HUDSON interview 2012 final.pdf

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Athens News interview, September 2012

How finance capital leads to debt servitudeThis edited transcript is expanded from a live phone interview by Dimitris

Yannopoulos. He can be reached by e-mail at [email protected].

Dimitris Yannopoulos:As an academic with a strong grounding in economic history as well as banking and

finance, professor Michael Hudson has built his own school of thought - distanced from bothKeynesians and neoliberals with regard to the stark options facing a contemporary Westernworld drowned in unsustainable debts of governments and households at the mercy ofunaccountable global bankers and financiers.

Options for the indebted amount to a choice between feudal-like servitude andfreedom, because debts that cant be paid, wont be. That has become Prof. Hudsons well-known tag line. He explains his logic in this interview with theAthens News, on the occasionof publication of his latest book, The Bubble and Beyond: Fictitious Capital, Debt Deflationand Global Crisis (2012, available from Amazon.com).

Q:How has the financial system evolved into the form of economic servitude that you calldebt peonage in your book, implying a negation of democracy as well as free-marketcapitalism as classically understood?A: The original hope of banking and finance capitalism in the 19th century was that bankswould make productive loans to finance industry. The aim was for banks to do something new,that no economy had done in the past: make loans not merely to ship and market goods oncethey were produced, but to finance new capital investment by manufacturers and producers, aswell as by the public sector to build infrastructure. The idea was for these investments to createprofits out of which to pay the interest and the principal back to the lenders.

This was defined as productive lending. Nothing like it occurred in antiquity or in thepost-feudal period. Investment always had been self-financed out of savings. Banks onlyentered the picture when it came to shipping and trading what had been produced.

As matters have turned out, banking has allied itself with real estate, mineral

extraction, oil, gas and monopolies instead of with industry. So instead of getting a share ofthe profits, it has focused on lending against economic rent. This technical term is defined asunearned income. It is obtained by charging prices in excess of cost value. Economic rent hasno counterpart in the cost of putting means of production in place. And land has no cost; it isprovided by nature. The only cost is the price of buying the right to charge rent on it. Thiseconomic rent is created by special legal privilege or ownership rights to install tollbooths onroads, education systems and other basic needs. Owners aim to charge as they can, withoutregard for how this affects overall growth and balance.

Banks have the privilege of creating credit and charging for access to it. Most bankcredit is extended to buy property or rent-seeking privileges already in place. Banks rarely areset up to evaluate new capital investment. Their time frame is notoriously short-term. It takestime to develop production facilities, mount a sales campaign and develop markets for newgoods. It is easier simply to buy a privilege to extract charges without producing anything at

all. This is what property rights are, along with special privileges such as charging interestwithout making a tangible investment. So banks back the kind of economy that makes moneywithout new capital investment. The easiest way to do this is to make loans for real estate atincreasingly debt-leveraged, bank-inflated prices. They call this a post-industrial serviceeconomy. It is simply a rentiertollbooth economy.

Classical economists from the Physiocrats down through the Progressive Era a centuryago explained why land rent, subsoil natural resource rent and monopoly rent should have beenthe source of tax for cities, states and nations. That is the essence of classical economics. Butinstead of supporting productive industry by extending credit to increase tangible capital
mailto:[email protected]:[email protected]:[email protected]


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investment, the banking system has extended credit mainly (about 80 percent in the UnitedStates and most English-speaking countries) to buy real estate and load it down with debt. Theresult is that rental income is used to pay interest to the banks rather than to pay taxes. Thisforces governments to tax wages, profits and sales. That increases the cost of living and doingbusiness, on top of the interest charge.

In search of this loan market, banks have come to back untaxing real estate and

deregulating monopolies, so that their economic rent can be paid to the banks as interest bycustomers eager buy these rights and charge even higher rents or raise prices even furtherwithout making a new capital investment of their own. Instead of financing industry, U.S. banksdon't make loans for what can be produced in the future. They make loans against collateralalready in place including entire companies with high-interest junk bonds. The targetcompany is obliged to pay the debt that the corporate raider takes on. The raider then is free todownsize and outsource the work force, squeeze the budget and hope to come out with a capitalgain after paying off the banks and bondholders. The process is more extractive than productive.

This is the basic problem with the Anglo-American-Dutch banking system. Instead ofextending loans to create new factories to employ people, new means of production, bankerslook at what can be pledged as collateral on which they can foreclose.

Stock markets were supposed to supply equity investment capital. But they havebeen turned into a vehicle for debt-financed leverage buyouts (LBOs). Raiders borrow money

much like landlords borrow to buy a rental property and bleed it. This turns corporate cashflow into interest. Governments permit this to be tax-deductible, so this encouragement of debtfinancing over equity worsens their fiscal position. It forces them into debt to bondholders. Sothe process becomes a deteriorating financial spiral.

