Dress Rehearsal For Debt Peonage, Part 2
Transcript of a Bonnie Faulkner Guns & Butter Radio interview with Dr. Michael Hudson
Originally broadcast on August 26, 2009 on KPFA-FM radio in Berkeley CA
Click here for part one of this interview. A link to the original audio is provided at the end of the article.
"... Originally the income tax fell on the wealthy... Only one percent of the population actually had to file an income tax return...."
Bonnie Faulkner: One of the other points of Obama's financial regulatory reform proposal that you say is a failure is the failure to deter credit default swaps and other casino capitalist gambles. You point out that Mr. Obama proposes that loan originators keep a token five percent on their books only.
Michael Hudson: There's been a large discussion in the financial press over whether computerized trading, whether speculative trading for instance in oil and other products, whether the whole idea of default insurance swaps and derivatives and gambling really helps the economy at all, or whether it's really just gambling, and instead of which way interest rates or exchange rates or stock prices might go, how is that different from gambling on who's going to win the next baseball game, or win the next horse race? The idea is should Wall Street be essentially conducting all this activity by huge computers in trillions of dollars in derivatives and bets as a way of making money? Is that really how we want America to make money? Or do we want the economy to make money by investing in capital equipment and factories and farms that employ people and actually produce something?
Wall Street says well, wait a minute, when we're making profits by essentially gambling on which way derivatives are going and which way oil prices are going, we're buying oil not to use in gas tanks, not to make energy out of, we're buying oil to make a shortage and drive up the price so we can make a capital gain trading on it. We want to make sure you give us a tax break on this. You may tax industries, you may tax factories, you may tax people, but don't tax the winners, and by the way, if we make a big loss and can't pay the winners like AIG, who tried to insure the gamblers who lost, the government is going to come in and they're going to pay essentially all the winners at casinos who go bankrupt.
So in the end everybody gets paid at the public expense from this kind of gambling. Is that the economy we want? Obama's advisors say yes, that's the post industrial economy, that's what we want.
Bonnie Faulkner: Another point that you make about Obama's proposal, one of the filings, is the failure to reform the tax system that has distorted the financial system to promote predatory extractive debt, not productive industrial credit.
Michael Hudson: The tax system in America has been under attack ever since the income tax came in in 1913. Originally the income tax fell on the wealthy. It was really a tax on the returns to wealth. Only one percent of the population actually had to file an income tax return... if you earned less than about $102,000 today, you didn't have to even file a return. So the tax was paid largely by the real estate and financial interests and the insurance interests.
Well, for the last century the wealthy part of the population have chipped away, they've paid lobbyists to write small print into the tax code that favors almost every kind of income that wealth gets and that the bulk of the population doesn't get, so what we have is a huge shift of the tax burden off property, and off finance and on to labor. That's the real problem.
What has created this financial twist of our system, this distortion of our system is the fact that absentee owned property is largely tax exempt. Finance is tax exempt. Industry is not tax exempt and labor isn't tax exempt, so we've turned America from a low cost economy into a high cost economy, and by privatizing the public domain, we've turned what used to be user fees or services produced freely like roads and transportation into rent gouging exercises. We've sold off the public domain and let buyers buy on credit railroads and other public infrastructure, charge whatever the market would bear, raise the cost of doing business, raise the cost of living, and because they financed it all with debt, they count debt as a tax deductible expense, and they don't have to pay income tax on money they pay out in interest. Instead of favoring an equity economy, a savings economy, the tax code favors a debt leveraging economy.
Let's look at what's happening in California for an example. California, like many other states has a budget condition where it has to be in balance. Years ago, in the 1970s California passed Proposition 13. This limited the property taxes to a rise of only one percent a year. Property values on the other hand, have risen from eight to ten percent a year, and the effect of Proposition 13 has been a huge giveaway largely to commercial property and to the property of the wealthy.
