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  • Thursday's Hudson

    http://www.counterpunch.org/hudson09252008.html

    The Big Bank Job

    The Insanity of the $700 Billion Giveaway

  • #2
    Re: Thursday's Hudson

    Excellent article. Thanks for posting.

    Comment


    • #3
      Re: Thursday's Hudson

      Good article!

      Comment


      • #4
        The Big Bank Job

        The Big Bank Job

        The Insanity of the $700 Billion Giveaway

        By MICHAEL HUDSON

        The banksters’ plan now is for icing on the cake – to take Mr. Paulson’s $700 billion and run. It’s not a “bailout of the financial system.” It’s as giveaway – to insiders, to sell out all their bad bets. Companies across the board will get rid of their bad mortgages, and also their bad car loans, furniture time payments, credit-card loans, student loans – all the debts that any competent actuary could have told them never could have been paid in the first place.

        This is not what Treasury Secretary Paulson is acknowledging, and shame on him for it. Last Friday, Sept., he was joined by Fed Chairman Ben Bernanke singing in unison an advertising jingle for America’s new kleptocracy that rings so false that Congress and the American public must hear the off-notes. London’s Financial Times, as well as a host of Europeans realize it. That is what has been driving the dollar’s exchange rate this week. It seems easier for foreigners to recognize the threat to turn American democracy into a rapacious kleptocracy.

        This change always is sudden, arranged under emergency conditions. Those with a 12-year memory will see George Bush as playing the role of Boris Yeltsin in Russia in 1996, paying off his campaign contributors by giving them all the economic surplus that the government could expropriate in the notorious “loans for shares” plan applauded and supported by Clinton Treasury Secretary (and current Obama advisor) Robert Rubin. (The moral: do we have a Putin in our near future to lock in the anti-democratic coup?)

        Who really won the cold war?

        How ironic all this is! Back in the 1970s there was theorizing that the Russian and American economies were converging. The idea was that both were moving toward more centralized state control, state financing, state subsidy, and a military-industrial complex. Nobody expected the convergence to occur Yeltsin-style in government giveaways to insiders to create a new group of financial billionaires – the “seven bankers” under Yeltsin in 1996, and Mr. Paulson’s Crony Capitalist gang today.

        Let’s look at the euphemisms as an exercise in doublethink. Mr. Paulson defended his “troubled asset relief program” (TARP) by claiming that “illiquid mortgage assets … have lost value … choking off the flow of credit that is so vitally important to our economy.” The credit that is “so vitally important” has taken the form of bad loans. Contra Mr. Paulson’s pretense, the problem is not that they are “illiquid.” If that were the problem, it would be merely temporary. The Federal Reserve banks are designed to provide liquidity – on good collateral, of course.

        As Financial Times columnist Martin Wolf noted on Wednesday, Sept. 24, the problem is that the face value of mortgage loans and a raft of other bad loans far exceeds current market prices or prices that are likely to be realized this year, next year or the year after that. They are packaged into what the financial press rightly calls “toxic.” The bailout is not efficient, he writes, “because it can only deal with insolvency by buying bad assets at far above their true value, thereby guaranteeing big losses for taxpayers and providing an open-ended bail-out to the most irresponsible investors.” “The simplest way to recapitalize institutions,” He concludes, is “by forcing them to raise equity and halt dividends. If that did not work, there could be forced conversions of debt into equity. The attraction of debt-equity swaps is that they would create losses for creditors, which are essential for the long-run health of any financial system.” This is the key: if debts cannot be paid, then creditors must take losses.

        These bad loans are toxic because they can only be sold at a loss – if at all, because foreign investors no longer trust the U.S. investment bankers or money managers to be honest. That is the problem that Congress is not willing to come out and face. Many of these loans are outright fraudulent. And they are being sold by crooks. Crooks who work for banks. Crooks who use accounting fraud – such as the fraud that led to the firing of Maurice Greenberg at A.I.G. and his counterparts at Fannie Mae, Freddie Mac and other companies engaging in Enron-type accounting.

        The real mad money

        This is not what the magic of compound interest promised. But it is where it had to end up, with mathematical inevitability. It was an advertising come-on for Wall Street money managers and promoters of “pension-fund capitalism” (or “peoples’ capitalism” as it was called in Chile by the Chicago Boys working for General Pinochet’s murderous regime, and Margaret Thatcher’s Conservatives in England). The promise is that if people consign these funds to individuals who make much, much more than they do but have the survival-of-the-fittest advantage of being much, much more greedy, they will receive a perpetual doubling of interest. That is how retirements for American workers are still supposed to be paid – by magic, not by direct investment. Prospective retirees are supposed to ensure a good life by investing savings in loans to corporate raiders who fire, lay off, downsize and outsource these very workers. The trick is to persuade employees to hand retirement funding over to financial managers whose idea was to make money off the economy by extracting interest and dividends off workers, homeowners and companies being bought on debt leverage. In the final analysis it is debt leverage by itself that is supposed to fuel capital gains.

