Michael Hudson: The Wall Street Economy is Draining the Real Economy

An interview by Gordon T. Long of the Financial Repression Authority. Originally published at his website

GORDON LONG: Thank you for joining us. I’m Gordon Long with the Financial Repression Authority. It’s my pleasure to have with me today Dr. Michael Hudson Professor Hudson’s very well known in terms of the FIRE economy to—I think, to a lot of our listeners, or at least he’s recognized by many as fostering that concept. A well known author, he has published many, many books. Welcome, Professor Hudson.

MICHAEL HUDSON: Yes.

LONG: Let’s just jump into the subject. I mentioned the FIRE economy cause I know that I have always heard it coming from yourself—or, indirectly, not directly, from yourself. Could you explain to our listeners what’s meant by that terminology?

HUDSON: Well it’s more than just people getting fired. FIRE is an acronym for Finance, Insurance and Real Estate. Basically that sector is about assets, not production and consumption. And most people think of the economy as being producers making goods and services and paying labor to produce them – and then, labour is going to buy these goods and services. But this production and consumption economy is surrounded by the asset economy: the web of Finance, Insurance, and Real Estate of who owns assets, and who owes the debts, and to whom.

LONG: How would you differentiate it (or would you) with what’s often referred to as financialization, or the financialization of our economy? Are they one and the same?

HUDSON: Pretty much. The Finance, Insurance, and Real Estate sector is dominated by finance. 70 to 80% of bank loans in North America and Europe are mortgage loans against real estate. So instead of a landowner class owning property clean and clear, as they did in the 19th century, now you have a democratization of real estate. 2/3 or more of the population owns their own home. But the only way to buy a home, or commercial real estate, is on credit. So the loan-to-value ratio goes up steadily. Banks lend more and more money to the real estate sector. A home or piece of real estate, or a stock or bond, is worth whatever banks are willing to lend against it

As banks loosen their credit terms, as they lower their interest rates, take lower down payments, and lower amortization rates – by making interest-only loans – they are going to lend more and more against property. So real estate is bid up on credit. All this rise in price is debt leverage. So a financialized economy is a debt-leveraged economy, whether it’s real estate or insurance, or buying an education, or just living. And debt leveraging means that a larger proportion of assets are represented by debt. So debt equity ratios rise. But financialization also means that more and more of people’s income and corporate and government tax revenue is paid to creditors. There’s a flow of revenue from the production-and-consumption economy to the financial sector.

LONG: I don’t know if you know Richard Duncan. He was with the IMF, etc, and lives in Thailand. He argues right now that capitalism is no longer functioning, and really what he refers to what we have now is “creditism.” Because in capitalism we have savings that are reinvested into productive assets that create productivity, which leads to a higher level of living. We’re not doing that. We have no savings and investments. Credit is high in the financial sector, but it’s not being applied to productive assets. Is he valid in that thinking?

HUDSON: Not as in your statement. It’s confused.

LONG: Okay.

HUDSON: There’s an enormous amount of savings. Gross savings. The savings we have that are mounting up are just about as large as they’ve ever been – about, 18-19% of the US economy. They’re counterpart is debt. Most savings are lent out to borrowers se debt. Basically, you have savers at the top of the pyramid, the 1% lending out their savings to the 99%. The overall net savings may be zero, and that’s what your stupid person from the IMF meant. But gross savings are much higher. Now, the person, Mr. Duncan, obviously—I don’t know what to say when I hear this nonsense. Every economy is a credit economy.

Let’s start in Ancient Mesopotamia. The group that I organized out of Harvard has done a 20-study of the origins of economic structuring in the Bronze Age, even the Neolithic, and the Bronze Age economy – 3200 BC going back to about 1200 BC. Suppose you’re a Babylonian in the time of Hammurabi, about 1750 BC, and you’re a cultivator. How do you buy things during the year? Well, if you go to the bar, to an ale woman, what she’d do is write down the debt that you owe. It was to be paid on the threshing floor. The debts were basically paid basically once a year when the income was there, on the threshing floor when the harvest was in. If the palace or the temples would advance animals or inputs or other public services, this would be as a debt. It was all paid in grain, which was monetized for paying debts to the palace, temples and other creditors.

