Wednesday, January 27, 2010

Preparing for the State of the Union address

By Tony Wikrent

Michael Hudson has an extremely important article up at CounterPunch, Myths of Recovery : Which Economy is Obama Talking About?, which fully explores the economic issues Obama must deal with, what he will probably talk about instead, and some of the recent economic issues that have generated much debate and screaming, such as the "spending freeze."
The problem that Obama faces is one that he cannot voice politically without offending his political constituency [large campaign contributors (my correction)]. The Bubble Economy has left families, companies, real estate and government so heavily indebted that they must use current income to pay banks and bondholders. The U.S. economy is in a debt deflation. The debt service they pay is not available for spending on goods and services. This is why sales are falling, shops are closing down and employment continues to be cut back.
. . . . So we must beware of the President using the term "recovery" in his State of the Union speech to mean a recovery of debt and giving more money to Wall Street. Jobs cannot revive without consumers having more to spend.
Michael Hudson is a former Wall Street economist, but has been one of the leading heterodox economists of the past decade and more. His experience on Wall Street allows him to explain more clearly than most exactly how Wall Street loots the real economy. He is a Research Professor at the University of Missouri, Kansas City (where William Black has a post), and has authored many books, including Super Imperialism: The Economic Strategy of American Empire.

(NOTE: I will quote from different parts of Hudson's article out of place, so I urge you to go read the entire article: Myths of Recovery : Which Economy is Obama Talking About? WARNING: it will probably induce severe cognitive dissonance in those people who cling to the "green shoots" story of an economic recovery being underway. )

First, I want to quote Hudson in one of the most concise and lucid explanations of exactly is wrong with the idea of a "spending freeze" at this time. Hudson's explanation goes beyond the standard argument of the need for Keynesian deficit spending:

Traditionally, running deficits is supposed to help pull economies out of recession. But today, spending money on public services is deemed "bad," because it may be "inflationary" - that is, threatening to raise wages. Talk of cutting deficits thus is class-war talk - on behalf of the FIRE sector. . . .
The pro-financial mass media reiterate that deficits are inflationary and bankrupt economies. The reality is that Keynesian-style deficits raise wage levels relative to the price of property (the cost of obtaining housing, and of buying stocks and bonds to yield a retirement income). The aim of running a "Wall Street deficit" is just the reverse: It is to re-inflate property prices relative to wages.
Second, here is what Hudson writes about Bernanke:
The President needs a better set of advisors. But Wall Street has obtained veto power over just who they should be. . . Wall Street has threatened that the stock market will plunge if oligarch-friendly Fed Chairman Bernanke is not reappointed. Obama insists on keeping him on board, in the belief that what's good for Wall Street is good for the economy at large.
Now, those are just two small quotes, which directly address two of the economic issues that have been prominent here the past few days. Let us now turn to Hudson's article in its entirety. Hudson goes directly to the little discussed heart of the economic problem facing us today, by discussing two different conceptions of what an "economic recovery" actually is. (Again, this is a cobbling together of different sections of the article.)
When listening to the State of the Union speech, one should ask just which economy Obama means when he talks about recovery. Most wage earners and taxpayers will think of the "real" economy of production and consumption. But Obama believes that this "Economy #1" is dependent on that of Wall Street. His major campaign contributors and "wealth creators" in the FIRE sector - Economy #2, wrapped around the "real" Economy #1.
Economy #2 is the "balance sheet" economy of property and debt. The wealthiest 10 per cent lend out their savings to become debts owed by the bottom 90 per cent. A rising share of gains are made in extractive ways, by charging rent and interest, by financial speculation ("capital gains"), and by shifting taxes off itself onto the "real" Economy #1. . . 
The State of the Union address is in danger of purveying the usual euphemisms. I expect Obama to brag that he has overseen a recovery. But can there be any such thing as a jobless recovery? What has recovered are stock market averages and Wall Street bonuses, not disposable personal income or discretionary spending after paying debt service. 
. . . Corporate Democrat Harold Ford Jr. writes nostalgically that Bill Clinton's eight years in office created 22 million jobs, "balanced the budget and left his successor with a surplus. This can be done again," if only Obama moves further to the right (which Ford calls the center, meaning the Bayhs and Republicans).
It can't be done again. Pres. Clinton's administration balanced the budget by "welfare reform" to cut back public spending. This would be lethal today. Meanwhile, his explosion of bank credit and the boom (rising stock prices and bonuses without any earnings) fueled the early stages of the Greenspan bubble. It was a debt-leveraged illusion. Instead of the government running budget deficits to expand domestic demand, Clinton left it to banks to extend interest-bearing credit-debt pollution that we are still struggling to clean up.
The danger is that when Obama speaks of "stabilizing the economy," he means trying to sustain the rise in compound interest and debt. . . .
Debts that can't be paid, won't be. So defaults are rising. The question that Obama should be addressing is how to deal with the excess of debt above the ability to pay - and of negative equity for the one-quarter of U.S. real estate that has a higher mortgage debt than the market price is worth. If the hope is still to "borrow our way out of debt" by getting the banks to start lending again, then listeners on Wednesday will know that Obama's second year in office will be worse for the economy than his first. . . .
A compliant Federal Reserve is to flood the credit markets to lower interest rates to revive bank lending -- interest-bearing debt borrowed to buy real estate already in place (and stocks and bonds already issued), enabling banks to work out of their negative equity position by inflating asset prices relative to wages.
The promise is that re-inflating prices will help the "real" economy. But what will "recover" is the rising trend of consumer and homeowner debt responsible for stifling the economy with debt deflation in the first place. This end-result of the Clinton-Bush bubble economy is still being applauded as a model for recovery.
One of the worst problems I see among liberals and progressives is a woeful ignorance of real economics. This manifests itself as an inability to distinguish between productive economic activity on the one hand, and speculation, usury, and economic rent on the other, as seen in such questions as "What's wrong with banks making profits?" However, it must be admitted that the concept of "economic rent" is not easy to understand, probably because of the popular conception of what the word "rent" means. Hudson's article includes one of the best explanations of "economic rent" I have seen in many, many years:

