the bailout’s new financial oligarchy

8/8/2019 The Bailouts New Financial Oligarchy

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The Bailouts New Financial OligarchyOctober 15, 2008

Guns and Butter Interview on KPFA radio .

For part one of this interview click here .If you want to see the ideal of the World Bank and the IMF, look at the Russian,Latvian and Estonian economies. They have shrunk as if there were a war on. Andin a sense it is a war a class war and simultaneously a war of American highfinance against the rest of world. As in military wars, its devastating consequencesthreaten to include shortening life expectancy, lower health standards anddepopulation, poverty and de-industrialization, rising debt arrears and defaults.Youre going to have many of the post-Soviet countries going the way of Icelandvery quickly as their real estate debt collapses. Because crazy as it may seem, it wasthe real estate bubble that brought in the foreign exchange in the form of

mortgage loans denominated in foreign currencies that financed their structuraltrade deficits. Now that the bubble has burst, theres no way of keeping theseneoliberal hothouse economic experiments afloat.

Im Bonnie Faulkner (BF): Today on Guns and Butter, Dr. Michael Hudson. Todays show: TheBailouts New Financial Oligarchy. Dr. Hudson is a Financial Economist and Historian. He isPresident of the Institute for the Study of Long-Term Economic Trend, a Wall Street FinancialAnalyst and Distinguished Research Professor of Economics at the University of Missouri, KansasCity. His 1972 book Superimperialism: The Economic Strategy of American Empire is a critiqueof how the United States exploited foreign economies through the IMF and World Bank. He is alsoauthor of The Myth of Aid and Global Fracture: the New International Economic Order.

Dr. Hudson has written several articles on the recent Wall Street meltdown and Secretary of theTreasury Hank Paulsons Plan. These articles include, Financial Bailout: Americas OwnKleptocracy the Largest Transformation of Americas Financial System since the GreatDepression; The Paulson/Bernanke Bailout: Will the Cure Be Worst than the Disease?; FinancialFraud: Mr. Paulson and the New Yazoo Land Scandal; and Thinking the Unthinkable: a Debt WriteDown and Jubilee Year Clean Slate. These articles are on CounterPunch and Global Research, andare picked up on Information Clearing House and other sites.

BF: Dr. Hudson, welcome again.

Michael Hudson (MH): Thank you, Bonnie.

BF: Last week the Dow Jones Industrial Average closed out its worst week ever, down 18%. OnThursday, October 9th, it touched 7999, down over 40% from its high around 14000. Then onFriday it had a 1000-point swing on record volume. I heard one woman on the floor of the NewYork Stock Exchange yelling that no one knows what anything is worth. Whats going on?

MH: During the first seven minutes on Thursday I watched the Dow sink 100 points per minute.Thats over 1% per minute. Then the average began to recover, pending a statement by PresidentBush. But when he didnt say anything helpful, it continued its fall. Late in the day you could seethe Plunge Protection Team come in and try to push up the financial stocks, but the attempt ran outof steam. The reason is that most investors and voters too, by the way have come to realize thatPaulsons plan is not going to help the real economy, only his cronies on Wall Street.

Lets go over his two plans. Plan A, initially rejected by Congress (thanks mainly to Republicanopposition) was to buy $700 billion of junk mortgages and other bad debts, including fraudulentloans. The aim was to bail out bad lenders and investors, but not their victims. This predator-
http://www.counterpunch.org/http://www.kpfa.org/archives/index.php?arch=28908http://www.kpfa.org/archives/index.php?arch=28908http://michael-hudson.com/2008/10/the-new-kleptocracy/http://www.counterpunch.org/http://www.kpfa.org/archives/index.php?arch=28908http://michael-hudson.com/2008/10/the-new-kleptocracy/


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oriented plan was a waste of money as far as helping the economy recover was concerned. Congressrejected it as a blatant giveaway, although Mr. Paulson says that hes still going to spend hundredsof billions of dollars for this purpose and nobody looks ready to impeach him. Predatory finance has

been able to protect its gains extracted from the economy at large by passing its losses onto thegovernment sector.

Plan B calls for giving this money directly to the banks and leading insurance companies, on termsthat let them continue paying high executive salaries and dividends to existing shareholders rather than wiping them out as normally happens when an enterprise has Negative Equity. The Treasurysidea of protecting the taxpayer is to buy preferred stock. The word preferred is a legal termthat means simply that the shares are non-voting and can be wiped out, because they are nottechnically creditor claims. In case of further trouble the government goes to the back of thecollection line, not to the front. This gives the banks money to pay the big speculators on badgambles, enabling the winners to collect from suddenly affluent debtor-banks and debtor insurancecompanies.

The pretense is that the banks are going to turn around and lend out this government money is goingto help the economy at large. But the economy is too over-indebted and is shrinking too fast to take

on more debt. Homeowners and consumers, real estate investors and corporations have pledged somuch of their income to pay debt service that there is not much left to pay interest on yet more debt.The solution to todays problem is less debt, not more.

The market plunge for mortgages and corporate bonds had the virtue of preparing the ground for renegotiations, write-downs and write-offs along these lines. But Mr. Paulson made it much moredifficult sought to turn things around in this way. Higher valuations for mortgages and other debtclaims have taken the pressure off creditors to agree to write-downs. Its easier for them simply toswap their junk mortgages to the Treasury or Federal Reserve for full-value U.S. Treasury bonds,and make the government take the loss and presumably levy taxes to cover the interest charges onthe augmented debt!

There is no way that Mr. Paulson, in charge of as clever a company as Goldman Sachs, couldhonestly pretend that giving money to banks would persuade them to make bad loans that will loseeven more.[1] This assertion merely serves as a cover story for the Treasury giveaway. The moneyactually will be used to buy other banks, consolidating the U.S. banking sector into just a few giantnationwide banks, European-style.

Mr. Paulson is what Franklin Roosevelt called a bankster. Congress is not going to indict him for perjury, but I think people have seen his true colors and that he is not a public servant acting inthe national interest. When an official follows a policy that fails, you can be pretty sure thatsomebody is benefiting by his blindness. Such people are called useful idiots to the vestedinterest, but I think we are dealing here not with idiots but by skilled double-talkers, masters of

deception. The aim of these banksters is to take the bailout money and run or as I said, to act asvulture investors buying other banks to strengthen their monopoly hold on the rest of the economy.So what were seeing is really the largest financial theft in American history. Wall Street hasinserted its lobbyists into the governments decision-making apparatus and crafted a cover story thatthey know to be false. The media are barely questioning it. Todays New York Times front page(Oct. 15) does point out that the Treasury has given the banking system and its lobbies what theywant a program free of Treasury control over executive remuneration.

