September 19, 2018
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. 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 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 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 was 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 simply talk about how slow the recovery has been since 2008.
To put this issue in perspective, almost all of the growth in GDP – the measure 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. You mentioned 9 million homeowners lost their homes. They now have to rent. Rents are rising, debts are rising. Corporate debt, municipal debt, and student debt are way higher now than 2008.
Most of this is because of the way in which President Obama double-crossed his voters and said, I’m not representing you, I’m representing my donors. 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 called Donald Trump supporters “deplorables,” he 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 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 approximate.
Obama said, no, I’m representing the bankers, not the debtors. He appointed bank lobbyists such as Tim Geithner as Secretary of the Treasury. Obama basically followed everything that President Clinton’s Secretary of the Treasury Rubin recommended to him. He was handed a list of the people that Wall Street wanted to appoint. And then he washed his hands of it. 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 taking over the insolvent banks – he kept the bad debts 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. 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.
So this crash of 2008 was not a crash of the banks. The banks were bailed out. The economy was left with all the junk mortgages in place, all the fraudulent debts. Then, to further help the banks recover, the Federal Reserve came in and pushed quantitative easing, lowering the interest rates so much that banks could make the widest profit they ever made in history – the margin 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 enormous profit centers, leading the stock market gains.
Over the weekend, the newspapers said, 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. There was 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 occurs when the Federal Reserve spent $4.3 trillion on buying the bad debts and the bank assets and creating bank reserves. Essentially it’s like printing money. 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 and suffered reckless losses. Sheila Bair, in her autobiography, wrote about how Citibank was the most mismanaged bank in America. Not quite as fraudulent as Countrywide or Bank of America, but simply incompetent by making bad gambles under Prince, who ran the thing. They were bailed out and then subsidized. The larger the fines for fraud, the more subsidy they got and the bigger they grew. Crime pays.
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 that there were many alternatives at the time. The alternative that was talked about, mainly by Republicans, was to say, OK, these mortgages were fraudulently written. That’s why the whole media were using the word ‘junk mortgages.’ So we should write down the mortgage to the ability of mortgagee 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 pay to rent. In other words, if someone’s paying $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 Landesbanks.
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 for a moment about what was being proposed that was not paid attention to in 2008, that had to do with one of the things you say, which is a pretty radical notion, which is that we should have bailed out the debtors, and not the banks. 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 or buy the bad loans at a discount.
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 for a $100,000 junk mortgage. This is essentially what Blackstone Realty did, and what private equity people did, buying foreclosed properties. The government 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.
This $4.3 trillion could have spurred an enormous takeoff. 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: 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. But it seems to me that 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 and some bondholders, because they were holders in a fraudulent organization, and in her autobiography she said the FDIC could have taken over Citibank. Every insured depositor would have had their money sae.
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 the bank is insolvent, the government takes it over. There were still enough assets to cover the insured deposits, but not leave anything for the stockholders, or maybe not much 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 insured depositor would have lost. But the bondholders would have lost, because 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. That’s a 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 for services. Essentially they lend to raiders 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.
Contrary to the idea that bailing out the banks helps the economy, the fact is that the economy today cannot recover without a bank failure.
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 recover without a bank failure? What does that mean?
MICHAEL HUDSON: That means that the banks hold the student loan debt, the mortgage debt and credit card debt. If you leave all of this debt in place, people will not 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.
So the economy is shrinking. You’ve seen a lot of stores, international and national chains going out of business. You’ve seen whole streets of New York City with almost half the stores empty. They’re boarded up. The economy’s not recovering, it’s limping along. It’s called debt deflation. My book Killing the Host describes how 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. 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. 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: 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. 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: The volume of debt in any society grows faster than the ability to pay. That should be the starting point of any analysis.
Debt grows exponentially. The interest charges grow year after year. If you have a savings account you can see it mount 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. So people – 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 are we going to bring the debt payments back in line so that the economy has room to grow? The only way to do this in any society is by writing down debt. Germany did that in 1948 with its economic miracle. They wrote down nearly all the domestic debt. Normally the function of a crisis like the Great Depression is 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 holds in debt?
Well, obviously the One Percent is the donor class, and they’re writing the laws. The result of their leaving this debt in place is a rising debt-income ratio. That is, the proportion of corporate earnings that has to pay for debt service has been soaring because corporate raiders have gone to the banks, borrowed money and taken over corporations. 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. That should be what people are talking about, because more and more economists are warning that 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 to handle the next crisis in a way that doesn’t bail out banks, that bails out the economy by writing down the debts.
If banks have bad debts, they’ve made bad loans. Banks used 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 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. So you want someone who’s not a banker to actually do the regulation.
But 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. He said that the people are all wrong, they’re nutty to believe that debt’s the problem. 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.