        This has led to madness. The maddest solution of all would be for the government to give the extractive financial sector even more money – funds that no private lenders have been willing to provide, not even vulture funds. No private firm has been able to discover what Mr. Paulson and the unfortunate Mr. Bernanke are sanctimoniously promising: that a viable deal, even an almost money-making one, can be made by buying junk now and waiting for “the economy” to make it good.

        Just what is “the economy” that is supposed to perform this remarkable feat, if not its mortgage debtors and corporate debtors? The government is to do what law enforcement officials have moved to prevent Countrywide Financial and other predatory lenders from doing: squeezing exploding Adjustable Rate Mortgages and “negative equity” mortgages out of debtors, on terms that often were bait-and-switch to begin with. Private companies could be challenged and their array of penalty fees thrown out of court. But perhaps Congress can craft a law imposing these harsh terms on voters. It is not as if we live in a system where people vote their self-interest.

        Promises that “taxpayers” will be able to recover a large part of this money are a fiction. If there were a hope of recovering this money, then investors abroad – foreign buyout funds, foreign banks, foreign sovereign wealth funds – would have been willing to buy Bear Stearns, Lehman Brothers, A.I.G. and other companies at some price. But they wouldn’t touch this at any price.

        Why then should the U.S. Treasury pay three times as much as the Iraq War for money that will end up being lost after paying off the gamblers from their own bad bets. These are the bankers who already have placed all the risk onto their clients and, by lobbying to rewrite the bankruptcy laws, onto debtors. As matters now stand, the $700 billion is to be used to finance this year’s annual bonuses, this year’s million-dollar salaries and sales commission, and to contribute yet more to the retirement funds for the golden parachutes that financial managers have siphoned off to provide a safety net for themselves. So we are back to the basic motto these days: “You only have to make a fortune once in a lifetime.” Now is the time to make these fortunes as big as they’re going to get. Because it’s all down hill from here.

        Why the banks won’t lend

        Here’s why the government giveaway logic is fallacious: It’s a giveaway, not a bailout. A bailout is designed to keep the boat afloat. But the existing Wall Street boat crafted by the investment bankers seeking to unload their junk must sink. The question as it sinks is simply who will be able to grab the lifeboats, and who drowns.

        There is a reason why the banks won’t lend: Housing and commercial real estate already are so heavily mortgaged that there is no rental value available (over and above operating expenses, current taxes and debt service) to pledge to the banks. It still costs more to buy a house than to rent it. No increase in the amount of credit, short of hyper-inflation can cure this. No lowering of interest rate, will lead banks to risk making a bad new loan – that is, a loan that probably will go bad and end up with the bank taking a loss after the borrower walks away or defaults.

        Does Congress know what it is being told to do? Suppose that “taxpayers” are to squeeze money out of the “toxic” junk mortgages they buy from the investors that have bought these bad loans. The only way to do so would be for real estate prices to be raised to even higher levels. This means an even higher proportion of take-home pay by prospective homeowners.

        Mr. Paulson realizes this. That’s why he’s directed Fannie Mae and Freddie Mac to inflate real estate prices all the more. At least, by the existing mortgage-holders to get paid off by existing debtors selling to the proverbial “greater fool.” The hope in Mr. Paulson’s plan is that there are enough “greater fools” with enough money to borrow from yet more foolish new mortgage lenders. Only Fannie Mae, Freddie Mac and the Federal Housing Agency are willing to make such foolish loans, and that is only because they are being directed to act in a foolish way by Mr. Paulson.

        Here’s the problem with following Mr. Paulson’s orders and lending yet more: Every major real estate advisor on record has forecast a further drop of between 20 to 30 percent in property prices over the coming twelve months. This is now the standard forecast. It means that over and above the five million arrears and foreclosures that Mr. Paulson acknowledged already are on the books, yet more families are to give up the fight by this time next year. Is the $700 billion giveaway fund to try and recoup by evicting them too from their houses – to pay the “taxpayer” enough to bail out Countrywide, Washington Mutual and other predatory lenders for loans that state Attorneys General have accused of being fraudulent?

        For the government to even begin to recover some of the value of the $700 billion in junk mortgages it has bought would force new homebuyers to pay even more of their income to the banks. And if they do that, they will have less income to spend on goods and services. The domestic market will shrink, and tax revenues will fall at the state, local and federal levels. The debt overhead will deflate the economy, causing shrinkage all down the line.

        So here’s where the cognitive dissonance comes in: It is necessary, even inevitable, for the volume of debt to come down – not up – to restore equilibrium. The economy was well on its way to preparing the ground for this last week. As Alan Meltzer of the American Enterprise Institute (of all places!) explained on McNeill-Lehrer, Merrill Lynch was able to be sold at 22 cents on the dollar; and the economy survived Lehman Brothers and Bear Stearns being wiped out.

