By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is J is for Junk Economics Jointly posted with Hudson’s website
Wall Street did not let the Lehman Brothers crisis go to waste. The banks that have paid the largest fines for financial fraud are now much bigger and more profitable. The victims of their junk mortgage loans are poorer, and the economy is facing debt deflation.
Was it worth it? What was not saved was the economy.
Today’s financial malaise for pension funds, state and local budgets and underemployment is largely a result of the 2008 bailout, not the crash. What was saved was not only the banks – or more to the point, as Sheila Bair pointed out, their bondholders – but the financial overhead that continues to burden today’s economy.
Also saved was the idea that the economy needs to keep the financial sector solvent by an exponential growth of new debt – and, when that does not suffice, by government purchase of stocks and bonds to support the balance sheets of the wealthiest layer of society. The internal contradiction in this policy is that debt deflation has become so overbearing and dysfunctional that it prevents the economy from growing and carrying its debt burden.
Trying to save the financial overgrowth of debt service by borrowing one’s way out of debt, or by monetary Quantitative Easing re-inflating real estate, stock and bond prices, enables the creditor One Percent to gain, not the indebted 99 Percent in the economy at large. Therefore, from the economy’s vantage point, instead of asking how the banks are to be saved “next time,” the question should be, how should we best let them go under – along with their stockholders, bondholders and uninsured depositors whose hubris imagined that their loans (other peoples’ debts) could go on rising without impoverishing society and preventing creditors from collecting in any event – except from government by gaining control over it.
A basic principle should be the starting point of any macro analysis: The volume of interest-bearing debt tends to outstrip the economy’s ability to pay. This tendency is inherent in the “magic of compound interest.” The exponential growth of debt expands by its own purely mathematical momentum, independently of the economy’s ability to pay – and faster than the non-financial economy grows.
The higher the debt/income ratio rises, the more interest, amortization payments and late fees are extracted from the economy. The resulting debt burden slows the economy, causing defaults. That is what happened in 2008, and is accelerating today as debt ratios are rising for corporate debt, state and local debt, and student debt.
Neither legislators, academics nor the public at large recognize a corollary Second Principle following from the first: An over-indebted economy cannot be saved unless the banks fail. That means writing down the financial claims by the One to Ten Percent – in other words, the net debts owed by the 99 to 90 Percent. Wiping out bad debts involves writing down the “bad savings” that are the counterpart to these debts on the asset side of the balance sheet. Otherwise the economy will suffer debt deflation and austerity.
“Recovery” since 2008 has been much slower than earlier recoveries because debt deflation is siphoning off more and more personal and corporate income. To make matters worse, the bailout’s policy of Quantitative Easing to re-inflate asset prices has reduced rates of return for pension funds, insurance companies and employee retirement savings. This means that more state and local government income must be diverted to meet retirement commitments.
Something has to give, and it is not likely to be the savings of the donor class at the top of the economic pyramid. As a result, the economy at large is threatened with an exponentially expanding erosion of disposable income and net worth for most people and companies. Investment managers are warning of a financial meltdown, given today’s historically high price/earnings ratios for stocks and also for rental properties.
What is not acknowledged is that such a crisis is a precondition for today’s economy to recover from the rising debt/income and debt/GDP ratios that are burdening the United States, Europe and other regions. At least the United States has been able to monetize its budget deficits and subsidize banks to carry its rising debt overhead with yet new debt. The Eurozone has banned budget deficits of over 3 percent of GDP, imposing austerity that leaves the only response to over-indebtedness to be Greek-style austerity: depopulation, shrinking living standards, wipeouts of retirement income and pensions, mortgage defaults, shortening lifespans, and mass selloffs of public infrastructure to foreign financial appropriators.
None of this was spelled out in the September 15 weekend marking the tenth anniversary of Lehman Brothers’ failure and subsequent rescue of Wall Street. President Obama, Treasury Secretary Tim Geithner and their fellow financial lobbyists at the Federal Reserve and Justice Department are credited with saving “the economy,” as if their donor class on Wall Street was a good proxy for the economy at large. “Saving the economy from a meltdown” has become the euphemism for saving bondholders and other members of the One Percent from taking losses on their bad loans. The “rescue” is Orwellian doublespeak for expropriating over nine million indebted Americans from their homes, while leaving surviving homeowners saddled with enormous bubble-mortgage payments to the FIRE sector’s owners.
What has been put in place is not a restoration of traditional status quo, but a reversal of over a century of central bank policy. Failed banks have not been taken into the public domain. They have been enriched far beyond their former levels. The perpetrators of the collapse have been rewarded, not penalized for lending more than could possibly be paid by NINJA borrowers and speculators whose mortgage applications were doctored by systemic fraud at Countrywide, Washington Mutual, Bank of America, Citigroup and their cohorts.
The $4.3 trillion that could have been used to save debtors was given to the banks and Wall Street firms whose recklessness and outright fraud caused the crisis. The Federal Reserve “cash for trash” swaps with insolvent banks did not restore normalcy or the status quo ante. What occurred was a financial revolution by stealth, reversing the traditional responsibility of creditors to make prudent loans.
