The Lehman Brothers bankruptcy was the largest in U.S. history and unleashed a financial meltdown. The Banks were saved but not people’s debt, savings or homes. Michael Hudson looks at the economic instability that we continue to live in
MARC STEINER: Welcome to The Real News Network. I’m Marc Steiner. Great to have you with us once again.
On September 15, 2008, the financial meltdown began with the bankruptcy of the Lehman Brothers. That was 10 years ago, obviously. The shock waves that hit the economy threw 9 million families out of their homes who could not afford to pay their rising mortgages. So Congress and the president in the 1990s, remember, killed Glass-Steagall, written in 1933 to save us from the excesses of the financial industry. And then Congress gave us Dodd-Frank in the wake of the 2008 crisis that bailed out Wall Street, but not America. And now Trump seems to continue the process with killing Dodd-Frank and completely turning over the keys to Wall Street.
Our guest today says in part we must wipe out debt and not bail out the banks. So with that, let me welcome back to Real News Michael Hudson, research professor of economics at the University of Missouri Kansas City, and a research associate at the Levy Economics Institute at Bard College. His latest book is J Is for Junk Economics. Michael, welcome, good to have you with us.
MICHAEL HUDSON: Good to be here.
MARC STEINER: So let’s start there, with this whole idea of what we did wrong in 2008, why we got it wrong, and what we should have done, from your perspective.
MICHAEL HUDSON: Well, you’re talking about September 15. And if you talked about last weekend, the 10-year anniversary, all that you read in The New York Times and other newspapers was a celebration. We did everything right. We bailed out the banks. There is very little discussion of the fact that this is a disaster for the economy. Nobody has related the fact that we bailed out the banks on their own terms to the fact the economy has not recovered. People talk about a recovery since 2008.
Just to put this whole issue in perspective, almost all of the growth in GDP which they look at is taken the form of higher bank earnings, which they call financial services, meaning penalty fees, late fees, and interest rates over and above the banks’ cost of funds; and rising rents that homeowners would have to pay themselves if they rented instead of owned their homes. And as you’ve had so many- you mentioned 9 million homeowners lost their homes. They now have rent. Rents are rising, debts are rising. The corporate debt, municipal debt, and student debt are way higher now than 2008.
And most of this is because of the way in which President Obama doublecrossed his voters and said, I’m not representing you, I’m representing my donors. And he invited the bankers to the White House and said, don’t worry, folks, I’m the only guy standing between you and the mob with pitchforks. Just like Hillary told Donald Trump supporters, the word that she used, she called his supporters the mob with pitchforks. And he stuck it to them.
In my book Killing the Host, you have Barney Frank saying that he got the agreement of Secretary of the Treasury Hank Paulson to write down the mortgages to the realistic charges; namely, number one, what the mortgage borrowers could afford out of their income, and number two, the carrying charge of the mortgage would be the going rent rate, which is what mortgages historically have tended to.
Obama said, no, I’m representing the bankers, not the debtors. And he appointed bank lobbyists such as Citibank’s Tim Geithner as Secretary of the Treasury. He basically followed everything that President Clinton’s Secretary of the Treasury Rubin recommended to him. He was handed the list of the people that we want to appoint. And he did it, washed his hands of it. And the terms of the bailout- instead of doing what normally happens in a crisis, writing down the debts, and writing off the bad savings and the bad loans as a counterpart to the debts- and instead of taking over the insolvent banks, he kept everything on the books.
There was a big argument in the administration. Surprisingly enough, the good guys were the Republicans in this. Sheila Bair was a Republican from the Midwest, and she said, look, Citibank is not only insolvent, it’s a basically a financial fraud organization. We should take it over. It doesn’t have any money. On the other hand- but Obama said, wait a minute, Geithner is a protege of Rubin, and he’s become head of Citigroup. We’ve got to bail out Citigroup. So what Obama did was take the banks that have been the most fraudulent, that have paid the largest amount of civil fines for financial fraud, and said, these are the banks we want to be the leaders. We’re going to make them the biggest banks, and we’re going to make them stronger. And we’re not going to forgive any loans. We’re going to leave the loans in place, unlike what’s happened for the last few hundred years and crashes.