Q: When did this process get out of hand?A: The turning point was in 1980, when the Reagan Administration was elected in theUnited States, right after Margaret Thatcher led Britains Conservatives into office and beganthe big privatization sell-offs at enormous, unprecedented commissions that made the financialsector richer than ever before. Drexel Burnham led the practice of turning the stock market intoa vehicle for banks to emulate their real estate loan departments by creating credit for corporateraiders to take over companies, load them down with debt and extract profits to pay out asinterest. This was done by downsizing the labor force, shifting over to non-union labor, and

where possible, renegotiating employee pensions downward or simply grabbing the pensionfunds or Employee Stock Ownership Plans (ESOPs) to pay creditors. So corporate financebecame destructive instead of productive.

This sort of banking has concentrated wealth, and used it to privatize and buy control ofgovernments and their regulatory agencies. Banks have lobbied to keep interest tax-deductible soas to favor corporate financing by issuing bonds and taking out loans instead of issuing stocks.Bank lobbyists back the political campaigns of lawmakers committed to deregulating the bankingindustry and its major clients (real estate, natural resources and monopolies). It even has takenover the Justice Department and the courts, so that financial fraud in America has beendecriminalized, as there is no regulation of outright criminal behavior. This is especially true ofthe largest banks such as Citibank and Bank of America where the fraud tends to be concentrated,as my colleague William Black at the University of Missouri at Kansas City has shown.

Q:How do they get off the hook?A: Nearly every large Wall Street bank has paid large sums of money to settle criminalfraud cases with the U.S. legal authorities, without admitting criminal liability for their hugegains. So no banker has gone to jail. The banks have paid the fines, not the managers who havepaid themselves enormous salaries, bonuses and stock options for writing junk mortgages andoperating in a manner that would have sent them to jail back in the 1980s. Thats when S&Lfraudsters were sent to jail for doing what commercial bankers much higher up on the socialpyramid have done over the past decade.


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The top executives know that if they are convicted of billions of dollars of fraud, theirbanks will pay a fraction of this amount, not themselves. They know that the jig is nearly up,so they are giving themselves enormous bonuses and running. The Treasury argues that if itfines the banks to recover the full amount of the fraud, theyll be driven under and thegovernment will have to bail them out. In effect it would be paying the fine to itself. So it doesnothing, except receive more campaign contributions from Wall Street for being so passive.

Q:Is the so-called financialization of the economy an outcome of deregulating banking andfinance?A: Financialization is an appropriate term because it means the surplus is used for financialpurposes and not spent on the real economy. It began by taking over the real estate and insurancesectors, prompting national income economists to lump together what they call the FIRE sectors(Finance, Insurance, Real Estate). It also should include the legal sector, because most law thesedays is corporate law that condones, protects or even facilitates financial fraud and monopolies.Finance has expanded to absorb the entire economic surplus in the form of debt service to thebanks. This leaves it unavailable for capital investment to increase output or consumption.

Q:Isn't this also because the profits for financial investment in asset bubbles are much higherthan profits in manufacturing?

A: There's a problem in terminology here, between technical economic jargon andpopular understanding. Classical economists were careful to define the term profit to meanan economic gain made by investing in plant and equipment (capital) and employing labor toproduce goods and services to sell at a markup. Profits were a return on tangible capitalinvestment and current expenses on labor, raw materials and other inputs.

This is not how the financial sector makes its gains. Its interest, fees, commissions andpenalties are the result of built-in, standardized legal privileges. Economists call these returnseconomic rents. Unlike profits, they are independent of the cost of production. Their costconsists of buying privileges, not of making tangible capital investment. The same is true ofthe other major element financial returns: asset-price (capital) gains.

A privilege is literally a private law (from the Latin legis, law), a monopoly right.The main privilege is to create bank credit and take deposits that are insured by governments,ultimately by public debt and the right to tax. These financial returns have an entirely different

dynamic from commercial and industrial profits. They are made offthe economy, not part of theeconomys physical and technological growth and capital formation. They are an overheadcharge paid out ofprofits and wages.

In these respects, financial returns and profits are quite different dynamics. When acompany is bought out on credit, the profits end up being paid out as interest rather thanreinvested to expand production and employment. Financialized companies are treated much asabsentee-owned commercial real estate: Buyers pledge the rent (in this case, the corporateprofits) to the creditor who lends the credit for the purchase. Buyers may even pay depreciation(tax-deductible cash flow) to the banks and bondholders hoping to squeeze out a capital gainor sell of the companys parts for more than the whole is worth. Low-return divisions are closeddown or sold off. The basic dynamic is shrinkage.