Quantitative Easing saved creditors and the largest stockholders and bondholders by lowering the interest rates by enough to make it profitable for new loans to inflate asset prices on credit. This revived the value of collateral backing bank loans and bondholdings. “Saving” the economy in this way actually sacrificed it. That is why our “recovery” is only “on paper,” a result of calculating GDP to include bank earnings and hypothetical homeowner windfalls as rents are soaring.
Among Democrats, the most extreme tunnel vision denying that debt is a problem comes from Paul Krugman: Writing that “The purely financial aspect of the crisis was basically over by the summer of 2009,”[1]he criticized what he called the “bizarre Beltway consensus that despite high unemployment and record low interest rates, debt, not jobs, was the real problem.”
This misses the point that 2009 was the real beginning for most of the nine million homeowners being foreclosed on and evicted from their homes. Consumers found themselves with less income “freely disposable” after paying their monthly FIRE sector nut off the top of their paycheck – housing charges, credit card charges, medical insurance, student debt, FICA withholding and tax withholding. Krugman says that he would have solved the problem by more deficit spending to pump enough money into the economy to enable debtors to keep paying the banks their exponential growth of interest claims.
We are still living in the destabilized, debt-ridden aftermath of such pro-bank advocacy. In the New Yorker, John Cassidy celebrates a book by Columbia professor Adam Tooze promoting the idea that “the economy” cannot exist without the credit (that is, debt) provided by the financial sector.[2]True enough, but does it follow that rescuing the economy must involve rescuing Wall Street and enriching the banks at the expense of the rest of the economy. That conflation is an Orwellian rhetoric of deception that has been introduced to the discussion of how the economy was “rescued” by locking in today’s Great Debt Deflation.
At the neoliberal/neocon Brookings Institution, Treasury secretaries Hank Paulson and Tim Geithner joined with the Federal Reserve’s Ben Bernanke to explain that the public simply didn’t understand how successful they all were in saving not only the banks, but non-bank financial institutions. Unlike Sheila Bair, they did not point out that behind these institutions were the bondholders, the One Percent of savers who held the rest of the economy in debt. Bernanke wrote a Financial Timespiece producing junk statistics purporting to show that there was no underlying debt or financial problem at all, merely a “panic.”[3]To paraphrase, he said: “The crisis was all in the mind folks. Nothing to see here. Keep moving on.” It is as if, as Margaret Thatcher liked to insist, There Is No Alternative.
Can this bailout without debt writedowns really bring prosperity? Can economies achieve growth by “borrowing their way out of debt,” by creating enough new credit to cover the interest charges out of capital gains from the asset-price inflation fueled by new bank credit. That is the logic that has guided the Federal Reserve’s net $4.3 trillion in Quantitative Easing, and the parallel credit creation by the European Central Bank under Mario “Whatever it takes” Draghi. Ellen Brown recently published a review, “Central Banks Have Gone Rogue, Putting Us All at Risk, noting that the ECB has become a major stock buyer.[4]The beneficiaries are the stockholders who are concentrated in the wealthiest percentiles of the population. Governments are not underwriting homeownership or the solvency of labor’s pension plans, but are underwriting the value of collateral backing the savings of the narrow financial class.
The GDP accounts report the widening gap between low government bond rates and the cost of credit to banks compared to the higher rates paid by mortgage borrowers, credit-card holders and student loan customers as “financial services.” What is extracted from the economy is added to the GDP statistic instead of being treated as a subtrahend. This absurd practice reflects the degree to which Wall Street lobbyists have captured economic statistics. The National Income and Product Accounts (NIPA) have been turned into a vehicle for deception. What is celebrated as growth of the GDP since 2008 has been mainly the growth in financial extraction, along with the health-insurance sector profiting from Obamacare.
Glenn Hubbard, chairman of the Council of Economic Advisors under George W. Bush, uses Orwellian doublethink to pretend that “Debt is Wealth.” He concludes a Wall Street Journalop-ed: “An ability to recapitalize banks remains crucial and must be explained to a skeptical Congress and public,”[5]so that wealthy bondholders and speculators will not suffer losses.
On a brighter side, Adair Turner pokes fun at the “Authoritative experts such as the IMF [who] explained how increased securitisation and trading activity made the financial system more efficient and less risky.”[6]It was as if “options” and hedges can get rid of risk entirely, not shift them onto Wall Street victims such as the naïve German Landesbanks.
The aim of this week’s disinformation campaign is to prevent popular anger advocating what was done in classical antiquity. The ancients fought civil wars for land redistribution and debt cancellation. Today the demand should be for mortgage writedowns to bring their carrying charges in line with reasonable rent charges, limited to the former normal 25 percent of homeowner income – while rolling back the FICA wage withholding and allied taxes levied to bail out the creditor class.
An Athenian Antecedent to Today’s Financial Takeover
It is an old story, with a striking parallel in classical Athens. After losing the Peloponnesian war to oligarchic Sparta in 404, a Pinochet-style military junta – the Thirty Tyrants – was installed. During its eight months of terror its members killed a reported 1,500 democratic advocates whose land and other property they grabbed. Advocates of democracy took refuge in Thrace and other neighboring regions.
