The New Kleptocracy

[suchandra]

Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank, now JPMorgan Chase & Co., Arthur Anderson, and later at the Hudson Institute.

 

The New Kleptocracy

 

 

By Dr. Michael Hudson – via Peter Myers October 8, 2008

 

 

Guns and Butter Interview on KPFA radio- Part One , and Part Two

 

“Considering that there is an $800 billion giveaway, to be followed by another trillion and another trillion after that, this is the biggest giveaway since the land giveaway to the railroads in the mid-nineteenth century and just as that giveaway created a power elite that would rule America for a century and a half, this is creating a new power elite that has changed America from a democracy into an oligarchy. And as Aristotle said, ‘what is democracy but the stage immediately preceding oligarchy?’” --

I’m Bonnie Faulkner (BF): Today on Guns and Butter, Dr. Michael Hudson. Today’s show: “The New Kleptocracy”. Dr. Hudson is a Financial Economist and Historian. He is President of the Institute for the Study of Long-Term Economic Trend, a Wall Street Financial Analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book “Superimperialism: The Economic Strategy of American Empire” is a critique of how the United States exploited foreign economies through the IMF and World Bank. He is also author of “The Myth of Aid” and “Global Fracture: the New International Economic Order”.

Dr. Hudson has written several articles on the recent Wall Street meltdown and Secretary of the Treasury Hank Paulson’s Plan. These articles have included, Financial Bailout: America’s Own Kleptocracy--the Largest Transformation of America’s Financial System since the Great Depression. The Paulson/Bernanke Bailout: Will the Cure Be Worst than the Disease? Financial Fraud: Mr. Paulson and the New Yazoo Land Scandal. And Thinking the Unthinkable: a Debt Write Down and Jubilee Year Clean Slate.

BF: Dr. Michael Hudson, welcome again.

Michael Hudson (MH): Thank you very much, Bonnie.

BF: Secretary of the Treasury Hank Paulson’s $700 billion so-called bailout, first called “The Plan”, was defeated in the House. Then a modified version called “Troubled Asset Rescue Plan or (TARP)” was passed by Congress in its “Emergency Economic Stabilization Act of 2008”. Still others refer to this legislation as “Cash for Trash”. What would you call it?

MH: Cash for trash is exactly what it was, and the emphasis should be placed on “Emergency” for Emergency Plan. It was rushed through without giving any opportunity to debate. Dennis Kucinich protested, for instance, that this was the first time a major plan that was going to create the equivalent of 700 billionaires, people who are going to become the next power elite to govern America for the next century --that this act was done without any hearings, without specialists--despite hundreds and hundreds of major economists throughout the world saying that it was a disaster and a giveaway. It is cash for trash. It will not resolve the problems. The dollar will plunge. The stock market already plunged. It is purely a giveaway to Mr. Paulson’s colleagues on Wall Street and a giveaway to Mr. Obama’s and Mr. McCain’s campaign contributors. The Democrats were the major supporters of Mr. Paulson while even the Republicans sought to dissociate themselves from the plan so they couldn’t get blamed when the inevitable failure of the plan shows that all that was done was a giveaway of $700 billion to Mr. Paulson’s colleagues and pals on Wall Street.

BF: Well, now what and who are being bailed out? People now are saying it’s a $700 to an $850 billion revolving money fund.

MH: The Secretary of the Treasury said that he really just picked the amount out of the air. There will be another $700 billion next month, another $700 billion after that. Trillion after trillion will go to create a financial elite of kleptocrats. What’s happened here by Mr. Paulson of Goldman Sachs is almost a mirror image of what the other Goldman Sachs’ Treasury Secretary Robert Rubin did in Russia: he’s creating and endowing a class of kleptocrats by giving them liquid treasury securities in exchange for basically worthless junk. It’s actually called the “Worthless Assets Recovery Program, (WARP)”. This is pretty much what was done in Russia to create Russian kleptocrats. In Russia’s case they gave State ownership of raw materials and fuels, oil, other assets to individuals who then diversified their portfolios by selling as much as they could to the West and taking their money out and putting them into dollars and sterling and euros. What’s happening here is that the Wall Street beneficiaries are going to take the money and run and put it in safe economies such as Russia, China and any other non-US economy they can find: the result will be a huge capital outflow, a capital flight that will put downward pressure on the dollar.

