retour article original
par Chris HEDGES
Chris HEDGES :
"We’re going to be discussing a great Ponzi scheme that not only defines the U.S. but the global economy, how we got there and where we’re going. And with me to discuss this issue is the economist Michael Hudson, author of Killing the Host : How Financial Parasites and Debt Destroy the Global Economy. A professor of economics who worked for many years on Wall Street, where you don’t succeed if you don’t grasp Marx’s dictum that capitalism is about exploitation. And he is also, I should mention, the godson of Leon Trotsky.
I want to open this discussion by reading a passage from your book, which I admire very much, which I think gets to the core of what you discuss. You write, “Adam Smith long ago remarked that profits often are highest in nations going fastest to ruin. There are many ways to create economic suicide on a national level. The major way through history has been through indebting the economy. Debt always expands to reach a point where it cannot be paid by a large swathe of the economy. This is the point where austerity is imposed and ownership of wealth polarizes between the One Percent and the 99 Percent. Today is not the first time this has occurred in history. But it is the first time that running into debt has occurred deliberately”. Applauded. “As if most debtors can get rich by borrowing, not reduced to a condition of debt peonage”.
So let’s start with the classical economists, who certainly understood this. They were reacting of course to feudalism. And what happened to the study of economics so that it became gamed by ideologues ?"
Michael HUDSON :
"The essence of classical economics was to reform industrial capitalism, to streamline it, and to free the European economies from the legacy of feudalism. The legacy of feudalism was landlords extracting land-rent, and living as a class that took income without producing anything. Also, banks that were not funding industry. The leading industrialists from James Watt, with his steam engine, to the railroads …"
-"From your book you make the point that banks almost never funded industry".
"That’s the point : They never have. By the time you got to Marx later in the 19th century, you had a discussion, largely in Germany, over how to make banks do something they did not do under feudalism. Right now we’re having the economic surplus being drained not by the landlords but also by banks and bondholders.
Adam Smith was very much against colonialism because that lead to wars, and wars led to public debt. He said the solution to prevent this financial class of bondholders burdening the economy by imposing more and more taxes on consumer goods every time they went to war was to finance wars on a pay-as-you-go basis. Instead of borrowing, you’d tax the people. Then, he thought, if everybody felt the burden of war in the form of paying taxes, they’d be against it. Well, it took all of the 19th century to fight for democracy and to extend the vote so that instead of landlords controlling Parliament and its law-making and tax system through the House of Lords, you’d extend the vote to labor, to women and everybody. The theory was that society as a whole would vote in its self-interest. It would vote for the 99 Percent, not for the One Percent.
By the time Marx wrote in the 1870s, he could see what was happening in Germany. German banks were trying to make money in conjunction with the government, by lending to heavy industry, largely to the military-industrial complex".
-"This was Bismarck’s kind of social –I don’t know what we’d call it. It was a form of capitalist socialism…"
"They called it State Capitalism. There was a long discussion by Engels, saying, wait a minute. We’re for Socialism. State Capitalism isn’t what we mean by socialism. There are two kinds of state-oriented..."
-"I’m going to interject that there was a kind of brilliance behind Bismarck’s policy because he created state pensions, he provided health benefits, and he directed banking toward industry, toward the industrialization of Germany which, as you point out, was very different in Britain and the United States".
"German banking was so successful that by the time World War I broke out, there were discussions in English economic journals worrying that Germany and the Axis powers were going to win because their banks were more suited to fund industry. Without industry you can’t have really a military. But British banks only lent for foreign trade and for speculation. Their stock market was a hit-and-run operation. They wanted quick in-and-out profits, while German banks didn’t insist that their clients pay as much in dividends. German banks owned stocks as well as bonds, and there was much more of a mutual partnership.
That’s what most of the 19th century imagined was going to happen –that the world was on the way to socializing banking. And toward moving capitalism beyond the feudal level, getting rid of the landlord class, getting rid of the rent, getting rid of interest. It was going to be labor and capital, profits and wages, with profits being reinvested in more capital. You’d have an expansion of technology. By the early twentieth century most futurists imagined that we’d be living in a leisure economy by now".
-"Including Karl Marx".
"That’s right. A ten-hour workweek. To Marx, socialism was to be an outgrowth of the reformed state of capitalism, as seemed likely at the time –if labor organized in its self-interest".
-"Isn’t what happened in large part because of the defeat of Germany in World War I ? But also, because we took the understanding of economists like Adam Smith and maybe Keynes. I don’t know who you would blame for this, whether Ricardo or others, but we created a fictitious economic theory to praise a rentier or rent-derived, interest-derived capitalism that countered productive forces within the economy. Perhaps you can address that".
