Michael Hudson: 10 Years Since Lehman Brothers Bankruptcy – Did the Economy Really Recover?

In this Real News Network segment, Michael Hudson revisits some of the issues he discussed in a post earlier this week on the implications of the crisis.

MARC STEINER: Welcome to The Real News Network. I’m Marc Steiner. Great to have you with us once again.

On September 15, 2008, the financial meltdown began with the bankruptcy of the Lehman Brothers. That was 10 years ago. The shock waves that hit the economy threw 9 million families out of their homes who could not afford to pay their rising mortgages. So Congress and the president in the 1990s killed Glass-Steagall, written in 1933 to save us from the excesses of the financial industry. And then Congress gave us Dodd-Frank in the wake of the 2008 crisis that bailed out Wall Street, but not America. And now Trump seems to continue the process with killing Dodd-Frank and completely turning over the keys to Wall Street.

Our guest today says in part we must wipe out debt and not bail out the banks. So with that, let me welcome back to Real News Michael Hudson, research professor of economics at the University of Missouri Kansas City, and a research associate at the Levy Economics Institute at Bard College. His latest book is J Is for Junk Economics. Michael, welcome, good to have you with us.

MICHAEL HUDSON: Good to be here.

MARC STEINER: So let’s start there, with this whole idea of what we did wrong in 2008, why we got it wrong, and what we should have done, from your perspective.

MICHAEL HUDSON: Well, you’re talking about September 15. And last weekend, the 10-year anniversary, all that you read in The New York Timesand other newspapers was a celebration: We did everything right. We bailed out the banks. There is very little discussion of the fact that this was a disaster for the economy. Nobody has related the fact that we bailed out the banks on their own terms to the fact the economy has not recovered. People simply talk about how slow the recovery has been since 2008.

To put this issue in perspective, almost all of the growth in GDP – the measure they look at – is taken the form of higher bank earnings, which they call financial services, meaning penalty fees, late fees, and interest rates over and above the banks’ cost of funds; and rising rents that homeowners would have to pay themselves if they rented instead of owned their homes. You mentioned 9 million homeowners lost their homes. They now have to rent. Rents are rising, debts are rising. Corporate debt, municipal debt, and student debt are way higher now than 2008.

Most of this is because of the way in which President Obama doublecrossed his voters and said, I’m not representing you, I’m representing my donors. He invited the bankers to the White House and said, don’t worry, folks, I’m the only guy standing between you and the mob with pitchforks. Just like Hillary called Donald Trump supporters “deplorables,” he called his supporters the mob with pitchforks. And he stuck it to them.

In my book Killing the Hostyou have Barney Frank saying that he got the agreement of Secretary of the Treasury Hank Paulson to write down the mortgages to realistic charges: namely, number one, what the mortgage borrowers could afford out of their income, and number two, the carrying charge of the mortgage would be the going rent rate, which is what mortgages historically have tended to approximate.

Obama said, no, I’m representing the bankers, not the debtors. He appointed bank lobbyists such as Tim Geithner as Secretary of the Treasury. Obama basically followed everything that President Clinton’s Secretary of the Treasury Rubin recommended to him. He was handed a list of the people that Wall Street wanted to appoint. And then he washed his hands of it. Instead of doing what normally happens in a crisis – writing down the debts, and writing off the bad savings and the bad loans as a counterpart to the debts, and taking over the insolvent banks –  he kept the bad debts on the books.

There was a big argument in the administration. Surprisingly enough, the good guys were the Republicans in this. Sheila Bair was a Republican from the Midwest, and she said, look, Citibank is not only insolvent, it’s a basically a financial fraud organization. We should take it over. It doesn’t have any money. But Obama said, wait a minute, Geithner is a protege of Rubin, and he’s become head of Citigroup. We’ve got to bail out Citigroup. So what Obama did was take the banks that have been the most fraudulent, that have paid the largest amount of civil fines for financial fraud, and said, these are the banks we want to be the leaders. We’re going to make them the biggest banks, and we’re going to make them stronger. And we’re not going to forgive any loans. We’re going to leave the loans in place, unlike what’s happened for the last few hundred years and crashes.

