Michael Hudson: Debt: The Politics and Economics of Restructuring

By Lambert Strether of Corrente.

I imagine there will be more material to come on this year’s iNet “Paradigm Lost” conference in Berlin, but for now, here’s a teaser in the form of a video of Michael Hudson’s talk.

And how good it is to see somebody from UMKC doing some of that “new economic thinking” this year.

I made a transcript of part of Hudson’s presentation:

HUDSON [6:58] What you’re seeing today and for the last thirty years has turned around and inverted the last eight centuries of legal [and] economic development in the West. [Like I said: A “revolutionary oligarchy.” –lambert] Ever since the Schoolmen of the thirteenth century developed the theory of just price and value theory, to ask what is a fair price for bankers to charge, and the answer was what is the cost of doing business.

[Watch for an unsmiling reaction shot 7:53-8:03 –lambert]

[7:22] Ever since that, the laws have been more and more rewritten to favor the debtors. You don’t have debtor’s prisons any more, you have personal bankruptcy laws that free individuals from debt, that free corporations from debt, but the idea of clean slates has only recently been developed on an economy wide scale. You had it for instance in the Brady Plan for Latin American third-world debt in the 1980s after Mexico said it couldn’t pay, but right now there is enormous resistance to applying that kind of a write-down to today’s situation. The problem is that not having a debt breakdown means debt deflation, and the debt deflation means a shrinking economy, and if the economic structure is not changed, there’s no way of getting out of the economic problem that you have.

[8:30] And the problem is that there’s not only the real problem of the debt overhang that was mentioned, there’s a problem of economic theory, and the illusion that all debts can be paid. The illusion that banks lend only to customers only for projects that are going to enable the customers to actually repay the loan; the bankers make a calcuation of what the customer can repay. But that’s not what happens at all.

[Watch for a wonderful smile at 9:30-9:36 –lambert]

[9:00] Back in the 1960s, I was Chase Manhattan Bank’s balance of payments analyst, and my job was to focus on the Latin American countries: Argentina, Brazil, and Chile, and my job was to calculate how much of a balance of payments surplus they could generate, and the idea of the bank marketing department was the entire economic surplus could be used to pay debt service to the seven major Americam banks.

[9:40] And pretty quickly we found out that there wasn’t any surplus to pay the banks, and there was an international department that got very upset because he said “Look, I get promoted for making loans, and the real estate guys are making all the loans, you’re telling us they can’t afford to repay!” And he took it up to David Rockefeller, we went across the street to the Federal Reserve bank, and the Federal Reserve bank said “It’s in America’s interest to make these loans to Latin America. Mr. Hudson, according to your calculations, Britain can’t afford to replay any more.” “That’s right. I don’t see any way in which it can get the money to repay the debt.” And the Federal Reserve man said “Ah! But did you take into account the fact that the US Treasury is always going to lend Britain the money to pay? We will never let it go down.” I said, “Well, that’s a deus ex machina from outside the system. Yes, you can lend them the money to repay.”

[10:30] And since David Rockefeller was a very good American citizen he believed in doing what the government wanted him to do, and took the lead on lending to our client in Latin America.

[10:42] The problem here is the economic models that we use. They don’t built debt into the economic models. They really don’t built the surplus into economic models in the sense that classical economists did.

Oh, and this is interesting:

[11:30] I want to get into the possible remedies for all of this. The basic approach to remedies I think was put forth about three hundred years ago in the state of New York when it was still a colony of England. And that’s something that’s still on the books of New York law, the fraudulent conveyance principle.

[11:52] British sharpies would come over and make loans to– they wanted to get into their own hands the rich farmlands of upstate New York. They would make loans to farmers that would be more than they could repay, and at that time you could ask for repayment of the debt whenever you wanted. So the British creditors would ask for payment before the crop was in.

[12:14] So the colony passed the fraudulent conveyance law. And that law said that if a lender makes a loan to a debtor that cannot be repaid in the reasonable course of business, the loan is declared null and and canceled.

I find the focus on history and real operations — as opposed to diagrams — very refreshing. Don’t you?

