Obama and his Wall Street Friends
An excellent interview with Michael Hudson by Bonnie Faulkner. How Obama has boxed in the Democrats and sold his constituents to Wall Street at a bargain price. You can download the mp3 here. But here are some of the high points.
The jobless recovery
Michael, I read the in the newspapers that the great recession, so-called, has long since ended, but 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 – in this case, caused mainly by debt deflation. Just because the stock market is being inflated by the Federal Reserve doesn’t mean that the economy itself is growing. It’s shrinking – from a combination of families and businesses having to pay off debts rather than spend their income on goods and services, and the government’s shift of taxes off finance, insurance and real estate (FIRE) onto labor and industry.
The economy is getting worse and worse – deeper negative equity (mortgage debts in excess of property prices), shrinking markets, stores going out of business, rising defaults and foreclosures, job layoffs – with new graduates having to pay student loans but not having a job.
That’s why the stock market is down 160 points today. The financial sector realizes that the game is over. From America to Ireland, Greece and the rest of Europe, financial interests are insisting that governments take responsibility for paying off the bad bank debts to their bondholders and other bankers in cross-deals and gambles on derivatives that have gone bad. The problem is that these banks have made bad real estate loans and other gambles. In Ireland, the collateral backing these loans is only about 20 percent of the face value of the mortgages.
Somebody has to lose when loans go bad. In this case, it is taxpayers. Governments have taken these bad loans onto their own balance sheet, so that bondholders and big creditors to these banks (typically foreigners) would not lose. But it is very expensive for governments to take on obligations to pay bad debts – that is, negative equity where the debt is higher than the collateral assets are worth. So now, having spent enormous sums to make sure that bankers and bondholders don’t lose a penny, governments are trying to balance their budgets by cutting off spending throughout the “real” economy. In other words, governments have sacrificed the economy so that the financial sector won’t take a loss. And even worse, the governments have left the bad real estate debts, personal debts, education debts and credit card debts on the books. So the “real” economy is being shrunk by debt deflation, while tax policy is being steered to benefit the financial sector.
The policy that started in the United States after September 2008, with Sec. Paulson’s Troubled Asset Relief Program (TARP) and later with the Treasury taking Fannie Mae and Freddie Mac ($5.3 trillion) onto the government’s balance sheet. This policy quickly spread to Europe, starting in Ireland. Its government went broke bailing out the bankers. And now in Greece, the government is told to start selling off over $50 billion worth of public land and other public-sector assets to pay down debts so that its bondholders won’t lose a single euro. Greece is slashing its public spending, unemployment is spreading, and the sell-offs are beginning – of the sort that we already have seen in Chicago, which sold its sidewalk rights to financial investors installing parking meters. Economies are being turned into rentier “tollbooth economies” to generate the funds to pay debts that the “real” economy simply can’t sustain. It’s a losing game in the end. So the financial sector is trying to take as much as it can right now, and run.
And now there is serious talk even in Germany of the eventual Greek default followed by Italy and Ireland.
When the Fed and Wall Street push the dollar down, the main victims are consumers. Import prices rise, while devaluation lowers the price at which their labor exchanges for that of foreign economies. When you devalue a currency, what you’re really devaluing is the price of labor, because all the other costs are globally fixed. Oil and raw materials prices, machinery prices and shipping remain fixed worldwide prices, so all exporting countries have a common cost structure for basic commodities and technology.
So Obama believes that reducing the purchasing power of American labor in terms of foreign exchange will make the economy more competitive. He also believes it will help deflate the economy to reduce the budget deficit. The economy needs government spending to revive employment and markets, but he’s acting like President Coolidge in the Depression. Republican Treasury Secretary Andrew Mellon said that the solution had to be to liquidate labor, liquidate housing and liquidate the economy. That tunnel vision is being fed to Mr. Obama’s by his Clinton- and Bush-era advisors, from Larry Summers to Tim Geithner. He is doing what nobody really imagined the kind of change that was possible when he was elected. He has let Michelle Bachman and the Republican Tea Party tax cutters move to the left of his position.