So this crash of 2008 was not a crash of the banks. The banks were bailed out. The economy was left with all the junk mortgages in place, all the fraudulent debts. Then, to further help the banks recover, the Federal Reserve came in and pushed quantitative easing, lowering the interest rates so much that banks could make the widest profit they ever made in history – the margin between the lending rate on mortgages, 5-6 percent; student loans, 9 percent; credit card loans, 11-29 percent; and the banks’ borrowing charge, which is 0.1 percent. The banks became enormous profit centers, leading the stock market gains.

Over the weekend, the newspapers said, look at the wonderful success. The stock market’s up, the One Percent are richer than ever before. Let’s look at the good side of things. There was no analysis at all as to why the economy is notrecovering, and whether this failure to recover is a backwash of the way in which the crisis was handled- by bailing out the banks, not the economy.

MARC STEINER: Let me take a step backwards here. First of all, very quickly for us, define quantitative easing.

MICHAEL HUDSON: Quantitative easing occurs when the Federal Reserve spent $4.3 trillion on buying the bad debts and the bank assets and creating bank reserves. Essentially it’s like printing money. You’ve heard the phrase ‘money-dropping helicopters.’ But the helicopters only fly over Wall Street. So the Federal Reserve created $4.3 billion on the accounts of the banks, and let the banks get through the fact that they’d made recklessly bad loans and suffered reckless losses. Sheila Bair, in her autobiography, wrote about how Citibank was the most mismanaged bank in America. Not quite as fraudulent as Countrywide or Bank of America, but simply incompetent by making bad gambles under Prince, who ran the thing. They were bailed out and then subsidized. The larger the fines for fraud, the more subsidy they got and the bigger they grew. Crime pays.

MARC STEINER: Let’s talk a bit about what could have been the alternative. To me that’s what is a gripping story we never wrestled with, nor talk about very much. Right?

MICHAEL HUDSON: Isn’t that amazing. Over the weekend, not a single paper that I know said that there were many alternatives at the time. The alternative that was talked about, mainly by Republicans, was to say, OK, these mortgages were fraudulently written. That’s why the whole media were using the word ‘junk mortgages.’ So we should write down the mortgage to the ability of mortgagee to pay, out of 25 percent of their income, or whatever. Or, the carrying charge of their mortgage would be the same that they could pay to rent. In other words, if someone’s paying $1200 a month in mortgage payments, but for $600 a month they could rent out the identical house next door, you reduce the mortgage to the realistic value. Because the banks hired crooked appraisers and their own crooked firms to do false valuations on these loans they made in order to sell them the gullible people, like German Landesbanks.

MARC STEINER: So in 2008 some Republicans, along with some economists who were to the left of Wall Street, were talking about bailing out people who were in debt, bailing out people whose mortgages were underwater. Dealing with the question of how much we’re charging for student loans, and kind of either putting a freeze on that, or writing them down. So let’s talk a bit for a moment about what was being proposed that was not paid attention to in 2008, that had to do with one of the things you say, which is a pretty radical notion, which is that we should have bailed out the debtors, and not the banks. Let’s start there. What does that mean, and how does that work?

MICHAEL HUDSON: Suppose you had taken the $4.3 trillion, and instead of giving it to the banks to lend out mainly to corporate raiders or to speculators, or to currency speculators, you would have used this $4.3 trillion to take over or buy the bad loans at a discount.

MARC STEINER: Who’s ‘they’? Some of the federal government?

MICHAEL HUDSON: The federal government could have bought the junk mortgage loans in default for maybe a quarter of the value. Let’s say 25 percent, $25,000 for a $100,000 junk mortgage. This is essentially what Blackstone Realty did, and what private equity people did, buying foreclosed properties. The government could have bought from the banks their bad loans. And instead of foreclosing, they’d write down the loans to the realistic market price that the market was pricing the property and the loans at. The inflated housing prices would have been recalculated at the market rate. There would be a lower mortgage, there would be lower interest rates and no penalty payments.

This $4.3 trillion could have spurred an enormous takeoff. It could have left the 9 million families that were evicted in place. It could have kept the housing prices low for the country. It could have kept the purchasing power of homeowners available to be spending on goods and services. And the economy would have recovered instead of stagnating. That wasn’t done because the financial sector was running the Democratic Party’s policy and politics, not the voters.