So, unable to tax property, the free rent, California has left all this rental value of real estate, homes and office buildings, to be paid out to banks as interests on loans taken out to buy the property. It costs just as much to operate, to get a home, or an office building, or a company under the low property tax (regime) today as it would have cost under the high tax (regime) except that instead of paying a high property tax that goes to finance California's budget and pay for education the high costs go to pay the banks in interest. So California has to make up the amount of money somewhere else by taxing labor and industry and causing unemployment.
In the final instance, when it's not able to tax property, what's it to do? It cuts back on what used to be one of the best educational systems in the country. It cuts back public spending, it cuts back medical spending. The result is to reduce the California state economy to debt peonage, much as the position of Iceland or Latvia.
Bonnie Faulkner: In addition to what you have listed, they;re gouging all the way down to the parking meters, the sales tax has gone up, and a lot of the infrastructure is going to be privatized.
Michael Hudson: That seems to be happening in Chicago also, they've been privatizing parking meters and everything. somehow, things that used to be free are now being paid to private enterprises and the government can't raise funds to perform its basic public sector duties. Then it has to sell off the public domain to private buyers. Private buyers prefer to buy any kind of public enterprise or rights, like the streets or parking lots or roads, to turn them into toll roads, to put toll booths and parking meters wherever they can all over the economy, over the electric system, over the train system, the transport system, the airwaves.
"...the reality is that debt isn't wealth, debt is debt, the antithesis of wealth... That's like saying war is peace. "
What the government used to provide in the progressive era...the public infrastructure that made America the most competitive economy in the world, it's now loading down with privatized debt payments to the banking system. Look (they say) at all the wealth we're creating! If the government owned these roads it wouldn't be part of the private wealth, which is all they look at. It would be part of the national balance sheet. But once we sell it on credit to somebody who borrows the money it's worth as much as a bank will lend against it.
That's what I said at the beginning of the talk, that the value of a house or a company or a toll road or a street that you can put parking meters on is however much a bank will lend against it. The interest bearing capacity of any asset is whats looked at as wealth. Well the reality is that debt isn't wealth, debt is debt, the antithesis of wealth and somehow there's been an inversion, a turning inside out or upside down of the whole idea of what wealth is. Now the idea is saying that debt is wealth. That's like saying war is peace.
Bonnie Faulkner: Isn't it also true that when the infrastructure is privatized, the people that buy it are borrowing the money from a bank to buy it and the interest they have to pay on these loans is tax deductible?
Michael Hudson: That's right, and in fact they may borrow it for themselves. For instance in Iceland, Iceland had hoped that when it turned over its geothermic power to AlCan and aluminum plants, that this would be a natural resource and it would get part of the economic rent from the cheap energy that it provides to make electricity. Basically, aluminum is made out of electricity because it's made out of clay and clay is everywhere but electricity isn't everywhere. Well it turns out that AlCan arranged to borrow the money, to debt leverage the money from one of its other affiliates in one of the offshore banking enclaves where it doesn't have to pay tax and then it tells Iceland, well wait a minute, we didn't make any profits. All the profit we had to pay as interest on the loan we made to ourselves so we have no income tax to pay you. So Iceland is left somehow without getting any benefit at all from the financial resource it thought was going to make it reach. so it turns out they don't really have a natural resource, it's been stripped by the banking and financial sector. That's what the banking and financial sector has turned into across the world, in America, in Iceland, Latvia, all over the world the financial sector is asset stripping and income stripping. It doesn't finance direct capital investment. It strips away the income from investment, for natural resources, for land that's already in place, and often supplied freely by nature.
Bonnie Faulkner: To sum up this financial regulatory reform proposal of Obama's what does it consist of, will it have to pass the legislature, or what?
Michael Hudson: The agreement will have to rewrite the nation's regulatory laws. I'm hoping that the Democrats in congress will say wait a minute, we're not even going to think of turning over any regulation to the Federal Reserve until you agree at the very outset... (to a ) consumer financial products agency. We need consumer protection so that the massive national subprime mortgage fraud, real estate fraud, financial fraud is not continued, so the credit card ripoffs and predatory financial practices will be stopped. That has to be the first order of priority.
