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United for Peace of Pierce County - ANALYSIS: 'Talk of cutting deficits is class-war talk' (Michael Hudson)

The entire U.S. power structure is in thrall to a myth, economist Michael Hudson said Monday.  --  "Wall Street is not 'the economy.'  It is a superstructure of credit and money management privileges positioned to extract as much as it can, while threatening to close down the economy if it does not get its way."[1]  --  This superstructure is really a "protection racket," and reinforcing it is certainly "not the change that most people voted for in November 2008."  --  Hudson views the notion that "the economy cannot recover without enriching Wall Street" as "the Administration’s tragic flaw."  --  The notion that "this is how the world works, like it or not" has been adopted by the Obama administration and, indeed, seems to have "captured Mr. Obama’s brain," despite his vaunted intelligence and clear-sightedness.  --  In fact, however, what the economy needs is "to recover from the enrichment of Wall Street.  It doesn’t need more credit, but a write-down for the unpayably high debts that the banks have imposed on American families, businesses, states and localities, real estate, and the federal government itself."  --  But as "American democracy slips into oligarchy," the two major parties "vied last week for who could denounce the banks and blame the other party the most for the giveaways to Wall Street that have swollen the public debt since September 2008" by $13 trillion.  --  The financial élite claims to have saved the system, but it is "not saving the economy; it is sacrificing it.  What has been saved is the debt overhead -- the wrong side of the balance sheet."  --  In Hudson's view, the politics of the situation are so unstable that "a political realignment may be in the making."  --  Among policymakers "there is a widening realization that the economy has painted itself into a financial corner."  --  In an article posted about a week earlier, Hudson explained why the FIRE-based (finance, insurance, and real estate) bubble economy cannot be reinflated.[2]  --  "The word 'recession' implies that economic trends will return to normal almost naturally," but "[a]ny dream of 'recovery' in today’s debt-leveraged economy is a false hope," Hudson wrote on the eve of the State of the Union address.  --  Here's the essence of the situation, in Hudson's view:  "The economy is best viewed as the FIRE sector wrapped around the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs."  --  "Talk of cutting deficits thus is class-war talk -- on behalf of the FIRE sector." ...



By Michael Hudson

Global Research
February 1, 2010

In a dress rehearsal for this November’s mid-term election, Democrats and Republicans vied last week for who could denounce the banks and blame the other party the most for the giveaways to Wall Street that have swollen the public debt since September 2008, pushing the federal budget into deficit and the economy into a slump.

The Republicans are winning the populist war.  On the weekend before his State of the Union address on Wednesday, Mr. Obama strong-armed Democratic senators to re-appoint Ben Bernanke as Federal Reserve Chairman.  His Wednesday speech did not mention this act (happily applauded by Wall Street).  The President sought to defuse voter opposition by acknowledging that nobody likes the banks.  But he claimed that unemployment would be much higher if they hadn’t been bailed out.  So the giveaway of public funds was all for the workers.  The $13 trillion that has created a new power elite was just an incidental byproduct.  Unpleasant, perhaps, as American democracy slips into oligarchy.  But all for the people.  The least bad option.  It had to be done.  People might not like it, but Main Street simply cannot prosper without creating hundreds of Wall Street billionaires -- without enabling them to increase their bonuses and capital gains as bank stock prices quadruple.  It’s all to get credit flowing again (at 30% for credit card users, to be sure).

So the rest of us must wait for wealth to trickle down.  The cover story is that this is how the world works, like it or not.  At least this is the argument of the lobbyists who are drafting and censoring laws and signing off on just who is acceptable to run the Federal Reserve, Treasury, and other public-subsidy agencies.  The working assumption is that the economy cannot recover without enriching Wall Street.

This is the Administration’s tragic flaw.  What the economy needs is to recover from the Bush-Obama supposed cure, i.e., from the mushrooming debt overhead.  It needs to recover from the enrichment of Wall Street.  It doesn’t need more credit, but a write-down for the unpayably high debts that the banks have imposed on American families, businesses, states and localities, real estate, and the federal government itself.

