How the Chicago Boys Wrecked the
an interview with Michael Hudson
by Mike Whitney
Michael Hudson is a former Wall
Street economist specializing in the balance of payments and real
estate at the Chase Manhattan Bank (now JP Morgan 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
Mike Whitney: The United States current
account deficit is roughly $700 billion. That is enough "borrowed"
capital to pay the yearly $120 billion cost of the war in Iraq,
the entire $450 billion Pentagon budget, and Bush's tax cuts for
the rich. Why does the rest of the world keep financing America's
militarism via the current account deficit or is it just the unavoidable
consequence of currency deregulation, "dollar hegemony"
Michael Hudson: As I explained in Super
Imperialism, central banks in other countries buy dollars not
because they think dollar assets are a "good buy," but
because if they did NOT recycle their trade surpluses and U.S.
buyout spending and military spending by buying U.S. Treasury,
Fannie Mae and other bonds, their currencies would rise against
the dollar. This would price their exporters out of dollarized
world markets. So the United States can spend money and get a
The solution is (1) capital controls to
block further dollar receipts, (2) floating tariffs against imports
from dollarized economies, (3) buyouts of U.S. investments in
dollar-recipient countries (so that Europe and Asia would use
their central bank dollars to buy out U.S. private investments
at book value), (4) subsidized exports to dollarized economies
with depreciating currency, and similar responses that the United
States would adopt if it were in the position of a payments-surplus
country. In other words, Europe and Asia would treat the United
States as its Washington Consensus boys treat Third World debtors:
buy out their raw materials and other industries, their export
plantations, and their governments.
MW:Economist Henry Liu said in his article
"Dollar hegemony enables the US to own indirectly but essentially
the entire global economy by requiring its wealth to be denominated
in fiat dollars that the US can print at will with little in the
way of monetary penalties.....World trade is now a game in which
the US produces fiat dollars of uncertain exchange value and zero
intrinsic value, and the rest of the world produces goods and
services that fiat dollars can buy at "market prices"
quoted in dollars." Is Liu overstating the case or have the
Federal Reserve and western banking elites really figured out
how to maintain imperial control over the global economy simply
by ensuring that most energy, commodities, and manufactured goods
are denominated in dollars? If that's the case, then it would
seem that the actual "face-value" of the dollar does
not matter as much as long as it continues to be used in the purchase
of commodities. Is this right?
Michael Hudson: Henry Liu and I have been
discussing this for many years now. We are in full agreement.
The paragraph you quote is quite right. His Asia Times articles
provide a running analysis of dollar hegemony.
MW:What is the relationship between stagnant
wages for workers and the current credit crisis? If workers wages
had kept up with the rate of production, isn't it less likely
that we would be in the jam we are today? And, if that is true,
than shouldn't we be more focused on re-unionizing the labor force
instead looking for solutions from the pathetic Democratic Party?__
Michael Hudson: The credit crisis derives
from "the magic of compound interest," that is, the
tendency of debts to keep on doubling and redoubling. Every rate
of interest is a doubling time. No "real" economy's
production and economic surplus can keep up with this tendency
of debt to grow faster. So the financial crisis would have occurred
regardless of wage levels.
Quite simply, the price of home ownership
tends to absorb all the disposable personal income of the homebuyer.
So if wages would have risen more rapidly, the price of housing
would simply have risen faster as employees pledged more take-home
pay to carry larger mortgages. Stagnant wages merely helped keep
down the price of houses to merely stratospheric levels, not ionospheric
As for labor unions, they haven't been
any help at all in solving the housing crisis. In Germany where
I am right now, unions have sponsored co-ops, as they used to
do in New York City, at low membership costs. So housing costs
only absorb about 20% of German family budgets, compared to twice
that for the United States. Imagine what could be done if pension
funds had put their money into housing for their contributors,
instead of into the stock market to buy and bid up prices for
the stocks that CEOs and other insiders were selling.
MW:When politicians or members of the
foreign policy establishment talk about "integrating"
Russia or China into the "international system"; what
exactly do they mean? Do they mean the dollar-dominated system
which is governed by the Fed, the World Bank, the IMF, and the
WTO? Do countries compromise their national sovereignty when they
participate in the US-led economic system?
