Michael Hudson is a former Wall Street economist
specializing in the balance of payments and real estate at the Chase Manhattan
Bank (now JP Morgan Chase & Co.), Arthur Anderson, and later at the Hudson
Institute (no relation). In 1990 he helped established the world�s first
sovereign debt fund for Scudder Stevens & Clark.
Dr. Hudson was Dennis Kucinich�s Chief Economic Advisor in
the recent Democratic primary presidential campaign, and has advised the U.S.,
Canadian, Mexican and Latvian governments, as well as the United Nations
Institute for Training and Research (UNITAR). A Distinguished Research
Professor at University of Missouri, Kansas City (UMKC), he is the author of
many books, including Super
Imperialism: The Economic Strategy of American Empire (new ed., Pluto
Mike Whitney: The
United States current account deficit is roughly $700 billion. That is enough �borrowed�
capital to pay the yearly $120 billion cost of the war in Iraq, the entire $450
billion Pentagon budget, and Bush�s tax cuts for the rich. Why does the rest of
the world keep financing America�s militarism via the current account deficit
or is it just the unavoidable consequence of currency deregulation, �dollar
hegemony� and globalization?
Michael Hudson: As I explained in Super Imperialism, central
banks in other countries buy dollars not because they think dollar assets are a
�good buy,� but because if they did NOT recycle their trade surpluses and U.S.
buyout spending and military spending by buying U.S. Treasury, Fannie Mae and
other bonds, their currencies would rise against the dollar. This would price
their exporters out of dollarized world markets. So the United States can spend
money and get a free ride.
The solution is (1) capital controls to block further dollar
receipts, (2) floating tariffs against imports from dollarized economies, (3)
buyouts of U.S. investments in dollar-recipient countries (so that Europe and
Asia would use their central bank dollars to buy out U.S. private investments
at book value), (4) subsidized exports to dollarized economies with
depreciating currency, and similar responses that the United States would adopt
if it were in the position of a payments-surplus country. In other words,
Europe and Asia would treat the United States as its Washington Consensus boys
treat Third World debtors: buy out their raw materials and other industries,
their export plantations, and their governments.
MW: Economist Henry
Liu said in his article �Dollar hegemony enables the US to own indirectly but
essentially the entire global economy by requiring its wealth to be denominated
in fiat dollars that the US can print at will with little in the way of
monetary penalties . . . World trade is now a game in which the US produces
fiat dollars of uncertain exchange value and zero intrinsic value, and the rest
of the world produces goods and services that fiat dollars can buy at �market
prices� quoted in dollars.� Is Liu overstating the case or have the Federal
Reserve and western banking elites really figured out how to maintain imperial
control over the global economy simply by ensuring that most energy,
commodities, and manufactured goods are denominated in dollars? If that�s the
case, then it would seem that the actual �face-value� of the dollar does not
matter as much as long as it continues to be used in the purchase of
commodities. Is this right?
Michael Hudson: Henry Liu and I have been discussing this
for many years now. We are in full agreement. The paragraph you quote is quite
right. His Asia Times articles provide a running analysis of dollar hegemony.
MW: What is the
relationship between stagnant wages for workers and the current credit crisis?
If workers wages had kept up with the rate of production, isn�t it less likely
that we would be in the jam we are today? And, if that is true, than shouldn�t
we be more focused on re-unionizing the labor force instead looking for
solutions from the pathetic Democratic Party?
Michael Hudson: The credit crisis derives from �the magic of
compound interest,� that is, the tendency of debts to keep on doubling and
redoubling. Every rate of interest is a doubling time. No �real� economy�s
production and economic surplus can keep up with this tendency of debt to grow
faster. So the financial crisis would have occurred regardless of wage levels.
Quite simply, the price of home ownership tends to absorb
all the disposable personal income of the homebuyer. So if wages would have
risen more rapidly, the price of housing would simply have risen faster as
employees pledged more take-home pay to carry larger mortgages. Stagnant wages
merely helped keep down the price of houses to merely stratospheric levels, not
As for labor unions, they haven�t been any help at all in
solving the housing crisis. In Germany where I am right now, unions have
sponsored co-ops, as they used to do in New York City, at low membership costs.
So housing costs only absorb about 20 percent of German family budgets,
compared to twice that for the United States. Imagine what could be done if
pension funds had put their money into housing for their contributors, instead
of into the stock market to buy and bid up prices for the stocks that CEOs and
other insiders were selling.