Instead of helping debtors, Mr. Obama has moved to heal the creditors, making them whole at public expense.  If debtors cannot pay, the Treasury and Fed will take their IOUs and bad casino gambles onto the public sector’s balance sheet.  The financial winners must come first -- and it seems second and third, too.  The rationale is that unless the government gives the large financial institutions what they want and saves them from taking a loss, their “incentive” to protect the economy from devastation will be gone.

Knuckling under to this protection racket is not the change that most people voted for in November 2008.  So on Thursday afternoon, most Republican senators opposed a second four-year term for Bernanke.  By leading the effort to re-confirm him, the Corporate Democrats (but not most of their colleagues who had to face voters this autumn) removed this albatross from the Republican neck and put it around their own.

For starters, Chairman Bernanke has convinced the President that the Fed should be the single regulator of Wall Street -- ideologically kindred, and drawn from its ranks, or with its assent.  Mr. Obama’s address made no reference to the Consumer Financial Products Agency he promised a year ago to be the centerpiece of financial reform.  Its main sponsor, Elizabeth Warren, has been warning that hopes for reform are being overwhelmed by financial lobbyists arguing that truth-in-lending laws and anti-usury regulations threaten to reduce bank profits, forcing lenders to raise costs to consumers.  In Mr. Bernanke’s world, regulations to protect consumers simply will oblige the banks to pass on the cost increase caused by this “government interference.”  The more regulation there is, the more consumers will have to pay.

This is the inside-out picture drawn by bank lobbyists and purveyed by Mr. Obama’s economic team.  Could George Bush have gotten away with it?  Democrats have a friendlier and more compassionate face, but the substance remains the same.

Most economists believe that Mr. Obama is whistling in the dark when he says the economy will recover this year under Chairman Bernanke’s guidance.  The financial screws are being tightened, yet the Fed refuses to abide by its charter and regulate credit card rates going through the roof.  Instead of counter-cyclical federal spending to rescue the economy from debt deflation, Mr. Obama says that since we have given so much to Wall Street in the past year and a half, little is left to spend on the “real” economy.  Sounding like a Republican in Democratic clothing not unlike his Senate mentor Joe Lieberman, his State of the Union speech urged creation of a bipartisan (that is, Republican-friendly) working group to agree on how to lower the deficit.  The President proposes that starting next year Congress should freeze spending not already committed under entitlement programs.

Testifying Wednesday morning as a run-up to Pres. Obama’s evening speech, Messrs. Geithner and Paulson at least avoided the Washington ploy of emulating Alzheimer’s patients and saying that they couldn’t recall anything about their giveaways.  Sophisticated enough to outplay their questioners in verbal tennis, the past and present Treasury Secretaries brazened it out.  Using the Plausible Deniability defense, they claimed that they weren’t even in the loop when it came to paying AIG enough to turn around and pay Goldman Sachs and other arbitrageurs 100 cents on the dollar for securities worth about a fifth as much.  It was all done by their subordinates.  Their underlings did it.  “This was a Federal Reserve loan,” Mr. Paulson explained.  “They had the authority.  They had the technical expertise . . . and I was working on many other things which were in my bailiwick.”[Note 1: Serena Ng and Michael R. Crittenden, “Geithner Defends Big AIG Payouts,” Wall Street Journal, January 28, 2010.]  And in any case an AIG bankruptcy “would have buckled our financial system and wrought economic havoc.”  Unemployment, he warned, “could have risen to 25%.”  The Fed had to protect people.

When there was no way to dodge, they frankly admitted what had happened, providing helpful pieties to the effect that it is the job of Congress to change the law to make sure nothing like this happens again.  Yes, there was a big giveaway, but we saved the economy.  Wall Street’s loss would have been the peoples’ loss.  Certainly we need new rules to protect the taxpayer, blah, blah, blah.  We’re all in the same boat.  If the banks took a loss, they would have to raise the price of financial services and we would all have had to pay more.  Thank heavens that everything is getting back to normal now.

