Michael Hudson: Economists’ Deadly but Innocuous-Seeming Proclamations

Yves here. If you are a Michael Hudson fan, the early part of the interview may give you the impression that Hudson is covering familiar ground. But fear not. The exchange reveals some tidbits new to me, such as the role Robert Heilbroner played in reconciling the New School to the Chicago School (ugh).

This is a transcript from Meet the Renegades with economist Michael Hudson and interviewer Ross Ashcroft.

You can watch the full interview with Michael here.

Michael Hudson: I’m Michael Hudson. I’m a professor of economics at the University of Missouri, Kansas City and Peking University. My focus is on the distinction between the financial economy and the real economy at large. I treat the financial sector and debt as an economic overhead, so my focus is on how society can deal with the debt and to explain why society cannot recover from the current depression until it writes down the debts to what can be paid.

Ross Ashcroft: Michael, we’re almost a decade on since 2008 and we sit here now in the developed west and we look at the global economy. To even an untrained eye, things aren’t still right and haven’t been right for some time. Where are we and what’s your view on why we’re here?

MH: We’re in a permanent debt deflation. To make it brief, people think in terms of business cycles – as if whenever things go down, they automatically recover. But every business recovery since World War II has taken place with a higher level of debt – higher and higher and higher. Finally, by 2008, the volume of debt was so high that it was absorbing all the economic growth. At that point the stock markets plunged, especially when it became apparent that the business plan of the large banks was economic fraud and junk mortgages.

People say when Queen Elizabeth asked “Why didn’t anybody foresee it?” The fact is, everybody foresaw that there was going to be a crash. That’s why they used the term “junk mortgage.” That’s why they coined the term NINJA: No income, No job, no assets. All this terminology was widely used. The FBI in 2004 explained that there was the largest wave of financial bank fraud in history, but George Bush shifted the investigators out of the FBI into national security, so nothing was done.

When President Obama ran for election, he promised to write down mortgage debts to the real value of property, not the junk mortgages in excess of the value. The terms that Congress set for the bailout of the banks, the Troubled Asset Relief Program or TARP, were that banks would rewrite the mortgages so that homeowners who could not pay the nominal mortgage would simply pay what the rental value of their property was.

RA: And what happened?

MH: In practice nothing was done. The banks were saved, not the economy. Tim Geithner, who was a protégé of Robert Rubin, was moved on behalf of Citibank into the Treasury, and he bailed out the banks – leaving all the debts in place, not writing them down. Banks stopped lending mortgage money, and began to call in their credit card loans by about 100 billion dollars, from one trillion to about 900 trillion. Mortgages were not written off, so homeowners had to pay so much money to pay off the debts that had been built up during the bubble economy that they didn’t have enough income left to buy goods and services.

RA: You make a distinction between the real economy and Wall Street or the financialized economy and when you say that the debt has built up since World War II, year on year. Are you’re saying that when the real economy can no longer service that debt, we have a financial crisis?

MH: That’s when you have a crisis.

RA: So it isn’t a black swan as such?

MH: It is inevitable. The magic of compound interest means that interest grows and the debt accumulates. When you add in new money creation, debts grow faster than the economy at large. So the situation that existed in 2008 remains the case today: Debt in almost every country is equal to the entire GDP, the entire national income. Now, if debt is equal and the interest rate on debt that people have to pay is 4 percent, then if economies only grow at 1 or 2 percent (as they are today), then all their economic growth has to be devoted to paying the financial sector.

RA: For interest payments?

MH: On interest alone – not mentioning the repayments of principal to pay down the debt. This is the phenomenon of debt deflation that was discussed in the 1930s. It’s a phenomenon that is inherent in the mathematics of compound interest. In fact, this should be the focus of the economic curriculum.

RA: Can you explain?

MH: If you’re teaching economics, you should begin with the relationship between finance and the economy – between the buildup of debt and the ability to pay. That should be the starting point if you realize that the problem of our time is how can society cope with the debt buildup that has occurred. That is what is keeping the economy from recovering?

RA: So people listening to that must think “Well God that is the obvious place to start. Why doesn’t every undergrad economics course start with that?”

MH: I taught money in banking at the New School for Social Research in the 60s and 70s. Bob Heilbroner, the department chairman, wanted to conform to the mainstream and teach the Chicago School monetarism that treats the economy as if it operates on barter. If you look at almost any economic textbook, all the way through the Ph.D., they treat the economy as being barter. They then factor in money creation as if money it directly affects prices proportionally –and claim that this doesn’t change basic relationships, even between debtors and creditors.

This kind of tunnel vision led people to call the bubble economy’s lead-up stage “the Great Moderation.” It was a Great Moderation in the sense that the banks were able to lend homeowners and companies and governments enough money to pay the interest. There has been the largest increase in credit creation in history since 2008, with almost no increase in consumer prices or wages. All the money creation has gone to buy stocks and bonds into the financial sector.

RA: So just let’s define the Great Moderation. Which years would you put the great moderation between?
MH: About 1995 to 2008. As Alan Greenspan explained it, he said that it was moderate because labour didn’t complain. Productivity was soaring and wage rates did not go up in the American economy. He explained this before the Senate committee, as what has been called the “Traumatized Worker Effect.” He said that workers are so deeply in debt that they’re afraid to strike. They’re afraid to complain about working conditions, because they could be walked out the door, and if they are fired, if they don’t have a job, then suddenly the interest rates they pay on their credit cards go up to 29 percent. They’re one month away from insolvency, one month away from homelessness.” So Greenspan said, in effect, “We’ve hooked them. We’ve got them.”

RA:  And his view is that’s the optimum state for workers, why?

MH: Because that’s what he calls a “free market.” It’s a free market where the 1% get to smash the 99% without any ability of the 99% to fight back. A free market in which people do what they’re told. That is the opposite of what Adam Smith and John Stuart Mill and other classical economists meant by a free market. They meant a market free from rentiers, free from landlords, free from banks – so that where everybody got only what they deserved and produced. But under Greenspan and modern economics, a market is “free” from government regulation, free from throwing the bankers in jail when they commit crime, free from any kind of policymaking by government, by labor unions, or by society. So a free market today is a centrally planned economy, but it’s not planned by government. The planning is shifted out of government to the banks.