        Such debt writes-offs are a precondition for writing down America’s mortgage debts to levels that are affordable. But Mr. Paulson’s plan is to fight against this tide. He wants the Wall Street to keep on raking in money at the expense of the economy at large. These are the big banks who lobbied Congress to appoint de-regulators, the banks whose officers paid themselves enormous bonuses and gave themselves enormous golden parachutes. They were the leaders in the great disinformation campaign about the magic of compound interest. And now they are to get their payoff.

        The pretense is that not to pay them off would threaten “the economy.” The reality is that it only would stop their predatory behavior. Worse than that, for the economy at large a government take-over of these bad loans would prevent the debt write-down that the economy needs!

        It gets worse. If Congress should be so destructive as to buy out $700 billion of bad loans (for starters), the sellers will do just what Russia’s kleptocrats did. They will take their money and move it abroad to a “hard” currency country. This will help collapse the dollar. Up will go gasoline costs and prices for other imports. America will be turned into a Russian-style post-Soviet economy, having endowed a new domestic kleptocracy of insiders, who use some of their gains to finance the campaigns of American Yeltsins such as McCain.

        So let us admit that the economy has been taking a wrong track for a number of decades now. As John Kay noted : “When the dust settles, many banks and hedge funds will have lost more money on their trading activities in the past year or so than they had made in their entire history … The pursuit of shareholder value damaged both shareholder value and the business.”

        I worry that Wednesday’s jump in the Dow Jones average signals that the big betters have decided that there is a good chance of the vast giveaway going through. The Republican protests seem to me to aim not so much at really stopping the measure, but on going on record that they opposed it – before they voted for it. When the public wakes up to the great giveaway, the Republicans can say, “It was a Democratic Congress that did it, not us. Read our anguished protests.” Everyone is trying to cover themselves. With good reason.

        Don’t let them speak on behalf of voters and then act against the economy, claiming that they are trying to save it. A giveaway of unprecedented magnitude would cripple it for as far as the eye can see.

        We have reached the point where it may finally be able to break through the membrane of cognitive dissonance that has been blinded people. The very first course in economics –starting in high school, followed up in college and then refined in graduate school – should explain to students why it is false to believe the advertisement that Wall Street has been trying to sell for the past half century: The deceptive promise that an economy can get rich off the mathematical “magic of compound interest.”

        The unreality of this promise should be immediately apparent by looking at the math of exponential growth. Already at the time of the American Revolution, financial economists were popularizing the contrast that Malthus soon would imitate in his population theory: Debts grow at “geometric” rates, while the economy itself grows only “arithmetically,” in a slower and more linear way.

        All that is needed is to put this idea together with the basic balance-sheet definition: One person’s savings are lent out to become other peoples’ debts. So the “magic of compound” interest to savers means an equal “magic of exploding debt” to somewhere else in the economy. And inasmuch as creditors insist on protecting themselves from inevitable default by possessing collateral, it is natural that most of the economy’s debts are owed on its largest asset: land and buildings. This explains why mortgage debts have become repayable and “gone toxic.”

        The “magic of compound interest” refers to the tendency of savings to double and redouble exponentially, with a matching rise in what debtors owe on the other side of the balance sheet. These mathematics have been operated throughout history, ever since the charging of interest was invented in Sumer some time around 2750 BC. In every known society, the effect has been to concentrate wealth in the hands of people with money. In recent years, one’s own money is not even necessary to do this. The power to indebt others to oneself can be achieved by free credit creation. However, the resulting mushrooming exponential growth in indebtedness must collapse at the point where its interest and other carrying charges (now augmented by exorbitant late fees, bounced-check fees, credit-card costs and other penalties) absorb the entire economic surplus.

        This is the point that has been reached – and passed – today. It has been developing for many decades. But there is a great reluctance to accept the fact that debts cannot be paid. “The poor are honest,” as one banker explained to me, and believe that “a debt is a debt” and must be paid. (This is not what Donald Trump, Bear Stearns or A.I.G. believe, but they are at the top of the economic pyramid, not its base.)

        Numerous publishers turning down my proposed books on the subject over the years. As they have explained to me: “Nobody wants to read how the bubble will break – at least, not until after it bursts. Can’t you write a book on how you can make a million dollars off the coming economic collapse? That would be a winner, Prof. Hudson. But to tell people that they can’t put aside savings and pay for their retirement ‘in their sleep’ is like telling them that they will have bad sex after the age of 50. It’s a no-seller. Come back when you have good news.”

        These are the words I’ve been hearing since the mid-1980s. I’ve spent much of my time looking through history to read up on how the failure to wipe out the debt overhead led to the collapse of Rome’s imperial republic, and to the Ottoman Empire as what was known as “the spoiling of Egypt” and “the ruin of Persia” toward the end of the 19th century. I’ve also published a series of four colloquia by assyriologists and archaeologists describing how earlier, from about 2500 to perhaps 300 BC, Babylonian and other Near Eastern rulers kept their citizens free and preserved their landholdings by annulling personal and agrarian debts when they took the throne – a true “tax holiday” – or when economic or military conditions warranted a general Clean Slate. (The series was funded and published by Harvard’s Peabody Museum and is now available from CDL Press.)