Michael Hudson: By "integrating"
they mean absorbing, something like a parasite integrating a host
into its own control system. They mean that other countries will
be prohibited under WTO and IMF rules from getting rich in the
way that the United States got wealthy in the 19th and early 20th
centuries. Only the United States will be permitted to subsidize
its agriculture, thanks to its unique right to grandfather in
its price supports. Only the United States will be free from having
to raise interest rates to stabilize its balance of payments,
and only it can devote its monetary policy to promoting easy credit
and asset-price inflation. And only the United States can run
a military deficit, obliging foreign central banks in dollar-recipient
countries to give it a free ride. In other words, there is no
free lunch for other countries, only for the United States.
Other countries do indeed give up their
national sovereignty. The United States never has adjusted its
economy to create equilibrium with other countries. But to be
fair, in this respect only the United States is acting fully in
its own self-interest. The problem is largely that other countries
are not "playing the game." They are not acting as real
governments. It takes two to tango when one party gets a free
ride. Their governments have become "enablers" of U.S.
MW:What do you think the Bush administration's
reaction would be if a smaller country, like Switzerland, had
sold hundreds of billions of dollars of worthless mortgage-backed
securities to investment banks, insurance companies and investors
in the United States? Wouldn't there be litigation and a demand
that the responsible parties be held accountable? So, how do you
explain the fact that China and the EU nations, that were the
victims of this gigantic swindle, haven't boycotted US financial
products or called for reparations?
Michael Hudson: International law is not
clear on financial fraud. Caveat emptor is the rule. Foreign investors
took a risk. They trusted a deregulated U.S. financial market
that made it easiest to make money via financial fraud. Ultimately,
they put their faith in neoliberal deregulation - at home as well
as in the United States. England is now in the same mess. The
"accountability" was supposed to lie with U.S. accounting
firms and credit rating agencies. Foreign investors were so ideologically
blinded by free market rhetoric that they actually believed the
fantasies about "self-regulation" and self-regulating
markets tending toward equilibrium rather than the real-world
tendency toward financial and economic polarization.
In other words, most foreign investors
lack a realistic body of economic theory. The United States could
simply argue that they should take responsibility for their bad
investments, just as U.S. pension funds and other investors are
told to do.
MW:The Congress recently passed a bill
that gives Treasury Secretary Henry Paulson the unprecedented
authority to use as much money as he needs to keep Fannie Mae
and Freddie Mac solvent. Paulson assured the Congress that he
wouldn't need more than $25 billion but, the 400 page bill allows
him to increase the national debt by $800 billion. How will the
Fannie/Freddie bailout affect the dollar and the budget deficit?
Are interest rates likely to skyrocket because of this action?
Michael Hudson: The Fed can flood the
economy with money, Alan Greenspan-style, to prevent interest
rates from skyrocketing. Nobody really knows what will happen
to FNMA and Freddie Mac, but it looks like the mortgage and financial
crisis will get much, much worse over the coming year. We are
just heading into the storm where adjustable-rate mortgages (ARMs)
are scheduled to reset at higher rates, and where U.S. banks have
to roll over their existing debts in a market where foreign investors
fear that these banks already have no net worth left.
So the principle here is "Big fish
eat little fish." Wall Street will be bailed out, and banks
will be allowed to "earn their way out of debt" as they
did after 1980, by exploiting retail customers, above all credit-card
customers and individual borrowers. There will be a lot of bankruptcies,
and people will suffer more than ever before because of the harsh
pro-creditor bankruptcy law that Congress passed at the behest
of the bank lobbyists.
MW: A few months ago, the Wall Street
Journal ran an editorial which said that they could imagine two
nightmare scenarios if the current credit crisis was not handled
properly; either there would be a run on the dollar causing a
sudden plunge in its value, or the unexpected failure of a major
financial institution could send the stock market crashing. Last
week, the former head of the IMF Kenneth Rogoff triggered a sell-off
on Wall Street when he said, "We're not just going to see
mid-sized banks go under in the next few months, we're going to
see a whopper; we're going to see a big one - one of the big investment
banks or big banks." What happens if Rogoff is right and
Merrill, Citi or Lehman go belly up? Is that enough to send the
stock market freefalling?
Michael Hudson: Not necessarily. Citibank
would be nationalized, then sold off. The principle should be
that if a bank is "too big to fail," it should be broken
This should start with a repeal of the
Clinton Administration's repeal of Glass-Steagall.
