The U.S. is Saving the Financial Sector, not the
Economy.
Before juxtaposing the U.S. and alternative responses to the corona virus’s economic effects,[1] I would like to step back in time to show how the pandemic has revealed a deep underlying problem. We are seeing the consequences of Western societies painting themselves into a debt corner by their creditor-oriented philosophy of law. Neoliberal anti-government (or more accurately, anti-democratic) ideology has centralized social planning and state power in “the market,” meaning specifically the financial market on Wall Street and in other financial centers.
At issue is who will lose when
employment and business activity are disrupted. Will it be creditors and
landlords at the top of the economic scale, or debtors and renters at the
bottom? This age-old confrontation over how to deal with the unpaid rents,
mortgages and other debt service is at the heart of today’s virus pandemic as
large and small businesses, farms, restaurants and neighborhood stores have
fallen into arrears, leaving businesses and households – along with their
employees who have no wage income to pay these carrying charges that accrue
each month.
This is an age-old problem.
It was solved in the ancient Near East simply by annulling these debt and rent
charges. But the West, shaped as it still is by the legacy of the Roman Empire,
has left itself prone to the massive unemployment, business closedowns and
resulting arrears for these basic costs of living and doing business.
Western civilization distinguishes itself from its Near Eastern
predecessors in the way it has responded to “acts of God” that disrupt the
means of support and leave debts in their wake. The United States has taken the
lead in rejecting the path by which China, and even social democratic European
nations have prevented the corona virus from causing widespread insolvency and
polarizing their economies. The U.S. corona virus lockdown is turning rent and
debt arrears into an opportunity to impoverish the indebted economy and
transfer mortgaged property and its income to creditors.
There is no inherent material need for this fate to occur. But it
seems so natural and even inevitable that, as Margaret Thatcher would say,
There Is No Alternative.
But of course there is, and always has been. However, resilience
in the face of economic disruption always has required a central authority to
override “market forces” to restore economic balance from “above.”
Individualistic economies cannot do that. To the extent that they
have a strong state, they are not democratic but oligarchic, controlled by the
financial sector in its own interest, in tandem with its symbiotic real estate
sector and monopolized infrastructure. That is why every successful society
since the Bronze Age has been a mixed economy. The determining factor in whether or not an economic
disruption leaves a crippled economy in its wake turns out to be whether its
financial sector is a public utility or is privatized from the debt-strapped
public domain as a means to enrich bankers and money-lenders at the expense of
debtors and overall economic balance.
China is using an age-old
policy common ever since Hammurabi and other Bronze Age rulers promoted
economic resilience in the face of “acts of God.” Unless personal debts, rents
and taxes that cannot be paid are annulled, the result will be widespread
bankruptcy, impoverishment and homelessness. In contrast to America’s
financialized economy, China has shown how natural it is for society simply to
acknowledge that debts, rents, taxes and other carrying charges of living and
doing business cannot resume until economic normalcy is able to resume.
Near Eastern protection of economic resilience
in the face of Acts of God
Ancient societies had a different logic from those of modern
capitalist economies. Their logic – and the Jewish Mosaic Law of Leviticus 25,
as well as classical Greek and Roman advocates of democratic reform – was
similar to modern socialism. The basic principle at work was to subordinate
market relations to the needs of society at large, not to enrich a
financial rentier class of creditors and absentee landowners. More
specifically, the basic principle was to cancel debts that could not normally
be paid, and prevent creditors from foreclosing on the land of debtors.
All economies operate on credit. In modern economies bills for
basic expenses are paid monthly or quarterly. Ancient economies operated on
credit during the crop year, with payment falling due when the harvest was in –
typically on the threshing floor. This cycle normally provided a flow of crops
and corvée labor to the palace, and covered the cultivator’s spending during
the crop year. Interest
typically was owed only when payment was late.
But bad harvests, military conflict or simply the normal hardships
of life frequently prevented this buildup of debt from being paid. Mesopotamian
palaces had to decide who would bear the loss when drought, flooding,
infestation, disease or military attack prevented the payment of debts, rents
and taxes. Seeing that
this was an unavoidable fact of life, rulers proclaimed amnesties for taxes and
these various obligations incurred during the crop year. That saved
smallholders from having to work off their debts in personal bondage to their
creditors and ultimately to lose their land.