Then, instead of turning over all regulatory authority to the Federal Reserve, and saying wait a minute, the Securities and Exchange Commission (SEC) has just turned into a lobbying agency for Wall Street, what the government should do is, say we don't want just one regulator, we want more than one regulator. We want five or six regulators. Unlike the past, we're not going to let companies shop around for the stupidest, the dumbest, the most understaffed and underfinanced regulator, they're all going to have authority.
So (hopefully) you're not only going to have the Federal Reserve as oversight, you're going to have the Treasury as oversight. You're going to have the SEC, the Securities and Exchange Commission as oversight. We're actually going to put teeth into these regulations (hopefully) just as we had 70 or 80 years ago. Instead of de-regulating we're going to put real regulators in charge of the regulatory agencies. We're (hopefully) going to assign them a budget sufficient to give them enough staff so that next time somebody turns in, in great detail, how someone like Bernie Madoff is running a Ponzi scheme for $50 billion there's going to be somebody on staff available to actually read the letter and not just file it away under complaints in a filing cabinet, as was done before.
" Reform today is just the opposite of what reform meant in the progressive era of America a hundred years ago. Then reform meant government oversight and checks and balances. Today the word reform means getting rid of checks and balances... "
We're going (hopefully) to actually have regulatory agencies that are run in the public interest, not in the interest of Wall Street because self-regulation doesn't work. And the Federal Reserve, as the lobbyists for the banking sector, owned by the commercial banks, not by the federal government. You don't (hopefully) have the lobbyists for the financial sector acting as regulators any more than you have the pharmaceutical industry in charge of the Federal Drug Administration... you don't want them to be run by the industry and staffed by the managers of the industries they're supposed to regulate.
Bonnie Faulkner: So then Obama's financial regulatory reform proposal hasn't gone before the legislature yet.
No, he's still drawing it up and discussing things and his proposals are giving the word reform as bad a name as it got in Russia under Yeltsin. Reform today is just the opposite of what reform meant in the progressive era of America a hundred years ago. Then reform meant government oversight and checks and balances. Today the word reform means getting rid of checks and balances, turning over regulation to the industries being regulated. It means exactly the opposite of what the word reform used to mean, and we've entered a world of Orwellian doublespeak.
Bonnie Faulkner: Yes, I think in your article you made the statement that instead of a Roosevelt, we've got a Yeltsin.
Michael Hudson: That's right.
Bonnie Faulkner: Now with regard to this price-inflation bubble, the latest one of course having been the sub-prime, you write that prices of everyone's property went up. Of course so did people's debts. The problem is that asset prices fall when the Ponzi scheme ends. But the debts remain in place. That yeah, the prices of the stuff they bought goes down, but their debt doesn't go down.
Michael Hudson: What it means is that somebody's bought a house for $500,000, and now they took out a full mortgage for $500,000, but now the market price is only $300,000. So there's $200,000 in what they call negative equity. Now what are they going to do? Are they going to walk away, in what is called "jingle mail," mail in the keys to the bank and say OK, we're going to walk out of this house, we're going to buy the identical house across the street for $300,000, and you've taken a $200,000 loss.
Well, the government is trying to either tell the banks gee, you've made a bad loan, we don't want you to lose any money cause you're our biggest campaign contributor after all, we wouldn't be in office if it weren't for your campaign contributions that we spent on television ads to get people to vote for us. So we're going to split the loss with you, but you're going to be allowed to add all of the late fees and penalties, so in effect you won't lose a penny. You're going to be bailed out at taxpayer expense. When people walk out of their $500,000 house and leave you with a $200,000 loss, we'll give you $200,000 out of the public debt and you'll be OK. By the way, we're changing the law so that the people who bought the $300,000 house we can now sue them and make them pay the $200,000 loss, make them pay the debt for the rest of their lives. They won't be able to send their children to college, they won't be able to go to the hospital when they get sick, we'll make sure all that money goes to you...
