Michael Hudson on why the core issue today is Debt (#OccupyWallStreet Teach-In)

Excerpted from an interview of Michael Hudson by Alan Minsky:

“Michael Hudson: The Occupy Wall Street movement has many similarities with what used to be called the Great Awakening periods in America. Such periods always begin by realizing how serious the problem is. So diagnosis is the most important tactic. Diagnosing the problem mobilizes power for a solution. Otherwise, solutions will seem to come out of thin air and people won’t understand why they are needed, or even the problems that solutions are intended to cure.

The basic problem today is that nearly everyone is in debt. This is the problem in Europe too. There are Occupy Berlin meetings, the Greek and Icelandic protest, Spain’s “Indignant” demonstrations and similar ones throughout the world.

When debts reach today’s proportions, a basic economic principle is at work: Debts that can’t be paid; won’t be. The question is, just how are they not going to be paid? People with student loans are not permitted to declare bankruptcy to get a fresh start. The government or collection agencies dock their salaries and go after whatever property they have. Many people’s revenue over and above basic needs is earmarked to pay the bankers. Typical American wage earners pay about 40 percent of their wages on housing whose price is bid up by easy mortgage credit, and another 10 to 15 percent for credit cards and other debt service. FICA takes over 13 percent, and federal, local and sales taxes another 15 percent or so. All this leaves only about a quarter of many peoples’ paychecks available for spending on goods and services. This is what is causing today’s debt deflation. And Wall Street is supporting it, because it extracts income from the bottom 99% to pay the top 1%.

Half a century ago most economists imagined that the problem would be people saving too much as they got richer. Saving meant non-spending. But the problem has turned out to be just the opposite: debt. Overall salaries have not risen in decades, so many people have borrowed just to break even. Instead of an era of free choice, very little of their income is available for discretionary spending. It is earmarked to pay the financial, insurance and real estate sectors, not the “real” production and consumption economy. And now repayment time has arrived. People are squeezed. So when America’s saving rate recently rose from zero to 3 percent of national income, it takes the form of people paying down the debts.

Many people thought that the way to get rich faster was to borrow money to buy homes and stocks they expected to rise in price. But this has left the economy financially strapped. People are feeling depressed. The tendency is to blame themselves. I think that the Occupy Wall Street movement, at least here in New York, is like what has occurred in Greece and also in the Arab Spring. People are coming together, and at first they may simply watch what’s going on. Onlookers may come by to see what it’s all about. But then they think, “Wait a minute! Other people are having the same problem I’m having. Maybe it is not really my fault.”

So they begin to see that all these other people who have a similar problem in not being able to pay their debts, they realize that they have been financially crippled by the banks. It is not that they have done something wrong or are sore losers, as Herman Cain says. Something radically wrong with the system.

Fifty years ago an old socialist told me that revolutions happen when people just get tired of being afraid. In today’s case the revolution may grow nearer when people get over being depressed and stop blaming themselves. They come to think that we are all in this together – and if this is the case, there must be something wrong with the way the economy is organized.

Gradually, observers of Occupy Wall Street begin to feel stronger. There is positive peer pressure to reinforce their self-confidence. What they intuitively feel is that the Reagan-Clinton-Bush-Obama presidencies have squeezed their lives. The economy has become untracked.

What’s basically wrong is that the financial system is running the government. For years, Republicans and Democrats both have said that a strong government, careful regulation and progressive taxation is the road to serfdom. The politicians and neoliberal economists who write their patter talk say, “Let’s take planning out of the hands of government and put it in the ‘free market.’” But every market is planned by someone or other. If governments step aside, then planning passes into the hands of the bankers, because of their key role in allocating credit.

The problem is that they have not created credit to finance industrial investment and employment. They have lent for speculation on asset price inflation using debt leveraging to bid up housing prices, stock and bond prices, and foreign exchange rates. They have convinced borrowers that they can get rich on rising housing prices. But this merely makes new homebuyers go deeper into debt to buy a home. And when banks say that rising stock and bond prices are good for the economy, this price rise lowers the dividend or interest yield. This means that pension funds and individuals have to save much more for retirement. Instead of improving their life, it makes them work harder and borrow more just to stay in place.

The banking system’s alternative to “the road to serfdom” thus turns out to be a road to debt peonage. This financial engineering turns out to be worse than government planning. The banks have taken over the Federal Reserve and Treasury and put their lobbyists in charge – men such as Tim Geithner and the others with ties to Rubinomics dating from the Clinton administration, and especially to Goldman Sachs and other giant Wall Street firms.