The IMF has this Austrian theory that pretends that money began as barter and that capitalism basically operates on barter. This always is a disinformation campaign. Nobody believed this in times past, and it is a very modern theory that basically is used to say, “Oh, debt is bad.” What they really mean is that public debt is bad. The government shouldn’t create money, the government shouldn’t run budget deficits but should leave the economy to rely on the banks. So the banks should run and indebt the economy.

You’re dealing with a public relations mythology that’s used as a means of deception for most people. You can usually ignore just about everything the IMF says. If you understand money you’re not going to be hired by the IMF. The precondition for being hired by the IMF is not to understand finance. If you do understand finance, you’re fired and blacklisted. That’s why they impose austerity programs that they call “stabilization programs” that actually are destabilization programs almost wherever they’re imposed.

LONG: Is this a lack of understanding and adherence to the wrong philosophy, or how did we get into this trap?

HUDSON: We have an actively erroneous view, not just a lack of understanding. This is not by accident. When you have an error repeated year after year after year, decade after decade after decade, it’s not really insanity doing the same thing thinking it’ll be different. It’s sanity. It’s doing the same thing thinking the result will be the same again and again and again. The result will indeed be austerity programs, making budget deficits even worse, driving governments further into debt, further into reliance on the IMF. So then the IMF turns them to the knuckle breakers of the World Bank and says, “Oh, now you have to pay your debts by privatization”. It’s the success. The successful error of monetarism is to force countries to have such self-defeating policies that they end up having to privatize their natural resources, their public domain, their public enterprises, their communications and transportation, like you’re seeing in Greece’s selloffs. So when you find an error that is repeated, it’s deliberate. It’s not insane. It’s part of the program, not a bug.

LONG: Where does this lead us? What’s the roadmap ahead of us here?

HUDSON: A thousand years ago, if you were a marauding gang and you wanted to take over a country’s land and its natural resources and public sector, you’d have to invade it with military troops. Now you use finance to take over countries. So it leads us into a realm where everything that the classical economists saw and argued for – public investment, bringing costs in line with the actual cost of production – that’s all rejected in favor of a rentier class evolving into an oligarchy. Basically, financiers – the 1% – are going to pry away the public domain from the government. Pry away and privatize the public enterprises, land, natural resources, so that bondholders and privatizers get all of the revenue for themselves. It’s all sucked up to the top of the pyramid, impoverishing the 99%.

LONG: Well I think most people, without understanding economics, would instinctively tell you they think that’s what’s happening right now, in some way.

HUDSON: Right. As long as you can avoid studying economics you know what’s happened. Once you take an economics course you step into brainwashing. It’s an Orwellian world.

LONG: I think you said it perfectly well there. Exactly. It gets you locked into the wrong way of thinking as opposed to just basic common sense. Your book is Killing the Host. What was the essence of its message? Was it describing exactly what we’re talking about here?

HUDSON: Finance has taken over the industrial economy, so that instead of finance becoming what it was expected to be in the 19th century, instead of the banks evolving from usurious organizations that leant to governments, mainly to wage war, finance was going to be industrialized. They were going to mobilize savings and recycle it to finance the means of production, starting with heavy industry. This was actually happening in Germany in the late 19th century. You had the big banks working with government and industry in a triangular process. But that’s not what’s happening now. After WW1 and especially after WW2, finance reverted to its pre-industrial form. Instead of allying themselves with industry, as banks were expected to do, banks allied themselves with real estate and monopolies, realizing that they can make more money off real estate.

The bank spokesman David Ricardo argued against the landed interest in 1817, against land rent. Now the banks are all in favor of supporting land rent, knowing that today, when people buy and sell property, they need credit and pay interest for it. The banks are going to get all the rent. So you have the banks merge with real estate against industry, against the economy as a whole. The result is that they’re part of the overhead process, not part of the production process.

LONG: There’s a sense that there’s a crisis lying ahead in the next year, two years, or three years. The mainstream economy’s so disconnected from Wall Street economy. What’s your view on that?

HUDSON: It’s not disconnected at all. The Wall Street economy has taken over the economy and is draining it. Under what economics students are taught as Say’s Law, the economy’s workers are supposed to use their income to buy what they produce. That’s why Henry Ford paid them $5 a day, so that they could afford to buy the automobiles they were producing.