Rep. Bachman recently pointed out that she voted against TARP from the beginning, as did other Republicans opposing the giveaway to the Wall Street interests. The Republicans also haven’t called to cut back Social Security to pay Wall Street. That’s the Obama-Geithner position. It’s put Democratic Congressional leadership in a bind, because they have difficulty opposing a president even though he’s moved to the right of the Republican Party.
I warned about this already in 2008 before Mr. Obama took office. The last presidential debate he had with Republican candidate John McCain was on a Friday night. McCain had just lost his “maverick” status by going back to Washington that day to say that he supported the bailout of the banks and wouldn’t take time off to debate until everyone agreed on the giveaway to the banks. So in the debate that evening, both candidates avoided discussing the bailout. The public was strongly against it, and if either candidate had opposed it, they would have lost their campaign contributions from Wall Street. And in any case, Senators McCain, and Obama both believed that the economy actually needed to be led by Wall Street as central economic planner and resource allocator. Alan Greenspan voiced the ideology more nakedly, but Mr. Obama follows it to such an extent that Marshall Auerback has called him the “Tea Party President.”
Hudson then goes on to say that his actions and policies put him even to the right of the republicans.
The debt ceiling and default charade
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 charade. The Republicans are playing the role of the bad cop. Their script says: “You cannot raise taxes on anybody. No progressive income tax, no closing of tax loopholes for special interests, not even prosecutions for tax fraud. And we can get a lot of money back into the economy if we give a tax holiday to the companies and individuals that have been keeping their money offshore. Let’s free the wealthy from taxes to help us recover.’
Mr. Obama can turn around and pretend to be the good cop. “Hey, boys, let me at least do something. I’m willing to cut back Social Security. I’m willing to take over what was George Bush’s program. I share your worries about the budget deficit. We have to balance it, and I’ve already appointed a Deficit Reduction Commission to prepare public opinion for my cutbacks in the most popular programs. But you have to let me get a little bit of revenue somewhere.”
In the end the Republicans will make some small token concessions, but they’ll get their basic program. Mr. Obama will have sold out his constituency.
The problem is, how can Mr. Obama move to the right of where George Bush stood? The only way he can do this is for the Republicans to move even further to the right. So the Republicans are accommodating him by pushing the crazy wing of their party forward, the Tea Party. Michelle Bachman, Eric Cantor and their colleagues are coming with such an extremist, right-wing attitude that it gives Mr. Obama room to move way to the right as he triangulates, depicting himself a the less crazy alternative: “Look. I’m better than these guys are.”
He’s hoping that people will vote for him just because he’s not as extreme as the Tea Party. But the reality is that there is another alternative. People can “vote with their backsides” and stay home. There may not be many people showing up to vote on the Democratic side. So it’s possible for the Republicans to get in, now that there is so little real difference between their position and that of Mr. Obama. What’s the point of voting?
The silver lining for the Republicans winning in 2012 would be that the Democratic Congress would find its backbone again, once it’s in opposition. It would say “No” to the Republicans trying to push the policy that Mr. Obama is now trying to push. But it can’t say no to Mr. Obama. That’s why his presidency is turning out to be such a disaster.
The economy is seeking because investors realize that his deflationary attempt to cut public spending looks like a done deal. Trying to run a budget surplus will push the economy deeper into depression. When Clinton ran a budget surplus, the banks provided the increase in credit to keep the economy going. But now they have pulled back, as there is little surplus that has not already been pledged to pay the banks. So Mr. Obama’s advisors have convinced him to do what European political front men also are doing. A depression is deemed necessary to cut living standards and labor by about 30 percent. Mr. Obama’s aim is to lower American wage levels.
So third world status here we come. A calculated gambit to deflate the economy to that of our biggest competitors. India, China, Japan…etc.
