How finance led to debt servitude (or f**k the EU Monster)

A very interesting response by Dimitris Yannopoulos posted on Yannis Varoufakis’ latest blog.

 

“According to Michael Hudson, stock markets have been a vehicle for banks to create credit for junk bond buyers.

As an academic with a strong grounding in economic history as well as banking and finance, professor Michael Hudson has built his own school of thought – distanced from both Keynesians and neoliberals – with regard to the stark options facing a contemporary Western world drowned in unsustainable debts of governments, with households at the mercy of global bankers and financiers who have no accountability.

Options for the indebted amount to no less than a choice between feudal-like servitude and freedom, because “debts that can’t be paid, won’t be”, Hudson argues in an interview with the Athens News, on the occasion of the publication this year of his book, The Bubble and Beyond: Fictitious Capital, Debt Deflation and Global Crisis.

Distinguished research professor of economics at the University of Missouri, Hudson is also president of the Institute for the Study of Long-Term Economic Trends (ISLET), a former Wall Street financial analyst and a research associate at the Levy Economics Institute of Bard College, New York.

Athens News: How has the financial system evolved into a form of economic servitude which – in your latest book – you call ‘debt peonage’, implying a negation of democracy as well as of free-market capitalism itself?

Michael Hudson: The original hope of banking and finance capitalism in the 19th century was that banks would make productive loans to help finance industry and that they would advance funds to manufacturers and producers as well as to the public sector for infrastructure; this would create an economic surplus out of which to pay the interest and the principal back to the lenders. This was defined as productive lending. But as matters have turned out, instead of aligning itself with industry and manufacturing, banking has allied itself with real estate, mineral extraction, oil, gas and with all sorts of monopolies. So instead of getting a share of the profits, it has taken a share of the rent, which is unearned income.

In fact, in the US, banks don’t make loans for what can be produced in the future. They make loans against collateral. That’s the Anglo-American-Dutch banking system. A banker can look at what can be pledged as collateral on which the bank could foreclose, instead of extending loans for the creation of new factories to employ people, new means of production. This was supposed to be done by the stock market.

When did this process get out of hand?

Since 1980, more than 30 years now, the stock market has been a vehicle for banks to create credit for junk-bond buyers – corporate raiders who would take over companies, load them down with debt and just extract interest by downsizing the labour force, shifting it to non-union labour, breaking up companies, and sell off the parts so that finance becomes destructive instead of productive. And as this sort of banking has gained wealth, it has used this wealth to privatise the government itself. It has bought control of governments to make interest tax-exempt, to favour debt financing instead of equity financing and to deregulate the banking industry so that in America financial fraud by the largest banks has been virtually decriminalised.

Is the so-called financialisation of the economy a product of bank deregulation?

Financialisation is a very good term because it shows that finance is taking over the whole economy. It began by taking over the real estate and insurance sectors, prompting national income economists to lump together what they call the FIRE sectors – finance, insurance and real estate – but it also should include the legal sector, because most of the law these days is corporate law that aids financial fraud. Finance has thus expanded to absorb the entire economic surplus of the economy so that this surplus is not being used either for capital investment to increase output or for increased consumption, because it is being diverted to increase debt service to the banks. Financialisation means the surplus is used for financial speculation purposes and not spent on the real economy, which is driven to a spiral of debt deflation and unemployment.

But this system collapsed in 2008, right?

This is not so. In fact, the collapse of 2008 was the greatest victory of finance capital in centuries. It used a crisis as an opportunity to panic the US Congress into taking all of the losses of the big gambling banks into the public balance sheet, incurring 13 trillion dollars of added debt. Therefore the crisis became an opportunity to turn democracy into a financial oligarchy. The same thing happened in Ireland, when Irish banks were stranded with enormous fraudulent loans or in Greece, when massive public debts were diverted to tax fraud and state corruption backed by EU multinationals. In both cases, the government pledged to pay the fraudsters by shifting the burden to small taxpayers, homeowners, employees and pensioners.

Isn’t the case of Greece peculiar, in the sense that it allowed global creditors to shift their debt burden onto eurozone governments?

Under eurozone rules, Greece cannot have a central bank monetise its public debt and must pay the debts that it has taken on by raising taxes, cutting wages, axing social welfare and privatising the public domain. So the financial sector is using the Greek debt crisis as an opportunity to seize whatever the Greek government and nation owns, its real estate and public buildings, its mineral wealth and its oil rights in the Aegean, all for the benefit of the eurozone banking sector.

What are the options available to the world for resolving the debt crisis and avoiding a global depression?

A shrinking economy can only fall further into arrears in a debt deflation spiral. The question today is whether a new wave of reform will restore and indeed complete the task of classical political economy to distinguish tangible wealth creation from debt overhead and other capital gains. Otherwise, the democratic era of industrial capitalism will be rolled back towards a neofeudal reaction of the financial oligarchy against social reform.

What is at stake is how society will liberate itself from the legacy of debts that can’t be paid. If it lets the financial sector foreclose, governments will be forced to privatise the public domain under blackmail, dismantling public administration and welfare services, ushering in a dark age of poverty/immiseration – most characteristically, one of debt peonage.

The only alternative to this nightmare is for debts to be written down to what can be paid back in a democratic mixed economy, geared to a more equitable distribution of wealth and income.

Returning to the 19th century

Athens News: Why so much emphasis on austerity and internal devaluation?

Michael Hudson: This is because financialisation brings the class war back, in a new way. For the last 100 years the social divide was between employers and employees fighting for workplace rights, higher wages and so on, but once you bring in the financial sector, this adds a new dimension to their struggle. Once creditors take control of governments and unions, they push austerity and unemployment that drives down wages on a macroeconomic “financial” level to a degree that could not occur before. In the US, workers are in debt and afraid to go on strike, afraid even to complain about working conditions, because if they are fired and miss a payment in their electricity or mortgage bills, they are one paycheque away from homelessness. So what’s happening in Greece is happening in America too. We have government-sponsored wage cuts and abolition of labour rights in ways 19th-century industrialists never dreamed of.”

 

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