But neither the New York Times nor other popular media have acknowledged the basic problem:Todays debt overhead is substantially in excess of the ability to pay, and hence of todays marketvaluations. This means that a large part of the private sectors bad mortgages and other bad debtsare unpayable. But now are going to be carried, either by the banks or by the government if it takesownership in exchange for the new Treasury bonds it is printing.

When you get down to the actual magnitude of this problem, the only real solution turns out to be


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Plan C the Unthinkable Option from the creditors vantage point. That is to do what always hasto be done in the end: to write down the unpayable debts to reflect the current market value of collateral pledged to back them, that is to the amount that can be paid under todays conditions. Andremember, these conditions are worsening. The economy will continue to shrink as long as theseexcessive debts are kept on the books.

Unfortunately, the Treasury plan does not require banks to renegotiate or otherwise write down thedebts. The bailout plan passed by Congress is an anti-debtor plan. It wont work over time, but a lotof speculators and creditors can get richer by leaving the government holding the bag for these baddebts. The Treasury is swapping its own bonds for bad IOUs. Interest charges on these newlyminted Treasury bonds will be built into the federal budget as a transfer payment from taxpayers(that is, the lower income brackets, which pay the highest tax rates) to creditors and propertyowners (who have made themselves exempt from income taxation).

One twist to Mr. Paulsons Plan is that banks do not have to mark their securities or other assets toactual market prices. Rather than telling prospective investors, depositors or others that theyreworth, banks can use Enron-style mark-to-model accounting to say that their stocks book value iswhatever in-house model-builders want to say theyre worth, on whatever blue-sky assumptions

they choose. The only constraint now is the fact that foreigners and domestic investors have nowrealized the degree to which that the banking system, Wall Street and the rating agencies are run bymen that used to be crooks, but now are euphemized simply as creative accountants.

BF: A lot of people, including yourself, have come out with good ideas about what ought to bedone, but theyre not doing it. It seems that the people at the levers of power dont really want to fixthe economy.

MH: Its worse than that, Bonnie. The interests of Mr. Paulson and his Wall Street banksters areantithetical to the economy. The product that the banks and Wall Street sell is interest-bearingdebt. The banking system makes its money by extracting interest from the economy, and by lendingit out. Its gain is the industrial economys loss if it does not finance new tangible capital formation

but simply provide borrowers with the credit to bid up prices for housing, commercial buildings,stocks and other assets already in place. This forces prospective buyers of these assets to borrow yetmore and pay yet more interest in a snowballing effect. The process doesnt create new tangible

property; it only inflates access prices, while the rising payment of debt service diverts incomeaway from the normal or Says Law circular flow between producers and consumers.

To make matters worse, the financial sector lobbies politically to un-tax commercial real estate andother property so as to leave more rent and monopoly super profits available to be paid as interest.But interrupting this flow to siphon off interest and management fees is the basic business of financial institutions, in contrast to industry and public enterprises. So when Mr. Paulsons planleaves the economy poorer than before, its not a case of, Oh, gee, we messed up. We didnt expect

downturn to continue. The reality is that theyre trying their worst to take as much of the economyfor themselves as they can. Their aim is to empty out the cupboards before the November 4thelection.

Its something like medieval populations fleeing from Genghis Khan: Lets take everything we cancarry. Except in this case, its Wall Street Republicans fleeing from the prospect of a Democraticelection victory, fearing that somehow Obama may not end up appointing Robert Rubin or another Wall Street Treasury Secretary. They better steal everything they can while they can. And it lookslike they may steal enough to shape the next century of American Wealth by creating a new set of ruling families and vested interests before our very eyes.

There goes the theory of the Invisible Hand! It turns out to be the hand of predators, not that of a

beneficent deity. Acting covertly as insiders, theyve created a deceptive rhetoric by weaving acloak of invisibility around their actions. They do this first by depicting finance and rent-seeking privilege as part of the economys real wealth-creating process rather than as an extractive sector,


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and second, by, pretending that the financial problem is only a temporary liquidity problem, not astructural problem debt of debts that cant be paid unless the government makes up the gap at thenon-financial sectors expense.

The bottom line is that we have two economies. An extractive financial sector (Economy #2) haswrapped itself around the real economy of production, distribution and production (Economy #1).The academic and political strategy of Economy #2 is to conceal public recognition of thisdichotomy, so that it can continue its extraction of interest and fees.

BF: There doesnt seem to be much fight-back at all. Do you see anybody in any position of power pushing back against this?

MH: (laughing wryly) I dont even see anybody not in a position of power pushing back. Hardlyanyone is confronting the real issue the fact that the only way to revive an over-indebted economyis to write down the bad debts. This should be so obvious that leaving it out of account shows thedegree of control that Wall Street lobbyists have, not just over Congressional debate, but over themass media and even academic economics departments.

BF: How significant is insider trading in the Dows huge daily price swings?

MH: Theres no way to know. It doesnt seem to make sense that something worth one price in themorning can be worth either twice or half as much in the afternoon. Wall Street has killed theregulatory policemen. The Republicans say theyre in favor of putting more police on the streets,

but theyve fired or downsized the financial policemen on Wall Street.

BF: It seems from these huge swings that institutions and people with a lot of money know ahead of time whats going to happen, and its all discounted in advance.

MH: Its hard to know whats going to happen, but they have a fallback position. Years ago,insurance companies who managed pension funds and other peoples money would do the usualarray of trades each day. The good trades that made money would be registered in their ownaccounts. The bad trades would be put in the accounts of the clients whose funds they managed.This is the option that repeal of the Glass-Steagall Act has provided to banks and their money-management subsidiaries.

BF: On television they keep talking about interest-rate cuts. What will this do?

MH: The interest rate theyre talking about is not the rate on credit cards. Its not the mortgage rateeither. Its not a kind of interest that people or companies pay, but the very low interest rate at whichthe government provides credit to the banking system and large financial speculators. The Treasuryand Federal Reserve are saying: Were going to give you almost free credit. If you borrow enough,you can bid up the price of assets and make a capital gain. So were going to flood the economywith credit and let you make this gain. That will re-inflate the assets you hold to back what you oweyour depositors.

The problem is that the banks and the other investors who would like to make such a free lunchdont want to buy assets that already are underwater. The problem is Negative Equity. So manymortgages, so many assets and so many banks themselves have negative equity that is, they owemore debt than their assets are worth that there is no point in buying assets right now. Thegovernment credit policy is called pushing on a string. You can lead a horse to water, but youcant make it drink. You can provide credit, but in a shrinking economy you cant make people

borrow to buy assets they expect to keep falling in price.

BF: Financial commentators on television keep saying, Weve got to unfreeze credit. Banks arescared to lend money to each other. They think the answer is for banks to lend short-term credit to

each other. What about this?MH: The reason banks arent lending isnt that they dont have enough capital reserves. Its thatWall Streets behavior has destroyed trust. The law that Congress passed made things worse, by


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giving banks the right to misrepresent their position by marking to model accounting. This lets banks take a package of sub-prime junk mortgages and say its worth anything they want. So their model-builders say, If its paid off at the exploding interest rate we expect, if the current owner somehow is able to sell the house in a revived real-estate market, then the mortgage is worth such-and-such. This turns financial markets into an exercise in science fiction that has little basis inreality.