“A lot of people think the president of the New York Fed works for the government,” Democrat Marcy Kaptur of Ohio concluded, “but in fact he works for the banks on the board that elected you.”[Note 2:  Mary Williams Walsh, “Drawing Fire, Geithner Backs Rescue of A.I.G.New York Times, January 28, 2010.]  Not so, testified New York Federal Reserve general counsel Thomas Baxter.  “A.I.G. wanted to keep the information confidential, for fear that it would lose business if customers were named.”  And if it lost business, “This would have had the effect of harming the taxpayers’ investment in A.I.G.”  So it was all to save the taxpayers money that the Fed spent $185 billion of their money.

But was it really necessary not to let A.I.G. go bankrupt in September of 2008?  The Wall Street Journal’s editorial page blew the whistle on how the government’s wheeler-dealer insiders have been changing their story again and again -- not usually a sign of truthfulness.  “Secretary of the Treasury Timothy Geithner and predecessor Hank Paulson said they didn’t bail out AIG to save its derivatives counterparties” from bad credit default swap contracts because if it would have asked these counterparties to “take a haircut,” credit-ratings agencies would have downgraded AIG.  A lower rating would have obliged it to post even more collateral on its other swap contracts, presumably because of the higher risk.

There are a number of problems with this story, the editorial explained.  First of all, Goldman Sachs and other counterparties unilaterally said the prices had declined for securities that had no market price at all, only subjective valuations.  A.I.G. would have been reasonable in disputing this.  In any event, as the firm’s new 80% stockholder, the U.S. Government said it would stand behind AIG.  This should have removed fears of non-payment.  But most important of all was the claim by Messrs. Paulson and Geithner that failure to “honor” AIG’s swaps would have threatened its far-flung insurance businesses on which so many American consumers depended.  New York Insurance Superintendent Eric Dinallo, who was AIG’s principal insurance regulator at the time, testified before the Senate last year that these operations were not threatened at all!  “‘The main reason why the federal government decided to rescue AIG was not because of its insurance companies.’  He was so confident in the health of the AIG subsidiaries that, before the federal bailout, he was working on a plan to transfer $20 billion of their excess reserves to the parent company.”[Note 3:  “The Latest AIG Story,” Wall Street Journal editorial, January 28, 2010.]

This directly contradicts Mr. Geithner’s claim “that the ‘people responsible’ for overseeing the insurance subsidiaries ‘had no idea’ about the risks facing AIG policyholders.  He’s talking about Mr. Dinallo here.  Instead of being safely segregated, Mr. Geithner said the insurance businesses were ‘tightly connected’ to the parent company.  Mr. Paulson added that the healthy parts of AIG had been ‘infected’ by the ‘toxic assets.’  He added, ‘One part of the company would have contaminated the other.’”  Does this mean that New York’s “heavy state insurance regulation was a sham,” the newspaper asked?  It would seem that “When push came to shove, policyholders were not protected from a default by the parent company.”  It urges that Mr. Dinallo be brought back to straighten the matter out.

Mr. Geithner closed his own comments by saying, “if you are outraged by what happened with AIG, then you should be deeply committed to financial reform.”[Note 4:  Mary Williams Walsh and Sewell Chan, “Under Fire, Geithner Says A.I.G. Rescue Was Essential,” New York Times, January 27, 2010.]  This is rhetorical judo.  The financial system in question is not the economy at large.  It was AIG’s carefully segregated bookies’ account for wealthy hedge fund gambles and Wall Street speculations that should have had little to do with the “real” economy at all.

Wall Street -- and most business schools -- promote the myth that the “real” economy of production and consumption cannot function without making Wall Street’s insiders immensely rich.  Emulating Louis XIV, Wall Street’s spokesmen explain, “L’économie, c’est nous.”  There seems nothing to be done about banks impoverishing people by extortionate credit card rates, junk securities and a debt burden so heavy that it will require one bailout after another over the next few years.  Present policy is based on the assumption that the U.S. economy will crash if we don’t keep the debt overhead growing at past exponential rates.  It is credit -- that is, debt -- that is supposed to pull real estate out of its present negative equity.  Credit -- that is, debt leveraging -- that is supposed to raise stock market prices to enable pension funds to meet their scheduled payments.  And it is credit -- that is, debt -- is supposed to be the key to employment growth.