For these palatial economies, resilience meant stabilization of
fiscal revenue. Letting private creditors (often officials in the palace’s own
bureaucracy) demand payment out of future production threatened to deprive
rulers of crop surpluses and other taxes, and corvée labor or even service in
the military. But for thousands of years, Near Eastern rulers restored fiscal
viability for their economies by writing down debts, not only in emergencies
but more or less regularly to relieve the normal creeping backlog of debts.
These Clean Slates extended
from Sumer and Babylonia in the 3rd millennium BC to
classical antiquity, including the neo-Assyrian, neo-Babylonian and Persian
Empires. They restored normal economic relations by rolling back the
consequences of debts personal and agrarian debts – bondage to creditors, and
loss of land and its crop yield. From the palace’s point of view as tax
collector and seller of many key goods and services, the alternative would have
been for debtors to owe their crops, labor and even liberty to their creditors,
not to the palace. So cancelling debts to restore normalcy was simply
pragmatic, not utopian idealism as was once thought.
The pedigree for “act-of-God” rules specifying what obligations
need not be paid when serious disruptions occur goes back to the laws of
Hammurabi c. 1750 BC. Their aim was to restore economic normalcy after major
disruptions. §48 of Hammurabi’s laws proclaim a debt and tax amnesty for
cultivators if Adad the Storm God has flooded their fields, or if their crops
fail as a result of pests or drought. Crops owed as rent or fiscal payments
were freed from having to be paid. So were consumer debts run up during the
crop year, including tabs at the local ale house and advances or loans from
individual creditors. The ale woman likewise was freed from having to pay for
the ale she had received from palace or temples for sale during the crop year.
Whoever leased an animal that died by an act of god was freed from
liability to its owner (§266). A typical such amnesty occurred if the lamb, ox
or ass was eaten by a lion, or if an epidemic broke out. Likewise, traveling
merchants who were robbed while on commercial business were cleared of
liability if they swore an oath that they were not responsible for the loss
(§103).
It was realized that hardship was so inevitable that debts tended
to accrue even under normal conditions. Every ruler of Hammurabi’s dynasty
proclaimed a Clean Slate cancelling personal agrarian debts (but left normal
commercial business loans intact) upon taking the throne, and when military or
other disruptions occurred during their reign. Hammurabi did this on four occasions.2
Bronze Age rulers could not afford to let such bondage and
concentration of property and wealth to become chronic. Labor was the scarcest
resource, so a precondition for survival was to prevent creditors from using
debt leverage to obtain the labor of debtors and appropriate their land. Rulers therefore acted to
prevent creditors from becoming a wealthy class seeking gains by impoverishing
debtors and taking crop yields and land for themselves.
By rejecting such alleviations
of debts resulting from economic disruption, the U.S. economy is subjecting
itself to depression, homelessness and economic polarization. It is saving
stockholders and bondholders instead of the economy at large. That is
because today’s rentier interests take the economic surplus in the form of debt
service, holding labor and also corporate industry in bondage. Mortgage debt is
the price of obtaining a home of one’s own. Student debt is the price of
getting an education to get a job. Automobile debt is needed to buy a car to
drive to the job, and credit-card debt must be run up to pay for living costs
beyond what one is able to earn. This deep indebtedness makes workers afraid to
go on strike or even to protect working conditions, because being fired is to
lose the ability to pay debts and rents. So the rising debt overhead serves the business and financial sector by
lowering wage levels while extracting more interest, financial fees, rent and
insurance out of their take-home pay.
Debt deflation and the transition from finance
capitalism to an Austerity Economy
By injecting $10 trillion into the financial markets (when Federal
Reserve credit is added to U.S. Treasury allocation), the CARES act enabled the
stock market to recover all of its 34 percent drop (as measured by the S&P
500 stocks) by June 9, even as the economy’s GDP was still plunging. The government’s new money creation
was not spent to revive the real economy of production and consumption, but at
least the financial One Percent was saved from loss. It was as if prosperity
and living standards would somehow return to normal in a V-shaped recovery.
But what is “normal” these days? For 95 percent of the population,
their share of GDP already had been falling ever since the Obama Depression
began with the bank bailout in 2009, leaving an enormous bad-debt overhead in
place. The economy’s long upswing since World War II was already grinding to an
end as it struggled to carry its debt burden, rising housing costs, health care
and related monthly “nut.”3
This is not what was
expected 75 years ago. World War II ended with families and businesses rife with savings
and with little debt, as there had been little to buy during the wartime years.
But ever since, each business cycle recovery has started with a higher ratio of
debt to income, diverting more revenue from business, households and
governments to pay banks and bondholders. This debt burden raises the economy’s
cost of living and doing business, while leaving less wage income and profit to
be spent on goods and services.