RA: …and Wall Street.

Michael: Wall Street in the United States, and the city in London.

RA: There can be no bigger failure, as we sit here, when you look at the actions of central bankers. When you talk about the real economy, where next for them?

MH: It’s hard to take people who have a tunnel vision and expand it, because they’re like the old-time Stalinists or religious sectarians. Their minds are absolutely set, there is no way you can have a reasonable argument with the Federal Reserve economists, because they know who appoints them: the Wall Street institutions. They’re drawn from these Wall Street institutions. It’s also the financial sector that endows the universities and the business schools. Hardly by surprise, these schools teach that there is no such thing as unearned income, no exploitation. They teach that the financial sector is the most productive sector in the economy, instead of a burden that should be subtracted from GDP, because it’s an overhead that the rest of the economy has to pay.

This was the basic classical economics of Smith, Ricardo and John Stuart Mill. They all looked at what the landlords got – and what banks got – as socially unnecessary overhead. The economy could function technologically without a landlord class, without a banking class. But there was a political malformation of markets.

Market economists take the status quo for granted. They assume that “the market” is what exists, as if this has occurred naturally through some kind of Darwinian evolution. As Margaret Thatcher said, “There Is No Alternative.” That’s what central bank theory is like: there is no alternative to central banks serving their clientele, the commercial banks.

RA: So let me suggest that there is an alternative, and get your thoughts on this, because this idea has run its course. People are now starting to wake up and say” enough.” You’ve written a lot about unearned versus earned wealth – unearned wealth or unearned increment, if you like – and it goes back to a man called John Bates Clark. He was one of the first neoclassical economists. I think I’m right in saying that. Just talk a bit about him, he said there was no differentiation, is that right?

MH: Yes.

RA: And that seemingly innocuous proclamation has had huge effects.

MH: By the 1870s and ‘80s there was a lot of pressure in all countries, especially in the United States, by socialists on the one hand and followers of the journalist Henry George on the other. George wanted to tax away the land’s economic rent and use that as the tax base, instead of taxing labor and industry. So John Bates Clark wrote about the philosophy of wealth, and said “There’s no such thing as unearned income. Everything that the economists before me have written is wrong. Everybody earns exactly what they contribute to national product and that means that whatever their earnings are will be added to national product.”

I’ll give you an example of where this leads. About two years ago the head of Goldman Sachs, Lloyd Blankfein, said that Goldman Sachs managers were the most productive people in the American economy, because they earned $22 million a year in salary – not counting their stock bonuses. What he meant was that all this $22 million is added to GDP. If productivity is measured by the income received per laborer, and if by definition, everything you’re paid to Goldman Sachs is in addition to GDP instead of a subtraction from it, then we at Goldman are the most productive. That is their tradition that John Bates Clark got us started along.

RA: No wonder he got funded!

MH: He got so well-applauded by the bankers, landlords and the FIRE sector that the American Economic Association established the John Bates Clark Award for economists under 40 years old who were writing in this anti-classical tradition. They call it “neoclassical” to erase the fact that they are the exact opposites of classical economics.

RA: Wow and that medal- or that award?

MH: It goes to free enterprise right-wing economists to legitimize their trickle-down pattern talk. There’s been a pretense that the only legitimate economists are people with a tunnel vision who say it’s OK to give Wall Street whatever it wants. Their line is that governments shouldn’t regulate prices, they should not throw the bankers in jail, they shouldn’t even regulate consumer protection, because that’s added paperwork and only adds to consumer prices. If you get rid of government, everybody will be happy. So the 1% say: “Trust us we’re job creators.” In fact, of course, they’re job destroyers when they use leveraged buyouts to take over a firm, downsize the labor force, wipe out the pension fund and outsource labor to China or wherever.

RA: Just so we’re clear on terminology, can you give us your definition between earned wealth and unearned wealth or income, because people on the ground know that there’s something wrong but they can’t define what the problem is.

MH: The classical economists said there were three kinds of unearned income: Land rent of absentee owners, that you have to pay just because their ancestors conquered the land and established a hereditary rental claim. Monopoly rent by a monopolist, and natural resource rent by mine and other owners. They all charge a price that’s much more than the cost of production justifies. Finally, there is interest and financial charges. These are technologically unnecessary. We have economies that share the same technology all over the world. So essentially, “economic rent” was the term that the classical economists used for unearned income. It’s the excess of price over actual cost value.

How much does a product, a pharmaceutical, for instance, actually cost? If it costs $2 to make a pharmaceutical pill and they sell it for $200 ,that difference of price over value is “rent.”

RA: And is that called the economic rent?

MH: That’s called monopoly rent. It’s one of the three forms of economic rent. Unearned income is income that really is paid to an unnecessary class. They used to be called the idle rich in the 19th century.

RA: What did Veblen call them?

MH He called them the vested interests. They were the people who actually run society and they secure their status by dumbing down economics. Veblen wrote wonderful books about the decay of education, which he said was the ideology of the ruling class. The purpose of economic education is not to explain how the world works, but to give a vocabulary that will confuse people into believing that the world has to be the way it is, so that there is no alternative, instead of thinking about possible reforms.

Vested interests do not want the history of economic thought taught. When I studied economics and got my Ph.D. there were still courses in the history of economic thought, all of this has been dropped from mathematics now. So when people talk about Adam Smith on a pedestal, or John Stuart Mill, they have no idea that Smith actually was criticizing the rentier sector, the landlords, the monopolists and the banks. He’s made out to be a prototypical Alan Greenspan, a lobbyist for the banks and for the real estate sector.

RA: Where do you see the discipline? You touched on it earlier. Professor Luis Garicano at the LSC – when the Queen asked him, she said “Why did no one see it coming?” He couldn’t answer the question. Economics is the dismal science, and it couldn’t get more dismal. It’s a field you’ve worked in all your life. Where do you see it going from here?

MH: You can’t turn a cold-blooded frog into a warm-blooded mammal by saying “Why don’t you just warm up your blood?” It takes an entirely different entity. I don’t think academic economics can be reformed from within, because you have locked in the old vested interests. You can’t change the thoughts of somebody whose mind is trained in tunnel vision.

