Economic Lessons for 2020: A Conversation with Dr. Michael Hudson
Peoples Forum, December 12, 2019.
We are facing a crisis of poverty and economic precarity, where 140 million people are poor or low-income, the costs of living are going up and the chances of living are going down. What condition is our economy in today, more than ten years after the Great Recession of 2008, to withstand another economic downturn? What lessons have we learned – or failed to learn – over this past decade? What lessons can we draw from history to guide us in the months and years to come?
On December 12, 2019, the Kairos Center hosted a talk at The People’s Forum in New York City with economist Dr. Michael Hudson on the 2008 economic crisis, what’s happened over the past ten year, and what we can anticipate in 2020. Dr. Hudson is President of the Institute for the Study for Long-Term Economic Trends (ISLET) and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. He has been in conversation with the Kairos Center around economic issues for several years. He has also written extensively on the 2008 crisis, including the books The Bubble and Beyond, Killing the Host, and J is for Junk Economics, and done groundbreaking research on debt and finance in antiquity, most recently in “… and Forgive Them their Debts,” revealing a long history of lending, foreclosure and redemption, and how “debts that can’t be paid, won’t be paid.” The only question is on whose backs those debts will be carried.
Shailly Gupta Barnes:
I want to start by asking you why most economists were surprised by the great recession, the financial crisis of 2008.
Dr Michael Hudson:
Well, let’s first talk about all the people who were not surprised. Wall Street was not surprised, and bankers were not surprised. Already in 2007/08, new terms and words were being added to the English language. One term was “junk mortgage.” Another word was NINJA: “no income, no jobs, no assets,” describing the kind of loans that were being made.
The FBI also was not surprised. Already in 2004 it warned that the largest wave of financial fraud in American history was underway. Other people who weren’t surprised were the bank lobbyists, but they pretended to be. The banks that were most crooked – Citibank, Wells Fargo, Bank of America and Countrywide – have all grown tremendously since 2008. They were not only bailed out, they were subsidized and rewarded. Crime and fraud pay, if you have captured the regulators and policy makers.
Economists were surprised, because their mainstream theory says everybody behaves in a way that helps the economy. It is as if you need the banks, rich people, and especially the financiers to move the economy in the best direction. But when you look for the evidence, finance, debt, and savings don’t really appear in the economics textbooks. Most people think of the economy simply in terms of production and consumption. Textbooks depict workers producing goods for sale and other people buying them. Credit is taken for granted, not looked at in terms of how this actually affects peoples’ budgets and how much they have to spend after paying their debt, housing costs and other fixed monthly expenses.
The reality is that this production and consumption economy is wrapped in a financial sector. The financial sector’s product is debt. Most is created to buy assets – real estate, stocks and bonds, not goods and services. And more money has been made since 1980 by buying stocks and bonds, real estate or oher assets such as art than actually producing new things. That’s the problem we have now.
Many people make a wrong criticism of the Federal Reserve. They say the Federal Reserve is owned by the commercial banks. That’s not the problem. The problem is not that the bondholders and the banks can own the Federal Reserve, it is that they own the Government and back the campaigns of the politicians who control the Federal Reserve.
Could you actually take us a step back to explain many of the trends since the 2000s that led to the Great Recession had been maturing over a number of years. Could you explain what precipitated that crisis?
What made 2008 different – and what makes the current depression different – is that in the past when there was a crash, banks would lose money, as Lehman Brothers did. They would go broke. What do you do if somebody owes you money and you can’t pay? Usually, you lose it. If you’ve written a junk mortgage pretending that a property is worth a lot of more than it is, you’re still going to lose money, because the collateral is not worth as much as the money that you’ve lent.
But such a loss didn’t happen in 2008. There was a temporary crash, but the bad loans were kept on the books. The Federal Reserve told the banks, “We know you’ve made bad loans. But don’t worry. None of you are going to lose money. We’ll make the homeowners pay or else kick them out. You can continue to demand payment of your debts and foreclose. You can borrow from the Federal Reserve.” It then created $4.6 trillion worth of credit for the banks, called Quantitative Easing.
The Obama Administration could have been spent this money into the economy to make it grow. But it didn’t. It could have paid off the bad debt and left the ten million families that were foreclosed on in their homes. That wasn’t done. The government only gave money to the banks who were responsible for the crisis and for writing bad loans.
Ten years later, we’re seeing negative interest rates, low unemployment rates but higher costs of living, record wealth inequality, and an even higher debt burden than in 2008. Are we actually in a worse situation than what led to the Great Recession?
The wealthiest 10 percent of Americans own between 75 and 80 percent of the stocks and bonds. When President Trump or others talk about how good the economy is doing, they mean that the stock market is going up, but they are only looking at that 10 percent. For the Federal Reserve, the economy is that 10%. For the government and the lobbyists, the economy is mainly that 10% – their Donor Class.