Cutbacks in federal spending mean that the states can’t cover their own budgets – and their constitutions prevent many from running deficits. It looks like there will be little federal revenue to share with Minnesota or Wisconsin or the city of Chicago. They’re going to have to sell their roads and streets, sell their infrastructure and their public utilities, sell off whatever business enterprises they have that can bring in credit. These assets themselves will be sold on credit, to buyers who then will “expense” their profits as tax-deductible interest. So governments will not get the potential user fees that result from putting up parking meters on their sidewalks, tollbooths on their roads and other rent extraction facilities on their other assets. The financial sector will take all this.
The federal government may also become a seller. It has the Postal Service, and already is privatizing its army to private contractors. Newspapers have joked about Greece selling its Parthenon and other tourist sites. Imagine the U.S. Government selling its national parks and forests – to buyers who borrow the money from the banks. This would let the banks “earn their way out of debt” by creating a huge new market for them in privatizing and cutting up what used to be the public domain. It will end up in the hands of the wealthiest 10 percent of the population.
In this respect the class war is back in business. We’re going into a depression that is unnecessary – except to drive down wage levels and strip away government obligations to pay for Social Security, Medicare and other public programs. This will enable the government to get rid of what remains of progressive taxation on the higher wealth and income brackets.
The stock market may fall, of course, and the bond market too as interest rates rise. But investors expect to be able to buy back these stocks at a lower price. Meanwhile, the game is over – the idea of investing in a growing market. The new game is to grab what one can and bail out. This is the post-bubble phase of the financial “cycle.”
The Democratic leaders feel boxed in. Nobody is prepared to challenge Mr. Obama in 2012. He still has his constituency in the Democrat party locked up. So they can’t run against him. Under Rahm Emanuel the Congressional leadership has promoted the worst of the Blue Dog Democrats. Fortunately, they were the major losers in the last election. But we’re still living with the consequences of Mr. Emanuel’s quip that a crisis is too good an opportunity to waste. He advised the President to use it to lock in the Democratic Leadership Committee’s pro-Wall Street program. This is the program of Clinton, Gore and Joe Lieberman. It is the mentality that led Mr. Obama to appoint Erskine Bowles and like-thinking members to the Simpson-Bowles Commission. He is now pushing its recommendations claiming that this is bipartisan. But I would say that it’s basically Republican, if I didn’t think that this really is where the Democratic Party also now stands – just as in Greece, austerity plans and privatization are being promoted by ostensible socialists.
Mr. Obama wants to cut $4 trillion out of the budget, while Republican leader Boehner only wants a 2.4 trillion cut over a shorter period. I’ve read that it was Obama, not the Republicans, who proposed putting Social Security cuts on the table. Why would he be proposing much larger cuts than the Republicans?
The main reason is that he is in a unique position to deliver enough Democratic votes to let the sell-out (“compromise”) go through. No Republican administration could get away with cutting Social Security. This is the most basic income protection program that Americans have. But now, it’s being depicted as a welfare program that is hurting the economy. Only a Democrat posing as a left-winger could really pull off what Mr. Obama is proposing.
The White House equivalent to Harold Hill’s Think System.
China has warned the U.S., “Do not default.” What would be the ramifications of a default? Would it put the global banking system into crisis?
Nothing would happen. There’s not going to be a default. China will not lose a cent. Its leaders know that there’s a lot of American investment in China. In principle, it could use its dollars to buy this out at its book value. But the reality is that a U.S. default would mean that the dollar would not be acceptable again until the United States paid. This would mean that America would have no way of paying for its military bases. It would be unable to extend the wars that Mr. Obama has escalated.
Would a U.S. default send interests rates soaring? If so, what would be the economic effect?
An interest rate wouldn’t matter if you default. If you tell me that I can write you an IOU but you’re not going to collect, I’ll give you 20 percent. But seriously, the bond market has not given any hint that interest rates will rise at all. As I said above, this is a just-pretend pseudo-crisis to give Mr. Obama the opportunity to do what politicians do – to sell out his constituency to his campaign contributors on Wall Street.