MARC STEINER: They’ve been doing this for a long time. I mean, whether it was President Bush or President Clinton, and going after pieces of Glass-Steagall and finally killing it and the rest, which you can talk about in a minute if we have time today. But it seems to me that people would say to you in response, well, what about the banks? That’s where our money is. That’s how we get our loans. That’s who finances small businesses in our community. How can you not bail them out? How can they not be the centerpiece of this, along with us, whose homes are underwater?

MICHAEL HUDSON: Well, just about everybody who listens to this show has their bank accounts guaranteed by the Federal Deposit Insurance Corporation, the FDIC. Sheila Bair was the head of the FDIC. She was leading the advocacy to take over the banks and essentially wipe out their stockholders and some bondholders, because they were holders in a fraudulent organization, and in her autobiography she said the FDIC could have taken over Citibank. Every insured depositor would have had their money sae.

MARC STEINER: What does it need to take over Citibank? What does it mean to take over the banks, what does that mean?

MICHAEL HUDSON: That means when the bank is insolvent, the government takes it over. There were still enough assets to cover the insured deposits, but not leave anything for the stockholders, or maybe not much for the bondholders.

MARC STEINER: So one more time for us. So you’re saying- so taking over the banks would have guaranteed who, and not the bondholders?

MICHAEL HUDSON: It would have guaranteed the depositors. There was enough money in Citibank, even though it was crooked, even though it was incompetently managed, even though we know that it’s paid tens of billions of dollars for fraud. It would have wiped out the big speculators. But all of the depositors, the bread and butter users, would have been paid. The same for all the other banks. No insured depositor would have lost. But the bondholders would have lost, because banks essentially would have used their money to pay the depositors and to stay in business, not pay the owners of the banks, who were owners of a crooked organization.

MARC STEINER: So where does the money come from, then, to invest in infrastructure, in new businesses, and whatever else has to be invested in?

MICHAEL HUDSON: Well, banks don’t invest. That’s a myth. The pretense is that rescuing the banks rescued the economy. But the banks don’t make loans to the economy. Banks don’t make loans to fund factories. They don’t make loans for infrastructure. They make loans to buy assets already in place. They’re privatizing the structure to take it private, raise the rates the people have to pay for services. Essentially they lend to raiders taking over corporations. They won’t help a corporation put in more equipment and hire more people, but they’ll lend to a raider to break up a corporation, downsize the labor force, smash it up and leave it a bankrupt shell. That’s the financial management plan. That’s what they teach in business schools.

Contrary to the idea that bailing out the banks helps the economy, the fact is that the economy today cannot recover without a bank failure.

MARC STEINER: Let me stop you right there, before we go on. Let’s examine that before we have to close. So what do you mean by that? What do you mean, the economy cannot recover without a bank failure? What does that mean?

MICHAEL HUDSON: That means that the banks hold the student loan debt, the mortgage debt and credit card debt. If you leave all of this debt in place, people will not have enough money after paying their monthly nut, after paying their banks, their mortgage payments, their housing payments, all of the monthly stuff, there’s not enough money to buy the goods and services that they produce.

So the economy is shrinking. You’ve seen a lot of stores, international and national chains going out of business. You’ve seen whole streets of New York City with almost half the stores empty. They’re boarded up. The economy’s not recovering, it’s limping along. It’s called debt deflation. My book Killing the Hostdescribes how this was described in the 1930s. It’s a well-known phenomenon. But nobody talking about the rescue was saying, wait a minute, what was rescued was the volume of debt, instead of writing it down like you did in the 1930s.

So essentially we’re not in a recovery at all. We can’t get into recovery until you write down the debt. Otherwise you’re going to have the economy looking like Greece. You’re going to have austerity. Basically we’re on an austerity budget now, not so much because of tax policy but because of the debt overhead that is owed to the banks and other major creditors.

MARC STEINER: We’re talking to Michael Hudson, and it’s a fascinating conversation about what could have been, and what is not. We’re going to come right back to finish this conversation with Michael Hudson here on The Real News Network to briefly talk about what it is we can do, and where we are at this moment. Stay with us.

