[News] The Cash-for-Trash Economy

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Tue Mar 17 12:30:31 EDT 2009


http://www.counterpunch.org/

March 17, 2009


The Cash-for-Trash Economy

Mr. Bernanke Spreads the Fire

By MICHAEL HUDSON

On the March 15 CBS show “60 Minutes”, Federal 
Reserve Chairman Ben Bernanke used a false 
analogy already popularized by President Obama in 
his quasi-State of the Union Speech. He likened 
the financial sector to a house burning down – 
fair enough, as it is destroying property values, 
leading to foreclosures, abandonments, stripping 
(for copper wire and anything else recoverable) 
and certainly a devastation of value. The problem 
with this analogy was just where this building 
was situated, and its relationship to “other 
houses” (e.g., the rest of the economy).

Mr. Bernanke asked what people should do if an 
irresponsible smoker let his bed catch fire so 
that the house burned down. Should the neighbor 
say, “it’s his fault, let the house burn”? That 
would threaten the whole neighborhood with fire, 
Mr. Bernanke explained. The implication, he 
spelled out, was that economic recovery required 
a strong banking and financial system. And this 
is just what he said: The economy cannot recover 
without yet more credit and debt. And that in 
turn requires trillions and trillions of dollars 
given by “the neighbors” to the bad irresponsible 
man who burned down his own house. This is where 
the analogy goes seriously off track.

But watching “60 Minutes,” my wife said to me, 
“That’s just what Mr. Obama said the other night. 
What do they do – have a meeting and agree on 
what metaphor to popularize?” They seem to have 
an image that will lock Americans into supporting 
a policy even though they don’t like it and many 
feel like letting the financial house (A.I.G., 
Citibank, and Bank of America/Countrywide) burn down.

What’s false about this analogy? For starters, 
banking houses are not in the same neighborhood 
where most people live. They’re the castle on the 
hill, lording it over the town below. They can 
burn down and leave the hilltop revert “back to 
nature” rather than having the whole down gaze up 
at a temple of money that keeps them in debt.

More to the point is the false analogy with U.S. 
policy. In effect, the Treasury and Fed are not 
“putting out a fire.” They’re taking over houses 
that have not burned down, throwing out their 
homeowners and occupants, and turning the 
property over to the culprits who “burned down 
their own house.” The government is not playing 
the role of fireman. “Putting out the fire” would 
be writing off the debts of the economy – the debts that are “burning it down.”

To Mr. Bernanke the “solution” to the debt 
problem is to get the banks lending again. He’s 
spreading the debt-fire. The government is to 
lend the “threatened neighbors” enough money so 
that credit customers of the financial “house on 
the hill” can to pay it the stipulated interest 
charges they owe. It is not burning down at all; 
the neighborhood’s money (in this case, tax money) is being burned up.

Mr. Bernanke explained to the Sunday evening 
audience that his policy aimed at helping the 
economy return to “normalcy.” Fully in line with 
what Mr. Paulson was saying last summer, 
“normalcy” is defined as a new exponential growth 
in the volume of debt. He talked about 
“sustainable” recovery. But “the magic of 
compound interest” is not sustainable. It’s all a false metaphor.

Mr. Bernanke then left the realm of metaphor 
altogether to give an outright false explanation 
of the balance of payments and the upcoming Gang 
of 20 meetings in Europe. On Friday, China’s 
premier expressed worry over the health of the 
American economy, in which China had recycled 
nearly $2 trillion of its dollar inflows in order 
to prevent the yuan from rising in price against 
the dollar. The fear is that despite this heavy 
recycling of dollars by foreign central banks, 
the U.S. exchange rate will still weaken as the 
trade balance continues unabated and, just as 
seriously, U.S. military spending keeps on 
pumping dollars into the world economy as war 
spreads eastward from Iraq to Afghanistan and Pakistan.

The way Federal Reserve Chairman Bernanke 
explained the problem on CBS, America had to keep 
its markets attractive to “Chinese savers.” The 
image being conjured up again and again is that 
there is a world “savings surplus.” That is 
supposed to be what flooded the large U.S. banks 
and Wall Street with so much money that they were 
obliged to move it into riskier and riskier 
investments. “They made us do it” was the message not quite spelled out.