The economy is best viewed as the FIRE [Finance, Insurance, Real Estate - NBBOOKS] sector wrapped around the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs. . . .
Say's Law of markets, taught to every economics student, states that workers and their employers use their wages and profits to buy what they produce (consumer goods and capital goods). Profits are earned by employing labor to produce goods and services to sell at a markup. (M - C - M' to the initiated.)
The financial and property sector is wrapped around this core, siphoning off revenue from this circular flow. This FIRE sector is extractive. Its revenue takes the form of what classical economists called "economic rent," a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as "capital" gains. (These are mainly land-price gains and stock-market gains, not gains from industrial capital as such.) Economic rent and capital gains are income without a corresponding necessary cost of production (M - M' to the initiated).
Banks have lent increasingly to buy up these rentier rights to extract interest, and less and less to promote industrial capital formation. Wealth creation" FIRE-style consists most easily of privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of convenient money (credit cards), or the credit needed to get by. . . It is a form of overhead, not a means of production. The revenue it extracts is a zero-sum economic activity, meaning that one party's gain (that of Wall Street usually) is another's loss.
The problem of "economic rents" as a zero-sum economic activity is at the core of a recent article by Paul Craig Roberts, Assistant Secretary of the Treasury in the Reagan administration, 2 days ago, How Wall Street Destroyed Health Care. Roberts' article is extremely useful in highlighting how cororatism suborns the institutions of government in order to create, maintain, and enforce economic rents.

While Medicare payments for in-office services to private doctors, including those for blood work and x-ray units, were drastically cut, payments to outside corporate facilities for the same services were increased. . . .

Legislation that cuts payments to private physicians and increases the payments to large corporate entities is intended to destroy private practice and to create in its place corporate bureaucracies in which doctors are wage slaves. The physician's income is diverted to shareholders, CEO bonuses, and Wall Street. Health care is being replaced with health business. . . .

It turns one's stomach to watch libertarians and "free market economists" defend bureaucratized impersonal health care as "free market medicine." There is no free market present. Corporate lobbies and campaign contributions use government power to create bureaucratized monopolies that destroy medicine for the practitioner and the patient. Wall Street pushes for greater shareholder earnings, which are achieved by denying care.

Just as independent businesses have been destroyed by corporate chains from Wal-Mart to auto parts to fast food, medicine is being destroyed by monopoly capital. The risks of starting a private business today are many times higher than they were a half century ago. Chains have turned Americans who once were independent business men and women into employees. . . .