Credit means giving Wall Street what it wants.  Regulating it is supposed to interfere with prosperity.  Truth-in-lending, for example, will increase the “cost of production” by “making” banks charge consumers even more for creating credit on their computer keyboards.

This Stockholm syndrome when it comes to Wall Street’s power-grab is junk economics.  Wall Street is not “the economy.”  It is a superstructure of credit and money management privileges positioned to extract as much as it can, while threatening to close down the economy if it does not get its way.  High finance holds the economy hostage not only economically but also intellectually at least to the extent of having captured Mr. Obama’s brain -- and also the federal budget, as money paid to Wall Street has crowded out spending on economic recovery.  It has re-defined “reform” to mean putting Wall Street even more in power by making the Fed the sole regulator of Wall Street.  Under these conditions, saving “the system” means saving a mess.  It means saving a debt dynamic that must grow exponentially at the economy’s expense, absorbing more and more federal bailout funds and hence crowding out the spending needed to revive the economy.

Mr. Paulson’s testimony echoed the idea that the rescue of A.I.G. was necessary to keep the economy from collapsing.  “We would have seen a complete collapse of our financial system,” Mr. Paulson said, “and unemployment easily could have risen to the 25 percent level reached in the Great Depression.”  So it was all for the working class, for employees and consumers.  It was done to save the government -- a.k.a. “taxpayers” -- from losing money on its investment.  It was to save the economy from breaking down -- or perhaps to pay off protection-racket money to Wall Street not to wreck the economy.  And as we all know, taxpayers today are mainly the lower-income individuals unable to take their revenue in the form of low-taxed “capital gains” like Wall Street traders, in today’s fiscal war between finance and labor.

It seems to be merely an incidental by-product of saving taxpayers and labor that Wall Street ended up with the hundreds of billions of dollars of gains (and losses avoided) -- at a $13 trillion expense of government and of about four million jobs in the overall economy whose employment is shrinking, and about four million home foreclosures in 2009-10.  The cover story is that matters would have been worse otherwise. This was the price for “saving the system.”  But “the system” turns out to be the Bubble Economy, in which the Obama administration has put as much faith as Bush did.  This is why the same managers have been kept in place.  This policy has enabled Republicans to strike a posture of denouncing the banks in preparation for this November’s mid-term election.

“Saving the economy” has become a euphemism for the policy of keeping bad debts on the books and saving high finance from writing them down to reflect the realistic ability to pay.  Wall Street has used its bailout money to lobby Washington, back its political nominees to hold Congress hostage, and blame the downturn on any regulator or president who does not yield to its demands.

The resulting program is not saving the economy; it is sacrificing it.  What has been saved is the debt overhead -- the wrong side of the balance sheet.


A bipartisan compact between Corporate Democrats and Republicans is not the change voters expected in November 2008.  Confronted with the “Obama surprise” -- an absence of change -- the only option that many voters believe they have is to change the existing party.  Republicans are setting their eyes on Pres. Obama’s former Senate seat in Illinois, Vice Pres. Biden’s seat in Baltimore, and Majority Leader Reid’s seat in Nevada.  Losing these and other seats would create a political standoff giving Mr. Obama further excuse for not changing course.

This kind of standoff normally would enable a popular president to ask voters to elect a majority large enough to legislate the program he outlines.  But instead of a program, Mr. Obama has simply appointed the leading Bush-era administrators and brought back the Clinton “Rubinomics” team from Wall Street.  His spending freeze in a shrinking economy is a Republican program, his modest “stimulus package” is over, and he has dropped the Consumer Financial Products Agency under Wall Street pressure.  So if we are to look at what the administration actually is doing, its program is simply a blank check to the Fed and Treasury (under Bush-era management) to revive Wall Street fortunes -- in a nutshell, more Rubinomics.

Convergence between the two parties reflects the privatization of politics by political lobbying and campaign contributions.  Getting paid back with fiscal favors, sell-offs, and bailouts promises to increase in the wake of the recent Supreme Court “Frankenstein” decision that corporations are virtual people when it comes to freedom of speech and the purchase of media time.