The virus pandemic has merely acted as a catalyst ending of the
long postwar boom. Yet even as the U.S. and other Western economies begin to
buckle under their debt overhead, little thought has been given to how to
extricate them from the debts and defaults that have accelerated as a result of
the broad economic disruption.
The “business as usual” approach is to let creditors foreclose and
draw all the income and wealth over subsistence needs into their own hands.
Economies have reached the point where debts can be paid only by shrinking
production and consumption, leaving them as strapped as Greece has been since
2015. Rejecting debt writedowns to restore social balance was implanted at the
outset of modern Western civilization. Ever since Roman times it has become
normal for creditors to use social misfortune as an opportunity to gain
property and income at the expense of families falling into debt. Blocking the
emergence of democratic civic regimes empowered to protect debtors, creditor
interests have promoted laws that force debtors to lose their land or other
means of livelihood to foreclosing creditors or sell it under distress
conditions and have to work off their debts.
In times of a general economic
disruption, giving priority to creditor claims leads to widespread bankruptcy. Yet it
violates most peoples’ ideas of fairness and distributive justice to evict
debtors from their homes and take whatever property they have if they cannot
pay their rent arrears and other charges that have accrued through no fault of
their own. Bankruptcy proceedings will force many businesses and farms to
forfeit what they have invested to much wealthier buyers. Many small
businesses, especially in urban minority neighborhoods, will see years of
saving and investment wiped out. The lockdown also forces U.S. cities and
states to cope with plunging sales- and income-tax revenue by slashing social
services and depleting their pension funds savings to pay bondholders.
Balancing their budgets by privatizing hitherto public services will create
monopoly rents and new corporate empires
These outcomes are not necessary. They also
are inequitable, and instead of being a survival of the fittest and most efficient
economic solutions, they are a victory for the most successfully
predatory. Yet such results are the product of a long-pedigreed legal and
financial philosophy promoted by banks and bondholders, landlords and insurance
companies reject economy-wide debt relief. They depict writing down debts and
rents owed to them as unthinkable. Banks claim that forgiving personal and
business rents would lead absentee landlords to default on their mortgages,
threatening bank solvency. Insurance companies claim that to make their policy
holders whole would bankrupt them.4 So something has to give: either the
population’s broad economic interests, or the vested interests insisting that
labor, industry and the government must bear the cost of arrears that have
built up during the economic shutdown.
As in oligarchic Rome, financial
interests in today’s world have gained control of governments and captured the
political and regulatory agencies, leaving democratic reformers powerless to
suspend debt service, rent arrears, evictions and depression. The West is
becoming a highly centrally planned economy, but its planning center is Wall
Street, not Washington or state and local governments.
Rising real estate arrears prompt a mortgage
bailout
Canada and many European governments are subsidizing businesses to
pay up to 80 percent of employee wages even though many must stay home. But for
the 40 million Americans who haven’t been employed during the closedown, the
prospect is for homelessness and desperation. Already before the crisis about
half of Americans reported that they were living paycheck to paycheck and could
not raise $400 in an emergency. When the paychecks stopped, rents could not be
paid, nor could other normal monthly living expenses.
America is seeing the end of the home ownership boom that endowed
its middle class with property steadily rising in price. For buyers, the price
was rising mortgage debt, as bank credit was the major factor in raising
property prices. (A home is worth however much a bank will lend against it.)
For non-whites, to be sure, neighborhoods were redlined against racial
minorities. By the early 2000s, banks began to make loans to black and Hispanic
buyers, but usually at extortionately high interest rates and stiffer debt
terms. America’s white home buyers now face a fate similar to that which they have
long imposed on minorities: Debt-inflated purchase prices for homes so high
that they leave buyers strapped by mortgage and compulsory insurance payments,
with declining public services in their neighborhoods.
When mortgages can’t be paid, foreclosures follow. That causes
declines in the proportion of Americans that own their own homes. That home
ownership rate already had dropped from about 58 percent in 2008 to about 51
percent at the start of 2020. Since the 2008 mortgage-fraud crisis and
President Obama’s mass foreclosure program that hit minorities and low-income
buyers especially hard, a more landlord-ridden economy has emerged as a result
of foreclosed properties and companies bought by speculators and vast
absentee-owner companies like Blackstone.
Many businesses that closed down did not pay the landlords.