BF: You know Dr. Hudson, I was just about to ask you what the difference is between the Russian Kleptocrats and the American Crony Capitalists? Is there any difference at all that you see?

MF: Only that the Russian Kleptocrats were supported by Clinton’s Democratic Administration and the American’s Kleptocrats are supported nominally under a Bush Administration but primarily by Mr. Obama and the Democrats led by Barney Frank in the Congress, and Nancy Pelosi and by Reid. These are Democrats that must go and if there is any sign of Mr. Obama keeping them on then you know that the Democratic Party has been firmly captured by the Democratic Leadership Committee, i.e. Wall Street’s lobbying group within the Democratic Party.

BF: Well now, since you’ve brought up Barack Obama, he was the one that lobbied “for” the passage of this, isn’t he?

MF: That’s correct and the amazing thing was that McCain did too. Last Friday I was attending the American Monetary Institute Conference in Chicago and we had some of the smartest financial brains around at that. It was at Roosevelt University and we all went down to the Student Union to watch the debate. And let’s take a look at what happened last Friday. The previous Thursday Mr. McCain had said there might not be a Friday debate because he was going to suspend the campaign until he could straighten out Washington regarding the bailout. So he went to the White House. There was reportedly not much very much that he said during the meeting but the Republican Congressional Leader Boehner made some very good suggestions. He suggested instead of the bailout the government use the money to set up a bank insurance fund of say anywhere from $250 billion to the $700 billion that was mentioned. The insurance fund would lend money to banks in exchange for their preferred stock. This fund would be financed by levying an insurance charge on the entire US banking system, just like the Federal Deposit Insurance Corporation levies insurance rates on the banks. And the rates that would be levied, under the Republication proposal, would have reflected the actual risks involved. So that if the banks got together and lobbied politicians and supported the political campaigns of politicians who wanted to deregulate the industry that’s’ fair enough but let them pay the risks. Let them pay 1% or 2% or even 3% of their deposits for this because that’s what it would take the government to bail out policies that Alan Greenspan and others have supported. Instead of supporting this plan and instead of saying that he’d come to Washington to save American taxpayers from the giveaway, Mr. McCain did absolutely nothing. He was blamed by the media on Friday morning (Friday afternoon too) for saying, “Oh he’s come to disrupt a done deal. Look what happened. He went to the White House. Now you have the Congressional Republicans opposing it.” Mr. McCain could have said, “Absolutely,” that’s just what he’s done because he’s a maverick and he’s going to protect American taxpayers from the bipartisan attempt to both reflect the campaign contributions of their largest contributors--Wall Street. And he’s not going to let it happen. He could have jumped in front of the parade. Jumped in front of the opposition to the Act, that reportedly 90% of voters were supposed to oppose, and this would have put Mr. Obama on the defensive. McCain could have said, “I’m opposed on the giveway and supporting taxpayers. Mr. Obama is the man who is giving it all way to Wall Street and his major campaign contributors. Look at what’s happening with Mr. Rubin, there’s no difference at all between his financial advisor Robert Rubin and the Treasury Secretary Hank Paulson.” Instead Mr. McCain shifted gears, reversed himself, gave in and said, “now I’m supporting the plan too”. So the result of the Friday debate, if you remember the first half hour, Mr. Lehrer kept trying to press both presidential candidates on ‘how do you feel about the bailout, what do you think? ‘ And they talked about anything else. Mr. Lehrer tried to be more polite and finally he was laughing, and he said, “Aren’t either of you guys going to answer my question?” And they both of them said, “No.” Now when they refused to give their position to the bailout to the American people. When they refused to take a position on a plan that most voters “overwhelmingly” opposed and then they support the plan this shows they’re just in the hands of their financial backers.

BF: Could you just briefly explain again how this insurance proposal would have worked and why it would have been preferable?

