Bill Totten's Weblog

Saturday, August 08, 2009

The Parasitic Finance Sector

Fred Harrison interviews Michael Hudson

RenegadeEconomist, London (February 27 2009)

Transcript by Peter Myers (July 30 2009)

See the video - Hudson at his best:

Fred Harrison: How do we solve the Debt problem today?

Michael Hudson: The only way to do it is to wipe out the debts that can't be paid. If a mortgage is $500,000 on a $250,000 house, you've got to write down the mortgage to the market price, and you've got to have the creditors take a loss for their bad loans.

FH: Is the bailout of the banks going to solve this financial crisis?

MH: No, the bailout of the banks is only paying the creditors, and giving the creditors the money for the bank loans, without giving a penny of debt relief to the actual debtors. All it means is that the government is taking over the creditor position, kicking out the homeowners and throwing the homes on the market.

FH: But won't the taxpayers get their money back in the end?

MH: If the taxpayers could get their money back, you can be sure that private enterprise would have come in and bought the mortgages. If you have the marketplace NOT buying the mortgages, if you have the banks saying, "These are junk mortgages, and this is toxic waste", how on earth can taxpayers make money off this toxic waste? Is it really a good investment for the taxpayers to come in and bail out the banks that say, "We've made junk mortgages, and this is toxic waste, and we weren't able to sell it, to find a greater fool". There's no way the taxpayers can make money out of that. [And even if they COULD make money, is it a good idea for them to do so by kicking defaulting mortgagees out of their homes?]

FH: Ok, now I know you've been an economist in Wall Street, you teach economics in universities, all over the world, actually. You're a consultant to governments around the world, and yet you think there are lessons to be learned from the Ancient World ­ that somehow in the Biblical times the debt cancellation was something that we can learn from today. In what way?

MH: Well, for 3,000 years, from Sumer to Babylonia to the Jewish lands with the Jubilee law, they had the same policy. When a new ruler would take the throne for the second year in Babylonia and Sumer, he had a three-pronged solution: He would liberate the debt-bondsmen, he would return the lands to people who'd lost them for foreclosure, for homes ­ the basic means of self-support - and he would annul the personal debts. By wiping the bad debts off the books, he'd create a clean slate. This was the policy that was taken over in Jewish law, in Leviticus, by the Jubilee Year.

FH: So you're now saying that there is a way to translate that history into modern economics, to solve the global financial crisis.

MH: Yes. Antiquity managed to last for 3,000 years, without a financial bubble, without an economic bubble, and continually restoring order. And Antiquity realized something that the modern economists don't: they realized that debts tend to grow in excess of the ability to pay. And when the debts did that in Antiquity, the ruler would cancel the debts. Now that was very easy in Antiquity, because most debts were tax debts owed to the Palace ­and it's easy to cancel debts when the debts are owed to you. It's harder to cancel debts once you got to Greece and Rome, and the debts were owed to private creditors; that's where the problem began.

FH: So, now, 2,000 years later, we can't just cancel the debts by rule of the Government.

MH: Well, you actually can, because the debts are going to be written off already they estimate they've said there are eight trillion dollars worth of bad real estate debts. Now if the Government would have just left market conditions to take their place, when Lehman Brothers went bankrupt in September, Lehman Brothers mortgages were trading on the market at 22 cents on the dollar. Now at this point, buyers could have come in, bought the mortgages at 22 cents on the dollar, and then gone to the home-owners and the real-estate on this, and said, "OK, we're going to re-negotiate your mortgage at 22 cents, maybe 24 cents on the dollar, or even 25 cents on the dollar" - that would have given them a profit. They would have marked down the debts to the ability to pay, or to the market price. And one way or other the debts are going to have to be written down to the ability to pay, otherwise they're not going to be paid. If people can't pay more debt, they won't pay. The question is, "How won't they pay"?

FH: So why aren't Governments doing that, writing off the debts, or allowing the debts to be cancelled today?

MH: Very good question. The reason is that the largest contributor to the political campaigns is the Financial Sector, and the Governments have a choice: they can save the economy, or they can save the creditors who made the bad loans. They've said, "We don't care about the economy, we're bailing out the creditors ­ that's our constituency". And that's what the Governments are doing today. They're not saving the economy; they're saving their constituency, the creditors: they're saving London City, they're saving Wall Street, and they're saving the bourse, and the economy's left to shrink. And until the Government saves the economy, and writes down the debts to the ability to pay, there's not going to be a recovery.

FH: You're saying, then, Governments are acting in bad faith.

MH: They're not acting democratically. What the Governments have done has been to turn from a Democracy into an Oligarchy. And we're seeing an Oligarchy, and in fact a Kleptocracy emerge here. And the Governments are not doing what the people expected them to do ­ they're not representing the interests of their constituents.

FH: But President Obama says he's going to effect a change, it's not business as usual in Washington.

MH: When Obama talks about change, he's not talking about financial change; he's not talking about economic change. He's talking about workmen's laws, health reform, racial equality; he's not talking about any economic change at all, because, in fact, he's re-appointed the Bush administrators and the Clinton administrators. He's brought back the same people who brought us the Russian crisis. And if you want to see what their plans are for the United States, look what Obama's team did when they had a free hand in Russia in the 1990s. They brought the biggest inequality and kleptocracy in modern times.

FH: So, Michael, you're in London to address a conference here at the University of London. What is it that you're going to tell them?

MH: Well, I'm going to tell them that the Finance sector, and the Real Estate and the Insurance sector are not part of the real economy of production and consumption. The asset and wealth sector is different from the production sector. You can think of the financial sector as being wrapped around the real economy, almost like a parasite, and that's why it's been called parasitic for so long. The financial sector extracts interest from the economy, the property sector extracts economic rent, as do monopolies. Now the key thing about parasites, is that it's not simply that they extract nourishment from the host. The parasite takes over the host's brain, to make it think it's part of the economy, to make it think it's part of the host's own body, and, in fact, that's it almost like a child of the host, to be protected. And that's what the financial sector has done today. You have Obama coming out and saying, "We have to save the banks in order to save the real economy". The fact is, you can't serve both the parasite and
the host.

Now the amazing thing is that we have the economic training tablets from Babylonia, from 2000 BC, and the mathematical models they had of the economy, in 2000 BC, are more sophisticated than any of the mathematical models that they use today for government planning. And the reason is that they calculated how long it takes for a debt to double. Any interest-rate has a doubling time. They knew in 2,000 BC that the debts double; they also knew that the economy grew in an S-curve. They had mathematical models for the growth of herds in an S-curve, for agricultural production, so they knew that the tendency was for debts to grow faster than the economy can grow, and that's why, when every new ruler took the throne, they cancelled the debts.

FH: But, look, we've had Nobel-prize-winning economists telling hedge funds how to operate. Are you saying they are clueless on mathematics?

MH: Well, that's a very good question. You look at the fact that Long Term Credit Management went broke using the Nobel-prize-winners. The mathematical models that won the Nobel Prize have led to 450 trillion dollars of Derivative contracts that are now junk. So, what they won the Nobel Prize for, is junk mathematics that have led to junk derivatives and junk mortgages. That's what's happened.

Bill Totten


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