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Wall Street’s Euthanasia of Industry
July 16, 2011
By Michael Hudson
Michael interviewed on Guns N Butter with Bonnie Faulkner
(transcript: listen at link below)
Thank you very much, Bonnie.
Michael, I read the in the newspapers that the great recession, so-called, has long since ended but that unemployment remains stubbornly high with only a measly 18,000 jobs created in June. I believe the term that was coined some time ago is a jobless recovery. What is a jobless recovery?
We call that a depression. And the economy is going worse and worse. That’s why today the stock market is down 160 points. The financial sector realizes that the game is over. The financial interests from America to Greece, Ireland and Europe are all insisting that governments pay off the bad bank loans that they’ve taken onto their balance sheet by increasing taxes and pushing the economy into a depression. In the United States, president Obama has bought the idea that the only way of getting recovery is to cut wages by about 30 percent and he’s doing that in two ways. At the Federal Reserve he’s empowered the Federal Reserve Chairman, Bernanke, to lower interest rates, flood the economy with money, QE2, $600 billion have flown out of the country, to push the dollar down. When you push the dollar down the main victims are consumers because oil prices and raw materials prices and machinery prices and shipping all have a common cost.
When you’re devaluing the currency what you’re devaluing really is the price of labor because all the other costs are globally fixed. So Obama believes that reducing the prices of American labor in foreign exchange is going to make the economy more competitive. At the Treasury Department you’re now seeing him argue over how to reduce the budget deficit and he is doing what nobody really imagined the change was possible when he was elected president. He’s actually moved to the right of Michelle Bachman and the Republican party. Michelle Bachman on television recently has pointed out that she was against TARP, the giveaway to the Wall Street interests.
I remember the very last presidential debate between Mr. Obama and Mr. McCain. It was on a Friday night and McCain had just gone back to Washington to say that he supported the bailout of the banks. And in the debate, everybody avoided even discussing the bailout. And then later Mr. Obama said that in order for there to be a recovery the banks had to avoid losing a single penny. And in fact, what’s happened today was all made pretty clear even before Mr. Obama was elected by the appointees he made – the sort of right-wing economic appointees, Tim Geithner, the bank lobbyist and the Secretary of the Treasury, Larry Summers, financial pusher of bank deregulation and getting rid of the Glass-Steagall Act as his chief advisor, and of course Rahm, who was pushing the interests. So the Obama administration kept the Bush administration by giving $13 trillion of giveaway to the banking sector. Now, all of this has pushed the government way into deficit and the question is, how do you get the money back?
People would have thought before Mr. Obama was elected that he’d get the budget back in balance by now beginning to reintroduce progressive taxation by taxing wealth and by using the taxes on finance and the very rich to fund what he’d promised – a public option in the public health program and protecting Social Security. Over the weekend he’s come out against this. He wants to lower Social Security, to cut back Medicare, cut back Medicaid, especially the payments to the poor, and you realize that now if you look back on that last debate he had with John McCain before the election in 2008, he and McCain were bidding for the campaign contributions that are what politicians do. And the way that you get campaign contributions, if you’re any politician, is you deliver your constituency to your campaign contributors.
The biggest campaign contributors are Wall Street and the real estate sector, and these are the contributors that the Democrats and the Republicans are all vying for and indeed, Mr. Obama’s main contributors were these large Wall Street interests and those are the people that he’s going for now and he’s delivering his constituency, namely the people who voted Democratic, and he’s delivering them to Wall Street and he’s showing his philosophy by saying, “Well, we have to make sure that bankers don’t lose money; employees lose money.”
Now, over the weekend, yesterday in the New York Times, there was an interview with the head of the FDIC, Sheila Bair, whose five-year term just expired last week. Now that it’s expired she can begin to tell the stories. And she told the story of how one meeting with Obama after another he’d make promises to her, promises that he would try to prevent the mortgage crime that was occurring, to prevent the fraudulent subprime mortgages, to make a bank regulation to prevent criminal activities. She said in every case she’d go to his big speeches and an hour before the speech she’d be given a copy of it and he took out everything that he’d promised her and it was all rewritten by the big bank contributors.
The important thing is that now Ms. Bair is saying look, people said that there would’ve been a meltdown I you didn’t give all this 13 trillion to Citibank, to AIG and to Goldman Sacks but the fact is that we at the FDIC wound down Washington Mutual. Our business is winding down bad banks. Citibank could have gone under and all the other banks and the depositors wouldn’t have lost. They would’ve all been insured because there were plenty of bank assets. There weren’t enough assets in Citibank and AIG to pay the gamblers and the big players, the wealthiest one percent. And she said in every case they were told the wealthiest one percent can’t afford to lose a penny.
So that’s when Mr. Obama said, “OK, to make these gains, to save the financial sector from losing money, we have to make employees pay. We have to make them pay through more Social Security taxes instead of making the higher brackets pay, we have to pay by cutting back Medicare. We can’t charge the pharmaceutical companies by actually bargaining with them like they do in Canada; we have to let them set the prices with no argument. And he’s sort of made an accommodation with the Republicans to solve the problem.
The problem is, how can he, Mr. Obama, who’s pledged to represent his constituency in the Democrats, how can he move way to the right of where George Bush is at? Well, the only way he could do this would be for the Republicans to move even further to the right. So the Republicans have accommodated Mr. Obama by pushing the crazy wing of their party, the Tea Parties, Michelle Bachman, the Alaskan Governor Palin, and they’ve come with such a crazy, intransigent, right-wing attitude that now Mr. Obama can move way to the right and essentially still triangulate and say, ‘Look. I’m better than these guys are.’ And he’s hoping that people will vote for him just because he’s not as bad as the Republican Tea Partyists.
Well, the reality of course is that there are not going to be many people showing up to vote on the Democratic side and it’s quite possible the Republicans would get in. And the one silver lining for the Republicans winning in 2012 would be at that point the Democratic congress would find its backbone again, once it’s in opposition, and would say no to the Republicans trying to push the policy that Mr. Obama is now trying to push.
Well, you asked about the economy. The economy’s going under because Wall Street and investors realize that it’s a done deal. That Mr. Obama is going to succeed in pushing the economy much further into a depression. We need the depression in order to cut living standards and labor by 30 percent. We need a depression in order just to lower the wages of America and to have an excuse – of course, a depression is going to make the budget deficit even larger and the solution to the depression has already been written up just like the invasion of Iraq was all written up before 9/11 the solution is going to be that the government is going to sell of its land, whatever is in the public domain.
The American government is going to look just like Greece and just like Ireland. They’re going to be told, ‘The states can’t pay, there’s no federal revenue to share with Minnesota or Wisconsin or the city of Chicago. They’re going to have to sell off their roads, sell off their streets, sell off their infrastructure, sell off their public utilities, sell off their business. The government will sell whatever it has, the Postal Service, to essentially buyers who will now borrow the money from the banks making a huge new market for banks and investment bankers, in privatizing and cutting up what used to be the public domain and turning it over to the wealthiest 10 percent of the economy. So people realize yes, the class war’s back in business. We’re going into a depression. We’ll buy back all these stocks after they go but meanwhile, the game’s over. Let’s grab what we can and just bail out. And that’s what’s happening now.
What is your assessment over the current debate in Washington concerning the raising of the debt ceiling? This debate seems to be taking place between the Obama administration and the Republicans without much input from Democrats.
It’s a good cop-bad cop deal, a charade that they’re both playing. The Republicans are playing the role of the bad copy, saying, ‘You have to not raise taxes on anybody, no progressive income tax at all, no closing of the tax loopholes, not even a prosecution for income tax fraud. And by the way, we can get a lot of money if we just give a tax holiday to all of the companies and the individuals that have been keeping their money offshore. Let’s just free wealthy people from taxes altogether and that will help recover.’ So they’re being sort of the bad cop so Obama can pretend to be the good cop and say, ‘Hey, boys, let me at least do something. You know, I’m willing to cut back Social Security, I’m willing to take over really what was a George Bush program, but you have to let me get a little bit of revenue somewhere’. And at the very end the Republicans will say, ‘Oh, okay, you can throw us into the briar patch.’, and they’ll give something and they’ll essentially get their program and Obama will have sold out his constituency.
Now, the question is, what will the Democrats do? They don’t know what to do. The politicians I talk to say nobody’s going to challenge Mr. Obama in 2012. He has his constituency pretty much locked up in the Democrat party. So they can’t really run against him. As the leadership in congress he’s promoted all of the worst of the Blue Dog Democrats. Fortunately ,most of them are the ones who lost their office in the last election. But essentially, we’re still living with the consequences of Rahm Emanuel, who said a crisis is too good to waste. Let’s use this to really lock in our pro-Wall Street program.
If there’s any group that’s to the right of the Republican party it’s the Democratic leadership committee – the Clintons, the Rahms, the Clinton manager who was appointed to the Simpson-Bowles Commission, Erskine Bowles. So what Mr. Obama is doing is really pushing forth now the recommendations of the Simpson Bulls Commission that he’d appointed right after he was elected but before he took office so he now says that, okay, he’s going to go with this bipartisan commission and the Republicans will pretend to say, ‘Well, we really wanted to get the deal done. We’ve got a lot’. And they’ll go along with what really is a Republican program. What can the Democrats do? They’re stymied.
