"When I see Hank Paulson and Ben Bernanke on TV, I see fear in their eyes. Like on a battlefield when people are shooting at you. I think they are afraid to say how serious the problem is for fear of making it worse," said Bruce Bartlett, an economist who was a Treasury official under the first President Bush.
Andrew William Mellon (March 24, 1855 — August 27, 1937) was an American banker, industrialist, philanthropist, art collector and Secretary of the Treasury from March 4, 1921 until February 12, 1932. He is the only Secretary of the Treasury to have served under three United States Presidents (Harding, Coolidge and Hoover).
Mellon became unpopular with the onset of the Great Depression. Many economists today partially attribute the collapse of the American banking industry to the popularity among Federal Reserve leadership of Mellon's infamous "liquidationist" thesis: weeding out "weak" banks was seen as a harsh but necessary prerequisite to the recovery of the banking system.
This "weeding out" was accomplished through refusing to lend cash to banks (taking loans and other investments as collateral), and by refusing to put more cash in circulation. He advocated spending cuts to keep the Federal budget balanced, and opposed measures for relief of public suffering.
In 1929-31, he spent much of the time overseas, negotiating for repayment of European war debts from World War I. In February 1932, Mellon left the Treasury Department and accepted the post of U.S. Ambassador to the United Kingdom. He served for one year and then retired to private life. Source : Wikipedia
History never literally repeats itself has every crisis or event bring something new to the fore. This current crisis like the one in the 1930's is still dominated at this stage by embedded market neo liberals except they have learned how to ultilise the capitalist state despite their ideology, something which escaped a free marketeer like Andrew Mellon, but was vigourously taken up by Roosevelt in the New Deal to salvage the US capitalism of the 1930's .
The re-adjustment of the United States Economy not just the financial sector to the reality of real value and not fictitious value/capital will be painful has the total amount of credit/debt in society far exceeds the real productive value created by United States. Has Brendan M Cooney points out in his video on Credit:
Government debt is another source of credit and therefore of fictitious value. When the government sells bonds it is borrows money in return for an IOU. Now, where does the value come from to pay back that fictitious value? Government don’t engage in capitalist production- they aren’t part of the circuit of capital. So how do they get value to pay debts? Government revenue comes from taxes. Tax revenue comes from taxing wages and profit- that is, they are deductions out of the circuit of capital.
The further increase of credit by the Federal Reserve of $700 Billion in fictitious credit to Wall Street will not solve the problem only an increase in real value by the society can do that or a wiping out of the debts like Japan did after its Banking Crisis.
We want any money used to help those struggling with their mortgages and refinancing normal commercial banking and not investment banking.The big three banks, Bank of America, J P Morgan and Citibank which are now too big to fail should be taken into public ownership as they are essentially now publically funded utilities for the commercial and financial system
How the US responds to the questions of wiping out debts or creating a new economy which creates the new values it requires will shape not just US but Global politics in the 21st Century.
Has the crisis deepens the veil lifts on the capitalist system and reveals what has been there all along a dictatorship of the bourgeoisie dressed up in Congressional or Parliamentary Rhetoric.
"The centrality of accumulation in capitalism also forces the state to undertake a function that does not exist in other class societies, and that is helping the capitalists realize the value of their products. Given how capitalism works, capitalists simply require more direct political help in their efforts to enrich themselves than did feudal aristocrats or the slave owners of antiquity.
Democracy Now's Amy Goodman interviews Naomi Klein about Henry Paulson and the current Economic Crisis here is her reply. We would like to point out in our Democracy and Class Struggle view of the crisis we pointed Paulson's similarities with Andrew Mellon and the great Depression of the 1930's.
NAOMI KLEIN: You know, Amy, I don’t think we can stress this enough. Henry Paulson is one of the key people, the top people, responsible for creating the crisis that he is now claiming he will solve, you know, and this is—if we think about the 9/11 analogy and, you know, the state of shock that Americans were in after 9/11 and the emergence of Rudy Giuliani as the savior—and, you know, people have so much regret about that. And in the book, I write about this as the state of regression that we go into when we’re frightened. And I think Henry Paulson has really been cast in this role as an economic Rudy Giuliani, saving the day, impartial, bipartisan, a strong leader.
I found this article in BusinessWeek that ran when Paulson was appointed to the Treasury, and I just want to read you one sentence, because I think it’s all we need to know about Henry Paulson. This is from BusinessWeek, when he got the appointment as Treasury Secretary in 2006. The headline of the article is “Mr. Risk Goes to Washington.” It says, “Think of Paulson as Mr. Risk. He’s one of the key architects of a more daring Wall Street, where securities firms are taking greater and greater chances in [their] pursuit of profits. By some key measures, the securities industry is more leveraged now than it was at the height of the 1990s boom.”
Then it goes on to say that when Paulson took over Goldman Sachs in 1999, they had $20 billion in debts. When he—in these high-risk gambles. When he left, they had $100 billion, which means he took their risk level from $20 billion to $100 billion. So it is absolutely no exaggeration to say that Henry Paulson, far from speaking for Main Street, is actually bailing out his colleagues for some of the very debts that he himself accumulated. This is an extraordinary conflict of interest.
Will the Cure be Worse Than the Crisis? The Paulson-Bernanke Bank Bailout Plan By MICHAEL HUDSON
Saturday’s $700 billion junk mortgage bailout is the largest and worst giveaway since a corrupt Congress gave land grants to the railroad barons a century and a half ago. If it goes through, it will shape the coming century by giving finance unprecedented power over debtors – homebuyers, industry, state and local government, and the federal government as well.
But what threatens to be even worse is the government’s move to let the financial sector make even higher, unprecedented gains by working its way out of negative equity to “make taxpayers whole” by repaying the government’s bailout by bleeding the economy at large. nticipating congressional capitulation in this license to engage in predatory credit, the latest Sunday evening surprise is that Treasury Secretary Henry Paulson’s own firm, Goldman Sachs, is to become bank holding company picking up the financial wreckage now that the government is covering the bad loans and investment gambles Wall Street has made.
What Mr. Paulson did not say in his weekend TV interviews, organized as what he hoped would be a series of victory laps. Neither he nor Fed Chairman Ben Bernanke nor any other Wall Street spokesman has acknowledged that the government has helped promote today’s $46 trillion debt bomb. This enormous overhead consists of the product that banks are selling – interest-bearing debt that is being added to real estate, corporate industry and personal income to price the U.S. economy out of world markets.
We have heard nothing about how Wall Street lobbyists have succeeded in killing the financial cops on Wall Street – and done the same with the consumer cops on Main Street. There is no public recognition of the fact that more money in tax cuts went to the top 1% than the bottom 80% combined.
So how much credence should we give the newest proposals for the United States to commit economic suicide by turning over the powers of government in effect to Wall Street? When they talk about “making taxpayers whole,” what really is their game?
At first glance it may sound appealing to taxpayers for banks to be told to use their future earnings to pay back the $700 billion dollars in junk mortgages, bad hedge-fund bets and other gambles that the Treasury promised on September 20 to pick up at face value, no loss incurred. To provide a sense of proportion, this money could have funded the next forty or fifty years of Social Security. It could have funded health care for all Americans. It could have made a big step toward rebuilding the nation’s crumbling infrastructure. But that is another story. For now the major question is just how the banks, insurance companies and financial conglomerates are to raise the money to pay off this bailout.
The last time the government let banks earn their way out of negative equity was in 1980. Interest rates to bank customers topped 20 percent, driving down prices for real estate, stocks and bonds so low that the leading U.S. banks saw their net worth wiped out. Their debts to depositors and bondholders exceeded the collateral they held in their reserves to back these deposit obligations. But as soon as Ronald Reagan led the Republicans back into office, the Federal Reserve began to flood the economy with free credit, driving down the interest rates that banks had to pay. They were allowed to act as a monopoly and keep credit-card interest rates high, at 20 percent, and above 30 percent with penalties, thanks to the fact that America’s high post-Vietnam interest rates led state after state to repeal anti-usury laws to keep credit flowing.
So the banks did “earn their way out of debt.” But if you were a taxpayer who needed to use a credit card, you paid through the nose. The banks earned their way out of debt at your expense. And by the way, if you really did pay an income tax, you probably did not own commercial real estate or significant financial assets. The Internal Revenue Service made commercial real estate and a large swath of finance (at least for the wealthiest investors) income-tax free by generating tax credits that could be applied against income across the board. The capital-gains tax was lowered to a fraction of the income tax, leading investors to pay out whatever income their investments generated as interest on loans to buy property they expected to sell at a markup. And with Alan Greenspan appointed the head the Federal Reserve Board in 1987, the age of asset-price inflation had arrived.
Cities and states vied with each other to slash property taxes, replacing them with income and sales taxes that fall mainly on labor and consumers. The upshot is that wealth has polarized to an unprecedented degree. According to statistics collected by the Congressional Budget Office, the wealthiest 1% now own 57% of the nation’s returns to wealth (interest, dividends and capital gains) and the richest 10% own no less than 77%.
With this background in mind, it looks like the Paulson-Bernanke plan for the Wall Street investment banks and other predatory lenders – and insurers such as A.I.G. – to “earn their way out of debt” will be at the economy’s expense. The bailout is to be achieved by letting Wall Street’s post-Glass-Steagall financial conglomerates charge their customers exorbitant financial charges. As Britain’s Conservative Party leader Margaret Thatcher put it in her favorite phrase, TINA: There is no alternative. And as Lady Macbeth said, if the deed is to be done, let it be done fast. After all, it is a once-in-a-lifetime chance for every financial institution in America to cash out with a fortune!