LONG: Exactly.

HUDSON: But Wall Street is interjecting itself into the economy, so that instead of the circular flow between producers and consumers, you have more and more of the flow diverted to pay interest, insurance and rent. In other words, to pay the FIRE sector. It all ends up with the financial sector, most of which is owned by the 1%. So, their way of formulating it is to distract attention from today’s debt quandary by saying it’s just a cycle, or it’s “secular stagnation.” That removes the element of agency – active politicking by the financial interests and Wall Street lobbyists to obtain all the growth of income and wealth for themselves. That’s what happened in America and Canada since the late 1970s.

LONG: What does an investor do today, or somebody who’s looking for retirement, trying to save for the future, and they see some of these things occurring. What should they be thinking about? Or how should they be protecting themselves?

HUDSON: What all the billionaires and the heavy investors do is simply try to preserve their wealth. They’re not trying to make money, they’re not trying to speculate. If you’re an investor, you’re not going to outsmart Wall Street billionaires, because the markets are basically fixed. It’s the George Soros principle. If you have so much money, billions of dollars, you can break the Bank of England. You don’t follow the market, you don’t anticipate it, you actually make the market and push it up, like the Plunge Protection Team is doing with the stock market these days. You have to be able to control the prices. Insiders make money, but small investors are not going to make money.

Since you’re in Canada, I remember the beginning of the 1960s. I used to look at the Treasury Bulletin and Federal Reserve Bulletin figures on foreign investment in the US stock market. We all used to laugh at Canada especially. The Canadians don’t buy stocks until they’re up to the very top, and then they lose all the money by holding these stocks on the downturn. Finally, when the market’s all the way at the bottom, Canadians decide to begin selling because they finally can see a trend. So they miss the upswing until they decide to buy at the top once again. It’s hilarious to look at how Canada has performed in the US bond market, and they did the same in the silver market. I remember when silver was going up to $50. The Canadians said, “Yes, we can see the trend now!” and they began to buy it. They lost their shirts. So, basically, if you’re a Canadian investor, move.

LONG: So the Canadian investors are a better contrarian indicator than the front page cover, you’re saying.

HUDSON: I’d think so. Once they get in, you know the bubble’s over.

LONG: Absolutely on that one. What are you currently writing? What is your current focus now?

HUDSON: Well, I just finished a book. You mentioned Killing the Host. My next book will be out in about three months: J is for Junk Economics. It began as a dictionary of terms, so I can provide people with a vocabulary. As we got in the argument at the beginning of your program today, our argument is about the vocabulary we’re using and the words you’re using. The vocabulary taught to students today in economics – and used by the mass media and by government spokesmen – is basically a set of euphemisms. If you look at the television reports on the market, they say that any loss in the stock market isn’t a loss, it’s “profit taking”. And when they talk about money. the stock market rises – “Oh that’s good news.” But it’s awful news for the short sellers it wipes out. Almost all the words we get are kind of euphemisms to conceal the actual dynamics that are happening. For instance, “secular stagnation” means it’s all a cycle. Even the idea of “business cycles”: Nobody in the 19th century used the word “business cycle”. They spoke about “crashes”. They knew that things go up slowly and then they plunge very quickly. It was a crash. It’s not the sine curve that you have in Josef Schumpeter’s book on Business Cycles. It’s a ratchet effect: slow up, quick down. A cycle is something that is automatic, and if it’s a cycle and you have leading and lagging indicators as the National Bureau of Economic Research has. Then you’d think “Oh, okay, everything that goes up will come down, and everything that goes down will come up, just wait your turn.” And that means governments should be passive.

Well, that is the opposite of everything that’s said in classical economics and the Progressive Era, when they realized that economies don’t recover by themselves. You need a—the government to step in, you need something “exogenous,” as economist say. You need something from outside the system to revive it. The covert idea of this business cycle analysis is to leave out the role of government. If you look at neoliberal and Austrian theory, there’s no role for government spending, and no role of public investment. The whole argument for privatization, for instance, is the opposite of what was taught in American business schools in the 19th century. The first professor of economics at the Wharton School of Business, which was the first business school, was Simon Patten. He said that public infrastructure is a fourth factor of production. But its role isn’t to make a profit. It’s to lower the cost of public services and basic inputs to lower the cost of living and lower the cost of doing business to make the economy more competitive. But privatization adds interest payments, dividends, managerial payments, stock buybacks, and merges and acquisitions. Obviously these financialized charges are factored into the price system and raise the cost of living and doing business.

