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Government Debt and Deficits Are Not the Problem - Private Debt Is - YouTube
Channel: The Real News Network
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PAUL JAY: Welcome to The Real News Network.
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I'm Paul Jay in Baltimore.
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As the effects of the sequester agreement
ripple through the American economy--massive
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cuts, that is, to social programs, and the
military to some extent--one thing is clear:
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both sides--President Obama and the leadership
of the Republican Party--seem to think that
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public debt is the biggest challenge facing
the American economy.
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Well, our next guest begs to differ.
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Now joining us in the studio is Michael Hudson.
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He was a Wall Street financial analyst, is
now a distinguished research professor of
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economics at the University of Missouri-Kansas
City.
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His recent books are The Bubble and Beyond
and Finance Capitalism and Its Discontents.
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Thanks for joining us again.
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MICHAEL HUDSON: Thank you very much.
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JAY: So I'm reading your material, and clearly
you don't agree that public debt's the issue.
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Why?
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And if not, what is?
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HUDSON: Well, the one kind of debt that really
isn't an issue is public debt, because there's
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a great difference between public and private
debt.
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Governments can own the printing presses.
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No government can become insolvent as long
as its debt is owed in its own currency.
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And not only has the U.S. public debt gone
down as a proportion of GAP [sic] and national
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income; it actually is financed very largely
by the Federal Reserve simply printing money.
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The pretence in Washington is that when government
debt goes up, it's because you're borrowing
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from people and somehow crowding out other
markets, and if you don't borrow from the
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banks, if you print your own money, that somehow
that's going to create hyperinflation.
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JAY: Yeah.
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I mean, the contention--the argument would
be you can't keep doing this without any limits
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to it, 'cause at some point people don't want
your currency anymore.
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HUDSON: The United States has been doing it
without limit and has no limit for the last--since
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the financial crisis of 2008.
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Now, there's something very interesting.
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All of the people in Washington--and I just
came from a conference down there--they're
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all talking about the debt that's owed to
the Social Security people, recipients, to
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the Medicaid recipients.
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They're talking about--and the debt owed to
labor and to most of the population.
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And yet for every half a trillion dollar deficit
that the government has spent into the economy,
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it's created twice as much, $1 trillion, in
the form of giveaway to the banks.
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Not a single Republican, not a single Democrat
has talked about what has actually increased
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the government debt by $13 trillion since
2008.
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And that is the bailouts of the banks, taking
a Freddie Mae [sic] and Freddie Mac onto the
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public balance sheet for $5.3 trillion to
bail out the banks from their reckless mortgage
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loans, the more than $2 trillion in quantitative
easing when the Federal Reserve has just created
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credit to give to the banks to buy their junk
mortgages and cash for trash.
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So somehow there's an idea that creating a
credit to give to the banking system for President
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Obama to say, we want the banks to get lending
again and we want Americans to keep borrowing--.
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They want to reinflate the private debt market,
the real estate market back to its previous
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unaffordably high levels.
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JAY: So the point you're making is you're
saying it's okay to, quote-unquote, print
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money as long as it's going to the banks,--
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HUDSON: Yes.
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JAY: --but you can't print money--the reason
I'm going quote-unquote is you don't really
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have to print it.
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It's just, like, tapping into the--
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HUDSON: It's all on a computer keyboard now.
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They don't even have [crosstalk]
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JAY: --tapping at the keyboard.
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But they won't create that same kind of money
in order to get the real economy going.
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HUDSON: Right.
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Now, it's just amazing that the people who
were talking about let's get the government
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debt under control are only then following
it by saying, so cut back Social Security
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and squeeze labor and cut back social spending.
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Not a single person is saying, cut back the
giveaways to the bank; stop trying to reinflate
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the market.
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To the Obama administration and the Republicans
they're saying more private debt is the solution.
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Well, in reality, the problem is private debt,
not the government debt.
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And that's because unlike government debt,
private debts have to be repaid.
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And there are only two ways of resolving a
private debt problem for an economy as a whole.
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Either you do the American way, which is foreclosure
and essentially foreclose on the real estate,
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or you write down the debts to the ability
that can be paid.