As for Lehman, that would be given the
Bear Stearns treatment, and also sold off - probably to a hedge
fund. Merrill is much larger, but it also could be parceled out,
I suppose. The stock market's financial index would plunge, but
not necessarily industrial stock prices.
MW:According to MarketWatch: "In
the three months from April to June, banks posted their second
worst earnings performance since 1991.... Earnings for the quarter
totaled just $5 billion, compared with $36.8 billion a year ago,
a decline of 86.5%." Also, according to a front page article
in the Wall Street Journal: "financial institutions will
have to pay off at least $787 billion in floating rate notes and
other medium term obligations before the end of 2009." How
are the banks going to pay off nearly $800 billion ($200 billion
by December!) when they only earned a measly $5 billion in the
quarter!?! And how in the world is the Federal Reserve going to
keep the banking system functioning when earnings can't even cover
current liabilities? Do the banks have some secret source of revenue
we don't know about or is the system headed for disaster?
Michael Hudson: The traditional way to
pay debt is with yet MORE debt. The interest due is simply added
on to the principal, so that the debt grows exponentially. This
is the real meaning of "the magic of compound interest."
It means not only that savings left to accumulate interest keep
on doubling and redoubling, debts do to, because the savings that
are lent out on the "asset" side of the creditor's balance
sheet (today, that of America's wealthiest 10%) become debts on
the "liabilities" side of the balance sheet (the "bottom
The banks don't have a secret source of
revenue. It's right out in the open. They will take their junk
mortgages to the Federal Reserve and borrow the money at full
face value. The government will be left with the junk.
It then can either take over the bank,
as the Bank of England did with Northern Rock when it went bankrupt
early this year, or it can let the bank "earn" money
by stiffing its customers some more.
MW: From 2000 to 2006, the total retail
value of housing in the United States doubled, going from roughly
$11 trillion to $22 trillion in just 6 years. For the last 200
years, housing has barely kept pace with the rate of inflation,
usually increasing 2 to 3% per year. The Federal Reserve's low
interest rates were the main cause of this unprecedented housing
bubble and, yet, ex-Fed chief Alan Greenspan still denies any
responsibility for what "The Economist" calls "the
largest bubble in history". Did Greenspan understand the
problems he was creating with his "loose" monetary policies
or was there some ulterior motive to his actions?
Michael Hudson: He simply didn't care
about the problem. He saw his job as a cheerleader for people
who were able to get rich fast. These always had been his major
clients in his years on Wall Street, and he saw himself as their
servant - sort of like a pilot fish for sharks.
Mr. Greenspan's idea of "wealth creation"
was to take the line of least resistance and inflate asset prices.
He thought that the way to enable the economy to carry its debt
overhead was to inflate asset prices so that debtors could borrow
the interest falling due by pledging collateral (real estate,
stocks and bonds) that were rising in market price. To his Ayn-Rand
view of the world, one way of making money was as economically
and socially productive as any other way of doing so. Buying a
property and waiting for its price to inflate was deemed as productive
as investing in new means of production.
Ever since his days as co-founder of NABE
(the National Association of Business Economists), Greenspan has
long looked only at GNP and the national balance sheet as an economic
indicator, being "value-free." This is his intellectual
and conceptual limitation. He wanted to provide a way for savvy
investors to get rich, and the easiest way to get rich is to be
passive and get a free lunch. His ideology led him to believe
the "free market" ideology that the financial sector
would be self-regulating and hence would act honestly. But he
opened the floodgates to financial crooks. His set of measures
did not distinguish between Countrywide Financial getting rich,
Enron getting rich, or General Motors or industrial companies
expanding their means of production. So the economy was being
hollowed out, but this didn't appear in any of the measures he
looked at from his perch at the Federal Reserve.
So just as journalists and the mass media
proclaim every market downturn as "surprising" and "unexpected,"
he was as clueless as a lemming running headlong over the cliff.
It's an inherent instinct for free-market boys.
MW: The housing market is freefalling,
setting new records every day for foreclosures, inventory, and
declining prices. The banking system is in even worse shape; undercapitalized
and buried under a mountain of downgraded assets. There seems
to be growing consensus that these problems are not just part
of a normal economic downturn, but the direct result of the Fed's
monetary policies. Are we seeing the collapse of the Central banking
model as a way of regulating the markets? Do you think the present
crisis will strengthen the existing system or make it easier for
the American people to assert greater control over monetary policy?