People talk about the GDP going up, but all of its growth since 2008 has accrued to just 5% of the population. For 95% of the economy the GDP is less than it was before. 95% of Americans they have less disposable income to spend on goods and services after paying their monthly debt service, rent or housing costs, medical insurance, other debt and utility bills. That is why we’re in the state we’re in today. People are not buying things. They don’t have enough money left to buy enough to keep employment going.
At the same time, if the government is going to balance the budget, increase the military build-up and cut taxes for the rich, then it will need to slash social security and drastically increase medical costs and the wage withholding that most of us face. Basically, our costs are going up and our incomes are going down.
But the top ten percent of the population is in a great situation. They have tripled their wealth since 2008. For all the rest of the country, it’s much worse. Their take-home pay less, while their debt overhead has grown, leaving less to spend on the things they need to live.
There is a curious agreement between mainstream economists and orthodox Marxist economists today that household debt really doesn’t matter in terms of crisis formation. On the one hand mainstream economists see a debt to one person as a credit to another. And because they can’t appreciate the class distinction, it’s all a wash: Who’s in debt and who owns that debt doesn’t matter. Others argue that that idea of debt servicing crowds out effective demand, but the only factor that matters in crisis formation is the falling rate of profit. What are both sides missing when it comes to understanding the dynamics of debt and how it relates to crisis formation?
It seems simple: You can say that we owe the debt to ourselves, so it all balanced. But who’s the “we”? We owe the money to the banks and the 1 percent. They’re the “ourselves” to whom the debt is owed. Really, the 99 percent owe more and more debt to the 1 percent. If we’re going to have an efficient economy, we can’t have this kind of exploitation. The financial sector has become an oligarchic class.
The question is, how can workers afford to buy what they produce? Marx explained that underconsumption can never cause a problem, because as capitalists make more money by employing workers to make more goods. They build more factories, and they have to buy more machinery, because technology makes machinery is more and more efficient. Every new factory and every new machine they buy is more efficient. That means that new producers come online, undersell their competitors and the old factories have to invest in new machinery, so capitalism is forced to expand just to keep solvent.
The problem is that finance doesn’t have anything to do with profits. It is a purely mathematical dynamic. Compound interest grows much faster than the economy. Marx wrote about this in Volume III of Capital and his Theories of Surplus Value. He thought that industrial capitalism was going to act in its own self-interests and wouldn’t have a crisis coming from underconsumption, but it would have a crisis from the financial wrapping around the economy – unless it would industrialize and socialize the financial sector.
Do you think the debt overhead today could trigger the next crisis?
There will be a huge crash. The Trump administration has followed the Democrats in getting rid of anti-monopoly legislation and prosecution. They’re essentially promoting rising prices for everything. The question is, how long can companies get by producing less and charging more when the customers are poorer and poorer? The banks know that the debts that can’t be paid, and hence that they won’t be paid – unless it’s by the government bailing them out. Everybody with whom I talk on Wall Street knows there’s going to be a crash. But they think they can sell out first because someone from the government will call them and say we’re going to raise interest rates suddenly, but will bail them out and leave the non-insiders holding the bag.
Are there lessons from other periods of our history, maybe the 1930s, to draw on today?
Roosevelt did. He did save capitalism, but he saved it for the capitalists. I think what we want to do is save capitalism for the socialists. The whole idea is to have capitalism save itself by evolving into socialism, not falling back into feudalism. So the problem is really political. We have a centralized economy and centralized planning, but it’s centralized in Wall Street. The question is how you get the centralized planning out of Wall Street and get it into the hands of the general government.
The key is to isolate the financial sector and financialized wealth. There can’t be any recovery without writing down the debts that are we owe. The good thing about writing down the debts is that you wipe out savings at the same time, including the tripling of savings of the upper 10 percent that’s occurred since 2008. If those savings are left place, then that echelon is going to essentially buy control of the government, the media and all of our economy.
As you know the Kairos Center is one of the conveners of the Poor People’s Campaign: a National Call for Moral Revival. Our numbers are growing, not only because this is a timely campaign, but because of the conditions that you’ve been laying out: that growing poverty and dispossession and economic precarity that people are living in and the lack of responses from and accountability from any governmental or any other form of authority. We’re connected to these communities all over the country and we’re fighting around an agenda that is based on ending systemic racism, ending poverty, ending militarism and the war economy, and ending climate disasters. Do you have advice for us, as we organize this Campaign?
The problem is how do bring people together in a time of division and identity politics? Among all of the identities that are talked about, there’s only one kind of identity that they don’t talk about: wage earners and consumers. The one identity that you all have in common is that you’re the exploited part of an exploitive system, even if you’re exploited unequally. That is what you need to organize around and that is a real challenge, but the times are also pushing us in this direction.