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Now, in the past, when you had a financial
crisis, the banks would have to liquify the
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loans.
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They take the loss on the loans.
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The debts would be written down to whatever
the market could afford.
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That was the old market solution to the debt
problem.
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But now the government is saying, we cannot
have a market solution to the debt problem
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because our constituency, our largest campaign
contributors, the banks, would lose, so we
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have to keep the debts in place, and in fact
we have to have even more debt to reinflate
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the real estate market so that the banks won't
lose any money on the fact that they've lent
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much too much money that cannot be repaid.
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So you have something very interesting.
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The largest form of debt in America is real
estate debt by homeowners.
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When I first went to work on Wall Street in
1961, everybody had to--there was a rule of
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thumb on Wall Street.
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If you were taking out a home mortgage, they
would limit it: the mortgage payment couldn't
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exceed 25 percent of your income.
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That was the rule of the thumb.
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The banker would ask: how much money do you
make?
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And they'd say, okay, you can afford to pay
25 percent of that in debt.
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Well, then the banks began to make larger
and larger loans.
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So last year, Sheila Bair, the head of the
Federal Deposit Insurance Corporation, said
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she recommended limiting the amount of mortgage
debt service to 32 percent of the loans.
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Well, just a few months ago, the federal housing
agency of the government said, okay, the government
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will guarantee nine out of every ten mortgages
in America are now guaranteed by the federal
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housing administration to the banks for up
to 43 percent of the income of the borrower
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to be paid to the banks as mortgage service.
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Now, just imagine what that does to a family.
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If you're paying 43 percent of your income
to the banks for your mortgage, if you're
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paying--some people are paying 25 percent
of their income for student loans.
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But forget student loans.
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Let's say only 10 percent of your income,
above that, goes for other bank loans, credit
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card loans; you have 15 percent of your salary
taken out for Social Security; and then you
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have income tax.
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Then you're only going to be able to spend
about 20 percent of your salary on the goods
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and services you produce.
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JAY: And then they wonder why there's no demand
in the economy.
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HUDSON: That's exactly the point.
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It's all about demand in employment.
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And what the people who are talking about
the debt situation in Washington are leaving
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out of account is the employment.
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How on earth are Americans going to buy what
they produce if they have to pay all the money
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to the bankers, and the bankers are using
this money not to buy goods and services themselves,
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they're using the money to make yet more loans
to try to get yet more interest, and it's
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[crosstalk]
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JAY: Yeah, I'm seeing in my mail now I'm getting
all these do you want a new credit card ads,
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or envelopes are coming through again; TV
ads for credit cards are in full steam again.
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So I guess now that the banks have gotten
a lot of free money from the Fed, they're
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going to maybe perhaps start another credit
bubble to try to get things going.
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HUDSON: Well, that's the government--the government
policy doesn't call it a credit bubble this
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time.
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They call it reflating real estate, and they
call it a fiscal responsibility of balancing
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the budget.
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But fiscal responsibility for the government
debt is irresponsible for the economy, 'cause
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if the government doesn't run a debt, if the
government doesn't run a surplus, then it's
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not going to be pushing money into the economy.
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And if the government doesn't use this opportunity
that we're having now to run a deficit and
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to--not to tax the Social Security recipients
(this just occurred in January), not to add
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to the tax withholding, if it does what the
Republicans want and runs a surplus or balances
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the budget, then all of the growth in the
economy will be left to commercial banks to
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finance.
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The growth of private debt will grow to even
more than the current 75 to 80 percent of
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family income--.
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JAY: That's even assuming the private banks
are willing to loan, because part of the problem
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is they don't want to loan because they don't
trust the economy.
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HUDSON: But as long as the government treats
the entire loan system like student debt--the
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government is now saying to the banks, loan
whatever you want to students.
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We don't care if they can't pay.
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We don't care if your loan is reckless.
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We, the so-called tax payer, will pay.
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And it's not the taxpayer, of course; it's
the Treasury that just creates the money to
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pay.
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So, first of all, there's a pretence that
the taxpayer has to pay when the government
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runs a deficit.
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The taxpayers don't pay for the deficit; the
government simply prints the money.