Paying out profit as interest leaves no reportable earnings. Interest is deemed a costof doing business. But it is not a cost of production. It is financial overhead. And since the

1980s, growth in this overhead has absorbed and even outstripped the rise in productivity.Instead of living standards rising, the economic surplus has taken the form of a return to theFIRE sector, mainly the financial sector commercial banks, investment banks, mortgagepackagers and brokers, and so forth. Real estate owners gained during the bubble years asproperty prices rose faster than the bank debt that was inflating them. But the reckless junkmortgage lending and outright fraud led to a collapse of new lending after September 2008,leaving a residue of negative equity, bankruptcy, foreclosures and abandonments in its wake.

Companies that pay out all their cash flow as interest do not pay income taxes onthis diversion of revenue, because interest is a tax-deductible expense. As for the financial


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engineers at the top the class that has replaced industrial engineers they aim to get richnot by earning profits, but by capital gains. These are taxed at much lower rates. So thefinancialized tax system encourages speculation rather than profit-making direct investment.

Suppose that a company earns $1 million dollars of profit in a year. About $400,000must be paid in income tax. A corporate raider will buy the companys stockholders (equityowners), for $10 million in junk bonds. The entire $1 million dollars of profit will now be

paid to the banker or the bondholder in the form of interest. The company wont report aprofit, so there is no tax payment. The financial manager will hope to increase the companysprice (to re-sell it on the stock exchange) by cutting costs or selling off its pieces to make acapital gain. This is how Republican presidential candidate Mitt Romneys Bain Capital mademoney. It is balance sheet engineering, not aimed at raising production or living standards.

Q: What makes capital gains so different from business profits?A: This is best understood in real estate. The motto of new buyers is that Rent is forpaying interest. The parallel for a corporate raider is that Company profits are for payinginterest. A real estate buyer will look at a building to see how much rent it pays off, and bidagainst other prospective buyers for a loan. The winner usually is whoever will anticipateearning the most rent from tenants to pay the interest and promise to pay this to the bank.What the speculator or long-term investor wants is the capital gain.

Yet this does not appear on the National Income and Product Accounts (NIPA), despitethe fact that bubble economies are all about orchestrating such gains. That is how the banksgot people to borrow larger and larger debts hoping to buy homes that would rise in price.The larger the home they bought with the largest mortgage loan the more money theywould make in the bubble economy. They thought they could get rich by becoming biggerbank customers.

The NIPA were not designed to analyze this kind of an economy making gains byinflating asset prices rather than investing directly to create tangible assets. They were designedto track direct investment, profits and wages (along with government spending and taxes), notmonetary and financial phenomena that affect balance-sheet assets and debts. But financialengineering of balance sheets is what all about, and that is what makes todays financecapitalism so different from the industrial capitalism that classical economists analyzed.

The result is that property investors on credit appear not to be making any income.

They expense their revenue as an interest charge, while their capital gains are invisible in theNational Income and Product Accounts (NIPA). These capital gains in asset prices are taxedat much lower rates than taxes on wage income and profits. In fact, they typically are not taxedat all, if the gain is spent on buying yet more property. By making capital gains tax exempt, thetax code diverts investment away from tangible capital formation into financial speculation.

Q: Were derivatives and structured bonds the final stage in pumping up the financial bubblethat burst in 2008?A: Well, at least it was the stage before austerity and debt deflation. I call it CasinoCapitalism. Large Wall Street banks made money by betting which way the economy wouldgo, much like betting on a horse race. As in other forms of gambling, the casino always wins and crime is rife. Credit default swaps are the easiest to manipulate in ways that were illegal inthe past. So the cards are stacked in favor of banks against their customers and counterparties.

Investment banks that deal in these derivatives dont count their capital gains asprofits. They are not part of the production process, unlike profits made by employing laborto work with capital equipment to produce output. Derivatives and the financial system donthave much to do with production and employment except to shrink markets. They have todo with buying and selling assets to make a capital gain. This is the increasingly dominantspeculative part of the FIRE sector, not part of the production and consumption economy.Weve turned Industrial Capitalism inside out and made gambling the most important market,not production and consumption.


