“The Federal Reserve helicopter only flies over Wall Street. It doesn’t fly over the economy”
Michael Hudson is a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “and forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year
Ellen Brown hosts the podcast It’s Our Money
Transcript cross-posted from Counterpunch
Ellen Brown: My guest today is Dr. Michael Hudson, who we’re delighted to have on our Public Banking Institute Advisory Board, and who really should be advising the Federal Reserve and the Treasury, but BlackRock seems to have gotten the job. Paul Craig Roberts, who is former Assistant Treasury Secretary under Reagan, called Michael Hudson the greatest economist on the planet. He’s a Wall Street financial analyst, Professor of Economics at the University of Missouri, Kansas City, and author of over two dozen books, including Killing the Host and one called … and Forgive Them Their Debts, which are both particularly relevant today. So it’s great to be speaking with you, Michael.
Michael Hudson: It’s good to be back, Ellen.
Ellen Brown: Thanks. So, you recently wrote in The Washington Post the Corona virus outbreak is serving as a mind expansion exercise, making hitherto unthinkable solutions thinkable. Debts that can’t be paid, won’t be. A debt jubilee may be the best way out. So, for anyone who hasn’t heard you explain this before, could you explain what you mean by a debt jubilee, and why it may be the best way out, and what the real crisis is that it’s the best way out of?
Michael Hudson: Well, there was the debt problem that’s been mounting up ever since World War II. Every economic recovery, every business cycle since 1945 has started from a higher level of debt. Most people thought they were getting rich off debt because most bank credit – 80 percent of bank loans – are mortgage loans. They’re made against real estate. Banks have sought to expand the market, and have lent more and more against real estate. In the 1960s when I first bought a house, you had to have debt service absorb not more than 25 percent of your income. You had to put down 30 percent of the price of the house. So basically, a house was worth whatever a bank would lend.
But by the time that the economy collapsed in 2008 – or rather, by the time the financial system collapsed – banks were making loans with zero down payment. You didn’t need 30 percent. The requirement that mortgage payment be affordable – 25 percent of your income – went out the window. Banks would lend any amount of money, regardless of what you were making. And even the interest didn’t have to be paid. Instead of having a self-amortizing mortgage where you’d own the house after 30 years of paying the bank, you’d pay the bank after 30 years and you wouldn’t own any more at all, because you wouldn’t be paying any amortization.
So basically, banks lent so much money against housing, inflating it up to such a high price, that after paying the mortgage costs – or, if you can’t afford a house, if you’re a renter – after paying the debt service and the credit card debt, the other debt, and after paying the insurance costs and taxes, you really don’t have much left for basic goods and services that you produce, except for the bare minimum of food, clothing and transportation.
So a point was reached already by the time the virus broke out of how the economy can continue to grow. For 95 percent of the population, the economy stopped growing in 2008, when Obama bailed out the banks and left all the bad debts in place. Since 2008, all the growth of GDP – all the increase in national income – has accrued just to the wealthiest five percent of the population. That means that for 95 percent of the population the economy hasn’t been growing at all. It’s been shrinking.
The question is, how are you going to grow if you leave all of the debt service in place, if you leave all of the debt pyramided housing in place? Bonds and stocks are so high-priced that they don’t yield an income for retirement anymore. The economy reached a point already by the beginning of this year that it had to choose either to pay all the debts, continue paying the growth in income to the five percent that basically are the creditor and financial class, or write down the debts and let the economy grow again.
The basic issue is, who is the economy going to be run for? Is it going to be run for the banks and Wall Street, or for Main Street? Well, you said I should be a adviser to the Federal Reserve and Treasury. They wouldn’t pay any attention to anything I say, because they run the economy for Wall Street. As you’ve just seen, the Federal Reserve has created a virus of quantitative easing since 2008. First, four and a half trillion dollars for the Obama bailout, and then another two trillion that is set to go up to 10 trillion, essentially just to buy stocks and bonds and push up the prices of assets that the five percent own.
