitive. So the great opportunity to serve the public interest by taking over banks gone broke was missed. Stockholders were bailed out, counterparties were saved from loss, and managers today are paying themselves bonuses as usual. The “crisis” was turned into an opportunity to panic politicians into helping their Wall Street patrons.

One can only wonder what it means when the only common sense being heard about the separation of bank functions should come from a far-out extremist in the current debate. The social democratic tradition had been erased from the curriculum as it had in political memory.

Tom Fahey: Would you say the bailout program was a success? …

BACHMANN: John, I was in the middle of this debate. I was behind closed doors with Secretary Paulson when he came and made the extraordinary, never-before-made request to Congress: Give us a $700 billion blank check with no strings attached.

And I fought behind closed doors against my own party on TARP. It was a wrong vote then. It’s continued to be a wrong vote since then. Sometimes that’s what you have to do. You have to take principle over your party.

Proclaiming herself a libertarian, Ms. Bachmann opposes raising the federal debt ceiling, Pres. Obama’s Medicare reform and other federal initiatives. So her opposition to the Wall Street bailout turns out to lack an understanding of how governments and their central banks can create money with a stroke of the computer pen, so to speak. But at least she was clear that wiping out bank counterparty gambles made by high rollers at the financial race track could have been wiped out (or left to settle among themselves in Wall Street’s version of mafia-style kneecapping) without destroying the banking system’s key economic functions.

The moral

Contrasting Ms. Bachmann’s remarks to the panicky claims by Mr. Geithner and Hank Paulson in September 2008 confirm a basic axiom of today’s junk economics: When an economic error becomes so widespread that it is adopted as official government policy, there is always a special interest at work to promote it.

In the case of bailing out Wall Street – and thereby the wealthiest 1% of Americans – while saying there is no money for Social Security, Medicare or long-term public social spending and infrastructure investment, the beneficiaries are obvious. So are the losers. High finance means low wages, low employment, low industry and a shrinking economy under conditions where policy planning is centralized in hands of Wall Street and its political nominees rather than in more objective administrators.

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92 comments

  1. Francois T

    Without being so well informed and articulate has the author of this post, voters clearly understand that something is definitely wrong with the economic picture in the US and Europe.

    If they only knew the true extent of the deception foisted upon them by the bandits at the top, there would be rivers of blood in the streets. But it is very difficult for a populace to accept such a radical fact: we, the people, cannot possibly trust what anyone in power say.

    That is how the unraveling of civilizations begin; the consent of the governed is withdrawn, the necessary changes are bitterly resisted, the economic and social situation further deteriorate and the use of oppression and force become the default option.

    No need to wonder anymore why the Obama administration has been so hell bent in destroying civil rights. It got almost nothing to do with Al Qaeda and everything to do with preserving the elites’ privileges at home.

    1. Doug Terpstra

      “…we, the people, cannot possibly trust what anyone in power say.”

      Apparently, the same is true of 911, as George Washington says:

      “Ellsberg says that the government has ordered the media not to cover 9/11:”

      “Ellsberg seemed hardly surprised that today’s American mainstream broadcast media has so far failed to take [former FBI translator and 9/11 whistleblower Sibel] Edmonds up on her offer, despite the blockbuster nature of her allegations [which Ellsberg calls "far more explosive than the Pentagon Papers"]. And he says that some of the claims concerning government involvement in 9/11 are credible, that “very serious questions have been raised about what they [U.S. government officials] knew beforehand and how much involvement there might have been”, that engineering 9/11 would not be humanly or psychologically beyond the scope of those in office, and that there’s enough evidence to justify a new, “hard-hitting” investigation into 9/11 with subpoenas and testimony taken under oath.”
      ———
      “Once nature starts to foreclose . . . the social contact breaks down. People may suffer stoically for a while, but sooner or later the ruler’s relationship with heaven is exposed as a delusion or a lie. Then the temples are looted, the statues thrown down, the barbarians welcomed, and the emperor’s naked rump is last seen fleeing through a palace window.” – Ronald Wright

  2. geezer

    It was never true that Medicare and Social Security were in trouble. That was a deliberate miscalculation.

  3. ReaderOfTeaLeaves

    Credit is a form of infrastructure, and such public investment is what enabled the United States to undersell foreign economies in the 19th and 20th centuries despite its high wage levels and social spending programs. As Simon Patten, the first economics professor at the nation’s first business school (the Wharton School) explained, public infrastructure investment is a “fourth factor of production”

    The concept that banks should be operated as utilities is likely to gain a great deal of traction the next 12 months.
    The banks have no one to blame but themselves, although they will fight mightily to extend and pretend that they can still party like it’s 2005.

  4. Rex

    Wow. Quotes, in that article, by Michele Bachmann, that werern’t blatently counter-factual or gag inducing. What’s that phrase Yves likes… Mirabile Dictu!

    Is this a demonstration of the stopped watch phenomenon?

  5. Alex SL

    Great read, only a tad on the longish side. Thanks for clarifying so many things about the role of credit in crises that I was bit hazy on.

  6. attempter

    The Bailout/austerity one-two punch is the worst of all worlds, and is clearly a systematic crime against humanity. It would be absurd by now to claim anyone was taken by surprise in 2008, or that every step up till then and since then hasn’t followed from a preconceived master plan. The only question would be whether the crash was intentionally triggered when it happened, or whether everyone simply knew it was inevitable and was prepared to switch from bubble mode to disaster capitalist mode.

    Meanwhile, if in some parallel universe the bubble hadn’t intentionally been blown up by an incipient kleptocracy, but had simply been an “accident”, then the best response would have been to let Wall Street take all the losses while the government assertively bolstered Main Street. This would have included recognizing and fixing the mistake of abdicating the core constitutional money creation function to private banks in the first place.