So the first thing to realize is something that is characteristic of all great reform movements. Voters are not yet supporting a radical position to restructure the whole system. But at least they are coming to see that small marginal reforms won’t work, or are simply trick promises, like President Obama’s promise that banks would renegotiate mortgages for homes in negative equity as part of the quid pro quo for the bailouts they received from Treasury Secretary Geithner. There’s been no quid pro quo, merely talk.

People see that law enforcement is missing when it comes to the banks and Wall Street. So simply restoring the criminal justice system would be progress. It used to be that if you ran a fraud, if you cheated people, if you lied on your income tax and falsified statistics, then you would be sent to jail. But the Obama administration has appointed Eric Holder to represent Wall Street. He has not thrown any bankers in jail, recognizing that they are the major campaign contributors of the party, after all.

What is easiest for most people to accept is the idea of restoring the way the economy used to be more in balance – back when people earned income by being productive rather than getting rich by transferring other peoples’ savings and public giveaways into their own pockets. But what I sensed in New York was anger not only at this economic problem, but the fact that the political system is broken. There is no one to vote for as an alternative to pro-bank candidates. So what began as anger has become a gathering awareness that Mr. Obama was simply fooling voters instead of leading the change he promised. That’s what politicians do, of course. But people hoped that he might be different. That was the gullibility he played on. He has turned into the nightmare they thought they were voting against.”

1 Comment Michael Hudson on why the core issue today is Debt (#OccupyWallStreet Teach-In)

  1. AvatarTom Crowl

    Predatory Capitalism begets Predatory Democracy…

    The view taken by Wall Street of the citizen as a “mark” rather than as a fellow member of a community (in which the role of investment is SUPPOSED to add value for the community as a whole rather than to scam and transfer value that already exists from one place to another…

    has come to infect and dominate political leaders and parties as much as it has the financial services sector.

    Its true that to some extent that deception and hidden agendas have always been a part of political decision. Even a hunter-gatherer may suggest to his fellows that there’s better hunting “thataway” when his real agenda may to acquire the tasty berries he knows are now in season in the hunting area he suggests.

    But the difference between then and now is the capability for feedback. In the hunter-gatherer society that level of deception is limited by the proximity of forceful feedback from his fellows and the very conscious awareness that his own survival is dependent not only on the health of the group as a whole… but on their acceptance of him in their group. (Get too clever with your politics Mr. Ooog and you’re gonna be out on your ear trying to survive by yourself… or worse!)

    These feedback mechanisms are difficult to scale. In fact I consider this simple fact… along with the biological altruism problem as forming the needed roots for the Authoritarianism that arose with the birth of agriculture and larger social structures. (note re altruism: for survival reasons its unfortunately actually a fundamental human characteristic that we will be more emotionally impacted by the death of our family dog than news of the death of a million on the other side of the world… while it is genetically based the root is in cognitive limits and how those connect to what’s sometimes called natural human community size… Dunbar’s Number… rather than any necessary genetic connection between members of the ‘in-group’).

    It’s imperative in this context to understand that the essence of biological altruism is the demarcation between in-group and out-group… its NOT about being nice. In fact biological altruism can stimulate great brutality… just try walking into a bear’s den and playing with her cub!

    I’d suggest that concrete technologies are needed to address this.

    Now this get to the nature and role of money.

    While we typically think of money as a store of value… and that has some utility.

    It may even be more important to recognize it as a store of ‘decision rights’… it serves to transfer a decision (an idea accompanied by an intended action) from one to another. Money is a ‘decision technology’!

    Its interesting to note that it shares this characteristic with a couple of other technologies: torture devices and advertising.

    This doesn’t suggest that we can abolish ‘money’… but it does suggest that the area needs some work.

    I’m all in favor of the alternative currency movement and support the idea of competing currencies. But that’s not going to solve it all. And there will still be some need for more general or universal currencies.

    Perhaps its a leap for this brief comment but I’m convinced a core element of remedial technology includes a needed understanding that the P2P monetary transaction… and for scaling reasons… ESPECIALLY THE MICROTRANSACTION… (moreover especially in speech related areas) must be unburdened and the habit culturally incorporated.

    When the citizen… whether he/she be a hunter-gatherer or a party caterer comes to understand that they too have not only a ‘decision right’ but a decision capability…

    Only then will it be possible to cultivate and empower the individual citizen in a way the produces crowd wisdom rather than the easily manipulated mob.

    P.S. If anyone has any connection with Clay Shirky… whom I greatly admire… I’d like to suggest that the microtransaction (or very small payment as he prefers to call them)… ESCAPES the very valid objections he makes regarding their viability in other contexts. I believe its role will be found in the ways I suggest and that that leads to other valuable social benefits. I’d like a chance to hear his thoughts or respond to his critique and would naturally hope that he would have some interest in mine.

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