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Q:Is this why derivatives dont appear on the balance sheets of banks? And does this make itdifficult to know whether or not they are solvent?A: Derivatives are bets on the price of assets and on which way interest rates and hence,bond prices will go. Banks bet on stocks, currencies or anything they want to. But they dontuse money for this, so the bet is a contingent liability with an elusive statistical appearance,sort of like the Higgs boson in physics. The result is a casino economy betting which way

prices will go rather than actually producing goods and services.The problem is that for every winner there is a loser. So on balance its a zero-sum

game. The economy as a whole doesnt gain. In fact, large losers who cant afford to pay thewinners receive public bailouts. The government says that the economy needs to keep thecasinos big players solvent or the game will end and there will be a crisis. So the centralbank and Treasury print more public debt to make bad debts good. All the big players aremade winners leaving the government with more debt. This debt is not a result of spendingmore current income into the economy. It is purely a balance sheet phenomenon.

Q:Hasnt this system collapsed since 2008?A: Just the opposite. The 2008 aftermath was used by Wall Street as an opportunity to panicCongress into taking the losses of big banks onto the public balance sheet, incurring $13 trillionof added debt. In effect the Obama administration told the real economy to drop dead. The crisis

became an opportunity to turn democracy into an oligarchy. The same thing happened in Ireland.After its banks made enormous insider loans, reckless loans and fraudulent loans, thegovernment pledged to make the gamblers whole. The non-financial economy must now pay thebad bank debts, because the European Central Bank (ECB) now rules the eurozone economies.

Q:Isnt the ECB taking over the function of bailing out EU governments, having done so witheurozone banks?A: The ECB is not bailing out the existing status quo as much as acting to change it. Theaim is aggressive, not passive. It is to replace democratically elected governments in Greeceand Italy (and ultimately, everywhere) with oligarchy. German Chancellor Merkel and otherneoliberals claim that democracy would put the interest of people first. And theres not enoughto maintain their living standards and sustain a growth in wealth at the top at existing rates. Sosomething has to give and it is living standards, not the debt overhead. This is the social

revolution in which Europe and the entire Western world is in today.The ECB puts commercial banks first. Thats what central banks do. Thats why the

Federal Reserve Bank was made independent from the U.S. Treasury in 1913. They are thereto promote bank interests, increasingly at odds with the rest of the economy. The first ploy isto place technocrats (a scientific sounding euphemism for bank lobbyists) in place of electedgovernments in Greece and Italy.

The anti-democratic transformation occurring in Europe today resembles whatoccurred in Rome in 133 BC to inaugurate a century of financial war, which historians calleda Social War. It was waged by the creditor oligarchy (which had enriched itself largely byprivatizing public land after the Punic Wars with Carthage, much as todays financialoligarchy has grown rich by privatization and corrupt public-private financial cooperation).At issue was whether the economy should be run to enforce creditor rights by depriving thepopulation of its liberty from debt servitude, or should help the citizenry prosper.

The patrician creditor class used violence and murder of political leaders, as in Chilein 1973. Advocates of debt cancellation (such as supporters of Catilines conspiracy) werekilled. The Social War ended with much of the population falling into bondage. Todayscreditors are winning not to put individuals into bondage, but to let them be free to work andlive anywhere they want as long as they pay taxes to government to subsidize high finance,and buy goods and prices from privatized infrastructure squeezing out extortionate economicrent. This is the ECBs idea of a free market financial-style. That is the essence of neoliberalideology, and explains why its politicians are so well subsidized by the banking sector.


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Q: Wasnt the case of Greece unique in allowing creditors to shift the burden of the financialand fiscal crisis onto eurozone governments, by turning it into a sovereign debt crisis?A: Neither Greece nor other eurozone countries have a central bank monetize theirbudget deficits. So they need to borrow from bankers and bondholders, at interest rates thatrise as the dysfunctional system grows more untenable. Governments have been directed toshift taxes off property and the wealthy onto labor and industry, and to finance the resulting

budget deficits by raising taxes, cutting wages, axing social welfare and selling off thepublic domain. Financial neoliberals are using Greeces debt crisis as an opportunity to pryaway whatever its government owns: real estate and public buildings, mineral wealth, oiland gas rights in the Aegean, port facilities, electric utilities and roads. The eurozonebanking sector is to benefit, not the Greek people.

In times past, what the ECB is achieving in Greece would have taken an army to carryout by invading the country and taking over its land and infrastructure. The ECB is doing thiswithout military force, just by appointing technocratic proconsuls of high finance. A lameattempt is made to frighten voters into believing that There Is No Alternative (TINA, asMargaret Thatcher liked to express her diktat). Propaganda sites blare out that all this is for thebest. It is as if writing down debts will bring about poverty, not liberate economies from debt.