MW: When politicians
or members of the foreign policy establishment talk about �integrating� Russia
or China into the �international system,� what exactly do they mean? Do they
mean the dollar-dominated system which is governed by the Fed, the World Bank,
the IMF, and the WTO? Do countries compromise their national sovereignty when
they participate in the US-led economic system?
Michael Hudson: By �integrating� they mean absorbing,
something like a parasite integrating a host into its own control system. They
mean that other countries will be prohibited under WTO and IMF rules from
getting rich in the way that the United States got wealthy in the 19th and
early 20th centuries. Only the United States will be permitted to subsidize its
agriculture, thanks to its unique right to grandfather in its price supports.
Only the United States will be free from having to raise interest rates to stabilize
its balance of payments, and only it can devote its monetary policy to
promoting easy credit and asset-price inflation. And only the United States can
run a military deficit, obliging foreign central banks in dollar-recipient
countries to give it a free ride. In other words, there is no free lunch for
other countries, only for the United States.
Other countries do indeed give up their national
sovereignty. The United States never has adjusted its economy to create
equilibrium with other countries. But to be fair, in this respect only the
United States is acting fully in its own self-interest. The problem is largely
that other countries are not �playing the game.� They are not acting as real
governments. It takes two to tango when one party gets a free ride. Their
governments have become �enablers� of U.S. economic aggression.
MW: What do you
think the Bush administration�s reaction would be if a smaller country, like
Switzerland, had sold hundreds of billions of dollars of worthless
mortgage-backed securities to investment banks, insurance companies and
investors in the United States? Wouldn�t there be litigation and a demand that
the responsible parties be held accountable? So, how do you explain the fact
that China and the EU nations, that were the victims of this gigantic swindle,
haven�t boycotted US financial products or called for reparations?
Michael Hudson: International law is not clear on financial
fraud. Caveat emptor is the rule. Foreign investors took a risk. They trusted a
deregulated U.S. financial market that made it easiest to make money via
financial fraud. Ultimately, they put their faith in neoliberal deregulation --
at home as well as in the United States. England is now in the same mess. The
�accountability� was supposed to lie with U.S. accounting firms and credit
rating agencies. Foreign investors were so ideologically blinded by free market
rhetoric that they actually believed the fantasies about �self-regulation� and
self-regulating markets tending toward equilibrium rather than the real-world
tendency toward financial and economic polarization.
In other words, most foreign investors lack a realistic body
of economic theory. The United States could simply argue that they should take
responsibility for their bad investments, just as U.S. pension funds and other
investors are told to do.
MW: The Congress
recently passed a bill that gives Treasury Secretary Henry Paulson the
unprecedented authority to use as much money as he needs to keep Fannie Mae and
Freddie Mac solvent. Paulson assured the Congress that he wouldn�t need more
than $25 billion but the 400-page bill allows him to increase the national debt
by $800 billion. How will the Fannie/Freddie bailout affect the dollar and the
budget deficit? Are interest rates likely to skyrocket because of this action?
Michael Hudson: The Fed can flood the economy with money,
Alan Greenspan-style, to prevent interest rates from skyrocketing. Nobody
really knows what will happen to FNMA and Freddie Mac, but it looks like the
mortgage and financial crisis will get much, much worse over the coming year.
We are just heading into the storm where adjustable-rate mortgages (ARMs) are
scheduled to reset at higher rates, and where U.S. banks have to roll over
their existing debts in a market where foreign investors fear that these banks
already have no net worth left.
So the principle here is �Big fish eat little fish.� Wall
Street will be bailed out, and banks will be allowed to �earn their way out of
debt� as they did after 1980, by exploiting retail customers, above all
credit-card customers and individual borrowers. There will be a lot of
bankruptcies, and people will suffer more than ever before because of the harsh
pro-creditor bankruptcy law that Congress passed at the behest of the bank lobbyists.
MW: A few months
ago, the Wall Street Journal ran an editorial which said that they could
imagine two nightmare scenarios if the current credit crisis was not handled
properly, either there would be a run on the dollar causing a sudden plunge in
its value, or the unexpected failure of a major financial institution could
send the stock market crashing. Last week, the former head of the IMF Kenneth
Rogoff triggered a sell-off on Wall Street when he said, �We�re not just going
to see mid-sized banks go under in the next few months, we�re going to see a
whopper, we�re going to see a big one -- one of the big investment banks or big
banks.� What happens if Rogoff is right and Merrill, Citi or Lehman goes belly
up? Is that enough to send the stock market free falling?