Hudson’s paper is very rich. Listen to the whole thing!


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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. CB

    Gosh, you see how simple it all is? There were, I gather, quite a few laws under which the financial services industry could have been quickly and decisively brought to heel. The administration and the reg agencies have done everything they can, which has been considerable, to ensure that none of that happened. The financial services Varangian Guard.

    1. R Foreman

      But, it’s so much easier just to starve everyone if they don’t play ball and reinflate the ponzi bubble with our best friends the banks.

      Trying to regulate banks is just, well, it’s just too difficult. You don’t know what you’re asking us to do here.

      1. CB

        But I do remember when IBM was ordered out of the copier business, so I assume that assiduous preparation and prosecution can work.

  2. Jim Tarrant

    Yes, this is brilliant but I find Hudson’s approach to the Little Depression and the ongoing medievalization of the world economy generally to be thinking creatively out-of-the-box. Bravo.

    1. nonclassical

      …please keep ameri”K”an economics out of berlin..we intend to retire there…having lived there 5 years previously.

    1. JurisV

      Dirk Bezemer’s presentation was brilliant — I totally agree! It is now my favorite and closely followed by Steve Keen’s. Bezemer and Keen are both superb speakers and present ideas and info in a concise, interesting, logical way that is accessible to any reasonably intelligent person. And they include a view of the historical trail that led to their ideas.

      An awesome talk was Antonio Damasio’s after-dinner talk on the first day — and it wasn’t on economics (but it does relate to how we humans “understand” economics). It was on modern neuroscience — but in a very “holistic” suitable for us lay-people. Don’t miss it !! And our esteemed blog founder, Yves Smith, had an excellent comment /question. To see the questions you need to access the videos on the INET site. Ives is at the 46:20 minute mark — and she showed up a number of times on the live feeds.

      This INET conference was probably the best I’ve ever seen. I’ve gone to a lot of fantaastic technical engineering conferences, but this one really “spoke” to my mind and my heart.

        1. F. Beard

          I enjoyed this even more!

          I’m only sad that Keen spent so little time on his “A Modern Jubilee” idea.

      1. Leverage

        I recommend a lot the Antonio Damasio lecture, but I’m a freak on that stuff because my background comes from neuroscience & psychology, also recommend anyone to buy & read his books for the layman on neuroscience. BTW is amazing to see layman continually confusing ’emotions’ with ‘conscious feelings’ (that phenomenologically appear to the subject).

        Indeed, the bad foundations on ‘rational economic actors’ and preferences to ignore emotions by economists is precisely because of this confusion, from where bad reputation of ’emotions’ as decision drivers come from, but actually as has been demonstrated emotions can be very “rational” when you understand rationality as what is (making decisions in the best of the actor interests according to a set of rules and limited knowledge in the context of uncertainty).

        What are rational or irrational decisions is a very open question, and irrational is usually a word which is abused, because the judgement is made a posteriori. In fact with the limited information (‘central bank puts’) bankers had, one could say they are actually being very rational about what they do, even if a posteriori is reckless, but is very profitable for them. Off course because uncertainty they could end up hanging from light poles as they had sometimes in the past, but is an improbable outcome, so worth the risk for gamblers.

        About Yves question, it all is tied, a couple issues that help explaining it are:
        a) ‘Emotional cost’ to assume your assumptions are wrong. This is literally the hardest thing most humans can do, abandoning ideas which were previously defended. The day we can ‘fix’ this shortcoming we will evolve like we haven’t ever done, it’s our greatest burden.
        b) That they are not being rational/logical supporting certain ideas, even if these were proved wrong. Here again the definition of what is ‘rational’ or ‘irrational’ is quite important, if you examine something from a social fairness point of view it may be irrational, but not so much for individuals (more if they are psychopaths!).
        c) Subjective perception of one-self circumstances (information & knowledge in the context of uncertainty): ideas are very powerful (comes from point a), ideas come from perception primary. Even if something indicates that may be ‘wrong’, if it is beneficial for the individual to stick thinking it, emotions will disrupt the thought process (stop changing assumptions) to avoid turning a beneficial situation into an non-beneficial one (all very ‘logical’ and rational! it’s amazing how these complex systems have emerged from evolution).