Bank lobbyists have gotten their way in avoiding reality and now the banks are suffering for their political victory of being able to keep financial reality secret. When Congress, backed by thePresident and a Wall Street Treasury Secretary, all give banks a license to lie, investors and moneymanagers respond by saying, We dont want any part of this. The media are not reporting that asfar as Europe is concerned, Wall Street is being run by crooks in much the same way that it used to

be before the Reform Era and New Deal clean-ups. Instead of acknowledging crooked behavior and prosecuting these guys, government financial officials are rewarding them. And when investorsrefrain from providing new money to these banks and insurance companies, the government turnsaround and spends $125 billion to buy their stocks at a price way above current market value. Sothe worse Wall Street behaves, the worse the financial crisis gets and the more they are able to go to

Washington and say, You have to pay more money to save us, because whats good for us is goodfor the economy. The implicit message is, Well wreck the economy if you dont give us what wewant!

BF: Wasnt this part of Paulsons Plan this change in accounting rules where they dont have tomark to market?

MH: He hoped that promising that the government would give $700 billion to the banks wouldconvince foreigners and sovereign wealth funds (maybe OPEC countries, Arab oil sheiks, maybeChina and Japan) that the government could solve the problem. But the trick didnt work, becausethe Bush Administration has lost credibility. Wall Street has made matters worse by the wayLehman Brothers emptied out its European offices of cash the day before it went bankrupt, paying

off its closest U.S. cronies. The government followed up by making an illegal gift to American car manufacturers by saying Were going to break international law and only give subsidies to U.S.auto companies, not foreign-owned companies in the United States. Asian companies protestedagainst this favoritism that discriminates against Japanese firms that have relocated in the UnitedStates to take advantage of a tariff and non-tariff trade barriers. They say, Were doing everythingyouve said, and now youre screwing us. So is it any surprise that foreigners view thisadministration as a gang? Thats why theyre bailing out of the economy.

Never before in my experience (which goes back fifty years on Wall Street), have I seen seven daysof steady decline in the stock market. Every decline Ive ever seen has normally been a zigzag: Itgoes down one, two, three maybe even four days, then it bounces up. Theres a brief squeeze onshort sellers, pessimists who have oversold and have to buy shares to cover their positions. But thenthe market goes down again, bounces up, and then goes down further. A zigzag is how marketsnormally operate. But theres been no zigzag. So you know its not a panic but a phase change.Foreign investors in particular and even foreign officials now are disgusted with how theAmericans are mismanaging the economy and indeed, flagrantly stealing from the public domain.

BF: Yet I hear financial reporters on television railing about how we need foreign investment, andhow were going to attract it.

MH: That era has ended. We are entering a new era of other countries treating the U.S. economy asa hot potato. They want to get rid of dollar-denominated assets. The German government has had to

bail out German banks in Dsseldorf and in Saxony banks that had faith in the packaged mortgagedebt that U.S. financial institutions and money managers were selling them. Its like the situation inAnimal House, when one of the fraternity boys lent his friends his fathers expensive car and theywrecked it. He was crying, all upset: Youve wrecked my fathers car! What will I do? One of the

boys explained: You screwed up. You trusted us. Thats what America has said to banks in


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Germany and other countries: You screwed up, you trusted our money managers.

In other words, Weve made a mint off you, and were going to keep it. These managers alreadyhave given themselves stock options, golden parachutes and high salaries. Thats the result of our failure to regulate. The banksters have got their money that is, all the Treasury bonds that Mr.Paulson has been able to give them and theyre running. Let the next administration clean up themess and pay for this bailout and the vast new sums of public debt its created.

BF: So Paulsons bailout is not going to fix the need for foreign capital.

MH: Thats one reason why the stock market has been going down. Foreigners are saying, Wedont trust the U.S. economy anymore. We especially dont trust the banks. So theyre selling U.S.stocks and other investments. The balance-of-payments problem looks like it will be pushing downthe dollars value against other currencies, so even if stocks go up in dollars, they may fall whendenominated in euros.

The big picture is that America is running a heavy long-term structural trade deficit. It also isalready running a heavy military deficit because of the wars in Afghanistan and Iraq. In the pastthese deficits have been financed by foreign central banks and private-sector foreign investors

recycling these dollars back to the United States via the Treasury or Wall Street. But now theres anet U.S. investment outflow as well. The result is a three-fold pressure on the U.S. dollar. WallStreets free-market planning has hollowed out the economy.

Dismantling public regulation has been supported by the economic theory taught in almost everyuniversity. This is the junk-economic theory that has been getting Nobel prizes for free trade andopen capital markets for the last thirty-two years. It is as bankrupt as the banking system.

BF: Youre referring to Milton Friedman. Didnt he get a Nobel Prize?

MH: Yes. The vast majority of these prizes have been given to Chicago School economists who arein effect shills for the financial sector. When these useful idiots use complex math to oppose arole for government planning, they overlooked what you and I have talked about on this show

before: Every economy is planned by some party or other. Economies have been planned ever sincethe Neolithic. People have to look forward. Thats why the calendar was invented. If thegovernment doesnt do the key planning, if it withdraws as societys long-term planner, then therole is left to Wall Street. The problem with this relinquishing of public authority is that the timeframe of the financial sectors credit allocation traditionally has been short-term. A hit-and-runmentality is the norm. Today, Wall Street managers have taken their golden parachutes andexercised their stock options, squirreled away their high salaries and put them into hard assets land, real estate, anything they can get. Theyve made themselves safe, and now theyre letting therest of the economy go under.

BF: In the show that you and I did entitled America: host or parasite? you explained how foreigninvestment has been supporting our economy.MH: These days foreigners are pulling out their money. Theyre also unwinding the cheap moneytheyve borrowed via Japans carry trade. This has been pushing up the yen, and that money has

been coming to the United States, pushing up the dollar temporarily. But when this unwinding isfinished, we return to a situation in which foreign creditors to the United States have lost a bundle.German banks have gone broke from their U.S. investments, and English banks have gone broke ontheir own U.S.-style real estate pyramiding. The G7 meetings in Washington have failed because theU.S. Government has taken a belligerent nationalistic position. It is telling European and other governments to bail out the American bank branches in their countries. The message is, We dontcare what it costs you. Just take care of us.

The reaction by the European and other foreign bankers has been to conclude that there cant really be an agreement. Theyre now trying to figure out how to try and save themselves. At best this will put governments on a path to try to develop an alternative to the U.S. dollar-based system, that is,


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dollar hegemony that obliges other countries to hold their foreign exchange reserves in the form of loans to the U.S. Treasury. Its become obvious that the money theyre lending will never be repaid.It never can be repaid, and in any event there is no desire in the United States to repay foreigners.