For Mr. Paulson this means not giving Congress a chance to represent the public interest in designing the terms of this giant bailout. Sec. 8 of the Treasury plan bans any Congressional review, giving him unprecedented power by: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Under cover of emergency force majeur conditions, the plan is to take the money and run, preferably without permitting any Congressional debate.
It is bad enough for the government to buy $700 billion of bad bank investments at prices that no private-sector investor has been willing to approach. This itself is an undeserved giveaway to the financial institutions that caused the problem by living recklessly in the short run. But making them – and indeed, helping them – pay back this gift with the aid of favorable tax and deregulatory policies will simply shift the cost off their shoulders onto those of bank depositors, credit-card users, mortgage borrowers and hapless pension-fund contributors to the money managers who have taken most of the current income in the form of commissions, salaries and bonuses to themselves. This will sharply add to the price of doing business in the United States, and specifically to the economy’s debt overhead by the banks making even more predatory loans.
It gets worse. In order for the existing junk mortgages to be “made good,” real estate prices must be raised further above the ability to pay for this year’s five million homeowners in arrears and facing default. Is this a good thing? Is it good to raise access prices for housing even more, forcing new homebuyers to go further into debt than ever before to gain access to housing? Mr. Paulson has directed the Federal Reserve, Fannie Mae, Freddie Mac and the FHA (Federal Housing Authority) to re-inflate the real estate market. They are to pump nearly a trillion dollars into the mortgage market.
Fiscal policy is also to be brought to bear to turn the real estate market around by pressuring cities and states to “help homeowners pay their mortgage debts” by cutting property taxes. The idea is to leave more revenue available for property owners to pay mortgage bankers. Unfortunately, this will oblige cities to make up these cuts by taxing labor and sales, running deeper into debt than they already are, or cutting back their spending on basic infrastructure, education and public services and continue shortchanging their pension funds. This is the price to be exacted to “protect the taxpayer’s interest” by bailing out irresponsible banks. The solution is to let them make even more money by acting in a yet more predatory way.
This is not industrial capitalism; it is asset stripping. The closest analogy I can think of would be to give the Mafia free reign to start a new crime wave “in the taxpayers’ interest” so as to raise enough money to pay its fines to the Justice Department. Imagine how our world would look like if the economy had been turned over to Al Capone as head political capo and to Mafia financial manager Meyer Lansky as Treasury Secretary in the 1930s, with the pyramid schemer Carlo Ponzi heading the Federal Reserve and bank robber Willie Sutton as Attorney General.
The last thing the economy needs is a new real estate bubble. To prevent it, local property taxes need to be raised, not lowered. But this is not the Treasury’s plan. Instead of representing the national interest, it is representing the banking sector whose profits come from making more and bigger loans. This is just the opposite from what a well-run economy needs to recover its growth and competitive power. It needs debt write-downs to what homeowners can pay.
But Mr. Paulson has made it clear that aid for homeowners is not part of the Treasury’s plan. On Sunday, September 21, he resisted suggestions that his program be amended to include further relief for homeowners facing mortgage foreclosures. Because financial markets remain under severe stress, he claimed, there is an urgent need for Congress to act quickly without adding other measures that could slow down passage. “We need this to be clean and to be quick,” he said in an interview on ABC’s “This Week.” He expressed concern that debate over adding all of those proposals would slow the economy down, delaying the rescue effort that is so urgently needed to get financial markets moving again. "The biggest help we can give the American people right now is to stabilize the financial system," Mr. Paulson said.
If you doubt that this is the government’s ideal plan, just look at what it is rejecting. You hear no talk from Mr. Paulson or Mr. Bernanke about bailing out homeowners by writing down their debts to match their ability to pay. This is what economies have done from time immemorial. Instead, the Republicans – along with their allied Wall Street Democrats – have chosen to bail out investors in junk mortgages presently far exceeding the debtor’s ability to pay, and far in excess of the current (or reasonable) market price. The Treasury and Fed have opted to keep fictitious capital claims alive, forgetting the living debtors saddled with exploding adjustable-rate mortgages (ARMs) and toxic “negative amortization” mortgages that keep adding on the interest (and penalties) to the existing above-market balance.
The question to be asked is just how much will the economy’s debt overhead grow, and what will it cost debtors (a.k.a. “taxpayers”)? And how will the economy look when the dust settles?
Economically the act gives a new meaning to the classical concept of circular flow. The traditional textbook meaning has referred to the circulation between producers and consumers, from wage payments by industrial companies to their employees, who use their wages to buy what they produce. This is why Henry Ford famously paid his workers the then-towering $5 a day. This was Say’s law: Income paid for production is finds its counterpart in consumption to maintain equilibrium in a way that enables the economy to keep on growing. The new circular flow runs from the Fed and Treasury to Wall Street in the form of bailouts, and then back to Republicans in Washington in the form of campaign contributions. The money circulates without having to go through the “real” economy of production and consumption at all.
The Treasury Department issued a fact sheet on the proposal on Saturday evening: “Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth.” In everyday language the euphemism “removing troubled assets” means buying junk mortgages at way above current market price, as if the banks didn’t know all along that they were junk but hoped to pawn them off on their clients. The problem is that the banks have not been financing growth in the form of tangible capital investment, but have found their quickest profits to lie in a combination of asset stripping and asset-price inflation.
On Sunday a BBC World Service reporter asked me to list three things that the financial sector would like to see. Taking the open-ended question on the highest philosophical plane, I said, first of all, the banks would love to free themselves of all deposit liabilities – simply to keep the money for themselves. That is their objective when they see a client, after all: How much of the client’s earnings and money can they shift into their own pockets. Second, they would like to see politicians elected directly by the amount of money they could raise, thereby doing away with the actual problem of elections. If politics is going to be privatized, this is the way to do it. Rome’s voting system was organized along these lines. Third, the financial sector prefers not to have to report any data at all or pay any taxes. It has lobbied Congress to block collection of statistics, on the premise that what is not seen will not be taxed. And at present, banks and brokerage houses are still screaming to repeal Sarbanes-Oxley bill calling for full and honest accounting. For financial ideologues this is an equivalent watershed dragon to Rowe vs. Wade, now that they have repealed the Glass-Steagall Act that had separated banks from casinos.
Somewhat taken aback by the rawness of these principles, the reporter asked what outcome was most likely. If Congress does what it is supposed to do, there should be quite a showdown. But how unlikely to be achieved is the above scenario? A few hours earlier on Sunday my friend Eric Janszen of itulip.com sent me a note he had received from a fund manager attesting to the lack of care for clients of financial institutions, giving a flavor of the predatory spirit guiding the bailout’s planners and its beneficiaries:
RAIDS OF INDIVIDUAL ACCOUNTS
This is so important a topic, that it deserves top billing!!! Hidden inside the AIG bailout funding package, surely hastily cobbled together, but carefully enough to include a totally corrupt clause, was a handy dandy clause that permits raids. The conglomerate financial firms are permitted at this point to use private individual brokerage account funds to relieve their own liquidity pressures. This represents unauthorized loans of your stock account assets. So next, if the conglomerate fails, your stock account is part of the bankruptcy process. ...
The actual evidence for legalized stock account raids by the financial firms can be found in recent articles in Financial Times and Wall Street Journal. So this is not a wild claim. The September 14th article on the Wall Street Journal entitled "Wall Street Crisis Hits Stocks" was the first exposure.
The runs on US banks are in progress. See Washington Mutual, where private email messages have been shared by WaMu bank officers. WaMu alone could deplete the entire Federal Deposit Insurance Corp fund for bank deposit coverage. Eventually the FDIC will compete for USGovt federal money for bailouts and nationalizations, which would be funded by the US Govt because they will not let FDIC run dry.
My Kucinich-campaign colleague David Kelley and I agree on how Wall Street’s action plan ideally would work. The Republicans will take the $800 billion of U.S. Treasury securities presently earmarked for the Social Security Administration accounts, and achieve the privatization that Pres. Bush and his backers have been pressing for so hard for the past eight years. Under emergency conditions – today’s 9/21 as the modern analogue to 9/11 just seven years ago (the well-known natural lifespan of locusts) – will swap these Treasury bonds for junk mortgages, at face value of course. Then, a few months from now (after the new president takes office in February, or perhaps a few days before to achieve the usual political clean slate) the government will tell prospective retirees and workers who have been suffering FICA withholding all these years, “Oops, the government has just lost all your money. Well, that just shows how government planning is the road to serfdom. Next time save yourself by handling your own accounts – or at least choosing whether to consign your forced retirement savings to Lehman Brothers, Bear Stearns or kindred predatory money managers. If only we could have done this a few months ago, there would have been no meltdown and Wall Street would have been doing just fine.”
If you are going to take such a step, you of course say you are doing it to “save” the economy. You even proclaim yourself to be a hero. This is how the nation’s newspaper and TV media responded after news of the bailout of AIG and, more to the point, the Wall Street gamblers and derivatives traders whose gains and losses – that is, the ability of trillions of dollars worth of computer-driven trading gambles – to collect their winnings and avoid losses.
