Prosper Australia

photo credit: elodole

MICHAEL HUDSON

Former Treasury Secretary Hank Paulson wrote an op-ed in The New York Times yesterday, February 16 outlining how to put the U.S. economy on rations. Not in those words, of course. Just the opposite: If the government hadn’t bailed out Wall Street’s bad loans, he claims, “unemployment could have exceeded the 25 per cent level of the Great Depression.” Without wealth at the top, there would be nothing to trickle down.

The reality, of course, is that bailing out casino capitalist speculators on the winning side of A.I.G.’s debt swaps and CDO derivatives didn’t save a single job. It certainly hasn’t lowered the economy’s debt overhead. But matters will soon improve, if Congress will dispel the present cloud of “uncertainty” as to whether any agency less friendly than the Federal Reserve might regulate the banks.

Paulson spelled out in step-by-step detail the strategy of “doing God’s work,” as his Goldman Sachs colleague Larry Blankfein sanctimoniously explained Adam Smith’s invisible hand. Now that pro-financial free-market doctrine is achieving the status of religion, I wonder whether this proposal violates the separation of church and state. Neoliberal economics may be a travesty of religion, but it is the closest thing to a Church that Americans have these days, replete with its Inquisition operating out of the universities of Chicago, Harvard and Columbia.

If the salvation is to give Wall Street a free hand, anathema is the proposed Consumer Financial Protection Agency intended to deter predatory behavior by mortgage lenders and credit-card issuers. The same day that Paulson’s op-ed appeared, the Financial Times published a report explaining that “Republicans say they are unconvinced that any regulator can even define systemic risk. … the whole concept is too vague for an immediate introduction of sweeping powers. …” Republican Senator Bob Corker from Tennessee was willing to join with the Democrats “to ensure ‘there is not some new roaming regulator out there … putting companies unbeknownst to them under its regime.”

Paulson uses the same argument: Because the instability extends not just to the banks but also to Fannie Mae and Freddie Mac, Lehman Brothers, A.I.G. and Wall Street underwriters, it would be folly to try to regulate the banks alone! And because the financial sector is so far-flung and complex, it is best to leave everything deregulated. Indeed, there simply is no time to discuss what kind of regulation is appropriate, except for the Fed’s familiar protective hand: “delays are creating uncertainty, undermining the ability of financial institutions to increase lending to businesses of all sizes that want to invest and fuel our recovery.” So Paulson’s crocodile tears are all for the people. (Except that the banks are not lending at home, but are shoveling money out of the U.S. economy as fast as they can.)

As Obama’s chief of staff Rahm Emanuel put it, a crisis is too good a thing to waste. Having created the crisis, Wall Street wants to use its momentum to knock out any potential checks to its power. “No systemic risk regulator, no matter how powerful, can be relied on to see everything and prevent future problems,” Paulson explained. “That’s why our regulatory system must reinforce the responsibility of lenders, investors, borrowers and all market participants to analyze risk and make informed decisions,” In other words, blame the victims! The way to protect victims of predatory bank lending (and crooked sales of junk securities) is not new regulations but just the opposite: “to simplify the patchwork quilt of regulatory agencies and improve transparency so that consumers and investors can punish excesses through their own informed investing decisions.” Simplification means the Fed, not a Consumer Financial Protection Agency.

Moving in for the kill, Paulson explains that the Treasury is bare, having used $13 trillion to bail out high finance in 2008-09. So he warns the government not to run a Keynesian-type budget deficit. The federal budget should move into balance or even surplus, even if this accelerates the rise in unemployment and decline in wage levels as the economy moves deeper into recession and debt deflation. “We must also tackle what is by far our greatest economic challenge — the reduction of budget deficits — a big part of which will involve reforming our major entitlement programs: Medicare, Medicaid and Social Security.” The economy thus is to be sacrificed to Wall Street rather than reforming finance so that it serves the economy more productively. It is simple mathematics to see that if the government cannot raise taxes, it must scale back Social Security, other social welfare spending and infrastructure spending.

What is remarkably left out of account is that today’s financial crisis, centered on public debts, is largely a fiscal crisis in character. It is caused by replacing progressive taxation with regressive taxes, and above all by untaxing finance and real estate. Take the case of California, where tears are being shed over the dismantling of the once elite University of California system. Since American independence, education has been financed by the property tax. But Proposition 13 has “freed” property from taxation – so that its rental value can be borrowed against and turned into interest payments to banks. California’s real estate costs are just as high with its property taxes frozen, but the rising rental value of land has been paid to the banks – forcing the state to slash its fiscal budget or else raise taxes on labor and consumers.