Now, Obama wants to cut four trillion out of the budget while the Republican leader, Boehner, only wants a 2.4 trillion cut. I’ve also read that it was Obama, not the Republicans, who proposed putting Social Security cuts on the table. Why would Obama be proposing much larger cuts than the Republicans?
For two reasons: Number one, he can get away with it. No Republican administration could ever have got away with cutting Social Security. That is the most basic income protection program that Americans have and it was sold as saying, ‘look, this is not a social welfare program, it’s not a tax. This is money that you put in’. In order to double-cross his constituency, only a Democrat could do it and only a Democrat posing as a left-winger could really pull the double-cross that Mr. Obama is posing.
I’m speaking with financial economist and historian, Michael Hudson. Today’s show, “Guns, Finance and Butter: Finance is the New Mode of Warfare.” I’m Bonnie Faulkner. This is Guns and Butter.
China has warned the U.S., “Do not default.” What would be the implications and ramifications of a U.S. default? Would a U.S. default put the entire global banking system into crisis?
Nothing would happen at all. Everybody knows there’s not going to be a default. China would not lose a cent on this. China would say, ‘Okay, if you can’t pay us the They’re bills that’s okay. There’s a lot of American investment in China; we’ll just take possession of it at its book value.” They wouldn’t mind that very much. A default would mean that the dollar would not be acceptable again until the United States pad – and again, there’s not going to be a default but if there were, America would have no way of paying for its military bases anymore. America would be unable to extend the war. Mr. Obama couldn’t be the war president.
I mean, even before he took office he won the Nobel War Prize so he knew that he was going to escalate wherever he could. That’s what the war prize is given for. That’s why it was given to Kissinger and to other people that go to war. And he wouldn’t be able to extend the war into Libya, he wouldn’t be able
Would a U.S. default send interests rate soaring and if so, what would be the economic effect?
An interest rate wouldn’t matter if you default. I mean, if you tell me I can write you an IOU but you’re not going to collect, I’ll give you 20 percent. What does it matter if you default? No, it wouldn’t send interest rates soaring at all. It wouldn’t have any effect at all. This is all a just pretend argument to create the crisis to give Mr. Obama the opportunity to do what politicians do – to sell out his constituency to his campaign contributors on Wall Street. He’s going to go down as a Herbert Hoover, or rather a Warren Harding probably. He’s going to go down as the man who brought on the depression that the Republicans never could have gotten away with. Only a Democrat posing as a left-winger could support the anti-labor, anti-wage, pro- Wall Street policies that his advisors have been pressing. And there again, that came out in the New York Times interview with Sheila Bair.
I see. So this is a charade put on for public consumption, the business of a possible debt default.
It is to create the illusion of a crisis. Now politician or Wall Street really likes a crisis but what they do like is the illusion of a crisis to create a pretense for introducing a solution to the crisis that actually makes fortunes for them all. And the way in which Obama resolves the non-crisis of the budget limit is going to make fortunes for Wall Street – and impoverish the population for the next decade.
I see. So this is a way of getting away with all of this.
Yes.
I was going to ask you if there are elements within the U.S. establishment who actually want a default but it sounds to me like it’s just a charade.
It’s a charade. Nobody wants the default. The safest investment there is are Treasury bills. America’s whole international position would go, the whole basis of American diplomacy and military power is the ability to write IOUs that it never intends to pay. I mean, you could say America defaulted back in August of 1971 when it closed the gold window. What can China do with its Treasury bonds already? The Americans will be glad to give them another Treasury bond with a new maturity but it won’t let China buy oil companies or filling stations or anything else. It won’t let them buy industrial companies or technology companies or technology exports. I mean, it’s already – in effect, the whole international monetary system based on the dollar has been in default for the last 30 years.
Is the U.S. in an economic war with China?
No, not really a war. There’s a jockeying for position but there’s no economic war. I’ve never heard any anti-American expression whatsoever in China. Only on MSNBC do I hear China-bashing and I guess from Paul Krugman I hear it. But even when Paul Krugman goes to China he makes a million dollars by giving speeches. But there’s no real warfare.
Dr. Hudson, let’s talk a bit now about Europe, starting with Greece. You have written that the Greek economic will not end up with the proceeds of any European central bank bailout; the banks will get the money. Could you explain that?
That’s right. The condition of the loans that the EU and the IMF are making to Greece is that all of the money has to be paid out to bondholders of these banks, mainly in France and in Germany. Angela Merkel, in Germany, said that ‘wait a minute. This isn’t what the free market’s supposed to be all about. If they make a bad loan the bondholders can be wiped out. The depositor is protected but not the bondholder.’ This is exactly what Sheila Bair said in her New York Times interview, was the banks said, ‘Look, the bondholders have to be paid first, the domestic economic later’, and they’ve corrupted basically the socialist government in Greece.
Now, this returns us to what we were talking about at the beginning of this show. You have in Greece the socialist government, the premiere, Papandreou, is head of the Socialist International, the Second International. He’s pushing for the austerity program and the bank bailouts that’ll hopelessly indebt Greece and force it to sell off much of its economy. The conservatives are opposing this just like Michelle Bachman here was saying she was opposing TARP and the bank bailouts. The conservatives in Greece, and actually throughout Europe, are to the left of the Socialist parties. And the same thing happens in Britain with the British Labour party being on the ultra-right for privatization, privatizing the railroads and other things that even Margaret Thatcher and the conservatives couldn’t do. In Iceland it’s the Social Democrats that were pushing for bailing out the banks with the conservative parties and the Icelandic population were against. Same thing in Ireland. All over Europe the Socialists are now on the right wing of the political spectrum.
Now the politics is all about finance. And the fact is that finance has nothing to do with the right or the left wing of the political spectrum. It spans the whole spectrum. And the terminology and the political concepts that existed a century ago when the Social Democratic and the Labour parties were being formed were basically concerned with employer/employee relations, labor unionization vis-à-vis heavy industry. That’s not the case today. Today you have a war of finance not only against consumers and employees, but against industry. You have industries being financialized. That’s what they talk about in business schools. In fact, Bob Locke and others are coming out with a good book by Zed Books in the fall all about how this management philosophy is disabling economies. This management philosophy, financialization, has also disabled socialist politics and left-wing politics.
You don’t hear very much at all in America, either in the Socialist parties, the Democrat parties, or in Europe about financial issues and economic issues. It’s about cultural issues, minorities, sexual equality, but it’s not about the economic issues. So almost without anybody preparing a political alternative you’ve had a transformation of what began as an economic democracy into a financial oligarchy. This is going to be the main problem for the next century – how to cope with the emerging financial oligarchy that has been empowered by the financial bubble and most of all, by the bailout.
When Bush and Obama gave $13 trillion to Wall Street’s managers they’ve empowered a whole century of ruling class people, much as the 19th century railroad barons were empowered by giving them the western lands and all the money for the railroads and much of the great land barons and real estate interests were created in much of the third world. So you’ve created a rentier oligarchy that is exactly the opposite of everything that was expected at the early 19th century and into the 1930s.
In the middle of the Great Depression, in 1936, Keynes wrote his general theory of employment interest and as his last chapter called for euthanasia of the rentier. Well, what we have now instead of the euthanasia of the rentier is the euthanasia of the employees, the euthanasia of industry, the euthanasia of entire economies in order to siphon off rent extraction and interest and financial fees to the very top of an economy and nothing like this has really occurred in Western civilization since the conquest of Europe a thousand years ago. It did occur in the roman empire when the creditors took over and we all know what happened to that. We had a Dark Age and you talked about recession. Well, we’re not only moving into a depression but the question is, is the depression going to keep on going and what kind of a society are we going to have if we have the kind of tax shift off wealth onto employees, onto labor, onto industry, onto the cities, and privatization, meaning a sell-off and sort of pre-bankruptcy sale on credit and essentially an oligarchy emerging. That’s what nobody’s talking on either end of the political spectrum.
Will the IMF and EU bailout for Greece lead to another default?
Yes. There’s no conceivable way in which Greece can pay the money that’s being demanded. The Financial Times of London has been very clear on this for the last month or so. You can read the columns on the editorial page, on the op-ed page, and you can see that almost everybody realizes that they can’t be paid. All you have to do is look at the premium for default insurance for Greek bonds to see that.
So the question is, if Greece can’t pay anyway, why are they even going through the charade? Well, the reason they’re going through the charade is so that the commercial banks can then sell all of the bonds that they do have. They can be reimbursed and sell the bonds to their own commercial banks and to suckers. They’re letting the people who now are holding the bag take the money and run. So what they’re doing is saying, ‘Okay, the commercial banks can sell out to the IMF and the Central Bank and now it’s much harder to default on an inter-governmental debt, if it’s a government of Europe, against the government of Greece than it is for the commercial banks’. And again, the Greeks can say, ‘Well, we know the game that you’re playing. You are the people that lent the money to us to pay the bank. We didn’t get a penny of it. You in effect paid your own banks; this is your problem. We’re not going to pay you. You don’t like it? Kick us out.’