MARC STEINER: We’re about to continue our conversation with Michael Hudson. Michael, I want to pick up here about where we are now. Because we’re looking at Donald Trump, who is I think doing an even more radically dangerous job than anybody before him in terms of dismantling whatever regulations exist. And you’re seeing all the kind of foxes guarding the hen house across his administration. Look at the Supreme Court. We never look at the Federal Reserve and what he’s doing there. So the question I have for you is where are we right now? What are the prospects for our economy? And what are the prescriptions as you see them?

MICHAEL HUDSON: Well, essentially, Donald Trump isn’t doing much in the financial sector. He’s slashed tax rates on the One Percent. He is deregulating. But basically there is no way in which any of these micro or marginal changes can affect the fact that there’s a basic tendency at work. It’s an underlying tendency: The volume of debt in any society grows faster than the ability to pay. That should be the starting point of any analysis.

Debt grows exponentially. The interest charges grow year after year. If you have a savings account you can see it mount up, like if you have a retirement account you’ve seen the stocks go up. If you have it in bonds you see those go up. But the economy doesn’t go up anywhere near as much as the stock market. That means that the financial sector and the debt volume grows much faster than the economy can grow. So people – the economy, families – have to spend more and more of their money every month on their mortgage debt for housing, on their credit card debt, on their student loan debt, on their automobile debt, and also in health insurance. They have less and less money to spend on goods and services.

So the starting point should be how are we going to bring the debt payments back in line so that the economy has room to grow? The only way to do this in any society is by writing down debt. Germany did that in 1948 with its economic miracle. They wrote down nearly all the domestic debt. Normally the function of a crisis like the Great Depression is to wipe out the bad debts. But when you wipe out the debts, you wipe out the savings, mainly of the One Percent. And the question is, who is the government going to make its policy for? The one percent of creditors, or the 99 Percent that the One Percent holds in debt?

Well, obviously the One Percent is the donor class, and they’re writing the laws. The result of their leaving this debt in place is a rising debt-income ratio. That is, the proportion of corporate earnings that has to pay for debt service has been soaring because corporate raiders have gone to the banks, borrowed money and taken over corporations. Instead of using the corporate earnings to invest in more equipment, they’ve bought their own stock by stock buybacks that push up stock prices instead of investing.

So the financial management philosophy that we have is diametrically opposed to what’s needed for economic growth. That should be what people are talking about, because more and more economists are warning that given the rising debt ratios, there’s going to be another crisis. What we should be talking about when we look back on the anniversary of Lehman’s bankruptcy is how to handle the next crisis in a way that doesn’tbail out banks, that bails out the economy by writing down the debts.

If banks have bad debts, they’ve made bad loans. Banks used to be conservative and prudent. But if they make imprudent loans and they say, we don’t care the borrower can’t pay because we’ve sold the whole loan off to a pension fund or a German Landesbank, and somebody else is going to take the loss, you have to restructure the banking system and the financial management, and take it out of the hands of bankers to manage.

If you leave the Treasury Department and the Justice Department and the bank regulators in the hands of bankers, they’re going to loot the rest of the economy. They’re going to take everything they can. So you want someone who’s not a banker to actually do the regulation.

But how are you going to get such a group? Well, you have people like Paul Krugman who came out on the anniversary saying, debt is not the problem. He that the people are all wrong, they’re nutty to believe that debt’s the problem. All we need to do is run a bigger budget deficit, so that we can spend money into the economy to make it grow enough so that the home owners and workers will have enough extra money to be able to pay this exponentially growing debt. In other words, the whole economy should be run in order to enable it to pay off debt that it’s run up.

This is crazy. The economy should be run to help people’s living standards, not to help the bankers and the one percent who own the banks, the bondholders.

MARC STEINER: Well, Michael Hudson, this has been a really refreshing and interesting conversation. I appreciate you taking the time today as we continue to look at where our economy is, where it’s going, and what this tenth anniversary means. Michael Hudson, thanks so much. Appreciate your time.

MICHAEL HUDSON: Good to be here.