        These Clean Slates were adopted literally, almost word for word, in the Biblical Jubilee Year of Leviticus 25. Even the same Hebrew word, deror, was used for the Babylonian andurarum proclaimed by rulers of Hammurapi’s dynasty from 2000 to 1600 BC. So it is remarkable to me that men claiming to be Christian leaders today should ignore the fact that in the very first sermon that Jesus gave, in Nazareth (Luke 4:14-30), he unrolled the scroll of Isaiah 61 and promised that he had come “to proclaim the Year of the Lord,” the Jubilee Year. That was the literal “good news” that the Bible preached, as the Dead Sea scrolls have abundantly illustrated.

        Yet it is a sign of the power of creditor ideology that even the essence of this founding document of Western civilization has been ignored by a distorted view of what early Christianity, Judaism and other religions were all about. Hardly surprising. Luke’s passage on this founding sermon of Jesus concludes by pointing out that “all the people in the synagogue were furious when they heard this. They got up, drove him out of the town, and took him to the brow of the hill on which the town was built, in order to throw him down the cliff.”

        Down the cliff! This is where the revolting right-wing Roman senators drove the followers of the Gracchi brothers on the Senate hill, in an exercise of political violence that prevented Rome from granting debt relief toward the end of the second century BC. Livy, Diodorus, Plutarch and other historians of the epoch attributed the prospective fall of the Roman Empire to its harsh creditor-oriented debt laws. But today, historians publish books speculating that perhaps the problem was lead piping or lead goblets for their wine, or disease, or imperial overreaching, or superstition – anything but the cause to which the Roman historians themselves pointed.

        We are still living with the consequences of Rome’s oligarchic revolution. That is what makes this week’s Congressional hearings on the $700 billion giveaway so important. First with military force and then via debt bondage and serfdom, Rome bequeathed to Europe a property-based, creditor-oriented body of law. But since the 13th century, country after country has shifted the balance back to favor debtors – to save them from literal debt bondage, from debtor’s prisons, from permanent indebtedness, to give them Clean Slates on an individual level.

        Handel arranged the first performance of The Messiah as a benefit to raise money to bail debtors out of Irish debtors’ prisons, and every year the oratorio was repeated for that charitable purpose. Martin Luther warned about the mathematics of compound interest as the monster Cacus, devouring all. Yet Luther’s denunciations of usury are excluded from his collected works in English, and are available in this language only in Vol. III of Marx’s Capital and Book III of his Theories of Surplus Value. The discussion of interest and banking has become so marginalized that even when I taught money and banking at the New School in New York City in the late 1960s and early ‘70s, it was not part of the core curriculum but treated as a special topic. (Fortunately, that is not the case where I am now happily situated at the University of Missouri in Kansas City. But it took a long time to get here.)

        Behind this shift in legislative choice was the perception that no economy can keep up with the burden of debts growing at exponential rates faster than the economy itself is growing. No economy can grow at steady exponential rates; only debts can multiply in this way. That is why Mr. Paulson’s $700 billion giveaway to his Wall Street colleagues cannot work.

        What it can do is provide a one-time transfer of wealth to insiders who already have been playing the debt-credit system and siphoning off its predatory financial proceeds to themselves. The Wall Street bankers, brokers and fund managers to whom I’ve been speaking for many decades all know this. That is why they pay themselves such large annual bonuses and large salaries each year. The idea is to take as much as you can. As the saying goes: “You only have to make a fortune once in a lifetime.” They have been salting away their fortunes year after year, mainly in hard assets: real estate (free of mortgages), fine furniture, boats and trophy art. One last $700 billion heist and they can make their getaway.

        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 (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 Press, 2002) He can be reached via his website, mh@michael-hudson.com

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        Last edited by FRED; 09-25-08, 05:29 PM.
        Ed.

        Comment


        • #5
          Re: Thursday's Hudson

          I have to work but I will return to this topic in some detail. Meanwhile I have to say that I am amazed at the almost syncophant acceptance of Hudson drivel by the normally rational itulip community.
          Sure, this is a 'cash for trash' or a give-away to Wall St managers, who must be now busy thinking up ways they can rip tens of billions of this amount for themselves personally.
          He then goes on to talk about exponentially rising debt as the problem - which is also true.
          His diagnosis of how and why this debt arises is just plain tripe. His solutions are even worse and have been tried before one form and another and result in totalitarian soecieties.

          Comment


          • #6
            Re: Thursday's Hudson

            Joing Itulip NOW, you will learn interesting insights to whats going on behind close doors, also as a bonus you will learn new exciting words.

            For example todays new word : kleptocracy

            Defined: .."a government or state in which those in power exploit national resources and steal; rule by a thief or thieves"...

            I suggest all users keep this link VERY CLOSE : http://dictionary.reference.com/

            WTF - Nice one Itulip !

