Debt Deflation in Europe and America

Published on Global, by Prof. Michael Hudson, October 8, 2011. (Edited Interview by Bonnie Faulkner with Michael Hudson, September 2, 2011, first aired on Pacifica, September 14, 2011 – see also Guns and

… Is the European Central Bank part of the government, or is it privately owned?

  • It’s government-owned, but Europe’s governments themselves are being privatized by a financial oligarchy. The Europeans can’t imagine a private central bank – at least, not yet. So it is a government body, but it’s independent of the government. It’s run by bank officials, not by elected officials or by parliament, although its heads are appointed by parliament. So the situation there is very much like the Federal Reserve here. Bankers in effect have a veto power over any bank officer that does not act as a lobbyist to defend their interests vis-à-vis the rest of the economy.  
  • The kind of administrators that are going to get appointed either to the U.S. Federal Reserve or to the European Central Bank are those with financial experience that can be got only by working for the big banks.Heads of the Federal Reserve, for example, are basically appointed from Goldman Sachs to act as their lobbyist, as Tim Geithner did when he ran the Federal Reserve Bank of New York. His first concern was to bail out the big banks and Wall Street, shifting the loss onto taxpayers.
  • The kind of people who are appointed to any central bank are former bankers who have the worldview of the financial sector – or brainwashed professors such as Ben Bernanke at the Fed. Their worldview is that no matter what happens, the banks have to stay solvent for the economy to operate. But this view shrinks the economy keeping the debts in place, so that is the basic internal contradiction at work.
  • Well, the banks now, if they’re buying a bond of Greece or somewhere else, all of a sudden they have to pay huge risk insurance premiums in order to protect themselves against the fact that Greece may simply say, “Look. We don’t have enough money to pay the bonds.”
  • And this brings up the other moral issue that’s being talked about here. To what extent should a country impose austerity and even depression on itself – more than a great recession, an entire lost decade on itself – simply to pay interest to bondholders who’ve been financing a fiscal system that hasn’t really taxed the rich in Greece?
  • The countries that are in trouble were fascist at one point – Spain under Franco, Portugal, Greece under the Colonels. Right-wing military dictatorships put in place tax systems that favored the rich and avoided taxing real estate or financial wealth. You could think of these tax systems as the Republican Party’s dream, or for that matter that of the Obama Administration’s Wall Street backers. Shifting the tax burden onto labor and industry seems to be the direction in which the world is heading these days. That is what is causing such trouble for countries going neoliberal, that is, favoring a financial oligarchy.

What does the Lisbon Treaty prescribe? … //

… Talk about the University of Missouri-Kansas City economics blog, the New Economic Perspectives on MMT that you mentioned.What is modern monetary theory?

  • Basically, it’s the realization that we’re not on a gold standard anymore. When banks make a loan, they create a credit on their computer keyboard and their customer signs an IOU. So the loan creates the deposit, not the other way around.
  • Governments can do this too. They don’t need to borrow from banks. They can create the money on their own keyboards to pull the economy out of recession. Some people call this post-Keynesian, others call it heterodox. We’re the opposite of the Chicago School, which claims to be free market but actually is pro-banker. Its idea of a free market is to let gangsters be part of the economy, as if crime is all part of individualistic gain seeking.
  • What is “modern” about today’s money is that it is created by banks electronically at will – “freely.” If the government runs a deficit, it pumps spending power into the economy – either the goods-producing sector, or Wall Street balance sheets. But if the government runs a surplus, it sucks revenue out of the economy.
  • If we’re going to spur recovery today, we need employment. The way to get this when there’s a lack of private sector demand is for the government to become the source of demand, by running a deficit. This is the opposite of what the Republicans and the Democrats are saying. But even Herbert Hoover as well as Roosevelt said back in the 1930s. The Republicans and the Democrats back then realized that the government had to spend more money to get the economy out of recession. Today both parties are pushing austerity plans.

If people want to read about Modern Monetary Theory, where would they go on the Internet?

What about currencies – the dollar and euro as well as the renminbi and yuan?

  • Currency markets are in turmoil because nobody knows how Europe will resolve its debt crisis. People are moving out of the euro into the dollar, and then out of the dollar into gold. They’re moving out of everything financial. Meanwhile, currency markets are being swamped by huge computer programs. There’s no underlying way to relate exchange rates to domestic consumer prices, labor’s wage rates anything that the textbooks talk about. It’s now all about the flow of funds – on credit, dominated by speculators.

If debts are canceled, how would this be done?

  • The original plan for bad mortgage debt was to reset mortgages to match the current property prices. That’s one method. Or, you can bring mortgages in line with rental valuation, by asking what a home would rent for – and then capitalize the net rental revenue at, say, 5 percent interest. That would be a reasonable price for the property, so banks would be told to reset the mortgage at that level.

So the banks would write off a lot of the debt.

  • Yes. And somebody would have to lose and it would have to be the big bank depositors because the Federal Deposit and Insurance Corporation insures depositors up to $100,000 or $200,000, I think pretty positively. So the big rollers would lose.
  • And they’ve increased. The wealthiest one percent of Americans in 1979 had 39 percent of the interest, dividends, rent and capital gains. Now they have about two-thirds. They’d have to go back to their historical proportions and the economy would become much less polarized between rich people and the rest of the economy. So you’d have a much more normal economy by writing down this financial fat or parasitism. You’d get rid of it.

(full long long text).


European Central Bank: its Homepage; on en.wikipedia;

Lisbon Treaty: on open, 263 pdf-pages; on The Lisbon Treaty; on; on en.wikipedia;

German Finance Minister Prepares for Possible Greek Bankruptcy: on Spiegel Online International, October 9, 2011 (first on WSWS, by Peter Schwarz, October 8, 2011).

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