In the modern Sarah Palin / Milton Friedman US culture, Michael Hudson is a Communist because he opposes the consolidation of power and the mistreatment of the non elite. These ideas can get you kicked out of the nicer cocktail parties in this country.
Michael Hudson
In an era when most economists are content to teach pro-corporate economics for their university salary, or work for one of the major financial institutions churning out lies, Michael Hudson actually provides a perspective not often seen. He makes the corrupt very angry with his assessments of how badly the current economic system treats the vast majority that work within it. He uses a device that is simply appalling to most economists…..history. In the present environment, the less you know about history, the better according to those that think that economics is primarily about interest rates and investment banking. However, here is the things, history shows a different path for the development of economic thought. Adam Smith did not hold a position in economics, but one in moral philosophy. Frank Knight, the great University of Chicago Economist (before UC became completely corrupted by corporate money) wrote on topics such as ethics and skepticism. No economist could think of publishing on these topics now. Economists instead push out one overly mathematical paper after another that has less and less relevance to the real economy, and is primarily concerned with the fictitious economy.
One of the most influential professors at The University of Chicago, Frank Knight could not even hold a position at his old university today. He would be considered to populist, not sufficiently mathematical, and bad for fundraising.
http://www.amazon.com/Ethic-Competition-Classics-Economics/dp/1560009551/ref=sr_1_3?ie=UTF8&s=books&qid=1261569528&sr=1-3
Below is an excerpt from an interview with Michael Hudson that is very illuminating.
Hudson on Monopolies, Banks and Landlords
MH: Well, classical economics was all about the free lunch. Look at Ricardian rent theory. That’s all about the free lunch. The role of modern economic theory — I should call it post-modern economic theory and statistics is to pretend that the banks, the landlords and the monopolies actually earn their income instead of extracting it from the (productive) economy.
BF: Your book is really an antidote to the dominant Chicago school of free marketeers. What is the meaning of “free market” these days, as understood on Wall Street?
MH: It’s exactly the opposite of what Adam Smith, and Ricardo and the classical economists defined as a free market. Classical economics defined a free market as one that is free of overhead charges, free of unnecessary charges of production, free of watered stock. Today a free market means that predators are free to extort any price from the public, they are free to deregulate, free to lie to consumers, free to exploit, free to load any company they want down with debt, and basically lead (us) to a world of debt peonage… So the whole concept of freedom has been turned upside down by the Chicago school and by the Bush administration.
In fact if you’re wealthy in today’s economy, you don’t make any money at all, because it’s all a (tax deductible) cost. Corporations don’t seem to make any money because they seem to have everything as an expense. For instance interest payments are the largest item that the IRS permits corporations to take off as an expense of doing business. But it’s not an expense of doing business at all, it’s a function of what outside raiders and corporate junk bond holders have paid to buy up the company, and instead of doing business, they’re carving them (companies) up, closing them down, stopping their long term research and other projects, and doing just the opposite of what’s needed for an industrial economy. That’s why the book deals primarily with what the financial sector, which is not part of the economy at all, nor is the property sector part of the economy. They are a completely separate consumption process, more in the character of a parasite, than of (producing) actual goods and services….
The National Income and Product Accounts treat everyone who earns an income as producing a service. So if you’re taking money out of an ATM machine, and I’m holding a gun, saying “your money or your life” then I’m giving you the service of your life for the money you’re taking out. This is the opposite of what classical economics is all about.
A century ago when the classical economists, Adam Smith, John Stuart Mill, in the reform era, tried to say look, there are some incomes that are not earned. Rent is not earned, it’s an excess price. Interest is not earned, it’s a monopoly price. Monopoly profits aren’t earned, they’re extortionate. All this was viewed (by classical economists) as something that government regulators should get rid of, either by not permitting it in price, or by holding the monopolies in the public domain, or by the land itself being either nationalized or taxed. The classical economists divided almost the entire economy into productive and unproductive labor, into wealth, and overhead, into real income and costs. This threatened the vested interests with taxing away their free lunch, so you have an anti-classical reaction that is epitomized by the Chicago school of anti-government, anti-tax people whose leader, Milton Friedman, said there’s no such thing as a free lunch.
“…a free market means that predators are free to extort any price from the public, they are free to deregulate, free to lie to consumers, free to exploit, free to load any company they want down with debt…”
BF: Why is today’s understanding so different?
MH: Because hundreds of millions of dollars have been spent to mislead people and to endow business schools and universities to stop teaching the history of economic thought, to stop teaching the classical economists, and essentially to brainwash students, so that those with a sense of realism simply drop out of the field of economics and go into some other field.
Milton Freidman’s Insane Idea Regarding Market Efficiency
BF: Acolytes of the Chicago school claim that there’s no such thing as a free lunch, but they don’t mean what people usually think they mean. What do they really mean?
MH: They say that everybody “earns” what they get, so that if you’re an executive, let’s say you’re the CountryWide executive who paid himself $125 million last year, while the company went bankrupt, he provided the service of adding wealth. All of the rich people, Donald Trump is worth what he gets, anybody who owns property and inherits it is worth what he gets, anybody with a trust fund earns what he gets, so that nothing’s free, and nothing should be taxed, because if everybody earns what they get then the government is just taking things away. Therefore nothing should be taxed because everything is perfectly in balance.