So the Federal Reserve basically is working against Main Street. It’s working only for its constituency, which are the commercial banks, instead of trying to think how can the economy free itself from this debt overhead? It certainly can’t work its way out of debt because nobody’s earning enough money to amortize, that is to pay off the principal. All they can do is try to pay the current interest charges. So the economy has painted itself into a corner. And that’s the problem that I address in Killing the Host and all the books that I write and all the interviews that I do.
Ellen Brown: I totally agree with all that. You mentioned this four and a half trillion, which is levered up. I just wondered, how do they get away with that? I mean, it’s not a bank. Why did they figure ten to one? Tthey could do 100 to one. The Federal Reserve can issue whenever it wants. I guess one of my basic questions about the Federal Reserve is that people say they could actually go bankrupt, their balance sheet doesn’t balance, and all that. Do they actually have a balance sheet that counts?
Michael Hudson: Sure they have a balance sheet. The question is, what is a balance sheet? You have assets on the left-hand side and liabilities and net worth on the right-hand side. The Federal Reserve can create a credit / deposit, just like a bank does. If you go to a bank and want to borrow money, the bank will create an account for you just on the computer. “Here’s $100,000 we’re putting in your checking account. Go buy a house or do anything.” In exchange, the bank has an asset, a claim on you for repayment with interest. Well, the Federal Reserve also can do anything on its balance sheet. It can tell corporations and the banks, “We’re the Statue of Liberty: Give us your poor junk loans, give us your bad debts, give us all of the junk, and we will create a deposit – 100 cents on the dollar for it – and we will pick up all of your bad loans. And we know that the loans can’t be paid, because the economy can’t pay.”
On the asset side of the balance sheet, we’ll say we have the claim against you. And we will then give you the money for it. And we will try to make sure that we don’t have to lose money on these assets that we’ve let you pledge to us, because we’re going to keep bidding up the market higher and higher. We can do that not only by buying stocks, junk bonds and packaged mortgages, but we can do financial tricks.
You mentioned Paul Craig Roberts before, former Undersecretary of the Treasury for International Affairs. He told me that what the Federal Reserve is doing these days is manipulating the forward market. It will go into Wall Street and it will say, “We promise to buy the Dow Jones average at 50 points higher than it is today, next week.” Well, once it makes a promise to buy, the speculators will see that and they will begin to bid up the prices to what the Federal Reserve promises to pay for the stocks. It can keep doing that, week after week and month after month and it can keep pushing up the stock market. That’s how it pushes up the bond market by promising to buy bonds at a higher and higher price. That means that an existing bond will yield less interest income. They can just continue to inflate the economy with credit, like a Ponzi scheme.
So the Federal Reserve is the official Ponzi scheme that keeps finance capitalism operating in the United States. Obviously, at some point every exponential growth scheme has to stop, because otherwise you’d have an infinite amount of debt. So at a certain point, the Fed will sit down with the main Wall Street firms and the main billionaires that are behind these firms, and say, “Well, you know, the game is over. We’ve got to let it go.” These investors will say, “OK, we’ll take the money and run.” That’s what a lot are all doing already. “We’re going to buy gold. We’re going to buy real estate in New Zealand, so we have somewhere to run to when the economy collapses.” They’re just going to drop everything, sell out and there will be a crash with the pension funds and the small savers who aren’t in on the game, losing whatever they have.
Ellen Brown: This goes on over and over. My question about the Fed’s balance sheet, though, does their balance sheet have to balance?
Michael Hudson: Every balance sheet balances, because any transaction is a balance. If you’re a physicist talking about a man falling flat on his face, that’s equilibrium. Anything can be looked at as a duality of two sides of the same coin. The two sides are assets and liabilities. And if I promise to pay you $100,000 for a broken down car, I can say that I have an asset worth $100,000, and you have a $100,000 IOU from me. That balances. It’s just not a realistic balance. So balance sheets do have to balance, but they don’t have to be realistic.