    However, we don’t live in that parallel universe, but this one where the system is a kleptocracy, where the corporate-government nexus is nothing but history’s greatest organized crime endeavor. Therefore, to still recommend things like MMT is to make a category error, since that would still imply that we’re dealing with a “government” which is responsive and accountable in theory, but merely corrupt in practice. But this is not the case.

    The only solution to kleptocracy is the destruction of it. While it’s still unclear how to get there, and whether or not we mostly have to wait for it to destroy itself while we mostly organize to resist it in the meantime, some of the basic anti-kleptocratic principles are clear:

    1. Political elitism is a proven failure* and malignity.

    2. Economic elitism is a proven failure and malignity.

    3. Representative pseudo-democracy is a proven scam (it was already admitted to be such by Madison).

    4. Corporations must cease to exist.

    5. The only moral, rational, and practical solution going forward is positive democracy: Political and economic.

    (List not meant to be exhaustive.)

    *The definition of failure: That prosperity failed to improve for all, that wealth didn’t become ever more evenly distributed, that full, stable employment wasn’t achieved, that political participation didn’t become ever more easy and broad, that social stability didn’t improve. These were all the promises of capitalism and representative government. And during the Oil Age the wealth to achieve them incontrovertibly has existed, for many decades now.

  7. jake chase

    Prof Hudson gets it exactly right, and a literate person shouldn’t need any more econmics than this to understand exactly what happened. Perhaps the next crash will be handled properly? It is hard to imagine even Americans falling for another round of bankster bailouts. Or is it?

  8. financial matters

    Spot-on! Three for three. Great insights and consolidation of what actually happened and what should have happened. The whole post deserves to be underlined but a few of my favorite lines..

    “to keep stock prices high and thus give more munificent rewards to managers via the stock options they give themselves than are being issued to raise new equity capital.”

    “This super-computerized financial horseracing is what the bailout was about, not bread-and-butter retail and business banking or insurance.”

    “The bailout of casino capitalists vested a new ruling class with $13 trillion of public IOUs (including the $5.3 trillion rescue of Fannie Mae and Freddie Mac) added to the national debt.”

    “The bottom 99 percent of the U.S. economy would have recovered with only a speed bump to clean out the congestion at the top”

    And the real money quote…

    “Even more remarkable is the attempt to convince the population that new money and debt creation to bail out Wall Street – and vest a new century of financial billionaires at public subsidy – cannot be mobilized just as readily to save labor and industry in the “real” economy.”

  9. Schofield

    Now you should have little illusion left concerning the depths of depravity Neo-Liberalism will stoop to. Misleading a society’s citizens into financing gambling addiction.

  10. Bruce Krasting

    Nice rant Micheal. I’m not sure on your accounting. You say $13T was socialized. I don’t think it was that big. But the real issue (to me) is how much taxpayers actually have to pay for this, rather than the movement of assets and liabilities.

    On Fannie and Freddie, I agree with the $5.3t of assets that ended up on the taxpayers back. The losses on this so far are a over $100b. The final number will be much higher than that. It could be 300-400b when all is said and done.

    That is staggering. A truly biblical number.

    But now look at SS. They reported recently that the Net Present Value of their liabilities went up by $1.1 Trillion
    in just one year. That is not a number that may hit taxpayers 60-70 years from now. That is the number that we would have to cough up to get us back to where we were a year ago when the the NPV was “only” 5.4 Trillion.

    You can add up the TARP losses and the idiots and Fannie and Freddie and all of the other losses and it would still look small to what is going on in SS in terms of actual costs to society.

    Please don’t read this as a defense for all that happened back in 2008. I hated that as much as you did. My point is that the losses at SS and Medicare over the next decade will make what happened in the financial sector in 2008 look like small beer.

    Whether we should have “fixed” the banks in 2008 is a muse of history. But the cost of “fixing” SS and Medicare will trump that 10 times over. We can’t afford it.
    bk

    1. ScottW

      The phrase: “We cannot afford it,” is usually uttered by the wealthy who can afford most everything, and have earned their wealth on the backs of the masses. If we truly cannot afford it, then we should all turn in our collective wealth and start over again. Yet, I see few takers at the top of the heap for that option as they continue to preach that the bottom 98% need to learn to live on much less. The “we cannot afford it” mantra must be followed by policy suggestions that result in a more egalitarian society, or it is totally meaningless.

    2. chris

      Bruce,

      SIGTARP Neil Barofsky has similar if not higher numbers for total bailout costs.

      Should be interesting to see what the increase in the Net Present Value of the liabilities of the Social Security Trust fund is when the decrease in the employees share (courtesy of the exceptional stupidity of lowering the employees contribution rate from 6.2% to 4.2% for 2011) is run through the system.

      Even better, the happy, depraved Left thinks a cut in the employers contribution to Social Security would benefit the economy.

    3. Cedric Regula

      c’mon Bruce. I think you are using the 75 year accrued number there, meaning the NPV of the projected shortfall over the next 75 years increased $1.1 trillion.

      Why not estimate the future costs of banking crisis, derivatives meltdowns, the coming FHA crisis and tax rates hitting the zero bound?

      I get the 75 year NPV at 1.1 Giga Bazillion, but I don’t know if it will be in Dollars or not!

    4. dw

      not sure how you can predict the future costs of SS or Medicare. its the same as predicting the total cost of any private companies debt as the total of any current and future debt. that would make them all instantly bankrupt if you looked at it that way. and in their case you can’t even offset that with their earnings cause you can’t use current ones to predict future ones. and of ss and Medicare are insolvent, so are all of the health insurance and life insurance companies too. and our 401k and IRA retirement ‘plans’ are really scams unless you can predict to the day how long you will live and how much it will cost to do so. otherwise they can’t and won’t work.