MARC STEINER: And I’m Marc Steiner here for The Real News Network. Thank you all so much for joining us. More to come. Stay with us.

 

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31 comments

  1. Invy

    If anyone is interested, the left out podcast (part of the democracy at work group) has a episode where Michael Hudson does an autobiography. He has a long family labor history and just a fascinating life.

    Reply
  2. Norb

    Like so many other voices of reason, Michael Hudson has been hammering away for a long time about the reality and dangers of predatory lending and people are beginning to catch on.

    However, it is amazing how often common workers accept the justifications for the current economic situation they find themselves in. When will the tipping point occur? Will the population be reduced to a rabble?

    The handling of bad loans and the existence of debt bondage define the nature of a society. This form of debt resembles a cancer that ultimately destroys the social fabric- to the glee of the perpetrators. They believe, in the end, they can rebuild the world anew.

    Manipulating fear is the problem. Bondholders fear loosing their hoarded treasure, while the working class fears poverty.

    Maybe, the only hope, both on an individual level and thinking systematically, depends on focusing on standard of living as Mr. Hudson suggests.

    Re-define in your own mind what a quality life should be and change might be possible to direct in a positive and productive manner. Otherwise, crash outs result.

    Until people truly believe that the meek shall inherit the earth- exploitation will reign until the very end.

    Reply
      1. flora

        …anything except what his voters wanted. He never caved in to / represented to his voters. I even recall his then chief of staff calling liberals “F’ing retards.”

        Reply
    1. Summer

      And his VP (still a presidential hopeful) was senator of a state that has recorded more registered corporations than people.
      Nothing could ever justify a Biden as a change candidate

      Reply
  3. fresno dan

    MICHAEL HUDSON: Isn’t that amazing. Over the weekend, not a single paper that I know said that there were many alternatives at the time.
    ================================================
    Isn’t that amazing…..Repubs and Dems – no alternative at all. no, we have no alternatives, and alternatives are never spoken of

    Reply
    1. polecat

      TINA Rules !! .. until the moment the tumbrels and guillotines show on the horizon ..

      I can envision when times get so tough, and so desperate for the mopes, that push finally yields to shove .. and shove some moarrr .. with Hell being put paid to Anyone deemed enriched be grift and fraud .. be they a pol, a bankster, a business, or a neighbor.
      I don’t think we have long to wait !

      Why is it that the powerfully grifted wait until the point of no-deposit-no-return has been reached before a ‘correction’ in head-height becomes the norm in the minds of the plebs ??

      Reply
  4. flora

    Thanks for this post. Since Wall St. and the FIRE sector is NYC’s economic engine I’d expect the NYTimes to crow that “everything was done right”… because NYC’s (and NY’s) economic engine was saved.

    However, and this isn’t a great comparison but it’s the one that comes to mind, crowing that everything was done right and there were no alternatives to what was done comes across like W.Bush telling his FEMA director that he did a “heck of a job” managing the Katrina Hurricane event and aftermath.

    Reply
  5. Eureka Springs

    So essentially we’re not in a recovery at all. We can’t get into recovery until you write down the debt.

    All stop.

    Reply
      1. jrs

        longest recovery ever they say, but in the only terms the average person actually cares about: JOBS, JOBS, and JOBS and the ability to get one if you need one and maybe one that even pays your bills, any recovery is very recent really, the last 3 years at most.

        Reply
  6. HopeLB

    Jack Rasmus’s explication of the Banksters’ decision to let Lehman fail while rescueing Bear Stearns dovetails nicely with Hudson’s analysis.

    “This past weekend, September 15-16, marked the 10th anniversary of the Lehman Brothers Investment bank collapse and the subsequent generalized financial system crash that followed. Business and mainstream media flooded the airwaves and print publications with recounts and assessments of the events of ten years past. Most promoted the theme about how the Federal Reserve central bank and the US Treasury rescued us all from another 1930s-like depression. The corollary message is that ‘IT’ can’t happen today because of the various reforms instituted in the wake of the crash that now prevent the repeat of something similar like 2008.”
    …….
    “Goldman thus benefited greatly from Lehman’s collapse while Chase similarly did from Bear Stearns’ rescue. And the government—the US Treasury and Federal Reserve—was complicit in arranging the bailout of the one and the collapse of the other. The apparent anomaly of why Bear was bailed and Lehman allowed to go under is thus explainable by the US government’s role allowing even bigger and more influential banks—JP Morgan Chase and Goldman Sachs—to gobble up their competitors (Bear and Lehman) on the cheap. In the one, Chase benefited from the bailout; in the other, Goldman benefited from the collapse.