The only countervailing power is that within the Republican Party a fringe of tea partiers threatens to run against more established candidates safely sold to special interests.  The Democratic Party always has been a looser coalition, which may not hold together if the Rubinomics team continues to lock out non-Corporate Democrats.  So a political realignment may be in the making.  Financial and fiscal restructuring issues span left and right, progressive Democrats and populist Republicans.  So far, their sentiments are reactive rather than being spelled out in a policy program.  But there is a widening realization that the economy has painted itself into a financial corner.

What is needed is to explain to voters how financial and tax policies are symbiotic.  The tax shift off finance, insurance, and real estate (FIRE) onto labor and industry since 1980 has polarized the economy between a creditor class at the top of and an indebted “real” economy below.  Unless this tax favoritism is reversed, more and more revenue will be diverted away from spending on consumption and investment to pay debt service and “financialize” the economy even more.

It is natural that the world’s most debt-ridden economies -- Latvia and its Baltic and post-Soviet neighbors, and Iceland -- are the first to perceive the problem.  They may be viewed as an object lesson for a dystopian future of debt peonage.  New Europe’s debt strains are threatening to break up the core euro-currency area (aggravated from within by the Greek, Spanish, and Irish public debt problems).  The British economy is likewise financialized, weakening sterling.  And Europe lacks the U.S. financial safeguard that enables mortgage debtors here to walk away from properties that have fallen into negative equity.  Insolvent homeowners in Europe face a lifetime of literal debt peonage to make the banks (even foreign banks, which dominate Central Europe’s post-Soviet economies) whole on their bad debts as the continent’s real estate prices are plunging even more steeply than those in the United States -- some 70 percent in Iceland and Latvia.

The only silver lining I can see is that perception will spread that the financial sector is an intrusive dynamic subjecting the economy to debt deflation.  But at present, lawmakers are acting as if the economy is an albatross around Wall Street’s neck.  (“How are we wealthy people to bear the cost of healing the sick and employing the masses?” the financial sector complains.  “The cost is eating into our ability to create wealth.”)  Libertarians have warned that our economy is going down the Road to Serfdom.  What they do not realize is that by fighting against government power to check financial hubris, they are paving the road for centralized financial planning by Wall Street.  They have been tricked into leading the parade on behalf of the financial, insurance, and real estate sector -- down the road to debt peonage in a monopolized and polarized economy.

--Michael Hudson is a frequent contributor to Global Research.



By Michael Hudson

** Which Economy is Obama Talking About? **

January 26, 2010

The State of the Union address is in danger of purveying the usual euphemisms.  I expect Obama to brag that he has overseen a recovery.  But can there be any such thing as a jobless recovery?  What has recovered are stock market averages and Wall Street bonuses, not disposable personal income or discretionary spending after paying debt service.

There is a dream that what can be “recovered” is something so idyllic as to be mythical:  a Bubble Economy enabling people to make money without actually working, by borrowing and riding the tide of asset-price inflation to make capital gains.  Corporate Democrat Harold Ford Jr. writes nostalgically that Bill Clinton’s eight years in office created 22 million jobs, “balanced the budget and left his successor with a surplus.  This can be done again,” if only Obama moves further to the right (which Ford calls the center, meaning the Bayhs and Republicans).

It can’t be done again.  Pres. Clinton’s administration balanced the budget by “welfare reform” to cut back public spending.  This would be lethal today.  Meanwhile, his explosion of bank credit and the boom (rising stock prices and bonuses without any earnings) fueled the early stages of the Greenspan bubble.  It was a debt-leveraged illusion.  Instead of the government running budget deficits to expand domestic demand, Clinton left it to banks to extend interest-bearing credit-debt pollution that we are still struggling to clean up.

The danger is that when Obama speaks of “stabilizing the economy,” he means trying to sustain the rise in compound interest and debt.  This mathematical financial dynamic is autonomous from the “real” industrial economy, overwhelming it economically.  That is what makes the present economic road to debt peonage so self-defeating.