Ellen Brown: Of course. I think we need a universal basic income. And you think we need a debt jubilee and we need to discuss what those are. But let’s say they’re paid by the Federal Reserve. The argument against that is that, like real helicopter money where you just drop money on the people, you can’t bring it back and therefore it would be inflationary, whereas what they do is supposedly reversible. So if you buy an asset, you’re putting money into the economy. And then if the economy overheats, as they say, then you can always sell the asset back and pull the money back and shrink the money supply. And you can’t do that with the UBI or writing off debts or all those various things. But it seems to me that they never can reverse their quantitative easing anyway. What do you say to that argument?
Michael Hudson: You’re quite right. Remember, the Federal Reserve helicopter only flies over Wall Street. It doesn’t fly over the economy. All this $4.5 trillion of quantitative easing, and all the $2 trillion that it’s created under the Trump by the CARES Act – all this could have been spent into the real economy. It could have been spent building infrastructure. It could have been spent supporting basic income. It could have been spent on the people and Main Street. Instead, it was only spent on Wall Street. The idea is that if you buy an asset, you can always make a profit. That created the middle class from 1945 to about 2008. The way that almost all the middle-class wealth in America was accumulated was through the rising price of housing. In other words, every family that bought a house had to pay more and more of its income, and a higher and higher price to get a house. That’s enriched the people who were fortunate enough to have been able to buy real estate in 1945: white people, not blacks, not Hispanics; they were red-lined. But if you were a white person with a job, you could get onto the middle-class debt treadmill, and actually make it work for you – for a while.
Everybody thought that they could just keep borrowing money to make an even larger asset-price gain. Remember, in 2006, 07 and 08, people thought that if you borrow as much as you can, forget the interest rate, you can pay back the banks out of the rising price of the housing. But then the housing price stopped and you had nine or 10 million families lose their homes in the great Obama foreclosures. He said, “Either I can support the banks or I can support my voters. Who am I going to support? Well, the banks are my campaign contributors and I’m going to support my donor class.” He invited them to the White House and said, “I’m the guy standing between you and the mob with pitchforks.” the voters for me, the people that Hillary called the deplorables. He said, “I’ll protect you,” and he did indeed. No banker went to jail. He gave the banks enormous amounts of money, at the cost of the 10 million families that he exploited. The cost was stopping industrialization in this country, stopping the domestic market and bringing on the Obama depression.
That’s the policy that Biden is committed to follow. He committed himself in the last few days, saying that his intention to get re-elected is not to appeal to Bernie Sanders or the left or the working class, but to try to get enough Republicans to vote for him that he can beat Trump. He’s supporting the position he pushed as vice president, supporting the banks, trying to write down Social Security, cut back Social Security, cut back Medicare, cut back social spending in order to give to the donor class on Wall Street. So we’re going to see Obama with an exclamation point with the Biden-Republican program likely to come to this country.
Ellen Brown: We’re in a sorry state, I think. So your proposal then would be that we have a debt jubilee. So can you describe what that is and where the term came from and how you would actually do it?
Michael Hudson: The term jubilee came from the Bible. It was pronounced “yobel.” The J was pronounced Y, as in Spanish and Hebrew. “Yobel” was the term used in Leviticus 25, saying that every 50 years you will cancel the debts, and you will free the debt servants who’ve been subjected to bondage, and you’ll return all of the slaves that have been pledged to creditors as the main collateral to the debtor, and you’ll return the land that they also lost. The yobel was the horn that was blown on the jubilee to signal it. But the word that they used in addition to yobel was deror, which was a cognate to the Babylonian word andurarum. It had been used ever since the Hammurabi and the Babylonian dynasty back in 1750 BC. Hammurabi, like every other member of his dynasty, started his reign by claiming an anderarum, a clean slate, a debt cancellation. He did this because he realized that debts grew faster than the ability to pay. If you didn’t write down the debts, you would have much of the population falling into debt to the creditors, including wealthy members in the palace bureaucracy. Hammurabi and other Near Eastern rulers realized that if you let people fall into debt to the creditors, they would have to spend their labor working for the creditors on their land, and wouldn’t be able to work on the public corvée infrastructure work. They wouldn’t be able to build palaces or walls, and they wouldn’t be able to pay their crops as taxes, because they’d owe it as interest to their creditors.
