https://www.unz.com/mhudson/us-economy-is-based-on-a-ponzi-scheme/
MICHAEL HUDSON: Yes, the whole problem stems exactly from 2008 or more particularly, 2009, when President Obama took office. His solution to the junk mortgage crisis, the bank fraud crisis, was to turn the economy into a Ponzi scheme.
He needed to bail out the banks. The banks had made so many fraudulent and bad loans, that exceeded the ability of these banks to collect on their high-interest, junk mortgages that had been given, that the major banking companies were in negative equity.
What was the solution? The solution was a zero interest-rate policy, ZIRP. The Federal Reserve lowered interest rates from the high crisis levels in 2008 and 2009 way down to 0.1%, which is what banks could borrow for.
The Federal Reserve was able to create electronic money on its computers to lend to the banks at a very low interest rates and said, “Well, banks, you have as much money as you want, at 0.1%, that we are providing you to lend out to the economy, to support the price of real estate, stocks, and bonds, so that we will restore the negative equity that the reckless banking sector has created”.
Well, the result is that the banks did two things.
One, they could simply leave the 0. 1% money they borrowed with the Federal Reserve, and make a few percentage points for nothing, in their sleep, by just leaving it with the Federal Reserve, because the Federal Reserve said, in effect: “Our job is to transfer money from the private economy into the banking sector, to rescue the financial sector, because that’s what central banks do; we represent the commercial banks”.
“So we’re going to begin paying interest on the bank reserves”, which the Fed hadn’t done before. “But, all the rest of the money, we want you to lend out to the economy, to make as much interest rate margin, the increase in what you charge to borrowers over what you can borrow, the cost of your borrowing from us, which is almost nothing”.
Well, the banks weren’t set up to evaluate loans to particular companies. They usually make money on collateral being pledged for their loans. Bank credit isn’t extended, in the United States or Britain, to finance industrial capital investment. That’s the job of the stock market, if anything, or of companies to reinvest their earnings.
Banks lend money for assets, real estate, stocks, and bonds, already issued, already in existence. So they lend money out to intermediaries, saying, “You do the job; you find the companies to take over”.
You then begin to have private capital take over companies and make money by essentially looting them. Thames Water in England is typical of how you loot a company. Hospitals, for instance, were a target of these private equity companies. They would go to a hospital saying, “We’ll sell off your real estate, to a separate entity. Then you agree to use the capital gain, the money that you make selling the real estate, to pay a special dividend. And now, instead of owning the real estate, you will now be paying rent on a long-term lease for the real estate. And we’ll lend you the money for this, and you’ll be paying us credit, management fees, late fee penalties”.
The result is that a lot of hospitals went bankrupt. Private equity proceeded to bankrupt whole swaths of the American economy. A new word was added to the English language: enshittification — just cutting back the quality of what companies were doing, slashing expenses, working labor harder, making them work overtime, cutting.
When there was an attrition of the labor force, when workers left, you let the remaining workers pick up all of the slack. Productivity went up. So you had an extractive, predatory financial system in the United States.
Meanwhile, this predatory financial system was making so many gains for the companies that were financialized and using their profits not to invest in new capital formation and new factories and means of production; all of that was done abroad; it was sent to China and other Asian countries.
92-94%, of corporate cash flow profits and all the surplus they had was spent either on dividend payouts or buying their own stocks. So you had companies creating the stock market boom by buying their own stocks back, to push up the price, so that the earnings they had would be spread over a shrinking and shrinking number of shares, making the illusion of increasing earnings per share.
The earnings weren’t really earned. When you make money in your sleep, it’s not earned; it’s economic rent, meaning unearned capital that you make in predatory ways.
So the financial system has been turned into a predatory system. And all of this enormous growth in financial wealth since 2009 has accrued to the financial and real estate sector, dominated by the wealthiest 10% of the population.
40% of the American population doesn’t have any savings at all. They’re living on the brink.
And now the costs are going up. They’re having to fall further and further behind on their credit card debt, their personal debt, their automobile debt, student loans especially. So they’re not able to pay. And the bottom 60-80% finds itself hardly increased at all. What used to be the middle class isn’t really in the middle anymore.
It turns out the middle-class people are wage earners, just like the blue-collar earners. They have to pay rising costs for either for rent or for their mortgages to buy homes, whose price is inflated by the low interest rates that enable a larger and larger debt to be created on the basis of these low interest rates.
Well, now that interest rates are going up, you can imagine the cost squeeze.
There’s a huge wave of defaults happening all the way from consumers — that’s polite word for wage earners, in America — to corporations that are being squeezed. Tthis is all part of the backwash that — being a Ponzi scheme, essentially, the way that you enable the economy to keep paying its debts if you lend the debtor the money to pay the interest.
That’s what credit card holders do. They will send in the payment, a monthly payment due on their credit cards, and their credit card debt is going to go up and up and up, and with it their monthly payments. But as long as the credit card companies will lend to the consumers the money, the credit, to remain current on their obligations and not have to pay penalty fees, then you’re going to be able to keep the Ponzi scheme going.
A Ponzi scheme is one that needs more and more money paid into it to keep the exponential growth rate growing.
The same thing happens for corporations. As corporate sales fall off, as labor squeezed — if, in the United States, wage earners have to spend more money on gasoline, on electricity prices that are going up, partly as a result of gas prices, on all of these monopolized expenses, then they’re going to have less and less money to spend on the goods that they produce.
That means that companies that produce goods and services for sale in the United States are going to have lower sales, and lower profits out of which to pay the rising debt and the interest on their carrying charges that they are mounting up, and that are being increased as the economy is pushed into financial crisis, as a result of the move to a war economy. It means that there are going to be layoffs, that companies are going to be closing down.
Farmers cannot afford to do farming anymore. Chemical companies cannot afford to produce what they were producing before. Electric companies cannot afford to pay the higher prices for their gas, or oil, without regulatory agencies increasing their electric rates. And that means that firms using electricity are going to have to close down their offices.
We’re in for the equivalent of what was the Great Depression. And depressions are not inflationary. They’re deflationary. That’s what nobody seems to get.
They think, “Oh, if interest rates go up, then a wealthy people who have a bond are not going to be able to buy as many goods and services as they could. And we have to stabilize the purchasing power of their credit by lowering the purchasing power of labor”. The economy is to be sacrificed to the financial sector. That’s what neoliberalism is all about. That’s what finance capitalism is all about, and what makes it so different from industrial capitalism.
We’re in a post-industrial society, and that’s a financial society run by the banks, through their control of the central banks, which are controlled by the government, [which is run by politicians] whose campaigns are financed by contributors from the finance and the real estate sector.
So it’s all sort of a self-feeding circular flow. And Ponzi schemes always end in a crash. That’s what’s leading other investors to try to withdraw from the American and European economies. But where can they withdraw to? That’s the problem. What can they do?
A Hebrew hammers the White West: Jews hate Christianity because it represents White Europe (image from the Guardian)