One would think that Mr. Bernanke knows nothing 
at all about the balance of payments or how the 
global monetary system works. Here’s what really 
has been happening. The U.S. economy itself pumps 
“savings” into foreign central banks by spending 
abroad on military bases. (60 Minutes showed 
robot fork-lift machines moving around 
$40-million loads of U.S. currency through the 
New York Federal Reserve Bank the way that 
similar machines have been doing in Iraq to buy 
off local supporters and political groups.) U.S. 
consumers likewise buy more than the country is 
exporting. When these surplus dollars are turned 
over to foreign banks for domestic currency, the 
banks turn them over to the central bank – which has a problem.

Remember when an earlier U.S. Secretary, John 
Connolly, said “It’s our deficit, but their 
problem”? He meant that the U.S. was spending 
funds (at that time mainly in Southeast Asia) 
that ended up in foreign central banks, which 
faced a dilemma: If they let “the market” handle 
these dollars, their own currency would rise. 
That would threaten to price their exports out of 
world markets, and hence would cause domestic 
unemployment. So foreign governments chose to 
recycle their dollar inflows by keeping them in 
dollars – mainly in U.S. Treasury bills and then, 
when the supply began to run out, in federal 
agency securities such as Fannie Mae and Freddie Mac.

So the “fire” in the international sphere was the 
U.S. military-spending deficit and trade deficit. 
This doesn’t have much to do with Chinese 
consumers saving too much. Central banks were 
doing the quasi-saving, by being stuck with 
surplus U.S. dollars like a hot potato. But one 
rarely hears public officials mention the 
nation’s military deficit. It is as if foreign 
saving comes first, then a “market-based” 
decision to place these in the U.S. economy, “the 
engine of world growth.” What actually comes 
first is the U.S. balance-of-payments deficit, 
pumping surplus dollars into the economy – which 
foreign central banks find themselves obliged to 
recycle within the dollar sphere. (This is the 
phenomenon I discuss in Super Imperialism: The 
Economic Strategy of American Empire, and Global Fracture.)

As for the surplus credit that Wall Street lent 
out, it is created out of thin air. At least Mr. 
Bernanke was clear about this, when he explained 
that the Fed “creates deposits” for its member 
banks just as these banks “create deposits” for 
their own customers at a stroke of the computer keyboard.

The bottom line is that the American public is 
being fed a carefully crafted mythology (no doubt 
“market tested” on “response groups” to see which 
images fly best) to mislead the American public 
into misunderstanding the nature of today’s 
financial problem – to mislead it in such a way 
that today’s policies will make sense and gain voter support.

But this mythology is based on false analogies, 
not economic reality. It is designed to make Wall 
Street appear as a savior, not an arsonist – and 
to depict the Fed and Treasury as protecting the 
welfare of American citizens by shoveling 
billions of dollars at the banks whose gambles have caused the crisis.

While Mr. Bernanke’s “60 Minutes” interview was 
being broadcast, the government was releasing the 
counterparties on the winning side of the Wall 
Street casino in bets that A.I.G. lost. To 
deflect the widespread voter disapproval of 
giving $160 billion to A.I.G., the Treasury 
finally released the names of the 
“counterparties” who ended up with the funds 
A.I.G. paid out to winning betters. Confirming 
rumors that had been circulating for the past few 
months, Mr. Paulson’s own company, Goldman Sachs, 
headed the list at $13 billion! Followed by 
Merrill Lynch ($7 billion), Bank of America ($5 
billion), Citigroup ($23 billion and the 
much-loathed junk-mortgage lender Wachovia ($1.5 
billion). So as Treasury Secretary, Mr. Paulson 
turns out to have represented not the U.S. 
interest but that of his own firm and its Wall Street neighbors.

These neighbors were given U.S. Treasury bonds in 
“cash for trash” transactions. The rest of the 
economy will be paying interest on this debt for 
a century to come. This is what causes “debt 
deflation.” Revenue is diverted from spending on 
goods and services to pay interest and taxes. So 
the Treasury is spreading the fire, not putting it out.

Michael Hudson is a former Wall Street economist. 
A Distinguished Research Professor at University 
of Missouri, Kansas City (UMKC), he is the author 
of many books, including 
<http://www.amazon.com/exec/obidos/ASIN/0745319890/counterpunchmaga>Super 
Imperialism: The Economic Strategy of American 
Empire (new ed., Pluto Press, 2002) He can be 
reached via his website, <mailto:mh at michael-hudson.com>mh at michael-hudson.com




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