After the exiled democratic leaders reconquered Athens, they sought to restore harmony, going so far as to pay off all the debts that the oligarchic junta had run up to Sparta. To top matters, the subsequent 4thcentury obliged Athenian jurors and indeed, mayors in some Greek cities to swear an oath: “I will not allow private debts (chreon idiom) to be cancelled, nor lands nor houses of Athenian citizens to be redistributed.”[7]
If no such pledge is needed today by public officials, it is because the financial administrators at the Treasury, Federal Reserve and other regulatory agencies already have shown themselves to be so tunnel-visioned from graduate school through their employment history that they can be trusted to find debt writedowns as unthinkable as enforcing laws against criminal financial fraud to punish individuals rather than their institutions. Academia joins in the deception that financial engineering can sustain a geometric growth in debt ad infinitumwithout imposing austerity.The bailout aftermath has demonstrated that corporations are not really “persons” if they cannot be given jail time made their officers personally liable.
The key financial principle is that this self-expansion of interest-bearing debt, growing to absorb more and more of the economic surplus. The solution therefore must involve wiping out the excess debt – and savings that have been badly lent. That is what crashes are supposed to do. It was not done in 2008. That is why the status quo was not restored. A vast giveaway to the financial elites occurred, setting the rest of the economy on a road to debt peonage.
It would have been nice to have read an article by Sheila Bair explaining the procedures that the FDIC had in place, ready to take over insolvent Citigroup and other banks in similar straits, saving all the insured depositors by taking over these institutions. No doubt as public institutions they would not have indulged in junk mortgages or, for that matter, takeover loans.
It would have been nice to hear from Hank Paulson and perhaps Barney Frank on how they tried to get incoming President Obama to write down bad mortgages whose carrying charges were as far above the debtor’s ability to pay as they were above the going rental value for similar properties. It would have been nice to hear a mea culpafrom Mr. Obama apologizing for representing the interest of his campaign donors by standing between them and his voters with pitchforks. Even an article by Tim Geithner or Eric Holder on how lucky they felt at getting such high-paying jobs after they left office from the financial sector they had overseen and “regulated.”
What is needed now is to follow up the primary policy perception that today’s financially dysfunctional economy cannot be saved withouta bank crash. That means rolling back the enormous gains that the FIRE sector has made since 1980 at the expense of the “real” economy. Banks have ceased to be an “engine of growth.” They are not making loans to create new means of production. They are lending to asset strippers, not asset creators. It is not hard to show this statistically. (I drafted an attempt in Killing the Host, and am now working with Democracy Collaborative to prepare a larger study.)
At stake is whether the U.S. and Western European economies are going to end up looking like those of Greece, Latvia and Argentina – or imperial Rome for that matter. Neoliberals applaud today’s victorious finance capitalism as the “end of history.” One such end has already occurred once, at the close of Roman antiquity. It is remembered as the Dark Age. Progress stopped as the creditor and landowning class lorded it over the rest of society. Trade survived only among the lords at the top of the economic pyramid. Today’s “End of History” dream threatens to unfold along similar lines. It is all about relative power of the One P
[1]Paul Krugman, “Days of Fear, Years of Obstruction,” The New York Times, September 14, 2018.
[2]John Cassidy, A World of Woes: A global take on a decade of financial crisis,” The New Yorker, September 17, 2018.
[3]“Ben Bernanke pins blame for Great Recession on bank panic,” Financial Times, September 13, 2018.
[4]Ellen Brown recently published a review, Central Banks Have Gone Rogue, Putting Us All at Risk.” Public Banking Institute and Truthdig, September 13, 2018.
[5]Glenn Hubbard, “Bailouts Shouldn’t Be Only for Banks”Wall Street Journal, September 14, 2018. To be sure, Hubbard acknowledges that Republicans had agreed to but incoming President Obama nixed: “The government should have directed a mass refinancing of mortgages for primary homes in which the borrower was current in payments.”
[6]Adair Turner, “Banks are safer but debt remains a danger,” Financial Times, September 12, 2018.
[7]Demosthenes Against Timocrates(xxiv.149).
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If the growth of debt is higher than the ability of the economy to pay then we need to look into how to make them in sync with each other or the former lesser than the latter. Any ideas apart from simple interest?
The killer/no filler line Michael Hudson always delivers at least once an article:
I agree Paul although I have to say the whole piece is unique among all the nonsense that has poured forth from the usual suspects on the tenth anniversary of the Lehmann collapse, none of the actors in which have suffered financially – as in lost their home or income , or capital. The post 2008 balance sheet does not balance and so at some point a severe correction will occur . As Matt Taibbi has pointed out the bailing out of the banks didn’t save Capitalism it saved the banks ‘ from Capitalism ‘ . Post 2008 the banks are truly the welfare queens par excellence of our tortured economies .
Yes, bankers fear monger about how irresponsible “the people” would be if they got their hands on the mechanisms of fiat money, but the one time “the people” did, we got the New Deal and vast, prosperous middle classes in every affected country (see the Marriner Eccles post on Saturday).
Now the bankers have their hands on the mechanisms of fiat money and what they choose to do with it is gorge themselves like giant tics on a mouse: as Husdon says, “Killing the Host”.
the balance has been restored, the poor have greater obligations and the rich have greater assets.
Assets that can be leveraged, politically,legally, militarily and financiacally to decadently maintain and mine those obligations.