Today’s financial markets are well personified in the classic Hollywood westerns. They typically are about towns taken over and run by a banker (“Wall Street” in miniature), for whom a retinue of outlaws and their gangs work (the boys in the back room). The banker runs the town, usually doing business from its biggest building, the local saloon or casino where most of the action occurs. It has a brothel upstairs (the usual Hollywood simile for Congress). The good-hearted prostitute (sometimes the madam) with a heart of gold usually is the movie’s only honest secondary character (a stand-in for one of the bleeding-heart Congressmen on the finance or mortgage-credit committees lisping well-scripted lines promising that all new legislation will benefit homeowners, not predatory mortgage lenders).
There also is a good-hearted investigative newspaper publisher-journalis t. He almost always gets killed and his printing press destroyed. (Today his paper is simply bought out by a conglomerate and merged into the pro-Wall Street mass media.) The banker’s gang appoints the sheriff (on today’s larger scale, the Federal Reserve and Justice Department), and also the mayor (who rarely is seen except to sign papers). The sheriff’s job is the same as in today’s world: to evict debtors from homes and properties on which the land-greedy banker is foreclosing. This is the common theme of westerns, after all: They are all about the great American land grab – situated out West so as to protect the identities of the guilty here in the East on Wall Street.
Attentive readers will notice that I have left out of this script the hero. His role is to fight the banker/land grabber and the gang he has brought into town. Wearing a white hat, he rides into town to clean it up, and in the final showdown shoots the head gunslinger (or perhaps the banker himself, who is done for in any event). This is the position that Mr. Paulson portrays himself. But what the audience doesn’t see (at first) is that the bullets he is shooting are merely blanks. It is in fact only a movie after all! The showdown is staged! He works for the banker himself! Goldman Sachs turns itself into a big-fish bank and gobbles up all the little fish in a great financial squeeze.
An alien class of financial mock-heroic poseurs has taken over – land grabbers and banksters of various stripes. Almost unnoticed, an invasion of government snatchers, bank snatchers, money snatchers pretending to be Main Street, pretending to be “the economy” and now claiming to need to be rescued – at the cost of saying goodbye to public finance as we have known it, goodbye to Social Security, to peoples’ hope for upward economic mobility.
It looks like Wall Street will receive government support at Main Street’s expense. This is hardly surprising when you look at who the major campaign contributors are – to both parties. Understandably, Mr. Paulson and Mr. Bernanke are trying to muddy the issue for their financial constituency. Hedge fund traders and kindred banksters have metamorphosized into “the financial system to be saved” and hence “the economy” itself. As if it is necessary to save peoples’ savings deposits and bank accounts by rescuing the casino companies with which the banks have merged – the predatory mortgage brokers, the insurance companies with their fraudulent accounting, the crooked asset-management firms, all of which have merged into conglomerates “too large to fail.” If they are too large, simply un-merge them. Restore Glass-Steagall, which worked for 65 years to prevent this kind of problem from erupting.
The most egregious pretense is that the problem is only temporary, not structural. We are merely “freeing up” the market for new loans. This is precisely the opposite of what the classical economists meant by “free markets.” What America has is a bad debt problem, not a “liquidity” problem. There is no “illiquidity” when people refuse to buy a junk mortgage on a property worth only a fraction of the mortgage’s face value. Many of these bad mortgage loans are fraudulent. The Treasury bailout seeks to make $700 billion of fictitious financial claims “real” – that is, way overvalued as compared to their actual worth(lessness) .
What is reducing real estate and corporate stocks and bonds to junk is the exponential growth in the economy’s debt overhead. Debts that cannot be paid have little market value at any price. The nation must make a choice: If the government bails out the large financial institutions for having made bad loans – or to be more precise, for not being able to pawn off these bad loans on foreigners or other financial prey in a timely fashion – then the only way in which the government (or other new creditors) can be paid back is by not forgiving the debts owed by strapped homeowners. This would tighten the debt terms on debtors at the bottom of the food chain – those against whom the bank-sponsored new bankruptcy has been aimed. This is why I deplore the government bailout of Fannie Mae and Freddie Mac for the junk mortgages it has been packaging from predatory lenders such as Countrywide Financial, Washington Mutual and other deceptive lenders. The wrong parties have been gifted.
I should add that the solution does not lie simply in creating a new regulatory system, much less a single regulatory agency. After all, it was at Wall Street’s command that the Bush Administration installed deregulators in all the key regulatory positions. This meant that regulations didn’t matter at the Environmental Protection Agency (EPA), at the Fed under Alan Greenspan, at the Securities and Exchange Commission (SEC) under Mr. Cox (after William H. Donaldson resigned when the White House would not let him regulate as much as he thought necessary) or at the Department of Justice under Bush yes-men such as Alberto Gonzales. Politics and people have turned out to be more important than the law. We have seen the Supreme Court scrap the Constitution in the 2000 election – with acquiescence from the Democrats, starting with Mr. Gore’s refusal to contest Florida.
To appoint a single regulator would prevent all other regulators – and law enforcement officers, attorneys general, the SEC and so forth – from enforcing honest financial policies in the event that an incoming president should appoint another Greenspan, Gonzales or other ideological extremist averse to the idea of applying existing regulations and honest laws. Under these conditions “consolidated regulation” would mean a free ride for crooks much like J. Edgar Hoover gave the Mafia under his tenure.
My alternative solutions are as simple as Mr. Paulson’s, but of course are quite different. The public interest does indeed call for maintaining the economy’s basic credit, money-transfer, credit card and depository checking and savings functions. But not under the current venal and predatory management practices. It is this management that has lobbied so hard for deregulation, and whose industry representatives have insisted so strongly to place extremist ideological deregulators into the economy’s major positions. Therefore, the Treasury only should buy junk mortgages at current market price. The losses should be taken in order to re-even out the wealth pyramid that has become so much steeper under the Greenspan-Bernanke ploys. The banks knew full well that these mortgages lacked underlying value. The price of making use of this borrowing facility is to forfeit all equity stock to the government. The Treasury should prohibit any financial institution that sells or swaps securities to the Fed from paying any dividends to shareholders or stock options and bonuses to managers. It also should give the government priority over other creditors. Otherwise, firms that have negative equity will benefit purely at public expense, using the money to pay dividends, bonuses and exorbitant salaries.
Second, we need to restore the Glass-Steagall separation of commercial banks from risk-taking investment banks, mortgage brokers and other financial-sector flotsam and jetsam. Break up the mergers between banks and casino sell-side financial and real estate institutions. Just the opposite is occurring: On Monday, Sept. 22, the financial universe was transformed by the announcement that Mr. Paulson’s Wall Street firm, Goldman Sachs, was transforming itself into a bank holding company. The casinos are to take over the banking system as big fish eat little fish in the present financial emergency. It looks like new giants are emerging, already larger than the government in terms of the magnitude of the debts they have run up – and certainly in their earning power. Indeed, who is to say that extracting interest from the U.S. economy will not emerge as the new form of taxation?
Third, re-write the bankruptcy laws to favor debtors once again, not creditors. This means reversing the current bankruptcy code sponsored by lobbies from the credit-card companies. The interests of the five million mortgage debtors faced with foreclosure and expropriation this year should rightly be placed above the interest (literally) of predatory creditors.
Fourth, sharply increase property taxes, shifting them back off labor and sales. We need to return to the classical idea of taxing unearned and unproductive income instead of adding to the price of labor and industry. What has been freed from the tax collector by the shift of taxes off property has not lowered the cost of housing and other real estate, or corporate costs of doing business. The income “freed” has ended up being paid to the banks as interest. The government still has had to raise money – but in the form of taxes that fall on labor’s wages and industry’s profits. So labor and industry now pay twice for what they formerly paid only once. They still pay the same overall amount of taxes, but also pay an equivalent amount of interest. The financial system is crowding out the government.
In the fifth place, we need to start discussing whether we really need a banking system that behaves in the way the present one does. In recent decades banks have made loans mainly to inflate asset prices by loading real estate and industry with interest-bearing debt. What if all banks were to be organized along the lines of savings banks, with 100% reserves. This is the Chicago Plan from the 1930s (currently revived by the American Monetary Institute, which holds its annual meeting this week in Chicago, by the way). This at least would go back to basics to provide a foundation from which to re-begin to discuss just what kind of credit the economy needs and what would be the best terms on which to structure financial markets.
Any solution does indeed need to be radical. But it can be much less radical than Mr. Paulson’s power grab for his Morgan Stanley firm and the rest of Wall Street in the closing days of the Bush administration just before the Republicans look like losing power. The indicated solution is to reverse predatory finance, not bail it out at permanent taxpayer expense. Government funds are not unlimited. Is it worth wiping out hopes for Social Security and public health care, for renewed national infrastructure spending and industrial restructuring in order to bail out a banking and financial system that has not contributed to economic growth but has weighed it down with reckless debt regardless of the economy’s ability to pay?
Is it right to blame the five million homeowners now in arrears and facing foreclosure, but rewarding the irresponsible bankers and outright fraudulent institutions who have used Enron accounting to make a once-in-a-lifetime rip-off? That is what Mr. Paulson would do in insisting that Congress pass his legislation without taking time to discuss the issue and above all without “assigning blame.” But without such assignation, how do we know where to go from the current mess caused by financial deregulation, repeal of Glass-Steagall, the financial system’s Enron-style accounting and predatory mortgage lending?
Before leaving from his post as Federal Reserve Chairman, Alan Greenspan’s speeches sounded like “Apres moi, le deluge.” We are living in a world whose economic and political pressures are much like those in the interregnum between Louis XIV and the French Revolution. Where are the revolutionists today?
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.