You have to do what was done a century ago and create a new discipline. Unfortunately, sociology has met the same fate as economics, largely at the hands of the University of Chicago. So you have to have something else: You could call it “futures studies,” or “reality economics.” But it would be a different discipline. We still call it economics at the University of Missouri at Kansas City, where I am a professor. Our graduates, however, have difficulty being hired by other universities, because in order to be hired in America you have to publish articles in refereed journals. The right wing, the monetarists, the Libertarians and neoliberals, especially through the Chicago school – they have taken over the economic journals, and will not let any alternative analysis or views be pushed.

That’s the genius of Chicago free-market economics. It’s the Pinochet principle: You cannot have a Chicago-style free-market unless you’re willing to kill or eliminate everybody who disagrees with you. Free-market economics Chicago-style must be totalitarian. There must be no alternative. This is what is happening. This is how economic education in the United States is. It’s the Pinochet model without the machine guns.

RA: Don’t they see the irony in this?

MH: No, they see their paychecks.

RA: If we take it to its logical conclusion, where does it end? Totalitarianism?

MH: It ends with economic planning shifting out of the hands of democratic government into the hands of the central bankers and the Treasury. They will do to Europe what they’ve done to Greece. They will do to the United States what they’ve done to the Baltics, who celebrate austerity and mass immigration and demographic collapse as if it is a miracle instead of economic disaster and suicide.

So you have a vocabulary that has been twisted into what really is junk economics. You have euphemisms, an Orwellian-type vocabulary of using words that actually mean the opposite. So a “free market” really means “the road to debt peonage.” You have Friedrich Hayek calling any kind of consumer protection or government protection of the economy the Road to Serfdom instead of the road away from debt peonage.

Basically, free market economics is “blame-the-victim” economics. It says that if you don’t have a job, if you owe money and can’t pay your education debt, that’s your fault. You’ve made the wrong economic decisions. If you were smarter, as smart as Goldman Sachs people, you would make money. The rich people are simply the smart people, and if you’re poor it’s because you’re dumber than the smart people. That, basically, is what it’s all about: intelligence.

Well you don’t need intelligence to make money. All you need is greed, and that’s not taught in business schools. That’s why Goldman Sachs and other Wall Street firms, already 50 years ago when I was on Wall Street, said that the best people they recruited came either from the Brooklyn slums or the Hong Kong slums. They’re the best foreign exchange traders because all they want to do is make money. They’re the people that Wall Street investment banks want. But that has nothing to do with being smart. It’s a tunnel vision, a short termism. The economy, by living in the short term, is destroying itself in the long term.

RA: Let’s end on a positive. Where do you see a hopeful scenario? Where do you see change coming from? I know you’re saying we’re locked into this. It’s sort of structurally determined. But there must be glimmers of hope that you see?

MH: In the end there’s only one way of solving the problem. That’s to write down the debts. There is no way today’s debts can be paid. The only way to free the economy from these payments for debt service is to write down the debts. That’s what finally happened in Rome. That was what Jesus’ first sermon was all about, wanting to restore the Jubilee Year.

RA: We know what happened to him.

MH: That’s what finally happened in the 1920s when Germany and the allies were pushed into depression by German reparations to the allies, for them to pay their Inter-Allied war debts to the United States. Finally these were all cancelled in 1931.

So after about a decade of depression, there will be enough people who will finally see that the debts have to be written down. But there’s not that awareness yet, because there is a feeling that money doesn’t matter – that debts don’t matter, and the economy is really just barter. Unless people think of debt in terms of the whole economy being wrapped in a context of debt and property ownership and rent extraction, they won’t realize that’s what’s being sucked out of the economy doesn’t have to be. It doesn’t have to be this way.

RA: So you’re saying there is an alternative.

MH: Yes, there is alternative.

RA: Flesh out that view.

MH: Well, it’s the view that classical economists had. They were reformers. Their idea was to keep natural monopolies – including health care and pharmaceuticals, water and electricity – in the public sector. You’d have a public alternative to provide basic services and basic needs that cost.

The first business professor in the United States, Simon Patten, said that government infrastructure is a fourth factor of production, alongside labor, land and capital. But unlike private capital, it doesn’t aim at making a profit. It aims at supplying health care and water, and banking either at cost or at a subsidized price or freely. That’s how you make an economy low-cost. If there is a natural rent in some land sites, you use that as a tax base. You tax economic rent, not labor, not industry. Basically, you tax free-lunch income. You don’t use a tax system that adds to cost instead of subtracting from costs.

RA: If you approach the economy as a design job and say “This is the economy we want to design.” The social and economic indicators are going to start to go in the right direction. You’ll have a completely different set of indicators. But we are diametrically opposed to that system at the moment?

MH: Yes, that’s correct.

RA: And really, because you’ve written ‘Killing the Host’, which, by the way, is excellent and what a contribution. This depicts it because the parasite is now so big, the host is labouring badly under that.
MH: The key of parasitism in nature is not simply that the parasite takes the life blood of the organism. In order to do that, the parasite has to take over the brain. It takes over the brain of the host to make the brain think that the parasite is actually part of the host’s bod, and even the baby. So what you have today is an economy that imagines that the financial sector and the Donald Trumps of the world and the real estate speculators are part of the economy, part of GDP instead of being an overhead, a tumor. You can get rid of the tumour, through a proper tax policy and by having a public option as an alternative.

RA: If you were going to run I’d vote for you.

MH: I don’t think I could raise as much money from Wall Street as the other side.

RA: Why not? You don’t think they like this message?

MH: Well, politics is not about reality. You saw what happened to Bernie Sanders and all the stuff that’s come out from WikiLeaks about how the election was fixed against him. The delegates that Hillary won at the beginning were in the South, which are Republican states. So she won the Republican states as her major backers within the Democratic Party. That means that the candidate of the Democratic Party was elected primarily both from apparatchiks within the party and by Republican states. That’s the irony of all this.

RA: Congratulations on ‘Killing the Host’

MH: Thank you very much.

RA: An excellent book.

MH: Just finishing the sequel to that and the companion volume, which is “J for Junk Economics”-

RA: Tell us about it.