        One of the main problems is that human societies evolved on very small groups (like other primates) so this feedback systems work very well on small groups (where other subjects emotions can be read effectively btw), disputes can be solved and abusers addressed (sometimes rather violently). But on huge civilizations off course some individuals can get off abusing others without any cost.

  3. financial matters

    Some more on fraudulent conveyance..


    Michael Hudson: The Financial Road to Serfdom – How Bankers are Using the Debt Crisis to Roll Back the Progressive Era


    Financial lobbyists are turning the English language – and economic terminology throughout the world – into a battlefield. Creditors are to be permitted to take the assets of insolvent debtors – from homeowners and companies to entire nations – as if this were a normal working of “the market” and foreclosure was simply a way to restore “liquidity.” As for “solvency,” the ECB would strip Greece clean of its public sector’s assets. Bank officials have spoken of throwing potentially 150 billion euros of property onto the market.

    Most people would think of this as a solvency problem. Solvency means the ability to maintain the kind of society one has, with existing public/private checks and balances and living standards. It is incompatible with scaling down pensions, Social Security and medical insurance to save bondholders and bankers from taking a loss. The latter policy is nothing less than a political revolution.

    When the economic surplus is pledged to bankers rather than invested at home, we are not merely dealing with “insolvency” but with an aggressive attack

    But the tables are now turning, from Icelandic voters to the large crowds gathering in Syntagma Square and elsewhere throughout Greece to oppose the terms on which Prime Minister Papandreou has been negotiating an EU bailout loan for the government – to bail out German and French banks. Now that nations are not raising money for war but to subsidize reckless predatory bankers, Jean-Claude Trichet of the ECB recently suggested taking financial policy out of the hands of democracy.

    At issue is sovereignty itself, when it comes to government responsibility for debts. And in this respect the war being waged against Greece by the European Central Bank (ECB) may best be seen as a dress rehearsal not only for the rest of Europe, but for what financial lobbyists would like to bring about in the United States.



    Michael Hudson: Some Modest Proposals for Reforming the U.S. Financial and Tax System


    financial matters says:
    November 20, 2011 at 10:24 am

    Michael Hudson is spot-on as usual. Need any more be said..

    “”The government itself has become more indebted, most recently by the $13 trillion in new debt printed and given to the banks to make sure that no financial gambler need suffer a loss. At the same time the Obama administration did this, it claimed that a generation in the future, the Social Security system may be $1 trillion in deficit. And that, Mr. Obama says, would cause a crisis – and not leave enough to continue subsidizing his leading campaign contributors””””



    Nevada Lawsuit Shows Bank of America’s Criminal Incompetence


    The best way to restore the housing market, the rule of law, and faith in the American system is by rounding up criminal enterprises masquerading as banks.

    As we’ve stated before, litigation by attorney general is significant not merely due to the damages and remedies sought, but because it paves the way for private lawsuits.

    And make no mistake about it, this filing is a doozy. It shows the Federal/state attorney general mortgage settlement effort to be a complete travesty. The claim describes, in considerable detail, how various Bank of America units engaged in misconduct in virtually every aspect of its residential mortgage business.

    note that BofA may have engaged in fraudulent conveyance

    1. Steve

      Most of the Banks must have, look at the wreckage across the country. The problem is the burden is usually too heavy for individuals to lift into court and without process the crimes are indemnified. The role should have then fallen onto the state’s top attorneys, and the result is politically motivated capture and a failure to provide justice. The administration refuses to investigate, absolutely refuses.

  4. Dan B

    This is good stuff. It inches us closer to -although it’s a very bitter pill- the fact that the good fairy of economic growth has expired and human economies do not control the biosphere. We’ve got to figure out how to have an economy without this organizing premise of growth and the instead recognizes limits to growth.