The largest transformation of America's Financial System since the Great Depression
By Dr. Michael Hudson
Nobody expected industrial capitalism to end up like this. Nobody even saw it evolving in this direction. I'm afraid this failing is not unusual among futurists: The natural tendency is to think about how economies can best grow and evolve, not how it can be untracked. But an unforeseen road always seems to appear, and there goes society goes off on a tangent.
What a two weeks!
On Sunday, September 7, the Treasury took on the $5.3 trillion mortgage exposure of Fannie Mae and Freddie Mac, whose heads already had been removed for accounting fraud.
On Monday, September 15, Lehman Brothers went bankrupt, when prospective Wall Street buyers couldn't gain any sense of reality from its financial books. On Wednesday the Federal Reserve agreed to make good for at least $85 billion in the just-pretend "insured" winnings owed to financial gamblers who bet on computer-driven trades in junk mortgages and bought counter-party coverage from the A.I.G. (the American International Group, whose head Maurice Greenberg already had been removed a few years back for accounting fraud).
But it is Friday, September 19, that will go down as a turning point in American history. The White House committed at least half a trillion dollars more to re-inflate real estate prices in an attempt to support the market value junk mortgages - mortgages issued far beyond the ability of debtors to pay and far above the going market price of the collateral being pledged.
These billions of dollars were devoted to keeping a dream alive - the accounting fictions written down by companies that had entered an unreal world based on false accounting that nearly everyone in the financial sector knew to be fake. But they played along with buying and selling packaged mortgage junk because that was where the money was. As Charles Prince of Citibank put it, "As long as they're playing music, you have to get up and dance." Even after markets collapsed, fund managers who steered clear were blamed for not playing the game while it was going. I have friends on Wall Street who were fired for not matching the returns that their compatriots were making. And the biggest returns were to be made in trading in the economy's largest financial asset - mortgage debt. The mortgages packaged, owned or guaranteed by Fannie and Freddie alone exceeded the entire U.S. national debt - the cumulative deficits run up by the American Government since the nation won the Revolutionary War!
This gives an idea of just how large the bailout has been - and where the government's (or at least the Republicans' ) priorities lie! Instead of waking up the economy to reality, the government has thrown all its resources to promote the unreal dream that debts can be paid - if not by the debtors themselves, then by the government - "taxpayers," as the euphemism goes.
Overnight, the U.S. Treasury and Federal Reserve have radically changed the character of American capitalism. It is nothing less than a coup d'Etat for the class that FDR called "banksters." What has happened in the past two weeks threatens to change the coming century - irreversibly, if they can get away with it. This is the largest and most inequitable transfer of wealth since the land giveaways to the railroad barons during the Civil War era.
Even so, there seems little sign that it even may end the free-market patter talk by financial insiders who have managed to avert public oversight by appointing non-regulators to the major regulatory agencies - and thus created the mess that Treasury Secretary Henry Paulson now says threatens the bank deposits and jobs of all Americans. What he really means, of course, are simply the largest Republican campaign contributors (and to be fair, also the largest contributors to Democratic candidates on key financial committees).
A kleptocratic class has taken over the economy to replace industrial capitalism. Franklin Roosevelt's term "banksters" says it all in a nutshell. The economy has been captured - by an alien power, but not the usual suspects. Not socialism, workers or "big government," nor by industrial monopolists or even by the great banking families. Certainly not by Freemasons and Illuminati. (It would be wonderful if there were indeed some group operating with centuries of wisdom behind them, so at least someone at least had a plan.) Rather, the banksters have made a compact with an alien power -not Communists, Russians, Asians or Arabs. Not humans at all. The group's cadre is a new breed of machine. It may sound like the Terminator movies, but computerized Machines have indeed taken over the world - at least, the White House's world.
Here is how they did it. A.I.G. wrote insurance policies of all sorts of that people and businesses need: home and property insurance, livestock insurance, even aircraft leasing. These highly profitable businesses were not the problem. (They therefore will probably be sold off to pay the company's bad gambles.) A.I.G.'s downfall came from the $450 billion - almost half a trillion - dollars it was on the hook for as a result of guaranteeing hedge-fund counterparty insurance. In other words, if two parties played the zero-sum game of betting against each other as to whether the dollar would rise or fall against sterling or the euro, or if they insured a mortgage portfolio of junk mortgages to make sure that they would get paid, they would pay a teeny tiny commission to A.I.G. for a policy promising to pay if, say, the $11 trillion U.S. mortgage market should "stumble" or if losers placing trillions of dollars in bets on foreign exchange derivatives, stock or bond derivatives should somehow find themselves in a position that so many Las Vegas patrons are in, and be unable to come up with the cash to cover their losses.
A.I.G. collected billions of dollars on such policies. And thanks to the fact that insurance companies are a Milton Friedman paradise - not regulated by the Federal Reserve or any other nation-wide agency, and hence able to get the proverbial free lunch without government oversight - writing such policies was done by computer printouts, and the company collected massive fees and commissions without putting in much capital of its own. This is what is called "self-regulation. " It is how the Invisible Hand is supposed to work.
It turned out, inevitably, that some of the financial institutions that made billion-dollar gambles - usually in the form of a thousand million-dollar gambles in the course of a few minutes or so, to be precise - couldn't pay up. These gambles all occur in microseconds, at strokes of a keyboard almost without human interference. In that sense it is not unlike alien pod people taking over. But in this case they are robot-like machines, hence the analogy I drew above with the Terminators.
Their sudden rise to dominance is as unforeseen as an invasion from Mars. The nearest analogy is the invasion of the Harvard Boys, World Bank and U.S.A.I.D. to Russia and other post-Soviet economies after the Soviet Union was dissolved, pressing free-market giveaways to create national kleptocracies. It should be a worrying sign to Americans that these kleptocrats have become the Founding Fortunes of their respective countries. We should bear in mind Aristotle's observation that democracy is the political stage immediately preceding oligarchy.
The financial machines that placed the trades that bankrupted A.I.G. were programmed by financial managers to act with the speed of light in conducting electronic trades often lasting only a few seconds each, millions of times a day. Only a machine could calculate mathematical probabilities factored in regarding the squiggles up and down of interest rates, exchange rates and stock and bonds prices - and prices for packaged mortgages. And the latter packages increasingly took the form of junk mortgages, pretending to be payable debts but in reality empty flak.
The machines employed by hedge funds in particular have given a new meaning to Casino Capitalism. That was long applied to speculators playing the stock market. It meant making cross bets, lose some and win some - and getting the government to bail out the non-payers. The twist in the past two weeks' turmoil is that the winners cannot collect on their bets unless the government pays the debts that the losers are unable to cover with their own money.
One would have thought that this requires some degree of control over the government. The activity probably never should have been licensed. In fact, it never was licensed, and hence nor regulated. But there seemed to be a good reason: Investors in hedge funds had to sign a paper saying that they were rich enough to afford to lose their money on this financial gambling. Your average mom and pop investors were not permitted to participate. Despite the high rewards that millions of tiny trades generated, they were deemed too risky for the uninitiated lacking trust funds to play with.
A hedge fund does not make money by producing goods and services. It does not advance funds to buy real assets or even lend money. It borrows huge sums to leverage its bet with nearly free credit. Its managers are not industrial engineers but mathematicians who program computers to make cross-bets or "straddles" on which way interest rates, currency exchange rates, stock or bond prices may move - or the prices for packaged bank mortgages. The packaged loans may be sound or they may be junk. It doesn't matter. All that matters is making money in a marketplace where most trades last only a few seconds. What creates the gains is the price fibrillation - volatility.
This kind of transaction may make fortunes, but it is not "wealth creation" in the form that most people recognize. Before the Black-Scholes mathematical formula for calculating the value of hedge bets, this kind of put and call option was too costly to provide much profit to anyone except the brokerage houses. But the combination of powerful computers and the "innovation" of almost free credit and free access to the financial gambling tables has made possible a frenetic back-and-forth maneuvering.
So why has the Treasury found it necessary to enter this picture at all? Why should these gamblers be bailed out, if they had enough to lose without having to become public wards by going on welfare? Hedge fund trading was limited to the very rich, for investment banks and other institutional investors. But it became one of the easiest ways to make money, loaning funds at interest for people to pay out of their computer-driven cross-trades. And almost as fast as it was made, this revenue was paid out in commissions, salaries and annual bonuses reminiscent of America's Gilded Age in the years prior to World War I - years before the income tax was introduced in 1913. The remarkable thing about all this money was that its recipients didn't even have to pay normal income tax on it. The government let them call it "capital gains," which meant that the money was taxed at only a fraction of the rate that incomes were taxed.
The pretense, of course, is that all this frenetic trading creates real "capital." It certainly does not do so in the classical 19th-century concept of capital. The term has been decoupled from producing goods and services, hiring wage labor or from financing innovation. It is as much "capital" as the right to conduct a lottery and collect the winnings from the hopes of the losers. But then, casinos from Las Vegas to riverboats have become a major "growth industry," muddying the language of capital, growth and wealth itself.
For the gaming tables to be closed and the money paid out, the losers must be bailed out - Fannie Mae, Freddie Mac, A.I.G. and who knows what to come? This is the only way to solve the problem of how companies that already have paid out their revenue to their managers and stockholders instead of putting it in reserves are to collect their winnings from insolvent debtors and insurance companies. These losers also have paid out their income to their financial managers and insiders (along with the usual patriotic contributions to the political candidates on the key committees in charge of deciding the nation's financial structuring) .