"Here’s what happened. Marx traumatized classical economics by taking the concepts of Adam Smith and John Stuart Mill and others, and pushing them to their logical conclusion. Progressive capitalist advocates –Ricardian socialists such as John Stuart Mill– wanted to tax away the land or nationalize it. Marx wanted governments to take over heavy industry and build infrastructure to provide low-cost and ultimately free basic services. This was traumatizing the landlord class and the One Percent. And they fought back. They wanted to make everything part of “the market”, which functioned on credit supplied by them and paid rent to them.
None of the classical economists imagined how the feudal interests –these great vested interests that had all the land and money– actually would fight back and succeed. They thought that the future was going to belong to capital and labor. But by the late 19th century, certainly in America, people like John Bates Clark came out with a completely different theory, rejecting the classical economics of Adam Smith, the Physiocrats and John Stuart Mill".
-"Physiocrats are, you’ve tried to explain, the enlightened French economists".
"The common denominator among all these classical economists was the distinction between earned income and unearned income. Unearned income was rent and interest. Earned incomes were wages and profits. But John Bates Clark came and said that there’s no such thing as unearned income. He said that the landlord actually earns his rent by taking the effort to provide a house and land to renters, while banks provide credit to earn their interest. Every kind of income is thus “earned”, and everybody earns their income. So everybody who accumulates wealth, by definition, according to his formulas, get rich by adding to what is now called Gross Domestic Product (GDP)".
-"One of the points you make in Killing the Host which I liked was that in almost all cases, those who had the capacity to make money parasitically off interest and rent had either –if you go back to the origins– looted and seized the land by force, or inherited it".
"That’s correct. In other words, their income is unearned. The result of this anti-classical revolution you had just before World War I was that today, almost all the economic growth in the last decade has gone to the One Percent. It’s gone to Wall Street, to real estate…"
-"But you blame this on what you call Junk Economics".
"Junk Economics is the anti-classical reaction".
-"Explain a little bit how, in essence, it’s a fictitious form of measuring the economy".
"Well, some time ago I went to a bank, a block away from here –a Chase Manhattan bank– and I took out money from the teller. As I turned around and took a few steps, there were two pickpockets. One pushed me over and the other grabbed the money and ran out. The guard stood there and saw it. So I asked for the money back. I said, look, I was robbed in your bank, right inside. And they said, “Well, we don’t arm our guards because if they shot someone, the thief could sue us and we don’t want that”. They gave me an equivalent amount of money back.
Well, imagine if you count all this crime, all the money that’s taken, as an addition to GDP. Because now the crook has provided the service of not stabbing me. Or suppose somebody’s held up at an ATM machine and the robber says, “Your money or your life”. You say, “Okay, here’s my money”. The crook has given you the choice of your life. In a way that’s how the Gross National Product accounts are put up. It’s not so different from how Wall Street extracts money from the economy. Then also you have landlords extracting…"
-"Let’s go back. They’re extracting money from the economy by debt peonage. By raising…"
"By not playing a productive role, basically".
-"Right. So it’s credit card interest, mortgage interest, car loans, student loans. That’s how they make their funds".
"That’s right. Money is not a factor of production. But in order to have access to credit, in order to get money, in order to get an education, you have to pay the banks. At New York University here, for instance, they have Citibank. I think Citibank people were on the board of directors at NYU. You get the students, when they come here, to start at the local bank. And once you are in a bank and have monthly funds taken out of your account for electric utilities, or whatever, it’s very cumbersome to change.
So basically you have what the classical economists called the rentier class. The class that lives on economic rents. Landlords, monopolists charging more, and the banks. If you have a pharmaceutical company that raises the price of a drug from $12 a shot to $200 all of a sudden, their profits go up. Their increased price for the drug is counted in the national income accounts as if the economy is producing more. So all this presumed economic growth that has all been taken by the One Percent in the last ten years, and people say the economy is growing. But the economy isn’t growing…"
-"Because it’s not reinvested".
"That’s right. It’s not production, it’s not consumption. The wealth of the One Percent is obtained essentially by lending money to the 99 Percent and then charging interest on it, and recycling this interest at an exponentially growing rate".
-"And why is it important, as I think you point out in your book, that economic theory counts this rentier income as productive income ? Explain why that’s important".
"If you’re a rentier, you want to say that you earned your income by…"
-"We’re talking about Goldman Sachs, by the way".