And so this crash of 2008, it was not a crash of the banks. The banks were bailed out. The autonomy was left with all of the junk mortgages, all of the fraudulent debts. And then to further help the banks recover, the Federal Reserve came in and push quantitative easing, lowering the interest rates so much that banks could make an enormous, the widest profit they ever made in history, between the lending rate on mortgages, 5-6 percent; student loans, 9 percent; credit card loans, 11-29 percent; and the banks’ borrowing charge, which is 0.1 percent. The banks became an enormous problem profit centers, leading these stock market gains.
So they were bailed out. And over the weekend, the newspapers say, look at the wonderful success. The stock market’s up, the one percent are richer than ever before. Let’s look at the good side of things. And there is no analysis at all as to why the economy is not recovering, and whether this failure to recover is a backwash of the way in which the crisis was handled- by bailing out the banks, not the economy.
MARC STEINER: Let me take a step backwards here. First of all, very quickly for us, define quantitative easing.
MICHAEL HUDSON: Quantitative easing is when the Federal Reserve created $4.3 trillion of buying all of the bad debts and the bank assets and creating bank reserves. Essentially it’s like printing money. And it’s printing money, and you’ve heard the phrase ‘money-dropping helicopters.’ But the helicopters only fly over Wall Street. So the Federal Reserve created $4.3 billion on the accounts of the banks, and let the banks get through the fact that they’d made recklessly bad loans, they’ve made reckless losses. Sheila Bair, in her autobiography, wrote about how Citibank was the most mismanaged bank in America. Not quite as fraudulent as Countrywide is, or Bank of America, but simply incompetent by making bad gambles under Prince, who ran the thing. They were bailed out. They were subsidized.
MARC STEINER: Let’s talk a bit about what could have been the alternative. To me that’s what is a gripping story we never wrestled with, nor talk about very much. Right?
MICHAEL HUDSON: Isn’t that amazing. Over the weekend, not a single paper that I know said- there were many alternatives at the time. The alternative that was talked about mainly by Republicans was saying, OK, these mortgages were fraudulently written. That’s why the whole media were using the word ‘junk mortgages.’ They say, we should write down the mortgage to the ability of mortgager to pay, out of 25 percent of their income, or whatever. Or the carrying charge of their mortgage would be the same that they could rent. In other words, if someone’s paying $600 a month, or $1200 a month in mortgage payments, but for $600 a month they could rent out the identical house next door, you reduce the mortgage to the realistic value. Because the banks hired crooked appraisers and their own crooked firms to do false valuations on these loans they made in order to sell them the gullible people, like German [inaudible[
MARC STEINER: So in 2008, some Republicans, along with some economists who were to the left of Wall Street, were talking about bailing out people who were in debt, bailing out people whose mortgages were underwater. Dealing with the question of how much we’re charging for student loans, and kind of either putting a freeze on that, or writing them down. So let’s talk a bit about for a moment what was being proposed that was not paid attention to in 2008 that had to do with more- because one of the things you say, which is a pretty radical notion, which is we should have bailed out the debtors, and not the banks. So let’s start there. What does that mean, and how does that work?
MICHAEL HUDSON: Suppose you had taken the $4.3 trillion, and instead of giving it to the banks to lend out mainly to corporate raiders or to speculators, or to currency speculators, you would have used this $4.3 trillion to take over, buy all of the bad loans at a discount. They could have bought a-
MARC STEINER: Who’s ‘they’? Some of the federal government?
MICHAEL HUDSON: The federal government could have bought the junk mortgage loans in default for maybe a quarter of the value. Let’s say 25 percent, $25,000. This is essentially what Blackstone Realty did, and what private equity people did, buying the foreclosed properties. The governments could have bought from the banks their bad loans. And instead of foreclosing, they’d write down the loans to the realistic market price that the market was pricing the property and the loans at. The inflated housing prices would have been recalculated at the market rate. There would be a lower mortgage, there would be lower interest rates and no penalty payments.
And this $4.3 trillion could have spurred an enormous take off. It could have left the 9 million families that were evicted in place. It could have kept the housing prices low for the country. It could have kept the purchasing power of homeowners available to be spending on goods and services. And the economy would have recovered instead of stagnating. That wasn’t done because the financial sector was running the Democratic Party’s policy and politics, not the voters.