It’s doctrination all down,baby…………..
I had no idea how many adverbs I would have to use in that comment.
Agency sure seems important
As Matt Taibbi has pointed out bailout of the banks didn’t save Capitalism , it saved the banks from Capitalism. The banks are the welfare queens par excellence now.
Even when they are close to correct, you can still see that modern economics is a morality play, not a science in any sense of the word:
“The government should have directed a mass refinancing of mortgages for primary homes in which the borrower was current in payments.”
Why does the borrower have to be “current in payments”??? If he’s really a deadbeat then he won’t make the new mortgage payments either, and foreclosure will still follow and those all-so-important moral lessons (for the little people) will be learned. If she’s not, this might just be the lifeline needed.
Shorter me: (Family blog) Glenn Hubbard, if that’s the best he can do.
Because many homeowners got into their foreclosure mess due to job loss caused by the financial crimes, I always felt that we should have had a forbearance until employment was secured post-crisis.
I lost years worth of wages just trying to save my home. That monetary loss can never be reclaimed.
That’s the point. Putting the little people into their place. Helping you was about the last thing that they wanted to do.
To paraphrase Andrew Mellon, they should liquidate stockholders, liquidate bondholders, liquidate uninsured depositors, liquidate insolvent banks – and when they are finished doing that, liquidate all the bad debts held by the later. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.
I suspect something different. As they got away with it the last time around by saddling the real economy with all the bad debts that they made while still accruing massive bonuses to themselves under the protection of the government, they will want to do it again. Logic dictates that as another crash is inevitable, that plans are being made to capitalize on the next one. I would not be surprised, for example, that there is legislation been drawn up to change the laws to protect themselves, consolidate their power and load their newer mistakes on the taxpayers. If this sounds unlikely, remember how after 9/11 that the legislation for the ‘Patriot Act’ suddenly appeared out of nowhere already thought out and drawn up? This will be more of the same.
They might want to do it again, but where will they find takers on of debt to take on more debt? I think the well has run dry.
On that last part, it didn’t appear spontaneously. The Patriot Act was already ghost written before 9/11 to take advantage of something like it. Not that the writers wanted 9/11, but that they were prepared for opportunity.
Should have put in a sarc tag. That is what I meant. You wonder what other Acts are out there just waiting for the next crisis to appear.
It is getting harder and harder to actually be sarcastic isn’t? Sometimes I wake up and it’s like WTF happened?
“No matter how cynical I get, I just can’t keep up.” – Lily Tomlin
Maybe the time has come for the 90 or “99”-percenters to #juststoppaying? Since functionally that seems to be inevitable, and does it hurt more to rip the Band-Aid ™ off quick, or peel it off slowly, where the ping of each hair being plucked by Johnson&Johnson’s best adhesive from the macerated skin beneath can be fully, ah, appreciated?
I stopped paying a long time ago. After I left the US in 2004, I paid for a while so I would not have trouble getting legal residency where I live now. Then when 2008 hit the fan, I wrote the few that I still owed money: sorry, I’ll get back to you. No money. I never got back to them, and they never got back to me. That cleared a couple of CC balances. I still owe the IRS some money since I raided my 401k, but I have a legal deferment. If we make it to next August and I can start to collect early Social Security, I will arrange (or they will arrange) to have some portion of my payments withheld to pay it back. I might also try the hardship route.
I seriously think the non-payment route will become the norm, not even an optional thing. I think in the US, even if people took that approach (just stop paying) a lot of them would end up in jail/prison in the short term. Longer term, it won’t matter. What can’t be paid back, won’t be paid back.
Michael Hudson is a God that Walks the Planet.
Perhaps not a god, but a guy with more than a normal (or what should be normal) amount of common sense. Something sorely lacking in the world today. We need more like him and less like the Bezos. Still, I get your point and appreciate what he has to say.
that’s why the Hudson river is named after him.
There is definitely a lot of well deserved smiting to be done.
…so while Hudson echoes “to recover from the rising debt/income and debt/GDP ratios that are burdening the United States, Europe and other regions”, elsewhere in this same issue of naked capitalism is blog entry “J.D. Alt: Paying for Hurricanes” (mildly) pooh poohing the same point Hudson is raising. Is Hudson leaning stealth right?
You will have to explain that further.
What is stealth right?
How is leaning this way?
Private debt and sovereign public debt are not analogous. Alt and Hudson would disagree on very little.
This is such a straightforward explanation of what happened to the economy in 2008, who benefited, and where we are today, that it must be finally agreed to by all. There is no way for things to continue in this fashion, and now that so many lives have been grievously affected, surely even the ones who have benefited so outrageously must be losing sleep, taking on burdens of illness that they never would have had if they had listened to Professor Hudson and Bill Black way, way back in the day.
Not a god? He’s mighty mighty close to being one in my opinion. Thank you, Professor Hudson for all you do.
How far down we have come when just saying the (obvious) truth makes one Godlike, but in reality those actually directing the insanity that is our political economic policy of economic obliteration are the ones given praise by the media and the politicians.
