Undernews is the online report of the Progressive Review, edited by Sam Smith, who has covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

February 12, 2009


Michael Hudson, Global Research - A true reform - one designed to undo the systemic market distortions that led to the real estate bubble - would have set out to reverse the Clinton-Rubin repeal of the Glass-Steagall Act so as to prevent the corrupting conflicts of interest that have resulted in vertical trusts such as Citibank and Bank of America/Countrywide/Merrill Lynch. By unleashing these conglomerate grupos (to use the term popularized under Pinochet), the Clinton administration enabled banks to merge with junk mortgage companies, junk-money managers, fictitious property appraisal companies, and law-evasion firms all designed to package debts to investors who trusted them enough to let them rake off enough commissions and capital gains to make their managers the world's highest-paid economic planners.

Today's economic collapse is the direct result of their planning philosophy. It actually was taught as "wealth creation" and still is, as supposedly more productive than the public regulation and oversight so detested by Wall Street and its Chicago School aficionados. The financial powerhouses created by this "free market" philosophy span the entire FIRE sector - finance, insurance and real estate, "financializing" housing and commercial property markets in ways guaranteed to make money by creating and selling debt. Mr. Obama's advisors are precisely those of the Clinton Administration who supported trustification of the FIRE sector. This is the broad deregulatory medium in which today's bad-debt disaster has been able to spread so much more rapidly than at any time since the 1920s.

The commercial banks have used their credit-creating power not to expand the production of goods and services or raise living standards but simply to inflate prices for real estate (making fortunes for their brokerage, property appraisal and insurance affiliates), stocks and bonds (making more fortunes for their investment bank subsidiaries), fine arts (whose demand is now essentially for trophies, degrading the idea of art accordingly) and other assets already in place. . .

The debt overhead far exceeds the economy's ability to pay. If the banks would indeed do what Pres. Obama's appointees are begging them to do and lend more, the debt burden would become even heavier and buying access to housing even more costly. When the banks look back fondly on what Alan Greenspan called "wealth creation," we can see today that the less euphemistic terminology would be "debt creation." This is the objective of the new bank giveaway. It threatens to spread the distortions that the large banks have introduced until the entire system presumably looks like Citibank, long the number-one offender of "stretching the envelope," its euphemism for breaking the law bit by bit and daring government regulators and prosecutors to try and stop it and thereby plunging the U.S. financial system into crisis. This is the shakedown that is being played out this week. And the Obama administration blinked - as these same regulators did when they were in charge of the Clinton administration's bank policy. So much for the promised change. . .

The first question to ask about any recovery program is, "recovery for whom?" The answer given on Tuesday is, "For the people who design the program and their constituency" - in this case, the bank lobby. The second question is, "Just what is it they want to 'recover'?" The answer is, the bubble economy. For the financial sector it was a golden age. Having enjoyed the Greenspan Bubble that made them so rich, its managers would love to create yet more wealth for themselves by indebting the "real" economy yet further while inflating prices all over again to make new capital gains.

The problem for today's financial elites is that it is not possible to inflate another bubble from today's debt levels, widespread negative equity, and still-high level of real estate, stock and bond prices. No amount of new capital will induce banks to provide credit to real estate already over-mortgaged or to individuals and corporations already over-indebted. . .

The first objective is to preserve the wealth of the creditor class - Wall Street, the banks and the other financial vehicles that enrich the wealthiest 1% and, to be fair within America's emerging new financial oligarchy, the richest 10% of the population. Stage One involves buying out their bad loans at a price that saves them from taking a loss. The money will be depicted to voters as a "loan," to be repaid by banks extracting enough new debt charges in the new rigged game the Treasury is setting up. The current loss will be shifted the onto "taxpayers" and made up by new debtors - in both cases labor, onto whose shoulders the tax burden has been shifted steadily, step by step since 1980. . .

This situation confronts the economy with a dilemma. The only policies deemed politically correct these days are those that make the situation worse: yet more government money in the hope that banks will create yet more credit/debt to raise house prices and make them even more unaffordable; credit/debt to inflate a new Bubble Economy #2. . .

This is a travesty of freedom. As the putative neoliberal Adam Smith explained, "The government of an exclusive company of merchants, is, perhaps, the worst of all governments." But worst of all is the "freedom" of today's economic discussion from the wisdom of classical political economy and from historical experience regarding how societies through the ages have coped with the debt overhead.