Michael Hudson: What do you mean "failure"?
Your perspective is from the bottom looking up. But the financial
model has been a great success from the vantage point of the top
of the economic pyramid looking down? The economy has polarized
to the point where the wealthiest 10% now own 85% of the nation's
wealth. Never before have the bottom 90% been so highly indebted,
so dependent on the wealthy. From their point of view, their power
has exceeded that of any time in which economic statistics have
You have to realize that what they're
trying to do is to roll back the Enlightenment, roll back the
moral philosophy and social values of classical political economy
and its culmination in Progressive Era legislation, as well as
the New Deal institutions. They're not trying to make the economy
more equal, and they're not trying to share power. Their greed
is (as Aristotle noted) infinite. So what you find to be a violation
of traditional values is a re-assertion of pre-industrial, feudal
values. The economy is being set back on the road to debt peonage.
The Road to Serfdom is not government sponsorship of economic
progress and rising living standards; it's the dismantling of
government, the dissolution of regulatory agencies, to create
a new feudal-type elite.
The former Soviet Union provides a model
of what the neoliberals would like to create. Not only in Russia
but also in the Baltic States and other former Soviet republics,
they created local kleptocracies, Pinochet-style. In Russia, the
kleptocrats founded an explicitly Pinochetista party, the Party
of Right Forces ("Right" as in right-wing).
In order for the American people or any
other people to assert greater control over monetary policy, they
need to have a doctrine of just what a good monetary policy would
be. Early in the 19th century the followers of St. Simon in France
began to develop such a policy. By the end of that century, Central
Europe implemented this policy, mobilizing the banking and financial
system to promote industrialization, in consultation with the
government (and catalyzed by military and naval spending, to be
sure). But all this has disappeared from the history of economic
thought, which no longer is even taught to economics students.
The Chicago Boys have succeeded in censoring any alternative to
their free-market rationalization of asset stripping and economic
My own model would be to make central
banks part of the Treasury, not simply the board of directors
of the rapacious commercial banking system. You mentioned Henry
Liu's writings earlier, and I think he has come to the same conclusion
in his Asia Times articles.
MW:Do you see the Federal Reserve as an
economic organization designed primarily to maintain order in
the markets via interest rates and regulation or a political institution
whose objectives are to impose an American-dominated model of
capitalism on the rest of the world?
Michael Hudson: Surely, you jest! The
Fed has turned "maintaining order" into a euphemism
for consolidating power by the financial sector and the FIRE sector
generally (Finance, Insurance and Real Estate) over the "real"
economy of production and consumption. Its leaders see their job
as being to act on behalf of the commercial banking system to
enable it to make money off the rest of the economy. It acts as
the Board of Directors to fight regulation, to support Wall Street,
to block any revival of anti-usury laws, to promote "free
markets" almost indistinguishable from outright financial
fraud, to decriminalize bad behavior - and most of all to inflate
the price of property relative to the wages of labor and even
relative to the profits of industry.
The Fed's job is not really to impose
the Washington Consensus on the rest of the world. That's the
job of the World Bank and IMF, coordinated via the Treasury (viz.
Robert Rubin under Clinton most notoriously) and AID, along with
the covert actions of the CIA and the National Endowment for Democracy.
You don't need monetary policy to do this - only massive bribery.
Only call it "lobbying" and the promotion of democratic
values - values to fight government power to regulate or control
finance across the world. Financial power is inherently cosmopolitan
and, as such, antagonistic to the power of national governments.
The Fed and other government agencies,
Wall Street and the rest of the economy form part of an overall
system. Each agency must be viewed in the context of this system
and its dynamics - and these dynamics are polarizing, above all
from financial causes. So we are back to the "magic of compound
interest," now expanded to include "free" credit
creation and arbitraging.
The problem is that none of this appears
in the academic curriculum. And the silence of the major media
to address it or even to acknowledge it means that it is invisible
except to the beneficiaries who are running the system.
Michael Hudson can be reached via his
Mike Whitney lives in Washington state.
He can be reached at: firstname.lastname@example.org