MARC STEINER: So I mean, but they’ve been doing this for a long time. I mean, whether it was President Bush or President Clinton, and going after pieces of Glass-Steagall and finally killing it and the rest, which you can talk about in a minute if we have time today. I mean, but the issue seems to me people would say to you in response, well, what about the banks? That’s where our money is. That’s how we get our loans. That’s who finances small businesses in our community. How can you not bail them out? How can they not be the centerpiece of this, along with us, whose homes are underwater?
MICHAEL HUDSON: Well, just about everybody who listens to this show has their bank accounts guaranteed by the Federal Deposit Insurance Corporation, the FDIC. Sheila Bair was the head of the FDIC. She was leading the advocacy to take over the banks and essentially wipe out their stockholders, because they were holders in a fraudulent organization, wait out the bondholders, and in her autobiography she was opposed. She said, we could have taken over Citibank. Every insured depositor would have had their money.
MARC STEINER: What does it need to take over Citibank? What does it mean to take over the banks, what does that mean?
MICHAEL HUDSON: That means when there is, when the bank is insolvent, the government takes it over at a price that- to cover the deposits [inaudible] for the bondholders.
MARC STEINER: So one more time for us. So you’re saying- so taking over the banks would have guaranteed who, and not the bondholders?
MICHAEL HUDSON: It would have guaranteed the depositors. There was enough money in Citibank, even though it was crooked, even though it was incompetently managed, even though we know that it’s paid tens of billions of dollars for fraud. It would have wiped out the big speculators. But all of the depositors, the bread and butter users, would have been paid. The same for all the other banks. No depositor would have lost. But the bondholders would have lost, because other banks essentially would have used their money to pay the depositors and to stay in business, not pay the owners of the banks, who were owners of a crooked organization.
MARC STEINER: So where does the money come from, then, to invest in infrastructure, in new businesses, and whatever else has to be invested in?
MICHAEL HUDSON: Well, banks don’t invest- banks, that’s the myth. The pretense is that rescuing the banks rescued the economy. But the banks don’t make loans to the economy. Banks don’t make loans to fund factories. They don’t make loans for infrastructure. They make loans to buy assets already in place. They’re privatizing the structure to take it private, raise the rates the people have to pay. Essentially the same thing is taking over corporations. They won’t help a corporation put in more equipment and hire more people, but they’ll lend to a raider to break up a corporation, downsize the labor force, smash it up and leave it a bankrupt shell. That’s the financial management plan. That’s what they teach in business schools.
And the idea that bailing out the banks helps the economy- the fact is that the economy today cannot recover without a bank failure, because if you-
MARC STEINER: Let me stop you right there, before we go on. Let’s examine that before we have to close. So what do you mean by that? What do you mean, the economy cannot let- without a bank failure? What does that mean?
MICHAEL HUDSON: That means that the banks hold the student loan debt, the mortgage debt, the credit card debt. If you leave all of this debt in place, people will have enough money after paying their monthly nut, after paying their banks, their mortgage payments, their housing payments, all of the monthly stuff, there’s not enough money to buy the goods and services that they produce anymore.
So the economy is shrinking. You’ve seen a lot of stories, international and national chains going out of business. You’ve seen whole streets of New York City being basically- half the stores are empty. Nobody’s in them. The economy’s not recovering, it’s limping along. And it’s what is called debt deflation. And again, my book Killing the Host describes how all of this was described in the 1930s. It’s a well-known phenomenon. But nobody talking about the rescue was saying, wait a minute, what was rescued was the volume of debt, instead of writing it down like you did in the 1930s.
So essentially we’re not in a recovery at all, and we can’t get into recovery until you write down the debt. Otherwise you’re going to have the economy looking like Greece. You’re going to have austerity. So basically we’re on an austerity budget now, not so much because of tax policy, but because of the debt overhead that is owed to the banks and other major creditors.
MARC STEINER: So we’re here talking to Michael Hudson, and it’s a fascinating conversation about what could have been, and what is not. We’re going to come right back to finish this conversation with Michael Hudson here on The Real News Network to briefly talk about what it is we can do, and where we are at this moment. Stay with us.