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February 26, 2012
A Planned Economy for the 1%
Michael Hudson: All economies have a certain amount of planning, the
question is, for whom
Watch full multipart A Planned Economy for the 1%
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Bio
Michael Hudson is a Wall Street Financial Analyst, Distinguished
Research Professor of Economics at the University of Missouri, Kansas
City and author of Super-Imperialism: The Economic Strategy of
American Empire (1968 & 2003), Trade, Development and Foreign Debt
(1992 & 2009) and of The Myth of Aid (1971).
Transcript
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm
Paul Jay in Washington.
Concentration of ownership leads to concentration of political power.
It's rather obvious. It's practically a truism. But it's not something
you will hear said very often on mainstream media. But it certainly
goes to the core of what's happening in Europe, Greece, and in United
States and Canada and many—most other countries, if not all.
Now joining us to talk about the relationship of banks, big banks,
financial power, and public policy is Michael Hudson. Michael was a
former Wall Street financial analyst. He's now a distinguished
research professor of economics at the University of Missouri–Kansas
City. And you can find his work at Michael-Hudson.com. Thanks for
joining us, Michael.
MICHAEL HUDSON, RESEARCH PROF., UMKC: Thank you very much, Paul.
JAY: You've written that, you know, all economies are planned to some
extent; this idea that there's simply a free market without government
planning is not very realistic. And [incompr.] you've raised the
question: but who does the planning, and for whom? Talk about that.
HUDSON: Well, in the past, ever since the Neolithic agriculture,
wherever you have a division of labor and a time gap between
production and a final payment, planting and harvesting, you need
forward planning. The whole idea from the 18th and 19th and early 20th
century is that the governments would make a forward plan. The French
called this planification, or indicative planning.
But if the governments don't plan to make subsidies and tariffs and
taxes, then if you dismantle government planning, then by default all
of the planning passes into the hands of bankers. And the bankers end
up allocating the nation's resources, because it's the bankers who
give the credit. And instead of the government deciding how to steer
the economy forward—by subsidizing education, by building private
infrastructure—all of a sudden the infrastructure and the division of
labor and the resources are passed on to the banks, and the banks are
going to decide, okay, sell all the public domain, sell the roads and
the railway systems and the power systems, and we will decide who gets
the credit, and we'll do the planning.
Well, the problem is is the financial timeframe is very short-term.
It's hit and run. They're into making a bundle as quick as they can on
one project and then go on to the next project. And they leave an
economy loaded down with debt, which is what you have from the
corporate takeover movement, from the hedge funds, from the leveraged
buyouts.
The financial plan is to take all of the revenue of a corporation, and
see how much revenue can be pledged to pay debt service, and we're
going to find a buyer who's going to buy this company and pledge all
the cash flow to us [incompr.] the company. Well, this doesn't leave
any money over, left for tangible capital investment in new plant and
equipment. Just like in a building—if Donald Trump or a real estate
investor is buying a property, the basic motto of a real estate
investor is rent is for paying interest. A investor will calculate how
much rent is there, and they'll bid for a big office building. The
winner is the person who pledges the whole of the rental cash flow to
the bank for interest. And they do this because they're not after the
rent; they're after the capital gain as banks keep lending more and
more money for the process to increase the whole price. And what you
have is asset price inflation.
Well, what's so unique about this is in Europe you have this whole
implanted memory of the German hyperinflation in the 1920s, that the
Germans and the Europeans say, well, wait a minute, we can't have a
central bank lending to governments, because that's inflationary or
is—. In fact, we've just seeing this huge inflation by the commercial
banking system in the United States, England, and Europe. But what
they have inflated isn't commodity prices or wages or consumer prices;
they've inflated housing prices, stock prices, bond prices, the price
of buying a retirement income.
And so the commercial banks tend to inflate the prices of assets. And
what that has done is increase the value of wealth and real estate and
corporate ownership in finance relative to labor. So there's been an
enormous concentration of wealth in the United States and polarization
since interest rates began to come down in 1980, from 20 percent then
to about 1 percent now.