    5. Joe Rebholz

      “But now look at SS. They reported recently that the Net Present Value of their liabilities went up by $1.1 Trillion
      in just one year. That is not a number that may hit taxpayers 60-70 years from now. That is the number that we would have to cough up to get us back to where we were a year ago when the the NPV was “only” 5.4 Trillion.”

      How absurd to talk of net present value of something that doesn’t have to be paid for 60 to 70 years. The present value is meaningless because it’s the future we are talking about. It doesn’t have to be paid now. NPV does not apply.

  11. alex

    A good article that clearly explains what a gigantic handout/rip-off this was. As angry as the American people are, they would torches and pitchforks mad if they really understand the magnitude of it. It’s the Fed’s printing press sleight-of-hand that hides it, since mostly it didn’t come from Treasury.

    “If there was a silver lining to all this, it has been to demonstrate that if the Treasury and Federal Reserve can create $13 trillion of public obligations …”

    A question about MMT. The aforementioned demonstration isn’t finished. As I understand it the limit on how much money can be printed is inflation. How do we know how much money can be printed without causing excess inflation? And what happens if the economy improves and the amount that has been printed causes inflation. What’s the MMT approach to reigning in inflation?

      1. alex

        By which you mean tax the money and then burn it?

        That’s my understanding. If true then it will never work. I can’t imagine any government burning the money it collects in taxes.

    1. chris

      alex,

      Without causing excess inflation?

      Too late.

      Unless of course margin compression, shrinking box sizes for food products, and massive price spikes are not considered inflation as there is not any wage inflation.

      The MMT theoretical mumbo-jumbo is not a sufficient enough bludgeon for causing one to divert their eyes from economic reality.

    2. F. Beard

      How do we know how much money can be printed without causing excess inflation? alex

      Good question!

      The answer is who would care so long as the government and its payees were the only ones to suffer? Unfortunately, legal tender laws for private debts and other government enforcement of the money monopoly forces the entire nation to suffer if government money is over-issued.

      The solution then is separate government and private money supplies. Btw, that solution was given almost 2000 years ago in Matthew 22:16-22 (“Render to Caesar …”).

    3. Peter Pan

      alex, I have the same question in mind, too. (Although I prefer money creation [from the unlimited supply of electrons] rather than money printing [from a limited supply]).

      Perhaps it would be helpful to have a MMT explanation (cause, effect, solution) to the stagflation of the 1970′s after the $USD went fiat that doesn’t rely on the excuse of oil supply shocks. Can anyone provide an answer or a link to an answer?

      1. alex

        “excuse of oil supply shocks”

        Why are they an “excuse”? Don’t you think they had a significant effect on inflation?

        Otherwise I agree I’d like to see an MMT view of the 1970′s (though I can live without retro disco).

        1. geezer

          I may be a geezer but I remember the 70s like they were yesterday and there’s no 1970s with disco!

          Here’s the MMT take on the 1970s:

          “I work all night, I work all day, to pay the bills I have to pay/ Ain’t it sad/ And still there never seems to be a single penny left for me/ That’s too bad”
          Abba, “Money, money, money”

    4. Cedric Regula

      Yup. Everyone will love a 25% surprise bump in taxes and re-figuring variable and fixed household expenses. I can hardly wait. But at least they will try and time it so it doesn’t happen in an election year!

      1. F. Beard

        The solution is separate government and private money supplies. That way, if there was price inflation in the government’s money then only government and its payees would suffer. That would insure that government itself would keep a close eye on government spending. Hence it is unlikely that there would be the need for drastic tax increases.

        1. Cedric Regula

          I guess that would contain the problem to government workers, the military and defense contractors, SS and Medicare recipients, copy machine and paper clip manufacturers, and Washington DC hookers.

          It’s a start, I guess.

          1. F. Beard

            I guess that would contain the problem to government workers, the military and defense contractors, SS and Medicare recipients, copy machine and paper clip manufacturers, and Washington DC hookers. Cedric Regula

            Yep, you got it. And the private sector, freed from government money mismanagement, would prosper and grow steadily without a nationwide boom-bust cycle. So over time we could expect that government would shrink to its proper size and oscillate above and below it within narrow limits. I don’t claim to know the proper size of government but clearly some negative feedback in its spending is necessary.

  12. David Lewis

    Basically a great analysis, especially from an ideological standpoint. But with all the middle-class 401Ks and HELOCs, I think there would have been a lot worse than speed bump damage to the 99% “real” economy. We saw the Dow off 50%, but I think it would have been more like 30′s levels, say 75%, and that would have punched an even bigger hole in demand.

    Not saying it wouldn’t have been a better outcome in the long run, but there would have been a lot of pain across the spectrum.

    And, the timing was not as fortuitous as it was for FDR. FDR took over at the bottom, whereas Obama started as it was sliding down. Obama might have gotten away with letting the economy go into free fall for a year, but I must say — even discounting his financier orientation (induced at least by campaign contributions) — it would have been a very difficult call.

    My beef is that, he could have pulled off essentially the same rescue from a financial standpoint AND taken complete control of the offending institutions. But it would have take a worse decline to make it politically feasible, and therefore a really strong stomach and a lot of luck to put the economy into a steeper dive, hoping we could pull out in time. Given his financier orientation, however the point is somewhat moot.

    1. rps

      Obama is the financier Champion of bankers, the Destroyer of the middle-class, and Oppressor of the poor.