The only real solution to today's debt overhang is a debt write-down. Until this occurs, debt service will crowd out spending on goods and services and there will be no recovery. Debt deflation will drag the economy down while assets are transferred further into the hands of the wealthiest 10 percent of the population, operating via the financial sector.

If Obama means what he says, he would use his office as a bully pulpit to urge repeal the present harsh creditor-oriented bankruptcy law sponsored by the banks and credit-card companies. He would campaign to restore the long-term trend of laws favoring debtors rather than creditors, and introduce legislation to restore the practice of writing down debts to reflect the debtor's ability to pay, imposing market reality to debts that are far in excess of realistic valuations.

A second policy would be to restore the power of state attorneys general to bring financial fraud charges against the most egregious mortgage lenders - the prosecutions that the Bush Administration got thrown out of court by claiming that under an 1864 National Bank Act clause, the federal government had the right to override state prosecutions of national banks - and then appointing a non-prosecutor to this enforcement position.

On the basis of reinstated fraud charges, the government might claw back the bank bonuses, salaries and bank earnings that represented the profits from America's greatest financial and real estate fraud in history. And to prevent repetition of the past decade's experience, the Obama Administration might help popularize a new psychology of debt. The government could encourage "the poor" to act as "economically" as Donald Trumps or Angelo Mozilo's would do, making it clear that debt write-downs are a right.

Also to ward off repetition of the Bubble Economy, the Treasury could impose the "Tobin tax" of 1% on purchases and options for stocks, bonds and foreign currency. Critics of this tax point out that it can be evaded by speculators trading offshore in the rights to securities held in U.S. accounts. But the government could simply refuse to provide deposit insurance and other support to institutions trading offshore, or simply could announce that trades in such "deposit receipts" for shares would not have legal standing. As for trades in derivatives, depository institutions - including conglomerates owning such banks - can simply be banned as inherently unsafe. If foreigners wish to speculate on financial horse races, let them.


Blogger mark eloheim said...

The Recovery Plan from Heaven~

The Rainbow Bridge To Peace On Earth!!!

February 12, 2009 4:48 PM  
Blogger scott said...

Probably one of the most succinct descriptions of the causes of the curent crisis, and the problems with the proposed solution! I've wondered myself how one would resolve an issue of too much debt by creating more debt!

February 12, 2009 7:31 PM  
Anonymous Anonymous said...

How long do you think a president who offered such a resolution would live?

February 13, 2009 1:43 AM  
Anonymous Anonymous said...

Of course, one could get similar--not to mention much better, more accurate and more realistic--information from sources not tainted by conspiradroid drivel.

GlobalFiction.ca is home to the easily debunked urban legend, nine-eleven-was-an-inside job, as well as other mythological products-for-sale.

Once again, Mr. Smith betrays a love affair with the counterproductive conspiradroid crowd and culture. He recently tried (tinyurl.com/cw2opp) to defend (using a backdoor) this penchant by way of an inductive reasoning versus deductive reasoning argument but nothing is more deductive than nine-eleven-was-an-inside-job.

Michael Hudson ignores reality in this piece--not surprising coming from GlobalFiction.ca. As usual, this is another essay about the subset of economics which completely ignores the parent issue of the environment: the biosphere which cannot, by definition, sustain infinite growth.

A much better, and more rational article, was recently written by Rob Dietz at SustainableIndustries.com:

"So why did the train skid off the tracks—why did we experience the financial meltdown and why are we now facing economic turmoil? Although pundits have supplied some answers, most have not dug deep enough to uncover the root cause of the problems.

"Theories about liquidity shortages and credit slowdowns aside, it is clear that financial instruments, even really complex ones, can only be as valuable as the real assets they represent (e.g., land, homes, durable goods, companies, infrastructure and information). No matter what the charts and financial wizards declare, those real assets exist in a world governed by physical and ecological laws—they can only grow so far and so fast.

"The current financial crisis occurred because paper assets grew much faster than real wealth. When investors started to realize that paper assets were out of sync with reality, they attempted to sell them. As these pieces of paper flooded the market, their value dropped, triggering an even bigger sell-off. All the paper assets that we thought had value suddenly didn’t, and people lost their retirement funds and other savings, and now they are losing their jobs and their ability to pay for basic necessities.

