Michael Hudson on Wall Street’s Euthanasia of Industry

This may be VERY long, but it is one of the most important explanations of the destructive course being followed by all parties in the budget debate charade: Obama, Democrats, Republicans. Every citizen of our republic should read this. Wall Street’s Euthanasia of Industry, by Michael Hudson.

Here are a few highlights from the interview of Hudson:

Somebody has to lose when loans go bad. In this case, it is taxpayers. Governments have taken these bad loans onto their own balance sheet, so that bondholders and big creditors to these banks (typically foreigners) would not lose. But it is very expensive for governments to take on obligations to pay bad debts – that is, negative equity where the debt is higher than the collateral assets are worth. So now, having spent enormous sums to make sure that bankers and bondholders don’t lose a penny, governments are trying to balance their budgets by cutting off spending throughout the “real” economy. In other words, governments have sacrificed the economy so that the financial sector won’t take a loss. And even worse, the governments have left the bad real estate debts, personal debts, education debts and credit card debts on the books. So the “real” economy is being shrunk by debt deflation, while tax policy is being steered to benefit the financial sector.

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The problem is that trying to pay debts rather than writing them down to realistic ability to pay (or writing down mortgages to the market price) and increasing taxes is pushing the U.S. and foreign economies into a depression. And the worst thing is that this is viewed as a solution – supposedly making economies more “competitive” by “squeezing out the fat.” What it is doing is passing the fat to the top of the economic pyramid, like globules floating on the broth, as Werner Sombart described the rentier class a century ago.

In the United States, President Obama has bought into the idea that the only way to get recovery is to cut wages by about 30 percent.

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So Obama believes that reducing the purchasing power of American labor in terms of foreign exchange will make the economy more competitive. He also believes it will help deflate the economy to reduce the budget deficit. The economy needs government spending to revive employment and markets, but he’s acting like President Coolidge in the Depression. Republican Treasury Secretary Andrew Mellon said that the solution had to be to liquidate labor, liquidate housing and liquidate the economy. That tunnel vision is being fed to Mr. Obama’s by his Clinton- and Bush-era advisors, from Larry Summers to Tim Geithner. He is doing what nobody really imagined the kind of change that was possible when he was elected. He has let Michelle Bachman and the Republican Tea Party tax cutters move to the left of his position.

Rep. Bachman recently pointed out that she voted against TARP from the beginning, as did other Republicans opposing the giveaway to the Wall Street interests. The Republicans also haven’t called to cut back Social Security to pay Wall Street. That’s the Obama-Geithner position. It’s put Democratic Congressional leadership in a bind, because they have difficulty opposing a president even though he’s moved to the right of the Republican Party.

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People would have thought before Mr. Obama was elected that the normal response to an economy falling into recession would be to increase counter-cyclical public spending. But the President is following neoliberal policy that makes the downturn much deeper, by cutting back government spending – especially on non-Wall Street programs. Instead of trying to get the budget back in balance by re-introducing progressive taxation, taxing wealth more highly than the lower income brackets, he is using tax revenues to help re-inflate the financial sector.

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Cutbacks in federal spending mean that the states can’t cover their own budgets – and their constitutions prevent many from running deficits. It looks like there will be little federal revenue to share with Minnesota or Wisconsin or the city of Chicago. They’re going to have to sell their roads and streets, sell their infrastructure and their public utilities, sell off whatever business enterprises they have that can bring in credit. These assets themselves will be sold on credit, to buyers who then will “expense” their profits as tax-deductible interest. So governments will not get the potential user fees that result from putting up parking meters on their sidewalks, tollbooths on their roads and other rent extraction facilities on their other assets. The financial sector will take all this.

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. . . this is a just-pretend pseudo-crisis to give Mr. Obama the opportunity to do what politicians do – to sell out his constituency to his campaign contributors on Wall Street. It looks like he will go down in history as a Herbert Hoover, being blamed for the depression that was not necessary and that the Republicans could not have gotten away with intensifying. Only a Democrat posing as a left-winger could support the anti-labor, anti-wage, pro-Wall Street policies that his advisors have been putting into his hands.

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All across Europe the Socialists have moved to the right of the conservative parties as far as financial policy is concerned.
The terminology and political concepts that existed a century ago when the Social Democratic and the Labour parties were being formed were concerned with wages, labor unionization and other employer/employee workplace relations much more than with bank policy. “Capital” meant mainly heavy industry. That’s not the case today. You have a war of finance not only against consumers and employees, but against industry – and most of all, against government, which is the only power able to restrain finance and tax it. Financialization has turned into asset stripping. It focuses on the public domain because this is still where most of the assets are. Also, national treasuries are able to create public debt – and make future taxpayers pay tribute to the financial oligarchy, which is un-taxed.
They actually teach short-term financial engineering in business schools. Bob Locke and J. C. Spender are coming out this fall with a good book, Confronting Managerialism, about how this management philosophy is disabling economies. Financialization also has disabled socialist and left wing politics. In a turnaround from their origins, you don’t hear much about financial issues from the Democrats in America or from the Socialist parties in Europe. They focus on cultural issues, minorities, sexual equality, but not banking and finance, or even privatization except when it threatens labor unions.
The result is an absence of a political alternative.

Read more of Wall Street’s Euthanasia of Industry, by Michael Hudson.