Wall Street is romanticized by libertarians and "free market economists." They believe, entirely on the basis of their ideology, that Wall Street finances venture capitalists who bring economic progress and higher living standards. Wall Street does no such thing, especially since financial deregulation turned Wall Street into a speculative hedge fund. . . .

The lobbies of greed rule America. The White House, Congress, even the federal judiciary are impotent in the face of capitalist greed. The recent Supreme Court decision permitting corporations to use shareholders' money in corporate treasuries to influence elections increases the control that corporations have over the outcome of elections and the decisions of the government of the United States.

There is no government of the people, for the people, by the people, only the rule of private interests.
Let me (almost) end with a few more quotes from Hudson:
GDP is rising mainly for the FIRE sector - finance, insurance and real estate - not the "real economy." Financial and corporate managers are paying themselves more for their success in paying their employees less.
Financial oligarchy is antithetical to democracy. That is what the political fight in Washington is all about today. The Corporate Democrats are trying to get democratically elected to bring about oligarchy. I hope that this is a political oxymoron, but I worry about how many people buy into the idea that "wealth creation" requires debt creation. While wealth gushes upward through the Wall Street financial siphon, trickle-down economic ideology fuels a Bubble Economy via debt-leveraged asset-price inflation.
The role of public spending - and hence budget deficits - no longer means taxing citizens to spend on improving their well-being within Economy #1. Since the 2008 financial meltdown the enormous rise in national debt has resulted from the reimbursing of Wall Street for its bad gambles on derivatives, collateralized debt obligations and credit default swaps that had little to do with the "real" economy. They could have been wiped out without bringing down the economy.
Obama's most dangerous belief is in the myth that the economy needs the financial sector to lead its recovery by providing credit. Every economy needs a means of payment, which is why Wall Street has been able to threaten to wreck the economy if the government does not give in to its demands. But the monetary function should not be confused with predatory lending and casino gambling, not to mention Wall Street's use of bailout funds on lobbying efforts to spread its gospel.

Since it is likely that President Obama will address the issue of financial reform, I thought it would be very useful to include some of the reform proposals that would actually fundamentally alter the financial system, not just provide mere window dressing. Rather than discuss all the proposals - which could, and has, taken a lengthy diary all by themselves - I decided to just include the links below:

Unsurprising Poll Results from Massachusetts: Voters Think Obama Sides With the Banks (You have to read through a few paragraphs to get to the list of excellent reform proposals)

The Obama Financial Tax Is A Start, Not The End (A short list at the end of this excellent discussion.

What Might Real Financial Reform Look Like(From October 2008, one of the best lists ever, which I diaried here a day or so later.

A Blueprint for Financial Reform, by John P. Hussman (A very good list, which, however, is in Wall Streetese, since Hussman is the founder and manager of a large investment trust bearing his name.)

The White House Should Also Announce An Antitrust Investigation Into Major Banks

Not a list of proposals, but an explanation of something that should have been down long ago (except, of course, for the fact that doing so would have interrupted the "free workings of the markets" - but anti-trust is something that can be done NOW, without having to pass any regulatory reform.)

For some really hard core policy discussion, this stuff from the Levy Institute of Economics will take a few days to get through:

A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part I, Key Concepts and Main Points

Also, in April of last year, Levy had its annual Hyman Minsky conference, 18th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies Meeting the Challenges of Financial Crisis. The ones you want to listen to are William Kurt Black in Session 1 I think it is; L. Randall Wray in the last session; and Joseph E. Stiglitz, who has a separate link in the listings. There are a few others, but I forget now.

Also, to get the full sense of why Black is so angry in his opening statements, you have to listen to Kasman's (chief economist of JP Morgan Chase), which is a sterile, amoral tour-de-force of group-think neo-liberalism. Kasman, spoke immediately before Black, and his presentation will give you a good idea of how professional economists have led us and continue to lead us to absolute ruin.

And coming up this April 14–16, 2010 is Levy's 19th Annual Minsky Conference: After the Crisis: Planning A New Financial Structure.

Fiscal Therapy, by David Cay Johnston (Goes a bit beyond strictly financial reform, to discuss other policies required to end Wall Street's war against America.)

1 comment:

  1. See "Stock Shock" for a real education on Wall Street and hedge funds. What a difference an hour or so makes!!! Yikes! DVD is cheaper at but it can be rented or bought pretty much anywhere.