I’m speaking with financial economist and historian, Michael Hudson. Today’s show, “Guns, Finance and Butter: Finance is the New Mode of Warfare.” I’m Bonnie Faulkner. This is Guns and Butter.
How is the European Central Bank different from central banks of other countries?
Very important question. Central banks from the Bank of England in 1694 to the Federal Reserve in 1913 were funded and created to finance the government deficit. The idea was that government spending would be fueled by banks just creating on their typewriters or their printing press, or now in their computer keyboard, they would create money. What we know as money is created on computer keyboards, whether commercial banks do it or central banks do. But the European Central Bank is different from all other central banks. They are not allowed to fund government operations. They’re not allowed to do this.
The whole idea behind the creators of the European Central Bank is that governments have to pay commercial banks what they could really do for themselves for nothing. They let commercial banks use their computer keyboard to create hundreds of billions of dollars worth of IOU’s that bear interest, whereas the Central Bank has its own computer keyboard; it could create this credit just as well if the European Central Bank doesn’t do this. So the European Central Bank is from the outset a creature of bank lobbyists who say, ‘We want the business of making interest and financial fees off the privilege of alone being able to create the public utility of money.’ You can think of money as a public utility just like electricity or water. And in America, public utilities – ConEd here in New York, electric companies elsewhere — all are regulated to keep their prices in line with the cost of producing the gas and electricity that they sell the customers.
Well, money’s that kind of privilege except you can create any amount of money simply on a computer keyboard if you’re a bank and you can find a customer – in this case the government customer but you can find almost any customer, especially in your own affiliates. Now that you’ve got rid of Glass-Steagall the banks can in effect create an infinite amount of money freely and create as much interest as they can find borrowers willing to pay. The European Central Bank gives them a free rein to do this and essentially has privatized the public utility of credit creation.
I see. So what you’re saying is that in Europe it’s only the private banks that can create credit, not the Central Bank.
That’s right. And they’re prevented specifically from funding the government debt, which is what central banks are supposed to do, and Europe is not allowed to bail out other governments. That’s under the Lisbon Treaty. It’s as if saying Washington is not allowed to have revenue sharing with the states and cities like there is. For the last few decades, Washington has been sharing revenue with the states and cities. That’s what was keeping them afloat until quite recently but now this is all different from Europe. And of course, this just is tearing Europe apart. There’s no way that Europe can survive under the financial rules of the Lisbon Treaty that have tied its hands financially. So one of the reasons the Euro has gone down against the dollar. In spite all of the dollar’s problems you’ve talked about it’s the euro that’s going down more than the dollar because they realized that the way in which the euro was created, the eurozone, is unworkable.
Right. So do you think, then, that either they’re going to have to change the rules there or the European Union is going t break apart?
Yes.
European banks hold debt from faltering EU countries such as Greece, Ireland, Portugal, etc. But American banks have sold European banks credit default swaps. That is, American banks have insured European bank debt. How is this going to play out if European governments default on their debt?
It complicates it very badly. In Ireland’s case, a month ago or so, for instance, Europe apparently was all set to realize that the Irish government made a terrible mistake in taking the bad bank debt – much of it crooked bank debt – onto the government balance sheet and making the taxpayers liable for all the banks’ bad loans that then were financialized by the European governments. They were going to say, ‘Okay, we’re going to write down the loans to the bondholders because there’s a basic principle at work. A debt that can’t be paid won’t be’.
Well, all of a sudden it was rumored that Tim Geithner, the U.S. Treasury Secretary, told the Europeans, ‘Wait a minute. You can’t make the banks take a loss because Wall Street has already taken a huge gamble on your horse race. We’ve placed big bets that these governments are going to pay, there won’t be a debt write-down, so you have to keep Irish labor on the hook, you have to keep the Irish taxpayer on the hook, you have to make Ireland pay.’ Same thing in Greece. It’s said that Geithner again told the Europeans, ‘The American banks have made a big gamble on Greece, the Greek people will be defeated, that the oligarchy will win, that the oligarchy will succeed in pushing them into depression and you’ve got to save American banks from losing on this gamble by destroying yourselves. Destroy Greece, destroy yourselves because otherwise our banks would lose money and we’re not willing to lose a dollar. We’d rather you lose a trillion dollars than us lose one dollar because I represent the American banks, not you.’ So one can say, ‘Shame on Mr. Obama for putting a Treasury secretary that has such a dysfunctional, almost sociopathic, personality and psychology to be willing to do this.’ Europe’s response is to say, ‘Who put Mr. Geithner in power over the European government, impoverishing us? Who put the American Treasury in a position to demand that we go into depression?’
When I was in Norway one of the Norwegian politicians sat next to me at a dinner and said, “You know, there’s one good thing that President Obama has done that we never anticipated in Europe. He’s shown the Europeans that we can never depend upon America again. There’s no president, no matter how good he sounds, no matter what he promises – we’re never again going to believe the patter talk of an American President. Mr. Obama has cured us. He has turned out to be our nightmare. Our problem is what to do about the American people that don’t realize this nightmare that they’ve created, this smooth-talking American Tony Blair in the White House.
What is your assessment of the new head of the IMF, Christine Lagarde?
She made her reputation as a corporate lawyer lobbying against labor unions and working on how the corporations could keep down labor, worsen workplace oppositions. She made her reputation working against labor so she’s in the right position. That’s the IMF – what it’s selling. The IMF’s product is austerity. The IMF’s product is poverty. She’s the perfect person to impose poverty. She’s anti-labor, she’s opportunistic, she supports the banks, she supports the IMF philosophy. She’s probably the best person to lead the worst organization in the world.
You describe a class war of banks against all the rest of society which cuts across the notion of left or right in political terms. Could you elaborate on that a little bit?
This is probably the hardest issue to get across because finance really isn’t a class. Surprisingly enough, the first discussion of this came in the 1970s and ’80s in Russia. Stalin – actually, it was already in the ’60s. Stalin had asked a leading thereologists and ancient historians to look at the class conflict in antiquity, and especially into Oriental despotism. And there were two people who took the lead. One of them was Muhammad Dandamaev who wrote a good book published by the University of Illinois Press on slavery and ancient Babylonia. And he said finance really isn’t a class because everybody’s a creditor. In America, employees save money, they have Social Security. Everybody is a creditor to somebody as well as being a debtor, and the financial classes are debtors. So it’s not really a class. He said it’s a legal estate. And if you look at all of the discussions in the 19th century about class warfare it was always, what was the class? The class was the owner of capital or the people that they hired. It was labor and industrial capital. Those were the two classes. There was also a land-owning class, the rentiers, but nobody ever thought of finance as being a class of people. Bankers were supposed to be intermediaries, they were supposed to provide credit for the wheels of commerce but most people thought of wealth as being land or stock ownership or securities. They didn’t think of finance as being a class. So I use the term very loosely, not in the classical meaning of the word class.
So there’s a financial dynamic of compound interest, a financial dynamic of banks and the financial sector getting the rest of society into debt that now can be created on a computer keyboard without limit, and then essentially getting rich by pushing the rest of society into debt up to the point where the entire economic surplus is being used not to raise living standards, not to invest in tangible industrial capital formation, not to pay taxes to government, but to pay interest and financial fees to the financial sector. So I guess instead of a class I should refer to what national income economists call the FIRE sector – finance, insurance and real estate. And it’s a symbiotic sector that’s emerged to become the characteristic central planners of the economic.
A hundred years ago people thought well, right now we have the big corporations, heavy industry, the steel companies, the railroads doing the planning. We think government should be doing the planning. That was the socialist planning. But now you don’t have government doing the planning, you don’t have industry doing the planning, you have Wall Street and the financial sector doing the planning. Nobody a hundred years ago expected anything like this so you have essentially a new class, a new bureaucracy – not the bureaucracy that Hayek warned about in The Road to Serfdom doing the planning, but a much more centralized planning bureaucracy on Wall Street in America, the city of London in England, the Bourse in France, Frankfurt in Germany, Shanghai in China. You have financial interests that are somehow centralizing all of the planning power and all of the economic surplus in their own hands in a way that’s impoverishing the rest of society. This is something entirely new and the political system has not come to terms with it.
You said that when you’re devaluing the price of the currency that what you’re devaluing really is the price of labor. Could you elaborate?
When all countries have common prices for fuels, raw materials, machinery and hard currency credit, so when the currency goes up and down the actual global price of all of this basic input – raw materials – remains the same. What are affected are domestic prices and costs and these are mainly labor and real estate. For instance, let’s look back at the 1980s when the United States was pushing Japan to increase the value of the yen. The yen went up in price against the dollar but the Japanese paid exactly the same global rate for their oil and iron and steel and copper and raw materials and the only thing that really went up was Japanese labor costs. Similarly, if the United States dollar goes down to make more exports, America’s still going to have to pay the same cost that other countries pay for its fuels and raw materials and equipment and what’ll become less expensive will be the price of labor, which will be worth less in terms of euros or other harder currencies. So devaluation basically is a means of lowering labor.