“The product of banks is debt. They make interest, they make late charges and penalties and fees, and finally they foreclose on property, they make management fees, and then they buy government, they privatize government, and they get bailed out, and add the bailout to the public debt,”
Bonnie Faulkner: Is that right, they're going to change the law to go after the people who've walked away?
Michael Hudson: That's what the Wall Street Journal proposed last Friday, and it's what the corporate lobbyists are trying to push in Washington.
Bonnie Faulkner: Wow. You wrote a very interesting article, "Bogus Solutions to the Financial Crisis: the Latest in Junk Economics" in which you discussed some of the summer book offerings, offering solutions to the financial crisis. These solutions included regulating or eliminating derivatives trading, instituting a token tax on securities transactions, closure of offshore banking centers and their tax avoidance stratagems. Your write "...No one is going so far as to suggest attacking the root of the financial problem." What is the root of the financial problem in your view? You kind of indicate it would be the tax deductibility of interest.
Michael Hudson: The problem is that the debts are beyond the ability of the economy to pay. That's why I've spent some time talking about Iceland and Latvia. When you have a whole economy that can't pay its debts, then it has to pay by running down its savings, by the government selling off the public domain, or by people forfeiting their homes and other assets to the creditors. The economy polarizes between creditors and debtors. That's the financial problem itself.
The root of the problem is that the economy favors debt leveraging as a way of making money. It lets investors deduct the interest charges they have to pay, but dividends are not tax deductible. So it encourages debt financing rather than equity financing. Ever since the early nineteenth century, the Frenchman Henri St. Simone said that the problem of economies throughout Western civilizations is that debts grow more rapidly than the economy can grow. This is called the magic of compound interest.
Any rate of interest is a doubling time. If you leave a debt... and keep reinvesting the interest, very quickly it doubles, it redoubles, it quadruples. The economy doesn't grow that fast. Economies taper off in s-curves, and in fact, the heavier the debt burden, the quicker economies slow down and the more of the economic surplus is shifted out of the hands of industry, out of the hands of people, into the hands of creditors who use their interest income to load the economy down with yet more loans and yet more debt. That's their business plan.
The product of banks is debt. They make interest, they make late charges and penalties and fees, and finally they foreclose on property, they make management fees, and then they buy government, they privatize government, and they get bailed out, and add the bailout to the public debt, so that the whole economy is left without any surplus at all, and then growth stops. That's basically the problem, is that the economy is being run for the creditor class, not only the financial economy, but also the tax system. Once the creditor class gets control of the tax system... (it) un-taxes itself, un-taxes its customers, mainly landlords and monopolies. Then you have the economic surplus not used to increase living standards, not used to increase capital investment, to increase productivity, not used to create the leisure society that people expected they were going to get back in 1945... when economies were pretty debt-free.
You load the economy down with more and more debt, that stifles growth... (Creditors) end up stripping all of its assets.... If you want to look at the future of the United States economy, look at what's happening in Iceland, Latvia, and in what used to happen in third world banana republics that were strapped by debt. Bonnie Faulkner: Now with regard to the magic of compound interest, a few years ago I bought an item at a store for $34. I misplaced the bill and I ignored it. Within a year, the $34 charge went up to two or three hundred dollars.
Michael Hudson: That wasn't simple interest, that was all the fees they added on. What used to be looked at as simply a financial return on interest, the financial sector has essentially got itself exempted from usury laws. You mentioned before Paul Volkher raising the interest rate to 22%. Interest rates were so high there that in order to borrow money, you weren't allowed to under state usury laws, so states abolished all their usury laws. Not only did they abolish (limits upon) the rate of interest that could be charged, but they abolished (limits upon) all of the side charges for penalties and late charges, and things, which is how Indy Mac and CountryWide and the other predatory lenders were making their money.
