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: We’re about to continue our conversation with Michael Hudson. Michael, I want to pick up here about where we are now. Because we’re looking at Donald Trump, who is I think doing an even more radically dangerous job than anybody before him in terms of dismantling whatever regulations exist. And you’re seeing all the kind of foxes guarding the hen house across his administration, which can- we look at the Supreme Court. We never look at the Federal Reserve and what he’s doing there. So the question I have for you is where are we right now? What are the prospects for our economy? And what are the prescriptions as you see them?
MICHAEL HUDSON: Well, essentially, Donald Trump isn’t doing much in the financial sector. He’s slashed tax rates on the one percent. He is deregulating. But basically there is no way in which any of these micro or marginal changes can affect the fact that there’s a basic tendency at work. It’s an underlying tendency. And that is that the volume of debt in any society grows faster than the ability to pay. That should be the starting point of any analysis. And if you say, wait a minute, debt grows exponentially. The interest rate grows year after year. If you have a savings account you can see it amount up, like if you have a retirement account you’ve seen the stocks go up. If you have it in bonds you see those go up. But the economy doesn’t go up anywhere near as much as the stock market. That means that the financial sector and the debt volume grows much faster than the economy can grow, and so people have- the economy, families- have to spend more and more of their money every month on their mortgage debt, for housing, on their credit card debt, on their student loan debt, on their automobile debt, and also in health insurance. They have less and less money to spend on goods and services.
So the starting point should be how is it going to bring the debt payments back in line so that the economy has room to grow? Well, the only way to do this in any society is by writing down debt. Germany did that in 1948 with the economic miracle. They wrote down all the domestic debt. Normally the function of a crisis like the Great Depression was to wipe out the bad debts. But when you wipe out the debts, you wipe out the savings, mainly of the one percent. And the question is, who is the government going to make its policy for? The one percent of creditors, or the 99 percent that the one percent that the 99 percent holds in debt? Well, obviously the one percent is the donor class, and they’re writing the laws.
So if you have the result of leaving this debt in place, you have the debt-income ratio. That is, the proportion of corporate earnings that has to pay for debt service has been soaring because of all of the money that’s been, the corporate raiders have gone to the banks, borrowed money, taken over the corporations. And instead of using the corporate earnings to invest in more equipment, they’ve bought their own stock by stock buybacks that push up stock prices instead of investing.
So the financial management philosophy that we have is diametrically opposed to what’s needed for economic growth. And that should be the question that people are talking about, because more and more economists are warning, given the rising debt ratios, there’s going to be another crisis. What we should be talking about when we look back on the anniversary of Lehman’s bankruptcy is how can we handle the next crisis in a way that doesn’t bail out banks, that bails out the economy by writing down the debts. And if banks have made bad debts, they’ve made bad loans. And banks used to be supposed to be conservative and prudent. But if they make imprudent loans and they say, we don’t care the borrower can’t pay because we’ve sold the whole loan off to a pension fund or a German Landesbank, and somebody else is going to take the loss, you have to really restructure the banking system and the financial management, and take it out of the hands of bankers to manage.
If you leave the Treasury Department and the Justice Department and the bank regulators in the hands of bankers, they’re going to loot the rest of the economy. They’re going to take everything they can. And you want someone who- not bankers- to actually do the regulation. But in order to do this, how are you going to get such a group? Well, you have people like Paul Krugman who came out on the anniversary saying, debt is not the problem. It’s just that the people are all wrong. They’re nutty to believe that debt’s the problem. It’s all, all we need to do is run a bigger budget deficit, so that we can spend money into the economy to make it grow enough so that the home owners and workers will have enough extra money to be able to pay this exponentially growing debt. In other words, the whole economy should be run in order to enable it to pay off debt that it’s run up. This is crazy. The economy should be run to help people’s living standards, not to help the bankers and the one percent who own the banks, the bondholders.
MARC STEINER: Well, Michael Hudson, this has been a really refreshing and interesting conversation. I appreciate you taking the time today as we continue to look at where our economy is, where it’s going, and what this tenth anniversary means. Michael Hudson, thanks so much. Appreciate your time.
MICHAEL HUDSON: Good to be here.
MARC STEINER: And I’m Marc Steiner here for The Real News Network. Thank you all so much for joining us. More to come. Stay with us.