BF: Can we expect hyperinflation?

MH: Not yet. That occurs when a currency crashes against other currencies, usually by trying to pay

debts that its trade balance cant cover. I dont think youll find hyperinflation of dollar prices untilother economies create an alternative to the dollar. This will start by developing a vehicle for tradeamong themselves.

The first stage is to arrange barter deals, as was done with the Soviet Union in the 1960s. The moralis that over-indebtedness always leads to barter in the final stage. The Roman Empire remainscivilizations primary and most serious example. But as we move toward this position, the UnitedStates simply will not have much to exchange with foreign economies.

Once Europe, Asia and the post-Soviet economies cant find many dollarized financial vehicles inwhich to invest, you can be sure that will try to develop an alternative to the dollar. Until theyactually do that, there will not be inflation here. There will simply be a polarization of income

between wealthy creditors the top 10 percent of the population and an increasingly indebted bottom 90 percent. This is basically a deflationary process debt deflation as far as the distributionof income is concerned. The only inflationary impact will come as the dollar declines to reflect howmuch the debt overhead has hollowed out the U.S. economy.

What Congresss vote to approve the Wall Street bailout accomplished was to polarize the economyto an unprecedented degree. The effect will be to reverse the American dream and make it muchharder for people to get rich, except for the few who win the lottery. But most people who play thelottery are going to lose, of course. People will become more desperate. And the more desperatethey get, the more money theyre going to lose and the faster the economy will polarize. Thats how

polarization occurs. Its an accelerating process, and Mr. Paulson and the Democrats have just pressed the financial accelerator.

BF: Even on American television, commentators were complaining that hes not being specific andisnt going far enough, that is, far enough to help debtors as well as Wall Street. What will be theeffect of the G7 meeting and the communiqu from Hank Paulson?

MH: When a Treasury Secretary is not specific coming out of a meeting of finance ministers, thismeans they wouldnt give him what he wanted. He tried to boss them and they wouldnt say yes, sothe United States has nothing to say. In other words, it made irrational demands. Short of droppingan atom bomb on Europe, I dont see theres any way of getting the U.S. demands met.

BF: The International Monetary Fund (IMF) and World Bank also are meeting this weekend. Whatrole do these organizations play?

MH: Nothing positive. These institutions function as extensions of the U.S. Treasury. Most of their staff and most finance ministers in general, for that matter are brainwashed pro-creditor monetarists or they wouldnt be in the World Bank or the IMF in the first place. The IMF has lost itsWestern clients, as Turkey left in May by paying off its remaining debt. And its prime minister saysit doesnt want to go back to it. Nobody wants to go near the IMF and World Bank, because of their knee-jerk policy demands: economic austerity and privatization sell-offs to insiders. The WorldBank is equally dysfunctional, creditor-oriented and pro-American.

So when you hear calls for a new Bretton Woods from Europe, Asia and the Third World, thisreally means an anti-Bretton Woods, negotiated to protect the rest of the world from U.S. dollar hegemony rather than lock them into it as occurred in 1944. (This is the story Ive told in Super Imperialism: The Economic Strategy of American Empire.) For the United States, on the other hand, a new Bretton Woods means a plan to wipe out the U.S. Treasury debt and replace it withpaper gold, that is, IMF notes for foreign central banks to trade among themselves, to be


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exchanged for claims on the U.S. Treasury and hence on the U.S. economy. This pseudo-reserveIMF currency would be meaningless trash for cash from an economic point of view. I dont seehow any country except little England and maybe Tonga will go along with it.

BF: Both these organizations have played a destructive role in Third World countries, havent they?

MH: Yes, and also in Russia and the post-Soviet countries where they promoted kleptocracies and

an anti-labor, anti-development flat tax while freeing real estate and finance from taxation. If youwant to see the ideal of the World Bank and IMF, look at the Russian, Latvian, and Estonianeconomies. They have shrunk as if theres a war on. It is a war a neoliberal class war being waged

by American finance against the rest of world. The effect is to free land rent and monopoly rentfrom privatized public enterprises to be paid to banks as interest, forcing taxes to be levied on labor and industry. So the government budget is limited to what it can extract from labor. The World Bank applauds this and puts Latvia and the Baltic states at the top of its list of business-friendly countries.These happen to be the countries whose economies are now falling apart the fastest. These are themost neoliberalized economies in the world, causing them to suffer from depopulation, de-industrialization, poverty, deteriorating health standards and rising industrial accident rates. Theyanti-labor policy and trade dependency are so extreme that about a sixth of men between the ages of

25 and 35 have told pollsters that they expect to emigrate in the next five years. In the past twoyears nearly 10 percent of Latvias workforce has emigrated between 50,000 and 100,000workers, about half to Ireland.

Many post-Soviet countries are going to go the way of Iceland as their real estate debt collapses.IMF and World Bank advice has led the Baltics to borrow primarily in foreign currency againsttheir real estate. Over three-quarters of Latvian mortgage debt is denominated in foreign currencies.Once the domestic currency goes down, debt defaults will spread and the economy will fracture.

BF: To shift back to the U.S. economy, I just saw an on-line video clip from a television station insouthern California, an area referred to as the inland empire. I think this covers Riverside and SanBernardino County where a lot of expensive housing recently has been built. They took a television-crew into some of these new developments. The houses are brand new, very spacious beautifulhomes that people simply have walked away from. The video was very disturbing because peoplehavent even taken anything with them. There was a business that does something thats nowreferred to as trash-outs. They go into these big homes where all the furniture is still there,

peoples clothing is hanging in the closets, there are computers, printers, flat-screen televisions, birth certificates, photographs everything that you can imagine would be in a house is still there.They go in and they move these big dumpsters out in the front yard and start clearing everything outof the house to take to a landfill. The homeowners apparently dont even have time to call a charityto come and pick it up, because they say the trucks dont arrive on time. One man has a companythat charges $200 to fix up lawns that have gone without any water. He spray-paints the lawns greenso that the place has what he calls curb appeal.

Every other house in this neighborhood is either in foreclosure or on what is called a short sale. Theinterviewer asked the person in charge of this trash-out why people left their things and he said,Well, I dont know, maybe they couldnt afford to hire a moving truck.

MH: Under the bankruptcy law, if youre a business, youre not allowed to empty it out when yougo bankrupt. You have to leave everything as it was or else the creditors can come after you for what youve taken. But for homeowners there wouldnt seem to be any motivation for people to actso irrationally. Nobody really needs to hurry to get out of the house. I dont understand why thecreditors didnt try to recover some of this material. It suggests that whats left is going to bedifficult to sell. Californias property tax laws dont help its Proposition 13 limiting how much thestate can tax owners who bought in early. The state economy is going to shrink and suffer more

bankruptcies as its economy becomes more stratified.