In Greece, for instance, if Greece were to leave the eurozone and adopt the drachma and devalue, its foreign debts are in hard currency so it would have to pay more in drachma to pay its euro debts and dollar debts and other foreign currency debts. It would have to continue to pay world prices for all of its basic inputs but Greek labor would be devalued relative to foreign currency. So the idea is to lower the cost of labor on the theory that it’s labor costs that determine international prices.
I’m speaking with financial economist and historian, Michael Hudson. Today’s show, “Guns, Finance and Butter: Finance is the New Mode of Warfare.” I’m Bonnie Faulkner. This is Guns and Butter.
So then you’re saying that with a dollar devaluating, American labor actually earn less. They have less buying power.
In global terms they have less buying power. If the dollar goes down and prices are set globally for machinery and imports, and the cost of what America imports is going to go up. The cost of what it imports in China, for instance, will go up and Walmart will have to charge people higher prices. The costs of its fuels and metal is going to go up. So the effect will be to squeeze the budget of employees and to raise the economy’s domestic cost structure faster than wages respond by rising. The idea of devaluing the dollar is to raise the cost of living and not raise wages so that you increase the rate of exploitation of labor.
Yes. That makes a lot of sense, particularly in view of the fact that most of the things that people buy these days are imported.
That’s right. As America has de-industrialized it’s shifted production abroad and it’s had to import more and more of its essentials. Its exports are primarily food and now it’s trying to raise the price of world grain by using corn and other crops for gasohol to drive down the price of oil, and it’s created an artificial world food surplus.
The aim of the government today is what it was under the Carter administration – to create a food crisis to starve out third World countries and make them more dependent on the United States so the United States government can say ‘we will give you more food but you have to sell off your raw materials to American firms, you have to get rid of your democracy and put in a government that we appointment so we can have Hilary Clinton in charge of your policy instead of your own people.’ And that’s how the Americans basically are impoverishing the Third World countries, by insisting – for instance through the World bank and IMF – that they will only give loans if other countries do not feed themselves and depend on American grain. Now that America’s using the grain to make alcohol and gasoline there’s no more grain available to feed these people so the result is African starvation as official American policy.
So you’re saying that the United States uses the World Bank and the IMF to force other countries to import our agriculture.
That’s been the explicit aim and I’ve described that in my book, Super Imperialism, how the mainstay of the U.S. balance of payments for the last 50 years has been agriculture, not industry. And in addition to agriculture, of course, military exports to the oil exporting countries so that they’re permitted to charge as much as they want for their oil as long as they agree to spending it on buying American airplanes. Saudi Arabia’s now buying tanks to use against its population. The idea is to arm the countries to prevent their domestic populations from bringing about a democratic government. That’s what’s creating the Arab Spring and the reactions against the governments – wasting their economic surplus on buying American arms and agreeing not to promote agriculture but to buy American food to essentially finance dependency on the United States. That’s the role of the World Bank and IMF – to make other countries dependent on the United States.
Right. And the way that they effect that is to put the other countries in debt.
That’s right. And not only in debt but in food dependency on the United States so that at the stroke of a foreign policy Hilary Clinton can say, “You’re not on our approved list. We are going to starve your population until you agree to follow American policy and sell off your public domain to more American companies”. So this is why I said that finance is the new mode of warfare. Finance and food dependency achieve today what military invasion was required to achieve in centuries past.
Now, Dr. Hudson, just to clarify – how is it that the United States can force other countries to not be self-sufficient in their agriculture? How are they forced to not grow their own crops?
There were proposals in the 1950s that the United Nations and the United States should promote land reform. And I’m told that David Rockefeller, at Chase Manhattan, gave John Deaver, the economic research director and my former boss, a copy of the Forgash Plan for a world bank for economic acceleration to promote land reform. And John Deaver said that in every country that has undertaken land reform to grow their own crops there’s been an anti-American feeling. Well, an anti-American feeling because American foreign policy is dictated very largely by the agribusiness interests in the United States – the large grain dealers. The mainstay of the U.S. balance of payments is food exporting, which means [INAUDIBLE sounds like: finance’s] counterpart in foreign economic and food dependency on the United States. So this is the most constant element of U.S. foreign policy since World War II, food dependency.
And if other countries need money to develop, if the United States can in effect have its banks raid these countries, creating a foreign exchange crisis, countries will have a choice: either they can withdraw from the world trade and financial system and go their own way or they can join. But the price of joining, the price of being a member, is they have to agree not to protect their own agriculture but to build in a special favoritism to U.S. agriculture. My book, Super Imperialism, explains how this is done and the trade field and in the financial field.
I’ve always been a little mystified as to why everyone joins the IMF and the World Bank, why they don’t go it alone.
The question you’re asking is, who are they? Who is Argentina? Who is Brazil? It’s not as if the whole country makes the decision. These countries are very largely their own oligarchies. For instance, when I started the Third World Bond Fund for Scudder Stevens in 1990, Brazilian and Argentine bonds were yielding 45 percent interest. Nobody would buy these bonds in America. Scudder was unable to sell shares in the funds to American buyers or to European buyers. The buyers were wealthy families in Brazil and Argentina because they knew that they were going to pay the debt. So the dollar yank for the Yankee Imperialists that were being blamed were actually Argentinean and Brazilian oligarchs operating through offshore funds with the dollars they’d siphoned out of their own country.
So if you have a country that’s run like Saudi Arabia is run, or other dictatorships, a client dictatorship run by a client oligarchy is kept in place by essentially the U.S. diplomacy against the domestic democracy. That’s why America backed dictators in Latin America for 50 years after World War II. And President Johnson said, ‘Well, they may be bastards but they’re our bastards.’ So the interest of the oligarchy is basically to make their economies dependent offshore because the oligarchs have their money outside of these countries. There’s a massive capital flight there and the more their currency goes down the more their currency becomes dependent, the more they have to borrow dollars, the more they borrow from their own domestic oligarchy and the higher the value this oligarchy, that has its money abroad, has vis-à-vis its own domestic economy. So the interest of the rentier oligarchy that’s floating on top of the economy, as Werner Sombart said, ‘like globules of fat on the soup of the economy’.
They benefit from this while the economy as a whole suffers. This is the problem with neoliberal reform. It’s created oligarchies throughout the former Soviet countries. We can see this from the Baltics to Central Asia and what’s happened there. We can see it in Latin America. We can see in what the U.S. and Europe have been promoting in the Near East, in Saudi Arabia and other countries. The interest of Saudi Arabia and Bahrain is not that of their citizens; it’s the interest of the rulers on top of these economies.
You have written that the bailout of Greek sovereign debt amounts to financial warfare. That is the selling off of the Greek Islands, the Athens Airport, etcetera. How is this stripping of Greek assets accomplished?
Essentially, the European Central Bank and the IMF told Greece, ‘Look. You have to run a budget surplus or minimize your deficit in order to meet the criteria that the eurozone members meet. So you’re going to have to balance the budget not by taxing the rich – that’s our constituency – but by selling off your airports and your public domain and counting this as a budget inflow. So you balance your budget not by progressive taxation, which is how America and western Europe got rich, but by selling off the public domain – to foreigners mainly – and the idea is that you’re going to get rich by selling it off because these new buyers are going to operate the water and airports and other things more efficiently, and lower your prices.’
Well, of course, this is pure mythology. When you privatize a basic infrastructure it’s privatized on credit and so the new owners build in their interest charges and financial charges into the cost of doing business, they pay themselves enormous salaries, much higher than the public sector would pay, and they begin to treat their monopoly position as if they can put a toll booth on the roads, a toll booth on the water and sewers, a toll booth anywhere. And if the governments don’t have a price regulating system in place to treat these infrastructure investments like public utilizes and keep their prices in line with the necessary costs of production, then you’re going to turn the whole economy into what economists call rent extraction – predatory monopoly charges just like rent-racking except on the scale of the water, sewer, use of broadcasting spectrum, telephones and you have the economy ending up looking like Mexico, where they privatized the telephones and Carlos Slim became the owner and became the wealthiest person in the world by making Mexico pay the highest prices for using telephones and the communications spectrum of any country in the world. That’s the neoliberal model saying, ‘Greece, you can get rich by letting the Carlos Slims of the world come in and take your economy. And we’re not going to do this by an army. We’re not going to land paratroopers. We’re going to just give political contribution to your socialist party members to vote to give all of this away. We’re going to do it financially without any bloodshed.’
Michael Hudson, thank you very much.
Thank you, Bonnie.
http://michael-hudson.com/2011/07/th...a-of-industry/
July 16, 2011
By Michael Hudson
Michael interviewed on Guns N Butter with Bonnie Faulkner
(transcript: listen at link below)
“When I was in Norway one of the Norwegian politicians sat next to me at a dinner and said, “You know, there’s one good thing that President Obama has done that we never anticipated in Europe. He’s shown the Europeans that we can never depend upon America again. There’s no president, no matter how good he sounds, no matter what he promises, we’re never again going to believe the patter talk of an American President. Mr. Obama has cured us. He has turned out to be our nightmare. Our problem is what to do about the American people that don’t realize this nightmare that they’ve created, this smooth-talking American Tony Blair in the White House.”