LONG: Well, Michael, we’re—I thank you for the time, and we’re up against our hard line. I know we didn’t have as much time as we always like, so we have to break. Any overall comments you’d like to leave with our listeners who might be interested this school of economics?

HUDSON: Regarding the downturn we’re in, we’re going into a debt deflation. The key of understanding the economy is to look at debt. The economy has to spend more and more money on debt service. The reason the economy is not recovering isn’t simply because this is a normal cycle. And It’s not because labour is paid too much. It’s because people are diverting more and more of their income to paying their debts, so they can’t afford to buy goods. Markets are shrinking – and if markets are shrinking, then real estate rents are shrinking, profits are shrinking. Instead of using their earnings to reinvest and hire more labour to increase production, companies are using their earnings for stock buybacks and dividend payouts to raise the share price so that the managers can take their revenue in the form of bonuses and stocks and live in the short run. They’re leaving their companies as bankrupt shells, which is pretty much what hedge funds do when they take over companies.

So the financialization of companies is the reverse of everything Adam Smith, John Stuart Mill, and everyone you think of as a classical economist was saying. Banks wrap themselves in a cloak of classical economics by dropping history of economic thought from the curriculum, which is pretty much what’s happened. And Canada—I know since you’re from Canada, my experience there was that the banks have a huge lobbying power over government. In 1979, I wrote for the IRPP Institute there on Canada In the New Monetary Order. At that time the provinces of Canada were borrowing money from Switzerland and Germany because they could borrow it at much lower interest rates. I said that this was going to be a disaster, and one that was completely unnecessary. If Canadian provinces borrow in Francs or any other foreign currency, this money goes into the central bank, which then creates Canadian dollars to spend. Why not have the central bank simply create these dollars without having Swiss francs, without having German marks? It’s unnecessary to have an intermediary. But the more thuggish banks, like the Bank of Nova Scotia, said, “Oh, that way’s the road to serfdom.” It’s not. Following the banks and the Austrian School of the banks’ philosophy, that’s the road to serfdom. That’s the road to debt serfdom. It should not be taken now. It lets universities and the government be run by neoliberals. They’re a travesty of what real economics is all about.

LONG: Michael, thank you very much. I learned a lot, appreciate it; certainly appreciate how important it is for us to use the right words on the right subject when we’re talking about economics. Absolutely agree with you. Talk to you again?

HUDSON: Going to be here.

LONG: Thank you for the time.

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31 comments

  1. Donald

    Interesting, but after insulting Duncan, Hudson says the banks stopped partnering with industry and went into real estate, which sounded like what Duncan said.

    I mention this because for a non- expert like myself it is sometimes difficult to tell when an expert is disagreeing with someone for good reasons or just going off half- cocked. I followed what Hudson said about the evils of the IMF, but didn’t see where Duncan had defended any of that, unless it was implicit in saying that capitalism used to function better.

    1. Alejandro

      Michael Hudson from the interview;

      “As we got in the argument at the beginning of your program today, our argument is about the vocabulary we’re using and the words you’re using. The vocabulary taught to students today in economics – and used by the mass media and by government spokesmen – is basically a set of euphemisms….”Almost all the words we get are kind of euphemisms to conceal the actual dynamics that are happening.”

      May consider it’s about recognizing and deciphering the “doublespeak”, “newspeak”, “fedspeak”, “greenspeak” etc, whether willing or unwitting…using words for understanding and clarifying as opposed to misleading and confusing…dialectic as opposed to sophistry.

      1. Michael Hudson

        What I objected to was the characterization of today’s situation as “financialization.” I explained that financialization is the FIRST stage — when finance WORKS. We are now in the BREAKDOWN of financialization — toward the “barter” stage.
        Treating “finance” as an end stage rather than as a beginning stage overlooks the dynamics of breakdown. It is debt deflation. First profits fall, and as that occurs, rents on commercial property decline. This is already widespread here in New York, from Manhattan (8th St. near NYU is half empty) to Queens (Austin St. in Forest Hills.).