"Yes, Goldman Sachs. The head of Goldman Sachs came out and said that Goldman Sachs workers are the most productive in the world. That’s why they’re paid what they are. The concept of productivity in America is income divided by labor. So if you’re Goldman Sachs and you pay yourself $20 million a year in salary and bonuses, you’re considered to have added $20 million to GDP, and that’s enormously productive. So we’re talking in a tautology. We’re talking with circular reasoning here.
So the issue is whether Goldman Sachs, Wall Street and predatory pharmaceutical firms, actually add “product” or whether they’re just exploiting other people. That’s why I used the word parasitism in my book’s title. People think of a parasite as simply taking money, taking blood out of a host or taking money out of the economy. But in nature it’s much more complicated. The parasite can’t simply come in and take something. First of all, it needs to numb the host. It has an enzyme so that the host doesn’t realize the parasite’s there. And then the parasites have another enzyme that takes over the host’s brain. It makes the host imagine that the parasite is part of its own body, actually part of itself and hence to be protected.
That’s basically what Wall Street has done. It depicts itself as part of the economy. Not as a wrapping around it, not as external to it, but actually the part that’s helping the body grow, and that actually is responsible for most of the growth. But in fact it’s the parasite that is taking over the growth.
The result is an inversion of classical economics. It turns Adam Smith upside down. It says what the classical economists said was unproductive –parasitism– actually is the real economy. And that the parasites are labor and industry that get in the way of what the parasite wants –which is to reproduce itself, not help the host, that is, labor and capital".
-"And then the classical economists like Adam Smith were quite clear that unless that rentier income, you know, the money made by things like hedge funds, was heavily taxed and put back into the economy, the economy would ultimately go into a kind of tailspin. And I think the example of that, which you point out in your book, is what’s happened in terms of large corporations with stock dividends and buybacks. And maybe you can explain that".
"There’s an idea in superficial textbooks and the public media that if companies make a large profit, they make it by being productive. And with…"
-"Which is still in textbooks, isn’t it ?"
"Yes. And also that if a stock price goes up, you’re just capitalizing the profits –and the stock price reflects the productive role of the company. But that’s not what’s been happening in the last ten years. Just in the last two years, 92 percent of corporate profits in America have been spent either on buying back their own stock, or paid out as dividends to raise the price of the stock".
-"Explain why they do this".
"About 15 years ago at Harvard, Professor Jensen said that the way to ensure that corporations are run most efficiently is to make the managers increase the price of the stock. So if you give the managers stock options, and you pay them not according to how much they’re producing or making the company bigger, or expanding production, but the price of the stock, then you’ll have the corporation run efficiently, financial style.
So the corporate managers find there are two ways that they can increase the price of the stock. The first thing is to cut back long-term investment, and use the money instead to buy back their own stock. But when you buy your own stock, that means you’re not putting the money into capital formation. You’re not building new factories. You’re not hiring more labor. You can actually increase the stock price by firing labor".
-"That strategy only works temporarily".
"Temporarily. By using the income from past investments just to buy back stock, fire the labor force if you can, and work it more intensively. Pay it out as dividends. That basically is the corporate raider’s model. You use the money to pay off the junk bond holders at high interest. And of course, this gets the company in trouble after a while, because there is no new investment.
So markets shrink. You then go to the labor unions and say, gee, this company’s near bankruptcy, and we don’t want to have to fire you. The way that you can keep your job is if we downgrade your pensions. Instead of giving you what we promised, the defined benefit pension, we’ll turn it into a defined contribution plan. You know what you pay every month, but you don’t know what’s going to come out. Or, you wipe out the pension fund, push it on to the government’s Pension Benefit Guarantee Corporation, and use the money that you were going to pay for pensions to pay stock dividends. By then the whole economy is turning down. It’s hollowed out. It shrinks and collapses. But by that time the managers will have left the company. They will have taken their bonuses and salaries and run".
-"I want to read this quote from your book, written by David Harvey, in A Brief History of Neoliberalism, and have you comment on it. “The main substantive achievement of neoliberalism has been to redistribute rather than to generate wealth and income. [By] "accumulation by dispossession" I mean … the commodification and privatization of land, and the forceful expulsion of peasant populations ; conversion of various forms of property rights (common collective state, etc.) into exclusive private property rights ; suppression of rights to the commons ; … colonial, neocolonial, and the imperial processes of appropriation of assets (including natural resources) ; … and usury, the national debt and, most devastating at all, the use of the credit system as a radical means of accumulation by dispossession. … To this list of mechanisms, we may now add a raft of techniques such as the extraction of rents from patents, and intellectual property rights (such as the diminution or erasure of various forms of common property rights, such as state pensions, paid vacations, and access to education, health care) one through a generation or more of class struggle. The proposal to privatize all state pension rights, pioneered in Chile under the dictatorship is, for example, one of the cherished objectives of the Republicans in the US”.