I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show, “Guns, Finance and Butter: Finance is the New Mode of Warfare.” Dr. Hudson is a financial economist and historian. He is president of the Institute for the Study of Long Term Economic Trends, a Wall Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri-Kansas City. His 1972 book, Super Imperialism: The Economic Strategy of American Empire, is a critique of how the United States exploited foreign economies through the IMF and World Bank. He is also author of Trade, Development and Foreign Debt: The Myth of Aid and Global Fracture: The New International Economic Order. Today we discuss the crisis of the economy in the United States, the jobless recovery, the debt ceiling debate, default in China. We also talk about the economic crisis in Europe and financial warfare against Greece. Michael Hudson, welcome.Thank you very much, Bonnie.
Michael, I read the in the newspapers that the great recession, so-called, has long since ended but that unemployment remains stubbornly high with only a measly 18,000 jobs created in June. I believe the term that was coined some time ago is a jobless recovery. What is a jobless recovery?
We call that a depression. And the economy is going worse and worse. That’s why today the stock market is down 160 points. The financial sector realizes that the game is over. The financial interests from America to Greece, Ireland and Europe are all insisting that governments pay off the bad bank loans that they’ve taken onto their balance sheet by increasing taxes and pushing the economy into a depression. In the United States, president Obama has bought the idea that the only way of getting recovery is to cut wages by about 30 percent and he’s doing that in two ways. At the Federal Reserve he’s empowered the Federal Reserve Chairman, Bernanke, to lower interest rates, flood the economy with money, QE2, $600 billion have flown out of the country, to push the dollar down. When you push the dollar down the main victims are consumers because oil prices and raw materials prices and machinery prices and shipping all have a common cost.
When you’re devaluing the currency what you’re devaluing really is the price of labor because all the other costs are globally fixed. So Obama believes that reducing the prices of American labor in foreign exchange is going to make the economy more competitive. At the Treasury Department you’re now seeing him argue over how to reduce the budget deficit and he is doing what nobody really imagined the change was possible when he was elected president. He’s actually moved to the right of Michelle Bachman and the Republican party. Michelle Bachman on television recently has pointed out that she was against TARP, the giveaway to the Wall Street interests.
I remember the very last presidential debate between Mr. Obama and Mr. McCain. It was on a Friday night and McCain had just gone back to Washington to say that he supported the bailout of the banks. And in the debate, everybody avoided even discussing the bailout. And then later Mr. Obama said that in order for there to be a recovery the banks had to avoid losing a single penny. And in fact, what’s happened today was all made pretty clear even before Mr. Obama was elected by the appointees he made – the sort of right-wing economic appointees, Tim Geithner, the bank lobbyist and the Secretary of the Treasury, Larry Summers, financial pusher of bank deregulation and getting rid of the Glass-Steagall Act as his chief advisor, and of course Rahm, who was pushing the interests. So the Obama administration kept the Bush administration by giving $13 trillion of giveaway to the banking sector. Now, all of this has pushed the government way into deficit and the question is, how do you get the money back?
People would have thought before Mr. Obama was elected that he’d get the budget back in balance by now beginning to reintroduce progressive taxation by taxing wealth and by using the taxes on finance and the very rich to fund what he’d promised – a public option in the public health program and protecting Social Security. Over the weekend he’s come out against this. He wants to lower Social Security, to cut back Medicare, cut back Medicaid, especially the payments to the poor, and you realize that now if you look back on that last debate he had with John McCain before the election in 2008, he and McCain were bidding for the campaign contributions that are what politicians do. And the way that you get campaign contributions, if you’re any politician, is you deliver your constituency to your campaign contributors.
The biggest campaign contributors are Wall Street and the real estate sector, and these are the contributors that the Democrats and the Republicans are all vying for and indeed, Mr. Obama’s main contributors were these large Wall Street interests and those are the people that he’s going for now and he’s delivering his constituency, namely the people who voted Democratic, and he’s delivering them to Wall Street and he’s showing his philosophy by saying, “Well, we have to make sure that bankers don’t lose money; employees lose money.”
Now, over the weekend, yesterday in the New York Times, there was an interview with the head of the FDIC, Sheila Bair, whose five-year term just expired last week. Now that it’s expired she can begin to tell the stories. And she told the story of how one meeting with Obama after another he’d make promises to her, promises that he would try to prevent the mortgage crime that was occurring, to prevent the fraudulent subprime mortgages, to make a bank regulation to prevent criminal activities. She said in every case she’d go to his big speeches and an hour before the speech she’d be given a copy of it and he took out everything that he’d promised her and it was all rewritten by the big bank contributors.
The important thing is that now Ms. Bair is saying look, people said that there would’ve been a meltdown I you didn’t give all this 13 trillion to Citibank, to AIG and to Goldman Sacks but the fact is that we at the FDIC wound down Washington Mutual. Our business is winding down bad banks. Citibank could have gone under and all the other banks and the depositors wouldn’t have lost. They would’ve all been insured because there were plenty of bank assets. There weren’t enough assets in Citibank and AIG to pay the gamblers and the big players, the wealthiest one percent. And she said in every case they were told the wealthiest one percent can’t afford to lose a penny.
So that’s when Mr. Obama said, “OK, to make these gains, to save the financial sector from losing money, we have to make employees pay. We have to make them pay through more Social Security taxes instead of making the higher brackets pay, we have to pay by cutting back Medicare. We can’t charge the pharmaceutical companies by actually bargaining with them like they do in Canada; we have to let them set the prices with no argument. And he’s sort of made an accommodation with the Republicans to solve the problem.
The problem is, how can he, Mr. Obama, who’s pledged to represent his constituency in the Democrats, how can he move way to the right of where George Bush is at? Well, the only way he could do this would be for the Republicans to move even further to the right. So the Republicans have accommodated Mr. Obama by pushing the crazy wing of their party, the Tea Parties, Michelle Bachman, the Alaskan Governor Palin, and they’ve come with such a crazy, intransigent, right-wing attitude that now Mr. Obama can move way to the right and essentially still triangulate and say, ‘Look. I’m better than these guys are.’ And he’s hoping that people will vote for him just because he’s not as bad as the Republican Tea Partyists.
Well, the reality of course is that there are not going to be many people showing up to vote on the Democratic side and it’s quite possible the Republicans would get in. And the one silver lining for the Republicans winning in 2012 would be at that point the Democratic congress would find its backbone again, once it’s in opposition, and would say no to the Republicans trying to push the policy that Mr. Obama is now trying to push.
Well, you asked about the economy. The economy’s going under because Wall Street and investors realize that it’s a done deal. That Mr. Obama is going to succeed in pushing the economy much further into a depression. We need the depression in order to cut living standards and labor by 30 percent. We need a depression in order just to lower the wages of America and to have an excuse – of course, a depression is going to make the budget deficit even larger and the solution to the depression has already been written up just like the invasion of Iraq was all written up before 9/11 the solution is going to be that the government is going to sell of its land, whatever is in the public domain.
The American government is going to look just like Greece and just like Ireland. They’re going to be told, ‘The states can’t pay, there’s no federal revenue to share with Minnesota or Wisconsin or the city of Chicago. They’re going to have to sell off their roads, sell off their streets, sell off their infrastructure, sell off their public utilities, sell off their business. The government will sell whatever it has, the Postal Service, to essentially buyers who will now borrow the money from the banks making a huge new market for banks and investment bankers, in privatizing and cutting up what used to be the public domain and turning it over to the wealthiest 10 percent of the economy. So people realize yes, the class war’s back in business. We’re going into a depression. We’ll buy back all these stocks after they go but meanwhile, the game’s over. Let’s grab what we can and just bail out. And that’s what’s happening now.
What is your assessment over the current debate in Washington concerning the raising of the debt ceiling? This debate seems to be taking place between the Obama administration and the Republicans without much input from Democrats.
It’s a good cop-bad cop deal, a charade that they’re both playing. The Republicans are playing the role of the bad copy, saying, ‘You have to not raise taxes on anybody, no progressive income tax at all, no closing of the tax loopholes, not even a prosecution for income tax fraud. And by the way, we can get a lot of money if we just give a tax holiday to all of the companies and the individuals that have been keeping their money offshore. Let’s just free wealthy people from taxes altogether and that will help recover.’ So they’re being sort of the bad cop so Obama can pretend to be the good cop and say, ‘Hey, boys, let me at least do something. You know, I’m willing to cut back Social Security, I’m willing to take over really what was a George Bush program, but you have to let me get a little bit of revenue somewhere’. And at the very end the Republicans will say, ‘Oh, okay, you can throw us into the briar patch.’, and they’ll give something and they’ll essentially get their program and Obama will have sold out his constituency.
Now, the question is, what will the Democrats do? They don’t know what to do. The politicians I talk to say nobody’s going to challenge Mr. Obama in 2012. He has his constituency pretty much locked up in the Democrat party. So they can’t really run against him. As the leadership in congress he’s promoted all of the worst of the Blue Dog Democrats. Fortunately ,most of them are the ones who lost their office in the last election. But essentially, we’re still living with the consequences of Rahm Emanuel, who said a crisis is too good to waste. Let’s use this to really lock in our pro-Wall Street program.