Realizing that if they are held responsible for paying full rents that accrued
during the shutdown, it would take them over a year to make up the payment,
leaving no net earnings for their efforts. That was especially the case for
restaurants with compulsory limited “distance” seating and other stores obliged
to restrict the density of their customers. Many restaurants and other
neighborhood stores decided to go out of business. For hotels standing largely
empty, some 19 percent of mortgage loans had fallen into arrears already by
May, along with about 10 percent of retail stores.5
The commercial real estate sector owes $2.4 trillion in mortgage
debt. About 40 percent of tenants did not pay their rents for March, April and
May, from restaurants and storefronts to large national retail markets. A
moratorium on evictions put them off until August or September 2020. But in the
interim, quarterly state and local property taxes were due in June, which also
was when the annual federal income-tax payment was owed for the year 2019,
having been postponed from April in the face of the shutdown.
The prospective break in the chain of payments of landlords to
their banks may be bailed out by the Federal Reserve, but nobody can come up
with a scenario whereby the debts owed by non-elites can be paid out of their
own resources, any more than they were rescued from the junk-mortgage frauds
that left over-mortgaged homes (mainly for low-income victims) in the wake of
Obama’s decision to support the banks and mortgage brokers instead of their
victims. In fact, it takes a radical scenario to see how state and local debt
can be paid as public budgets are thrown into limbo by the virus pandemic.
The fiscal squeeze forces governments to
privatize public services and assets
Since 1945, the normal Keynesian response to an economic slowdown
has been for governments to run budget deficits to revive the economy and
employment. But that can’t happen in the wake of the 2020 pandemic. For one
thing, tax revenue is falling. Governments can create domestic money, of
course, but the U.S. government quickly ran up a $2 trillion deficit by June
2020 simply to support Wall Street’s financial and corporate markets, leaving a
fiscal squeeze when it came to public spending into the real economy. Many U.S.
states and cities have laws obliging them to balance their budgets. So public
spending into the real economy (instead of just into the financial and
corporate markets) had to be cut back.
Sales taxes from restaurants and hotels, income taxes, and
property taxes from landlords not receiving rents. U.S. states and localities
are having a huge tax shortfall that is forcing them to cut back basic social
services and infrastructure. New York City mayor de Blasio has warned that
schools, the police and public transportation may have to be cut back unless
the city is given $7 billion. The CARES act passed by the Democratic Party in
control of the House of Representatives made no attempt to allocate a single
dollar to make up the widening fiscal gap. As for the Trump administration, it
was unwilling to give money to states voting Democratic in the presidential or
governorship elections.
The irony is that just at the time when a pandemic calls for public
health care, political pressure for that abruptly stopped. Logically, it might
have been expected the virus to have become a major catalyst for single-payer
public health care, not least to prevent a wave of personal bankruptcy
resulting from high medical bills. But hopes were dashed when the leading torch
bearer for socialized medicine, Senator Bernie Sanders, threw his support
behind Joe Biden and other opponents for the presidential nomination instead of
focusing the primary elections on what the future of the Democratic Party would
be. It decided to focus the 2020 U.S. election merely on the personality of
which candidate would impose neoliberal policy: Republican Donald Trump, or his
opponent running simply on a platform of “I am not Trump.”
Both candidates – and indeed, both parties behind them –sought to
downsize government and privatize as much of the public sector as possible,
leaving administration to financial managers. Past government policy would have
restored prosperity by public spending programs to rebuild the roads and
bridges, trains and subways that have fallen apart. But the fiscal squeeze
caused by the economic shutdown has created pressure to Thatcherize America’s
crumbling transportation and urban infrastructure – and also to sell off land
and public enterprises, basic urban health, schools – and at the national
level, the post office. Fiscal budgets are to be balanced by selling off this
infrastructure, in lucrative Public-Private Partnerships (PPPs) with financial
firms.
The neoliberal rent-extractive plan is for private capital to buy
monopoly rights to repair the nation’s bridges by turning them into toll
bridges, to repair the nation’s roads and highways by making the toll roads, to
repair sewer systems by privatizing them. Schools, prisons, hospitals and other
traditionally public functions. Even the police are to be privately owned
security-guard agencies and managed for profit – on terms that will provide
interest and capital gains for the financial sector. It is a New Enclosures
movement seeking monopoly rent much as landlords extract land rent.
Having given $10 trillion dollars to support financial and
mortgage markets, neoliberals in both the Republican and Democratic parties
announced that the government had created so large a budget deficit as a result
of bailing out the banking and landlord class that it lacked any more room for
money creation for actual social spending programs. Republican Senate leader
Mitch McConnell advised states to solve their budget squeeze by raiding their
pension funds to pay their bondholders.