      “Single acts of tyranny may be ascribed to the accidental opinion of the day; but a series of oppressions, begun at a distinguished period, and pursued unalterably through every change of ministers too plainly proves a deliberate, systematic plan of reducing us to slavery.” Thomas Jefferson

    2. Pat

      Anyone who follows the stock market knows the levels are completely stage-managed by the big brokerages using computer-buy programs, fed by daily repos from the Fed (aka the “Plunge Protection Team”). The daily trading patterns are completely artificial, usually in even saw-blade steady rises, often ending in hockey-stick looking melt-ups right at the end of the day. The longer-term patterns are equally artificial, steady saw-blade rises with the occasional retrenchment. The indexes are pushed to their highest possible levels, regardless of their true underlying value (which would probably be 6000-7000 on the Dow.)
      So in a sense the big brokerages really do have the country by the balls. If they are not suckled by the Fed and the government, the brokerages can throw a tantrum, bring in the computer-sell programs and drive the markets down, as they did in that precipitous crash down to the 7000 level. The difference between 7000 and the current 12000 level is something like 5-6 trillion dollars in “paper wealth” for the country, much of it held by pension funds, 401ks and mutual funds.
      So you can see why Obama decided to get into bed with Goldman Sachs et al. I’m not saying this is right, just that the brokerages hold a gun at the American economy that is very difficult to dislodge. Perhaps the government could play hardball with the crooks and force them to continue to levitate the markets, but without taking on their gambling losses and/or making them skim off less off the top. Perhaps the best way would have been for the government to take a 51% interest in the big houses in exchange for taking all that toxic sludge off their hands.

    3. ScottS

      You’re right that it wouldn’t have been just a speed bump, but for the wrong reasons.

      The source of demand in America comes from the lower and middle classes, and their investments (over 100%) are in their house(s).

      The housing bubble had to burst eventually. The question is where stimulus would be better spent — infrastructure (and consequently jobs), or the financial markets.

      We would have been much better off spending on infrastructure. The boon to unemployment would have cushioned the fall-off in demand and created opportunities for investment in productive areas instead of bidding up commodity prices.

      One of the priceless ironies of the government’s decision to goose asset prices, however, was the Arab Spring. So the revolutionaries have Obama and Bernanke to thank.

      And Hudson: fantastic piece. You are three for three in my book.

  13. chris

    Most of the above history is well known by those who have been paying attention. The question is

    Why is the Left so smitten with the Teleprompter?

    1. Art Eclectic

      Because he’s all we’ve got. He’s the only thing keeping right wing social conservatives from announcing a nationwide corps of uterus police and bedroom monitors. We know Obama is on the payroll of the FIRE sector, we get it. But we look at the other side of the aisle and what awaits there and we would rather the devil we know…. It’s a matter of lesser evils.

      1. chris

        Art Eclectic,

        So, the lesser of two evils is a buffoon that cannot end an illegal war started by a clown (Iraq), cannot win a second war started by a clown (Afghanistan), cannot obey the Constitution so he fumbles into a third war (Libya), and starts covert action (drone attacks on Yemen) for the fourth act?

        “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”- Ernest Hemingway

        As Democracy is prefected, the office of the President represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart’s desire and the White House will be adorned by a downright moron.”- H.L. Mencken

        Clearly, Shrubya and Hopey McChange qualify.

      2. F. Beard

        Because he’s all we’ve got. He’s the only thing keeping right wing social conservatives from announcing a nationwide corps of uterus police and bedroom monitors. Art Eclectic

        And thus is the Left hoist by its own genitalia.

        But two can play the morality game. How about pointing out to the Right that their wealth is based on usury and counterfeiting? No? Because the Left believes in usury and counterfeiting too?

        Thus the Right lives in a glass house but the Left has no stones to throw.

        1. NOTaREALmerican

          Exactly !

          The socialist (regardless of what they call themselves) and the fascists (also regardless of what they call themselves) end-up accomplishing the same task.

          Sad. The representative government thing was a good idea, it’s just not possible in the society that is the world’s biggest dick, and there’s always one society that must be it. Unfortunately, it was our turn and we’re all here watching it.

      3. James

        Not good enough. Better to take on the devil directly now while we still can. NoBama is nothing more than evil incarnate light. The GOP is actually benefiting from the current state of affairs, as they have NoBama as a straw man to take the heat for what are essentially GOP policies anyway. I say let them have their way and shine the light of day on their putrid rotting vampire flesh. Let’s flush the bastards out and drive a stake through their cold dead hearts.

        1. Art Eclectic

          If you accept the likely probability that the POTUS is just a figurehead and the real power behind the oval office is there to ensure “continuity” between administrations, there is only a limited slate of actual distinguishing issues between the Red Team and Blue Team. Most of those issues are social.

          In my opinion, voters like me get to choose from a handpicked set of options, all of whom have been vetted for willingness to do as they are told. You can choose your nanny state preference between the theocrats on the right and the social do-gooders on the left. I choose accordingly. I’d rather pay more taxes to feed poor people than pass less taxes and have right wingers all up in my personal business.

          Pick your poison.

          1. JTFaraday

            “the social do-gooders on the left. I choose accordingly. I’d rather pay more taxes to feed poor people”

            That’s a little optimistic, don’t you think?

  14. F. Beard

    Bank loans and bonds have replaced stocks, as more stocks have been retired in leveraged buyouts (LBOs) and buyback plans (to keep stock prices high and thus give more munificent rewards to managers via the stock options they give themselves) than are being issued to raise new equity capital. Dr. Michael Hudson

    Interesting! So if leverage is used to retire stock what would happen if leverage was severely restricted? Would not new stock have to be issued to take its place?

    Conventional money (including credit) is a wealth reaping tool. We accept that government has the right to reap wealth but why do we subsidise that ability of the banks?