If there’s any group that’s to the right of the Republican party it’s the Democratic leadership committee – the Clintons, the Rahms, the Clinton manager who was appointed to the Simpson-Bowles Commission, Erskine Bowles. So what Mr. Obama is doing is really pushing forth now the recommendations of the Simpson Bulls Commission that he’d appointed right after he was elected but before he took office so he now says that, okay, he’s going to go with this bipartisan commission and the Republicans will pretend to say, ‘Well, we really wanted to get the deal done. We’ve got a lot’. And they’ll go along with what really is a Republican program. What can the Democrats do? They’re stymied.
Now, Obama wants to cut four trillion out of the budget while the Republican leader, Boehner, only wants a 2.4 trillion cut. I’ve also read that it was Obama, not the Republicans, who proposed putting Social Security cuts on the table. Why would Obama be proposing much larger cuts than the Republicans?
For two reasons: Number one, he can get away with it. No Republican administration could ever have got away with cutting Social Security. That is the most basic income protection program that Americans have and it was sold as saying, ‘look, this is not a social welfare program, it’s not a tax. This is money that you put in’. In order to double-cross his constituency, only a Democrat could do it and only a Democrat posing as a left-winger could really pull the double-cross that Mr. Obama is posing.
I’m speaking with financial economist and historian, Michael Hudson. Today’s show, “Guns, Finance and Butter: Finance is the New Mode of Warfare.” I’m Bonnie Faulkner. This is Guns and Butter.
China has warned the U.S., “Do not default.” What would be the implications and ramifications of a U.S. default? Would a U.S. default put the entire global banking system into crisis?
Nothing would happen at all. Everybody knows there’s not going to be a default. China would not lose a cent on this. China would say, ‘Okay, if you can’t pay us the They’re bills that’s okay. There’s a lot of American investment in China; we’ll just take possession of it at its book value.” They wouldn’t mind that very much. A default would mean that the dollar would not be acceptable again until the United States pad – and again, there’s not going to be a default but if there were, America would have no way of paying for its military bases anymore. America would be unable to extend the war. Mr. Obama couldn’t be the war president.
I mean, even before he took office he won the Nobel War Prize so he knew that he was going to escalate wherever he could. That’s what the war prize is given for. That’s why it was given to Kissinger and to other people that go to war. And he wouldn’t be able to extend the war into Libya, he wouldn’t be able
Would a U.S. default send interests rate soaring and if so, what would be the economic effect?
An interest rate wouldn’t matter if you default. I mean, if you tell me I can write you an IOU but you’re not going to collect, I’ll give you 20 percent. What does it matter if you default? No, it wouldn’t send interest rates soaring at all. It wouldn’t have any effect at all. This is all a just pretend argument to create the crisis to give Mr. Obama the opportunity to do what politicians do – to sell out his constituency to his campaign contributors on Wall Street. He’s going to go down as a Herbert Hoover, or rather a Warren Harding probably. He’s going to go down as the man who brought on the depression that the Republicans never could have gotten away with. Only a Democrat posing as a left-winger could support the anti-labor, anti-wage, pro- Wall Street policies that his advisors have been pressing. And there again, that came out in the New York Times interview with Sheila Bair.
I see. So this is a charade put on for public consumption, the business of a possible debt default.
It is to create the illusion of a crisis. Now politician or Wall Street really likes a crisis but what they do like is the illusion of a crisis to create a pretense for introducing a solution to the crisis that actually makes fortunes for them all. And the way in which Obama resolves the non-crisis of the budget limit is going to make fortunes for Wall Street – and impoverish the population for the next decade.
I see. So this is a way of getting away with all of this.
Yes.
I was going to ask you if there are elements within the U.S. establishment who actually want a default but it sounds to me like it’s just a charade.
It’s a charade. Nobody wants the default. The safest investment there is are Treasury bills. America’s whole international position would go, the whole basis of American diplomacy and military power is the ability to write IOUs that it never intends to pay. I mean, you could say America defaulted back in August of 1971 when it closed the gold window. What can China do with its Treasury bonds already? The Americans will be glad to give them another Treasury bond with a new maturity but it won’t let China buy oil companies or filling stations or anything else. It won’t let them buy industrial companies or technology companies or technology exports. I mean, it’s already – in effect, the whole international monetary system based on the dollar has been in default for the last 30 years.
Is the U.S. in an economic war with China?
No, not really a war. There’s a jockeying for position but there’s no economic war. I’ve never heard any anti-American expression whatsoever in China. Only on MSNBC do I hear China-bashing and I guess from Paul Krugman I hear it. But even when Paul Krugman goes to China he makes a million dollars by giving speeches. But there’s no real warfare.
Dr. Hudson, let’s talk a bit now about Europe, starting with Greece. You have written that the Greek economic will not end up with the proceeds of any European central bank bailout; the banks will get the money. Could you explain that?
That’s right. The condition of the loans that the EU and the IMF are making to Greece is that all of the money has to be paid out to bondholders of these banks, mainly in France and in Germany. Angela Merkel, in Germany, said that ‘wait a minute. This isn’t what the free market’s supposed to be all about. If they make a bad loan the bondholders can be wiped out. The depositor is protected but not the bondholder.’ This is exactly what Sheila Bair said in her New York Times interview, was the banks said, ‘Look, the bondholders have to be paid first, the domestic economic later’, and they’ve corrupted basically the socialist government in Greece.
Now, this returns us to what we were talking about at the beginning of this show. You have in Greece the socialist government, the premiere, Papandreou, is head of the Socialist International, the Second International. He’s pushing for the austerity program and the bank bailouts that’ll hopelessly indebt Greece and force it to sell off much of its economy. The conservatives are opposing this just like Michelle Bachman here was saying she was opposing TARP and the bank bailouts. The conservatives in Greece, and actually throughout Europe, are to the left of the Socialist parties. And the same thing happens in Britain with the British Labour party being on the ultra-right for privatization, privatizing the railroads and other things that even Margaret Thatcher and the conservatives couldn’t do. In Iceland it’s the Social Democrats that were pushing for bailing out the banks with the conservative parties and the Icelandic population were against. Same thing in Ireland. All over Europe the Socialists are now on the right wing of the political spectrum.
Now the politics is all about finance. And the fact is that finance has nothing to do with the right or the left wing of the political spectrum. It spans the whole spectrum. And the terminology and the political concepts that existed a century ago when the Social Democratic and the Labour parties were being formed were basically concerned with employer/employee relations, labor unionization vis-à-vis heavy industry. That’s not the case today. Today you have a war of finance not only against consumers and employees, but against industry. You have industries being financialized. That’s what they talk about in business schools. In fact, Bob Locke and others are coming out with a good book by Zed Books in the fall all about how this management philosophy is disabling economies. This management philosophy, financialization, has also disabled socialist politics and left-wing politics.
You don’t hear very much at all in America, either in the Socialist parties, the Democrat parties, or in Europe about financial issues and economic issues. It’s about cultural issues, minorities, sexual equality, but it’s not about the economic issues. So almost without anybody preparing a political alternative you’ve had a transformation of what began as an economic democracy into a financial oligarchy. This is going to be the main problem for the next century – how to cope with the emerging financial oligarchy that has been empowered by the financial bubble and most of all, by the bailout.
When Bush and Obama gave $13 trillion to Wall Street’s managers they’ve empowered a whole century of ruling class people, much as the 19th century railroad barons were empowered by giving them the western lands and all the money for the railroads and much of the great land barons and real estate interests were created in much of the third world. So you’ve created a rentier oligarchy that is exactly the opposite of everything that was expected at the early 19th century and into the 1930s.
In the middle of the Great Depression, in 1936, Keynes wrote his general theory of employment interest and as his last chapter called for euthanasia of the rentier. Well, what we have now instead of the euthanasia of the rentier is the euthanasia of the employees, the euthanasia of industry, the euthanasia of entire economies in order to siphon off rent extraction and interest and financial fees to the very top of an economy and nothing like this has really occurred in Western civilization since the conquest of Europe a thousand years ago. It did occur in the roman empire when the creditors took over and we all know what happened to that. We had a Dark Age and you talked about recession. Well, we’re not only moving into a depression but the question is, is the depression going to keep on going and what kind of a society are we going to have if we have the kind of tax shift off wealth onto employees, onto labor, onto industry, onto the cities, and privatization, meaning a sell-off and sort of pre-bankruptcy sale on credit and essentially an oligarchy emerging. That’s what nobody’s talking on either end of the political spectrum.
Will the IMF and EU bailout for Greece lead to another default?
Yes. There’s no conceivable way in which Greece can pay the money that’s being demanded. The Financial Times of London has been very clear on this for the last month or so. You can read the columns on the editorial page, on the op-ed page, and you can see that almost everybody realizes that they can’t be paid. All you have to do is look at the premium for default insurance for Greek bonds to see that.