        1. Leonard C.Tekaat

          I wrote an article you might be interested in reading. It outlines a tax policy which would help prevent what you are discussing in your article. The abuse of credit to receive rents and long term capital gains.

          The title is “Congress Financialized Our Economy And Created Financial Crisis & More Poverty” Go to http://www.taxpolicyusa.wordpress.com

          1. TheCatSaid

            Can you please summarize a few of the key points? It looks like a long paper and I’d like to first understand the direction of your current thinking.

        2. SomeCallMeTim

          Thank you for another eye-opening exposition. My political economy education was negative (counting a year of Monetarism and Austrian Economics around 1980), so I appreciate your interviews as correctives.

          From your interview answer to the question about what we, the 99+% should do,I gathered only that we should not try to beat the market. Anything more than that?

          1. Balan

            As I gather from Hudson’s most illuminating reprise, you’ll make money by betting on debt deflation; align with this trend. There are financial luminaries who understand this, like Hudson, and others. Investing in yourself is the best bet, but if you have cash, save it is the next best bet as interest rates edge negative. Finally, if you have the means, own your own home mortgage-free, no car payment, and a cash buffer of two-years living expenses, have a twenty year investment horizon (ie you’re not even close to retirement), then with your excess reserves you might want to find a stock that aligns with this trend – being that you can handle the volatility and get in at the right time, and not get out at the wrong time – or just keep it for 20 years only checking on it once a year. The best investors say that psychology is 70% of investing, not finding the right stock pick. Regardless of knowing of that great stock to choose, it really sucks to do it. I’d rather be betting on debt inflation.

            This article makes me want to make a donation to Nakecapitalism.com. For so many years now you’ve posted tirelessly, serving the 99%. I’ll add you to my list along with Bernie.

            Love,

            Balan

    2. Skippy

      From my understanding, post Plaza banking lost most of its traditional market to the shadow sector, as a result, expanded off into C/RE and increasingly to Financialization of everything sundry.

      Disheveled Marsupial… interesting to note Mr. Hudson’s statement about barter, risk factors – ?????

  2. Eduardo Quince

    “secular stagnation” means it’s all a cycle

    Actually not.

    One of the most important distinctions that investors have to understand is the difference between secular and cyclical trends…Let us begin with definitions from the Encarta® World English Dictionary:

    Secular – occurring only once in the course of an age or century; taking place over an extremely or indefinitely long period of time

    Cycle – a sequence of events that is repeated again and again, especially a causal sequence; a period of time between repetitions of an event or phenomenon that occurs regularly

    Excerpted from: http://contrarianinvestorsjournal.com/?p=405#

    1. cnchal

      Secular stagnation from http://lexicon.ft.com/Term?term=secular-stagnation

      Secular stagnation is a condition of negligible or no economic growth in a market-based economy. When per capita income stays at relatively high levels, the percentage of savings is likely to start exceeding the percentage of longer-term investments in, for example, infrastructure and education, that are necessary to sustain future economic growth. The absence of such investments (and consequently of the economic growth) leads to declining levels of per capita income (and consequently of per capita savings). With the reduced percentage savings rate converging with the reduced investment rate, economic growth comes to a standstill – ie, it stagnates. In a free economy, consumers anticipating secular stagnation, might transfer their savings to more attractive-looking foreign countries. This would lead to a devaluation of their domestic currency, which would potentially boost their exports, assuming that the country did have goods or services that could be exported.

      Persistent low growth, especially in Europe, has been attributed by some to secular stagnation initiated by stronger European economies, such as Germany, in the past few years.

      Words. What they mean depends on who’s talking.

      Secular stagnation is when the predators of finance have eaten too many sheeple.

        1. John

          Or when the rate of profit falls in manufacturing (due to automation and/or foreign competition). The bubble was blown to only because the rest of the economy was growing so slowly and we needed GDP growth.

  3. Enquiring Mind

    Hudson says

    Markets are shrinking – and if markets are shrinking, then real estate rents are shrinking, profits are shrinking.

    Real estate rents in this latest asset bubble, whether commercial or residential, appear to have been going up in many markets even if the increases are slowing. That rent inflation will likely turn into rent deflation, but that doesn’t appear to have happened yet consistently.