What Banks do By Michael Hudson
MH: Banks lend 70% of their money for mortgage credit. There’s a myth in the textbooks that banks lend money to finance industry. No bank lends money to finance industry. They lend against collateral that’s already in place. They land against real estate, that’s mortgage loans, the 70%. They’ll make loans to corporate raiders. They’ll make loans to brokerage houses to buy stocks that have already been issued. And they’ll lend money to other governments, and they’ll lend for speculation, for derivatives trade. These are all things that governments do not spend money on. Governments spend money doing what governments do, bombing people, military spending is the best, paying off their political constituencies, also a little bit of welfare, social security and health care, and some infrastructure spending.
BF: Now the banks tend to invest their money in assets that already exist, not really investing in new research and development, or new industry.
MH: No, capital formation, research and development are financed almost entirely out of the retained earnings of corporations. To the extent that the banks lend money to outside raiders to take over these companies, the money that used to be spent on capital formation and long term research and development have to be spent to repay the banks. So the effect of bank lending is actually to crowd out research and development spending, and new capital formation
References
http://www.michael-hudson.com/interviews/080715FictitiousEconomy1.html
Good read. His views on how a fed-fueled bubble economy is replacing industrial capitalism via debt-financed, asset price inflation with the main purpose of increasing balance-sheet net worth, benefiting a select few while spreading risk among the general population are extremely important. While the media lauds efforts by government to prop up the housing market and stimulate auto sales, those who understand Hudson get that more debt-financed and artificially induced asset price inflation is detrimental to the economy, and particularly the middle class.
More from Hudson (http://www.counterpunch.com/hudson07152008.html):
“The Democratic congress pushes for American families to pay higher home prices
Congressional banking committee heads are simply behaving as politicians traditionally do by giving priority to their major campaign contributors in the financial and real estate sectors. Led by Democratic senators Charles Schumer from Wall Street and Christopher Dodd from Connecticut’s insurance industry, and supported by Congressman Barney Frank from the real estate sector, Congress is seeking to bail out the bubble’s sponsors, not its victims. The plan is to re-inflate the housing bubble at least long enough for the largest banks and other financial speculators to dump their riskiest holdings. Book values on these mortgages – and the real estate that backs them – are purely fictitious, despite the AAA whitewash from bond-rating agencies which themselves are now under investigation for the fatal Arthur Anderson-style conflict of interest between their research and sales arms.”
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“They have inflated asset prices with credit that has indebted homeowners to a degree unprecedented in history. This is why the real estate bubble has burst, after all. Yet Congress now acts as if the only way to resolve the debt problem is to create yet more debt, to inflate real estate prices all the more by arranging yet more credit to bid up the prices that homebuyers must pay. The plan is thus to pretend that the Bubble Economy’s financial unreality may be made real by Finance Socialism.
“The reason why Fannie and Freddie have been able to borrow at lower rates than their rivals is because their public sponsorship led investors to believe that there was an implicit public guarantee not to let them fail. And in view of the fact that these two agencies account for some $5 trillion in mortgages – nearly half the nearly $12 trillion U.S. home mortgage market – they do indeed seem to be “too big to fail.” The face value of mortgages they have guaranteed is nearly as large as the entire U.S. federal debt held by the public. This means that the nominal federal debt would double if they went under. But at least the government can always print money, while the real estate backing the mortgages guaranteed by Fannie and Freddie (or held in their own accounts) is plunging in price into the dreaded Negative Equity territory.”
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Peter Schiff was talking about all this stuff well before it all went down, as early as 2002 and warned that the “growth” of the 2000s was what he called “a phony economy”. He was literally ridiculed and laughed at. An excerpt from his economic commentary, March 5th, 2004:
“For those of you who still do not understand the dynamics behind the U.S. bubble economy, let me try and clarify it once again: American companies increase “productivity” by replacing high cost American labor with better educated, higher skilled, low cost foreign labor. American consumers replace their lost wages with home equity extractions, refi’s, and adjustable rate mortgages, and spend the proceeds on imported goods. The Fed keeps it going with artificially low interest rates, lenders cooperate by throwing credit standards out the window, and Asian central banks come to the rescue by intervening in the currency markets and buying treasuries. All the while, America goes deeper and deeper into debt to its foreign creditors as the industrial foundation of its economy crumbles.”
http://www.europac.net/externalframeset.asp?id=23&type=schiff
and November 18, 2005:
“FannieMae and FreddieMac
By insuring increasingly risky mortgages under the presumption of an implied Federal Government guarantee, FannieMae and FreddieMac enabled the origination, resale, and securitizations of mortgages, which otherwise never would have been possible. The moral hazard inherent in separating lenders from the ultimate holders of the paper results in the irresponsible extension of mortgage credit, to non-creditworthy borrowers, on liberal terms and with insufficient collateral, fueling the speculative run-up in housing prices.
The Mortgage Tax Deduction (Not a factor unique to this time period, but a powerful force artificially increasing home prices for years.)
By subsidizing homeownership, the government artificially increases home prices. Rather than making homes more affordable, the mortgage deduction ironically makes them more expensive. (This point has been proven by the mortgage industry’s lobbying efforts against the recently proposed changes in the tax code limiting mortgage deductions. Their principal argument: the move would cause home prices to collapse.)”