The link between financial and fiscal crisis – and hence the need for a symbiotic fiscal-financial reform – is just as clear in Europe. The Greek government has pre-sold its tax revenues from roads and other infrastructure to Wall Street, leaving less future revenue to pay its public debt. To cap matters, paying income tax is almost voluntary for wealthy Greeks. Tax evasion is hardly necessary in the post-Soviet states, where property is hardly taxed at all. (The flat tax falls almost entirely on labor.)

Throughout the world, scaling back the 20th century’s legacy of progressive taxation and untaxing real estate and finance has led to a public debt crisis. Property income hitherto paid to governments is now paid to the banks. And although Wall Street has extracted $13 trillion in bailouts just since October 2008, the thought of raising taxes on wealth to pay just $1 trillion over an entire decade for Social Security or health insurance is deemed a crisis that would lead Wall Street to shut down the economy. It is telling governments to shift to a regressive tax system to make up the fiscal shortfall by raising taxes on labor and cutting back public spending on the economy at large. This is what is plunging economies from California to Greece and the Baltics into fiscal and financial crisis. Wall Street’s solution – to balance the budget by cutting back the government’s social contract and deregulating finance all the more – will shrink the economy and make the budget deficits even more severe.

Financial speculators no doubt will clean up on the turmoil.

Read more by our favourite contemporary author at www.michael-hudson.com

It’s hard to keep up with Professor Hudson’s rapid fire work rate. Wash the dishes to these 2 key interviews.

Michael Hudson

If the economy deteriorates in the L-shaped “hockey-stick” rut that many economists forecast, what political price will President Obama and the Democrats pay for having returned the financial keys to the Bush Republican appointees who gave away the store in the first place? Reappointing Federal Reserve Chairman Ben Bernanke may end up injuring not only the economy but also the Democratic Party for years to come. Recognizing this, Republicans made populist points by opposing his reappointment during the Senate confirmation hearings last Thursday, January 27 – the day after Mr. Obama’s State of the Union address.

The hearings focused on the Fed’s role as Wall Street’s major lobbyist and deregulator. Despite the fact that its Charter starts off by directing it to promote full employment and stabilize prices, the Fed is anti-labor in practice. Alan Greenspan famously bragged that what has caused quiescence among labor union members when it comes to striking for higher wages – or even for better working conditions – is the fear of being fired and being unable to meet their mortgage and credit card payments. “One paycheck away from homelessness,” or a downgraded credit rating leading to soaring interest charges, has become a formula for labor management.

As for its designated task in promoting price stability, the Fed’s easy-credit bubble has made asset-price inflation the path to wealth, not tangible capital investment. This has brought joy to bank marketing departments as homeowners, consumers, corporate raiders, states and localities run further and further into debt in an attempt to improve their position by debt leveraging. But the economy has all but neglected its industrial base and the employment goes with manufacturing. The Fed’s motto from Bubblemeister Alan Greenspan to Ben Bernanke has been “Asset-price inflation, good; wage and commodity price inflation, bad.”

Here’s the problem with that policy. Rising prices for housing have increased the cost of living and doing business, widening the excess of market price over socially necessary costs. In times past the government would have collected the rising location rent created by increasing prosperity, public investment in transportation and other infrastructure making specific sites more valuable. But in recent years taxes have been rolled back. Land sites still cost as much as ever, because their price is set by the market. Land itself has no cost of production. Locational value is created by society, and should be the natural tax base because a land tax does not increase the price of real estate; it lowers it by leaving less “free” rent to be paid to the banks.

The problem is that what the tax collector relinquishes is now available to be paid to banks as interest. And prospective buyers bid against each other until the winner is whoever is first to pay the land’s location rent to the banks as interest.

This tax shift – to the benefit of the bankers, not homeowners – has made Mr. Obama’s hope of doubling U.S. exports during the next five years ring hollow. This is the upshot of “creating wealth” in the form of a debt-leveraged real estate and stock market bubble. Labor must pay more for debt-financed housing and education, not to mention payments to health insurance oligopoly and higher sales and income taxes shifted off the shoulders of finance and real estate.
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Read Hudson’s latest interpretation of Obama’s economic policies:

At stake now is President Obama’s credibility as an agent for change. Voters see his main “change” thus far to have been favoritism to Wall Street. Jay Leno jokes that Obama has done the impossible: resurrected the seemingly dying Republican Party and given it the coveted label of the “Party of Change,” running against Wall Street.

This is the political setting for what must certainly be a hastily rewritten State of the Union message. Instead of celebrating a Republican- and Lieberman-approved health care bill, Obama finds himself obliged to respond to voters who celebrated his first anniversary in office by choosing a Republican as their designated voice for change.