The situation is reminiscent of what occurred in Sparta at the end of the 3rd centuryBC. Spartas kings Agis IV and Cleomenes III sought to cancel the citizenrys debts, as a

creditor oligarchy had taken over. Neighboring oligarchies called in Rome, which waged awar (ultimately against Nabis, the last old Spartan leader), ending the democracy withRomes Empire. It established peace by imposing martial creditor rules that ended updriving the population to emigrate and shrink.

If Greece goes along with this, it will be surrendering without even a fight. That isthe political aim of the oligarchy: to win by conquest of the brain and ideology rather thanthe more expensive physical oppression of an outright police state.

Q: Why has there been so much emphasis on austerity and internal devaluation to drasticallyreduce wages and pensions?A: Financialization escalates the class war in a new way. For the last hundred yearspeople thought the war was between employers and employees over workplace conditions,wage levels and benefits. But the debt overhead adds a new dimension in class war. Finance

controls governments, especially in the public sector where unions typically are strongest.Most of all, financial lobbyists and the academic advisors they corrupt promote austerity andunemployment so as to drive down wages to a degree that could not occur in the company-by-company clash between industrial employers and their workers.

In the United States, Federal Reserve Chairman Alan Greenspan explainedtriumphantly to Congress that what was so remarkable since 1980 was that labor productivityrose by about 83 percent, but real wages didnt rise. The Maestro found the explanation to bethat workers had been obliged to take on enormous mortgage debts, education debts, autoloans, and live on credit-card debt in order to keep up with their neighbors. Their precariousfinancial situation made them afraid to go on strike or even to complain about workingconditions, because if they are fired and miss a payment in their electric utility bill, the interestrate on their credit card jumps to 29 percent. And in America if you miss a few mortgagepayments, you can lose your home. So many workers fear that they are one paycheck awayfrom being homeless. Thats what the debt overhead has achieved for relations between laborand capital. The two-thirds of Americans who own their homes are afraid to complain and losetheir job, because this would threaten their economic solvency and hence their social status.

Whats happening in Greece is similar. And for a dress rehearsal, look at Latvia,where neoliberals had a free hand. Two years ago, internal devaluation reduced its publicsector wages by 30 percent. This helped drag down wages in the private sector. Cutbacks inpublic spending shrank the domestic market and hence employment and spurred emigrationof young labor. Workplace rights are being rolled back in a way 19th-century industrialistsnever dreamed they could achieve under democratic government.


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Nearly everyone expected that democratic government would act to promote risingliving standards and expanding markets, not to act on behalf of the wealthy to shortsightedlyshrink them. It seemed logical that technology would increase the economic surplus andhence make it less necessary for families, companies or governments to run up debt, not sinkinto it even more rapidly than the tangible surplus was growing.

Q:But if neither Greek banks nor local industrialists are gaining from this, what dointernational creditors expect to receive from borrowers that cant pay their debts, mortgagesor taxes? How does a jobless workforce help them?A: The financial sector always has been so short-term as to be self-destructive. Theresbeen a race to the bottom who can extract the surplus for themselves before anyone elsedoes? Creditors treat the economy like an oil well, to be depleted, ignoring the long-termenvironmental consequences.

In this case the economic environment consists of tangible capital and technology,including the education and culture of the citizenry, capped by the debt overhead and risingconcentration of property ownership, along with the political corruption that accompaniesthe polarization of wealth by giving government power to the most avaricious, shortsightedand vicious members of society. So political economy turns into the asocial and anti-socialeconomics of Ayn Rand and the Chicago School, and financial predators find their Alan

Greenspans and Tim Geithners to act as their factotums. They dismantle the power ofgovernment (kings in the Bronze Age, democratic governments today) to write down debtsor regulate credit. Government becomes a board of directors of the financial wreckers.

You are quite right to notice that if such a government imposes such extreme austeritythat families and companies cannot pay their debts, the banks will lose and the governmentcant collect the taxes it needs to reduce the deficit. This is what the International MonetaryFunds austerity programs imposed on Latin America of the 1970s and 80s. That requiredmilitary dictatorships backed by U.S. armed force and covert destruction of the left massmurder of intellectuals, labor leaders and school teachers on a continent-wide scale. Greece isnow being treated economically the way that Latin American countries were treated by theIMF back then. It has not been necessary for U.S. state Department to send in the usualassassination teams to impose financial equilibrium creditor style, as under the ChicagoBoys in Chile and Operation Condor in the Americas. The absence of covert and overt

military force simply reflects the absence of serious opposition to the creditor plan.Now that U.S.-backed dictatorships are being thrown off in Latin America and

elsewhere, these countries are taking off economically. It shows the power of growth, oncethe financial oligarchy is checked from imposing its self-destructive economic policies. Onthe other hand, there is still a bonanza to be squeezed out of Greece and the rest of Europe byworsening the crisis to the point where hapless governments there do what Latin Americangovernments did: privatize the public domain, turning it over to buyers on credit, that is, onterms laid down by the banks, while deregulating the privatized monopolies.