So the question is, if Greece can’t pay anyway, why are they even going through the charade? Well, the reason they’re going through the charade is so that the commercial banks can then sell all of the bonds that they do have. They can be reimbursed and sell the bonds to their own commercial banks and to suckers. They’re letting the people who now are holding the bag take the money and run. So what they’re doing is saying, ‘Okay, the commercial banks can sell out to the IMF and the Central Bank and now it’s much harder to default on an inter-governmental debt, if it’s a government of Europe, against the government of Greece than it is for the commercial banks’. And again, the Greeks can say, ‘Well, we know the game that you’re playing. You are the people that lent the money to us to pay the bank. We didn’t get a penny of it. You in effect paid your own banks; this is your problem. We’re not going to pay you. You don’t like it? Kick us out.’
I’m speaking with financial economist and historian, Michael Hudson. Today’s show, “Guns, Finance and Butter: Finance is the New Mode of Warfare.” I’m Bonnie Faulkner. This is Guns and Butter.
How is the European Central Bank different from central banks of other countries?
Very important question. Central banks from the Bank of England in 1694 to the Federal Reserve in 1913 were funded and created to finance the government deficit. The idea was that government spending would be fueled by banks just creating on their typewriters or their printing press, or now in their computer keyboard, they would create money. What we know as money is created on computer keyboards, whether commercial banks do it or central banks do. But the European Central Bank is different from all other central banks. They are not allowed to fund government operations. They’re not allowed to do this.
The whole idea behind the creators of the European Central Bank is that governments have to pay commercial banks what they could really do for themselves for nothing. They let commercial banks use their computer keyboard to create hundreds of billions of dollars worth of IOU’s that bear interest, whereas the Central Bank has its own computer keyboard; it could create this credit just as well if the European Central Bank doesn’t do this. So the European Central Bank is from the outset a creature of bank lobbyists who say, ‘We want the business of making interest and financial fees off the privilege of alone being able to create the public utility of money.’ You can think of money as a public utility just like electricity or water. And in America, public utilities – ConEd here in New York, electric companies elsewhere — all are regulated to keep their prices in line with the cost of producing the gas and electricity that they sell the customers.
Well, money’s that kind of privilege except you can create any amount of money simply on a computer keyboard if you’re a bank and you can find a customer – in this case the government customer but you can find almost any customer, especially in your own affiliates. Now that you’ve got rid of Glass-Steagall the banks can in effect create an infinite amount of money freely and create as much interest as they can find borrowers willing to pay. The European Central Bank gives them a free rein to do this and essentially has privatized the public utility of credit creation.
I see. So what you’re saying is that in Europe it’s only the private banks that can create credit, not the Central Bank.
That’s right. And they’re prevented specifically from funding the government debt, which is what central banks are supposed to do, and Europe is not allowed to bail out other governments. That’s under the Lisbon Treaty. It’s as if saying Washington is not allowed to have revenue sharing with the states and cities like there is. For the last few decades, Washington has been sharing revenue with the states and cities. That’s what was keeping them afloat until quite recently but now this is all different from Europe. And of course, this just is tearing Europe apart. There’s no way that Europe can survive under the financial rules of the Lisbon Treaty that have tied its hands financially. So one of the reasons the Euro has gone down against the dollar. In spite all of the dollar’s problems you’ve talked about it’s the euro that’s going down more than the dollar because they realized that the way in which the euro was created, the eurozone, is unworkable.
Right. So do you think, then, that either they’re going to have to change the rules there or the European Union is going t break apart?
Yes.
European banks hold debt from faltering EU countries such as Greece, Ireland, Portugal, etc. But American banks have sold European banks credit default swaps. That is, American banks have insured European bank debt. How is this going to play out if European governments default on their debt?
It complicates it very badly. In Ireland’s case, a month ago or so, for instance, Europe apparently was all set to realize that the Irish government made a terrible mistake in taking the bad bank debt – much of it crooked bank debt – onto the government balance sheet and making the taxpayers liable for all the banks’ bad loans that then were financialized by the European governments. They were going to say, ‘Okay, we’re going to write down the loans to the bondholders because there’s a basic principle at work. A debt that can’t be paid won’t be’.
Well, all of a sudden it was rumored that Tim Geithner, the U.S. Treasury Secretary, told the Europeans, ‘Wait a minute. You can’t make the banks take a loss because Wall Street has already taken a huge gamble on your horse race. We’ve placed big bets that these governments are going to pay, there won’t be a debt write-down, so you have to keep Irish labor on the hook, you have to keep the Irish taxpayer on the hook, you have to make Ireland pay.’ Same thing in Greece. It’s said that Geithner again told the Europeans, ‘The American banks have made a big gamble on Greece, the Greek people will be defeated, that the oligarchy will win, that the oligarchy will succeed in pushing them into depression and you’ve got to save American banks from losing on this gamble by destroying yourselves. Destroy Greece, destroy yourselves because otherwise our banks would lose money and we’re not willing to lose a dollar. We’d rather you lose a trillion dollars than us lose one dollar because I represent the American banks, not you.’ So one can say, ‘Shame on Mr. Obama for putting a Treasury secretary that has such a dysfunctional, almost sociopathic, personality and psychology to be willing to do this.’ Europe’s response is to say, ‘Who put Mr. Geithner in power over the European government, impoverishing us? Who put the American Treasury in a position to demand that we go into depression?’
When I was in Norway one of the Norwegian politicians sat next to me at a dinner and said, “You know, there’s one good thing that President Obama has done that we never anticipated in Europe. He’s shown the Europeans that we can never depend upon America again. There’s no president, no matter how good he sounds, no matter what he promises – we’re never again going to believe the patter talk of an American President. Mr. Obama has cured us. He has turned out to be our nightmare. Our problem is what to do about the American people that don’t realize this nightmare that they’ve created, this smooth-talking American Tony Blair in the White House.
What is your assessment of the new head of the IMF, Christine Lagarde?
She made her reputation as a corporate lawyer lobbying against labor unions and working on how the corporations could keep down labor, worsen workplace oppositions. She made her reputation working against labor so she’s in the right position. That’s the IMF – what it’s selling. The IMF’s product is austerity. The IMF’s product is poverty. She’s the perfect person to impose poverty. She’s anti-labor, she’s opportunistic, she supports the banks, she supports the IMF philosophy. She’s probably the best person to lead the worst organization in the world.
You describe a class war of banks against all the rest of society which cuts across the notion of left or right in political terms. Could you elaborate on that a little bit?
This is probably the hardest issue to get across because finance really isn’t a class. Surprisingly enough, the first discussion of this came in the 1970s and ’80s in Russia. Stalin – actually, it was already in the ’60s. Stalin had asked a leading thereologists and ancient historians to look at the class conflict in antiquity, and especially into Oriental despotism. And there were two people who took the lead. One of them was Muhammad Dandamaev who wrote a good book published by the University of Illinois Press on slavery and ancient Babylonia. And he said finance really isn’t a class because everybody’s a creditor. In America, employees save money, they have Social Security. Everybody is a creditor to somebody as well as being a debtor, and the financial classes are debtors. So it’s not really a class. He said it’s a legal estate. And if you look at all of the discussions in the 19th century about class warfare it was always, what was the class? The class was the owner of capital or the people that they hired. It was labor and industrial capital. Those were the two classes. There was also a land-owning class, the rentiers, but nobody ever thought of finance as being a class of people. Bankers were supposed to be intermediaries, they were supposed to provide credit for the wheels of commerce but most people thought of wealth as being land or stock ownership or securities. They didn’t think of finance as being a class. So I use the term very loosely, not in the classical meaning of the word class.
So there’s a financial dynamic of compound interest, a financial dynamic of banks and the financial sector getting the rest of society into debt that now can be created on a computer keyboard without limit, and then essentially getting rich by pushing the rest of society into debt up to the point where the entire economic surplus is being used not to raise living standards, not to invest in tangible industrial capital formation, not to pay taxes to government, but to pay interest and financial fees to the financial sector. So I guess instead of a class I should refer to what national income economists call the FIRE sector – finance, insurance and real estate. And it’s a symbiotic sector that’s emerged to become the characteristic central planners of the economic.
A hundred years ago people thought well, right now we have the big corporations, heavy industry, the steel companies, the railroads doing the planning. We think government should be doing the planning. That was the socialist planning. But now you don’t have government doing the planning, you don’t have industry doing the planning, you have Wall Street and the financial sector doing the planning. Nobody a hundred years ago expected anything like this so you have essentially a new class, a new bureaucracy – not the bureaucracy that Hayek warned about in The Road to Serfdom doing the planning, but a much more centralized planning bureaucracy on Wall Street in America, the city of London in England, the Bourse in France, Frankfurt in Germany, Shanghai in China. You have financial interests that are somehow centralizing all of the planning power and all of the economic surplus in their own hands in a way that’s impoverishing the rest of society. This is something entirely new and the political system has not come to terms with it.
You said that when you’re devaluing the price of the currency that what you’re devaluing really is the price of labor. Could you elaborate?