It looks like he will go down in history as a Herbert Hoover, being blamed for the depression that was not necessary and that the Republicans could not have gotten away with intensifying. Only a Democrat posing as a left-winger could support the anti-labor, anti-wage, pro-Wall Street policies that his advisors have been putting into his hands. This is what came out in the New York Times interview with Sheila Bair.
So this kerfuffle about a possible debt default is a charade for public consumption?
The idea is to create an illusion of crisis, to create a pretense for introducing a solution that makes fortunes for financial predators – or at least gives them enough room to take their money and run, by swapping their bad loans for Treasury securities. The tragedy is that the way in which Mr. Obama is resolving today’s non-crisis of the budget limit is impoverish the population for the next decade, bringing on a depression rather than avoiding it.
This is a tragedy because it’s not really necessary. It’s a policy choice.
Not a kabuki dance but the old shell game with the people as the shells.
Greece: Banks, not countries, receive the bailouts
Let’s talk a bit now about Europe, starting with Greece. You have written that the Greek economy will not end up with the proceeds of any European central bank bailout. The banks will get the money. Can you explain that?
The condition attached to the loans the EU and the IMF are making to Greece is that all the money must be paid to the bondholders of these banks, mainly in France and in Germany. Even Angela Merkel protested, saying that this isn’t how a free market is supposed to work. Banks and bondholders that make bad loans and investments should take a loss, even if they’re German. Depositors should be protected, but not necessarily bondholders. But her comments caused an angry response from Europe’s central bankers. The problem in Europe is thus the same that Sheila Bair described in her New York Times interview. But the European Central Bank (ECB) insists that bondholders must be first in line for bailout money, the domestic economy later. And the ostensibly socialist government of Greece agrees.
Not countries and not people. Just banks
Will the IMF and EU bailout for Greece lead to another default?
Yes. There’s no conceivable way in which Greece can pay the revenue that is being demanded. The Financial Times has been clear on this for the last month or so. The columns on its editorial and op-ed pages show that almost everybody realizes that these debts can’t be paid. The premium for default insurance for Greek bonds shows that “the market” sees this. So if Greece can’t pay, why is the world going through this charade?
The main reason is to give commercial banks and bondholders enough time to sell their bonds to European governments, leaving the European Central Bank and perhaps IMF holding the bag. It’s harder for Greece to default on an inter-governmental debt. So this would end up pitting the governments of Europe against Greece, while the commercial banks will be free.
The Greeks can turn around and say, “We know the game you’re playing. You lent us the money to pay the bank. We didn’t get a penny of it. You paid your own banks, so the debt is now your problem. We’re not going to pay you. If you don’t like it, kick us out of the Eurozone.”
A Greek default has been a given for some time.
You said that when you devalue a currency, what you’re really devaluing is the price of labor?
All countries have a common global price schedule for fuels, raw materials, machinery and hard currency credit. So this global price list for these basic inputs remains unchanged by devaluation. What are affected when the currency goes up and down are domestic prices and incomes. These are mainly payments for labor and real estate.
In the 1980s, for instance, when the United States was pushing Japan to raise the value of the yen, it did indeed rise in price against the dollar. But the Japanese paid the same global rate for their oil, iron and steel, copper and other raw materials as did U.S. producers. The only cost that went up were Japanese labor costs. And inasmuch as their trade was “price inelastic,” American consumers paid more. Where this was not the case, Japanese producers accepted lower profit rates.
Mr. Hudson then goes on to explain how the IMF and World Bank and the US force countries to import our agriculture products rather than using their own. The whole situation is aneo-liberal take on neo-conservatism and New World Order that began with Reagan and continued on through Clinton, Bush and now Obama. I am sure the Obama and his friends think this is the best way and that it would work out as planned. I don not think that they have even considered that their policies could push the entire world into a depression that would make the 1930s look, like good times and that it would take decades to even get back to that point.