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A private family can't do that.
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If you run a deficit and you're a family balance
sheet--.
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JAY: But hang on.
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A lot of the money they're raising is through
Treasury bills, which is a form of a loan.
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HUDSON: Yes.
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JAY: They're not just--and there is a rising
public debt, and they are paying interest.
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It's very, very low right now, the interest
the American government's paying on its debt,
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but that could go up.
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So it's not this isn't without risk of at
some point paying serious interest.
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HUDSON: Well, there are three sources that
a government can borrow from.
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They act as if--the only source they talk
about is borrowing from the capital markets,
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from the banks and the bondholders.
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But the government can borrow from the Federal
Reserve, no interest whatsoever, and simply
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create the money.
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That's what it's done for the $13 trillion
of bailout that it's given Wall Street.
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JAY: But they seem to believe there needs
to be limits to that; otherwise, people lose
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confidence in the dollar.
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That's at least the logic they say.
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And then they go out and they--but they--and
they are getting almost interest-free money
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now for T-bills, so they are borrowing it.
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HUDSON: But it's--you're absolutely right.
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That's just what they're saying.
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And how can they say that people are losing
faith in the dollar when the dollar has continued
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to go up and up and up against the euro, against
the pound sterling, against other currencies
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that don't have the printing press?
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The reason people are putting their money
into Treasury bills, the reason the Treasury
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bills, if you buy them, only yield half a
percent or a quarter percent now, is because
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other countries have faith that America has
the printing press and can print the money.
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So it's exactly the opposite of the Zimbabwe
syndrome.
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People talk about Zimbabwe, but only Zimbabwe
can print its own money or America can print
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its own money.
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JAY: But there's clearly got to be some limit
to how much you can do that.
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Otherwise, give everybody $1 billion and,
you know, life would be fine.
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There are limits to this.
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HUDSON: Yes, of course there's a limit.
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The limit is so far not being reached because
the rest of the world is imposing the very
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kind of austerity that the Republicans are
trying to force on America.
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The rest of the world is saying, we want to
be fiscally responsible even at the cost of
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shrinking our economies.
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So their economies are falling apart, and
the savers in their economies are sending
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their money into the United States.
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So the reality is the opposite of the rhetoric
that's being used by the politicians.
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JAY: But the argument they would give you
is that if you start printing too much money,
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then people will lose confidence and they
won't keep doing--they stop buying American
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T-bills and they won't be sending money here.
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Right now it's the safe haven for global money.
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HUDSON: There is indeed one entity that has
been producing too much money, way too much
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money, irresponsibly, and that's the banking
system that led to the credit crisis.
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It was--the money that has been inflating
prices has been the commercial banks inflating
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real estate prices, inflating education prices,
inflating prices for stocks and bonds that
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have just had a huge bubble.
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So the inflationary money creation is by the
commercial banks, not by the government.
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And nobody's talking about that.
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Of course they've reached the limit.
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But it's the banks that are creating money.
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And somehow people have believed that inflation
is very good if what's going up is the price
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of your home.
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But then when the price goes down, what's
really gone up has been your debt, and what
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people thought was an asset boom in net worth
and wealth creation (as Alan Greenspan said),
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it turns out to be debt creation.
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And all--they're left with a massive debt.
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And it's the private debt that is the residue
of the bubble economy that is now the big
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problem in overlaying the economy.
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And instead of trying to resolve that problem
by writing down the debts to the ability to
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pay, by writing down housing debts to the
real value of the house, so the current mortgage,
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or writing it down to the one-quarter of your
income that used to be normal and is normal
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in other countries--by refusing to roll back
the public debt and write it down, the government
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is pushing austerity here, just exactly as
the pound is doing in Europe, as the Eurozone
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is doing.
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So all you have to do is look at Greece, Spain,
and Ireland, and you say, is that going to
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be America's future under this kind of pretence
that government debt's bad, bank debt is good,
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run into more debt, that will save us?
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It's as if they believe the Americans can
borrow their way out of debt.
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That's the current policy.
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JAY: Thanks for joining us, Michael.
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And thank you for joining us on The Real News
Network.
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