Of course many banks will go under and many governments will be driven intoinsolvency. Thats the objective. The idea is for big fish to eat little fish. Banks that go underwill sell off their debt claims on the cheap to major financiers in other countries. Thevultures will have a field day, as they did in taking over Icelands banks. (That story has notbeen widely told.)

Financialization leads to the bankruptcy of local banking systems so that outsiderscan come in and make a huge property grab. So the banks become casualties, just as themost highly criminalized U.S. banks deepest into fraud, Countrywide Washington Mutual(WaMu) and their cohorts in recent years were absorbed by the five large U.S. too big tofail giants. Many countries have pension systems that can be looted after the mannerperfected under Pinochet in Chile in the late 1970s. This in fact remains the U.S. plan today.

Of course it will impoverish the economy. But the big banks and bondholders hopeto be able get out fast enough to take their money and run, and repeat the process somewhereelse. The problem ultimately is that which Alexander the Great faced: He cried when he felt


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there were no more worlds to conquer. So finance capital will end in tears first for thedebtors, then for the creditors themselves. The parasite will die with the host. That is whatcaused the decline and fall of the Roman Empire.

Q:How has finance capitalism shaped economic theory to change the idea of a free marketand treat social spending and investment as deadweight overhead instead of treating rentier

income and property claims as overhead as in the classical economics of industrial capitalism?A: Rhetoric plays a key role here. The essence of a free market financial style is to takeplanning out of the hands of government democratically elected political representatives and centralize it in Wall Street and other financial centers. Relinquishing the allocation of creditand untaxing property and finance transforms the mode of planning into the diametric oppositeof what it meant to the Enlightenment and to the classical economists who sought to steer thedrives of industrial capitalism to serve societys long-term growth and raise living standards.

A free market financial-style means disabling government regulation (which Hayekcalled the Road to Serfdom), to give rentiers the unchecked freedom to exploit, not protectsociety by ensuring it freedomfrom exploitation. So this isnt really a free market as peoplediscussed this in the 19th and 20th centuries. It is a market of unchecked fraud and exploitation,with wealth and power being untaxed as well as deregulated. This is the economics of GeneralPinochet elaborated along the lines that Margaret Thatcher in England and Ronald Reagans

crazies in the United States pushed under the slogan of the Washington Consensus. AsGrover Norquist expressed matters, the aim is to shrink government to a size so small that itcan be drowned in the bathtub. Of course, it is the citizenry that ends up being drowned in debt.

In practice a financialized free market simply shifts planning out of the hands ofgovernment and centralizes it in those of Wall Street and other banking centers. Financialdirigisme aims to endow a rentieroligarchy, not uplift the citizenry and the real production-and-consumption economy. So what ends up being reduced is not government debt, but publicspending on goods and services, especially on Social Security and medical care along withtaxes on wealth and debt-leveraged capital gains. In contrast to public purchases of goods andservices employing labor, new government debt is created mainly to bail the banks out of thelosses that result from their self-destructive over-lending and outright gambling. The effect is toincrease the governments deadweight overhead under oligarchy, in contrast to democracy.

What is important to recognize in analyzing this shift in the locus of centralized

planning is that the financial sectors objectives are the opposite of those in the public sector.Democratic governments seek to increase employment, output and living standards. Butrelinquishing central planning to the banks, as the ECB and Washington Consensus wants todo, replaces democracy with oligarchy. Under these conditions financial planning takes theform of austerity, lowering wages and living standards. The ensuing economic crisis is usedas an opportunity to grab whatever property is in the public domain infrastructure, realestate and mineral rights, and even the creation of new monopolies to sell off and use theproceeds to pay the debts. (Chicago, for instance, sold the right of Wall Street investors toinstall parking meters on its sidewalks increasing the cost of driving and doing business.)

This is how the South Sea Bubble was orchestrated: Sale of the asiento monopoly onthe slave trade with the Americas that Britains government had won from Spain. Stock in thecompany was sold to the public with insiders making early gains and then selling out beforesticking the public with the crash. This is basically the plan to privatize Social Security. It isPinochets and Thatchers pension fund capitalism expanded to orchestrate bubbles byinflating asset prices on credit, and then letting the economy collapse as it becomes high-costand insolvent. The process is capped by the government creating debt to bail out the banks,but to help the tangible production-and-consumption economy recover. So financial planningunder oligarchic government is all about the FIRE sector.