This explains the denouement. The final end result you speak about in your book is, in essence, allowing what you call the rentier or the speculative class to cannibalize the entire society until it collapses".
"A property right is not a factor of production. Look at what happened in Chicago, the city where I grew up. Chicago didn’t want to raise taxes on real estate, especially on its expensive commercial real estate. So its budget ran a deficit. They needed money to pay the bondholders, so they sold off the parking rights to have meters –you know, along the curbs. The result is that they sold to Goldman Sachs 75 years of the right to put up parking meters. So now the cost of living and doing business in Chicago is raised by having to pay the parking meters. If Chicago is going to have a parade and block off traffic, it has to pay Goldman Sachs what the firm would have made if the streets wouldn’t have been closed off for a parade. All of a sudden it’s much more expensive to live in Chicago because of this.
But this added expense of having to pay parking rights to Goldman Sachs –to pay out interest to its bondholders– is counted as an increase in GDP, because you’ve created more product simply by charging more. If you sell off a road, a government or local road, and you put up a toll booth and make it into a toll road, all of a sudden GDP goes up.
If you go to war abroad, and you spend more money on the military-industrial complex, all this is counted as increased production. None of this is really part of the production system of the capital and labor building more factories and producing more things that people need to live and do business. All of this is overhead. But there’s no distinction between wealth and overhead.
Failing to draw that distinction means that the host doesn’t realize that there is a parasite there. The host economy, the industrial economy, doesn’t realize what the industrialists realized in the 19th century : If you want to be an efficient economy and be low-priced and under-sell competitors, you have to cut your prices by having the public sector provide roads freely. Medical care freely. Education freely.
If you charge for all of these, you get to the point that the U.S. economy is in today. What if American factory workers were to get all of their consumer goods for nothing. All their food, transportation, clothing, furniture, everything for nothing. They still couldn’t compete with Asians or other producers, because they have to pay up to 43 % of their income for rent or mortgage interest, 10 % or more of their income for student loans, credit card debt. 15 % of their paycheck is automatic withholding to pay Social Security, to cut taxes on the rich or to pay for medical care.
So Americans built into the economy all this overhead. There’s no distinction between growth and overhead. It’s all made America so high-priced that we’re priced out of the market, regardless of what trade policy we have".
-"We should add that under this predatory form of economics, you game the system. So you privatize pension funds, you force them into the stock market, an overinflated stock market. But because of the way companies go public, it’s the hedge fund managers who profit. And it’s those citizens whose retirement savings are tied to the stock market who lose. Maybe we can just conclude by talking about how the system is fixed, not only in terms of burdening the citizen with debt peonage, but by forcing them into the market to fleece them again".
"Well, we talk about an innovation economy as if that makes money. Suppose you have an innovation and a company goes public. They go to Goldman Sachs and other Wall Street investment banks to underwrite the stock to issue it at $40 a share. What’s considered a successful float is when, immediately, Goldman and the others will go to their insiders and tell them to buy this stock and make a quick killing. A “successful” flotation doubles the price in one day, so that at the end of the day the stock’s selling for $80".
-"They have the option to buy it before anyone else, knowing that by the end of the day it’ll be inflated, and then they sell it off".
"That’s exactly right".
-"So the pension funds come in and buy it at an inflated price, and then it goes back down".
"It may go back down, or it may be that the company just was shortchanged from the very beginning. The important thing is that the Wall Street underwriting firm, and the speculators it rounds up, get more in a single day than all the years it took to put the company together. The company gets $40. And the banks and their crony speculators also get $40.
So basically you have the financial sector ending up with much more of the gains. The name of the game if you’re on Wall Street isn’t profits. It’s capital gains. And that’s something that wasn’t even part of classical economics. They didn’t anticipate that the price of assets would go up for any other reason than earning more money and capitalizing on income. But what you have had in the last 50 years –really since World War II– has been asset-price inflation. Most middle-class families have gotten the wealth that they’ve got since 1945 not really by saving what they’ve earned by working, but by the price of their house going up. They’ve benefited by the price of the house. And they think that that’s made them rich and the whole economy rich.
The reason the price of housing has gone up is that a house is worth whatever a bank is going to lend against it. If banks made easier and easier credit, lower down payments, then you’re going to have a financial bubble. And now, you have real estate having gone up as high as it can. I don’t think it can take more than 43 % of somebody’s income to buy it. But now, imagine if you’re joining the labor force. You’re not going to be able to buy a house at today’s prices, putting down a little bit of your money, and then somehow end up getting rich just on the house investment. All of this money you pay the bank is now going to be subtracted from the amount of money that you have available to spend on goods and services.