            Also on CNBC today a bearish chap said that as at today there is known $3.2 trillion dollars of toxic waste on balance sheets, and $700 Bn bailout was not enough. The CNBC producer was not interesting in any bad news on a rally day and his TV time was limited after that statement.

            Ref: http://www.bloomberg.com/apps/news?p...d=ax3vfya_Vtdo&

            Wall Street underwrote $3.2 trillion of loans to homebuyers with bad credit and undocumented incomes from 2002 to 2007. Investment banks packaged much of that debt into investment pools that won AAA ratings, the gold standard, from New York-based Moody's and S&P. Flawed grades on securities that later turned to junk now lie at the root of the worst financial crisis since the Great Depression, says economist Joseph Stiglitz.
            Oooooouch !

            By the way in my posts I will use only words that do not require 10 MBAs to understand. (Just joking, I am going to say this new word at several dinner functions this week. ha ha)
            Last edited by icm63; 09-25-08, 07:51 PM.

            Comment


            • #7
              Re: Thursday's Hudson

              Firstly, I know I am crossing swords with the venerable of itulip here. My notions are somewhat ‘old fashioned’ and ‘out of date’, perhaps even “Austiran” (shame! Shame!) I’m not much in favour of labels and I don’t care. I can promise you a couple of things about human behaviour. It does not require millions of dollars of research and no great intellect to figure out
              The propensity to save is in direct proportion to the rewards from saving. Further, if there is negative reward (penalty), saving will be negative. Conversely, the more you reward spending and debt, the more debt and spending you will have.
              The propensity to save is in inverse proportion to the expected time until reward for saving is experienced.

              Now with those couple of basic facts in mind, let’s have a look at Hudson.


              We have reached the point where it may finally be able to break through the membrane of cognitive dissonance that has been blinded people. The very first course in economics –starting in high school, followed up in college and then refined in graduate school – should explain to students why it is false to believe the advertisement that Wall Street has been trying to sell for the past half century: The deceptive promise that an economy can get rich off the mathematical “magic of compound interest.”
              It would be doing people a service if they were told the facts about saving. That the whole system is designed to rip your savings from you, to steal from you, to impoverish you if you save. That the whole corrupt system is supported by all politicians, intellectuals (especially people like Hudson) and your fellow citizens.
              I’m not sure where “Wall St” promised that the economy can get rich off the “magic of compound interest”. Certainly I hear the “magic” being touted by the odd advisor in MSM in terms of people becoming more wealthy through the process. The exhortation to save and reap the reward of “compound interest” has been roundly ignored by society in general, with good reason. Instead of growing wealth, it depleted wealth.


              The unreality of this promise should be immediately apparent by looking at the math of exponential growth. Already at the time of the American Revolution, financial economists were popularizing the contrast that Malthus soon would imitate in his population theory: Debts grow at “geometric” rates, while the economy itself grows only “arithmetically,” in a slower and more linear way.
              It is simply not true that the economy grows in a linear way. He uses the term ‘more linear’ to obfuscate. That immediately ought tell someone something about the porosity of his argument.
              The reason debts have grown at geometric rates is twofold
              1. Interest rates (after tax) have been pretty much continuously negative.
              2. Debts do not match savings. The ‘magic’ that has been used that is wrong, is NOT compound interest! It is the leverage applied to savings to create debt. This naturally feeds back to 1. and becomes a continuous self feeding loop. Hence real interest rates become lower and lower while leverage multiplies.
              All that is needed is to put this idea together with the basic balance-sheet definition: One person’s savings are lent out to become other peoples’ debts. So the “magic of compound” interest to savers means an equal “magic of exploding debt” to somewhere else in the economy.
              The magic of exploding debt has nothing to do with compound interest. It has to do with exactly that there is no magic to compound interest because and interest earned is more than used up by tax and inflation. The exploding debt is caused by the ability to lever “savings” to the tune of 20, 30 50, …1000’s of times. If you had a society, where the only money that can be lent is that which is saved by someone else, you can bet anything you like that you would not have exponentially rising debt.


              And inasmuch as creditors insist on protecting themselves from inevitable default by possessing collateral, it is natural that most of the economy’s debts are owed on its largest asset: land and buildings. This explains why mortgage debts have become repayable and “gone toxic.”
              I fail to see a single word in this paragraph that ‘explains why mortgage debts have become repayable and “gone toxic.”’
              We just have some jump across a logical chasm that could never be achieved with reason. Yes banks require land and buildings as collateral. The reason of course is they cannot be moved. This is an area of Banking that ought be looked at by legislators. The debate on that topic would derail this comment.
              As we have seen these past few years, when you create money at a far greater pace than an economy grows, by inceasing leverage of debts to savings, that money has to go somewhere. In this case it has exploded the value of land and buildings. The flow of money (inflation) into land and buildings has been exacerbated by favourable tax treatments, especially for homes and favourable leveraging. Again you have a self-feeding loop. More money, favourable tax treatment, money to land and buildings, prices increase, more spending, more debt, more money…….etc etc