MF: The government would have set up a fund and the fund’s money would have been provided to banks on the term that Warren Buffet earlier that week had made--a $5 billion investment in Goldman Sachs. It would have leant money to banks on the condition that number one, it wipes out the stockholders--if any bank would have borrowed from the insurance fund that meant it was doing so as a life or death matter and either it would have sacrificed its common stock or it would have made its common stock subordinate to repaying the government for the risk. The government would have charged a high rate of interest and a high fee for making the insurance payment (as any insurance company would have done). And instead of printing new treasury bonds to give away in exchange for these bad mortgages it would have established simply a line of credit which at first would have been the same thing but the credit would have been repaid not only by the banks that borrowed but by all the banks in the country paying insurance—essentially bank insurance. Instead of being an insurance fund for depositors like the FDIC is, it would have been an insurance fund for the bank owners themselves. The banks have been acting almost as a financial gang in pressing not only to support the Federal Reserve chairman who is a deregulator (and the Federal Reserve is supposed to essentially represent the interests of the commercial banking system), but the banks also now have supplied the Treasury Secretary and the Treasury Secretary is not supposed to represent the banks. The Treasury Secretary is supposed to represent the public interests. And instead, Mr. Paulson is representing the banking interests, Wall Street, not the public interest and so there is an inherent conflict of interest and the system of checks and balances that are supposed to prevent a giveaway like this have been broken.

BF: That’s right. And you mentioned Warren Buffett and I’ve noticed you’ve mentioned the $5 billion he was putting into Goldman Sachs and other investments. He’s set it up where he’s got a good deal and he gets 10% back every year and other things.

MH: Yes. And he says the government should have done the same thing. And the Republican congressmen actually voted according to their ideology not according to their campaign contributions because they realized that what’s the point of getting a political campaign contribution if voting for the giveaway is going to result in their voters voting against them anyway and voting them out of office. Their corruption in changing their votes has been so egregious that no amount of television advertising can wipe away the fact that the voters now know that they’re bought and paid for. They’re trying to pretend that they did it in order to help the upper middle class by insuring bank deposits not only for $100,000 but for $250,000 so all your listeners up there that thought they were worried that had more than $100,000 in the bank can now rest a little bit more secure. And there were a few other giveaways to the upper middle class. They had to have the pretense of doing something as an excuse for changing but really the giveaway remains in place and most American voters realize that this has been a giveaway with no quick pro quo.

BF: One commentator noted after the modified plan passed the Senate, that most of the senators that voted against it were up for re-election in November.

MH: That’s right. If they want votes they have to represent the popular position and according to all the press reports and the statements out of Washington there has never been so much of a voter protest as there has been against this giveaway. The people seem to know very clearly when they’re being given a line that just isn’t true. And no amount of apology and pretense can cover up this obvious fact.

BF: Now is the government buying real assets or just worthless toxic junk?

