HUDSONs
SLOW CRASH
Based on an interview
to
Michael Hudson June
5, 2017
As published in Harper’s
Magazine.
OR
SLOW CRASH.
Economist Michael Hudson on the future of the stock market
Interview By Andrew Cockburn
INTRODUCTION
Two years before
the 2008 Wall Street crash that toppled the global economy into deep recession,
Harper’s Magazine published a dark prophecy of what was to come. In “The New Road to Serfdom,” economist Michael Hudson
laid out how millions of Americans had taken on huge debts to buy houses on the
presumption that they could later sell them at a profit. “Most everyone
involved in the real estate bubble so far has made at least a few dollars,”
he wrote. “But that is about to change. The bubble will
burst, and when it does the people who thought they would be living the easy
life of a landlord will soon find out that what they really signed up for is
the hard servitude of debt serfdom.” As the twenty million people who
lost their homes discovered, Hudson got it entirely right.
Today,
unemployment is at record lows, and the stock market is at record highs. Allegedly, we have recovered from the
disaster. I talked to Hudson, Distinguished Professor of Economics at the
University of Missouri-Kansas City and the author, most recently, of J is For Junk Economics, A Guide to Reality in an Age of
Deception, about his pre-crash prediction, and what
he now sees in our future.
-The Interview: Here only Extracts-
AS YOU
PREDICTED AND AS HAPPENED, PEOPLE JUST COULDN’T PAY ANYMORE AND THE THING
COLLAPSED. YOU COULD’VE MADE A LOT OF MONEY OUT OF THIS. DID YOU?
No, I couldn’t. I could only make money if someone would’ve
lent me a billion dollars, like they lent to Mr. Paulson [the Wall Street
operator who made billions out of the housing crash] to bet against it. I’m a
professor and a book writer. They’ll only lend you money if they can grab the
assets, and I’m somebody that doesn’t have many assets, except a big collection
of economics books.
HAVE YOU
EVER HEARD OF SOMEONE SITTING ON WALL STREET WHO READ HARPER’S IN MAY 2008 AND
ACTED APPROPRIATELY?
I don’t think they needed me. If they’re on Wall Street,
they didn’t need me to tell them that the economy is going to collapse. They
all knew it was going to collapse. That was in the language of “liar’s loans”
and “NINJAs.” It was pretty obvious what was going on. It’s just the media
didn’t talk about it because the media was giving handouts from Alan Greenspan
saying that it’s not possible for there to be a real estate collapse, it’s only
local. The media are cheerleaders for the stock market. Whenever it goes up they
celebrate, even if it goes up because there’s a short squeeze on speculators.
The media have not done a good job in educating the American public.
HAS THAT
IMPROVED IN THE TIME SINCE THE CRASH? DID THEY LEARN ANYTHING?
No. If anything, it’s gone down, because the media have all
been in a financial squeeze, and they’re getting pretty inexperienced editors,
reporters.
AT LEAST
YOU HAVE THE SATISFACTION, IF THAT’S THE WORD, OF EVENTS PROVING YOU CORRECT.
BUT WE’VE SUPPOSEDLY NOW RECOVERED FROM THAT DISASTER. HAVE WE?
No, we haven’t at all recovered. That’s why Hillary lost the
election. She said, “Look at how much better you are since 2008. Obama has
saved you.” Trump said, “Wait a minute. Look at how bad you are. You’re not
saved.” Everybody thought, “Who are you going to believe, your eyes or
Hillary?” We haven’t recovered at all. Obama saved the banks and Wall Street,
not the economy. From 2008 until today, the economy has grown by 2 percent, but
the top 5 percent of the economy have got all of that growth. The economy isn’t
recovering.
That’s why when the Department of Labor statistics gave the
most recent employment figures, everybody commented, “It’s very interesting.
Employment is up, but wages are continuing to fall.” It’s all minimum wage
work. The debt ratio for most families is rising, not falling, especially for
student debt, for mortgage debt, for automobile debt. The default rate is
continuing to rise.