Michael Hudson: Not necessarily. Citibank would be
nationalized, then sold off. The principle should be that if a bank is �too big
to fail,� it should be broken up.
This should start with a repeal of the Clinton
Administration�s repeal of Glass-Steagall.
As for Lehman, that would be given the Bear Stearns
treatment, and also sold off -- probably to a hedge fund. Merrill is much
larger, but it also could be parceled out, I suppose. The stock market�s
financial index would plunge, but not necessarily industrial stock prices.
MW: According to
MarketWatch: �In the three months from April to June, banks posted their second
worst earnings performance since 1991. . . . Earnings for the quarter totaled
just $5 billion, compared with $36.8 billion a year ago, a decline of 86.5
percent.� Also, according to a front-page article in the Wall Street Journal: �financial
institutions will have to pay off at least $787 billion in floating rate notes
and other medium term obligations before the end of 2009.� How are the banks
going to pay off nearly $800 billion ($200 billion by December!) when they only
earned a measly $5 billion in the quarter? And how in the world is the Federal
Reserve going to keep the banking system functioning when earnings can�t even
cover current liabilities? Do the banks have some secret source of revenue we
don�t know about or is the system headed for disaster?
Michael Hudson: The traditional way to pay debt is with yet
MORE debt. The interest due is simply added on to the principal, so that the
debt grows exponentially. This is the real meaning of �the magic of compound
interest.� It means not only that savings left to accumulate interest keep on
doubling and redoubling, debts do to, because the savings that are lent out on
the �asset� side of the creditor�s balance sheet (today, that of America�s
wealthiest 10 percent) become debts on the �liabilities� side of the balance
sheet (the �bottom 90 percent�).
The banks don�t have a secret source of revenue. It�s right
out in the open. They will take their junk mortgages to the Federal Reserve and
borrow the money at full face value. The government will be left with the junk.
It then can either take over the bank, as the Bank of
England did with Northern Rock when it went bankrupt early this year, or it can
let the bank �earn� money by stiffing its customers some more.
MW: From 2000 to
2006, the total retail value of housing in the United States doubled, going
from roughly $11 trillion to $22 trillion in just 6 years. For the last 200
years, housing has barely kept pace with the rate of inflation, usually
increasing 2 to 3 percent per year. The Federal Reserve�s low interest rates
were the main cause of this unprecedented housing bubble and, yet, ex-Fed chief
Alan Greenspan still denies any responsibility for what �The Economist� calls �the
largest bubble in history.� Did Greenspan understand the problems he was
creating with his �loose� monetary policies or was there some ulterior motive
to his actions?
Michael Hudson: He simply didn�t care about the problem. He
saw his job as a cheerleader for people who were able to get rich fast. These
always had been his major clients in his years on Wall Street, and he saw
himself as their servant -- sort of like a pilot fish for sharks.
Mr. Greenspan�s idea of �wealth creation� was to take the
line of least resistance and inflate asset prices. He thought that the way to
enable the economy to carry its debt overhead was to inflate asset prices so
that debtors could borrow the interest falling due by pledging collateral (real
estate, stocks and bonds) that were rising in market price. To his Ayn Rand
view of the world, one way of making money was as economically and socially
productive as any other way of doing so. Buying a property and waiting for its
price to inflate was deemed as productive as investing in new means of
Ever since his days as co-founder of NABE (the National
Association of Business Economists), Greenspan has long looked only at GNP and
the national balance sheet as an economic indicator, being �value-free.� This
is his intellectual and conceptual limitation. He wanted to provide a way for
savvy investors to get rich, and the easiest way to get rich is to be passive
and get a free lunch. His ideology led him to believe the �free market�
ideology that the financial sector would be self-regulating and hence would act
honestly. But he opened the floodgates to financial crooks. His set of measures
did not distinguish between Countrywide Financial getting rich, Enron getting
rich, or General Motors or industrial companies expanding their means of
production. So the economy was being hollowed out, but this didn�t appear in
any of the measures he looked at from his perch at the Federal Reserve.