    This suggests the unifying element of the apparent different treatments of Bear v. Lehman was the US government—Treasury and Fed—unofficial policy at the time of trying to resolve the crisis by making even bigger banks more financially solvent, and thus able to withstand the crisis, at the expense of the smaller.”

    https://www.counterpunch.org/2018/09/19/on-the-10th-anniversary-of-lehman-brothers-2008-can-it-happen-again/

    Reply
  7. HopeLB

    Jack Rasmus explication of the decision to let Lehman fail while rescueing Bear Stearns dovetails nicely with Hudson’s analysis;

    https://www.counterpunch.org/2018/09/19/on-the-10th-anniversary-of-lehman-brothers-2008-can-it-happen-again/
    “This past weekend, September 15-16, marked the 10th anniversary of the Lehman Brothers Investment bank collapse and the subsequent generalized financial system crash that followed. Business and mainstream media flooded the airwaves and print publications with recounts and assessments of the events of ten years past. Most promoted the theme about how the Federal Reserve central bank and the US Treasury rescued us all from another 1930s-like depression. The corollary message is that ‘IT’ can’t happen today because of the various reforms instituted in the wake of the crash that now prevent the repeat of something similar like 2008.”…..

    “Goldman thus benefited greatly from Lehman’s collapse while Chase similarly did from Bear Stearns’ rescue. And the government—the US Treasury and Federal Reserve—was complicit in arranging the bailout of the one and the collapse of the other. The apparent anomaly of why Bear was bailed and Lehman allowed to go under is thus explainable by the US government’s role allowing even bigger and more influential banks—JP Morgan Chase and Goldman Sachs—to gobble up their competitors (Bear and Lehman) on the cheap. In the one, Chase benefited from the bailout; in the other, Goldman benefited from the collapse.

    This suggests the unifying element of the apparent different treatments of Bear v. Lehman was the US government—Treasury and Fed—unofficial policy at the time of trying to resolve the crisis by making even bigger banks more financially solvent, and thus able to withstand the crisis, at the expense of the smaller.”

    Reply
  8. steelhead23

    Visualizing Hudson’s “what if”, I see other effects that I would consider good. First, were fraudulent banks to go bankrupt, one might expect less fraud. Were excessive risk taking to be punished rather than rewarded by stupid compensation packages, both risk taking and stupid (agency-ignoring) compensation packages would be reduced. And finally, if bank profits were reduced, we might see less interference by the 1% in our democracy.

    Obama was not the worst president of my lifetime, but he was the most disappointing. He had an opportunity to change the world we live in – but he dropped the ball.

    Reply
    1. James

      Or was he simply pitching for the other side all along? That seems to me to be the more logical explanation, especially in light of parallel and subsequent events.

      Reply
      1. XFR

        Or both sides are pitching for the Empire.

        Without the mega-fraud the real cost of Bush’s wars would have been immediately apparent and would have put the U.S. into a deep recession. Public support for them was on a knife-edge as it was and would surely have tanked in that case.

        The financial fraud was actively aided by Bush’s regulators and actively abetted by Obama’s, but perhaps they weren’t so much acting as the banker’s minions so much as the bankers were acting their own minions in their quest for Empire, and as such were entitled to call on their protection when–inevitably–the **** hit the fan.

        Reply
  9. polecat

    Why isn’t billy c rotting in some dark, dank dungeon on some off-shore islet for for cutting the final tendons of bankster restraint .. with obiwan con-no-me as a cell mate ??

    Reply
  10. Summer

    Hudson’s one of the few with an explanation of the economy that matches reality and not 18th and 19th Centuru robber-baron, Social Darwinis ideology.