  5. Conscience of a Conservative

    Banks were/are conducting business in this manner, car dealers do it all the time, yet the discredited ‘culture of poverty’ arguments from the bullies are still mainstream – blaming the victims. The poverty is in our Government, incidentally inhabited by some of the “fraudulent conveyors.” Obama’s SOTU speech for example, could have been read in North Korea, indifference to domestic economic problems with a celebration of militarism.

    ” So the colony passed the fraudulent conveyance law. And that law said that if a lender makes a loan to a debtor that cannot be repaid in the reasonable course of business, the loan is declared null and and canceled. “

    1. Susan the other

      Interpret “reasonable course of business.” Many intervening factors besides the timely harvest of farms. Like a great depression. Or an ever greater one pretending to be just a blip on the screen. Or incompetent governance. Or a control fraud scam to impoverish the entire economy. Or? Maybe a terrifying devastation and poisoning of the entire planet. You name it. We become more fragile every day. The simultaneous burps of ceptic tanks in India? The simultaneous farts of 8 billion people. Don’t light a match. The banks might go up in flames.

  6. ReaderOfTeaLeaves

    Fantastic explanation of how banks add to the overhead, rather than investing in the means to pay back debt — if 80% of US bank loans are for real estate, that creates severe dysfunction.
    It’s as if we have a diabetic economic system.

  7. Vote Green

    The sight of David Axlerod on TV is horrifying, not sure where Occupy ™ is with this guy. Last year, this probable baksheesh recipient/possible mobster spoke before 3,000 people at the Hyatt Regency in Chicago for the 98th annual convention of the Mortgage Bankers Association. All the leading problems were assembled together under one roof: Fannie, Freddie, MERS, Banksters, LPS. If Obama polls at 20% will he voluntarily resign and exit the race?

  8. Min

    “I find the focus on history and real operations — as opposed to diagrams — very refreshing. Don’t you?”

    Well, actually, I like both. :)

  9. Nat

    Hudson points out that Latvia is anything but a positive model; evidently earlier speakers think it is. This is more than a disagreement on the facts, and more than just a matter of emphasis, ie. some facts carry more weight in a particular world view. I suspect that Hudson’s last example, the entanglement of entire extended families in chronic debt, is viewed as a Latvian feature, not a bug to those who consider Latvia an economic success story. This attitude is akin to that of Bush 43 here:

    Woman sitting on stage with Bush: “I work three jobs and I feel like I contribute…”

    Bush (interrupting): “You work three jobs?”

    Woman: “Three jobs.”

    Bush: “Uniquely American, idn’t it. That’s fantastic, yuh, you doin’ that. Get any sleep?”

  10. Susan the other

    Michael Hudson said several things that made me rethink. That the fiscal and the financial must agree to avoid more chaos. That banks have lost their usefulness in a capitalist society because manufacturing corporations have long since been issuing their own paper. So then, making banks and credit-debt “useful” again is going to be a philosophical debate on humanity itself – does capitalism even serve humanity?

    I especially liked his explanation of the road we took to get here by lending the UK and South America all the money they needed, for a time, to pay the servicing costs of the money we had already loaned them. Because everyone understood they would never be able to pay it back. It was the patriotic thing to do in order to defeat the better forms of government like well run socialism, etc.

    And lastly – Michael Hudson pointed out that the banks, following this same 3rd world loan-pattern, are currently not just useless but a parasitic liability because their entire book is real estate. No wonder they can’t do anything about the mess they created. No matter what they do (with the sole exception of getting free money from the Fed and investing it!) it will destroy them. And if they are destroyed then the”government” they co-opted is destroyed.

  11. LeonovaBalletRusse

    Michael Hudson’s speech on Friday, 13, 2012 in Berlin was curtailed by time-constraints, so it only began to knock the socks off the audience. The full speech in text format has been posted on the net, and it must be sending shivers of terror down the spines of the Establishment. I didn’t even see his presentation posted on YouTube last night.