Those voters in Massachusetts last week who felt duped by Obama’s promise as a reform candidate did not really turn Republican, but obviously felt that at least they could throw out the Democrats for failing to make a credible start fixing the debt-strapped economy. The President has begged the banks to start lending again. But this means loading the economy down with yet more debt. The $13 trillion bailout was supposed to help them do this, but the banks have simply taken the money and run, paying it out in bonuses and salaries, stepping up their lobbying efforts to buy Congress, and buying out other banks to grow larger and increase their monopoly power.

Read More at Counterpunch

photo credit: kevindooley

Michael Hudson

Originally posted at Counter Punch

Paul Samuelson, America’s best known economist, died on Sunday Dec 13th. He was awarded the Nobel prize for economics, (founded one year earlier by a Swedish bank in 1970 “in honor of Alfred Nobel”). That award elicited this trenchant critique, published by Michael Hudson in Commonweal, December 18, 1970. The essay was titled “Does economics deserve a Nobel prize? (And by the way, does Samuelson deserve one?)”

It is bad enough that the field of psychology has for so long been a non-social science, viewing the motive forces of personality as deriving from internal psychic experiences rather than from man’s interaction with his social setting. Similarly in the field of economics: since its “utilitarian” revolution about a century ago, this discipline has also abandoned its analysis of the objective world and its political, economic productive relations in favor of more introverted, utilitarian and welfare-oriented norms. Moral speculations concerning mathematical psychics have come to displace the once-social science of political economy.

To a large extent the discipline’s revolt against British classical political economy was a reaction against Marxism, which represented the logical culmination of classical Ricardian economics and its paramount emphasis on the conditions of production. Following the counter-revolution, the motive force of economic behavior came to be viewed as stemming from man’s wants rather than from his productive capacities, organization of production, and the social relations that followed therefrom. By the postwar period the anti-classical revolution (curiously termed neo-classical by its participants) had carried the day. Its major textbook of indoctrination was Paul Samuelson’s Economics.

Today, virtually all established economists are products of this anti-classical revolution, which I myself am tempted to call a revolution against economic analysis per se. The established practitioners of economics are uniformly negligent of the social preconditions and consequences of man’s economic activity. In this lies their shortcoming, as well as that of the newly-instituted Economics Prize granted by the Swedish Academy: at least for the next decade it must perforce remain a prize for non-economics, or at best superfluous economics. Should it therefore be given at all?

This is only the second year in which the Economics prize has been awarded, and the first time it has been granted to a single individual — Paul Samuelson — described in the words of a jubilant New York Times editorial as “the world’s greatest pure economic theorist.” And yet the body of doctrine that Samuelson espouses is one of the major reasons why economics students enrolled in the nation’s colleges have been declining in number. For they are, I am glad to say, appalled at the irrelevant nature of the discipline as it is now taught, impatient with its inability to describe the problems which plague the world in which they live, and increasingly resentful of its explaining away the most apparent problems which first attracted them to the subject.

The trouble with the Nobel Award is not so much its choice of man (although I shall have more to say later as to the implications of the choice of Samuelson), but its designation of economics as a scientific field worthy of receiving a Nobel prize at all. In the prize committee’s words, Mr. Samuelson received the award for the “scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science. . . .”

What is the nature of this science? Can it be “scientific” to promulgate theories that do not describe economic reality as it unfolds in its historical context, and which lead to economic imbalance when applied? Is economics really an applied science at all? Of course it is implemented in practice, but with a noteworthy lack of success in recent years on the part of all the major economic schools, from the post-Keynesians to the monetarists.
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Following Prof Michael Hudson’s recent tour, here are more multimedia highlights:

Visual:
Hudson on ABC International with Jim Middleton.
Hudson on Switzer – Sky TV Business.
Forever Blowing Bubbles – Sydney presentation.
Hudson tour slideshow

Audio:
The Earth v the Neo-Liberal Paradigm – Prosper Australia speech
Global Policy Trends in a Financialised Economy – Federal Parliament’s Vital issues seminar. Transcript available soon.
Steering the Economy into Debt Deflation – Melbourne Town Hall speech
Philip Adams Interview – Late Night Live
Debt Creation as Wealth Creation – the Renegade Economists

Written:
The Age: Housing supply down, profits up – check the comments as per the Kavanagh link at the bottom.
What recovery? – Business Spectator interview
Landlords and bankers back in charge of the economy again – Daily Reckoning commentary
Interest Rates in Whose Interest – Press Release

Michael Hudson

As published in the Business Age
The 2nd most read article in the Age website on the day as per the graphic billing

HIGHER land and house prices typically lead to an increased supply of housing. Yet at the peak of Australia’s perennial housing affordability crisis, the Housing Industry Association declared that there would be a 13 per cent fall in housing starts this calendar year, compounding last year’s 18 per cent fall.

In light of massive rezonings in Victoria and improved planning bureaucracy in many states, this can only be seen as a warning that property insiders expect there to be a price crash.