So we’ve turned the post-war economy that made America prosperous and rich inside out. Somehow most people believed they could get rich by going into debt to borrow assets that were going to rise in price. But you can’t get rich, ultimately, by going into debt. In the end the creditors always win. That’s why every society since Sumer and Babylonia have had to either cancel the debts, or you come to a society like Rome that didn’t cancel the debts, and then you have a dark age. Everything collapses".
-"So, we spoke in previously about the parasitic quality of the banks, hedge funds and the speculative class that has in essence cannibalized the country –including, interestingly, industry itself, and forced down the throats of the American public an unsustainable debt peonage, whether that’s through student loans, predatory credit card interest rates where it’s that bait and switch– where you get zero percent interest and next thing you know, you’re paying as high as 26 percent, 23 percent…"
"If you miss a payment".
-"If you miss a payment. Mortgages, with many houses now underwater because of 2008. I want to look first at the self-identified liberal class within the Democratic Party, including Barack Obama. It often uses the language of economic justice, and will even chastise Wall Street rhetorically, but has been as committed to this neoliberal project as the Republicans".
"The key of demagogic politics is to realize that the people who are really backing you are your campaign funders. Your job as a politician is to say, “I can deliver this constituency to your backers”. Obama was a genius at doing what Donald Trump is trying to do today : taking a constituency. That’s his column A : a focus group listing everything the constituency wants. They want debt relief. They want better jobs. They want higher minimum wage".
-"And not trade agreements like NAFTA and…"
"Right. And then column B, that he didn’t tell them, was what the campaign backers on Wall Street want. Obama was picked essentially by Robert Rubin, who then became head of Citibank after having come out of the Goldman Sachs. Obama was picked by Rubin of Wall Street to promise was he was going to really do. It was what any president today is going to do : A politician’s job is to deliver whoever voted for you to your backers, who are on Wall Street. Whether you are a Republican or a Democrat, but especially if you are a Democrat –that’s really the Wall Street wing of the American political system. The Republicans are for the corporate monopoly, oil and gas wing of it.
As soon as Obama got in, Hank Paulson –the Republican Treasury Secretary– was talking to Barney Frank and said, you know, we were supposed to, under TARP, have some of the money to go for debt writedown".
"TARP was Troubled Asset Relief Program. It was supposed to treat banks as if they were troubled. If you’re a criminal and you’re stealing from people, that was called “troubled”. There’s a lawsuit recently in in the news about a rich boy drove his car and killed four people. His defense was, “It’s not my fault, I have affluenza. I’m so rich that I don’t have a social sense. So of course I drove away. But I’m innocent, because I’m rich. What do you expect ?”
Essentially that’s the Goldman Sachs view of the economy. You cause collateral damage all over, but that’s what Wall Street does. You can’t punish them for it. They’re just doing what a predatory financial institution does. So Obama said “No, , I’m not going to do that”, [meaning write down the mortgage debts as he had promised voters in Column A]. He came in and appointed Wall Street’s main lobbyist, Tim Geithner, as Treasury Secretary".
-"You spend a lot of time in your book, Killing the Host, on him".
"That’s right. Geithner appears in almost every dirty dealing episode of the book. He was the bagman. He was the person who [Sheila Baoir] accused of blocking the FDIC when it wanted to take over Citibank, which not only was broke but was a criminalized organization".
-"Explain just quickly why it was criminalized".
"Citibank, along with Countrywide Financial, was making junk mortgages. These were mortgages called NINJA. They were called liars’ loans, to people with no income, no jobs and no assets. You had this movie, The Big Short, as if some genius on Wall Street discovered that the mortgages were all going to go down. And you have the stories of Queen Elizabeth going to the economist…"
-"“How come none of you knew ?”
"Right. The fact is, if everybody on Wall Street called these mortgages liars’ loans, if they knew that they’re made for NINJAs, for people who can’t pay, all of Wall Street knew that it was fraud.
The key is that if you’re a really smart criminal, you have to plan to get caught. The plan is how to beat the rap. On Wall Street, if you buy garbage assets, how do you make the government bail you out ? That was what the president of the United States is for, whether it was Obama or whether it would have been John McCain…"
"Or whether it would be Hillary today, or Trump. Their job is to bail out Wall Street and make the people pay, not Wall Street. Because Wall Street is “the people” who select the politicians –who know where their money is coming from. If you have a campaign contributor, no matter whether it’s Wall Street, or locally if it’s a real estate developer, you all know who your backers are.