BF: Under the old bankruptcy law, before they changed it, I thought you could keep your house.


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MH: You can renegotiate mortgages on as many houses as you want, except for the house you livein. Senator McCain said he has maybe seven houses. If he were to go bankrupt he could keep thesecond, third, forth, fifth, sixth and seventh house and the judge could reset the debts attached tothem. But the new bankruptcy law prevents judges from renegotiating the mortgage on the housethe defaulting debtor or bankrupt lives in. The aim evidently was to deer homeowners fromthreatening bankruptcy as a way to negotiate their mortgage debt downward, the way commercial

investors such as Donald Trump have done. The effect is to cause abandonment. This is the law thatCongress passed on behalf of the credit card companies and mortgage lenders.

BF: Regarding these mortgages in default, in terms of the junk paper that the Treasury Plan wasdesigned originally to buy, I understand now that Fannie Mae and Freddie Mac are now buying this

paper. Is that right?

MH: They were given $200 billion dollars to resume lending and to buy these mortgages. In todaysmarket not many people are able to get new mortgages. If they really wanted to fix things, theywould simply write down existing mortgages to the current market value of houses. This would

begin to liquefy the real estate market again without costing government money. Bad lenders wouldabsorb the losses from their bad decisions. The reason why property cant be sold is that their

mortgages exceed the market price.The government is now scheduled to absorb the loss of writing off this negative equity, this extradebt thats been loaded onto them. This opens the door for cronyism. If Im working for Fannie Maeand buy $2 billion worth of loans from Countrywide (now part of Bank of America), I may hopethat when they break up Fannie Mae into a smaller agencies, I may get a nice vice-presidential jobin Bank of America. There is no protection against this kind of conflict of interest.

BF: Could you say a bit about the demise of the investment bank Lehman Brothers. That seemed togo belly up overnight, and is had a devastating effect. Nobody is writing much about it.

MH: Lehman Brothers basically committed suicide. It was trashed by its CEO, Richard Fuld, Jr.The Koreans and other groups made offers to buy the company if he would have sold it at areasonable price in a timely way. But he insisted on getting the reported book value according to hisEnron-style accounting. He wanted to be paid what Lehman Brothers used to be worth. Prospective

buyers offered to pay what the company was worth at the time. That would have been enough tokeep it in business. But he preferred that the company go bankrupt rather than take one penny lessthan what it used to be worth. He didnt want to take a loss. So the company went bankrupt. Theemployees lost their jobs. Employees in the London office were told to get out that night. All theyhad were the canteen credit cards on which theyd prepaid for a month up to a hundred pounds. Thenews reports said that employees were lining up before the canteens to buy coffee, gum or anythingthey could carry with them. The employees were furious at Mr. Fulds grandstanding. Having madehundreds of millions of dollars in bonuses and excess salary, he said in effect, I dont care if

everybodys losing their job and retirement accounts. Ive got my money. If I cant sell at the price I paid for Lehmans assets, I dont want to play in the game anymore. And if I dont play, no other Lehman employees will either.

The bankruptcy was contagious because Lehman had so many cross-trades on its books. Itsexecutives had emptied out the company treasury by paying out much of its capital in bonuses,dividends and even for stock buybacks. So it lacked the money to cover its bad trades andinsurance.

BF: Italian Prime Minister Sylvio Berlusconi said that governments may shut financial markets asthe credit freeze pummels stocks and threatens global recession. He said that markets may be shutwhile policy makers rewrite the rules of international finance. How likely do you think this is?

MH: Even if you shut down formal markets, a shadow market will spring up somewhere in theworld. It could be in the Cayman Islands, or even Russia or Beijing. These would be offshore tradein options, for settlement by securities held in American depositories. But officially, shares wouldnt


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be transferred. So what does it really mean to shut down financial markets?

One meaning would be that when the markets reopen, banks would start from a near-zero position.Debts (except for current wages that employers owed their employees) would be wiped out, alongwith deposits over a basic working-balance amount. This happened with remarkable success inGermany with the Allied monetary and debt reform of 1947. Alternatively, the currency could bedevalued. As in the post-Soviet economies, people would get possession of their homes free andclear. But this could not be done with commercial properties, or you would create an incrediblywealthy class. So the rental value would have to be collected by a tax policy simultaneous with thefinancial restructuring. Quite frankly, I dont think any politician has thought through whatrestructuring really would mean, because there are so many variables and so many policies andeven inevitable future developments are still in the unthinkable category.

Wiping out debts gets into the realm of rewriting the rules of international finance as well asdomestic tax policy. I have no indication that Europeans have such an idea. There was acommuniqu from the IMF yesterday saying that they were going to look at all possible options.But you know that when they say all possible options, it really is a pretty narrow range, designedto favor creditors and oppose labors interests. Richard W. Fischer of the Federal Reserve said that

the Fed will do whatever is necessary to ease the strains on markets and the economy. But hereagain, when someone in his position refers to whatever is necessary, this does not even consider writing down debts to the ability to pay. Appointees vetted by Wall Street or European financialinterests are not going to consider nationalizing the banks or insurance companies.

So the bottom line is that politicians are not going to go against these vested interests their biggestcampaign contributors, after all. Theyre not willing to think what, to them, is politicallyunthinkable. Even when reality hits them in the face, few politicians understand enough economicsto understand the constraints at work, especially now that the leeway for indebtedness has almost all

been used up. Thats the real problem: The only solutions able to save the economy from depressionare, to them, unthinkable. So politicians and public officials are most likely to keep on steering the

economy over the cliff.In such a situation, insiders normally take what they can, as fast as they can. This is whatshappening with the Paulson bailout today. It is the plan he worked out with the help of banking andWall Street lobbyists, supported by the Democratic Congress.

BF: Do you think they want a Depression?

MH: No, theyd love to have a thriving economy in which they could continue to make money andsiphon off a free lunch for themselves. This is their dream, the guiding fiction of the miracle of compound interest. The problem is that the financial sector doesnt want to do anything thatdoesnt serve its own short-term interest. Thats the inherent historical problem with finance. Itstime frame is short-term, based on quick in-and-out buying and selling. This is not a strategy of long-term growth. That is supposed to be the responsibility of governments. But for the last half century the financial sector has backed an ideology that sees governments only as part of the

problem, not part of the solution. Taxes are supposed to be only deadweight, not the basis for funding infrastructure. Government planning is supposed to be inherently inefficient. The inferenceis that government should relinquish planning power and resource allocation to the private financialsector. But when you do this, when you shift planning out of the hands of government to the banksand money managers, their policies aim to make money in the easiest way possible by inflatingasset prices and engaging in financial engineering rather than industrial engineering.

BF: State and local governments tax revenue is declining. What effect will this have?