This has to be orchestrated well in advance. It is necessary to buy politicians and give them a plausible cover story (or at least a well-crafted set of poll-tested euphemisms) to explain to voters just why it was in the public interest to bail out gamblers. Good rhetoric is needed to explain why the government should let them go into a casino and let them keep all their winnings while using public funds to make good on the losses of their counterparties.
What happened on September 18-19 took years of preparation, capped by a faux ideology crafted by public-relations think tanks to be broadcast under emergency conditions to panic Congress - and voters - right before the presidential election. This seems to be our September election surprise. Under staged crisis conditions, Pres. Bush and Treasury Secretary Paulson are now calling for the country to come together in a War on Defaulting Homeowners. This is said to be the only hope to "save the system." (What system is this? Not industrial capitalism, or even banking as we know it.) The largest transformation of America's financial system since the Great Depression has been compressed into just two weeks, starting with the doubling of America's national debt on September 7 with the nationalization of Fannie Mae and Freddie Mac. (My computer's spellchecker will not permit me to use the euphemism "conservatorship" that Mr. Paulson applied to bailing out the Fannie Mae and Freddie Mac fraudsters.)
Economic theory used to explain that profits and interest were a return for calculated risk. But today, the name of the game is capital gains and computerized gambling on the direction of interest rates, foreign currencies and stock prices - and when bad bets are made, bailouts are the calculated economic return for campaign contributions. But this is not supposed to be the time to talk of such things. "We must act now to protect our nation's economic health from serious risk," intoned Pres. Bush on September 19. What he meant was that the White House must make the Republican Party's largest group of campaign contributors whole - Wall Street, that is - by bailing out their bad gambles. "There will be ample opportunity to debate the origins of this problem. Now is the time to solve it." In other words, don't make this an election issue. "In our nation's history there have been moments that require us to come together across party lines to address major challenges. This is such a moment." Right before the presidential election! The same guff was heard earlier on Friday morning from Sec. Paulson: "Our economic health requires that we work together for prompt, bipartisan action." The broadcasters said that half a trillion dollars was discussed for this day's maneuverings.
Much of the blame should go to the Clinton Administration for leading the call to repeal Glass-Steagall in 1999, letting the banks merge with casinos. Or rather, the casinos have absorbed the banks. That is what has put the savings of Americans at risk.
But does this really mean that the only solution is to re-inflate the real estate market? The Paulson-Bernanke plan is to enable the banks to sell off the homes of five million home mortgage debtors faced with default or foreclosure this year! Homeowners with "exploding adjustable-rate mortgages" will lose their homes, but the Fed will pump enough credit into the mortgage-lending agencies to enable new buyers to go deeply enough into debt to take the junk mortgages off the hands of the gamblers who presently own them. Time for another financial and real estate bubble to bail out the junk mortgage lenders and packagers.
America has entered into a new war - a War to Save Computerized Derivative Traders. Like the Iraq war, it is based largely on fictions and entered into under seeming emergency conditions - to which the solution has little relation to the underlying cause of the problems. On financial security grounds the government is to make good on the collateralized debt obligations packaged (CDOs) that Warren Buffett has called "weapons of mass financial destruction. "
Hardly by surprise, this giveaway of public money is being handled by the same group that warned the country so piously about weapons of mass destruction in Iraq. Pres. Bush and Treasury Secretary Paulson have piously announced that this is no time for partisan disagreements over this shift of public policy to favor creditors rather than debtors. There is no time to make the biggest bailout in election history an election issue. Not an appropriate time to debate whether it is a good thing to re-inflate housing prices to a level that will continue to oblige new home buyers to go so deeply into debt that they must pay some 40 percent of their take-home pay on housing.
Remember when President Bush and Alan Greenspan informed the American people that there was no money left to pay Social Security (not to mention Medicare) because at some future date (a decade from now? 20 years? 40 years?) the system might run a deficit of what now seems to be merely a trivial trillion dollars spread over many, many years. The moral was that if we can't figure out how to pay, let's plow the program under right now.
Mr. Bush and Greenspan did have a helpful solution, of course. The Treasury could turn Social Security and medical insurance money over to Bear Stearns, Lehman Brothers and their brethren to invest at the "magic of compound interest."
What would have happened to U.S. Social Security had this been done? Perhaps we should view the past two weeks' events as having assigned to Wall Street gamblers all the money that has been set aside since the Greenspan Commission in 1983 shifted the tax burden onto FICA wage withholding. It is not retirees who are being rescued, but the Wall Street investors who signed papers saying that they could afford to lose their money. The Republican slogan this November should be "Gambling insurance, not health insurance."
This is not how the much-vaunted Road to Serfdom was mapped out to be. Frederick Hayek and his Chicago Boys insisted that serfdom would come from government planning and regulation. This view turned upside down the classical and Progressive Era reformers who depicted government as acting as society's brain, its steering mechanism to shape markets - and free them from income without playing a necessary role in production.
The theory of democracy rested on the assumption that voters would act in their self-interest. Market reformers made a kindred happy assumption that consumers, savers and investors would promote economic growth by acting with full knowledge and understanding of the dynamics at work.
But the Invisible Hand turned out to be accounting fraud, junk mortgage lending, insider dealing and a failure to relate the soaring debt overhead to the ability of debtors to pay - all of this mess seemingly legitimized by computerized trading models, and now blessed by the Treasury.
Michael Hudosn is President of The Institute for the Study of Long-Term Economic Trends (ISLET), 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 (1972 and 2003) and of The Myth of Aid (1971).
The interesting thing about this crisis is that the creators of this crisis like Investment Banker Henry Paulson are now trying to solve this crisis.
They called on another Banker in the 1930's Andrew Mellon to do the same and he also made it worse just like Paulson is doing today.
The financial elite are embedded neo liberals whose reason for being is a market solution to all problems and to save their friends the speculators from meltdown even if the cost is that the rest of the economy is brought to a halt.They are the great theoretical justifiers of the "free lunch" of parasitic finance capital despite the false protestations of Milton Friedman to the contrary.
Professors of economics were rolled off the production line in the US and China to justify the most bizarre financial instruments for the parasitic class and their Chicago and Harvard and Tsinghua University strongholds should be under seige today , but this elite still runs the show and they are laying seige to us trying to claw back assets like people's homes to pay for their ruthless greed and speculative mistakes.
The intellectual bankruptcy of neo liberalism market fundamentalism is apparent despite all their mathematical models which cannot explain the debt overhang in the economy.But where in the media is this bankruptcy challenged ?
History needs to be restored to economics which has been over mathmaticised to the extent that current reality escapes it. We have a mechanistic economic theory of capitalism in neo liberalism build on equilibrium models but what we need is a dynamic theory based on dialectical contradiction which can explain the great waves of value creation and devaluation under capitalism - Marxist Political Economy which has layed dormant for years and largely expelled from Academia is destined to make a return.
This blog is devoted to Political Economy Research,get up to speed with the crisis and it origins has well as the origins of false roads like market socialism which is still peddled by revisionists in China and CPUSA - look out for Minqi Li's new book in October "The Rise of China and the Demise of Capitalist World Economy" which will assist in burying that rattling old corpse in China.
Recommended interesting sites with informed anti neo liberal views of crisis visit :
Henry CK Liu @http://www.henryckliu.com/
Michael Hudson @ http://www.michael-hudson.com/
For a more popular view in video form of Marxist Political Economy including Crisis Theory visit Patrick M Cooney site :
Nomi Prins, former investment banker turned journalist. She used to run the European analytics group at Bear Stearns and is now a senior fellow at Demos. She is the author of two books: Other People’s Money: The Corporate Mugging of America and Jacked: How Conservatives Are Picking Your Pocket.
Michael Hudson, President of the Institute for the Study of Long-Term Economic Trends, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and author of Super-Imperialism: The Economic Strategy of American Empire. He is the chief economic adviser to Rep. Dennis Kucinich.
AMY GOODMAN: The US government has seized control of insurance giant AIG, American International Group, in an unprecedented $85 billion bailout. The Federal Reserve made the deal Tuesday to save AIG from collapse in what the New York Times describes as “the most radical intervention in private business in the central bank’s history.” The move to lend AIG up to $85 billion for two years in exchange for nearly 80 percent of its stock effectively nationalizes one of the central institutions in the crisis that has swept through financial markets this month.
AIG found itself on the verge of bankruptcy largely because of complex securities that are tied to subprime home mortgages and which plunged in value as the nation’s housing crisis deepened. The bailout marks a turnaround by the Bush administration and the Fed, who just two days earlier had refused to risk taxpayer money to prevent the collapse of Lehman Brothers or the distressed sale of Merrill Lynch to Bank of America. It also comes on the heels of a government bailout just over a week ago of mortgage giants Fannie Mae and Freddie Mac and six months after the Fed bailed out Bear Stearns by helping to finance a sale to JPMorgan Chase.
The unprecedented run of events has altered the shape of Wall Street and brings the total amount of government rescue efforts to stabilize the financial system and housing market to about $900 billion.
For more, we’re joined by two guests. Nomi Prins is a former investment banker turned journalist. She used to run the European analytics group at Bear Stearns. She is now a senior fellow at Demos. She is the author of two books: Other People’s Money: The Corporate Mugging of America and Jacked: How Conservatives Are Picking Your Pocket.
Michael Hudson is the president of the Institute for the Study of Long-Term Economic Trends, an economics professor at the University of Missouri, Kansas City, and author of Super-Imperialism: The Economic Strategy of American Empire. He is also—was chief economic adviser to Congress member Dennis Kucinich. He is currently, as well, as well as when he was presidential candidate.