The talent you need to have as a politician is to make the voters think that you’re going to be supporting their interests…"
-"And what’s that great Groucho Marx quote ?"
"The secret of success is sincerity. If you can fake that, you’ve got it made".
-"Well, and that’s kind of it. You know, there’s Ron Suskind in his book, what’s it called ?"
-"Confidence Men. He interviews someone on Wall Street, and asks why they’re so hostile to Obama when he’s so protective of Wall Street. And the answer is, because if we keep being publicly hostile, he can always do what we want".
"This is like Uncle Remus and the Briar Patch, when Br’er Rabbit keeps saying, don’t throw me into the briar patch. And finally the fox throws him into the briar patch, and the rabbit runs away, singing “Born and bred in the briar patch”. He runs away and is happy. The moral is that there’s a pretense that if a politician talks against Wall Street and can vocalize people’s resentment, that he must understand them and thus will support them".
-"Well, that’s what Hillary Clinton’s doing in spades".
"That’s exactly it. There’s a movie, La dolce vita, by Fellini, with Anita Ekberg. You have the Italian reporter Marcello go after Ekberg, and then her boyfriend comes up to him and says, “I can understand you”. Then whomp, he hits him right in the face. That basically is what we have here. The politician says to the voters, “I feel your pain. I can understand you”. And they think oh, he understands it. Then the politician hits them in the face and backs Wall Street, and tries to privatize pension funds, privatize Social Security. And doesn’t send a single banker to jail, by appointing Justice Department people who are vetted by Wall Street and treat them simply a “troubled” rich.
So essentially Wall Street campaign contributors have a veto over who you’re going to appoint as Secretary of the Treasury. They want the…"
"Yeah, Attorney General, to make sure that nobody has to pay the price for financial crime. Then the Council of Economic Advisors comes to assure people that Wall Street really is adding to the economy, and if you can only do what the Federal Reserve is doing. So Janet Yellen says, let’s give the banks more money, and the economy can borrow its way out of debt… if only we can have enough quantitative easing.
So the Federal Reserve has given Wall Street $4.5 trillion. That $4.5 trillion could have been used to write down the debt. And then we wouldn’t have a problem. Then everybody would have a lower costs of living. The $4.5 trillion could have been spent into the economy".
-"We could have saved people from being foreclosed and driven from their homes".
"Yes. But that wasn’t what Obama did".
-"Even though he promised that he would. And then he turned around, he earmarked some money to save people who were being pushed out of their homes. And then he never spent it".
"That’s right. It wasn’t spent. That’s what Niel Barofsky, the SIGTARP head –Special Inspector General for TARP– found out. He said, wait a minute, they’re not spending any of it. It’s a fraud. And he wrote a whole book, Bailout, describing the lies Geithner told. Then, when Geithner came out with his own autobiography, Barofsky reviewed it and exposed him as a liar who should go to jail.
Geithner was suitably rewarded by getting a rich job on Wall Street. The Japanese call that “descent from heaven”. When you take your rewards, having sold out the economy to your backers, you get a nice job and end up rich for life".
-"So, let’s talk a bit about what this means for the future, because there’s been no brakes put on this kind of criminal and fraudulent behavior on the part of the speculative class. Bubbles have been re-inflated with public funds. I think you had written an article in Harper’s magazine before 2008 saying this –we’re all going to have a big car wreck. Since we’re playing the game again, what’s going to happen ? Are they going to be able to go back and loot the U.S. Treasury the way they did before ?"
"What’s ahead first of all is that the economy hasn’t recovered since 2008. People talk about that there’s been a recovery, but the recovery has only been for the One Percent. The 99 Percent know they haven’t recovered. That’s why they’re voting for Trump, and that’s why they’re voting for Sanders. But they’re blaming themselves. There’s a tendency of victims to blame themselves. And the other part of that…"
-"But let’s be clear : The media doesn’t explain the economic reality at all. They’re always talking about the recovery".
"That’s the point. The result of the media telling people that is to create a Stockholm syndrome : The victim, the kidnap victim, identifies with the victimizer. The thinking is that if only we can give more money to Wall Street, it will save us. So if the Federal Reserve can only pump more money into the economy…
They talk about the Federal Reserve creating money with a helicopter. But the Federal Reserve’s helicopter only drops money over Wall Street. It doesn’t drop money over the economy. People don’t get it. The Fed doesn’t say, “We’re going to add $200 to everybody’s checking account so they can have more money and pay their debts”. It’s only lending money to Wall Street.
And what does Wall Street do ? It lends out money. So the solution to the debt problem that we’re in –debt deflation– is to lend even more money.