MH: Already in New York City, where I live, Mayor Bloomberg has said now that Wall Street is notgoing to be paying as much tax, so well have to cut back capital spending such as the 2nd Avenuesubway and raise fares for transportation and other public services. All over the country weveheard about infrastructure rotting away bridges collapsing in Minnesota, roads in disrepair, levees


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breaking. But states and municipal taxes are being voted down and cut back, while federal revenuesharing also is down. So theyre not able to fix the roads. Theyre not able to fix the bridges.Theyre cutting back capital spending programs and downsizing the municipal labor force, so weregoing to suffer economic shrinkage.

To top matters, almost no states and municipalities have been funding their pension programs. Sotheyre heading for the kind of situation that San Diego is in. If you want to see where manylocalities are going, look at San Diegos failure to put aside money to pay the pensions that it nowhas to fund on a current basis as tax revenues fall. This means huge cutbacks.

If the government really wants to help the American economy it would set up an insurance fund for states and municipalities, with regulatory power to insist on adequate financing rather than

borrowing. It would do well to federalize the property tax, levied on land rent as the basic fiscalrevenue, reversing the tax shift since the 1930s onto labor via income and sales taxes. But it hasdone nothing of the sort. The Treasury and Federal Reserve are only funding Wall Street, not thelocalities that are actually in need of revenue these days, and certainly not mortgage debtors. Nowthat real estate prices are falling, the banks and the real estate industry are clamoring for propertytax cuts so that owners can pay more to the banks and therefore support higher mortgages and hence

a return to higher property prices. But if cities and states lower their real estate taxes, their fiscal position will be squeezed even more.

Along with Ben Bernanke at the Federal Reserve, Mr. Paulson, is saying that weve got to reflatethe real estate market. They depict the collapse in real estate prices as a tragedy. But what is thistragedy? It is that real estate prices are becoming more affordable. So restoring wealth creation bysupplying more credit that is, by running up yet more debt is the same thing as saying, Wedont want more affordable real estate prices. We want high enough real estate prices to keep thedebt bubble fully inflated and growing once again.

The problem from Mr. Paulsons point of view seems to be that Americans are only paying 40 percent of their money for housing now. His plan calls for Americans to reflate the real estatemarket by paying up to 60 percent of their income on housing and financial charges, mainly in theform of mortgage debt. If this trend persists, how will families have enough to spend on goods andservices at anywhere near present levels?

Todays form of finance capitalism is turning out to be the antithesis of the industrial capitalism thatmost textbooks describe. Financial managers have increased stock prices for industrial companiesnot by investing more in capital formation, but by borrowing money to buy their own stocks or simply to pay out as dividends. This enables financial managers to cash out on their stock options athigher prices than they otherwise could have. But Wall Street has stripped corporate assets,hollowing out industrial capital by loading it down with debt.

So with regard to your question about state and municipal finance, todays finance capitalism iscommitted to capitalizing the entire economic surplus into interest charges. Local payment of debtservice is crowding out the use of tax revenue for direct spending. This threatens to de-urbanizethe economy and dismantle the public infrastructure that has kept down the cost of living and doing

business since the Progressive Era. In the public as well as the corporate sector, debt extraction isdepleting the wealth of nations.

BF: What do you think things will look like in the near future? So far we havent been able toidentify any pushback against this debt trend. What will our world look like after the next presidenttakes office?

MH: For a foretaste you might to look at what happened in Russia after 1996 and other post-Sovieteconomies that Mr. Rubin had a free hand in designing. Labor unions were broken (or simplystillborn) and living standards fell. If that is any guide, suicide rates will go up, life expectancy willshorten. President Bush already has told people to go to the emergency wards of hospitals if theyresick. They will be given an aspirin and maybe some baking soda to settle their stomachs. Jobs will


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be cut. Cities will be less pleasant places as people lose their jobs and mental problems rise.Transport will be cut back, as its already being cut back in New York, raising the cost of living inoutlying areas. Public infrastructure will crumble until its sold off to foreigners to solve the localfiscal crisis. The new private owners will charge or charge more for what they used to give for free or at subsidized prices for roads and other basic services. People will be squeezed like never

before in modern times. It may lead to emigration of skilled labor abroad just as there was a brain

drain in the case of Russia.BF: This could lead to complete social breakdown, couldnt it?

MH: Im not sure how far you want to go in defining the word breakdown. Todays economicdeterioration is financially driven to evolve into kleptocratic rentier economies with polarizedwealth distribution and debtor-creditor strains. America may begin to look like Mexican and LatinAmerican kleptocracies as politicians adopt essentially the economic plan the Chicago Boys whoadvised Gen. Pinochet in Chile, right down to trying to turn privatized Social Security into casinocapitalism.

The problem is debt deflation. The solution must be political by restructuring the institutionalcontext within which market forces operate. Unfortunately, I dont see much political pushback.

BF: Are we on the verge of a Great Depression?

MH: We seem to be not a V-shaped downturn with a quick recovery, but a longer L-shaped one,limping along until the debt overhead is paid off. The problem is that if the debts are indeed paid,this must be at the expense of foregoing the purchase of goods and services. If you dont buy goodsand services then people will not be hired to produce them.

It doesnt have to be this way. The financial sector and its neoliberal economists will try to convince people that going to say this is just a normal business cycle and will be cured automatically if thegovernment cuts taxes for the wealthy to let the financial sector lead the economy back up. So thecure is more trickle-down tax policy.

When stagnation continues, theyll insist that not enough subsidies have been given fast enough tothe banking and financial sector to restore normalcy. Their idea of normal leaves out of accountthe fact that this financial sector has gotten rich by loading down the economy with debt debt thatis beyond the ability to be paid, resulting in Negative Equity. The economy cannot earn its way outof debt of this magnitude. It would be much easier if the creditors and investors in junk mortgagesand junk bonds took their losses, and if the $450 billion in derivative superstructure simply was letgo. Instead, we are getting the worst of all possible worlds. The Treasury is taking responsibility for making bad lenders and bad investors whole, but leaving bad debts and even Negative Equity on the

books and even putting the government in the position of debt collector of last resort. But insteadof confronting the over-indebtedness problem, financial lobbyists along with the staff at the Fed

and Treasury, and the Congressional leadership will say that a depression happens mathematicallyonce a century, and recommend that one do nothing but give more money to the financial sector toloan out and create yet more debt. Without saying just what problem Mr. Greenspan created and Mr.Paulson aggravated, there is little likelihood of a real solution being proposed.

It was the Clinton Administration that really started the ball rolling. Now that you have Ms. Pelosiand Mr. Reid leading the pack for Wall Street, the Democrats have to take as much responsibility asthe Republicans for the Bailout and hence for pushing us into Depression.

BF: People keep talking about injecting money directly into the banks. What will this achieve?