We welcome you both to Democracy Now! Nomi Prins, let’s begin with you. The bailout of AIG.
NOMI PRINS: The bailout of AIG is an example of the government having to step in and clean up a mess. It is not so much that subprime mortgages fell and that caused some losses to AIG. AIG was acting not simply as an insurance company; it was acting as a speculative investment bank/hedge fund, as was Bear Stearns, as was Lehman Brothers, as is what will become Bank of America/Merrill Lynch. So you have a situation where it’s bailing out not just the money, but taking on the risk of items it cannot even begin to understand, because if it had understood them, this would never have gotten to the point to which it has gotten.
AMY GOODMAN: How did it get to this point? How did it go beyond insurance?
NOMI PRINS: In AIG and in Lehman and with Merrill and every other company on Wall Street that has faltered or is faltering, it’s about taking on too much leverage and borrowing to take on the risk and borrowing again and borrowing again, twenty-five to thirty times the amount of capital, the amount of money that they had to basically back the borrowing that they were doing. Human regular borrowers cannot do this. This is something that is an item only of the banking industry.
And not only was all that borrowing happening, but there was no transparency to the Fed, to the SEC, to the Treasury, to anyone who would have even bothered to look as to how much of a catastrophe was being created, so that when anything fell, whether it was the subprime mortgage or whether it was a credit complex security, it was all below a pile of immense interlocked, incestuous borrowing, and that’s what is bringing down the entire banking system.
AMY GOODMAN: Michael Hudson, we’re talking government bailout, which means taxpayers stuck with the bill. Do you think this is the right move?
MICHAEL HUDSON: No, it’s the worst possible move, and it puts the class war back in business with a vengeance. Wall Street has been preparing for this for years, because every financial analyst knows that the debts can’t be paid. And the question that Wall Street has, if you’re going to take a gamble on bad debts that can’t be paid, how are you going to come out a winner? And there’s only one way of coming out a winner, and that’s to make the government bail you out. This has been known for years, because it’s inherent almost in the mathematics of compound interest. Every banker I know knew that the loans they were making were going to go bad. They were trying to sell them to somebody else, ultimately expecting them to end up with some sovereign wealth fund.
And now, you had at the beginning of the show, McCain saying that this is the result of fraud and incompetence. The government has now bailed them out. But by bailing them out—Wall Street was coming to terms with the bad debts. When Bear Stearns went under and when Lehman Brothers went under, this began to wipe away the bad debts. And when the debts exceed the ability to pay, there’s only one thing any economy can do, and that’s wipe them out. Instead, the government is trying to keep the fiction alive. And what Paulson did yesterday, in bailing out AIG, was to try to lock in whoever is the next president not only to further bailouts of Wall Street, ostensibly to protect the public money, but to make it impossible to write down the debts of the four million homeowners that are expected to default this year, impossible to write down the debts of companies that have issued junk bonds, impossible for the country to get rid of this excess of debts that can’t be repaid. And you’re having really a war now of creditors against debtors. And this is what Wall Street has been preparing for. It needed an emergency to do it. It’s really not an emergency at all. This has been building up for many years. Everybody expected it. And breathlessly now, the Secretary of Treasury has done it.
AMY GOODMAN: But, of course, the argument was, if you don’t bail out AIG, it could lead to a global financial meltdown.
MICHAEL HUDSON: What you—it’s a meltdown of the gamblers, as Nomi said. These are people who’ve gambled. You had McCain saying they’re gamblers. If these people have gambled, we’re talking about derivative trades, billions of dollars of bets on which way interest rates will go, billions of dollars of bad loans beyond the ability of debtors to pay. Why on earth would you want to bail out these creditors?
AMY GOODMAN: So, what would happen if you didn’t?
MICHAEL HUDSON: Then you would prepare the ground for writing down the debts of the homeowners that have no way of repaying the exploding mortgages. Those interest rates are going to be jumping up this year. You would be able to bring the debts down to the ability of the economy to pay, and you would save these four million homeowners from defaulting and being kicked out of their houses. Now they’re going to be kicked out of the houses. The houses will be vacant. The cities are going to now say, “Gee, we’re going to have to cut the property taxes to enable the debts to be paid to save the financial system.” So, if they cut the property taxes, they’re going to have to cut back local expenditures, local infrastructure. The economy is being sacrificed to pay the gamblers.
AMY GOODMAN: Nomi Prins, how has Wall Street changed? And how does this meet everyday people? Lehman, bankrupt; you’ve got AIG nationalized, same with Freddie and Fannie; you’ve got the takeover of Merrill Lynch, now part of Bank of America—happened over a weekend.
NOMI PRINS: It’s insane, actually. It’s bad math, and it’s a bad precedent, because they’re not simply bailing it out with putting taxpayers’ money through the Fed into taking on the risks of these companies; they’re taking on risks. They’re not bailing out and selling debt; they are taking on the risk. They’re becoming—the Fed is continuing to become a larger and larger hedge fund. And it’s doing it with taxpayer money, and it’s doing it with the future debt of the United States.
So, for the one thing, they’re not attaching any rules to these bailouts. You know, you bail out Bear Stearns, effectively you’re putting up $30 billion to take Bear Stearns’s junk and say, “Alright, we’ll back the junk. JPMorgan Chase, you take Bear Stearns. We’ll back whatever junk is there.” But there’s no decision to say, “But, you know, you’ve got to tell us what’s there. And JPMorgan, by the way, as you’re taking on this bank, you have to explain to us what you really have. And Bank of America, you have to explain to us what your risks are.”
I know that at Bank of America they were struggling with their own risks and trying to figure out what was going on in their own company, and now they have assumed Merrill Lynch. That creates a tremendous institution, where the Fed is now obligated, when that starts to have more and more trouble, which it will.
AMY GOODMAN: What started all this?
NOMI PRINS: What started all of this was a complete lack of transparency and regulation in the banking system. If we go back to a history where we had a similar situation on Wall Street, which was 1929, when we had a stock market crash followed by a Great Depression, in 1932, when FDR was elected and Herbert Hoover was ousted, right after that, we put together—he put together—
AMY GOODMAN: But interestingly, FDR didn’t come in on a plank of changing everything the way he did. It happened—didn’t it?—after he became president with—
NOMI PRINS: He had to take a look at the banking system, which was undermining the general economy, which had undermined the general economy, and say, “You know what? We do not understand what’s going on here. We have two types of banks. We have speculating investment banks, and we have commercial banks that deal with the public, take deposits, take savings, make mortgage loans, understand what’s going on. We’ll back those. The government will back those commercial institutions that deal with the public. It will not back speculative investment banks. And, by the way, those two things have to split. You pick a side. You want to be an investment bank? You be an investment bank. You want to be a commercial bank? We’ll back you. The Fed will back you. We will be there. We’ll create an insurance company, the FDIC, to back deposits for the public. We’ll have your back.” There was no—there was no agreement to have the back of the speculative investment banks.
Over the years, these things have merged and merged and merged. And in late 1999, Glass-Steagall, that act, was repealed, killed, died in Congress. And now you have a situation where everything that went wrong up until the creation of that act is happening now with a lot more capital and a lot more international interplay and a lot more money on the federal government to have to bail out when things go wrong. So, we have gone backwards in banking history, and having Merrill be a part of Bank of America is a tremendously big accident waiting to happen. Bear Stearns’s assets part of JPMorgan—they’re all part of recombining speculation and commercial.
AMY GOODMAN: We’ve got to go to break. When we come back, Michael Hudson, adviser to former presidential candidate Dennis Kucinich, I want to ask about the current presidential candidates right now, their proposals, the main party candidates, McCain and Obama. This is Democracy Now! Our guests are Nomi Prins—she worked at a lot of these places that are going under now, being taken over, going bankrupt—Michael Hudson, a professor, president of the Institute for the Study of Long-Term Economic Trends, chief economic adviser to Dennis Kucinich. Stay with us.
[break] AMY GOODMAN: Major party presidential candidates Barack Obama and John McCain addressed the financial crisis on the campaign trail this week. Obama accused McCain of not understanding the seriousness of the crisis.
SEN. BARACK OBAMA: We are in the most serious financial crisis in generations, yet Senator McCain stood up yesterday and said that the fundamentals of the economy are strong. That’s what he said. Now, a few hours later, his campaign sends him back out to clean up his remarks. And he tried to explain himself again this morning by saying that what he meant to say was that the American workers are strong. But we know that Senator McCain meant what he said the first time, because he has said it over and over again throughout this campaign. AMY GOODMAN: Meanwhile, John McCain tried to strike a populist tone on the campaign trail.
SEN. JOHN McCAIN: While employees, shareholders and other victims are left with nothing but trouble and debt, the people who helped cause the collapse make off with tens of millions in severance packages. Disgraceful. I’ve spoken out against the excess of corporate executives, and I can assure you that if I’m president, we’re not going to tolerate that anymore.
AMY GOODMAN: Professor Hudson?
MICHAEL HUDSON: That’s his constituency. His constituency are the people who have caused the crisis. That’s who he’s representing. Now, of course, you’re not going to come in and say, “I’m going to support the people who have caused this crisis at your expense.” If you’re going to bail out your constituency, you’re going to say exactly the opposite. So what he’s saying has no reality at all.
These are the people who sang, “There’s no money for Social Security. We’re going to have to privatize it. We’re going to have to turn over your Social Security to Bear Stearns, to AIG”—to the very people who have shown how they’re mismanaging money. Imagine if the Republican program had gone through and Social Security had been privatized and these were the jokers who were managing your Social Security. They’d stick you with the losses.