The reason I mentioned Hammurabi and selected him is because in his laws. You have the first example of an Act of God clause. One of Hammurabi’s laws said that if there is an act of God, if the storm God Adad floods the fields with water and you can’t harvest the crop, or if there’s a drought, then you don’t have to pay the rents or tax debts. “You’re freed from the debts because we don’t want you to fall into bondage to the creditors, because then you’d pay them the surplus and we wouldn’t have it at the palace.” And in other parts of his laws he said if there’s an epidemic, if there is a sickness, or if there’s a military defeat, then debts are cancelled because the whole idea is we’re not going to let the money that people owe grow to such a large rate that the economy shrinks and people fall into bondage. He knew very well that if the population fell into bondage, then either they would defect. There was constant warfare. Either they’d go over to somebody else’s side, or there’d be a revolution and they would overthrow the ruler and cancel the debts.
Attempts to overthrow rulers who didn’t cancel the debts were made all through Greek and Roman antiquity, from the eighth century BC down to the time of the first century B.C. in Rome. There were constant debtor revolts. The question ever since Roman times has been, what do you do when the debts get too large to pay? Well, the debts were simply written down in the Near East. They were not written down in Rome. Instead, you had a small oligarchy taking over the economy and enslaving or reducing most of the population to bondage. The result was the Dark Age.
So to get back to your question, how do you cancel the debts? Look at what’s happening right now with the virus. A lot of people are unemployed – what’s the number 20 million or 40 million unemployed? They’re not able to pay their rents or, if they bought a house, they’re not able to pay their mortgage and other debts. So rents and mortgages are going unpaid. Beginning in July, and especially in August, there’s talk of large-scale evictions. Millions of Americans who’ve lost the job will not get any more money from the government. They’ve had to use the stimulus money just to buy food on the table and break even. So if you don’t write down the debts for these people, if you don’t cancel the rents and say, “OK, we know that you didn’t have a job, you can’t pay the rent.”
The same is true for businesses, especially for restaurants. If you don’t free them from the rents, then they’re going to go out of business and they’ll be unemployed. And, you’re going to have a gigantic homeless problem in the United States. You can just imagine the political results of all that. For one thing, now that the rents aren’t being paid, homeowners have been saying … and businesses, restaurants and stores … that they have insurance against the interruption of business. The insurance companies, which are just as crooked as the banks in this country, are saying, “Well, we can’t afford to pay you. It’s true, you got insurance, but if we paid you, then we’d go broke. So we’re not going to pay you.”
And the landlords, meanwhile, say, “Well, if we don’t get the rent, then we can’t pay the banks and the banks will foreclose.” That’s one reason why Wall Street is soaring. This is a bonanza for the really rich billionaires and multibillionaires and big companies like Blackstone. They think, “Oh, boy, there’s going to be another wave of foreclosures. Trump is doing as wonderful a job for us as Obama did.” Under Obama, homeownership fell from 57 percent to about 51 percent. And now there’s so many people who’ve been unable to pay their mortgages, that they’re going to lose their homes. The banks will sell the homes and office buildings in a convulsion of sell offs. Blackstone and other speculators are all going to be able to get rich and homeownership is going to plunge in the United States by another five points. We’ll be turning away from being a home-owning middle-class society into a rentier society that’s more and more impoverished. That is the result of what’s going to happen if the debts are not written down.