LAST TIME
AROUND IT WAS HOUSING DEBT OR HOUSING LOANS THAT BLEW EVERYTHING UP. HAVE THE
LOANS YOU JUST MENTIONED BEEN TURNED INTO SPECULATIVE PACKAGES SIMILAR TO THE
INFAMOUS COLLATERALIZED DEBT OBLIGATIONS [SECURITIES BASED ON HOUSING LOANS] OF
YESTERYEAR?
The difference between today’s packaged student and auto
loans compared to those toxic junk mortgage loans is that the buyers recognize
the risks involved. No ratings agencies are going to stick AAA labels on
consumer debt where arrears and defaults are soaring. They are unlikely even to
package student debt from for-profit “universities” or technical schools with
bona fide institutions. Every investor knows that students are NINJAs – No
income, No jobs, and no assets.
[But] you could say that the whole stock market is a kind of
a ponzi scheme, because $4.3 trillion has been provided to the banks by the
Federal Reserve in quantitative easing to keep the interest rates down. So if
you’re a good bank customer, you can borrow from the bank at 2 percent, you can
borrow to take over a company or to buy stocks or to buy risky bonds that are
yielding more, and you can make an arbitrage. That is, you can make in
dividends or interest more than you have to pay.
SO ARE WE
HEADING FOR ANOTHER EXPLOSION COMPARABLE TO 2008?
I’m not sure it’ll be an explosion. It’s more like a slow
crash. It’s more like people are getting desperate. They’re having to live off
their credit cards, not to buy luxuries but just simply to break even. They’re
falling further and further behind, and as they fall behind the interest rate
rises, the penalties rise, so people are getting more and more squeezed.
That’s why where I live in New York City, on all the big
shopping streets there are more and more storefronts for rent. The stores are
going out of business, especially the stores that are either mom and pops, or
small well-known stores like art supply stores that have been there for a
generation. Only the big chains are surviving, and even the chains are closing
down, Sears and others. Entire shopping malls are going into default.
BUT WE
KEEP BEING TOLD THAT THIS IS BECAUSE PEOPLE ARE SHIFTING TO ONLINE SHOPPING. IS
THAT NOT THE CASE?
Certainly many people are shopping online, but that’s not
the real cause. The real cause is that overall retail sales are going down,
because the average wage earner is only able to spend between a quarter and a
third of their income on goods and services, after what’s left over from
housing and taxes. The Federal Housing Authority now guarantees government
mortgages up to 42 percent of your income. In New York City it’s normal to pay
40 percent of your income for rent.
Assume that 40 percent of your income goes for housing.
Maybe 15 percent of your income is taken right off the paycheck by the FICA
[Federal Insurance Contributions Act] for Social Security and essentially
pre-saving for Social Security medical care (which provides the government with
enough money to cut taxes on the higher brackets.) There’s another 10 percent
to 15 percent in income taxes, local income taxes, and sales taxes. In addition
to paying the mortgage debt, people have to pay bank debt, auto debt, and
credit card debt. That’s about 10 percent. When you add all of these up,
there’s only about maybe 30 percent of the income that they can spend on goods
and services.
Economic textbooks talk about a circular flow, where the
workers will get paid wages and they buy what they produce. That’s why Henry
Ford paid his workers $5.00 a day, so that they could afford to buy cars. Now
they only have a little bit to buy what they produce, and the rest of their
money goes to the banks and to the government to give tax cuts for the top 10
percent. You’re having a slow squeeze on the middle class and the working class
in this country, and it’s stifling the domestic market.
HOW DO YOU
EXPLAIN WHAT ARE BILLED AS RECORD LOW UNEMPLOYMENT FIGURES?
People are desperate to go to work. But if you look at where
the jobs are, these are minimum wage jobs. Most of the jobs are in retail,
trade, or in other low-paying jobs. Yes, employment is going up, but at very
low wages that don’t enable families to save. You can see this particularly
every two years when the Federal Reserve publishes a survey of consumer
finances. You can see for instance that blacks and Hispanics have almost no
savings at all, and 50 percent of the American population as a whole doesn’t have
any savings because if you’re earning a low salary, then almost all of what you
do earn has to go to pay for rent and for bank credit and for taxes.