"The growth-based economic system is the underlying culprit. Our entire monetary system depends on the creation of debt and imparts a grow-at-all-costs mentality to practically all economic actors, from CEOs to politicians to stockholders to workers. Even if the costs of economic growth outweigh the benefits, more growth is promoted. Institutional investors, corporations and individuals comply with the growth imperative by seeking the highest returns to capital. The problem is that investment decisions, whether based on sophisticated financial models or gut feeling, tend not to account for the physical limits to growth. Often this growth occurs in the form of bubbles—such as the dot com bubble in the 90s, the housing bubble more recently and the financial bubble—that pop. The financial bubble is particularly illustrative of what’s wrong with the current system. When biophysical limits prevented real industries from growing, we simply grew the paper that represented those industries. Overshooting these limits is the ultimate cause of the financial fiasco.

"No matter how fast we get the train moving again (and the decision to bail out failing financial institutions occurred amazingly fast), it won’t do us much good if it’s headed the wrong way. Is economic growth taking society in the right direction? The answer is critical because, as the bailout and other rescue plans demonstrate, the authorities are working feverishly to fix the system by encouraging more growth."

February 13, 2009 1:16 PM  
Anonymous Anonymous said...

Anon 1:16, thanks for the chuckle at yet another display of irrational reactionary refusal to question, observe, and think. I'm sure you're right and all that "conspiradroid drivel" is just that. It's really really true that wealthpower giants never get together or act in their own interests and it's all just a series of unaided coincidences that just happens over and over by chance, to keep enriching the 1% exponentially at an ever-escalating pace and at the steepening expense and increasing impoverishment of the 99% and the planet.

yah, right.

How can and how dare you zealots in the limits-to-growth, carrying capacity, scarcity, overpopulation die-off crowd even SPEAK of closed systems - and then preach against it the very moment an essay is posted that lays bare the immense and long-ignored wisdom of the land-value tax!

If you clowns don't know by now that the mother and father and king and queen and sole progenitor of this economic catastrophfinancial meltdown is economic inequality, is the extreme wealthpower maldistribution inequity factor that resides in the billions... then I suppose you must be INCAPABLE of ever seeing it.

The extreme disparity in wealthpower is what caused this disaster - NOT limits to growth.

If the productivity gains had been spread as the work has been spread instead of funnelled to the tippy top and given away for no work done - if the debt we owed we were paying to ourselves AS MICHAEL HUDSON SAYS IN HIS TREMENDOUS SUMMARY OF OUR SITUATION - via the land value site rents single tax - our growth would have been smarter growth because it wouldn't have been growth of only the things wealthpower giants profit from: the destructive things; wars wiping out infrastructure; dumping oil in oceans...

most brains on earth are uneducated right now! the vast majority of educated brains are tied up in destructive endeavors. for a third of what the globe spends on the militaries to keep the war profits coming to the few we could - let me quote Dr. Helen Caldicott: "Globally the annual military expenditure stands at 780 billion dollars. The total amount required to provide global health care, eliminate starvation and malnutrition, provide clean water and shelter for all, remove land mines, eliminate nuclear weapons, stop deforestation, prevent global warming, ozone depletion and acid rain, retire the paralyzing debt of developing nations, prevent soil erosion, produce safe, clean energy, stop overpopulation, and eliminate illiteracy is only one third that amount – 237.5 billion dollars.”

...and you want me to believe we're out of options? BALONY! Tackle the issue that is the mother of all issues - extreme, extreme economic UNJUSTICE - and just get out of the way! People KNOW we're doing things unsustainably! give us some damn credit! if the damn wealthpower giants would just get out of the way of what the working people round the globe really want and had the power themselves to decide things, you think we wouldn't, couldn't do what is sustainable?

escalate education and equality and then come back in a few hundred years and the population will have decreased naturally and gradually sans any coersion to a billion! we will build up and then back down. we will scale and diversify farms, increase efficiency, productivity, sustainability. we will reuse much of what we've extracted from mother earth already. we are finding new energy in river-flows, etc - millions of people are working on millions of problems once they see them.

it was INEQUALITY that grew the problems. only ridding ourselves of the insane idea to tolerate extremes of wealth will enable the humans to save themselves. see it. wealth above a point has power to become above the laws and to lie to the public, thus to pollute and over-harvest resources - and the people don't see the studies that warn, the industrialists and capitalist have had power, influence, capability to deceive the public - who would have gladly cooperated in NOT ruining their planet and putting their descendents on such precarious ground, chained to such a diabolically stupid economics of unjustness!

you have failed to identify the enemy, Anon., and therefore you distract from the error that preceeds unsustainable activities. Inequality is what must be tackled.

or shall we just keep having some with too much to lend and some with no choice but to borrow just to survive????

...under one guise or another...

February 14, 2009 9:47 AM  

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