Debts that can’t be paid, won’t be.  So defaults are rising.  The question that Obama should be addressing is how to deal with the excess of debt above the ability to pay -- and of negative equity for the one-quarter of U.S. real estate that has a higher mortgage debt than the market price is worth.  If the hope is still to “borrow our way out of debt” by getting the banks to start lending again, then listeners on Wednesday will know that Obama’s second year in office will be worse for the economy than his first.

How realistic is it to expect the speech to make clear that “we can’t go home again”?  Obama promised change.  “We simply cannot return to business as usual,” he said on Jan. 21, introducing the “Volcker plan.”  But how can there be meaningful structural change if the plan is to return to an idealized dynamic that enriched Wall Street but not the rest of the economy?

The word “recession” implies that economic trends will return to normal almost naturally.

Any dream of “recovery” in today’s debt-leveraged economy is a false hope.  Yet high financial circles expect Obama to insist that the economy cannot recover without first reimbursing and enriching Wall Street.  To re-inflate asset prices, Obama’s team looks to Japan’s post-1990 model.  A compliant Federal Reserve is to flood the credit markets to lower interest rates to revive bank lending --- interest-bearing debt borrowed to buy real estate already in place (and stocks and bonds already issued), enabling banks to work out of their negative equity position by inflating asset prices relative to wages.

The promise is that re-inflating prices will help the “real” economy.  But what will “recover” is the rising trend of consumer and homeowner debt responsible for stifling the economy with debt deflation in the first place.  This end-result of the Clinton-Bush bubble economy is still being applauded as a model for recovery.

We are not really emerging from a “recession.”  The word means literally a falling below a trend line.  The economy cannot “recover” its past exponential growth, because it was not really normal.  GDP is rising mainly for the FIRE sector -- finance, insurance, and real estate -- not the “real economy.”  Financial and corporate managers are paying themselves more for their success in paying their employees less.

This is the antithesis of recovery for Main Street.  That is what makes the FIRE sector so self-destructive, and what has ended America’s great post-1945 upswing.

There are two economies -- and the extractive FIRE sector dominates the “real” economy.

When listening to the State of the Union speech, one should ask just which economy  Obama means when he talks about recovery.  Most wage earners and taxpayers will think of the “real” economy of production and consumption.  But Obama believes that this “Economy #1” is dependent on that of Wall Street.  His major campaign contributors and “wealth creators” in the FIRE sector -- Economy #2, wrapped around the “real” Economy #1.

Economy #2 is the “balance sheet” economy of property and debt.  The wealthiest 10 per cent lend out their savings to become debts owed by the bottom 90 per cent.  A rising share of gains are made in extractive ways, by charging rent and interest, by financial speculation (“capital gains”), and by shifting taxes off itself onto the “real” Economy #1.

John Edwards talked about “the two economies,” but never explained what he meant operationally.  Back in the 1960s when Michael Harrington wrote The Other America, the term meant affluent vs. poor America.  For 19th-century novelists such as Charles Dickens and Benjamin Disraeli, it referred to property owners vs. renters.  Today, it is finance vs. debtors.  Any discussion of economic polarization betweens rich and poor must focus on the deepening indebtedness of most families, companies, real estate, cities, and states to an emerging financial oligarchy.

Financial oligarchy is antithetical to democracy.  That is what the political fight in Washington is all about today.  The Corporate Democrats are trying to get democratically elected to bring about oligarchy.  I hope that this is a political oxymoron, but I worry about how many people buy into the idea that “wealth creation” requires debt creation.  While wealth gushes upward through the Wall Street financial siphon, trickle-down economic ideology fuels a Bubble Economy via debt-leveraged asset-price inflation.

The role of public spending -- and hence budget deficits -- no longer means taxing citizens to spend on improving their well-being within Economy #1.  Since the 2008 financial meltdown the enormous rise in national debt has resulted from the reimbursing of Wall Street for its bad gambles on derivatives, collateralized debt obligations, and credit default swaps that had little to do with the “real” economy.  They could have been wiped out without bringing down the economy.  That was an idle threat.  A.I.G.’s swap insurance department could have collapsed (it was largely in London anyway) while keeping its normal insurance activities unscathed.  But the government paid off the financial sector’s bad speculative debts by taking them onto the public balance sheet.