MH: It basically shows how the economic vocabulary has become Orwellian. The words that economists use have become the opposite of what they were really meant to be. “Free-market” now means the opposite of what Adam Smith meant by a free market. Right down the line, you have junk economics, which is basically neoliberalism, the Chicago school. It’s a fictitious picture of how a hypothetical universe might work if the 1 percent were really job-creators. If they really ran the economy in order for a long-term growth, instead of in the short-term to make money for themselves and take the money and run. So it confuses a good economy with a bad economy. Reality economics with desert island economics, which is the kind of individualistic asocial, almost autistic economics that passes for economic education today.

RA: So you’re not surprised that Greenspan and Ayn Rand were good mates and actually that she talked to him about sociology. You’re not surprised about that?

MH: When I worked on Wall Street for Chase Manhattan, he was brought into a study I was doing on the oil industry. Chase was very worried that just his presence on the study would discredit it, because he was notorious for saying whatever a client asked him to say. He was a lobbyist already in 1966 when this occurred. So I was given the job of firing Alan Greenspan from the study, and removing it, because they said “He’s such a little bastard, we don’t want him to come after us. You’re a little guy, you’re in your 20s, he doesn’t even know who you are. So give them the information that we know he faked the figures, we know where he faked.”

I was given the job of finding where he faked them from and writing it all up in the small print. So when Greenspan finally left the Federal Reserve, the BBC had on its screen for that day, “After me, the deluge.” with Michael Hudson because they asked me what do I thought of it. He left the economy knowing he was jumping ship, just like investors are jumping ship today from the economy that they’ve driven into debt deflation.

RA: Thank you very much. It’s an awesome book and so what’s coming up is ‘J for Junk Economics’.

MH: Yes that’ll be out later in January. I’m just going over the proofs now and ‘Killing the Host’ was just translated into German in late November by press.

RA: It’s always nice to shake the hand of a man who has fired Alan Greenspan.

MH: Thank you.

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  1. Jim Haygood

    It’s always nice to shake the hand of a man who has fired Alan Greenspan.

    If only Michael Hudson’s takedown of Greenspan had been flashed on the Times Square news ticker instead of buried in the “small print,” it would’ve added several cumulative percentage points to GDP by now.

    A glowing review of a new hagiography of Greenspan, posted in Links a couple of days ago, totally glossed over Hudson’s personal knowledge that Greenspan was an undistinguished lobbyist in the Sixties, with an abysmal track record of “wrong way Charlie” calls on the economy.

    1. John Wright

      Pierre Rinfret went to grad school with Greenspan and thought little of him.

      When Greenspan was tapped for the Fed job, Refret tried to hire employees of Greenspan-Townsend consulting.

      He found there were no employees to hire and no clients for the previous 6 months.

      Greenspan was surviving by giving speeches to conservative groups.

      For background on Rinfret (and Hudson as well), see http://jessescrossroadscafe.blogspot.com/2012/05/michael-hudson-firing-alan-greenspan.html

      But Greenspan was possibly chosen, in part, for the Fed because TPTB knew he was nearly broke and would do what they wanted.

      In perhaps the best call of his career, Greenspan did know when it was time to get out and book that “Age of Turbulence” book advance.

    2. Anarchus

      For three years in the 1990s, I worked for a guy who’d been one of Townsend-Greenspan’s institutional sales reps in Manhattan way back in the day . . . . . . he said that all Greenspan ever did was parrot conventional wisdom, and didn’t even do that well.

  2. Carolinian

    The purpose of economic education is not to explain how the world works, but to give a vocabulary that will confuse people into believing that the world has to be the way it is, so that there is no alternative, instead of thinking about possible reforms.

    Michael Hudson is so good! In how many other areas do the intellectual class see their role as explaining and rationalizing current arrangements? We live in a scientific age but still have a priesthood. The pope hands Napoleon the crown, and then he crowns himself. There’s not a lot of doubt about who’s running the show. Or as Hudson says

    It’s the Pinochet principle: You cannot have a Chicago-style free-market unless you’re willing to kill or eliminate everybody who disagrees with you. Free-market economics Chicago-style must be totalitarian. There must be no alternative. This is what is happening. This is how economic education in the United States is. It’s the Pinochet model without the machine guns.

  3. Plutoniumkun

    Illuminating as always.

    I was sorry to read that about Heilbronner, his book was the only text from my days studying economics that I truly enjoyed.

  4. BecauseTradition

    They meant a market free from rentiers, free from landlords, free from banks – so that where everybody got only what they deserved and produced. Michael Hudson [bold added]

    Then why do we subsidize banks with deposit insurance instead of an inherently* risk-free Postal Checking Service available to all citizens, their businesses, etc.?

    Michael wants to regulate banks. Shouldn’t we de-privilege them instead? How else to avoid being an accomplice to theft?

    *Inherently risk-free since it would make no loans. Sorry, no positive interest either but at least the rich could be subject to negative interest and that redistributed to individual citizen accounts with less than, say, $250,000.

  5. Moneta

    It’s so easy to talk about debt write-offs and complain that they did not happen fast enough but in real life it would bring on a whole new set of unintended consequences…

    What about the individual who decided to take on a 600k mortgage which becomes upside down vs. the other individual with the same income who decided to limit himself to 300k pays it all off and invests for retirement.

    Then you get a debt jubilee and the overextended gets to keep his house and the conservative one ends up with a more modest house and his portfolio getting downsized because of the debt write-offs. That’s another form of unearned income.

    The debt jubilee does not necessarily equal justice which is essentially what many are looking for. That’s why there has to be an extended period of debt indigestion and failures before jubilees… the suffering makes it more earned.

    Huge changes that happen overnight are usually not a good thing.

      1. Moneta

        Yes QE for the people.

        The thing is that a lot of real estate was built that should not have been built and other stuff… This new money would surely go to prop up something that should not be there.

        QE for the public is something that would need to be planned properly or would just blow new bubbles… not an overnight endeavour.

        The debt that can not be paid will not be paid but there is no quick fix… we are exactly where we should be in the cycle… clueless and deliberating.

        1. BecauseTradition

          or would just blow new bubbles…

          Steve Keen would limit new credit creation to preclude that. Another alternative is to de-privileged the banks since that would be very deflationary by itself and thus would provide the spending space needed for an inflation-free fiat distribution.

        2. BecauseTradition

          The debt that can not be paid will not be paid but there is no quick fix… Moneta

          It’s only fiat that is owed and that is cheaply created. The trick is to combine the new fiat distribution with de-privileging the banks for no net purchasing power creation.