For those not familiar with Nicheal Hudson’s web site here is a link to one of it’s articles with a link to home page. He has a new book coming out in November called Jesus Died for Your Debt not for your Sins. He has focused on ancient societies in the mid-east and how they sustained their societies. The key was debt forgiveness referred to a the Jubilee. The Bible is all about the struggle between debters and creditors. Sin and debt are represented by the same word. The Bible was interpreted as talking about sin when the original emphasis is on debt. It’s all there at Hudson’s site.
https://michael-hudson.com/2018/04/jesus-the-economic-activist/
Sorry, Telee, you will not discredit with those of the Christian faith Professor Hudson’s important work on the debt Jubilee as expressed in Biblical texts. We will most certainly agree, we Christians, that the practice of willfully imposing long term monetary indebtedness is a major offense and ranks right up there with all other sins mankind is capable of committing. It is a sin. Where we disagree is in saying that it is the only sin, but oh boy, is it a major one right now!
It is the sin from which all other sins flow…
We face another Dark Ages. We are engaged in a greater level of Economic Warfare than ever seen. Or as I read it somewhere “an unparalleled level of Economic Warfare.” Russia’s response has been Hybrid Warfare. Nobody has even asked them to pay for annexation of Crimea. Is it that their roubles are no good?
Years now have passed since IHS-Janes the private intelligence company for Corporations, primarily in the employ of the fossil fuel and weapons industries said Putin wants a land route directly to the Black Sea. What about a toll road?
Meantime due to near Unitary Power of the US & its Executive Offices fights are picked with China and Iran and the DPRK. The UN doesn’t have the balls to even demand the DPRK provide Notices to Airmen of rocket launches as do other nations as mandated by the ICAO. It is not necessarily illegal to launch rockets. If nuclear power has Civil Power generating utility rockets sure have civilian uses as well.
Rome was a competitive civilization with the one we have now and was unique for not being willing to use the Jubilee, (means write offs and write downs of debts) to maintain its civil society.
Western Civilization now is replicating Roman Banking practices in that regard and so Civil Society, led by the UN shies away from confronting the bankers while making themselves feel better about it as talking about the plight of Women, and how important “Sustainable Development” is.
The point of John C. Mearsheimer’s book “The Tragedy of Great Power Politics” is over and over that a nation without nukes will be subjugated. He has the honest to crow that he told Ukraine so.
The most important thing to have developed in our world at this time is a Government of Governments. It is what Mearsheimer says is missing and as missing means the weapons of riot, apocalyptic riot replace all civilization and law of and for nations.
The Euro system and the US Financial System are not advanced into an art form though they are with the perfection of fiat currency must be.
We are not peasants assured of food from our fields of occupation. Without money we are starved.
Clearly the US has reached too far before this administration towards Unitary power lost during the Obama administration, and the Western World’s Civilization dependent on a work of conceptual art that is a Financial System based on Economics Michael Hudson, Warren Mosler, Randall Wray, & Stephanie Kelton articulate has not reached far enough.
Thanks
P.S. I had not any idea of the write off as same as Jubilee until reading of Anarchist leader call for it with that use of the word which before I only understood as a word to describe a big party. I defined it in this letter for that reason, not to insult you knowledgable readers.
…Rome was a competitive civilization with the one we have now and was unique for not being willing to use the Jubilee, (means write offs and write downs of debts) to maintain its civil society.
Western Civilization now is replicating Roman Banking practices in that regard and so Civil Society, led by the UN shies away from confronting the bankers while making themselves feel better about it as talking about the plight of Women, and how important “Sustainable Development” .:.
One of the reasons why it collapsed is the hollowing of its economy, which included the collection of wealth including money, and especially land, into a fairly small class, especially in Gaul and Italy. When the Goths destroyed a very large chunk of the Roman army and killing the emperor at Adrianople in 378. In past times, Rome would have just created another army, but it was very difficult to replace all the experienced soldiers, never mind getting the new people.
The only reason the Goths were at war was because corrupt Roman officials screwed them over after they had come to Rome begging for help. It took some effort to make semi homeless refugees, which the Goths were, into an enraged nation, but arrogance and greed make people do really stupid stuff. Anyways, the Goths got their payback and then went to Italy and sacked Rome.
The Italians made no effort to fight as most of them were poor peasants working for very wealthy people with very large estates/farms. I am not sure that Rome even repaired the aqueducts that were destroyed by the Goths.
So Eastern Roman officials started an unnecessary war because of greed and arrogance which caused the destruction of an unreplaceable army triggering the sequence of disasters, misfortune, civil wars, and loss of much of what little economic strength remaining that caused the collapse of the Western Roman Empire.
I am noticing a certain rhyming of history here.
“What is celebrated as growth of the GDP since 2008 has been mainly the growth in financial extraction, along with the health-insurance sector profiting from Obamacare.”
True, but health insurers are not the only sector in the overall healthcare sector that have profited enormously from ObamaCare. The hospital sector has profited enormously as well, perhaps even more so. I say this because ObamaCare is tailored such that it has encouraged consolidation in the hospital industry. The same can’t be entirely said about the health insurance insurance. In fact, as the hospital industry continues to consolidate without any limits, consolidation in the health insurance industry has pretty much fizzed out.