So, these are his constituency. He knows he’s not telling the truth. He’s not paid to tell the truth. He’s pretending that it’s a crisis that has to be bailed out, that it’s the financial system. But it’s not the financial system that’s being bailed out; it’s the debt system. And it’s the debts that the homeowners own and the industry owns. And now the government is coming on the side of the creditors, who are going to close down the industries, sell them off to pay the debts, foreclose on the houses, sell them off to pay the debts. And the economy is going to shrink and shrink. That’s the program that they’re standing for. AMY GOODMAN: They’ve always said that Social Security can’t be bailed out, but that it’s going broke.
MICHAEL HUDSON: That [inaudible] bailout. They’ve already spent $5 trillion in the last two weeks to double the size of the national debt by taking over Fannie Mae. How can they bail out the gamblers, how can they bail out Wall Street and not—and claim that the Social Security system doesn’t really exist? They’ve used the Social Security money basically for the bailout. There it goes. They’ve made a choice. The choice is to bail out Wall Street against the people.
The Treasury is supposed to represent the government and the economy, and the Fed is supposed to be the board of directors of commercial banks, but now Wall Street plays both sides of the game. It not only supplies the heads of the Fed; it supplies the Secretary of the Treasury. And that’s why I said the class war is back in business with a vengeance. AMY GOODMAN: Nomi Prins, you worked at a number of these places, like Bear Stearns. You worked at Lehman Brothers, too, now bankrupt. Let’s talk about the money that Obama and McCain get. According to the Center for Responsive Politics, Obama, it’s nearly $10 million from the securities investment industry; McCain, it’s nearly $7 million. So Obama actually gets more. Employees of Merrill Lynch, the investment bank that’s been taken over by Bank of America, have given the largest corporate money to Senator McCain’s campaign, Merrill employees giving some—close to $300,000 to McCain, close to $200,000 to Obama. Lehman Brothers, which filed for bankruptcy, given—has been the eighth-largest corporate giver to Senator Obama’s campaign. Democrats have become increasingly reliant on Wall Street money. The industry ranks as the third-biggest giver to Senator Obama’s presidential campaign. How does this influence the debate, and what are the proposals of the two men?
NOMI PRINS: Well, the proposals of McCain have to do with—well, they’re very nondescript. Basically, he says there is a greed situation, and we need to contain it. And we need— AMY GOODMAN: And he says we have to set up a commission.
NOMI PRINS: We need to set up a commission to understand what’s going on. Well, we have seven different regulatory bodies in Washington, and they’re supposed to be watching various aspects of the financial community. And we have state ones that are supposed to be watching over insurance companies. So we actually have regulatory agencies. And Obama has basically said the same thing. He wants to strengthen the ones that do exist.
The problem is being connected to Wall Street, in terms of your funding. And Washington, in general—Wall Street, in general, was the biggest contributor to all of the politicians in Washington over the last decade. It’s where the most money comes from. So you have a situation where that money doesn’t want oversight, even when it so badly, as Michael was talking about, mismanages and over-leverages and over-bets and gets into such a tremendous problem that we haven’t seen. They don’t want the regulation.
What you should do, what the candidates should do, is step back and say, OK, well, you know what? Instead of having them dictate the terms and us coming in to bail them out with no strings attached—we’ll bail you out, and we won’t even ask you to explain to us what the heck has been going on with your balance sheets; we’re taking stuff on we don’t even understand—actually have to make it transparent and actually have to dissect the businesses back into a form where speculative businesses and commercial businesses are once again separated, at least until our government can understand what’s going on and understand the hook onto which they’re taking American public money to bail them out.
AMY GOODMAN: Professor Hudson, Phil Gramm was the top adviser to McCain. What was his role in all of this, the former senator from Texas?
MICHAEL HUDSON: He’s the frontman for the biggest crooks in the country. Basically, he says don’t regulate. He has responded to the lobbies by cutting back all of the information. The regulatory agencies don’t collect the information to let them know what’s happening. The government has no adequate statistics on what the value of real estate is, what the amount of debt is, because if it did have statistics, it would show that the volume of debt is far in excess of the ability of debtors to pay. And when you have that, you would have to do something about it.
Gramm has said don’t collect statistics, because if you know how these guys are making money, they’re going to pay taxes on it. And if you don’t look at what they’re doing, if you let them all do it through offshore vehicles, if you let them all bury everything, then they’re not going to be taxed. And that’s his constituency, to un-tax finance and to shift it onto labor and industry.
AMY GOODMAN: Where does Glass-Steagall fit into this?
MICHAEL HUDSON: That, as Nomi said—
AMY GOODMAN: And explain it.
MICHAEL HUDSON: It’s—Glass-Steagall was designed to prevent what has happened. It was designed to keep investment banking apart from commercial banking. Now you have the banking system taking—merging with the most crooked companies in the country, like Countrywide Financial that’s under indictment by attorney generals all over the country. You’re having the banking system commit its deposits and its space to recycle the savings not into industrial investment, but into exploitive loans.
AMY GOODMAN: Maybe injecting a little humor here, could this lead to single-payer healthcare? I mean, we’re talking about nationalizing of insurance.
NOMI PRINS: You might as well nationalize insurance.
AMY GOODMAN: And why does that have to be humorous?
NOMI PRINS: Well, no, exactly right. If you’re effectively nationalizing a portion of the banking—you’re nationalizing the worst portion of the banking system is what you’re effectively nationalizing. But you’re not even doing that, because you’re not running as a public entity.
You’re taking on risk you won’t be able to understand, and you’re not even trying to. So it’s even more dangerous.
With health insurance, which actually those companies have not sort of been involved in this, because they haven’t had the same derivatives, type of financial services, speculative activity that AIG has under its umbrella, which is the real reason it is imploding, you could actually put some money into something that preempts a problem happening and helps people get healthcare. AMY GOODMAN: What do you see has to happen now? And are we going to see a lot more banks going down, Professor Hudson?
MICHAEL HUDSON: You’ll see big fish eat little fish. The strong are going to win out. The people who are not going to be bailed out are going to be the pension funds, the labor funds, the small investors. You’re going to—the government has come down on the side of the sharks. And what they did yesterday is to lock in and prevent any Democratic administration from coming in and cleaning up the mess. The people who’ve made the mess are now in control.
AMY GOODMAN: But Obama is not against this.
MICHAEL HUDSON: You know, that’s true. He is not against it, and it was, after all, a Democratic president, Clinton, who repealed Glass-Steagall. And it was a Democratic Treasury secretary, Robert Rubin, who supported all of this. So they’re the—
AMY GOODMAN: Top adviser to Obama.
MICHAEL HUDSON: That’s right, the Treasury secretary. Yes, and still the top adviser. So, you’ve had both—I guess you could say the Republicans are a wholly owned subsidiary of Wall Street, the Democrats are a partially owned subsidiary. AMY GOODMAN: Nomi Prins?
NOMI PRINS: Well, yeah. Robert Rubin was at Goldman. So is the current Treasury secretary, Hank Paulson. So are a number of people in Washington. And you have that situation where you have people with speculative sort of minds running this concept of free market through Washington, which has created this complete catastrophe in the financial sector.
It will get worse, because the fact is these new conglomerates—the JPMorgan/Bear Stearns, the Bank of America/Merrill Lynch—they are larger, more risky entities than they were before the happening, and they have not disclosed the risks that they have. I worked in some of these companies. You cannot merge risk—you know, you cannot merge risk systems between the products within your own company. So when you start merging tremendously big companies, there is no hope in any sort of short timeframe the you are going to actually understand that risk. And there’s no need to report it to our government, because it’s not required. So it will get worse.
MICHAEL HUDSON: Nomi used the word “free markets.” Obviously, this is not a free market. They say they’re acting on behalf of Adam Smith. Adam Smith said that no government has ever repaid its debts. And it could be said that no private sector has, either. So, this is not a free market; this is a guaranteed gamble for Wall Street against industry and against labor.
AMY GOODMAN: You each have thirty seconds. You’re being called in by Senator McCain and Senator Obama to make your recommendation to them. They would maybe give you fifteen seconds, if they give you that, but, Nomi Prins, what are you going to tell them?
NOMI PRINS: It’s very simple. You don’t understand the system, so you know what? You take some guts, and you create a situation where you dissect the system. You don’t merge it; you dissect it. And you make accountable what is going on within each segment of the speculative and commercial banks, so that you know what’s going on, as was had to do in 1933, because that will create an actual stable system that the government can actually understand and quantify. AMY GOODMAN: Professor Hudson?
MICHAEL HUDSON: You realize the debts can’t be repaid, and you’re going to write down the debts to the ability of the debtors to pay.
AMY GOODMAN: You’re not bailing out any of these companies.
MICHAEL HUDSON: That’s right, you don’t. They knew they were bad debts. They knew they were bad loans. You don’t bail out the people who knew the debts were going to go bad and thought that they’d bought the government to bail them out. You say, “We’re not going to bail you out, and you haven’t bought us. And we’re going to act on behalf of the economy and the voters, not your behalf.”
AMY GOODMAN: I want to thank you both for being with us. Nomi Prins, former investment banker turned journalist, she worked at Bear Stearns, she worked at Lehman. She’s now a senior fellow at Demos. Michael Hudson is president of the Institute for the Study of Long-Term Economic Trends, a chief economic adviser to Congress member Dennis Kucinich, a professor at University of Missouri, Kansas City.