    1. a different chris

      Yeah but the fairness thing only ever works out in our heads.* If the 600k housed idiots can’t spend a dime, then the 300k sensible guy might just be the one that loses his job because of it. You obviously speak as one of the few whose “portfolio” has any significance at all when compared to their job.

      And anyway, the gummint can just take a lien so the 600k guy doesn’t actually profit when he sells (another version of “coverting it to a rental payment.” So he resides in a 600k instead of a 300k house, I can live with that. His commute probably sucks. And if the government fixes the economy down the road maybe they pocket 200k when the house is sold – helping all us 300k people. Not bad.

      BTW, I’m one of those “paid off 300k” people, of course I bought a long time ago when said property wasn’t worth 1/5 that. My kids need a better deal than what they’re looking at now.

      *Remember, at the base of this are people that have “jobs” where they get paid 22million/year for screwing everybody, so the whole thing is so badly bent away from “fairness” that might as well give it up for now.

      PS: it’s also easy to talk about other’s suffering, isn’t it?

      1. Moneta

        Well here in Canada those living in 600k houses vs. 300k have half the commute so not sure many would be happy with a jubilee.

        You introduce a lot of variables which show how murky the waters are. This makes me even more convinced that a debt jubilee would just create a whole new set of problems.

        A lot of investments that have been made over the last few decades are money pits that do not need more money injection. A debt jubilee might just prop up what needs to go.

    2. TedWa

      The idiot that takes the $600k mortgage has to scrimp and save to make the mortgage payments while the $300k guy has an easier life and lives the life of a rich man. In a debt jubilee – would you think the $300k guy is more deserving? He aimed low to take it easy while the $600k guy didn’t. I think it’s fair that both debts be forgiven. So then you mention that the $300k guy has a portfolio while the $600k doesn’t. Is it fair to trade off a relaxing life for 1 of hardships? I think it is fair. The $300k guy gets the tax write-offs while the $600k guy has increased taxes for the forgiveness of debt. The $300k guy maintains his lifestyle and so does the $600k guy. I think it’s fair and just.

    3. LA Mike

      Hi Moneta,

      I think this example is missing a few factors.

      The $600K house is now written down to what, $400K?

      If that’s the case, the $300K house is also written down to $200K. Why no adjustment for that guy?

      Next, I don’t understand how the $300K guy just “pays it all off” so quickly. How is that the case? If we’re doing any sort of apples to apples here, we should assume $300K is in a 20 or 30 year mortgage just as the $600K. We should assume the same number of payments left.

      The $200K guy is now sitting really pretty with some seriously comfortable payments. $600K is doing better, but what’s his job situation? What can he really afford in terms of payment? Was he in an ARM? If so, even $400K might now be too much for him.

      Finally, as “a different chris” wrote, who says that everyone gets to keep the gain from a write down? Perhaps the gain is only based on purchase price. And from there, give everyone the option of accepting the write down or not. Maybe $300K didn’t need his?

      I think there are a lot more variables/solutions than what you presented.

      1. Moneta

        Mortgage written down, not house. Why would a lender renegotiate and write down a loan in good standing?

        You’re looking for complications. There are plenty of households in the same income bracket some opting for jumbo mortgages, others for average.

      2. Moneta

        The one who can’t afford his mortgage should move out and find a place he can afford.

        Let prices drop so the young ones can buy something…

    4. H. Alexander Ivey

      ‘What about the individual who decided to take…’

      F* that. What about the bank who decided to made the loan? Huh? Ever thought of the other half of the contract? What about the lender’s responsibility to be responsible and professional? What about the lender taking the risk of making the loan in the first place?

      Seems to me that too many “bankers” today are simply loan sharks.

    5. swendr

      This is the old “widows and orphans” argument updated for modern times. Anyone living, even partially, off of economic rents is complicit. Just because they’re small fry doesn’t absolve them from contributing to the problem. It would be like asserting that we cannot make laws against theft because some steal in order to eat.

  6. a different chris

    Great stuff, great effort transcribing it.

    >Baltics, who celebrate austerity and mass immigration

    mass emigration, of course.

  7. TG

    Well said as usual. Kudos!

    I must however suggest that there is an even deeper blindness on economic issues than that concerning debt, and that’s the almost total rejection of the views of Franklin and Malthus and Mills and Keynes and Ma Yinchu on demographics.

    Finance and debt etc. are indeed powerful – but they are not all powerful. Even with optimal finance the real economy is still made up of flesh-and-blood human beings and they have finite abilities and require non-trivial physical resources. The rich like cheap labor and have been pushing not just for corrupt finance, but for ever more people. Because when there is more land than workers, workers do well and landowners are squeezed (unless there is chattel slavery but that’s hard to maintain). But when there are more people than land (or other resources) then workers become disposable peasants and the landowners become rich.

    But we can’t talk about the root causes of poverty in places like Haiti or Bangladesh or Syria because that would make it obvious that mass immigration into a rich country is a weapon aimed at workers, and that might result in policies aimed at moderating the rate of immigration into rich countries, and stopping pro-natalist policies in third-world countries, which could result in a tight labor market, and that might prevent a rich person from buying a second yacht this year, and that would never do. And so there is an almost total ban on discussing the economic effects of demographics in any intelligent way.

    We may not find it politically acceptable to believe in the physical world, but the physical world still exists.


    1. BecauseTradition

      But when there are more people than land (or other resources) then workers become disposable peasants and the landowners become rich. TG

      Along with a ban on usury (except from foreigners) and periodic debt forgiveness, the Old Testament also commands land redistribution every 50 years (at most since the land could be redeemed earlier for the price equivalent of the number of crops till the next Jubilee) – see Leviticus 25.

      The irony, of course, is when believing Christians and Jews oppress their own countrymen – perhaps from ignorance since the OT is currently passé, conveniently so for the bankers sitting in the pews.

  8. Jim

    So what is the role of the state in neoliberalism?

    Michael Hudson says above:

    “So a free market today is a centrally planned economy, but it is not planned by government, the planning is shifted out of government to the banks.”

    Philip Mirowski has stated:

    “Neoliberal doctrine embraces the project of retasking the strong state to impose the vision of society properly open to the dominance of the market as they conceive it.”