So just as journalists and the mass media proclaim every
market downturn as �surprising� and �unexpected,� he was as clueless as a
lemming running headlong over the cliff. It�s an inherent instinct for
MW: The housing
market is freefalling, setting new records every day for foreclosures,
inventory, and declining prices. The banking system is in even worse shape,
undercapitalized and buried under a mountain of downgraded assets. There seems
to be growing consensus that these problems are not just part of a normal
economic downturn, but the direct result of the Fed�s monetary policies. Are we
seeing the collapse of the Central banking model as a way of regulating the
markets? Do you think the present crisis will strengthen the existing system or
make it easier for the American people to assert greater control over monetary
Michael Hudson: What do you mean �failure�? Your perspective
is from the bottom looking up. But the financial model has been a great success
from the vantage point of the top of the economic pyramid looking down? The
economy has polarized to the point where the wealthiest 10 percent now own 85
percent of the nation�s wealth. Never before have the bottom 90 percent been so
highly indebted, so dependent on the wealthy. From their point of view, their
power has exceeded that of any time in which economic statistics have been
You have to realize that what they�re trying to do is to
roll back the Enlightenment, roll back the moral philosophy and social values
of classical political economy and its culmination in Progressive Era
legislation, as well as the New Deal institutions. They�re not trying to make
the economy more equal, and they�re not trying to share power. Their greed is
(as Aristotle noted) infinite. So what you find to be a violation of traditional
values is a re-assertion of pre-industrial, feudal values. The economy is being
set back on the road to debt peonage. The Road to Serfdom is not government
sponsorship of economic progress and rising living standards, it�s the
dismantling of government, the dissolution of regulatory agencies, to create a
new feudal-type elite.
The former Soviet Union provides a model of what the
neoliberals would like to create. Not only in Russia but also in the Baltic
States and other former Soviet republics, they created local kleptocracies,
Pinochet-style. In Russia, the kleptocrats founded an explicitly Pinochetista
party, the Party of Right Forces (�Right� as in right wing).
In order for the American people or any other people to
assert greater control over monetary policy, they need to have a doctrine of
just what a good monetary policy would be. Early in the 19th century, the
followers of St. Simon in France began to develop such a policy. By the end of
that century, Central Europe implemented this policy, mobilizing the banking
and financial system to promote industrialization, in consultation with the
government (and catalyzed by military and naval spending, to be sure). But all
this has disappeared from the history of economic thought, which no longer is even
taught to economics students. The Chicago Boys have succeeded in censoring any
alternative to their free-market rationalization of asset stripping and
My own model would be to make central banks part of the
Treasury, not simply the board of directors of the rapacious commercial banking
system. You mentioned Henry Liu�s writings earlier, and I think he has come to
the same conclusion in his Asia Times articles.
MW: Do you see the
Federal Reserve as an economic organization designed primarily to maintain
order in the markets via interest rates and regulation or a political
institution whose objectives are to impose an American-dominated model of
capitalism on the rest of the world?
Michael Hudson: Surely, you jest! The Fed has turned
�maintaining order� into a euphemism for consolidating power by the financial
sector and the FIRE sector generally (Finance, Insurance and Real Estate) over
the �real� economy of production and consumption. Its leaders see their job as
being to act on behalf of the commercial banking system to enable it to make
money off the rest of the economy. It acts as the Board of Directors to fight
regulation, to support Wall Street, to block any revival of anti-usury laws, to
promote �free markets� almost indistinguishable from outright financial fraud,
to decriminalize bad behavior -- and most of all to inflate the price of
property relative to the wages of labor and even relative to the profits of
The Fed�s job is not really to impose the Washington Consensus
on the rest of the world. That�s the job of the World Bank and IMF, coordinated
via the Treasury (viz. Robert Rubin under Clinton most notoriously) and AID,
along with the covert actions of the CIA and the National Endowment for
Democracy. You don�t need monetary policy to do this -- only massive bribery.
Only call it �lobbying� and the promotion of democratic values -- values to
fight government power to regulate or control finance across the world.
Financial power is inherently cosmopolitan and, as such, antagonistic to the
power of national governments.
The Fed and other government agencies, Wall Street and the
rest of the economy form part of an overall system. Each agency must be viewed
in the context of this system and its dynamics -- and these dynamics are
polarizing, above all from financial causes. So we are back to the �magic of
compound interest,� now expanded to include �free� credit creation and
The problem is that none of this appears in the academic
curriculum. And the silence of the major media to address it or even to
acknowledge it means that it is invisible except to the beneficiaries who are
running the system.
Whitney lives in Washington state. He can be reached at firstname.lastname@example.org.