It’s not due to lack of trying, though. The insurance industry has tried hard to consolidate even further, but has failed miserably due to a number of antitrust blows by the FTC. ( My guess is that ObamaCare has played a role in this, somewhat hidden though it is.) As of late, the FTC has blocked several high-profile merger attempts in the health insurance industry, specifically ones which are classified as “lateral mergers.” However, the FTC has done absolutely nothing to block so-called “vertical” mergers, which entails mergers between insurers and primary care providers, as well as between Pharmacy Benefit Managers (PBMs).
Needless to say, this has got the hospital industry a bit worried because these insurer-provider mergers have the potential to take money and power away from hospitals in general. But in reality, hospitals, including the very biggest ones, have very little to worry about. After all, the FTC and the courts have done next to nothing to block consolidation in the hospital sector. Hospitals are free to merger like mad without so much as a sidelong glance by the FTC or the courts.
Therefore, as consolidation on the hospital industry continues unabated, hospitals deserve an increasingly larger share of the blame for skyrocketing healthcare costs. Unfortunately though, hospitals will continue to be viewed as a mere bit player in terms of their contributions to rising, out-of-control healthcare costs, thanks to our spineless and supine anti-trust enforcers, as well as our spineless and supine media!
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.
Banks can create real wealth indirectly by lending money into business and industry.
2008 – “How did that happen?”
The financial wealth creators weren’t creating real wealth. They were just inflating asset prices and that sort of wealth can just disappear almost over-night, as it did.
Real wealth doesn’t disappear over night
The financial stability of the Keynesian era came from knowing how to create real wealth.
After the Keynesian era we threw the baby out with the bath water.
They used neoclassical economics in the 1920s.
They found out what was wrong with neoclassical economics in the 1930s.
Neoclassical economics came back in the 1980s and everything that had been learnt in the 1930s was forgotten.
The baby went out with the bath water.
Glass-Steagall separated the money creation side of banking from the investment side of banking. It also stopped the money creation side of banking from trading in securities.
The people that put it in place knew what it did, the people that repealed it didn’t.
Without Glass-Steagall the bankers could create money to buy securities they produced themselves in a ponzi scheme.
This is what they did.
https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png
1929 – Inflating the US stock market with debt
2008 – Inflating the US real estate market with debt
They look the same because they are.
Oh yes they did
Irving Fisher was a 1920’s neoclassical economist and he thought all those things that neoclassical economists think about the markets.
“Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.
He became a laughing stock, but being an economist who liked to understand the economy, he worked out where he went wrong and came up with his theory of debt deflation.
Hyman Minsky picked up this work and developed it into the financial instability hypothesis in 1974, which was then picked up by Steve Keen who saw 2008 coming in 2005 by looking here.
https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png
Steve Keen has been shunned by the mainstream in the West, but the Chinese have come to the same conclusion as him (they may have just read his work of course).
The private debt-to-GDP ratio tracks the unproductive lending in the economy that hasn’t created real wealth (GDP)
And GDP is a meaningful economistocal measure of exactly what, again? Although commonly posited as being full of meaning.
Lest we forget the author of GDP publicly disagreed with the way dominate economics used it, econometric taken out of context, human tool user problem thingy… wink….
GDP may not be perfect, but it is a step forwards from thinking the markets tell you anything about the economy.
Irving Fisher was a 1920’s neoclassical economist and he thought all those things that neoclassical economists think about the markets.
“Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.
He became a laughing stock, but being an economist who liked to understand the economy, he worked out where he went wrong and came up with his theory of debt deflation.
Hyman Minsky picked up this work and developed it into the financial instability hypothesis in 1974, which was then picked up by Steve Keen who saw 2008 coming in 2005 by looking here.
https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png
Steve Keen has been shunned by the mainstream in the West, but the Chinese have come to the same conclusion as him (they may have just read his work of course).
The private debt-to-GDP ratio tracks the unproductive lending in the economy that hasn’t created real wealth (GDP).
The UK is a better illustration of before and after.
https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.png
Before 1980 – banks lending into the right places that result in GDP growth
After 1980 – banks lending into the wrong places that don’t result in GDP growth
The UK eliminated corset controls on banking in 1979 and the banks invaded the mortgage market and this is where the problem starts.
The US and many other countries with salt water shores face another big problem–the rising sea levels, more powerful storms, and increased flooding that are inevitable because of higher sea water temperatures. Billions of dollars worth of physical assets will have to be abandoned if they can’t be protected. Whole cities and counties will lose usable land and their economic reasons for being. Millions of people, most of them with low incomes and many who lost everything they owned, will have to move in search of work. The refugee problems will exceed anything the world has seen so far.
This reality must be faced at the same time as debts and interest costs will have to be reduced. This is not an “either/or} problem, it is an inescapable “and” problem.
How can we take on both of them?
US president Trump said the only reason he continues to want to make more money is to “keep score”. We are destroying the earth so Trump as his 0.001% peers can continue to play money games that are all but worthless even to them. What kind of civilization (SIC) makes it possible in a sea of poverty for its wealthiest citizens to buy trips to the moon??
Sorta like quatloos and the gamesters of Triskelion?
More like fizbin (financial business)
It’s no good fixing the banks, if there are no borrowers.
The banks are ready to lend, but no one wants to borrow.
This is what happened after 2008, and the enormous bank reserves built up by QE didn’t reach the real economy.
Inflation staid low, as the money didn’t enter the real economy.