When all countries have common prices for fuels, raw materials, machinery and hard currency credit, so when the currency goes up and down the actual global price of all of this basic input – raw materials – remains the same. What are affected are domestic prices and costs and these are mainly labor and real estate. For instance, let’s look back at the 1980s when the United States was pushing Japan to increase the value of the yen. The yen went up in price against the dollar but the Japanese paid exactly the same global rate for their oil and iron and steel and copper and raw materials and the only thing that really went up was Japanese labor costs. Similarly, if the United States dollar goes down to make more exports, America’s still going to have to pay the same cost that other countries pay for its fuels and raw materials and equipment and what’ll become less expensive will be the price of labor, which will be worth less in terms of euros or other harder currencies. So devaluation basically is a means of lowering labor.
In Greece, for instance, if Greece were to leave the eurozone and adopt the drachma and devalue, its foreign debts are in hard currency so it would have to pay more in drachma to pay its euro debts and dollar debts and other foreign currency debts. It would have to continue to pay world prices for all of its basic inputs but Greek labor would be devalued relative to foreign currency. So the idea is to lower the cost of labor on the theory that it’s labor costs that determine international prices.
I’m speaking with financial economist and historian, Michael Hudson. Today’s show, “Guns, Finance and Butter: Finance is the New Mode of Warfare.” I’m Bonnie Faulkner. This is Guns and Butter.
So then you’re saying that with a dollar devaluating, American labor actually earn less. They have less buying power.
In global terms they have less buying power. If the dollar goes down and prices are set globally for machinery and imports, and the cost of what America imports is going to go up. The cost of what it imports in China, for instance, will go up and Walmart will have to charge people higher prices. The costs of its fuels and metal is going to go up. So the effect will be to squeeze the budget of employees and to raise the economy’s domestic cost structure faster than wages respond by rising. The idea of devaluing the dollar is to raise the cost of living and not raise wages so that you increase the rate of exploitation of labor.
Yes. That makes a lot of sense, particularly in view of the fact that most of the things that people buy these days are imported.
That’s right. As America has de-industrialized it’s shifted production abroad and it’s had to import more and more of its essentials. Its exports are primarily food and now it’s trying to raise the price of world grain by using corn and other crops for gasohol to drive down the price of oil, and it’s created an artificial world food surplus.
The aim of the government today is what it was under the Carter administration – to create a food crisis to starve out third World countries and make them more dependent on the United States so the United States government can say ‘we will give you more food but you have to sell off your raw materials to American firms, you have to get rid of your democracy and put in a government that we appointment so we can have Hilary Clinton in charge of your policy instead of your own people.’ And that’s how the Americans basically are impoverishing the Third World countries, by insisting – for instance through the World bank and IMF – that they will only give loans if other countries do not feed themselves and depend on American grain. Now that America’s using the grain to make alcohol and gasoline there’s no more grain available to feed these people so the result is African starvation as official American policy.
So you’re saying that the United States uses the World Bank and the IMF to force other countries to import our agriculture.
That’s been the explicit aim and I’ve described that in my book, Super Imperialism, how the mainstay of the U.S. balance of payments for the last 50 years has been agriculture, not industry. And in addition to agriculture, of course, military exports to the oil exporting countries so that they’re permitted to charge as much as they want for their oil as long as they agree to spending it on buying American airplanes. Saudi Arabia’s now buying tanks to use against its population. The idea is to arm the countries to prevent their domestic populations from bringing about a democratic government. That’s what’s creating the Arab Spring and the reactions against the governments – wasting their economic surplus on buying American arms and agreeing not to promote agriculture but to buy American food to essentially finance dependency on the United States. That’s the role of the World Bank and IMF – to make other countries dependent on the United States.
Right. And the way that they effect that is to put the other countries in debt.
That’s right. And not only in debt but in food dependency on the United States so that at the stroke of a foreign policy Hilary Clinton can say, “You’re not on our approved list. We are going to starve your population until you agree to follow American policy and sell off your public domain to more American companies”. So this is why I said that finance is the new mode of warfare. Finance and food dependency achieve today what military invasion was required to achieve in centuries past.
Now, Dr. Hudson, just to clarify – how is it that the United States can force other countries to not be self-sufficient in their agriculture? How are they forced to not grow their own crops?
There were proposals in the 1950s that the United Nations and the United States should promote land reform. And I’m told that David Rockefeller, at Chase Manhattan, gave John Deaver, the economic research director and my former boss, a copy of the Forgash Plan for a world bank for economic acceleration to promote land reform. And John Deaver said that in every country that has undertaken land reform to grow their own crops there’s been an anti-American feeling. Well, an anti-American feeling because American foreign policy is dictated very largely by the agribusiness interests in the United States – the large grain dealers. The mainstay of the U.S. balance of payments is food exporting, which means [INAUDIBLE sounds like: finance’s] counterpart in foreign economic and food dependency on the United States. So this is the most constant element of U.S. foreign policy since World War II, food dependency.
And if other countries need money to develop, if the United States can in effect have its banks raid these countries, creating a foreign exchange crisis, countries will have a choice: either they can withdraw from the world trade and financial system and go their own way or they can join. But the price of joining, the price of being a member, is they have to agree not to protect their own agriculture but to build in a special favoritism to U.S. agriculture. My book, Super Imperialism, explains how this is done and the trade field and in the financial field.
I’ve always been a little mystified as to why everyone joins the IMF and the World Bank, why they don’t go it alone.
The question you’re asking is, who are they? Who is Argentina? Who is Brazil? It’s not as if the whole country makes the decision. These countries are very largely their own oligarchies. For instance, when I started the Third World Bond Fund for Scudder Stevens in 1990, Brazilian and Argentine bonds were yielding 45 percent interest. Nobody would buy these bonds in America. Scudder was unable to sell shares in the funds to American buyers or to European buyers. The buyers were wealthy families in Brazil and Argentina because they knew that they were going to pay the debt. So the dollar yank for the Yankee Imperialists that were being blamed were actually Argentinean and Brazilian oligarchs operating through offshore funds with the dollars they’d siphoned out of their own country.
So if you have a country that’s run like Saudi Arabia is run, or other dictatorships, a client dictatorship run by a client oligarchy is kept in place by essentially the U.S. diplomacy against the domestic democracy. That’s why America backed dictators in Latin America for 50 years after World War II. And President Johnson said, ‘Well, they may be bastards but they’re our bastards.’ So the interest of the oligarchy is basically to make their economies dependent offshore because the oligarchs have their money outside of these countries. There’s a massive capital flight there and the more their currency goes down the more their currency becomes dependent, the more they have to borrow dollars, the more they borrow from their own domestic oligarchy and the higher the value this oligarchy, that has its money abroad, has vis-à-vis its own domestic economy. So the interest of the rentier oligarchy that’s floating on top of the economy, as Werner Sombart said, ‘like globules of fat on the soup of the economy’.
They benefit from this while the economy as a whole suffers. This is the problem with neoliberal reform. It’s created oligarchies throughout the former Soviet countries. We can see this from the Baltics to Central Asia and what’s happened there. We can see it in Latin America. We can see in what the U.S. and Europe have been promoting in the Near East, in Saudi Arabia and other countries. The interest of Saudi Arabia and Bahrain is not that of their citizens; it’s the interest of the rulers on top of these economies.
You have written that the bailout of Greek sovereign debt amounts to financial warfare. That is the selling off of the Greek Islands, the Athens Airport, etcetera. How is this stripping of Greek assets accomplished?
Essentially, the European Central Bank and the IMF told Greece, ‘Look. You have to run a budget surplus or minimize your deficit in order to meet the criteria that the eurozone members meet. So you’re going to have to balance the budget not by taxing the rich – that’s our constituency – but by selling off your airports and your public domain and counting this as a budget inflow. So you balance your budget not by progressive taxation, which is how America and western Europe got rich, but by selling off the public domain – to foreigners mainly – and the idea is that you’re going to get rich by selling it off because these new buyers are going to operate the water and airports and other things more efficiently, and lower your prices.’
Well, of course, this is pure mythology. When you privatize a basic infrastructure it’s privatized on credit and so the new owners build in their interest charges and financial charges into the cost of doing business, they pay themselves enormous salaries, much higher than the public sector would pay, and they begin to treat their monopoly position as if they can put a toll booth on the roads, a toll booth on the water and sewers, a toll booth anywhere. And if the governments don’t have a price regulating system in place to treat these infrastructure investments like public utilizes and keep their prices in line with the necessary costs of production, then you’re going to turn the whole economy into what economists call rent extraction – predatory monopoly charges just like rent-racking except on the scale of the water, sewer, use of broadcasting spectrum, telephones and you have the economy ending up looking like Mexico, where they privatized the telephones and Carlos Slim became the owner and became the wealthiest person in the world by making Mexico pay the highest prices for using telephones and the communications spectrum of any country in the world. That’s the neoliberal model saying, ‘Greece, you can get rich by letting the Carlos Slims of the world come in and take your economy. And we’re not going to do this by an army. We’re not going to land paratroopers. We’re going to just give political contribution to your socialist party members to vote to give all of this away. We’re going to do it financially without any bloodshed.’
Michael Hudson, thank you very much.
Thank you, Bonnie.
http://michael-hudson.com/2011/07/th...a-of-industry/