So the question is, is it really worth subjecting the economy to poverty, to homelessness, to close down businesses, to end the middle class in order to pay debts to the financial class that have made all the gains and growth since 2008? Or do we want to say, “OK, the debts can’t be paid.” That means that the mortgages won’t be paid, the loans won’t be paid, and some of these trillions of dollars that the financial sector and the Five Percent and the One Percent have made are going to be given back? Well, the One Percent says, “We’re not going to give back a penny. We are going to insist that the debts be paid. It’s worth it to us to impoverish the economy so we can get richer, even if by getting one dollar, we’re willing to make the economy lose a billion dollars because that’s all we care about.” That’s the point at which the American economy has reached today. Most of the discussions in the mainstream press don’t spell out the fact that if the economy does not write down the debts, we’re in for a chronic depression that will last until the debts are finally written down.
Ellen Brown: So if you were to write them down, it would have to be up to Congress, like you say. I mean, they’re the only one with the leverage to do it. They’ve got control.
Michael Hudson: Or, it can be up to the people in a revolution. In Rome there were revolutions to do it.
Ellen Brown: That’s true. I think there are a few Congresspeople we could get to bring a bill or something. How would you do it? Would the banks just write off those mortgages or, you know, there are some landlords who … like little old ladies who have rented out some rooms and that’s their income, for example. I mean, there are some people that really probably don’t deserve to be in that position. But the banks, we definitely don’t seem to mind writing down their loans. I just wondered exactly, if you were to have the ability to implement such a law, how would you write it?
Michael Hudson: You have to let nature take its course. You have to let the banks go under. You had a wonderful chance in 2008 for the banks to go under. We’ve spoken before on this show about what the FDIC proposed under Sheila Bair. She said, “Look, the most incompetent, worst-managed bank in the worst trouble is Citibank.” She said, “We could have taken it over.” There was enough money in Citibank to pay all the insured depositors. The speculators, stockholders and some bondholders would have been wiped out. But the bondholders are the wealthiest One Percent. We could have taken it out. And then, Citibank could have been operated as a public bank, which is what you’re talking about.
The fact is that banking should be a public utility. Privatized banking has not really helped the economy, because it makes loans basically against collateral. When you make loans against collateral – the house, real estate, corporate stocks and bonds – the effect of bank lending is to increase the price of this collateral. You end up with a high-priced economy: high housing prices, high retirement-income prices, high insurance prices. And you can’t have a viable public banking system built on the wreckage of the commercial banking system that has almost committed suicide, as you’ve described. You’re not going to be able to go forward.
You can’t simply return to normalcy because normalcy was a situation that brought us to this problem to begin with. You can’t simply keep lending, bailing out the banks and giving them more and more money to increase the debt more and more, because at a certain point the debt can’t be sustained. There will be a write-down of debts, one way or another. The question is, how will the debts be written down when they can’t be paid? Either you’re going to have foreclosures, which was the Obama and the Biden Democratic Party solution, or you’ll have the creditors and the banking system lose. If you were to rewrite the laws to take away all of the special tax favoritism for the financial sector, all the special deregulation and favoritism for the banks, they’d go under and the government could easily take them over and operate them as public banks, more and more like savings banks used to be. They wouldn’t necessarily be able to create credit except for public-authorized purposes. They wouldn’t be able to make the takeover loans, the predatory payday loans, and the other kinds of predatory finance that the commercial banking system has become in this country. So the problem isn’t simply a debt write-down; it’s to restructure the financial system to make it into a public utility instead of a private monopoly.
Ellen Brown: Right. I totally endorse that. That sounds great. So, I saw you wrote recently about the question of whether it wouldn’t be inflationary doing all these bailouts. You said no, that we’re actually in an era of deflation, and basically the way the Fed has been doling out money to the financial sector makes the deflation issue worse. Can you explain that?