Financial asset prices grew, as the banks had huge reserves to play with.
Richard Koo has the charts showing the enormous bank reserves built up by QE that could not enter the real economy.
https://www.youtube.com/watch?v=8YTyJzmiHGk
Japan has been in this situation since the 1990s (balance sheet recession).
The private sector is paying down the debt from the 1980s boom and few want to borrow.
The banks are ready to lend, but few want to borrow.
To get the real economy going again requires fiscal stimulus.
Debt deflation is due to a shrinking money supply as people repay debt and destroy money.
The money supply ≈ public debt + private debt
The private debt component is going down, so you need to increase the public debt component.
Plaza Accord….
Hudson writes: “Banks have ceased to be an “engine of growth.” They are not making loans to create new means of production. They are lending to asset strippers, not asset creators.”
I do not think this is difficult to show. For example, from my most recent “Weekly Wrap” of economic news (which heavily relies on Naked Capitalism while attempting to include more science and technology news):
https://real-economics.blogspot.com/2018/09/week-end-wrap-september-15-2018.html?m=1
“The “very underpinnings of modern capitalism are being questioned” precisely because so little of the flow of capital no longer goes to assist to the development of new technologies, new companies, and new jobs that are economically progressive (in terms of actually creating new, generally shared economic progress). Instead, most of the flow of capital goes to speculation: over $5 trillion a day in the foreign exchange markets alone; nearly $700 billion daily in USA bond markets, and about $200 billion per day in USA stock markets. Compare these daily trading volumes to the approximately $74 billion in total USA venture financing for the entire year of 2017, or the $1,575.7 billion ($1.6 trillion) U.S. nonfarm businesses spent on new and used structures and equipment in the entire year of 2016. Just to emphasize the point: the foreign exchange markets move three times more money in one day than all USA businesses spend on new plant and equipment in an entire year, while the USA bond market by itself will move as much money in two days and two hours.”
Original has links to sources for these numbers. If anyone knows Dr. Hudson, please pass this along. Thank you.
“The $4.3 trillion that could have been used to save debtors was given to the banks and Wall Street firms whose recklessness and outright fraud caused the crisis.” This is obviously true, but what really infuriates me is that the bailout was NEVER an either/or choice between banks and homeowners: bailing out the homeowners would automatically have bailed out the banks. I vaguely recall Naked Capitalism making this point back in the day (am I right about this?) but it is worth spelling out. All the government had to do was make the mortgage payments (as in pay the loan servicing bank directly) of all homeowners who lost their jobs because of the economic downturn. All that would be needed from the homeowner would be a copy of a notice or record from their state unemployment office. Self employed homeowners could submit a sworn affidavit attesting to their “lack of employment”. Note that no elaborate “means testing” would be required. The Treasury/IRS gets their W2s and schedule Cs so verification is automatic (if delayed): it all comes out in wash anyway. For how long would the mortgage payments be made? I believe the open-ended answer “as long as it takes” would be the best choice. Note that this scheme could also be (and I believe should be) extended to unemployed renters–the effect would be to keep small landlords from defaulting on their mortgages.
Following the money, it is clear that the default problem largely vanishes. All all these mortgage loans are now current and “performing assets”. There is no need for a massive bank bailout. Gone are the tent cities of homeless people. These were widespread and enormous but largely unreported by the mainstream media. Gone also are cratering and collapsing real estate values with whole neighborhoods being deserted because of massive foreclosures.
Would we have had a recession? Probably yes, but not a “Great Recession”, both in terms of length and unemployment, and that makes quite a difference.This is so because bailing out unemployed homeowners (and renters) is also a great fiscal stimulus. Almost certainly it would have been cheaper and the economy today would be far better off.
Letting the banks go under as they collapse from their impending failures is an opportunity to replace them with a new financial system.
A new form of exchange to replace USD, JPY, EUR, etc. at a ratio that removes the over-issue approved by central banks and restores the world’s currencies to an appropriate level for the size of our global economy and population.
Progress stopped as the creditor and landowning class lorded it over the rest of society.
Life stopped for this ” Aristocratic one percent class”. In the UK there are no aristocratic families who can trace their roots back much further than the Norman Conquest. Ever the UK Royal family has to get new blood form abroad (James I, George I, etc)
Is the same true for the Aristocracies, Turkish, Ottoman and Byzantine of the East and the Italian, Spanish and French of the west?
The English dynasties are noted for their length among very closely related heirs. Most dynasties that lasted tend not to have a father to son dynamic. Obviously, we can discuss semantics, but other dynasties that last tend to have significantly more variety than the English ones. The power of House of Commons (whatever they use to call it; I’ve drawn a blank; other institutions in other counties were too ad hoc) probably helped make the English monarchs more tolerable as succession approached.
Attempts to have dynasties similar to the English one usually fail. There is too much at risk.
I don’t think there is any reasonable argument counter to Dr. Hudson’s axiom that debts which cannot be repaid will not be repaid. It’s also plain that people cannot buy anything without money to spend. Without jobs the only source for that money is more debt.