    Progressives really need to dump their love affair with so-called “credit”. It is not credit at all but a form of counterfeiting and it has NOT led to a progressive society. It has instead greatly concentrated wealth. Is wealth concentration a progressive goal?

    1. jo6pac

      It is not credit at all but a form of counterfeiting

      It’s also a form of slavery but most don’t get it.

      Thinks MH another great read.

  15. ep3

    don’t forget the bailouts of the auto industry (not a bad thing) and how they and their creditors were punished for getting bailed out. yet the banks, nope.

  16. TG

    Wow, this summarizes the bludgeoning the American people have taken since the crisis began with great clarity.

    The argument made here: that since Treasury/The Fed can simply “create” money, there really isn’t a crisis of Medicare and Social Security, could really gain traction.

    I think the other lesson here is that Obama has been a complete and total failure at fixing the underlying problems.

    1. rps

      “Obama has been a complete and total failure at fixing the underlying problems.”

      The 1% would disagree.

      1. Art Eclectic

        The top 1% have no interest in fixing problems that don’t exist for them. The rest of us don’t matter.

  17. Paul Tioxon

    The promise of the 2nd Industrial Revolution, the Internet, will be realized when the technology of the search engine is used for the policy driven formal organization of of the social order, as revealed via MMT powered Credit Unions. Michele Bachman is to be commended when she takes a principled stand, based on facts, what eyes can see and ears can hear. It is not at all surprising that someone who has been culturally sequestered from the socialization process of the ruling class institutions of Harvard, Princeton and Yale, accept no substitutes, can plainly see what kind of lie was being sold to Congress. Of course, many other people not in so prominent a position as the Congress Woman can see this as well, and that clarity is a result of consciously resisting and paying the price for such resistance, the ruling class party line. And then, there are the those, the exact opposite of crackers, like Jesse Jackson, who ran for president once upon a time, and also told more bold face truths during his campaign, more than a decade of Meet the Press ever produced. So outsiders, commoners, the less exalted usually can experience without the filters of custom made acculturation, such as Obama has had. His key upbringing, in the US, in Hawaii, was at an elite private school, Punahou, where he learned how to act around powerful young men of wealth and be comfortable and buy into their worldview. Columbia and Harvard provided him with necessary and complete socialization that permits access to highest levels of power and privilege.

    But what Hudson points out, that even a 2012 version of George Wallace can see, that debt can be wiped out without wiping out the improvements facilitated by the use of credit. And the key to capitalism is not only the endless accumulation of profits, but taking those profits and deliberately reinvesting them into constructing more improvements, continually raising the standard of living for the social order as a whole. Financialized capitalism is making money by not investing into new enterprise formation, bigger and better factories, offices etc. but reinvested to make bigger profits from bigger profits without slowing down to actually build something other than what can be recorded on a balance sheet. It is the dream of every blinded by greed business man, to be rich if only he could do away with the his customers and just have payments show up in house bank account. What a country that would be!!

    And what the multitude of conflicting grievances, necessary but somehow, incomplete pictures of the world and its problems shows us, is that power is being fought over in the open, without much recourse to the usual manipulations, suppression of information, and silencing and denigration of the most truthful, if extreme critics. What Hudson left out of the picture, while trying to include a cracker perspective, is the critical yet misunderstood and seldom seriously discussed bailout of the auto industry in favor of the UAW at the expense of shareholders and bond holders. This is key to more than just viewing cracks in the dominant, but not even close to totalitarian, political structure. There are two important lessons of the bailouts. The one Hudson highlights with emphasis using Congress Woman Bachman. It is that money can be used to save Social Security and Medicare and rebuild the US public and private infrastructure if we decided to do so, the proof being, we decided to do so for the banks. And that money is created by the Fed through our own institutions in a way that will retain social order and economic stability. But Hudson leaves us hanging, like all critics do. How do we get the political decision that banks got for the rest of us, the 99% of America twisting in the wind? The answer lies in examining the auto industry bailout. How did the crackers of the UAW get so lucky? Did they buy lottery tickets? Since many dealers, wealthier upper middle class business men, were summarily executed in the bankruptcies along with shareholders, bondholders and many others, who, if they were banker would not have suffered. And the people who benefited, by not being liquidated wholesale, the assembly line workers and the retired workers who look forward to health benefits and pensions, were also not thrown into the volcano. And just what distinguishes the UAW. THEY ARE A UNION.

    The second lesson, that is missing, is that a decision to get government sponsored money in the hundreds of billions was acquired by the working class who were organized for the sole purpose of having political power to control their income, their benefits and thereby, the course of their lives. After the debunking, after the outrage and the anger, you simply have to act to create formal organizations to acquire political power to retain the slice of economic pie you have, up until now, been getting. You have to pick a side. You have to pile into that side, and you have to fight those within yr party to get what you want and then take control of the bureaucratic mechanism of state to act in yr favor. It has famously been called a government of, by and for the people. You’ll know it when you see, even if in bits and pieces here and there. The incremental parts will one day add up to a fully formed whole system.

  18. rps

    Welcome to Voter-Rage November 2012

    Unemployment, Banks/Corporations/Wall Street recipients of Obama’s largess via Socialization of taxpayer funds to private entities, Foreclosures (we are all Detroit), Jobs offshoring, Escalation of Wars, and Poverty are glued to Obama like a skunk at a garden party…

    Obama should do an LBJ; decline nomination for reelection.

    1. James

      In LBJ’s day it was still possible for pols to feel a modicum of shame. Have you seen Obama preening before the camera’s lately? Shame is clearly not in his lexicon.