For many decades, public employees accepted low wage growth in
exchange for pensions. Their patient choice was to defer demands for wage
increases in order to secure good pensions for their retirement. But now that
they have worked at stagnant wages for many years, the money ostensibly saved
for their pensions is to be given to bondholders. Likewise at the federal
level, pressure was renewed by both parties to cut back Social Security,
Medicare and Medicaid, with Obama’s 2010 Simpson-Bowles Commission on Fiscal
Responsibility and Reform to reduce the deficit at the expense of retirees and
the poor.
In sum, money is being created to fuel the
financial sector and its stock and bond markets, not to increase the economy’s
solvency, employment and living standards. The corona virus pandemic did not
create this shift, but it catalyzed and accelerated the power grab, not least
by pushing public-sector budgets into crisis.
It doesn’t have to be this way
Every successful economy has been a mixed public/private economy
with checks on the financial sector’s power to indebt society in ways that
impoverish it. Always at issue, however, is who will control the government. As
American and European industry becomes more debt ridden, will they be
oligarchic or democratic?
A socialist government such as China’s can keep its industry going
simply by simply writing down debts when they can’t be paid without forcing a
closedown and bankruptcy and loss of assets and employment. The world thus has
two options: a basically productive public financial system in China, or a
predatory financial system in the United States.
China can recover financially and fiscally from the virus
disruption because most debts ultimately are owned to the government-based
banking system. Money can be created to finance the material economy, labor and
industry, construction and agriculture. When a company is unable to pay its
bills and rent, the government doesn’t stand by and let it be closed down and
sold at a distressed price to a vulture investor.
China has an option that Western economies do not: It is in a
position to do what Hammurabi and other ancient Near Eastern palatial economies
did for thousands of years: write down debts so as to keep the economy resilient
and functioning. It can suspend scheduled debt service, taxes, rents and public
fees from having to be paid by troubled areas of its economy, because China’s
government is the ultimate creditor. It need not contend with politically
powerful bankers who insist that the economy at large must lose, not
themselves. The government can write down the debt to keep companies in
business, and also their employees. That’s what socialist governments do.
The underlying problem is
finance capitalism. Its roots lie at the heart of Western civilization itself,
rejecting the “circular time” permitting economic renewal by Clean Slates in
favor of “linear time” in which debts are permanent and irreversible, without
public oversight to manage finance and credit in the economy’s overall
long-term interest.
It often is
easier to get rich in such times of disaster and need than in times of normal
prosperity. While the U.S. economy polarizes between creditors and debtors, the
stock market anticipates fortunes being made quickly from the insolvency of
business with assets and property to be grabbed. Coupled with the Federal
Reserve’s credit creation to support the financial and real estate markets,
asset prices are soaring (as of June 2020) for companies that expect to get
even richer from the widespread distress to come in autumn 2020 when evictions
and foreclosures ae scheduled to begin again.
In that
respect, the corona virus’s effect has been to help defeat the financial
sector’s enemy, governments strong enough to regulate it. The fiscal squeeze
resulting from widespread unemployment, business closedowns, rent and tax
arrears is being seized upon as a means of dismantling and privatizing
government at the federal, state and local levels, at the expense of the
citizenry at large.
Notes
[1] WHEN
CHINA SNEEZES: From the Coronavirus Lockdown to the Global Politico-Economic
Implications, Edited by Cynthia McKinney, Chapter 9, Economic Impact.
[2] I
provide a detailed history of Clean Slate acts from the Bronze Age down through
Biblical times and the Byzantine Empire in “… and
forgive them their debts” (ISLET 2018).
[3] I
provide the details in Killing the Host: How Financial Parasites and
Debt Destroy the Global Economy ((SLET, 2015).
[4] Lawsuits
are exploding over the role of insurance companies supposed to protect business
from such interruptions. See Julia Jacobs, “Arts Groups Fight Their Insurers
Over Coverage on Virus Losses,” The New York Times, May 6,
2020, reports that “insurance companies have issued a torrent of denials,
prompting lawsuits across the country and legislative efforts on the state and
federal levels to force insurers to make payments. The insurance industry has
argued that … fulfilling all of these requests would bankrupt the industry.”
[5] Conor
Dougherty and Peter Eavis, “In Commercial Real Estate, the Domino Effect
Escalates,” The New York Times, June 9, 2020.
https://www.unz.com/mhudson/how-an-act-of-god-pandemic-is-destroying-the-west/