    Mirowski also has argued:

    “”The neoliberals theorized an elaborate political mobilization. They recognized early on that the creation of new markets is a political process requiring the intervention of organized power. The state would need to expand its economic and political power over time and the neoliberals themselves had to seize the state.”

  9. shinola

    Neoclassic economics is really nothing new. It is merely a codification of what might be called the Robber Barons’ view of how things should work.
    Whenever I read Michael Hudson’s (very rational) explanations of the detriments of massive, privately created debt, I am reminded of a popular song from my childhood. The refrain:

    You load 16 tons & what do you get?

    Another day older & deeper in debt

    St. Peter don’t you call me ’cause I can’t go

    I owe my soul to the company store

  10. cnchal

    Perhaps it is time to share strategies to cope with this rotten system of debt peonage capitalism.

    Any ideas out there?

    At the risk of offending any one, don’t have children. That is the start of the road to serfdom.

  11. susan the other

    Michael Hudson might become mainstream soon because everybody is beginning to see what went wrong. Today the automaticearth.com cross posted from the Guardian an article explaining the viewpoint of Wolfgang Struck who believes these days are the death throes of capitalism because TINA. TINA actually killed capitalism when it killed labor. Karmic. And Society was taken over by the financiers. So no matter how we forgive the debt, the economy will not work until we do so. The debt is, in fact, odious and ill-gotten because of economic malpractice. Debt can be forgiven in the stroke of a pen and a new economy can be designed to prevent the boom and bust we have suffered for a century. Whenever sovereign debt begins to crush sovereignty it’s time to eliminate the debt. Otherwise nothing works. Not even capitalism.

  12. herkie1

    There has been the largest increase in credit creation in history since 2008, with almost no increase in consumer prices or wages. All the money creation has gone to buy stocks and bonds into the financial sector.

    Sorry, this is where you lost me.

    In 2008 when I bought a house in April gasoline was $4.389 a gallon here (southern Oregon) and that has dropped by half, but NOTHING else has, and indeed I could go on for paragraphs just about the things that have doubled in price. Granted some of the increases are regional phenomenon other readers might not be experiencing and all of my experience is anecdotal, but in the end when the cost of living in a place like this rises by 40% in 6 years with the vast majority of that coming online after the start of 2013 then there is something SERIOUSLY wrong with monetary policy.

    I will say that two of the heaviest weighted items in the CPI here have gone up well over 40%, rents and food. Rents in this region are up by about 70% since Jan. 2013, and food is up about 45% but with many items up triple digits. The increase has been so far so fast that prior to the election I had decided that 2017 was the year I could no longer afford a roof over my head on my income, that of a 100% disabled veteran.

    The BLS/government bean counters, as well as the Fed claim there have been YEARS of zero inflation, something you are repeating in your interview above, in fact the COLA automatic raises for people on federal retirement/disability in the eight years from 2009 through the new year 2017 have amounted to less than 1% per year, and many in government felt those increases were too generous, the result is about a 40% loss in living standards for people like me. Everything else also has risen, with fast food in just the last two years up over 100% here, some places more than that. Insurance for autos up by 50%, I do not buy health insurance but that is well up over 50%, utilities up by about 40% in spite of the falling prices of commodities. You cannot even go out for breakfast now of 2 eggs potatoes and toast a couple tiny sausage links for under $14 with a reasonable tip. No juice, no coffee, just a few short years ago that cost about 7 with tip.

    I knew I was going to either be living in my vehicle this coming year or would have to relocate to a less expensive country, the election gave me the push I needed, though I would have liked to have settled down for the remainder of my life I find I am pushed economically into a vagabond life outside of the USA nearing 60 years old.

    I have a BS Finance, and was once upon a time a financial analyst and stockbroker, back when we had honest markets at least to some degree, by swallowing the Fed/BLS propaganda that there is no inflation and incorporating that into your model of current affairs in the economy you are functioning from a totally false premise. The powers that be who announce inflation numbers are flat out making them up, they are plug number designed to justify their policy priorities, which of course is to save the banks and equity shareholders in an effort to prove the “wealth effect” is alive and works just fine. And all you have to do is ignore things like the lady and her two kids next door taking in 2 other women and another kid and all three having couch surfing boyfriends in a two bedroom apartment. Or all the people in shelters, or wandering the streets with cardboard signs begging for anything, or the vast numbers of people begging on Craigslist for any rental no matter the price.

    This is where the seeds of populism come from and resulted in a fascist coup, now it is absurd to think that this clown will solve any problems, in fact within a year or two they will be exponentially worse. And that is where the seeds of REVOLUTION come from

    The USA is economically and politically on borrowed time. I give less than one half of one percent chance it will survive a Trump presidency, and that would require huge scientific leaps forward in free energy and robotics in which living standards across all sectors of society are lifted dramatically, so OK a bit less than zero chance then. I try to be an optimist, but the USA is going to fail and break up the way the Soviet Union did in 1991, or martial law will be established with suspension of elections and the constitution. The wall? It will be for keeping people in not out. So I am out of here before the Orange deity of the far right fascists gets into office.

    1. sierra7

      Wonderful comment!
      Didn’t realize there were two of us!
      It’s like “formal economics” have totally forgotten about “behavioral economics”!
      I’m well up into the “late” years of life; Well remember struggling early on with a family with 7 wonderful children; but, being able, more or less to manage on almost nothing……
      Today our society is thrown into the “gladiator ring” to fight or die while a small percentage of the population can bleat that they themselves present the only stage version of survival…….compete or die.
      Well ok, that’s well and good but what are the rich going to do when the rabble come for them?
      I also live in the “greater Silicon Valley Area” of the country; truly a wonderland of unreality……
      This country (and the globe) are in deep, deep doo-doo because we have crushed true education and have pushed too much of the system onto the greed train. And the surviving companies that “serve” the greater unwashed have learned how to buy off the political system, pile fee on fee for simple transactions. There is so much economic “cheating” going on; downsize packaging and raising prices…..feels just like inflation but too many economists will not label that activity as such but at least they call it cheating.
      Good luck on your life.