    2. ambrit

      rps;
      I was a kid then but I remember that speech. Dad got Mum and myself into the living room to watch. “Something big’s going to happen,” he said, “look at how unhappy that man is.” The main difference between the two is that Johnson was a master politician who knew when the game was lost, and Obama isn’t, and doesn’t.

  19. Hugh

    There is a lot to like here because, let’s face it, Hudson is saying what many of us have been saying in various ways since September 2008. But it wasn’t just junk economics. It was theft and kleptocracy. It didn’t just happen in 2008. The con has been in motion since the 70s. More importantly is what this says about the future. The next crash is coming and it will be bigger than 2008.

    1. ambrit

      Sir Hugh;
      I have to wholeheartedly agree with you here. My problem is that I’m low man on the totem pole, economically speaking, and thus tend to get shrill and contrary when personal doom is intimated, as in: “Oh my God! Were all going to end up this, that, or the other!” Yes, the coming crash will, in all likleyhood, be the ‘Mother of Dislocations.’ A good, how to book covering the coping mechanisms that proved out during the Great Depression I seems in order. (Sort of a ‘Steal This Book’ for post-yuppies.)

  20. Paul Boisvert

    Yves, I note that you have dropped ZeroHedge from your blogroll–no great loss. May I humbly make a suggestion that you replace it with New Economic Perspectives, to which Michael Hudson and several others with whose views you seem to be largely in consonance contribute regularly?

    Also, you have Mish’s Global Economic Analysis listed twice, under slightly different names, on your blogroll–while his (ironically, quite Keynesian) analysis of the lack of any economic growth engine is informative, his Austerian/libertarian solutions (gold standard, etc.) are way too nutty to list him twice!

    1. F. Beard

      Government recognition of gold as money is NOT libertarian. Mish is confused if he thinks it is.

  21. Kurt Scheel

    Kastings considers social securtiy and medicare a “cost to society” Right Bruce, maybe we should just gas old people when they get old and sick so they don’t become a “cost” to the rest of us.

  22. Jean

    Prof Hudson, I can’t thank you enough for your work. There are so many people who recognize the problem, but find it difficult to adequately understand and engage. The Wall Street/financial sector has not only taken over the country and the economy, they are adept at defining the conversation, abusing the language, leaving far too many of us completely vulnerable to their abuse. Your work is a marvelous counter to that.

    Plus, UMKC is my alma mater, and I take great pride in seeing you and other very fine and capable voices engaging in the work that you do.

  23. John Merryman

    One wonders why they don’t understand that in the long run, they are cooking their own golden goose? Don’t they understand long term profitability over short term profits?

    1. geezer

      Long run? ha ha…did someone say “Long run”?
      ha ha ha ha

      Long run! ha ha ha ha!

      long run! ha Ha hahahaha ! ha ha ha!

    2. ambrit

      Mr Merryman;
      I’m not sure of the chronology here, but this disconnect could well be an artifact of the ‘MTV Generation.’ They sure as H— ruined films and TV with their quick cutting and narcissistic world view.

    3. readerOfTeaLeaves

      It is mystifying.

      I doubt there’s anything stupider on the planet.
      And yes, it is amazing to behold.

  24. Glen

    Great post – states well much that I have thought since the start of the implosion – Depression in 2008.

    I have to say that we are dancing around our ability to create “money” from thin air unattached from our very real and perhaps diminishing ability to create those things which people/society require such as food, energy, shelter, healthcare, knowledge, and an education. Looked at from that perspective, Wall St’s real ability to move society forward is a massive fail.

  25. cargocultist

    It’s not quite as simple as you’re presenting it here. Were the Treasury to print $13 trillion and start paying social security with it, then the result would be some pretty impressive inflation. Assuming the money was deposited in the banking system, it would be subject to the multiplier process over time, and trigger approximately $90 trillion in additional money creation. With approximately $8 trillion currently in the US monetary system then, the resulting inflation over a relatively short time would be substantial. The payment of social security would also be directly inflationary since it would be directly distributed across the Economy. It would certainly rescue the debtors in the economy, but do we really want to penalise those who are prudent and choose to save rather than borrow? Build businesses, rather than buy them with borrowed private equity and strip them of their pension funds?

    One of the few saving graces so far of the TARP bailout, is that most of the money has stayed in the Banking system. Indeed it seems to have stayed on deposit at the Central Bank, judging by the base money figures. So far that’s stopped any resulting inflationary impact.

    But overall, as you point out nothing has been done to fix the fundamental regulatory problems, which means that the next credit crisis is only a matter time. As is the one after that.

    1. Derek

      Oh, it is just that simple. The trouble is that you’re forgetting MMT’s anti-inflation measures. Which are taxes. By all means hand out that $13T in social security. But if you want to avoid inflation you have to tax $13T back. If you don’t, you will get inflation. And the bigger the gap, the bigger the inflation.

      1. F. Beard

        But if you want to avoid inflation you have to tax $13T back. If you don’t, you will get inflation. Derek

        Not necessarily. Remember, the money supply is composed of base money plus so-called “credit” pyramided on top of it with 30 or so to 1 leverage. So ~97% of the money supply is credit.

        Now suppose all new credit creation was forbidden by an Act of Congress. What would happen to the money supply? answer: It would shrink drastically.

        Thus if new credit creation was forbidden then vast amounts of new money could be printed without a net increase of the money supply.

      2. cargocultist

        Once money is created outside of the banking system’s lendingmoney cycle, it hangs around. If it’s paid to the government as tax, they then pay it back out in salaries, interest payments on treasuries, etc. etc. Money really is a flow problem.

        1. F. Beard

          Once money is created outside of the banking system’s lendingmoney cycle, it hangs around. cargocultist

          Good! An elastic money supply is a major cause of the boom-bust cycle. Let’s have money that hangs around.