    Another mind-blowing, if not earth-shattering, presentation at this INET conference, “Paradigm Lost,” made on Saturday, 14 April 2012 by John Kay, was posted on YouTube, but had no hits last night until I clicked on the vid. The soft-spoken, very brave, John Kay proved himself to be in the same company as William K. Black, when it comes to courage and fortitude in telling the stark truth to We the People. Truly, “Give me liberty or give me death.”

    INET 2012: “Paradigm Lost” up-ended the Old World Universe in three days, even if the Old World remains in denial. It’s done.

  12. Schofield

    Thanks BT for the link to the Dirk Bezemer talk at INET. Absolutely rivetting. He makes it absolutely clear by implication that voting for either the Wall Street owned Democrat or Republican parties is the equivalent of voting for Bernie Madoff. You’re going to get yet more Ponzi bubble blowing in commodities and assets which will further destabilize and deflate the ecomony.

    Here is the orginal YouTube link and link to his paper for his talk:-



  13. craazyman

    whoa, I admit it, if they let Professor Hudson come and talk I guess this isn’t just an Institute for Neological Entertainment and Temporizing.

    If there were 100 people and 10 were fat and warm under 20 blankets with platters of food; 70 were surviving; and 10 were freezing on the verge of death, would the 10 share their blankets and food. Or would they loan them at a penalty rate and pay the 70 to build a jail?

    Of course, they’d say “it could be worse, you might have 10 thin people and 90 people dead if the commies took over. better that 70 can build a jail than 90 die.”

    I’d say “Yes, that is true. And it’s also true a demon is sucking your brain energy like a milkshake through a straw.” Holy Shit. I can even scare myself thinking about this stuff. That’s embarrasing.

    Professor Bezemer was also quite good. I got lost, frankly, in all the Cartesian graphs, but it sounded like it made sense if you could follow it. Too much debt is just too much. It can’t all be honest. There’s got to be a point where debt over a certain amount is just fraudulent conveyance.

  14. FRauncher

    If you have time, you might also listen to Adair Turner’s keynote speech. He is one of those Brits who is especially gifted in giving entertaining as well as informative after dinner talks. Because of his position he has to be a little more careful than Michael Hudson, but he is one of the good guys. I wish there were more like him at the Fed

  15. JurisV

    “Science-Fiction” Economics Model !!

    Kudos to Dirk Bezemer at the INET Conference for inaugurating this term for the out-of-date REH (Rational Expectations Hypothesis) model — aka DSGE. Dr Bezemer’s and Prof Steve Keen’s criticisms of that model, because it excludes Banks and money were echoed and reverberated throughout the conference presentations. I love the Sci-Fi allusion and I expect Bezemer’s terminology to live long and prosper!

    1. JurisV

      I forgot to reference the Ferengi business community!

      Rumor has it that the Ferengi financial overlords have, albeit reluctantly, acceded to the Shumpeter, Minsky, Keen, Bezemer, et al view of the reality of the Universal Financial Model: Banking functions and money are necessary in financial models. The Ferengi are not pleased!

  16. michael hudson

    Well, I just got back and rested from Berlin, so this is just an informational note.
    First of all, Steve Keen, Dirk Bezemir and I are writing a JOINT paper on MMT, putting forth our general theory.
    Steve was staying with me for four days before the conference, co-writing the draft, while I was setting my new book in type. So we were co-ordinating.
    Dirk has been a collaborator of mine for many years. I brought him to Latvia for a big poitical conference, and he was a hit there too.
    His teacher was Richard Werner, who just published “Where does money come from,” from the New Economic Foundation in Britain, that is quite good.

    1. beowulf

      Great speech Michael. I’m a little more sanguine than you about the use of fraudulent conveyance law. Just as “mortgage fraud” has been interpreted to mean borrower fraud while excluding lender fraud, modern fraudulent conveyance laws (Uniform Fraudulent Transfer Act and federal Bankruptcy Code) are typically written to target borrower’s activity and not lender’s. Funny how that works.

      “The UFTA and the Bankruptcy Code both provide that a transfer made by a debtor is fraudulent as to a creditor if the debtor made the transfer with the “actual intention to hinder, delay or defraud” any creditor of the debtor.”

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