Michael Hudson: There are two kinds of prices in the economy. One is prices for goods and services that people buy: the consumer price index for food, clothing, shelter; the other is the price of assets. What we have is asset-price inflation. The banks have been bailed out to lend more and more money against assets, that is, the collateral that they lend against. So banks have created this huge rise in housing prices. The basis of middle-class wealth has been created by banks increasing the price of real estate, the price of stocks and bonds. But increasing the price of real estate means that in order to buy a home of your own, or in order to rent a home, you have to pay more of your income to the financial sector, to the banks for the mortgage. Rent is for paying interest. Speculators, absentee owners, and real estate developers will borrow money from a bank in order to pay all of the rent basically for interest. What they’re after is the capital gain – the price rise. But as prices rise for real estate, stocks and bonds, the rest of the population has to pay more income, not only for housing but for a retirement income, and for monopoly goods and services. We turn into a rentier economy. More and more income is paid for economic rent, not for profits, not for wages, not for goods and services, but as a carrying charge for assets that are financed by bank credit. This is where the financial sector undercuts the economy.
This is not capitalism, in the sense that it is not industrial capitalism. It’s not what people expected in the 19th century. Finance capitalism can be thought of as the failure of industrial capitalism to free economies from rent and interest and from the legacy of feudalism. The finance capitalism that we have is the road back to feudalism. It’s neofeudalism. It’s neoserfdom. It’s turning the population into debt serfs, debt peons who have to pay all of the income that they have to the creditor, and don’t have enough money to buy goods and services. So of course, goods and services prices are actually falling, because people don’t have enough money to buy them. That’s because more and more of their income is paid for access to financialized housing, financialized public utilities and financialized monopoly services.
Ellen Brown: That’s my argument too. You could pour money into the real economy in the form of universal basic income or any other kind of helicopter money, relieving student debts, etc. And because that economy is actually short on money, it would fill that gap, the difference between debt and the money available to repay it. And the money that trickles up, that goes into the other … There are actually two economies and the money that goes into the financialized economy never comes back. I wish I could prove that, but it seems to me you can just see that that’s true. There’s only so many shoes you can buy. All the rest of your big money goes to big things like bribing politicians or buying Iowans their yachts or something like that.
Michael Hudson: There’s a simple explanation. The money doesn’t go back to the real economy, the production and consumption economy. The goes into the financial economy. It is recycled into bidding up the price of houses and stocks and bonds. And this price can go down and it can disappear. It can be eradicated, and always is in a financial collapse. So the question is, what is the economy? There are really two economies. There’s the production and consumption economy of workers producing goods and services, and buying what they produce. And there’s the financial economy. It’s really more than the financial economy. It’s the finance, insurance and real estate sector — the FIRE sector. When the money goes out of the goods and service economy into the rent and interest economy, it goes from the 99 Percent into the hands of the One Percent. So you can have the Main Street — the 95 or 99 percent of the population — and the financial economy that are becoming very much like the hereditary landlord class that ruled Europe off in the Middle Ages until the 19th century when industrial capitalism was supposed to free economies from this predatory class.
Industrial capitalism seemed to be taking off until World War I, but World War I changed everything. Since then, you have had a degeneration of industrial capitalism into its antithesis finance capitalism, which is really a fall back into neofeudalism and neoserfdom. Where will the Americans emigrate to when there are no jobs and they lost their houses?
Ellen Brown: Yeah, they’ll go to Mexico. I saw a joke about that, something about, “Are you coming in or going out?”
Michael Hudson: Well, they’d better learn Spanish.
Ellen Brown: Yeah. Yeah. Saw another joke it was the Statue of Liberty said, “Another year like this and gone back to France.” Yeah, well, it’s been great talking to you.
Michael Hudson: By the way, the Statue of Liberty holding the torch, that iconography occurs very early in civilization. When Hammurabi cancelled the debts, he raised the sacred torch. And the announcement “the ruler has raised the sacred torch” was a symbol in Babylonia for proclaiming a debt cancellation.
Ellen Brown: Oh cool. We have that right in New York Harbor.
Michael Hudson: Yes.