YOU SAY
THE MOST LIKELY PROSPECT FOR THE FUTURE IS A “SLOW CRASH” BUT WHEN YOUR ROAD TO
SERFDOM PIECE RAN IN HARPER’S, THE CASE-SCHILLER NATIONAL HOME PRICE INDEX
STOOD AT 184.38. AS OF FEBRUARY THIS YEAR IT STOOD AT 185.56. WHY SHOULDN’T
THERE BE A SIMILAR BLOW-UP?
Nowadays nearly all residential mortgages are guaranteed by
the government’s Federal Housing Agency (and have been since 2008), so banks
are not threatened. The government is on the hook to guarantee American
mortgage loans as well as student loans.
A large portion of the millions of homes that were
foreclosed have been bought by hedge funds, often for all cash – because they
can make more money renting them out than they can make in the financial
markets. So this real estate is not debt leveraged.
Wall Street’s investment banks and bondholders were rescued,
not the economy. The debts were left in place, and continue to grow not only by
compound interest but by arrears and penalties compounding. The proportion of
national income paid as interest, insurance fees and economic rent is rising
faster than the economy is growing.
Banks lend mainly to other financial institutions. They
don’t lend to factories that are creating jobs. They don’t lend out for goods
and services. They lend to other financial institutions. The whole economy has
turned into trying to make money on speculation and arbitrage, not on producing
goods and services, not on hiring people to actually do work. The economy
therefore is very fragile.
The whole economy at the end of the road is going to look
like Greece or Spain or Portugal or Italy. All of these economies are shrinking
by what’s called debt deflation. In other words, people have to pay either so
much debt or they have to have forced saving, like pension fund saving, that
the economy is shrunk for financial reasons, for putting more and more of its
money out of the real economy of goods and services into the financial sector.
IS THAT
YOUR PREDICTION FOR OUR FUTURE HERE IN THE UNITED STATES? GREECE?
Yes, a slow crash as more and more money is drained from the
economy to pay the FIRE sector—finance, insurance, and real estate—not the
goods and service producing sector.
IT ALL
SOUNDS LIKE A GHASTLY INEVITABILITY. IS THERE ANYTHING TO BE DONE TO SAVE US
FROM THIS?
Sure. There are a number of things. One of the things that
Trump had suggested in the campaign was to remove the tax deductibility of
interest. The tax system subsidizes the financial sector and subsidizes going
into debt. It would be best not to give the favoritism to the financial sector.
For example the real estate sector since World War II has hardly paid any
income tax at all, because it has fictitious deductions. Even though real
estate goes up and up and up, the real estate owner can pretend that the
building’s losing value, as if it’s depreciating instead of going up in value.
It can take this depreciating as if it’s an actual cost, even though there’s no
cash at all. They don’t have to pay any income tax, because when you take
depreciation, interest, and the high salaries they pay themselves, it appears
as if they’re not earning any money at all.
The oil industry, the minerals industry, all of the rent
extracting industries, the rentier industries, don’t have to pay tax. Only the
industrial sector and the workers and the middle class have to pay taxes.
That’s a backward tax system. This is the opposite of where economic theory was
going for over one hundred years.
COULD WE
QUICKLY DEFINE FOR THOSE WHO MIGHT NOT KNOW, “RENT” AND “RENTIER?”
Rent is unearned income. Rent is what landlords get, “what
they make in their sleep” as John Stuart Mill said. The landlord gets rent
simply for inheriting or somehow being able to buy property and then gouging
the renter for whatever will bear. Or rent is what is from natural resources.
If you’re given a forest or an oil well or a mine, the rent is what you make
over the actual cost of production and over the actual profit that’s made.
A rentier is someone who used to be called a coupon clipper.
The original meaning of rent was to own a government bond in French. Rent is
somebody who earns income every month or every quarter without doing any work
at all, just by ownership privilege, just by inheriting wealth or somehow
acquiring wealth and getting money without any work or any real value being
produced
YOU
SUGGESTED THAT TRUMP MIGHT’VE HAD THE RIGHT IDEA WITH HIS SUGGESTION TO ABOLISH
THE DEDUCTION FOR INTEREST. DO YOU SEE ANY SIGN OF THAT HAPPENING?
NOT A CHANCE.
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