“The way to get wealthy today is not by producing goods and services, certainly not to work for a living and save, it's to make a living by what the classical economists call rent seeking...”
Instead of throwing the heads of these banks in jail and prosecuting them, the government bailed them all out and made them billionaires. Instead of taking them over and running them in the public interest, they left them in private hands, and didn't even take the earnings that someone like Warren Buffett would have taken from them. So what you have is a travesty of financial regulation here. You have the economy being regulated by the financial sector instead of the economy regulating the financial sector. Something has to give. Either the financial sector or the real economy, and the government is sacrificing the real economy to the financial sector because they're the people who've bought control of the political election and lobbying process.
Bonnie Faulkner: In "Bogus Solutions to the Financial Crisis" you go on to say that the latest panacea being offered to jump start the economy is to rebuild America's depleted infrastructure. But you also see a deficiency in this proposal. What is it?
Michael Hudson: Well, if the government were rebuilding the infrastructure like they did in the 1930s, you'd be hiring people, you'd be putting them to work like the TVA, the Tennessee Valley Authority, the WPA, the Works Progress Administration, all of these other things. Instead, the government is doing its version of what in Britain is known as the public-private partnership initiative... selling off infrastructure on credit to let private buyers come in and buyout the road systems the streets and the parking meters, anything that's in the public domain, and essentially charging whatever they want without regulation. So America is becoming a Thatcherized or Yeltsinized economy.
Bonnie Faulkner: Finally, you write that what economics really is all about is the debt overhead; financial fraud and crime in general, military spending, a key to the US balance of payments deficit, and hence to the buildup of central bank dollar reserves throughout the world, the proliferation of unearned income and insider political dealing.
Michael Hudson: Adam Smith called his book The Wealth of Nations because he was writing about how to get wealthy. The way to get wealthy today is not by producing goods and services, certainly not to work for a living and save, it's to make a living by what the classical economists call rent seeking, by what John Stuart Mill called the unearned increment. You make money in a predatory way by getting something for nothing, by being able to charge a price for something that doesn't have a cost of production. You charge a price for land that you've been able to buy on the cheap. You buy a parking meter patent from a city and you put parking meters there. (It's) essentially to turn the economy into what classical economists call a rent seeking economy, a toll booth economy, where people get rich by charging for what used to be free.
Bonnie Faulkner: Michael Hudson, thank you very much.
Michael Hudson: Thank you, Bonnie.
Click here for part one of the transcript of this interview.
Click the flash player below to listen to or download an MP3 copy of the interview (about 60 minutes).
The Fictitious Economy, Part 1, An Interview With Dr. Michael Hudson
The Fictitious Economy, Part 2, An Interview With Dr. Michael Hudson
Dr. Hudson is an historian and economist, a former Wall Street insider and currently a professor of economics at the University of Missouri at Kansas City. He is president of the Institute for the Study of Long Term Economics. His web site is www.michael-hudson.net. Dr. Hudson was chief economic advisor to the 2008 presidential campaign of Dennis Kucinich (D-Ohio). Hudson is one of the relatively few economists who accurately predicted last year's Wall Street crash, as well as the government's most likely responses to it.
In this week’s segment, we discuss the anniversary of victory in Europe in World War II, and the disinformation that centers on the U.S.'s role and dismisses the pivotal Soviet role in that conflict…
Roger McKenzie is the international editor of the UK-based Morning Star Online, the only English-language socialist daily newspaper in the world. He joins us from Oxford to discuss his new book, “The…
The late Bruce Dixon was a co-founder and managing editor of Black Agenda Report. In 2018, he provided this commentary entitled, "US Fake History of World War II Underlies Permanent Bipartisan…
Nadiah Alyafai is a member of the US Palestinian Community Network chapter in Chicago and she joins us to discuss why the public must be aware of the Nakba and the continuity of Palestinian…
Black people who are among the rich and famous garner praise and love, and so do those who are in distress. But concerns for the masses of people and their struggles are often missing.