MH: Theyre talking about the government buying special non-voting stock in the banks. This willenable the banks to report this equity as part of their capital structure under whats called Basel II.This is the set of reserve requirements to have a certain amount of capital to back deposit liabilities.The governments contribution will take the form of so-called preferred stock, which is counted asequity. As I mentioned above, it wont be voting stock. Instead of the governments taking over the


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banks as in Europe, instead of steering their lending in the public interest, the Treasury is leavingcontrol over to the same guys who have been mismanaging the credit system all along. So its asubsidy to mismanagement.

This is not merely a set of personal errors or bad apples. The error is systemic. Its a mentality atwork one that blocks out an awareness of how serious the debt problem is. Just as culpable are theCongressional committee heads who act in effect as lobbyists to block appointment of officials or advisors who do understand the financial problem at hand. And at university economicsdepartments, neoliberal economists have acted as censors to exclude from the curriculum anyresponse to the debt problem that does not serve the short-term interests of the banks and WallStreet.

BF: In that vein, I understand that one of the parts of the Emergency Economic Stabilization Actsays that banks no longer are required to maintain cash reserves to cover deposits. Is that true?

MH: What that means is that if the banks go under, the FDIC now will bail depositors out up to$250,000 per account. So why should the banks need to keep heavy cash reserves if the governmentis going to take responsibility? The pretense is that banks will be able to lend more. But all thegovernment guarantee really does is to enable them to operate more profitably, by shifting the risk onto the government and leveraging their own capital more.

BF: What do you expect to see tomorrow morning when the stock markets reopen?

MH: I have no idea. Nobody I know has any idea on any given morning. Last week even JimCramer on CNBC, who euphemizes every decline as a buying opportunity, told viewers that if they are going to need their money in the next year or so, they dont belong in this market. If evenmanic Jim Cramer says to sell out for the short term, whats the point of holding onto stocks? If they are going to keep drifting down for another year or so before going back up, why should

people hold onto them on the way down?

BF: You know, I actually heard Jim Cramer say that whatever money you need in the next FIVE

years you should take off the table.MH: Its unprecedented. Suppose I need money in ten years. If I know the market is going down for five years, my interest would be to pull out now, put my money in cash or Treasuries, and buy back into stocks five years from now, or whenever the crisis has passed. The present gloom shows thedemoralization at work. What people imagined to be reality turns out to have been a fictitiousscience-fiction world, a just-pretend happy world where stocks and real estate prices only go up anddebts can be paid out of the financial free lunch of capital gains. The model that most people including Congressional policy makers carry around in their minds has not been reframed to graspfinancial reality.

BF: So you think we havent hit the bottom yet?

MH: When congenitally optimistic Jim Cramer worries that we may be five years from the bottom,I think people should realize that a phase change has occurred. In terms of the actual economy, thereal economy of peoples living standards, public services, the cost of living and the value of thedollar, all these things have a long way down to go.

BF: Before we close, could you say a bit more about the credit crunch. Is it still the case that peopleare not able to get loans?

MH: Its hard to get a loan for property thats worth less than the mortgage that already is on it. Itshard to get an auto loan, because it used to be that lenders could resell the car at a given price after ayear or two. But nobody is buying more cars these days, so lenders are not lending as high a

proportion of the cars price as they used to or real estate for that matter, because prices for housing and office building are declining. When forecasters say that they expect prices to declinefor another year or so, that means as far as the eye can see. Falling asset prices deter lending.


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Banks are not going make any more mortgage loans with zero down-payment at 100% of the purchase price, to say nothing of 125% loans. Buyers actually have to put up some money of their own now. That hasnt been done for a while, and it is changing the market. Most people dont haveenough money to make the higher down payments that the banks now require.

The problem isnt only the banks. Suppose you want to buy a house. Why would you buy right now,when houses all over the neighborhood have For Sale signs? You know that as these houses aresold off at distress prices, you can buy it cheaper later on. Why would buyers want to borrow under these conditions or banks lend to them? The economy is having to face the diverging relationship

between the volume of debt and the falling market prices for whatever assets they own or are buying. The Negative Equity gap is killing the market and preventing new credit from beingextended.

Many home owners are frozen into where they live, like feudal serfs tied to the land. If their employers shift them to another city, they cant move without paying off their mortgage, and mostdont have the cash to do this. They would be wiped out, as the Treasury and Congress are onlymaking lenders whole. The political system is thus as dysfunctional as the financial system. It has

become the legislative mirror image of the trickle-down mentality of neoliberal financialization.

It means the ending of Americas great traditions of upward mobility and geographic mobility.BF: Ive been reading that the lack of transparency in mortgage securities makes people uncertain,so they dont want to buy them.

MH: Instead of lack of transparency I prefer the term fraudulent Enron-style accounting.Theres a good reason for the lack of trust. Its not a lack, but a positive awareness of how the

banks, insurance companies and money managers are trying to exploit their customers and counter- parties in any way possible. People prefer safe investments such as Treasury bonds because theyrealize that banks have lobbied to deprive victims of financial fraud of their rights. As I mentionedearlier, the Treasury gave bank lobbyists the right not to disclose the accurate market value of their reserves, so nobody really knows their net worth or degree of negative equity. Why should anyone

be gullible enough to trust such people under these conditions?BF: The media is referring to the lack of market confidence and say that we need to restore it. Doyou think thats possible?

MH: Theres certainly been is a confidence game, which the financial sector would like to lead toa trickle-down economic policy. A con man is someone who gets people confidence and then stealstheir money. The con will be: You didnt give us enough the first time. We need more. Otherwise,without our being made whole, the economy wont be able to function. Implicit is the follow-upthreat: Well see to that. So the banking system is holding the economy hostage, not only for itself

but for the financial and insurance and brokerage affiliates that banks have taken over since Glass-Steagall was repealed in 1999.

The idea is to keep up confidence that the financial sector should continue to act as the economys planner and resource allocator via its control of the credit, payment and savings-managementsystem. But confidence in this worldview will gone as people come to understand that deregulationhas let a financial gang take over the banking system and vertically organize the financial sector into a giant trusts with only a few dominant capo banks. Remember what Zola said: Behind everyfamily fortune is a great theft, Never has this been more true than under the Clinton and BushAdministrations. Theyve let Angelo Mozilo of Countrywide walk away with hundreds of millionsof dollars instead of prosecuting him for fraud. Theyre using the governments bailing funding toreward executives who have wrecked the lives of millions of American families. These individualsare predators posing as philanthropists. Thats the con.

