Michael Hudson’s analysis

October 9, 2008 § Leave a comment

The writing about the current crisis is quite intense. See for example Michael Hudson who writes Will the Cure be Worse than the Disease?

The problem as I see it, before the article, is that we may not be able to ay for the changes because we have much  real economy to fallback on to pay the bills.

Saturday’s $700 billion junk mortgage bailout is the largest and worst giveaway since a corrupt Congress gave land grants to the railroad barons a century and a half ago. If it goes through, it will shape the coming century by giving finance unprecedented power over debtors – homebuyers, industry, state and local government, and the federal government as well….

To provide a sense of proportion, this money could have funded the next forty or fifty years of Social Security. It could have funded health care for all Americans. It could have made a big step toward rebuilding the nation’s crumbling infrastructure.

But if you were a taxpayer who needed to use a credit card, you paid through the nose. The banks earned their way out of debt at your expense. And by the way, if you really did pay an income tax, you probably did not own commercial real estate or significant financial assets. The Internal Revenue Service made commercial real estate and a large swath of finance (at least for the wealthiest investors) income-tax free by generating tax credits that could be applied against income across the board. The capital-gains tax was lowered to a fraction of the income tax, leading investors to pay out whatever income their investments generated as interest on loans to buy property they expected to sell at a markup.

 

Cities and states vied with each other to slash property taxes, replacing them with income and sales taxes that fall mainly on labor and consumers.

 

The bailout is to be achieved by letting Wall Street’s post-Glass-Steagall financial conglomerates charge their customers exorbitant financial charges.

 

For Mr. Paulson this means not giving Congress a chance to represent the public interest in designing the terms of this giant bailout. Sec. 8 of the Treasury plan bans any Congressional review, giving him unprecedented power by: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Under cover of emergency force majeurconditions, the plan is to take the money and run, preferably without permitting any Congressional debate.

 

This itself is an undeserved giveaway to the financial institutions that caused the problem by living recklessly in the short run. But making them – and indeed, helping them – pay back this gift with the aid of favorable tax and deregulatory policies will simply shift the cost off their shoulders onto those of bank depositors, credit-card users, mortgage borrowers and hapless pension-fund contributors to the money managers who have taken most of the current income in the form of commissions, salaries and bonuses to themselves. This will sharply add to the price of doing business in the United States, and specifically to the economy’s debt overhead by the banks making evenmore predatory loans.

 

It gets worse. In order for the existing junk mortgages to be “made good,” real estate prices must be raised further above the ability to pay for this year’s five million homeowners in arrears and facing default. Is this a good thing? Is it good to raise access prices for housing even more, forcing new homebuyers to go further into debt than ever before to gain access to housing? Mr. Paulson has directed the Federal Reserve, Fannie Mae, Freddie Mac and the FHA (Federal Housing Authority) to re-inflate the real estate market. They are to pump nearly a trillion dollars into the mortgage market.

 

Fiscal policy is also to be brought to bear to turn the real estate market around by pressuring cities and states to “help homeowners pay their mortgage debts” by cutting property taxes. The idea is to leave more revenue available for property owners to pay mortgage bankers.

 

The last thing the economy needs is a new real estate bubble. To prevent it, local property taxes need to be raised, not lowered. But this is not the Treasury’s plan. Instead of representing the national interest, it is representing the banking sector whose profits come from making more and bigger loans.

 

The Treasury and Fed have opted to keep fictitious capital claims alive, forgetting the living debtors saddled with exploding adjustable-rate mortgages (ARMs) and toxic “negative amortization” mortgages that keep adding on the interest (and penalties) to the existing above-market balance.

 

The question to be asked is just how much will the economy’s debt overhead grow, and what will it cost debtors (a.k.a. “taxpayers”)? And how will the economy look when the dust settles?

 

The new circular flow runs from the Fed and Treasury to Wall Street in the form of bailouts, and then back to Republicans in Washington in the form of campaign contributions. The money circulates without having to go through the “real” economy of production and consumption at all.

 

The problem is that the banks have not been financing growth in the form of tangible capital investment, but have found their quickest profits to lie in a combination of asset stripping and asset-price inflation.

 

The conglomerate financial firms are permitted at this point to use private individual brokerage account funds to relieve their own liquidity pressures. This represents unauthorized loans of your stock account assets. So next, if the conglomerate fails, your stock account is part of the bankruptcy process. …

 

The Republicans will take the $800 billion of U.S. Treasury securities presently earmarked for the Social Security Administration accounts, and achieve the privatization that Pres. Bush and his backers have been pressing for so hard for the past eight years. Under emergency conditions – today’s 9/21 as the modern analogue to 9/11 just seven years ago (the well-known natural lifespan of locusts) – will swap these Treasury bonds for junk

 

Hedge fund traders and kindred banksters have metamorphosized into “the financial system to be saved” and hence “the economy” itself.

 

What America has is a bad debt problem, not a “liquidity” problem. There is no “illiquidity” when people refuse to buy a junk mortgage on a property worth only a fraction of the mortgage’s face value. Many of these bad mortgage loans are fraudulent. The Treasury bailout seeks to make $700 billion of fictitious financial claims “real” – that is, way overvalued as compared to their actual worth(lessness).

 

Politics and people have turned out to be more important than the law.

 

Otherwise, firms that have negative equity will benefit purely at public expense, using the money to pay dividends, bonuses and exorbitant salaries.

 

So, have you heard that the U.S., as a whole, is overextended?   Have you heard that the federal government is “rescuing” the bad debt in the private sector by taking it on as their own, really all our children’s own, hopefully not-quite-as-bad debt? 

We’re just moving the debt around in our economy, not getting rid of any of it.  For proof one need only look up at the National Debt Clock in NYC, which in the past week had to give up its dollar-sign digit for a “1″.  The owner of the sign is working on getting a couple more digits added to the clock.  Why do I worry that folks might interpret that as an increase in the debt/credit limit of the country?

 

and from this PETER S. GOODMAN morning’s NYT,  Taking Hard New Look at a Greenspan Legacy “Derivatives have long had a great supporter in the former Federal Reserve Chairman Alan Greenspan”

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You are currently reading Michael Hudson’s analysis at Reflections on GardenWorld Politics Douglass Carmichael.

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