I am puzzled by what to make of discussion in the post around the quote from Krugman’s Op-Ed piece: “bizarre Beltway consensus that despite high unemployment and record low interest rates, debt, not jobs, was the real problem.” I think high unemployment, record low interest rates paid, and high levels of debts paying relatively high rates are all aspects of the same problem — a badly distorted economic structure. Truly, the financial crisis and the ascendancy of the FIRE Sector reflect serious flaws in the economic system. All Dr. Hudson’s assertions and proposed solutions make perfect sense. But I remain unconvinced that in their sum they would be sufficient to repair our economy and our polity. Many good first steps — our society feels much more badly broken than a broad debt jubilee and some bank restructuring could fix.
I’m not sure how this fits but it keep pestering me to join this comment —
I can imagine an Emperor Jones, supreme commander of America, in his departing moments repeating the last words of the Emperor Claudius from the TV-play “I Claudius”: “Let all the poisons that lurk in the mud hatch out.”
You’re right. Solving the debt problem would not solve the problems of capitalism, exploitation of labor, environmental pollution, war …
But it’s presenty the most pressing problem destabilizing society, and has been so throughout history.
Could I impose for one moment good Sir and forward the term debt its self is a problem, being multifaceted and all, not to mention all the various continuations via various philosophical bents flowing throughout history.
Especially considering the contractual nature and how that is administered.
What has been put in place is not a restoration of traditional status quo, but a reversal of over a century of central bank policy.
Just so. Thank much for this post. (They would rather destroy the financial soundness of the county as a whole than admit they were wrong. imo. )
I first learned about Mr. Hudson in a series of interviews with him around 2003 at Counterpunch.org by a journalist named Standard Schaefer https://www.counterpunch.org/author/2rbmsph111/
Here you would learn why Hudson was banished ages ago from the dark science of orthodox economics, and begin to learn that everything you’ve been told is a lie. This was followed by some excellent interviews by Bonnie Faulkner at http://gunsandbutter.org, and finally a note that he often appears on this website – have been a loyal reader now for many years. I have some of his books now and can only give thanks that people like this exist in our world
It’s quite clear that it was waitresses in Las Vegas that caused the Financial Crisis. Wall Street was just an innocent bystander that made a handful of errors.
https://www.reuters.com/article/us-usa-economy-cohn/who-broke-the-law-cohn-says-in-defending-wall-streets-role-in-crisis-idUSKCN1LX2LC
https://www.reuters.com/article/us-financial-crisis2008-podcast-breaking/breakingviews-the-exchange-a-chat-with-gary-cohn-idUSKCN1LY2Z3
The biggest confidence trick in the history of mankind, and the Americans have fallen for it twice.
We released the power of finance, which was the power of debt and debt just brings future prosperity into today.
The 1920s was the debt fuelled boom and the 1930s was the impoverished future that the 1920s prosperity had come from.
For Japan, the 1980s was the debt fuelled boom and ever since has been the impoverished future that the 1980s prosperity came from (balance sheet recession). It had already played out again in Japan before 2008.
Finance needs to give experts and world leaders a totally distorted view of reality for this confidence trick to work.
They can’t understand money, debt, banks and the money supply otherwise they would realise what is going on.
Banking theory has been regressing since 1856, when someone worked out how the system really worked.
Credit creation theory -> fractional reserve theory -> financial intermediation theory
“A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner
http://www.sciencedirect.com/science/article/pii/S1057521915001477
Even Ben Bernanke thought banks were financial intermediaries, and we put him in charge of the FED. No one could see the problem with his work on the Great Depression as the experts had been rendered incapable.
The confidence trick also relies on neoclassical economics that doesn’t consider debt and makes you think real wealth lies in the markets and money.
The Americans have fallen for this twice.
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.
The world had been fooled and loaded up on debt to mess about with financial assets and not create real wealth.
The best example is the UK:
https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.png
Before 1980 – banks lending into the right places that result in real wealth creation and GDP growth
After 1980 – banks lending into the wrong places that don’t result in real wealth creation and GDP growth
Everyone else does the same:
At 25.30 mins he has super imposed the debt-to-GDP ratios.
https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
The sequence of events:
1) Debt fuelled boom
2) Minsky moment
3) Balance sheet recession (stagnation) / Great Depression
2008 – “How did that happen?”
The financial wealth creators weren’t creating real wealth and a lot of it disappeared.
As we have spent so much time inflating financial asset prices (this includes real estate), rather than creating real wealth a lot of it is going to disappear again.
When asset prices collapse banks become insolvent.
Money comes out of nothing and should never be a problem as long as you have about the right amount. If there is too much you get inflation, and if there is too little you get stagnation/debt deflation.
Central banks can repair the damage the banks have inflicted on themselves at no cost.
The real economy can be driven through Government money creation to provide jobs and wages while the private sector recovers.
2008 – “How did that happen?”
The financial wealth creators weren’t creating real wealth and a lot of it just disappeared.
As we have spent so much time inflating financial asset prices (this includes real estate), rather than creating real wealth a lot of it is going to disappear again.
When asset prices collapse banks become insolvent.
Money comes out of nothing and should never be a problem as long as you have about the right amount. If there is too much you get inflation, and if there is too little you get stagnation/debt deflation.
Central banks can repair the damage the banks have inflicted on themselves at no cost.
The real economy can be driven through Government money creation to provide jobs and wages while the private sector recovers.