    2. F. Beard

      Assuming the money was deposited in the banking system, it would be subject to the multiplier process over time, and trigger approximately $90 trillion in additional money creation. cargocultist

      Good point. However, Congress could set reserve requirements to 100% if it desired to prevent price inflation from new money printing. In fact, with a 100% reserve requirement, massive printing would be required to prevent actual monetary deflation as existing credit was paid off with no new new credit created.

      The banks have inadvertently created a huge money hole that could be filled with new money without increasing the size of the money supply.

    3. Jason Ray

      Cargocultist,

      No, there would be no further inflation. The payments for Social Security are defined in the budgeting process; whether you ‘print’ new money or ‘use’ taxes makes no difference; the same amount of money will still be paid out to the righful recipients. Also, why are Social Security recipients debtors and not prudent? I thought they were people over 65 who had contributed a large part of their income each year, decade after decade, so they could receive a measly monthly stipend. I’m not sure you meant this, but this is the way you wrote it.

      Don’t confuse TARP, the funding for speculation and bonus payouts, with the $13T Dr. Hudson is referring to. The $13T is part of a swap; the Fed takes $13T in assets from the banks and gives them the equivelent in cash. Of course the banks’ assets aren’t worth anywhere near $13T, but the banks say they are and the Fed goes along with the lie. So the banks get to rid themselves of fraudulent mortgages in return for cash which will be used to meet reserve requirements freeing up other money for pure speculation. The inflationary impact is the skyrocketing price of all commodities and foodstuffs.

  26. David

    I don’t think that there was a legitimate reason to bail out AIG/Goldman Sachs and the banks. Clearly, Bachman, Ron Paul and Mitt Romney make more sense than Obama on this point.

  27. craazyman

    Sometimes Even Math Itself Doesn’t Make Sense

    I don’t get.

    US GDP is 14 trillion/year. Over the next hundred years, total GDP will be 1400 Trillion dollars, even if there’s no growth. And if there is growth of only 2% over 100 years, then that’s 10,000 trillion dollars in future GDP we’ll owe ourselves if we want to survive.

    It shocked me to consider the questions:
    How the hell can we afford to pay for an economy that big????????!!!! Where’s the money going to come from????!!!

    The answer is we can’t and nowhere. So I realized that we have to shrink the economy to be able to afford it, or else we’ll risk going broke trying to grow it fast enough to pay for it. And if we shrink the economy down to almost zero, then we can afford pretty much any economy we want.

    Or something like that . . .

    1. Cedric Regula

      You should get a job working for Pete Peterson. He likes forward thinking people like you!

  28. ajax

    Having the CFPB headed by Elizabeth Warren would be
    a definite plus for middle-class Americans, in my
    opinion. So I see the current debate surrounding the
    future of the CFPB as a litmus test for politicians.

  29. Andrew P

    So…Can we just abolish capitalism and run a new distribution system? Cause all this regulation seems like a lot of work for an economic game dominated by oligopolies suffering from falling rates of profit.

    People act like financialization is this strange thing that was foisted on the “real” economy. Well…not exactly. The real economy turned to financialization because it offered solid investment and profit opportunities. Keynes’s capitalism blew up in the 70s precisely for this reason, Monopoly capital just couldn’t churn out enough profits. Though those rates had more to do with high wages. Today it’s the opposite. Profits from the real economy aren’t so hot because wages are too low, leading to greater overproduction, and it’s not like that’s going away. As Ray Kurzweil notes, information technology makes all productive technology more efficient and that means fewer workers and higher productivity, worsening that investment overhang.

    Can’t we just ditch this system already? It’s like we’re trying to reform our abusive spouse instead of finding a new one. We have the resources and the technical capacity to run a democratic and socially planned economy. Most of the damned economy is already planned. Those massive multinationals that control most of the world? They’re planned economies. And it’s not like we lack the wealth to share. We have the productive capacity to allow most everyone live comfortable lives, and exponentially so with R+D put towards further automation and technological development.

    I dunno folks. Call me crazy but I think that’s the way to go.

    1. Foppe

      Wouldn’t that be lovely. Another way to put it: forcing capital to internalize the costs of social reproduction and environmental pollution. See this, you might enjoy it.

  30. Conscience of a Conservative

    There needs to be some remedy that punishes those that created these sloppy trusts , puts in place good procedures going forward and permits foreclosures on the affected properties going forward while respecting rule of law and recording of deed transfer. I know this is a tall order but it’s not good policy if the result of this is the gifting of properties to truly delinquent home owners.

    I’ve looked at many of these trusts and too many of the borrowers were financing investment and second homes or continually engaging in equity take outs. I don’t believe that the vast majority of the loans were original purchase mortgages.

  31. michael

    “…if the Treasury and Federal Reserve can create $13 trillion of public obligations – money – electronically on computer keyboards, there really is no Social Security problem at all, no Medicare shortfall, no inability of the American government to rebuild the nation’s infrastructure.”

    So what is the effect of creating $13 trillion additional dollars by the stroke of a key, Prof. Hudson?

    Isn’t it inflation, or in other words the devaluation of already existing dollars AND entitlements?
    I know, I know, we are seeing curious little inflation so far after the $13 trillion bank bailout, but isn’t that mostly because effectively the future entitlements have been devalued by that amount??
    Then how can printing some more money fix the entitlement problem in REAL terms???