That’s what makes the economy a Ponzi scheme, as you mentioned at the beginning of the first half of this interview. In a Ponzi scheme, people seem to make a lot of money, but that’s because you’re really not making profits. You’re just getting more and more people convinced that you’re making money. And you’re paying the early entrants out of the money from new subscribers. That’s what Bernie Madoff did. The whole economy has become a Madoff scheme".
-"And largely through real estate, right ?"
"Largely through real estate, because that’s the largest asset".
-"So the worth of your house ostensibly rises and rises and rises, and you believe that you have created it –that this is a form of wealth creation".
"Here’s the problem that existed in 2008. Either Obama could have saved the economy, or he could have saved Wall Street. He chose to save Wall Street. And the only way to save Wall Street, if banks have made a lot of bad loans, is to help them not go bankrupt. So what do you do ? You give them more money.
The theory, the pretense in the media, is that banks will make money by lending to industry to build more factories and hire people".
-"And credit dried up for small businesses and consumers".
"That’s right. Wall Street knew that the real estate market was already loaned up. In other words, the game was over. Nobody could pay any more of their income for rent or for mortgages. Banks couldn’t even make more credit card loans. So they began to cancel their credit card exposure. What they did was they gamble on foreign currency".
-"And student debt".
"And student debt".
-"Because it’s guaranteed".
"That’s right. They make, the government…"
-"I mean, the government guaranteed them".
"Since the 2008 crash the government has guaranteed almost all new mortgage loans. Up to 43 % of the borrower’s income, that was guaranteed. Student loans, all guaranteed. But basically the banks made money abroad. If you could borrow at one-tenth of a percent from the Federal Reserve, you could buy Brazilian loans, bonds paying 9 % or more. You could gamble on writing default swaps in Greece.
And when Greece had real problems, the fact that the German and French banks had made too many loans to it, the IMF was going to write down the Greek debt. But then Geithner got on the phone with Europe, and Obama went to the G20 meetings and said, “Look, you can’t write off the Greek debt, because the American banks have essentially turned into horse race betters. We have casino capitalism. They have bet and promised to guarantee, the Greek bonds. If the Greek bonds are written down, the American banks will go under. And if we go under, we promise we’re going to bring you down too. We’re going to bring down the European banks. Do you really want that to happen ?”
So the gambles made by Wall Street ended up almost driving Greece out of the European Union. Wall Street was willing to tear Europe apart politically just for the Wall Street investment banks –basically four banks– to make gains by insuring the Greek debt, by treating the financial market like a horse race.
That’s where we are now. It’s not really about imperialism draining foreign economies. It’s Wall Street making bets. And essentially it’s by Wall Street running the European Central Bank. Just like Europe has to do burden sharing in NATO, the financial ministries have to do burden sharing with the U.S. Treasury".
-"So let’s talk a bit about what this means, where we’re headed".
"It means that markets are not growing, because the American consumer has to spend so much money paying the banks and paying taxes that they don’t have enough money to buy more goods and services".
-"One of the things you pointed out in your book, which I didn’t know, is that when we measure the economy we actually count the paying off of debt, credit card debt, whatever it is, as a form of savings".
"That’s right. After 2008 the savings rate jumped way up. But the saving isn’t available. But to an accountant, if you owe less money, then actually you’ve done the same as paying it out of saving. So we’re in a savings economy. The savings rate in 2008 was zero. Actually, it was minus 2 % when you take into account borrowing from foreigners. The whole economy was essentially consumers maintaining their living standards by running up their credit card debt, and by taking out what Alan Greenspan called cashing out on your house’s rising value, by taking out an equity mortgage loan. But that’s not really cash. That’s taking on more debt.
So you had an inside-out vocabulary. America was going into debt thinking it would get rich, and all of a sudden it finds, it’s in a state of what you said, debt peonage, where the wage workers and others have to pay any increase in wages they get ; it goes to pay down…"
-"Because you’re spending all of your income to service the interest rather than paying off the principal. And that’s why wages have been suppressed since the 1970s. The speculative class on Wall Street does not want people to be able to pay off their debt".
"This was the one thing that Alan Greenspan contributed to economic theory : the Traumatized Worker Syndrome. He said, the reason you’ve had this huge productivity gain without any wage increase is workers are afraid to go on strike, or even to complain about working conditions, because they’re just one paycheck away from homelessness".
-"Which is true".
"And if they miss a credit card payment, all of a sudden their credit card fee escalates to 29 %. Even if they’re late on a utility bill, the bank will raise the fee".
-"So what does this mean ? I mean, what’s going to happen ?"
"It means a slow crash. It means what was…"
-"Which we’ve already begun, haven’t we ?"
