This post originally appeared in Fellowship of Reconciliation. John Repp is a community activist and coordinates the Seattle Public Bank Coalition.
The wealth of the 1% comes from the 99%. The 99% are enriching the 1%. There are many ways this happens, for example low wages and high prices. But increasingly, today, the 99% redistribute their wealth through indebtedness. In order to try and live in dignity, the 99%, or at least two-thirds of them that have debts, pay off their debts with interest as they educate themselves, buy houses or small businesses, buy a car, and use their charge cards. Debt peonage is ancient, much older than the industrial revolution and this older pattern is becoming more prominent every day
Since the crash of 2008, millions of people here and around the world have lost businesses, homes, and jobs. Today, many others despair at their not getting ahead financially. Too many blame themselves, thinking there is something wrong with their ability or drive. If they understood the economic, political, and financial system in which we live, maybe they would not blame themselves and we could find a collective solution to our problems.
Michael Hudson, distinguished research professor of economics at the University of Missouri, Kansas City has just written a book entitled Killing the Host (2015). Hudson writes that the FIRE sector (Finance, Insurance, and Real Estate) along with the monopoly control of natural resources like oil and gas is theparasite. Finance i.e. banks (what we call Wall Street) is the leader of the parasitic forces. The host is the productive economy like manufacturing and farming and needed services like health care and education. Even more sinister is the fact that, just like in biology, a successful parasite often inserts behavior-modifying enzymes into the host so the host acts like the parasite is part of itself and does not try to reject the parasite. In this case, the behavior modifying enzymes are a set of false ideas dominating the economics departments of leading American universities. Hudson calls those ideas “junk economics” and in this book Hudson labors to correct those false ideas. More often the set of ideas is called “neo-liberalism”. The politicians and technocrats like Geithner, Summers, Greenspan, Rubin, Clinton, and Obama put those ideas into practice inside the government of the host economy. Banks now control our economic and financial policy. The USA is no longer a democracy at the top. It is an oligarchy.
There is $11.8 trillion in private debt in USA, for houses, education, cars, and consumption. This is overhead and it causes the price of housing, education, cars and consumer goods to be higher. Hudson called this “asset-price inflation”. The debts displace money for other things in people’s budgets. Hudson calls this “debt deflation”. It is the private debt overload that is harming the US economy, not the government debt. Mixing the two up is one of the main ideas of “junk economics”. Just ask yourself, would you worry about paying your debts if you could print new money? It is the ability to create new money that makes a sovereign government like the United States very different than a private household. Evidence that private debt is overhead is the fact that after each business cycle since the end of World War II, the private debt in the USA has increased and each recovery has been weaker.
Another idea of “junk economics”, alluded to in the metaphor of parasite and host, is ignoring the difference between on the one hand actual production like manufacturing, farming, or needed services like health care and education, and on the other hand, the paying of interest to private banks. Calling them both “wealth creation” confuses people, especially economics students and via the mass media, the general public. It results in bad policy like the tax deductibility of interest and the tax favoritism of capital gains. A third key idea of “junk economics” is the idea that what a person earns in our society is a measure of the contribution they have made to wealth of our society. A hedge fund owner making a million dollars a hour, and that has happened, does not contribute 66,666 times what a $15 an hour person contributes.
Hudson writes that Obama presided over an oligarchic coup d’état. He let Geithner and Summers convince him, after the collapse of Lehman Brothers, that if the other big Wall Street Banks and hedge funds collapsed, the world economy would collapse. But there was an alternative to the bailouts. The Treasury Department could have taken control of the insolvent banks and could have wound them down like was done after the Savings and Loan crisis in the 1980’s and 1990’s. The FBI and SEC (Securities and Exchange Commission) could have continued their investigations into widespread mortgage fraud i.e. the creditors committed fraud, encouraged by the big Wall Street banks, by making loans to people they knew would not be able to pay back the loans, especially, after the higher interest rates kicked in after a few years. The Obama administration continued the Bush policy of stopping the FBI investigations. What was done instead was to bailout the winning speculators in unregulated derivatives, what Warren Buffet called “financial weapons of mass destruction” Even the insolvent banks, primarily Citibank and Goldman Sachs, could have made whole the plain vanilla part of the their business. The threat that America’s ATM machines would have run out of cash was bogus. Seeing that there was an alternative, especially an alternative with a precedent in our history, makes clear why Hudson says Obama presided over an oligarchic coup d’état.
There is an intriguing quote in the book: “If there is a second meltdown…it will come from a political revolt…probably not originating in the United States.. (e.g. a country like Greece cannot or refuses to pay its debts)” James K. Galbraith, fall 2013
There is another possibility that Hudson does not mention. From The Methods of Nonviolent Action (1973) by Gene Sharp, we read that method number 88 is the nonpayment of debts or interest. (pp. 238-239) If a mass movement of debtors would stop paying interest of their odious debts, it could cause banks to become insolvent. The movement should then demand the nationalization of Wall Street and the Federal Reserve and write-down of people’s odious debts, the taxation of “economic rent” which is unearned income from monopoly privilege, the revocation of the deductibility of interest, the creation of a public bank option, and the adoption of the policies of Modern Monetary Theory in which the nationalized Federal Reserve would create new money and Congress would spend it into the economy. Currently, the public/private Federal Reserve creates new money and gives it to the big Wall Street Banks to prop up their balance sheets, a process called “quantitative easing”. Hudson has a 10 point program (p.403) He writes that “reform must be across the board, not piecemeal” (p. 406) and it “must be done quickly and totally, not slowly and marginally” (p.407).
Behind ancient debt bondage and the modern form of debt peonage is the same basic dynamic. The real economy cannot grow as fast as compound interest does. Because the temples and the palaces of the rulers in Mesopotamia and Egypt loaned the money that indebted the poor, when the social stress became too destructive, because the creditors were public institutions, they could cancel the debts more easily than the private creditors of today. The cancellation of debts released the bondsman, a form of slavery, to return to their families or their land. This was referred to in the Bible as Jubilee. Hudson’s main academic area of study is the ancient Near East economies and long term economic trends. He was one of the few economists to predict the financial crash of 2008.