As a former senior IMF staff member (1966-1989) and long-time critic of both mainstream economics and its offshoot in The Washington Consensus, I have been of the view that post-Bretton Woods world financial arrangements have been undergoing 'structural disintegration' from the outset.
The root cause of the problem lies at the very heart of mainstream economic orthodoxy and its policy offshoot/The Washington Consensus - namely, in the foundational "hypothesis that [a real-world market] system is in "stable" equilibrium or motion". (Paul A. Samuelson, Foundations of Economic Analysis, p. 5)
The sole purpose of this hypothesis was to rationalize the use of high-school algebra and calculus as modus operandi of mainstream economics.
However, when applied to real-world monetary policy-making Samuelson's hypothesis implies that monetary stability is best served by governments and regulatory institutions getting out of the way of self-correcting market forces.
My heterodox monetary views and associated critique of the methodological presuppositions of mainstream economics were not well received either at the IMF or the Harvard Department of Economics which did not approve my proposal to do a Ph. D. thesis on "the methodology of science in general and of economics in particular" on the grounds that no faculty member was qualified to supervise a doctoral dissertation on the subject matter.
It is really not rocket science to figure out that an ever-increasing ratio of world paper 'wealth' to world output of goods and services is unsustainable. But, both inside and outside the IMF, people in positions of authority chose to ignore this near self-evident fact.
And, when it could no longer be denied, those in authority would feign surprise and claim that collapse of post-Bretton Woods world monetary arrangements was something that could not have been foreseen.
In December 1996, therefore, I advised US Fed Governor Laurence Meyer as follows:
It is fair surmise that macro-economic forecasting models predicated on mainstream monetary thought, which have detected no signs of a global crisis during the rapid rise in the ratio of paper wealth to real output during the past quarter century, are once again setting policy-makers up for a nasty surprise.
This was for the record.
As was my advice to Patrick Minford, economic adviser to Margaret Thatcher, in January 1997 concerning post-Bretton Woods world monetary arrangements:
[This] house of cards is certain to come crashing down.
As founding member of a trans-Atlantic group of economists known as Gang8, including UK members Geoffrey Gardiner and Christopher Meakin, I have addressed at length the analytical aspects of mainstream orthodoxy in a number of think-pieces.
See for example Principles of Economic Analysis (Summary -Revision), dated October 1, 1999 at the Archive section under www.creditary- economics. org.
Modern China is built on the complex dual legacy of the Chinese Revolution. During the Mao years, 1949-1976, China developed a national infrastructure that the post-Mao leadership were able to appropriate for rapid capitalist development. It also engendered a culture of social justice and class struggle that is still reflected in the language of workers and peasants when they confront egregious employers or corrupt party officials. The persistence of Maoism was clearly evident during the Tiananmen Square protests.
As the human costs of China’s neoliberal system pile up with no credible solutions, broad sections of people have increasingly begun to draw on the legacy of Maoism for both critique and radical vision. Minqi Li discusses this process among China’s New Left.
PAUL JAY, SENIOR EDITOR: Welcome back to the next segment in our interviews with Minqi Li about the current situation in China. Welcome, Minqi.
MINQI LI, PROFESSOR OF POLITICAL ECONOMY: Thank you.
JAY: The view we get, from the West, of China, we see to some extent the figures of the leaders of the Chinese Communist Party, we know a little bit in history, something called the democracy movement, but we know very little about it in terms of what the different trends are, and we don’t really hear about much else other than Chinese consumerism. But we know there’s a tremendously vigorous intellectual life in China. So can you talk about the intellectual and political trends as they exist today?
LI: There has been dramatic change in term of China’s intellectual life. Back through the 1980s, among most of the intellectuals who were politically conscious or politically active, among most of the university students, it was dominated by neoliberal ideas.
JAY: The ideas of open markets, independent capitalist enterprises, breaking down the sort of state-owned economy.
LI: That was also the case for, basically, virtually all of the leaders of the 1989 democratic movement. But things started to change by the mid-1990s.
JAY: Just to be clear, so you’re saying most of the leadership of the Tienanmen Square democracy type of movement were mostly connected to this neoliberal economic reform movement.
LI: Yeah. I would say probably all of them. And by the mid-1990s things started to change. You started to have some intellectuals who criticized the market-oriented reform, the neoliberal ideas, and so that by the late 1990s, early 2000s, you could say that a new trend that was referred to as the New Left emerged in China. In today’s Chinese context, this term New Left is used to refer to a very broad category that ranged from everyone from social democrat, nationalist, left nationalist, to Marxist. What they have in common is that they all are to different degrees critical of market-oriented reform, to a different degree critical of neoliberalism, and to a different degree have a generally positive view of the Maoist period, with different emphases.
JAY: They have a more positive view towards the Maoist period.
LI: Right. They are more positive. That’s right.
JAY: So you’re talking about things like there used to be more of a health care system for people than there is now and examples like that.
LI: In the Maoist period, for example, the people’s life expectancy increased from 35 years old around 1950s, and towards the end of Maoist period that’s increased to close to 70 years old. And so that’s a very dramatic change, probably the biggest increase in terms of life expectancy compared to other countries over the same length of period. And they also have developed some re-evaluation of the Cultural Revolution. So instead of the Chinese official point of view is that the Cultural Revolution has to be totally denied, it’s ten years of [inaudible] ten years of disaster, and they tend to emphasize that there have been many positive economic and social accomplishments.
JAY: For example? What are some of those positive examples? Because the picture that’s painted in the West of the Cultural Revolution is a sort of tyrannical, crazed period. That’s the way it’s painted for us.
LI: They actually cited the Chinese official statistics, population in the reform years. And so they used those statistically to argue that, in fact, China’s pace of industrialization had to be very rapid in the Cultural Revolution years. And, also, China had accomplished many technical achievements, including such as the hybridized rice. And China was not far behind the US at that time in term of computer development. And they also talk about the initial intention of Mao to start a Cultural Revolution had to do with trying to reverse the trends towards the emerging of a new, privileged bureaucratic caste, which would later lead to the development of capitalism. And they believe that has been, in fact, verified.
JAY: This trend that thinks the way you’re describing, this must be quite a small, in terms of population, a small segment of opinion. Is that true?
LI: It’s actually not true. Even among the intellectuals these days, and as well as among the politically conscious young students, I would say, you know, anywhere between one-quarter to one-third probably hold this kind of point of view. In terms of general population, not a small number of them have a quite favorable view about the Maoist period, especially, you know, for the workers, because of the negative social consequences of the market development.
JAY: What you’re calling the New Left critique of the current period, to what extent does that exist inside the party? Or is this mostly something that’s happening outside the Chinese Communist Party?
LI: Well, pretty much outside the Party. The Party itself, in terms of its view of the Cultural Revolution, its view of the Maoist period, it’s actually very close to the mainstream Western view, as well as what in China now is called a liberal approach, as opposed to a New Left.
JAY: You were talking about the left trend that makes a somewhat positive comparison about the Maoist period to the current period. But certainly we’re being told, in terms of popular opinion polls and such, that at least in the urban centers, people’s standard of living is much higher now than then. The Olympics and other indicators seems to show there’s been a tremendous leap in technology in China. Most people would kind of shake their heads at such a comparison. Can you speak to that?
LI: In terms of the rising income for the urban sector, and certainly some among urban sector has benefited a lot from the market-oriented reform, from the capitalist development. Recently it has been reported that now China has something like 100 new billionaires. So that’s very dramatic change. But on the other hand, of course, social and economic inequality has also increased a lot. And in one of the earlier segments we talked about between 1 to 5 percent of population controlled about 70 percent of China’s financial wealth—that’s in term of wealth. And there’s another set of data suggesting that the richest 10 percent of the Chinese population earn about 50 percent, half, of China’s total national income, while the poorest 10 percent only has access to about 1 percent. So despite China’s dramatic economic growth, you still have about 200 million people living on a daily income less than one purchasing-power-parity dollar a day. And if you take into account other aspects of social change, if we do not measure and adjust by material consumption, you have to also take into account access to health care, access to education, general social condition, personal safety, environmental conditions, I would say you could have the bottom 10, 20, or even 30 percent of the population, their quality of life has actually deteriorated since the beginning of the market-oriented reform.
JAY: And is this left trend pushing for a kind of European social democracy, or a return to a full-on state socialism?
LI: Well, that varies. And there are some of them who are in favor of social democracy, more or less in line with the official slogan of the current Chinese administration, the Harmonious Society, and there are some others who argue that for China to further develop, China must manage to upgrade China’s technology, must pursue high-tech development, and for that purpose you need a greater role of the state. And so you need to develop something like state capitalism. There are also some people who are in favor of the return to socialism. And so, in addition to intellectual development, another new development that is interesting is that in addition to the New Left intellectual trend I just talked about, you also have, outside of intellectuals, various Maoist activists, who are in favor of a kind of return to Maoist-style socialism.
JAY: I remember about ten years ago there was a small rural village that had refused to give up its Maoist economics, and it was telling the market reformers to stay out of the village. Is that a real trend that’s existing?
LI: Well, I would not say that’s a real trend right now in the countryside, although it’s not just one; in fact, you have several thousands of village that refused to privatize at the beginning of the reform period and continue to maintain some kind of collective form of organization or community ownership. And some of them continue to be prosperous until today. But I’m talking about separate trend. I’m talking about some Maoist activists who have been active in workers movement, who have been active in workers resistance to privatization. And that’s another quite challenging trend for China’s current regime.
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