MH: Well no real assets will be bought at all, although the government will end up foreclosing on them. Let’s say what the real problem is: the real problem is that the volume of mortgage debt far exceeds the ability of debtors to pay and the willingness to pay. Mr. Paulson’s pretense, which is an absolute lie and which should lead him to criminal prosecution because he knows it’s a lie, is that the problem here is a liquidity problem. But its not a liquidity problem, it’s a bad debt problem. Suppose that people bought a house for $125,000 and have a full mortgage on it for that price and suppose the house has fallen to $80,000. I know a number of houses like that. I know a professor in western Illinois that had a house that she bought for $125,000. The highest bid she has it on: $80,000, fully mortgaged. Dennis Kucinich tells me that the house next door to him in Cleveland, Ohio was bought for $125,000 and now it’s only worth $80,000. So this is typical. Now imagine a bank responding to a borrower who wants to say, “Well gee, I want to be able to pay my mortgage can you lend me enough money to pay my mortgage?” What bank can be expected, when already the house is 50% over-mortgaged… who is going to lend more mortgage than a property is worth? That era is over! No bank any longer is going to lend more money than a house is worth. And already Mr. Paulson said that 5 million Americans are in arrears and facing foreclosure. The figure was then corrected by other economists to 10 million Americans in the coming year are going to lose their homes! Now no amount of liquidity is going to provide them with the money to stay in if already they can’t afford the mortgage. And in fact the government is now supposed to make money “quote” for taxpayers “unquote” by coming in and acting as debt collector. Now, in order to make money for taxpayers, the government now has to come in and say, “We’re going to enforce the Adjustable Rate Mortgages that are exploding in interest rates. You are now going to have to pay much higher interest rates. Penalty rates. Back fees and penalties or we’re going to throw you out of your house because we have to make money for the taxpayers. We are now the collecting agents not Countrywide Financial or Fannie Mae or Washington Mutual or the others. So the debts of homeowners will remain in place. The debts of cities and municipalities will remain in the place and all that happens is that people who have the mortgages are supposed to be bailed out now because under Mr. Paulson’s plan as he wrote it and the plan that the house originally rejected, the terms were that the government would buy the bad mortgages and bad debts from the banks and other investors and insurance companies for what they had paid for them. In other words insurance companies will not take a loss for their bad investments. Banks won’t take a loss for their bad investments. Hedge funds won’t take a loss for their bad investments. Now how many of your listeners would love to be able to say, “geez I made a bad stock investment. I’d like the government to buy back these stocks that I bought that have gone down.” That’s not what the government is doing because these aren’t the major campaign contributors. So this is the asymmetry. The inequity. And the irony is that the Democrats have supported this so strongly. A week ago last Thursday in the Wall Street Journal, Hillary Clinton of all people came out with a wonderful wonderful plan. She said that the government should insist on rewriting the bankruptcy laws. She said the government should rewrite the mortgages down to the current market price and the government should replace exploding interest rate mortgages with normal interest rates or the teaser rates that had been signed. So she obviously knew what the right thing to do was. And that’s the plan that would have worked. And yet she went and voted for the plan as it came out of the Senate when they passed it on Thursday. So she met the criterion of evil that Milton described in Paradise Lost: somebody who knows the right thing and yet does the wrong thing knowingly. That is also the definition of a crime. A criminal has to knowingly and consciously be making a mistake. And Hillary, and the other democrats, Obama… just about all the democrats who supported the bill said, “We don’t like it. We know its wrong but we’re voting for it because it’s an Emergency and if we don’t vote for it the stock market will go down.” Well as you saw on Friday the stock market did go down and it will continue to go down because foreign investors realize that this money that is being given away is going to flow out of the country very quickly and that’s going to put downward pressure on the dollar. And even if housing prices only fall another 20% or so, if the dollar declines by more they’re going to take a heavy loss that they basically can’t afford to take.

 

 

Contact

mhmichael-hudson.com

www.michael-hudson.com

[AncientMariner]

Obahhhhhhhhhhhhma is gonna save us. Don't worry, be happy.

[bhaktajan]

Michael Hudson:

" . . . Wall Street beneficiaries are going to take the money and run and put it in safe economies such as Russia, China and any other non-US economy they can find:

 

the result will be a huge capital outflow, a capital flight that will put downward pressure on the dollar. . . ."

 

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This is the plain and simply reason--according to my speculation.

There was a run on the bank--and the monies have been withdrawn.

 

If money investments are based on the speculation that people will awake each morning to continue to work and pay the bills--why would debt ladden corporations be threatened by real estate forclosures? Wealth is based on Reality. The banks own the properties. But what if all the big cash investors all withdrew their cash simultaneously --inorder to make a defiant point:

Who is incharge you or us?

 

As I write this there are no ledgers to display to the public.

 

We are investing into a scheme that is managed by who-is-whats-its.

 

Children arise and declare that everyone is lying to eachother.

 

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OK. I'm got to go now sell my cargo shipping lines and then buys a couple of islands and then build another Hotel and then a quick colonoscopy and then get some more hair folical implants, and some liver spots lasered off, and then I'm gonna marry my next young immigrant wife--hey, I paided for her plastic surgery!