There is no panic in the market. Panic is a neurotic psychological response, often unrealistic. Thisis an intelligent, well-calculated economic response. Its not panic when investors refrain from

buying anything they dont know the value of. And if sellers have shown repeatedly that theyre out


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for themselves and have been dishonest about what theyre selling, investors are not going to patronize them. When people see banks browbeating the bond rating agencies and accounting firmsto whitewash the quality of what theyre pawning off on their customers, when they see bank lobbyists getting Washington to block state prosecutions of financial fraud so as to clear the way for more predatory lending and false packaging of the junk securities theyre selling and to win theright not to reveal their true financial position, theres a good reason not to buy whats in these black

boxes. Not many intelligent people would take a chance on paying good money to so deceptive asector.

BF: You mentioned at the beginning of the show that foreigners, sovereign investment funds andcentral banks are getting out.

MH: Foreign and U.S. investors. When the Secretary of the Treasury lets the banks act like crooks,depositors and other customers are going to expect them do just that. Only a crazy person wouldkeep on making a mistake of trusting them or trusting Congress again. Insanity is defined as doingthe same thing and imagining that the result will be different this time. Until the financial systemand the regulatory system and legal system are changed to put in place a reality-based economicideology and corresponding system of checks and balances, the economy cannot recover. It will

limp along and shrink slowly. Financial depression will stifle the real economy while pretending to save it with an IMF-style austerity plan, something like an abusive parent beating achild and saying, Its for your own good. Its really not good at all, of course.

What the government wants people to do is indeed to panic. Its succeeded in creating panic, in thehope that this will enable a radical giveaway to restore the market. The Treasury is spreading the

panic by its deception. Were in an economy of deception spread by the Treasury, promoted by theBush administration and amplified by the Democratic Partys Congressional leaders. Im afraid thatall youre getting from Mr. Obama and Mr. McCain is further deception in support of a bailout actthat should have been seen for what it is a plan that will create precisely the anarchy that weveseen in the last eight trading days. What created this crisis was Congressional ratification of the

Wall Street rip-off.What is so discouraging is that there has been no real pressure by the media, the public, the pensionfunds, labor unions or other groups. There has been no serious discussion of the basic problem thefact that the debts cant be paid. No economy ever has repaid its debts, as Adam Smith notedalready back in 1776. Were now at that crisis point for the United States, but no one is discussinghow we are going to not pay the debts. Are we going to resolve the problem of their non-payment

by letting widespread foreclosures take place at the expense of debtors? Will this include thevoluntary public bankruptcy of cities and states selling off their public enterprises, land and publicdomain to private buyers as an alternative to taxing property and wealth? Will voters be panickedinto believing that this kind of IMF austerity plan is valid for the United States, not just for thirdworld kleptocracies? Or, are we not going to pay the debts by writing them down to what can be

paid, or writing off many bad debts altogether?

Mr. Paulson only wants to write down the debts of his cronies on Wall Street and major campaigncontributors. Thats not going to help the economy. It means that the government will have to taxthe industrial economy, labor and middle classes all the more. So when you were asking for thescenario, I should have said I expect taxes and user fees to go up sharply for most people, and thequality of public services to decline sharply. This is part of turning America into a Third Worldcountry. The only choice that voters are now being given is between two presidential candidateswho have announced nearly identical economic programs as far as financial policy and favoritism toWall Street is concerned.

BF: Can you elaborate on what you mean when you say the government wants people to panic?

MH: Panic is what gives politicians a free hand to serve special interests with policies that could not be enacted under normal circumstances. The Wall Street panic has been the financial sectors 9/11.


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It created an emergency condition in which a government run by thieves can do whatever its backers want, by claiming that theyre doing what theyre acting to cure the panic. So they need tocreate a panic in order to say that theyre curing it. In reality, of course, what theyre doing ismaking the debt and tax problem much worse so they can grab much more, in a vicious circle thattheyll try to keep going for as long as possible.

On the one hand the government wants to panic voters to buy into a program of saving creditorsfrom having to take a loss on bad loans, and supporting anti-debtor policies. This is a radical U-turnin the direction in which Western civilization has been moving since the Enlightenment, and indeedsince the fall of ancient Rome as a result of its debt strains that reduced its imperial economy todebt bondage.

On the other hand, the financial sector wants investors and asset holders to panic the market to sellstocks and real estate at such low distressed prices that vultures can pick up assets on the cheap toclear the market. But the market is not being cleared of its debt encumbrances, although thegovernment may take many of these over. New buyers may come in to make a killing by buyingassets for much less than theyre worth from the government itself, if public agencies takeownership of real estate and other property being foreclosed on. This way of clearing market is to

have the Treasury or Federal Reserve absorb the loss.But were not yet near the lows. Stock market prices still have pretty high price-earnings ratios,especially in view of the fact that sales and earnings are expected to go way down as debt deflationdepresses the economy.

BF: Do you want to summarize the points youve made?

MH: Paulsons Giveaway Plans A and B buying trash for cash (Plan A) and giving money to the banks by buying preferred stocks (Plan B) are the financial equivalent of the Patriot Act that a panicked Congress passed quickly after 9/11. The Feds $850 billion purchase of loans on whichWall Street otherwise would take losses on is being made explicitly under emergency conditions.Its not allowed to lend to non-banks under anything except emergencies.

But the real emergency affects mainly debtors mortgage debtors with negative equity, companiesloaded down with junk bonds (many of them taken to buy back corporate stock and increasedividend payouts to increase the price at which managers can cash out). Also facing emergencyconditions are pension funds from their stock losses and bad-debt gambles. The government islikely to insist that if automakers and other companies get federal aid, they will have to avoidrewarding labor unions and replace defined benefit pension plans with defined contribution

plans. The PBGC lacks the money to insure corporate pension-fund losses. Nobody has suggestedhelping it, because the savers are workers, not billionaires.

State and local budgets with falling tax receipts. In fact, real estate interests are demanding even

further tax cuts, backed by financial lobbyists wanting to leave more revenue in the hands of property owners to pay their mortgages. This will aggravate the tax shift onto labor and industry.Homeowners will pay interest in place of property taxes and will have to make up the tax shortfallas well! So debt deflation and fiscal deflation will go hand in hand.

All these parts of the U.S. economy are being plunged into a real economic emergency in order to benefit Wall Street. Yet its losses and gains are extraneous to the real economy, except that it usesits financial inflows to lend out and indebt the economy further. This financial wrap-around of thereal economy is being saved, but not the contents the work force and tangible means of

production. This flesh and bone is being sacrificed in order to protect the fat. The result is atoxic form of financial and fiscal pollution debt pollution and the tax policies to preserve themagic of compound interest as an exponential trend. It is stifling life and growth by shifting theeconomic surplus out of the real economy.

BF: Dr. Hudson, thank you very much.


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MH: Thank you, Bonnie.

[1] For recent confirmation see James Politi, US banks tighten grip on lending, Financial Times, November 4, 2008: US banks have pulled back on lending to consumers and businesses in a bigway over the past three months. http://www.ft.com/cms/s/0/26a624c2-aa13-11dd-958b-000077b07658.html

the bailout’s new financial oligarchy

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