              The “magic of compound interest” refers to the tendency of savings to double and redouble exponentially, with a matching rise in what debtors owe on the other side of the balance sheet. These mathematics have been operated throughout history, ever since the charging of interest was invented in Sumer some time around 2750 BC. In every known society, the effect has been to concentrate wealth in the hands of people with money. In recent years, one’s own money is not even necessary to do this. The power to indebt others to oneself can be achieved by free credit creation. However, the resulting mushrooming exponential growth in indebtedness must collapse at the point where its interest and other carrying charges (now augmented by exorbitant late fees, bounced-check fees, credit-card costs and other penalties) absorb the entire economic surplus.
              There has been no ‘matching rise’ of debt to savings. Debt rose 20, 30, 50, 1000’s times savings!!! To claim otherwise as Hudson does is either dishonest or stupid…both in the extreme!
              We have leveraged savings with debt to the extent that we have driven ‘nominal’ savings interest rate to near zero. As a result we now have no savings…so debt must collapse. We have not yet learned how to create an infinite debt by multiplying zero savings. In addition, the recall of debt (perhaps as a result of some of our creditors asking for money or indded some interest) results in a leveraged destruction of debt. I think I am in tune with itulip here.
              So yes, the house of debt we built is now collapsing but it is NOT because of compound interest. It is more because we do not have positive compound interest.

              This is the point that has been reached – and passed – today. It has been developing for many decades. But there is a great reluctance to accept the fact that debts cannot be paid. “The poor are honest,” as one banker explained to me, and believe that “a debt is a debt” and must be paid. (This is not what Donald Trump, Bear Stearns or A.I.G. believe, but they are at the top of the economic pyramid, not its base.)
              Here we go with the old Socialist hogwash…”the poor are honest” and, by inference, those who save and own anything are dishonest!!!! Confusing isn’t it really…some of the poor also save. Some, through saving, hard work, ability, and a society that does make education available, are able to cross some of the boundaries that stratify our society…and can even do so without harming anyone else.


              Numerous publishers turning down my proposed books on the subject over the years. As they have explained to me: “Nobody wants to read how the bubble will break – at least, not until after it bursts. Can’t you write a book on how you can make a million dollars off the coming economic collapse? That would be a winner, Prof. Hudson. But to tell people that they can’t put aside savings and pay for their retirement ‘in their sleep’ is like telling them that they will have bad sex after the age of 50. It’s a no-seller. Come back when you have good news.”
              “Oh poor misunderstood Prof Hudson”

              Then we go on to the “clean slate” drivel. In essence the “clean slate” is the same as the Paulson Giveaway. It has as its kernel, the idea that we can create money from nothing…just suddenly wipe away all those debts with no cost to anyone. What the hell is the difference in concept to Paulson? The only good thing is that it would not go to the ‘few’ as Paulson’s proposal does. I wonder exactly what he thinks the recipients of this largesse would do…”well interest rates remain negative…so let’s go that new boat/TV/house/spa/gold taps/before it gets any more expensive…and get some more debt. This is as sure as night follows day!!
              As a solution for the economy the idea is at best stupid and at worst downright dangerous.

              Let’s summarise Hudson’s proposals
              1. We cannot have compound interest. Given that compound interest is only the postponement of expenditure to save a little more and NOT “magic”, we are basically saying we will not have saving.
              2. We do not in any form address the problem of leverage and a society with no savings. As a matter of fact, since we are actively discouraging saving, we need to leverage ourselves a whole lot more
              3. We are going to do the “clean slate” thing. Now as per his own argument about saving resulting in debt increase on the other side of the balance sheet. The cleaning away of debt means we also “clean away “ savings. This is a nice totalitarian solution!! So, in a society laded with debt, with debt as its core problem, if all savings are to be confiscated, you will have NO SAVINGS!!!!

              One other SMALL problem is that I guess a few of us who have some savings, that we have worked bloody hard for, and our families have ‘done without’ so we have savings, might actually put up a bit of a struggle when they are taken off us…so once again…straight to the tumbrils!!! This type of society cannot tolerate dissention.
              Now the sort of tripe I have had in itulip to this problem about the confiscation of savings has been typically “well…we don’t mean you” Then, who the hell does everyone mean? Who does Hudson mean? Whose wealth is he going to confiscate and who will be allowed to keep what they have? Is there some magical level of capital aka savings that one can have without being sent to the guillotine? What is it just so I can be prepared and get out and spend most of what I have!

              Lastly, the question I posed elsewhere……..

              Who will decide who amongst us is for the tumbrils, and who is to knit?

              Comment


              • #8
                Re: Thursday's Hudson

                Originally posted by The Outback Oracle View Post
                Firstly, I know I am crossing swords with the venerable of itulip here. My notions are somewhat ‘old fashioned’ and ‘out of date’, perhaps even “Austrian”
                In general, I don't disagree with anything you state... but I also urge you to read some more Hudson. He's not nearly as far from the Austrian view as you may think.
                http://www.NowAndTheFuture.com

                Comment


                • #9
                  Re: Thursday's Hudson

                  I absolutely agree with you Outback. Some of what I've read of Hudson on this site has been pretty good, but this article is total garbage.