"Yes. we’re in a slow crash now. All this was analyzed in the 1930s when it was called debt deflation by Irving Fisher. But debt doesn’t appear in the textbooks. They talk about saving, but not debt. The fact is, all money is debt of one form or another. The cash in your pocket is a government debt, technically. It’s on the liabilities side of the balance sheet. What people thought was an asset turns out to kept afloat by debt. But rather than the rising tide of debt raising all boats, it raises the yachts, but the rest of the economy is underwater, to make a metaphor".
-"So, spell it out for people. What’s going to –I mean, we’ve lost control of this predatory or parasitic force".
"Well, you can look at the future as what’s happening in Greece, what happened in Russia after their traumatic shock therapy. America’s in for shock therapy, no matter who wins the presidential…"
-"So play it out for me. What’s it going to look like ?"
"Well, more people are going to have higher and higher charges for what they spend for medical care. More for schooling. More just to break even. And they’re going to have to draw down their existing savings, or they’re going to have to downsize, or they’re going to have to default. The rate of default is still rising very sharply on student loans. And these are loans you can’t wipe out in bankruptcy".
-"Not unless you’re dead. And it’ll go to your parents, if they’re still around".
"That’s the point. The parents have countersigned. Meanwhile, the students who have taken out these loans are having to live at home with the parents. They can’t afford to buy a house. And if you can’t buy a house it’s really hard to get married. I was in China recently, and my translator there said that women in China are looking for a husband who can get his own house, because you need a house to have children. All that has stopped here.
When you have this phenomenon in Greece, Russia or other places, you have shrinking birth rates, rising mortality rates and disease rates, shorter life spans. Latvia followed this policy and lost 20 % of its population since the late 1990s. You have a huge emigration from Iceland, from Greece. There’s nowhere for Americans to emigrate to".
-"Right. And you say in the book that really, the only option left is a form of debt slavery or revolt".
"That’s exactly it. But the enzymes that the parasite have inculcated via the control of the media tell people it’s not Wall Street’s fault, it’s not the parasite’s fault, it’s your fault. The victims haven’t been able to make enough money to pay the One Percent, the victimizers. That’s financial affluenza after kills an economy".
-"But is it working ? I don’t think the lie of neoliberal economics is being swallowed by larger segments of the population, including the people gathered around Trump".
"That’s right. They know that something’s wrong, but they don’t know what it is, because nobody’s spelling out how the economy actually works. That’s why I wrote my book, to say here’s what’s happening. The reason I was able to warn about the crisis a year before it happened was that I had the charts that were published in Harper’s. My charts were cited in the Financial Times as the only charts by those who did foresee the crisis and said just how and why it would happen.
Anyone who does Wall Street charts about the ability to pay sees that this is what happened in the 1920s. Anybody who did charts like that can tell that there’s an intersection, a breaking point, and there’s a crisis. America now is having the same crisis that Argentina had, that Greece had, that Latvia had, that Russia had. These economies are our future. And it’s going to go down and down in a slow crash".
-"But could it go down and down, and what we end up with is a form of neofeudalism, a rapaciously wealthy, oligarchic elite with a kind of horrifying police state to keep us all in order ?"
"This is exactly what happened in the Roman Empire".
-"Yes, it did".
"You had the great Roman historians, Livy and Plutarch –all blamed the decline of the Roman empire on the creditor class being predatory, and the latifundia. The creditors took all money, and would just buy more and more land, displacing the other people. The result in Rome was a Dark Age, and that can last a very long time. The Dark Age is what happens when the rentiers take over.
If you look back in the 1930s, Leon Trotsky said that fascism was the inability of the socialist parties to come forth with an alternative. If the socialist parties and media don’t come forth with an alternative to this neofeudalism, you’re going to have a rollback to feudalism. But instead of the military taking over the land, as occurred with the Norman conquest, you take over the land financially. Finance has become the new mode of warfare. Not militarily –except in Europe, of course– but simply financially. You can achieve the takeover of land and the takeover of companies by corporate raids.
The Wall Street vocabulary is one of conquest and wiping out. You’re having a replay in the financial sphere of what feudalism was in the military sphere".
-"And in essence, we become a kind of nation of sharecroppers".
"That’s exactly right, having to shop at the company store".
-"At the company store".
-"Well, that lays it out. I think it illustrates the point that we need a vision to counter the vision of predatory, parasitic capitalism. If we don’t get a vision very soon, we’re in for a dark age".
"And the job of the politician is to promise the nice vision, and then double-cross the constituents".
-"Well, so far, unfortunately, they’ve done it very well".