    Reply
  11. Greensachs

    Now the premise for Michael’s interview is always consistently accurate, pointing clearly to cartel and the predatory financial ruling order’s use of white collar frauds.
    However, a little help here with Geithner being with Citi. Timmy was head of NY Federal Reserve (during the pillage) and then Obama’s Treas Sec.

    Does he mean Rubin?

    Reply
    1. Greensachs

      Never mind, listening closer it is just Huck Hudson and his excitable savant explanations.
      It’s part of the joy of having Dr. Hudson reveal the truthful narrative. Special guy!
      Those with eyes to see and ears to hear are grateful for adversarial truth to power. It’s in short supply from the ruling side.

      Reply
  12. Sound of the Suburbs

    The banker’s curse.

    They can create money, but it has no intrinsic value.

    Governments can create money as well and when they create too much you get hyperinflation. We all know how you can create money and drive up prices.

    The FED did the same with their “wealth effect” and drove up financial asset prices.

    They are effectively the same, but no one seems to realise that driving up financial asset prices is about as useful as hyperinflation.

    What is real wealth?

    In the 1930s, they pondered over where all that wealth had gone to in 1929 and realised inflating asset prices doesn’t create real wealth, they came up with the GDP measure to track real wealth creation in the economy.

    The transfer of existing assets, like stocks and real estate, doesn’t create real wealth and therefore does not add to GDP.

    The real wealth in the economy is measured by GDP.

    Inflated asset prices aren’t real wealth, and this can disappear almost over-night, as it did in 1929 and 2008.

    Real estate is like a financial asset and all that wealth can disappear, as it did in Japan, US (S&L crisis + 2008), Ireland and Spain.

    Why do we keep doing it?

    Reply
  13. Sound of the Suburbs

    Learn from past mistakes and don’t keep repeating them.

    China has made the same mistakes and is now undertaking a huge study of the West to find out what we did right and what we did wrong.

    They have already worked out that coming financial crises are indicated by over inflated asset prices and the private debt–to–GDP ratio and they announced it at Davos this year.

    https://www.youtube.com/watch?v=1WOs6S0VrlA

    They have seen their Minsky moment coming, while the US blunders blindly into them, 1929 and 2008.

    https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png

    They will soon see the problem with the strange path Western economics has taken.

    Classical economics – observations and deductions from the world of small state, unregulated capitalism around them

    Neoclassical economics – Where did that come from?

    Keynesian economics – observations, deductions and fixes for the problems of neoclassical economics

    Neoclassical economics – What are they doing?

    Reply
    1. Sound of the Suburbs

      Capitalism – back to basics (as seen by the classical economists)

      Disposable income = wages – (taxes + the cost of living)

      Employees want more disposable income (discretionary spending)
      Employers want to pay lower wages for higher profits

      Neoliberals weren’t aware of the other term in the brackets with taxes.

      They cut taxes, but let the cost of living soar.

      Think of the wages that have to cover the US cost of living.

      The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living

      Covering that cost of living in wages reduces profits and drives off-shoring.

      The Washington Consensus tilted the playing field against the West and towards Asia, due to the cost of living.

      What was Keynes really doing?

      Creating a low cost, internationally competitive economy.

      Keynes’s ideas were a solution to the problems of the Great Depression, but we forgot why he did, what he did.

      They tried running an economy on debt in the 1920s.

      The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics.

      Keynes looked at the problems of the debt based economy and came up with redistribution through taxation to keep the system running in a sustainable way and he dealt with the inherent inequality capitalism produced.

      The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living

      Disposable income = wages – (taxes + the cost of living)

      High taxation funded a low cost economy with subsidised housing, healthcare, education and other services to give more disposable income on lower wages.

      Keynesian ideas went wrong in the 1970s and everyone had forgotten the problem of neoclassical economics that he originally solved.

      Reply
  14. Glen

    Wall St’s raping of the real economy continues to this day. Student loans (education), home rents (housing) are examples of Wall St working to extract the last drop of blood from Americans. Soon we’ll be paying for good air, water, you name it.

    W may have screwed up American foreign policy with the stupidest war ever, but the damage Obama did to America makes that look like a flea bite. W wrecked America’s standing in the world. Obama wrecked America.

    Reply

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