The economy is best viewed as the FIRE sector wrapped around the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs.

Say’s Law of markets, taught to every economics student, states that workers and their employers use their wages and profits to buy what they produce (consumer goods and capital goods).  Profits are earned by employing labor to produce goods and services to sell at a markup (M – C – M’ to the initiated).

The financial and property sector is wrapped around this core, siphoning off revenue from this circular flow.  This FIRE sector is extractive.  Its revenue takes the form of what classical economists called “economic rent,” a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as “capital” gains.  (These are mainly land-price gains and stock-market gains, not gains from industrial capital as such.)  Economic rent and capital gains are income without a corresponding necessary cost of production (M – M’ to the initiated).

Banks have lent increasingly to buy up these rentier rights to extract interest, and less and less to promote industrial capital formation.  "Wealth creation” FIRE-style consists most easily of privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of convenient money (credit cards), or the credit needed to get by.  This kind of wealth is not what Adam Smith described in The Wealth of Nations.  It is a form of overhead, not a means of production.  The revenue it extracts is a zero-sum economic activity, meaning that one party’s gain (that of Wall Street usually) is another’s loss.


The problem that Obama faces is one that he cannot voice politically without offending his political constituency.  The Bubble Economy has left families, companies, real estate, and government so heavily indebted that they must use current income to pay banks and bondholders.  The U.S. economy is in a debt deflation.  The debt service they pay is not available for spending on goods and services.  This is why sales are falling, shops are closing down, and employment continues to be cut back.

Banks evidently do not believe that the debt problem can be solved.  That is why they have taken the $13 trillion in bailout money and run -- paying  it out in bonuses, or buying other banks and foreign affiliates.  They see the domestic economy as being all loaned up.  The game is over.  Why would they make yet more loans against real estate already in negative equity, with mortgage debt in excess of the market price that can be recovered?  Banks are not writing more “equity lines of credit” against homes or making second mortgages in today’s market, so consumers cannot use rising mortgage debt to fuel their spending.

Banks also are cutting back their credit card limits.  They are “earning their way out of debt,” making up for the bad gambles they have taken with depositor funds, by raising interest rates, penalties, and fees, by borrowing low-interest credit from the Federal Reserve and investing it abroad -- preferably in currencies rising against the dollar.  This is what Japan did in the “carry trade.”  It kept the yen’s exchange rate down, and it is lowering the dollar’s exchange rate today.  This threatens to raise prices for imports, on which domestic consumer prices are based.  So easy credit for Wall Street means a cost squeeze for consumers.

The President needs a better set of advisors.  But Wall Street has obtained veto power over just who they should be.  Control over the President’s ear time has been part of the financial sector’s takeover of government.  Wall Street has threatened that the stock market will plunge if oligarch-friendly Fed Chairman Bernanke is not reappointed.  Obama insists on keeping him on board, in the belief that what’s good for Wall Street is good for the economy at large.

But what’s good for the banks is a larger market for their credit -- more debt for the families and companies that are their customers, higher fees and penalties, no truth-in-lending laws, harsher bankruptcy terms, and further deregulation and bailouts.

This is the program that Bernanke has advised Washington to follow.  Wall Street hopes that he will be kept on board.  Bernanke’s advice has helped bolster that of Tim Geithner at Treasury and Larry Summers as chief advisor to convince Pres. Obama that “recovery” requires more credit.

Going down this road will make the debt overhead heavier, raising the cost of living and doing business.  So we must beware of the President using the term “recovery” in his State of the Union speech to mean a recovery of debt and giving more money to Wall Street Jobs cannot revive without consumers having more to spend.  And consumer demand (a hateful, jargon word, because only Wall Street and the Pentagon’s military-industrial complex really make demands) cannot be revived without reducing the debt burden.  Bankers are refusing to write down mortgages and other debts to reflect the ability to pay.  That act of economic realism would mean taking a loss on their bad debts.  So they have asked the government to lend new buyers enough credit to re-inflate housing prices.  This is the aim of the housing subsidy to new homebuyers.  It leaves more revenue to be capitalized into higher mortgage loans to support prices for real estate fallen into negative equity.