  13. dao

    There will be no debt jubilee and the debts will not be written down. Take a look at Greece. 25% unemployment, wages cut, pensions cut, taxes increased, public assets being sold off to creditors and no recovery in sight. Oh sure there were protests and strikes and referendums and so on. But in the end, there were no pitchforks.

    1. MED

      Maybe there is something in the plan for the USA, which we don’t know about. Don’t what the banks to lose

      “President Obama and Treasury Secretary Tim Geithner insisted that Angela Merkel and French President Sarkozy pressure the IMF to go against the opposition of its own staff and join the European Central Bank’s hardline demands that Greece impose austerity. Geithner and Obama warned that if Greek bondholders were not paid in full, some giant U.S. banks would lose heavily on the default insurance contracts and derivatives they had written, and their losses could spread “contagion” to Europe”.

  14. manymusings

    Regarding the notion that the $300k/$600k situation exemplifies another set of problems, or unintended consequences, of a jubilee. What’s interesting is the shift from economic principles to ethics, from a cause-and-effect analysis to a justice analysis. Without notice, the problem is redefined from one of pure economics to one of morality or justice. This reminds me of the Geithner pivot that so infuriated me at the time: we must bail about the banks he tells us, dollar for dollar, to “save” the economy (to save “Main St.”!). Collapse would be catastrophic, leading to unstoppable damage and if it all seems counter-intuitive and blatantly unjust, that’s just because we don’t understand all the complicated, high-finance factors at play and, well, leave the thinking to the experts and don’t clutter it up with any simpleton (or petty and resentful) moralizing. On the other hand, bail out homeowners? There we get no economic explanation but a moral one; doing so would create “moral hazard” or moral chaos of the sort described by the $300k/$600k scenario (responsible spenders penalized and the irresponsible rewarded). Suddenly the technocrats supposedly fixated on nothing but saving the economy are concerned about common people getting anything they don’t “deserve” for the sake of saving the broader economy. Why is the moral question either not relevant, or answered differently, when it comes to unjustly enriching wealthy speculators as opposed to an average homeowner or consumer? The irony is that, as MH describes, it is precisely double-standard — making creditors whole without relieving the debtors — that perpetuated the unsustainable “overhead” crisis that plagues our economy. So it was this *moral* double-standard that blinded the purely economic calculus, even if the Geithners tried to dress it up in econ-babble (something about improper “incentives”). (And the economic/moral hypocrisy seemed to be matched by a legal double-standard as well: No haircut for banks in the bailout, we were told, because of the inviolability of contracts (when has that worked for pensioners?). And then of course the bailed-out creditors were left with their claims to the underlying assets, free to sally forth and foreclose on homeowners left holding the bag — often, as we learned, without even being required to furnish a proper title (only the basic premise of property law, but why trifle with details).)

    But to emphasize my main point: MH doesn’t seem to offer the jubilee solution as “justice” for existing debtors, but as a necessary condition to establish a functional/sustainable economy. Of course it also seems more just than the current approach; but that isn’t the point, at least here. This seems critical, to maintain the distinction between two relevant but different analyses — what economic tools/actions will bring what results, and what is just. Otherwise we risk missing the neoliberal sleight-of-hand, i.e., policies benefiting rentiers to the disadvantage of everyone else are sold as “good economics;” but often moral assumptions are built in about what sorts of activity are “deserving” or “earning” or “productive” and wielded negatively ONLY against the non-elite. In fact, MH uses only the term “earn” — it’s the rest of us who immediately and instinctively equate earn with “deserve.” He’s talking about how to keep the FIRE sector from leeching off the real economy — it is not, in itself, a moral argument, and I think keeping it so is the way ultimately to win the argument. Same with questions of distribution and use of resources — clearly moral questions, but helpful to keep the “what actions bring what results” analysis separate.

    1. BecauseTradition

      Good points.

      And, btw, the system is designed to drive people into debt since to not “borrow” is to be left behind by those who do “borrow.” (I put borrow in quotes since banks don’t actually lend, except to each other.)

    2. Moneta

      Without ethics or morality, the elite has no reason to care about the little people.

      Without ethics or morality, debt jubilee will accomplish little.

      Neoliberalism feeds on this lack of morality and total focus on Econ.

      1. manymusings

        Neoliberalism feeds on its own *selective* use of morality — shaming debtors and cultivating sharp resentments over the “deserving” and “undeserving” — which is also the premise of the $300k/$600k complaint, as far as I can tell.

        Not clear how the $300k/$600k example is responsive to MH’s actual argument (or to mine, for that matter). I take MH to be saying that, by design, the FIRE sector saps the real economy; that debt (specifically, interest on debt) has outpaced the real economy; and that treating FIRE as inherently productive masks these facts and provides cover for policy prescriptions that only perpetuate the problem, e.g. paying off creditors. The only way out of the spiral is to write down the debt. The $300k/$600k example doesn’t address these points, but instead claims that writing down the debt would be unfair, because instead of rewarding smart and responsible people it would reward their foolish and irresponsible neighbors. If so, so what? does that mean it wouldn’t achieve its purpose? And why not? None of the snippets of explanation really makes sense. This idea that debt forgiveness would “prop up things that should go” seems to assume large swaths of the population are out there wheeling and dealing in investments and not just trying to get by. There seems to be no question among stats and indicators that nearly everyone is just trying to afford basics — food, shelter, healthcare, transportation (are those things it would be “bad economics” to “prop up”?). Likewise, the idea of needing more “debt indigestion and failures” and more “suffering” in order to “earn” a jubilee makes no sense. Sure, a jubilee ideally would be planned/executed in a way that is consistent with its purpose — whoever said it wouldn’t — but that’s a different thing than worrying about who deserves what and prolonging an economic death-spiral purely for the sake of suffering, or just desserts. This is a prime example of how a solution that isn’t punishing toward common people (and merciless toward everyday misfortunes or mistakes) is believed to be unworkable because of potential flaws (and the inverse – any solution that hammers us enjoys a presumption of credibility or even inevitability.

        1. Moneta

          My point is that with no sense of fairness, I don’t believe you get a middle class. You just get more wealth concentration.

          If 2 people working the same job end up with very different outcomes, you end up with resentment and other issues.
          This debt jubilee would end up rewarding those living a more highly energy intensive lifestyle when it needs to be shrunk.