So the financial plan is basically an asset grab. They want to load
the whole economy down with debt. A consumer will come in and say, I'd
like to take out a loan. They'll say, how much do you earn? Everything
over subsistence they'll want as a loan.
When I was at Chase Manhattan, for instance—and I joined in 1994.
And—1964, I'm sorry. My first job was to analyze Argentina, Brazil,
and Chile, and my job was to see how much of a surplus in foreign
exchange can these countries generate by exporting, by selling off
their property. And once we have the surplus, if that's capitalized
all into debt service, how much can they afford to borrow from us in
order—so that we can get paid their entire surplus for making loans
for them? And then, what's the portion of Chase's loans to other New
York banks and other American banks? And so we'll all have the whole
economic surpluses of entire countries being paid to the banks.
Well, once the surplus is paid to the banks, there's nothing over for
rising living standards, there is nothing over for new capital
investment, there is nothing over for long-term research and
development. When you have Henry Kravis or the other takeover artists
take over a company, the first thing they do is cut back long-term
projects—they cut back research and development, they slash projects
that have a long maturation period—and take it out.
JAY: Right. Michael, you know, if you look at the sort of graph of the
strength of the financial sector or size of the financial sector in
relationship to the GDP, it gets very, very high around 1931-1932, it
sort of starts to go down, then it really dips in World War II. After
World War II it's like a steady climb. But it seems like in terms of
planning, in government planning, that pre, you could say, 1980, '70s,
you had a little more mix that—you had government planning always, you
could say, in the final analysis, in the interest of the elites and
various—but more various sectors of the economy than just so much the
financial sector. We're now—it seems like by far the weight of public
policy is on the side or being directed by the finance sector. If you
agree with that as an idea, why?
HUDSON: Even in the—let's take the case of the industrial
corporations. Prior to 1980—well, in the 1930s, most industrial
corporations, if you look at who is a CEO, they were lawyers, because
the lawyers had to deal with debt and insolvency. During World War II
they tended to be military people, generals. They also were industrial
technologists, they were inventors, they were people who came from the
production end. Then from about the 1960s and '70s you had salesmen
become the CEOs. They were people who focused on marketing [inaud.],
because that was how the industrial [inaud.] to production.
But since 1980 you had a change. The business school focus was
shifted. And Robert Locke recently wrote a book on business school
education pointing out that the whole focus of business school
education now was to have industrial companies run by financial
managers—not salesmen, not production end, not lawyers, but financial
managers. And so you have a system where not only are the banks
allocating credit in the economy, but it's the corporate sector
itself, the industrial sector, is treating companies, industrial
companies, as if the purpose was to squeeze out a financial surplus to
pay bondholders and stockholders.
And, of course, you also have the phenomenon since 1980 that you
really didn't have before of stock options. If you pay the managers in
stock options, the whole objective of running a company is to increase
the value of the rewards that the managers get by exercising the stock
options.
JAY: Now—but is the strength of the financial sector in the fact—as
you're describing, in terms of corporate leadership, so much is about
finance. Is the underlying issue there is that there's more money to
be made through finance and speculation and such, and less through,
you know, what was considered more normal productive activity?
HUDSON: It's certainly easier money. It's easier to—. If you're a
corporation and you have, say, $1 million cash flow and you have a
choice—am I going to invest this in trying to develop a new product
that's very risky and don't know how to market it, or am I going to
use it to buy my own stock?—if they—you just use this money on a stock
buyback to buy their stock, they're going to raise the price of the
stock. This increases the value of the stock option that the managers
give themselves. And all of a sudden they make money that way. They
don't have to worry about developing a new product, of getting
approval, of finding markets for it, of advertising.
JAY: So whether it's financial speculation or these kinds of stock
buybacks, parasitical activity winds up being more profitable than
productive activity.
HUDSON: It's quicker and it's easier to make a Ponzi scheme than to
create an actual industrial advance. That's why all the financial
managers would love to do what Bernie Madoff did and do a Ponzi
scheme, because it's really easier to do that than to actually make
money by being productive.
JAY: Alright. Thanks for joining us, Michael.
HUDSON: Thank you very much.
JAY: Thanks for joining us on The Real News Network.
End
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