The pretense is that this is subsidizing the middle class, but homebuyers are only the intermediaries for government credit (debt to be paid off by taxpayers) to mortgage bankers.  Nearly 90 per cent of new home mortgages are being funded or guaranteed by the FHA, Fannie Mae, and Freddie Mac -- all providing a concealed subsidy to Wall Street.

Obama’s most dangerous belief is in the myth that the economy needs the financial sector to lead its recovery by providing credit.  Every economy needs a means of payment, which is why Wall Street has been able to threaten to wreck the economy if the government does not give in to its demands.  But the monetary function should not be confused with predatory lending and casino gambling, not to mention Wall Street’s use of bailout funds on lobbying efforts to spread its gospel.


It seems absurd for politicians to worry that running a deficit from health care or Social Security can cause serious economic problems, after having given away $13 trillion to Wall Street and a blank check to the Pentagon.  The “stimulus package” was only about 5 per cent of this amount.  But Obama has announced that he intends on Tuesday to close the barn door by proposing a bipartisan Senate Budget Commission to recommend how to limit future deficits -- now that Congress is unwilling to give away any more money to Wall Street.

Republican approval would set the stage for Wednesday’s State of the Union message promising to press for “fiscal responsibility,” as if a lower deficit will help recovery.  I suspect that Republicans will have little interest in joining.  They see the aim as being to co-opt their criticism of Democratic spending plans.  But in view of the rising and well-subsidized efforts of Harold Ford and his fellow Corporate Democrats, the actual “bipartisan” aim seems to be to provide political cover for cutting spending on labor and on social services.  Obama already has sent up trial balloons about needing to address the Social Security and Medicare deficits, as if they should not be financed out of the general budget by taxpayers including the higher brackets (presently exempted from FICA paycheck withholding).

Traditionally, running deficits is supposed to help pull economies out of recession.  But today, spending money on public services is deemed “bad,” because it may be “inflationary” -- that is, threatening to raise wages.  Talk of cutting deficits thus is class-war talk -- on behalf of the FIRE sector.

The economy needs deficit spending to avoid unemployment and poverty, to increase social spending to deal with the present economic shrinkage, and to maintain their capital infrastructure.  The federal government also needs to increase revenue sharing with states forced to slash their budgets in response to falling tax revenue and rising unemployment insurance.

But the deficits that the Bush-Obama administration have run are nothing like the familiar old Keynesian-style deficits to help the economy recover.  Running up public debt to pay Wall Street in the hope that much of this credit will be lent out to inflate asset prices is deemed good.  This belief will form the context for Wednesday’s State of the Union speech.  So we are brought back to the idea of economic recovery and just what is to be recovered.

Financial lobbyists are hoping to get the government to fill the gap in domestic demand below full-employment levels by providing bank credit.  When governments spend money to help increase economic activity, this does not help the banks sell more interest bearing debt.  Wall Street’s golden age occurred under Bill Clinton, whose budget surplus was more than offset by an explosion of commercial bank lending..

The pro-financial mass media reiterate that deficits are inflationary and bankrupt economies.  The reality is that Keynesian-style deficits raise wage levels relative to the price of property (the cost of obtaining housing, and of buying stocks and bonds to yield a retirement income).  The aim of running a “Wall Street deficit” is just the reverse:  It is to re-inflate property prices relative to wages.

A generation of financial “ideological engineering” has told people to welcome asset-price inflation (the Bubble Economy).  People became accustomed to imagine that they were getting richer when the price of their homes rose.  The problem is that real estate is worth what banks will lend -- and mortgage loans are a form of debt, which needs to be repaid.

--Michael Hudson is a former Wall Street economist.  A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed.., Pluto Press, 2002) [see here for a synopsis] and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, This email address is being protected from spambots. You need JavaScript enabled to view it.