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  April 22, 2011

Debt and a Broken System

Hudson and Wolff: Massive public debt incurred to bail out a broken private system
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Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971). ISLET engages in research regarding domestic and international finance, national income and balance-sheet accounting with regard to real estate, and the economic history of the ancient Near East. Michael acts as an economic advisor to governments worldwide including Iceland, Latvia and China on finance and tax law. Richard D. Wolff is Professor of Economics Emeritus, University of Massachusetts, Amherst where he taught economics from 1973 to 2008. He is currently a Visiting Professor in the Graduate Program in International Affairs of the New School University, New York City. He also teaches classes regularly at the Brecht Forum in Manhattan. Earlier he taught economics at Yale University (1967-1969) and at the City College of the City University of New York (1969-1973). In 1994, he was a Visiting Professor of Economics at the University of Paris (France), I (Sorbonne).


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. In Washington, the partisan rhetoric flies about the debt debate. But let's take a sort of deeper look at it. And now joining us to do that are Richard Wolff--Richard is a professor of economics emeritus at University of Massachusetts Amherst; he's also a visiting professor at the Graduate Program in International Affairs at the New School in New York City--and Michael Hudson. He's a former Wall Street economist. He's now a distinguished research professor at the University of Missouri-Kansas City. And he's the author of many books, including Super Imperialism: The Economic Strategy of American Empire. Thank you both for joining us again. So, Michael, you kick us off. What's concerning you?

MICHAEL HUDSON, RESEARCH PROFESSOR AT U OF MISSOURI: In all this talk about the deficit, people are talking about income tax rates, but they're not talking about how most debt is being run up. It's true that most of the debt, until a few years ago, was run up by cutting taxes. When Ronald Reagan came in, under Reagan and Bush, the US federal debt was quadrupled by cutting taxes on their constituency, Wall Street and the wealthy. But today there's a new way of creating debt, and that's by the Federal Reserve. The Federal Reserve, by bailing out Wall Street, spent $13 trillion, more than tripling America's public debt just to give it away to Wall Street for the money that it had gambled and lost. And now, today, the Federal Reserve is in the middle of quantitative easing 2, creating $600 billion just on computer keyboards to lend to the banks, and saying, make enough money to earn your way out of the debt that you've run up by your fraudulent real estate loans and your gambling. So the banks are putting all their money abroad, mainly in the BRIC countries--Brazil, Russia, India, and China. The result is that these currencies are going up, and the countries, even Korea and raw materials exporters, are raising their controls against dollars coming in. The attempt is to make--to drive down the dollar so that you increase the cost of living for American consumers. And Americans, workers, are being squeezed not simply by shifting the taxes from the rich down to them, but also by depreciating the dollar and making them pay more for what they import, especially from the American companies that have moved their jobs abroad, and from the raw materials producers, and from the countries that the US banks are using the Federal Reserve credit to bid up their currencies and drive down the American currency. [crosstalk]

JAY: Michael--hang on just one sec, Michael. My understanding is that when the Fed creates this money and loans it to banks, it doesn't show up the same way on the federal government debt. It's not considered a normal part of sovereign debt. And also, doesn't most of that eventually actually get repaid to the Fed versus what--apparently, the accumulating debt on the Treasury side?

HUDSON: Well, you know, Adam Smith said that no government has ever repaid its debt, and he said that over 200 years ago and it's still going on. The debt is supposed to be repaid in principal over time, but there's no money to pay. The government's creating all of this debt because the banks don't have enough money to pay what they already owe. The banks are insolvent, especially the banks that are too big to fail. So the government's creating money to bail out its campaign contributors, basically, and it's bailing them out by creating keyboard credit, by giving them free loans, by cutting their taxes, and by shifting taxes onto people that are not their campaign contributors--organized labor, labor unions, voters, and consumers. That's not the poll that the government's looking at. It's looking at the poll of its campaign [crosstalk]

JAY: Okay. Richard?