    Perhaps he meant to say that markets are going to shrink as the debt deflation becomes more evident?

    1. rfdawn

      Yes, I think we are into turnip country now. Figure 1 in this prior article looks clear enough – even if you don’t like the analysis that went with it. Wealth inequality still climbs but income inequality has plateaued since Clinton I. Whatever the reasons for that, the 1% should be concerned – where is the ROI?

  4. ke

    Barter has always existed and always will. Debt money expands and contracts the middle class, acting as a feedback signal, which never works over the long term, because the so encapsulated system can only implode, when natural resource liquidation cannot be accelerated. The whole point is to eliminate the initial requirement for capital, work. Debt fails because both sides of the same coin assume that labor can be replaced. The machines driven by dc technology are not replacing labor; neither the elites nor the middle class can fix the machines, which is why they keep accelerating debt, to replace one failed technology only to be followed by the next, netting extortion by whoever currently controls the debt machine, which the majority is always fighting over, expending more energy to avoid work, like the objective is to avoid sweating, unless you are dumb enough to run on asphalt with Nike gear.

  5. ke

    Labor has no problem with multiwhatever presidents, geneticists, psychologists, or economists, trying to hunt down and replace labor, in or out of turn, but none are going to be any more successful than the others. Trump is being employed to bypass the middle class and cut a deal. There is no deal. Labor is always going to pay males to work and their wives to raise children. Obviously, the majority will vote for a competing economy, and it is welcome to do so, but if debt works so well, why is the majority voting to kidnap our kids with public healthcare and education policies.

  6. meeps

    I’m not sure I heard an answer to the question of what people, who might be trying to save for the future or plan for retirement, can do? Is the point that there isn’t anything? Because I’m definitely between rocks and hard places…

    1. Robert Coutinho

      Yeah, he basically said there is no good savings plan. Big-money interests have rigged the rules and are now manipulating the market (this used to be the definition of what was NOT allowed). Thus, they use computer algorithms to squeeze small amounts out of the market millions of times. This means that the “investments” are nothing of the sort. You don’t “invest” in something for milliseconds. He said that the 1% are mostly just trying to hold on to what they have. Very few trust the rigged markets.

  7. ke

    If Big G can print to infinity, print, but then why book it as debt to future generations?

    The future is already becoming the present, because the millenials aren’t paying.

  8. Russell

    Low rent & cheap energy are key to the arts & innovations. My model has to work for airports, starts at the fuel farm as the CIA & MI6 Front Page Avjet did. Well before that was Air America. I wonder if now American Airlines itself is a Front.
    All of America is a Front far as I can about tell. Hadn’t heard that Manhattan rents were coming down. Come in from out of town, how you going to know? Not supposed to I guess.
    I got that textbook and I liked that guy John Commons. He says capitalism is great, but it always leads to Socialism because of unbridled greed.
    The frenzy to find another stable cash currency showing in Bit Coin and the discussion of Future Tax Credits while the Euro is controlled by the rent takers demands change on both sides of the Atlantic.
    We got shot dead protesting the war, and civil rights backlash is the gift that keeps giving to the Southerners looking up every day in every courthouse town, County seat is all about spreading fear and desperation.
    How to change it all without violence is going to be really tricky.

  9. cnchal

    Many thanks for the shout out to Canada.

    . . . So, basically, if you’re a Canadian investor, move.

    LONG: So the Canadian investors are a better contrarian indicator than the front page cover, you’re saying.

    HUDSON: I’d think so. Once they get in, you know the bubble’s over.

    When one reads the financial press in Canada, every dollar extracted by the lords of finance is a glorious taking by brilliant people at the top of the financial food chain from the stupid little people at the bottom, but when it counts, there was silence, in cooperation with Canada’s one percent.

    The story starts about five years ago, with smart meters. Everyone knows what they are, a method by which electrical power use can be priced depending on the time of day, and day of the week.

    To make this tasty, Ontario’s local utilities at first kept the price the same for all the time, and then after all the meters were installed, came the changes, phased in over time. Prices were increased substantially, but there was an out. If you changed your living arrangements to live like a nocturnal rodent and washed your clothes in the middle of the night, had supper later in the evening or waited for weekend power rates you could still get low power rates, from the three tier price structure.