          IMO the fact that many don’t see an issue with the 600k/300k example is a sign of how people do not care how their actions affect the others. The middle class will not get anything if it does not unite and care about its peers.

          Even the elite has a code of ethics among themselves and this code does not work for the little people of America because in the mind of the rich if the little people of America can’t spend there are 5B other little people who can replace them.

        2. Moneta

          I see it over and over… with money it’s typically easy come easy go. You give that 600k case a break and he will not instantly become a good money manager. He will keep on doing what has worked for him which are things that end up destroying the economy particularly with a debt jubilee where there would be millions like him getting rewarded for destructive behavior.

        3. Moneta

          I will finish by saying that this whole thing will go either way:

          – debt write-offs
          – huge printing

          I believe option 2 I’ll be used but there will probably be some fabulous bankruptcies down the road. It will probably help the young but not the 50+.

  15. Gaylord

    Not only is the real economy subjugated by the financial system currently in place, but the physical environment (our only viable habitat on earth) also is neglected. Those with the power and wealth are holding onto their privilege in what is nothing short of a suicide pact.

  16. Larry

    Yves is correct, there is great new Hudson information in this interview. I first became aware of Prof. Hudson through his writing at Harper’s and by attending the American Monetary Institute conference organized by Stephen Zarlenga. Hudson distills the essence of how our economy has been rigged to distribute profits to a limited set of beneficiaries. Trump leveraged this awareness in the population to his own reward, without ever acknowledging the roots of the problem. It was a shrewd play by him, and reminiscent of Obama’s empty promises of “hope”.

    Despite the elite having no concern other than making sure their own boats are gilded and not taking on water, I remain continually amazed that the whole damn thing hasn’t caved in on itself. QE and mild public stimulus averted an economic disaster of epic proportions. But Hudson’s continual line of debts that cannot be repaid won’t be paid has to come to the fore. I simply pray that when it all comes to a head, we have a solid political movement akin to Bernie’s campaign to steer the country in the right direction.

  17. EoinW

    Ethical thinking or economic thinking is quite thought provoking. Almost as valuable as Mr.Hudson’s latest gem. I can see points for and against each but won’t get into that. I’m not sure the 1% have any ethics or morality besides making more money. That’s my bias against them. As a natural saver, I’m also in tune with moral hazard. Again that’s just my personal view and it coincides with what I want to believe in. Thus we come to the problem that all people impose their personal agendas on their thinking. Objectivity becomes illusive, finding common ground virtually impossible. Nevertheless the biggest problem continues to be that 5% who benefit from this system have all the say, while the other 95% get to participate in online debates. That 5% – or 1% – are not giving up the power they have. We can have faith in Big Brother(as most Canadians still do) but is it rational to trust the people waging war on our standard of living to look after us indefinitely?

    Where do we go from here? Raul Ilargi makes it clear that our current lifestyles are unsustainable. Not just the person in the $600,000 home, also the person renting an apartment. Why would anyone want a debt jubilee when such a jubilee aims to save the economic system and our current unsustainable life style? I don’t mean to be critical of people wanting to save things, or buy us more time. That’s certainly in my personal interest. Is it in the interest of future generations or the planet? Frankly we’ve had it very easy. We’ve been spoiled like no other people have been in human history. Most of the human misery that does exist in our society is self inflicted(excluding those unfortunate to have serious health problems). Is it not time to pinch our nose and take one so that people might be fractionally as fortunate as ourselves 100 years from now? But I’m making moral observations on an economic problem. The number of people who would disagree could be countless. The number who will act on such thinking: zero.

    When all is said and done I fall back on one default position. Elites have run all our societies throughout the history of civilisation. The ones running ours today will either continue to hold things together or they will fall apart. Our views really aren’t part of the equation. Plus, to be brutal, this society passed its event horizon some time ago. We may think we offer solutions but, really, we are only usin bandages to stop internal bleeding.

    1. manymusings

      I see economic and moral thinking as inseparable — or more precisely consider that all economics is normative, even if the tendency is to try to obscure underlying moral assumptions for the sake of “objectivity.” The value is in parsing that out — what is purely a matter of cause-and-effect, this action yields this result, and what issues from moral or philosophical assumptions …. in the end, that sort of unraveling might be an ad infinitum exercise, but still worth doing to smoke out agendas (e.g., neoliberal bias).

      Agree with the broader observation here — a debt write-down isn’t a cure-all. We need a massive re-think of concepts like “progress” and “growth” and “choice” fetish, and a mass acceptance of more modest and restrained lifestyles. But that won’t happen, and in any case it’s too late.

    2. BartLK

      I hate to say it, EoinW, but I pretty much agree with you as to where we’re at. The system is beyond unsustainable, it’s condition is irreversible and as a father that breaks my heart. Trump’s election is the final fracture. While all people do have personal biases and agendas that inevitably influences our thinking, our ability to think critically—which includes metacognitive competence and self-criticism—is a sort of natural corrective, maybe put into place with the development of our frontal lobes, which can be shut down in large portions of a population due to a variety of reasons. A society functions by recourse to a shared set of values, vocabulary, and principles that establish a reference frame for public discourse. Extreme ideologies in effect ignore the rules and rely on force or institutional power to impose rules that only benefit the chosen few. In our world, it isn’t brown shirted thugs or secret police and informants, it’s the more subtle imposition of full-saturation commoditization and penetration of extractive capital into every phase of life. The rest—encroachment of civil liberties, exhaustion of social remedies for large portions of the population—follow from that and the power mongers, with fewer and fewer restraints, game the system even more, creating a positive feedback loop that ends, as Plato envisioned in his critique of democracy (whose substance I don’t share but give credit where it’s due), in tyranny. Given the bizarre nature of US politics and society—narcissistic self-absorption of which celebrity worship is one symptom, tremendous excess wealth and self-indulgence, paranoia and fear of the “other”, militarization, etc.—Trump/Bannon/Ryan/Goldman Sachs happens to be the form our tyranny takes. No society can survive when a significant faction rejects the language, values, and principles that the society was founded on, especially once that faction seizes power. The shared reference frame represents the collective corrective to runaway personal agendas. Our center hasn’t held and the rough beast slouching towards Bethlehem now resides in Washington D.C. Heaven help us all because I’m not sure we’re up to the job.

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