RICHARD WOLFF, PROF. ECONOMICS, THE NEW SCHOOL: Well, I think the important thing is, again, the clues provided to us by history. Up until 2007, the deficits we had were running in the neighborhood of 2, 3, 4 percent of our annual production in United States. Starting in 2007 and '08, it zoomed up to 10 and 11 percent, which is what it's running now. The lesson here is clear. The reason we have a suddenly humungous deficit is because we had a failure of our private capitalist system, and that the government has come in to hold it up, to rescue it, and to keep supporting it, which it is doing. Just to give you one statistic, 97 percent of all mortgages written over the last two years in this country were either guaranteed by or have become the property of the United States government. We would have no housing market in the United States without the government. If people are upset that the value of their homes have dropped in recent years, they will drop another 50 percent if the government ever got out of supporting the housing business. What we see is a failure of a private system, the government shoring it up. But then here comes the real kicker. When the government shores it up and borrows tremendous amounts of money, incurring huge interest costs every year, it wants to make the people who pay for this be the poor people on Medicaid, the old people on Medicare. Everyone who's entitled to social security should take a hit to help the government in its time of difficulty, when that difficulty has to do with an economic system that isn't working, and the payoff is going to the people who are mostly responsible for it not working. Is anyone surprised that the American people are upset, or that the Icelandic people in a very similar situation voted against their government's proposal, or that the Finnish people recently voted on the right wing, but out of the same anger from a situation that is becoming intolerable in terms of who is benefiting, who is causing trouble, and who has to bear the cost of it all in a kind of crescendo of self-destructiveness that the American economy now looks like to so many people that even our own Standard & Poor corporation is sounding an alarm?

JAY: Michael, one of the things in Standard & Poor's that didn't get a lot of focus in the media was its prediction or the possibility (or enough that it gave it some weight) of another big bailout, which it talked about could be another significant number of percent of GDP to do another big bailout. On the other hand, we're being told by the administration and others that the regulatory bill, the Dodd-Frank bill--and we're also being told by the chair of the FDIC that this too-big-to-fail thing is kind of solved, that there is the mechanisms now to deal with this. So which is it?

HUDSON: Well, there are no mechanisms. The system has not been changed. And the bank lobbyists have been at work, basically, on the small print of the Dodd-Frank bill doing everything they can to undo it and to have loopholes, which is what bank lobbyists do. For instance, you don't hear anything about Elizabeth Warren and the Consumer Financial Protection Agency that [incompr.] was supposed to occur. The fact is that, as Professor Wolff said, Wall Street has turned the economy into a Ponzi scheme, and the government tax system has turned into the subscriber to the Ponzi scheme, pumping enough money into it to keep the illusion going if the whole scheme works. And it doesn't work, because it requires exponential growth. And the only way that the exponential growth and debt can occur is, as Professor Wolff says, by paying more and more interest to Wall Street, more and more giveaways, more and more bank bailouts, until finally the banks are allowed to fail and they have a clean slate and start all over again. That's where we're moving to as the endgame.

JAY: Richard, but that endgame won't look very good for ordinary people.

WOLFF: No. It's already in bad shape for ordinary people. And you can see in the decision Obama made last November and December not to push for the higher tax rates on the rich, you can see it in this deal they made for the $38 billion--I'll be generous and call it a symbolic cut that doesn't basically deal with our deficit problem at all. You'll see that the difference between Republicans and Democrats reduces to exactly how much to cut--not whether to cut, just how much--and exactly on whom these cuts will fall. You can choose old people or sick people or poor people, but that's who's going to be getting it. And the ironic part of it for me, as an observer of this whole thing, is to see a process in which I would have thought, in my naivete as a professor, that when you have a collapse of a capitalist private enterprise system as severe as this one, taking us all back to the even bigger one 75 years ago, that you would have come out of it chastened a little bit, unwilling to reenact the same policies, as Professor Hudson says, that we had before, the too-big-to-fail--. Let me give you one concrete example. Merrill Lynch was our largest stock broker. It was too big to fail. Bank of America was one of our largest corporations by itself--too big to fail. When all the dust settled, those two corporations are now one corporation much bigger than either one was before. And the same people who told us before that regulations were in place that need not make anyone worry about a collapse are now telling us that again. The first time we believed it. Shame on them. But if we're going to believe them again, then it's shame on us for being as naive and as willing to put our whole futures on the line as we seem as a people now apparently willing to do.

JAY: Thank you both for joining us. And thank you for joining us on The Real News Network. And as far as our fiscal issues go, don't forget the donate button around here, because if you don't do that, we can't do this.

End of Transcript

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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