    The local utilities bought the power from the government of Ontario power generation utility, renamed to Hydro One, and this is where Michael Hudson’s talk becomes relevant.

    The successful error of monetarism is to force countries to have such self-defeating policies that they end up having to privatize their natural resources, their public domain, their public enterprises, their communications and transportation, like you’re seeing in Greece’s selloffs. So when you find an error that is repeated, it’s deliberate. It’s not insane. It’s part of the program, not a bug.

    LONG: Where does this lead us? What’s the roadmap ahead of us here?

    HUDSON: A thousand years ago, if you were a marauding gang and you wanted to take over a country’s land and its natural resources and public sector, you’d have to invade it with military troops. Now you use finance to take over countries. So it leads us into a realm where everything that the classical economists saw and argued for – public investment, bringing costs in line with the actual cost of production – that’s all rejected in favor of a rentier class evolving into an oligarchy. Basically, financiers – the 1% – are going to pry away the public domain from the government. Pry away and privatize the public enterprises, land, natural resources, so that bondholders and privatizers get all of the revenue for themselves. It’s all sucked up to the top of the pyramid, impoverishing the 99%.

    Eighteen months ago, there was an election in Ontario, and the press was on radio silence during the whole time leading up to the election about the plans to “privatize” Hydro One. I cannot recall one instance of any mention that the new Premier, Kathleen Wynne was planning on selling Hydro One to “investors”.

    Where did this come from? Did the little people rise up and say to the politicians “you should privatize Hydro One” for whatever reason? No. This push came from the 1% and Hydro One was sold so fast it made my head spin, and is now trading on the Toronto Stock exchange.

    At first I though the premier was an economic ignoramus, because Hydro One was generating income for the province and there was no other power supplier, so one couldn’t even fire them if they raised their prices too high.

    One of the arguments put forward by the 1% to privatize Hydro One was a classic divide and conquer strategy. They argued that too many people at Hydro One were making too much money, and by privatizing, the employees wages would be beat down, and the resultant savings would be passed on to customers.

    Back to Michael Hudson

    . . . The whole argument for privatization, for instance, is the opposite of what was taught in American business schools in the 19th century. The first professor of economics at the Wharton School of Business, which was the first business school, was Simon Patten. He said that public infrastructure is a fourth factor of production. But its role isn’t to make a profit. It’s to lower the cost of public services and basic inputs to lower the cost of living and lower the cost of doing business to make the economy more competitive. But privatization adds interest payments, dividends, managerial payments, stock buybacks, and merges and acquisitions. Obviously these financialized charges are factored into the price system and raise the cost of living and doing business.

    Power prices have increased yet again in Ontario since privatization, and Canada’s 1% are “making a killing” on it. There has been another change as well. Instead of a three tier price structure, there are now two, really expensive and super expensive. There is no longer a price break to living like a nocturnal rodent. The 1% took that for themselves.

  10. Procopius

    I am so tired of seeing that old lie about Old Henry and the $5 a day. I realize it was just a tossed off reference to something most people believe for the purpose of describing a discarded policy, but the fact is very, very few of Old Henry’s employees ever got that pay. See, there were strings attached. Old Henry hired a lot of spies, too. He sent them around to the neighborhoods where his workers lived (it was convenient having them all in Detroit). If the neighbors saw your kid bringing a bucket of beer home from the corner tavern for the family, you didn’t get the $5. If your lawn wasn’t mowed to their satisfaction, you didn’t get the $5. If you were thought not to bathe as often as they liked, you didn’t get the $5. If you didn’t go to a church on Sundays, you didn’t get the $5. If you were an immigrant and not taking English classes at night school, you didn’t get the $5. There were quite a lot of strings attached. The whole story was a public relations stunt, and Old Henry never intended to live up to it; he hated his workers.

  11. TheCatSaid

    One of many great quotes from this interview:
    [9:44, just after Hudson describes how the rental revenues/profits are sucked up to those on the top of the wealth pyramid, impoverishing the 99%]

    GORDON LONG: Well I think most people, without understanding economics, would instinctively tell you that’s what’s happening right now, in some way.