    1. Jason Ray

      Michael,

      Creating money does not necessarily lead to inflation. If you took the $13T, evenly distributed it, and mandated that it be spent solely on milk, then yes, the price of everything connected to milk would skyrocket; well, the price would, not necessarily the burden to pay. If you used that money to provide a basic level of protection in the form of health care and income for the elderly, then the answer is no. The money is used to support not just the direct recipient, but also anyone else who otherwise would have had to shoulder the cost. Get rid of Social Security and you suddenly have millions of people who could not survive with their families and friends support, etc…

      Take the infrastructure as another example. Do building roads lead to inflation? Well, yes in a good way, i.e. they allow for greater economic progress which leads to inflation, but good inflation, and no if you are talking about hyperinflation. Besides, what are the alternatives for funding infrastructure projects? Financing or taxes. So with financing you spend a portion of your funds just meeting interest payments to banks that didn’t have to do anything but ‘print’ money with their keyboards. Why let the banks ‘print’ the money and then charge you interest? The balls on these people!! Why not ‘print’ your own money and ensure that every dime goes towards creating an infrastructure that enables the economy?

      1. michael

        Jason,
        that sounds nice but in effect you are stating “There IS a free lunch. A big free one for almost everybody.”
        If we print money at a *faster* rate, we will have more inflation. We can discuss if money is currently being destroyed at an even faster rate than created right now, but that would mean there was horrendous inflation in the up-run of the housing bubble with all the credit created then. Or we can think it is “hidden” inflation, in the way of destroying entitlements, which are a kind of credit to the aging, in real terms.

        1. Jason Ray

          Hi Michael,

          I don’t want to get into the stupidity of Milton Freedman. Let’s not go there and instead stay with reality.

          Don’t forget that money is always being made. It’s ‘printed’ every time a bank makes a loan. That is what fractional reserve banking is all about. The thought here being that banks only make loans for productive purposes (whatever, dude!) and that the newly ‘printed’ money will help the economy grow and won’t spur higher levels of inflation. So, back to my original comment: “Creating money does not necessarily lead to inflation.” The proviso is the money must be used for good (in the economic sense, certainly not the moral sense).

          The drawback with bank created money is that it carries a burden in the form of interest. This is just economic rent. Government created money doesn’t carry this burden and can be used to fund the basics that a healthy society needs. So, which “free lunch” would you rather enjoy? The one you eventually won’t be able to digest or the one that satiates and helps you grow?

          Oh yeah, how does any of this destroy “entitlements” (which, by the way, are no such thing and the use of the word is ignorant)?

          1. michael

            I don’t know why you are bringing up Milton Friedman. If he was quoted first for using the term “free lunch”, you cannot imply I endorse everything he said or wrote by using that.

            Money being lent into existence is a feat of fiat money, not fractional reserve banking. I actually have no problem with *any* level of fractional reserve banking *IF* lending standards, accountability and regulations make it extremely unlikely that more than the reserve ratio will ever be written off by banks in short period – which is clearly not the case anymore at least since the mid 90s.

            So can we agree on the following version: “In theory creating money does not necessarily lead to inflation (e.g. if ALL credit is put into productive use), in practice it always does to a bigger or lesser extent.”

            So you say Gov’t created money needn’t pay interest. Which kind of implies it also doesn’t need to be paid back. And exactly how does such make it impossible to create inflation? Or did you leave something out?

            If an employee today expects to get some SS pension payments (in mostly unchanged real value) starting 30 years from now, how would you prefer to call that?
            And do you seriously believe today there is no *ever increasing likelyhood* that he will NOT get it, in real terms and in full?

  32. A Real Black Person

    “We would have been much better off spending on infrastructure. The boon to unemployment would have cushioned the fall-off in demand and created opportunities for investment in productive areas instead of bidding up commodity prices.”
    There’s no such thing as bidding up commodity prices. Commodity prices go up when supply is unable to meet demand.
    Any massive infrastructure spending aimed at building more bridges, and roads would end up increasing the trade
    deficit in the developed countries because they would logorithamtically increase demand for oil while at the same time not increasing manufacturing output. If manufacturing is shifting to develping and poor countries, how the hell are developed countries going to be able to pay the developing and poor countries?

    “Do building roads lead to inflation? Well, yes in a good way, i.e. they allow for greater economic progress”
    It sounds like level headed people like you have everything figured out. I’m really enjoying the record low fuel prices. Economic growth leads to commodity price deflation because high prices and high demand lead to more commodity creation. That’s right, creation! Commodities are infinite. They just need a litte imagination and smidgen of elbow grease for them to naturally grow from the ground. Only if those pesky pessismists and greedy banksters and opec could understand that. Never underestimate the power of human imagination! In ten years, we’re going to have cities on jUpiter powered by Hydrogen!

    Infrastructure projects lead to more oil consumption. Right now, there is a situation worldwide, particularly in the developing countries where more roads are being built for more cars to allow for more consumption for oil. Infrastructure projects are generally demand creation projects.

    “One of the priceless ironies of the government’s decision to goose asset prices, however, was the Arab Spring. So the revolutionaries have Obama and Bernanke to thank.” So, you think currency debasement is the only reason for the increase in commodity prices? You don’t think i a supply/demand comes into play at any point? Many Arab oil exporting economies have rising consumption of oil at home and falling export of oil. The countries that the Arab countries have been importing alll their food from, have been turning some of their food into “biofuel” to ensure that “progress” is not interrupted by rising demand for oil.

    It’s not so much speculation, it’s more so human stupidity. Food based biofuels is current example of of market failure in the energy market. Anyone with a sliver of scientific literacy will tell you how stupid it is, yet it’s being vigorously pursued by ideologues.

  33. Nathanael

    Good article, but you don’t follow through.

    The recovery in the sawtooth-shaped credit cycle is driven by the elimination of debt (specifically for the poorer people).

    The debt wasn’t eliminated this time, as you note.

    Therefore the economy does not recover.

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