[News] The Cash-for-Trash Economy
news at freedomarchives.org
Tue Mar 17 12:30:31 EDT 2009
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, its 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,
Thats 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 dont like it and many
feel like letting the financial house (A.I.G.,
Citibank, and Bank of America/Countrywide) burn down.
Whats false about this analogy? For starters,
banking houses are not in the same neighborhood
where most people live. Theyre 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. Theyre 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. Hes
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 neighborhoods 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. Its 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, Chinas
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. Heres 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 Its 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 doesnt 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
nations 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 todays
financial problem to mislead it in such a way
that todays 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. Bernankes 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. Paulsons 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
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
522 Valencia Street
San Francisco, CA 94110
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