    HUDSON (laughs): Right. As long as you can avoid studying economics you know what’s happened. Once you take an economics course you’ve stepped into the brainwashing–an Orwellian world.

    [and Long agrees with this assessment]

  12. Keith

    Michael Hudson – I read your book “Killing The Host” and I am just re-reading it again now.

    Hopefully, I will pick up more on the second reading and my knowledge has advanced more since the first reading.

    Great book by the way.

    The only thing I am a bit confused about is that you talk of banks lending out savings and with fractional reserve banking most of the money is just created out of thin air.

    With continual lobbying by the banks this reserve is now very small.

    Reading the book “Where does money come from ” by the Positive Money group, they say that a mortgage can now be loaned out where all the reserve is contained within the fee and so they need no reserve at all to start with.

    In the same book it points out that In 2008, the UK banks held only £1.25 in reserves for every £100 issued in credit (an 80:1 ratio). Bank lending is not really governed by reserves anymore and they are pretty much free to issue as much credit as they like, Central Banks increasing their reserves makes little difference.

    So how does this fit in with your book when you talk of the savings of the 1% being lent to the 99%?

  13. Chauncey Gardiner

    I appreciate Michael Hudson’s observation about repeated “policy failures”, far from meeting Einstein’s definition of insanity, are really considered huge policy successes in the eyes of the financial engineers engaged in wealth extraction:

    … “We have an actively erroneous view, not just a lack of understanding. This is not by accident. When you have an error repeated year after year after year, decade after decade after decade, it’s not really insanity doing the same thing thinking it’ll be different. It’s sanity. It’s doing the same thing thinking the result will be the same again and again and again. The result will indeed be austerity programs, making budget deficits even worse, driving governments further into debt”…

    …”The successful error of monetarism is to force countries to have such self-defeating policies that they end up having to privatize their natural resources, their public domain, their public enterprises, their communications and transportation, like you’re seeing in Greece’s selloffs. So when you find an error that is repeated, it’s deliberate. It’s not insane. It’s part of the program, not a bug.”

    And WRT the corporate stock buybacks that are leaving so many of our large corporations empty husks, as equity capital is replaced by debt:

    …”They’re leaving their companies as bankrupt shells”.

    Dr. Hudson shifted my view regarding the intended policy objectives. Thank you.

  14. RBHoughton

    Michael Hudson has been an immense force for good in clarifying the problems in the global economy, so its with trepidation that I dare to make a comment.

    The FIRE concept appears to exclude the stock brokers who provide, monopolise and manipulate the market – shouldn’t they be included with the others for completeness, then the appearance of the gambling economy becomes clearer imo?

  15. Fiver

    I find this piece a good example of a phenomenon I’ve noted in years of reading discussions of economics, what I will call a change in ‘voice’ when the speaker moves from the theoretical to the the ‘real’ (as with the generally accepted/consensus/given), to the ‘real’ as is understood by the speaker, and back, and in and out each.

    Check out ‘financialization’ in its differing contexts. Or ‘savings’. Or, while Austrians’ deep concerns re too much debt were quickly dispatched, we are told the problem today is indeed with debt deflation, which is what the other guys had long feared it would come to if new debt/GDP ratio was increasingly unproductive. Anyway, the solution is:

    ‘You need a—the government to step in, you need something “exogenous,” as economist say. You need something from outside the system to revive it.’

    My question is how ‘outside’ the system is any Government once that Government has already abandoned its independence by turning to banks, bond markets, etc. for the massive debt it has already incurred? The requirement for this ‘exogenous’ stimulus for Japan is now such a constant, the absence of a specific commitment to emerge from the last meeting, now almost routine, to do more than the already more + more done and pledged caused an instant 1,000 pt drop in the Nikkei. Sovereigns are also actively punished if they try to exit the system, and until they do, can be expected to continue borrow until it’s time for another massive shearing.

    As an aside, while Canadians ought to be held accountable for recent debacles like the tar sands and housing, and these will have huge ramifications for the country, I thought the examples from the past were not remotely of similar importance. And remember, Canada was forced by the US to do a lot of things it did not want to do beginning with Nixon’s surprise, unilateral decision re gold. Up until 1974 the Bank of Canada was the interest-free banker for large infrastructure projects.

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