Interview Summary: Dr. Michael Hudson

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Interview Summary: Dr. Michael Hudson

by Eric Janszen - August 21, 2007

It's unanimous, at least between the two presidential candidates who have ideas about economic policy that are more than just more of the same: "Get rid of the Fed"

We caught up with Dr. Michael Hudson for an update interview last week. We interviewed him back in March 2007 and interviewed him again in light of recent events in the markets and his yet to be officially announced appointment as Chief Economic Policy Adviser to Dennis Kucinich's presidential campaign.

Regardless of whether readers think Kucinich has a chance at winning the Democratic party primary or the election, in his new role Hudson's ideas will influence the economic debate just as Rep. Ron Paul's have. We are arranging an interview with Ron Paul to get his perspective on the same issues. (I spoke with a member of the Paul campaign yesterday and we are working on a time to talk either at the Hard Assets Conference in Las Vegas September 10 - 11 where I am delivering the keynote speech, if Sen. Paul attends again this year, or on the phone. We'll let you know when we know.)

You can already see Hudson language showing up in Kucinich statements on the economy, such as this one that uses the Hudson-esque phrase "debt-financed capitalism."

Kucinich calls for federal oversight to quell market volatility

Focusing on largely unregulated hedge funds and the scandalous practices of unscrupulous sub-prime lenders, Ohio Congressman and Democratic Presidential candidate Dennis Kucinich told a San Francisco audience that the Securities and Exchange Commissions and the Federal Reserve must step up their oversight responsibilities.

In a major economic policy address at the Commonwealth Club yesterday (Friday, August 10), Kucinich also warned that the "debt-financed capitalism" is reaching an economically dangerous level and could lead to a recession.

Kucinich's economic policies, now coming as they do largely from Hudson, appear virtually indistinguishable from Ron Paul's.

Both believe radical reform of the tax system is needed. But whereas Paul wants to abolish the IRS, Hudson believes that the income tax system needs to be rolled back to reflect its original intent, which was to support the growth of a strong middle class. Whether the new tax policies are carried out by the IRS or some other institution is not as relevant to Hudson as the tax policies themselves. In his view, tax policies need to encourage capital formation and capital investment in industry rather than in asset speculation, and Americans need to be rewarded for building wealth from productive work over earning capital gains from asset inflation. Sen. Paul is known to hold similar views.

In the interview, this perspective came as a surprise: Hudson, like Paul, believes that the Fed should be abolished. Hudson sees the Fed as an institution designed to support financial interests against the U.S. government.

The major difference between Hudson and Paul is that Paul's philosophies are rooted in Austrian economics whereas Hudson, as an economics historian, draws on an extended historical perspective. Paul is known to express the belief that government can be eliminated from economic planning, and that capitalist markets if allowed to work without interference from the Fed and other government and quasi-government agencies will take our economy in the right direction. Hudson, on the other hand, believes that conception is unscientific when viewed in the context of the past few thousand years of political economic development. To Hudson, the concept of free market economic determination is ideological, that the utopian ideal of a pure free market economy has never worked in practice.

According to Hudson, implementation of a pure free market economic model in practice means ceding economic planning to financial interests. Naturally, the economic planning that results tends to be self-serving, eventually leading to the kind of debt based money system and credit laden economy we see today. Paradoxically, in Hudson's view, the Fed–so loathed by the free market believers–is a creation of free markets, an institution designed to protect the interests of financial institutions which grew to fill the economic planning power void created by free market politics.

It's an intriguing argument. If that strikes readers as radical, some of the solutions that Hudson proposes, such as government participation in corporations as a shareholder, will make Milton Friedman libertarians jump out of their skin.

Before we dive into the interview, a quick note on iTulip's approach to gathering expert opinion.

iTulip seeks out expertise from across a broad spectrum of opinion on economics and finance. Our objective is to develop the best understanding of how the political economy actually works, versus how we'd like to imagine it works, in order to have the best chance of improving the predictive value of our models. We then talk to insiders to determine where we are in the process. Our record to date (Note: One call each, not over and over like a broken clock):

NASDAQ Bubble

• How the NASDAQ Bubble will End: Nov. 1999
• NASDAQ Crash: Mar. 2000
• NASDAQ Prediction Acknowledged by NYTimes, Boston Globe, etc. Aug. 2002
  
• Gold price bottom: Aug. 2001 (Chapter in America's Bubble Economy, John Wiley & Sons, 2006)

Housing Bubble

• Yes. It's a Housing Bubble: Aug. 2002
• Housing Bubbles Are Not Like Stock Market Bubbles: Jan. 2004
• Housing Bubble Correction: Jan. 2005
• Housing Bubble Top: Jun. 2005
• Recession Q4 2007: Oct. 2006
• March Crash 2007: July 2007

Economics and politics are inextricably intertwined, so our models take into account how possible economic outcomes may impact political outcomes and, conversely, how possible political outcomes may affect economic outcomes. However, we attempt to avoid political discussion to maintain our focus on finance and economics, and strive for as much political neutrality as possible. We consider ourselves to have succeeded at achieving political neutrality when we receive a more or less equal number of complaints of bias from both the right and the left.

These days we find the distinctions of left or right, Keynesian or Austrian, and so on, increasingly inutile.

The economists we interview generally fall into two categories: economists on the finance economy payroll and economists not on the finance economy payroll. One can usually tell whether or not an economist is on the finance economy payroll or not by his or her position on three key test issues. Call it the iTulip Economist Independence Test.

	Finance Economy Economist	Independent Economist
Housing Bubble	Two years ago: "There is no housing bubble." One year ago: "Ok, there was a housing bubble but it was no big deal." Now: "Ok, it was a big deal, but not enough of a big deal that its collapse will lead to a recession." One year from now, "Ok, it was enough of a big deal to cause a recession, an asset price deflation and decline of the finance economy, but when this is all over it's back to business as usual."	Two years ago: "By holding interest rates down too far too long in the early 2000s the Fed created a housing bubble to prop up the economy after the collapse of the technology stock bubble, which was created when the Fed kept interest rates down too long in the 1990s." One year ago: "The housing bubble is now collapsing." Now: "The collapse will badly damage the economy, certainly leading to recession and quite possibly worse." One year from now: "Told you so."
Financial Assets Crash	There is no crash, only temporary volatility that will quickly pass once loans to banks from the Fed calm investors. The DOW will soon resume its inexorable climb to 20,000.	The asset markets are in a crash process that will not end until trillions of dollars in fictitious value reflected in inflated asset prices is written off or inflated away.
Free Markets	A "free market" is when you get laid off from your job making parts for GM cars because GM made bad bets on products and failed to compete effectively with foreign auto manufacturers. A "free market" is also when the Fed loans money to banks that made a fortune selling mortgage-backed securities to foreign pension funds when the bets turn out wrong and those securities turn out to be worthless.	A "free market" is when you get laid off from your job making parts for GM cars because GM made bad bets on products and failed to compete effectively with foreign auto manufacturers. A "free market" is also when the Fed does not loan money to banks that made a fortune selling mortgage-backed securities to foreign pension funds when the bets turned out to be bad and securities worthless but instead allows the market to determine their fate. Or, if the Fed is going to loan money to failing banks because they made bad bets, then it should also loan money to the auto parts business so it can stay in business, too.

By this test, Dr. Michael Hudson is in the Independent Economist group.

Our interview with Dr. Hudson is available to iTulip Select subscribers here.

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