Unfortunately, economic history no longer is taught as part of the neoliberalizedeconomics curriculum, at least here in the United States. So people are not aware of howdestructive financialized management and planning has been ever since the fall of Rome.


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Q: What would be a progressive solution to this crisis? Should the central bank simply monetizethe deficits and consequent increase in public debt?A: The technocratic solution is indeed for the central bank to create new governmentIOUs money to bail out bankers at home and abroad. If they the existing debts are paidin this way (or by letting banks foreclose), it would make the financial sector by far the mostpowerful economic and political actor. The economy would polarize between creditors and

debtors, government insiderrentiers while the rest of society falls into poverty.My alternative is to anticipate that the end game must be a Clean Slate in any event.

Its simply a mathematical fact that debts that cant be repaid, wont be. So trying to collectthem threatens to tear the economy apart. A lot of pain will be saved by cancelling the debts.Greece should tell its fellow Europeans that every government has a prime mandate to protectits people from catastrophe. To carry this policy out, Greece should annul all its debts andbegin again with a Clean Slate, like Germany did in 1948. This would make it a low-costcompetitive economy as long as it taxes the free lunch of the lands site-value rent that hasbeen freed from debt, as well as natural resource and monopoly rents as a basis for its post-Clean Slate fiscal policy. So fiscal and financial reform need to go together.

Q:Do we need a central bank to monetize and coordinate such a policy?A: You need a central bank or Treasury to create money to finance budget deficits

without recourse to commercial banks and bondholders charging interest for credit that theycreate electronically on their own computer keyboards. The central banks role should be toregulate commercial banks and their lending policies, not serve as their lobbyist as presentlyis the case. The problem is that Europe doesnt have a real central bank to financegovernment deficits, unlike the Bank of England or the Federal Reserve. This is crazy! TheECB wont lend to governments which is what central banks were founded to do. The ECBonly buys from commercial banks, buying government bonds at a much higher price than thefree market would set. So here again, neoliberal free market policy financial-style isantithetical to what most people think of as free markets.

It also runs against what voters expected when they joined the eurozone. Greecejoined Europe because it wanted to increase its prosperity. To do this, it needs a real centralbank. Either this needs to be created within the eurozone, or else Greece and the Europeanperiphery should start afresh with the kind of Clean Slate that fueled Germanys Economic

Miracle. All Europe needs a debt cancellation to bring debts back within the ability to pay.Germany and its creditor allies would be welcome to join in the Souths effort to

restructure eurozone finances, escaping from the craziness of a currency area of governmentswithout central banks. The important thing is to avert an epoch of debt peonage resultingsimply from being denied the right to have a proper central bank to do what every centralbank in every civilized country of the world will do, namely finance the public deficit.

Q: Could a re-nationalized Greek central bank create enough money to pay off the debt in eurosbefore the ECB has the chance to pull the plug on it?A: The eurodebt shouldnt be paid at all. In any case, it cantbe paid without selling off thecountrys public domain. It is true that debts can be paid off by printing the amount of moneythats needed. That happened in the United States when the Federal Reserve created $13 trillionto cover the bad debts held by the banking system before it could stick Europeans, pension funds

and other gullible buyers with junk mortgages and impossibly convoluted derivatives.The problem is that the Feds act rescued the banks, not the economy. It kept the bad

debts on the books instead of writing them down. The banks created a recklessly and unpayablyhigh debt overhead that is subjecting the national economy to debt deflation as debtors try topay by drastically reducing their consumption and tangible new investment. The oppositepolicy should be pursued: Mortgage debt should be written down to the ability to pay instead ofthe Federal Reserve and Treasury financing bank losses and bad gambles. Bondholders shouldlose, and only FDIC-insured depositors be rescued.


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Greece should learn from Americas folly and refuse to borrow from the ECB to paybondholders on debts that have been run up by lacking a central bank and by not taxing thewealthy and by letting them avoid taxes by accounting tricks such as taking their profits intax-avoidance centers such as Switzerland. Greek banks have acted as enablers in capital flightand corruption. So let eurozone creditors pursue this flight capital while Greece builds a morerational financial and fiscal system with a Clean Slate. It may find allies in Southern Europe

(Italy, Spain, Portugal), the BRICS or neighboring countries in the Baltics and Far East.

Q:Havent Germany and the major Eurozone countries shifted the bulk of Greek public debt outof the hands of private bondholders (mainly EU banks and hedge funds) onto the official sector(EU states via the ECB and IMF), ultimately to be paid by Greek and other EU taxpayers?A: Thats right. As matters stand, the eurozone has been waging warfare against Greece.Greece has a right to respond by taking back control of its property by taxing its economic rentor windfall gains. This is why the financial sector a century ago sought to deny that there wasany such thing as economic rent, that is, unearned income.