                  Hudson says
                  One person’s savings are lent out to become other peoples’ debts.
                  For a guy who claims he understands how money is created and destroyed so well, he sure doesn't seem to know that when using fractional reserve banking, one man's savings become one bank's reserves becomes many debtors loans.

                  By changing the reserve requirements, we can grow the debts exponentially without any additional savings.

                  I also liked how he calls McCain an "American Yeltsin". Not that I have any love for McCain, but it is interesting that he doesn't bother mentioning the other aspiring "American Yeltsin". I guess he can stand a guy who is a full blown socialist (Obama), but someone like McCain who is only 99% socialist is worthy of Hudson's derision.

                  Comment


                  • #10
                    Re: Thursday's Hudson

                    Good post, thanks. I for one would love to have the O Oracle and Dr Hudson debate the relative merits and evils of USURY.

                    Who will decide who amongst us is for the tumbrils, and who is to knit?


                    I forgot which Greek it was who opined that the person who is most qualified to govern is the person who thinks he is least qualified to govern. modern day equivalent is the libertarian who doesn't want to rule the world but only herself.

                    Comment


                    • #11
                      Re: Thursday's Hudson

                      Originally posted by nathanhulick View Post
                      I absolutely agree with you Outback. Some of what I've read of Hudson on this site has been pretty good, but this article is total garbage.
                      Dr. Hudson's recent articles are, unfortunately, colored by his political bias (it's very obvious he's a Democrat) and distract from his otherwise insightful analysis of the current economic system. Like a stereotypical Democrat, Hudson is under the delusion that the solutions for many of society's ills can only come from government. It's not clear to me whether he believes government management of resources can be efficient and absolutely altruistic (I assume that, at the very least, he believes it will be relatively less exploitative than what the FIRE economy offers).

                      For example, his proposal of taxing real estate more heavily so that usage fees (economic rent in his terminology) are collected by the government rather than the banking system. While this gives the use of the money to the government for use in infrastructure and social services rather than FIRE economy profit, I have yet to see the municipal or state government that will not end up needing even more money due to government inefficiency and tendency to bloat.

                      This is probably the basis for the iTulip thesis of PPPs playing a key role in the alternative energy and infrastructure boom (bubble?). Private enterprise will contribute its drive for efficiency while government will act as an overseer to limit the abuses seen in the FIRE economy.

                      For a guy who claims he understands how money is created and destroyed so well, he sure doesn't seem to know that when using fractional reserve banking, one man's savings become one bank's reserves becomes many debtors loans.

                      By changing the reserve requirements, we can grow the debts exponentially without any additional savings.
                      Replace Hudson's references to compound interest with fractional reserve banking (leverage) and his analysis makes tremendous sense. I can't remember if Hudson recommended full reserve banking but that would address his "compound interest" complaint.

                      Comment


                      • #12
                        Re: Thursday's Hudson

                        Outback,

                        Your views on Hudson are well known.

                        I am still unclear, however, on why getting interest on savings is necessarily itself good when that interest only gets paid because said savings is used (with or without leverage) to create loans which in turn are paid a much higher rate of interest.

                        The gain of interest paid on savings thus is a net loss when the interest paid for the loans made based on said savings is added in.

                        You also fail to address why people take on debt.

                        Sure, some of it is buying iPods and LCD TVs. But the biggest portion of debts is for business and for buying homes.

                        The carrot being dangled is the prospect of becoming a property owner - or in Hudson's terms, become a recipient of economic rent.

                        Unfortunately for the general population, this carrot is in reality the cheese on a monstrous debt mousetrap.

                        Even for those who started early in the asset price inflation cycle fail to understand that the reason they are getting the free economic rent is because of the cycle, and that by its very nature the cycle is unsustainable.

                        You never responded to my point about US residential real estate growing at an annual pace of 5% from 1970 to 2007, vs. the GDP at a 3% rate. This is exactly what Dr. Hudson talks about.

                        You don't like his solutions - perfectly understandable.

                        But attacking his thinking without learning from it is dangerous.

                        His point about total confiscation is absolutely possible and has occurred in the past.

                        Raging about how unfair it is that the bankster's are conspiring to inflation tax away savings and future income purchasing power doesn't help you to understand either how it is occurring or how to protect against it.

                        Comment


                        • #13
                          Re: Thursday's Hudson

                          Good comments. And Hudson's rant is good.

                          I take his railing against compound interest and "clean slate" discussion to mean that compound interest has been abused and that the best way to solve the imbalances after a long period of same is a "clean slate" for debtors.

                          I don't think he is arguing against all interest.

                          The underlying problem is fiat (debt-based) money. It will always tend to turn into a complex of too much debt. Always has. Hudson could have said more about that.

