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“When I was in Norway one of the Norwegian politicians sat next to me at a dinner and said, “You know, there’s one good thing that President Obama has done that we never anticipated in Europe. He’s shown the Europeans that we can never depend upon America again. There’s no president, no matter how good he sounds, no matter what he promises, we’re never again going to believe the patter talk of an American President. Mr. Obama has cured us. He has turned out to be our nightmare. Our problem is what to do about the American people that don’t realize this nightmare that they’ve created, this smooth-talking American Tony Blair in the White House.”
I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show, “Guns, Finance and Butter: Finance is the New Mode of Warfare.”
The jobless recovery
Michael, I read the in the newspapers that the great recession, so-called, has long since ended, but unemployment remains stubbornly high with only a measly 18,000 jobs created in June. I believe the term that was coined some time ago is a jobless recovery. What is a jobless recovery?
We call that a depression – in this case, caused mainly by debt deflation. Just because the stock market is being inflated by the Federal Reserve doesn’t mean that the economy itself is growing. It’s shrinking – from a combination of families and businesses having to pay off debts rather than spend their income on goods and services, and the government’s shift of taxes off finance, insurance and real estate (FIRE) onto labor and industry.
The economy is getting worse and worse – deeper negative equity (mortgage debts in excess of property prices), shrinking markets, stores going out of business, rising defaults and foreclosures, job layoffs – with new graduates having to pay student loans but not having a job.
That’s why the stock market is down 160 points today. The financial sector realizes that the game is over. From America to Ireland, Greece and the rest of Europe, financial interests are insisting that governments take responsibility for paying off the bad bank debts to their bondholders and other bankers in cross-deals and gambles on derivatives that have gone bad. The problem is that these banks have made bad real estate loans and other gambles. In Ireland, the collateral backing these loans is only about 20 percent of the face value of the mortgages.
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.
The policy that started in the United States after September 2008, with Sec. Paulson’s Troubled Asset Relief Program (TARP) and later with the Treasury taking Fannie Mae and Freddie Mac ($5.3 trillion) onto the government’s balance sheet. This policy quickly spread to Europe, starting in Ireland. Its government went broke bailing out the bankers. And now in Greece, the government is told to start selling off over $50 billion worth of public land and other public-sector assets to pay down debts so that its bondholders won’t lose a single euro. Greece is slashing its public spending, unemployment is spreading, and the sell-offs are beginning – of the sort that we already have seen in Chicago, which sold its sidewalk rights to financial investors installing parking meters. Economies are being turned into rentier “tollbooth economies” to generate the funds to pay debts that the “real” economy simply can’t sustain. It’s a losing game in the end. So the financial sector is trying to take as much as it can right now, and run.
This is happening throughout the world. In that sense the U.S. debt deflation and government bailouts to Wall Street provided the model for Europe, and now Europe’s debt deflation and the political crisis that goes with it is providing a model for the United States. In Athens, for instance, when the Greek demonstrators protested the austerity program in front of their Parliament, there were signs referring to the Wisconsin demonstrations in the United States earlier this spring.
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. He’s doing that in two ways. At the Federal Reserve he empowered Chairman Ben Bernanke to lower interest rates by flooding the economy with money. QE2 injected $600 billion, which banks quickly sent out of the country. This pushed down the dollar against BRICS currencies, Australian dollar and currencies of other raw-materials exporters, which raised their own interest rates to prevent their domestic economies from overheating. These higher rates abroad mean that U.S. banks can borrow at only 0.25% from the Federal Reserve and buy Australian bonds at 5.75%, pocketing the arbitrage difference. In fact, they can get a free lunch simply by borrowing and leaving this money on deposit at the Federal Reserve here in the United States. These “excess reserves” have soared since the Fed began to pay interest on them back in September 2008, when Lehman Bros. collapsed – the watershed date for the post-Bubble financial order.
When the Fed and Wall Street push the dollar down, the main victims are consumers. Import prices rise, while devaluation lowers the price at which their labor exchanges for that of foreign economies. When you devalue a currency, what you’re really devaluing is the price of labor, because all the other costs are globally fixed. Oil and raw materials prices, machinery prices and shipping remain fixed worldwide prices, so all exporting countries have a common cost structure for basic commodities and technology.
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.
I warned about this already in 2008 before Mr. Obama took office. The last presidential debate he had with Republican candidate John McCain was on a Friday night. McCain had just lost his “maverick” status by going back to Washington that day to say that he supported the bailout of the banks and wouldn’t take time off to debate until everyone agreed on the giveaway to the banks. So in the debate that evening, both candidates avoided discussing the bailout. The public was strongly against it, and if either candidate had opposed it, they would have lost their campaign contributions from Wall Street. And in any case, Senators McCain, and Obama both believed that the economy actually needed to be led by Wall Street as central economic planner and resource allocator. Alan Greenspan voiced the ideology more nakedly, but Mr. Obama follows it to such an extent that Marshall Auerback has called him the “Tea Party President.”
So what is happening today was signalled even before Mr. Obama too office, by the right-wing economic appointments he made – Larry Summers, who had pushed bank deregulation and replacing the Glass-Steagall Act as his chief economic advisor; Tim Geithner, the bank lobbyist as Secretary of the Treasury; and Rahm Emanuel representing Wall Street the interests in the way that the Democratic Leadership Committee had done since the Clinton administration. Later, after Mr. Obama appointed Bush Administration carry-overs Ben Bernanke at the Fed and Defense Secretary Gates, he said that in order for there to be a recovery, the banks had to be made whole. That meant, not take a loss – and leaving their management in place even when the government took over their stock, as in the case of Citibank.
The Obama administration raised the financial sector’s bailout to $13 trillion. This has vastly increased the government debt. And now, Mr. Obama wants to bring it back down by cutting back Social Security, Medicare, Medicaid and other social spending – to transfer wealth and income to the top of the economic pyramid. At the start of his administration he appointed a Deficit Reduction Commission led by advocates of cutting back Social Security and Medicare: Republican Senator Alan Simpson (McCain’s economic advisor!) and Clinton chief of staff Erskine Bowles, representing the right-wing Democratic Leadership Committee cite above. The aim of this commission was to give Mr. Obama an “experts’ report” supporting the diametric opposite of the liberal constituency that voted for him.
This is how he is doing what politicians are supposed to do: delivering his constituency (liberals, racial minorities, urban dwellers and the poor – in fact, the American mainstream) to his campaign contributors. In that respect Mr. Obama is America’s version of Tony Blair, or Greek Prime Minister Papandreou, nominal head of the Socialist International – taking a position way to the right of Greece’s Conservative party when it comes to imposing austerity and privatization sell-offs to bail out bankers to save them from taking a loss. And Sec. Geithner has been pushing Europeans to take a hard line to make sure that bondholders do not take a loss on their bad investments. He is insisting that Europe impose depression conditions as bad as those in the United States. With full support from Mr. Obama!(snip)



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