Remember that Henry VIII nationalized the monasteries and church lands in England.Northern Europe responded to the papacy in Rome draining tribute by elevating nationalinterest to the highest religious plane as the only way to break the financial bond. Protestantismwas largely a financial response against papal bankers, the Lombards, Florentines and their

brethren described by Dante in hisInferno. To achieve financial independence, NorthernEurope needed a new ideology capped by religious independence and indeed, civilindependence from religion. That came finally in the form of the Protestant Reformation.Greece needs to do the same thing politically today. This requires an ideological alternative toneoliberal pro-creditor doctrine insisting that paying debts is part of free markets and denyingthat any income or wealth is unearned.

Q:How can Greece counter the terror propaganda warning about the horrors and calamitiesthat threaten to befall the nation if it defies its troika conquerors and tries to go it alone?A: The real terror is what would happen if Greece surrenders to the financial aggressorsbehind the ECB. Throughout most of history, populations and governments have fought back.Creditors know this, which is why it really is the banks that are afraid, because theyre papertigers in a fight with a government that uses its sovereign legal powers. Greece can do whatever

it wants with regard to which debts get paid or are written down or written off altogether. It canre-denominate debts in its own currency and then devalue. Or it can simply repudiate the debtas being unpayably high.

In the first place, Greece wouldnt have to act alone. It has options. Its diplomats canpursue agreements with other countries that are in the same sinking debt boat. They may rejectthat the eurozone model of austerity and debt deflation. In America, for instance, DonaldRumsfeld has referred contemptuously to old Europe. This reflects a feeling that the eurozoneis a Dead Zone. Greece can say that it has no intention of being sucked financially and fiscallyinto this dead zone. It can approach the BRIC countries, and even ask for U.S. support tobecome a new potential growth area.

Q: What are the options available to the rest of the world to resolve the debt crisis and avoidglobal depression?

A: A shrinking economy tends to fall further into arrears in a debt spiral. The questiontoday is whether a new ideology and political program of reform will emerge to complete thetask of classical political economy by freeing markets from unproductive debt overhead andunearned rentierincome. The alternative is a Counter-Enlightenment that would roll back thedemocratic era that industrial capitalism promised to inaugurate. Rentierinterests have escalated their fight against Progressive Era reforms to defendfinancial interests. They have gained control of the mass media and universities, the courts andnow the government itself under the U.S. Citizens United ruling that relinquishes electioncampaign financing to whomever has the most money which is turned into TV commercials


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and a massive ideological propaganda machine to convince voters that There Is No Alternativeto debt peonage. This bold ideological inversion of Enlightenment values even celebrates asset-price inflation and debt peonage as the workings of the free market as if it were a naturalevolution, not a hijacking and derailing of economic development.

At issue is how society will liberate itself from the buildup of debts that cant be paid.If governments let the financial sector foreclose, they will end up being forced to privatize the

public domain under duress conditions at distress prices. They will have to dismantle publicadministration and welfare services. The problem is capped by having to turn tax policy overto financial lobbyists who claim to be objective technocrats. The result must be economicpolarization between creditors and debtors ushering in a new Dark Age of poverty anddeepening debt peonage. Wages, profits and property rents will be earmarked to pay interest on loans that cant be paid in a shrinking economy.

This is the point at which the financial sector uses its political clout to demand bailoutsfrom the government, adding to public debt. The new credit given to the banks is sent abroad asbanks jump ship. This is what happened to the U.S. Federal Reserves $800 billion QuantitativeEasing #2 in 2011.

The alternative to this nightmare scenario is write down debts to what can be paid,within the framework of a mixed public/private economy geared to distribute wealth andincome more equitably. This involves not only monetary and financial reform but tax reform

as well. It needs to be highlighted in the public consciousness by placing at the heart of theacademic curriculum and media discussion the history of how societies have dealt politicallywith their debt overhead throughout history.

A new set of key measures needs to be reported and kept in the forefront of politicaldiscussion. Monetary theory needs to distinguish between asset-price inflation (the bubbleeconomys debt-leveraged real estate, stock and bond market boom) and consumer priceinflation. The National Income and Product Accounts need to recognize the magnitude of theFIRE sector and treat its revenue as eating into the economic surplus, not increasing it. Andasset-price (capital) gains need to be tracked as part of total returns to explain theeconomic polarization between rentiers and wage earners.

But I realize that all this is another story.

Documents

HUDSON interview 2012 final.pdf