The public face of the housing industry is quite different. So, what do property investors expect that the rest of the population does not?

Government spokesmen reflect assurances by bankers and their major category of customers – the real estate industry – that Australia’s economy is defying gravity. In reality, that is as impossible in economic life as it is in physical nature.

Property prices are defined by how much a bank will lend. Donald Trump claims that a man is worth what he can borrow. This usually depends on what a borrower can afford to pay, after meeting basic break-even needs (the cost of living, plus taxes). In the corporate sector, it means after-tax cash flow. So property prices are set by the banks, subject to the tax system.

The motto of real estate investors is that rent is for paying interest – and whatever the tax collector relinquishes is available to be capitalised into a bank loan as a flow of interest payments. The guiding idea is that affordability determines property prices. One example of how the tax system affects property prices is in its failure to distinguish land from capital improvements. Speculative withholding of prime locations from the market in an undeveloped or unsold state creates artificial scarcity. This raises prices.

Property speculators are able to afford this hoarding to the degree that the land’s potential site rent remains untaxed. Taxing the land would bring underutilised land and other property on to the market. It also would reduce the available free-lunch rent that is currently capitalised into bank loans to raise prices.
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Professor Michael Hudson on ABC International (broadcast to 44 countries) – Monday 26th October

The presentation from Professor Michael Hudson’s Sydney talk ‘Forever Blowing Bubbles’.
The screen size is small to reduce the file size.

photo credit: the|G|™

Written Oct 16th
Raising interest rates will do little to address underlying economic issues, says visiting US economist Professor Michael Hudson. “The market factoring in 7 interest rates rises spells danger for the Australian economic miracle” warns Professor Hudson.

“Governments must use tax policy rather than monetary policy to address asset bubbles. Burdening the whole economy with land price overheads penalises manufacturing by pricing the products of Australian labor out of global markets.”

“Higher interest rates will provide a windfall for arbitrageurs to borrow at about 1% abroad and lend to Australia at 3.25%. This inflow into the A$ will bid up the exchange rate. This will make Australian exports more expensive, slowing new manufacturing investment and employment while eating into export revenues across the board.”

Prof. Hudson says that “this is the same phenomenon that is happening in Canada. It represents a sacrifice of the real economy of production and consumption to the financial sector.”

“Raising interest rates will hurt government finances in three ways,” Prof. Hudson explains. “First, the government will have to pay more money to bondholders. Second, mortgagees also will see their interest payments rise. This will reduce the income they have to spend on goods and services. Markets will shrink, and so will tax revenues. Finally, the rising exchange rate will reduce business profits, reducing corporate revenue.”

“If the government really wants to slow the property bubble, the appropriate tool is fiscal policy. All they need to do is apply a windfall gains tax. This is like the excess profits tax that countries passed in times past.”

“The beneficiaries of higher interest rates are the banks, not labor and industry. Giving tax preferences to the FIRE sector (finance, insurance and real estate) rather than to industry and consumers limits the ability of economic growth to benefit most Australians. By cutting the capital gains tax below taxes on wages and business profits, the government is encouraging speculation, benefiting wealth and raising the price of property against labor. This means that consumers need to go deeper and deeper into debt to afford rising land and housing prices.”

“Rising interest rates accentuate the housing affordability crisis by rewarding speculators with negative gearing write offs whilst penalising first home owners.”

“Limiting asset bubble policy to raising interest rates makes billions of dollars for bankers in the carry trade, whilst penalising the manufacturing and export sector. Governor Stevens aggressive commentary on the likely prospect of rising interest rates shows his policy conundrum. He has indicated that speculators can make a gain on the rising A$ against foreign currencies ­and falling government bond prices. This seems a circuitous way to counter the price rise inhousing. He should look at keeping a lid on land prices via the use of a Land Tax. This tool should be incorporated into the RBA’s powers. Then it can be properly implemented without the limitations of political lobbying.”

In addition, Prof. Hudson observed, “The Treasurer’s announcement earlier this week that the government will expand its guaranteeing of mortgages shows that it has learnt little from America’s experience. Giving a public guarantee runs the danger that banks will simply give their loan officers bonuses on the number of mortgages they can write, without much care as to whether the borrowers can pay their debts or not, because the government will bail out bad loans.”

“This gives bankers the confidence to make as many loans as they want because the tax payer can always bail them out. The bonuses to bankers will continue as they load the economy down with debt. That is what Alan Greenspan called wealth creation.”

“The everyday person has been conned into believing that borrowing more and more money is the best way to get wealthy. This is the first time in history that going deeper and deeper into debt is seen as wealth creation” stated Professor Michael Hudson, touring the country warning on the epidemic of re-inflating asset bubbles.