                          Sound money is a necessary (though not sufficient) solution to this problem.

                          Some people do make the argument that all "interest" is evil. I don't agree. It is good to have debt-like funding, as opposed to just equity-like. Here is why the "all interest is evil" argument is mathematically wrong-minded:

                          In a sound money system, you have gradual deflation (increase in the value of money) as economic progress happens. Equivalently, the total "value outstanding" relative to total money outstanding goes up.

                          Under such a system, even if you lend at 0%, you are still lending at a real rate of interest. If deflation is running at 2%, then you are really lending at 2%, even if the nominal interest rate is 0%.

                          I think that is more the sort of situation the ancients had in mind; not totally doing away with the notion of lending.

                          However, as currency became debased (as it always was at the twilight of empires), this system falls apart, and you need higher rates of interest and an ever-increasing debt burden to preserve your return. Every such period has culminated in collapse of empire or regime, and the wise rulers would then indeed engage in mass debt forgiveness.

                          In the modern era we are in many ways much, much less kind. The bankers and econo-technocrats have completely taken over; no more are there philosopher-kings to free the people from debt after such a period of deterioration. In this respect it seems the trend unfortunately seems to be towards a broadening base of economic slavery, worldwide =(

                          Comment


                          • #14
                            Re: The Big Bank Job

                            "...So it is remarkable to me that men claiming to be Christian leaders today should ignore the fact that in the very first sermon that Jesus gave, in Nazareth (Luke 4:14-30), he unrolled the scroll of Isaiah 61 and promised that he had come “to proclaim the Year of the Lord,” the Jubilee Year. That was the literal “good news” that the Bible preached, as the Dead Sea scrolls have abundantly illustrated...."

                            The Scripture is misinterpreted on several points; a few are mentioned below. The 'Year of the Lord's favor' was indicating the beginning of the Messianic age. Sins are spiritual debts that need forgiveness; the Messiah canceling debts of sin. The outrage to cast Jesus from the cliff came from his references to the rejection of some of Israel and acceptance of some Gentiles (Luke 4:23-28).
                            The anger of the crowd was not from a bunch of brain-washed debt serfs over the mention of the Jubilee Year. The 'good news' of the Gospel is the forgiveness of debt, but it is spritual debt (sin).
                            Sorry to step outside economics, but the article was wrong on this point.

                            Comment


                            • #15
                              Re: Thursday's Hudson

                              I'll respond for (or alongside) Outback, just for fun.

                              Originally posted by c1ue View Post
                              Outback,

                              Your views on Hudson are well known.

                              I am still unclear, however, on why getting interest on savings is necessarily itself good when that interest only gets paid because said savings is used (with or without leverage) to create loans which in turn are paid a much higher rate of interest.

                              The gain of interest paid on savings thus is a net loss when the interest paid for the loans made based on said savings is added in.
                              You are assuming the dysfunction here.

                              The way the savings should be getting used is that it is invested prudently in economically productive ventures.

                              While that may seem a big "if", recall that if the saver/investment agent are not shielded from the consequences of their decisions, they are likely to be very careful on how that money is placed.

                              There is absolutely no need to go out and simply try to place the initially lent money at a higher rate. That would not be investment; it would be a carry trade speculation. And yes indeed, much of the existing financial economy works that way. But that is the problem; not the normal, stable state of things.

                              Originally posted by c1ue View Post
                              You also fail to address why people take on debt.

                              Sure, some of it is buying iPods and LCD TVs. But the biggest portion of debts is for business and for buying homes.

                              The carrot being dangled is the prospect of becoming a property owner - or in Hudson's terms, become a recipient of economic rent.

                              Unfortunately for the general population, this carrot is in reality the cheese on a monstrous debt mousetrap.

                              Even for those who started early in the asset price inflation cycle fail to understand that the reason they are getting the free economic rent is because of the cycle, and that by its very nature the cycle is unsustainable.

                              You never responded to my point about US residential real estate growing at an annual pace of 5% from 1970 to 2007, vs. the GDP at a 3% rate. This is exactly what Dr. Hudson talks about.
                              I'm not sure exactly how this rebuts Outback's points.

                              Yes, it is important to understand the "swindle" pulled off to trick most regular citizens into taking on way too much debt.

                              But the problem is still that the debt expansion is being enabled as a core, fundamental property of the monetary system.

                              If we were to "crack down" on unsound housing lending, the unsound activity would simply move to some other area, where there has not yet been a crackdown. In fact as the history of bubbles amply discussed on this site shows, the bubbles always do move to a new area, as long as the the two main ingredients of debt-based/fiat money system and political buy-in are present.

                              If we are to ever really "solve the problem", we must reform either the political or monetary system. And I think there is a lot more hope for the latter than former, since changing the former is tantamount to changing human nature. By contrast, we have at times had much more sound monetary systems.

                              Admittedly, the real challenge with that is keeping the politicians' hands off a good monetary system.

                              Comment

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