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Monday, April 16, 2012

Michael Hudson: Debt: The Politics and Economics of Restructuring « naked capitalism

Michael Hudson: Debt: The Politics and Economics of Restructuring « naked capitalism

By Lambert Strether of Corrente.
I imagine there will be more material to come on this year’s iNet “Paradigm Lost” conference in Berlin, but for now, here’s a teaser in the form of a video of Michael Hudson’s talk.
And how good it is to see somebody from UMKC doing some of that “new economic thinking” this year.
I made a transcript of part of Hudson’s presentation:
HUDSON [6:58] What you’re seeing today and for the last thirty years has turned around and inverted the last eight centuries of legal [and] economic development in the West. [Like I said: A "revolutionary oligarchy." --lambert] Ever since the Schoolmen of the thirteenth century developed the theory of just price and value theory, to ask what is a fair price for bankers to charge, and the answer was what is the cost of doing business.
[Watch for an unsmiling reaction shot 7:53-8:03 --lambert]
[7:22] Ever since that, the laws have been more and more rewritten to favor the debtors. You don’t have debtor’s prisons any more, you have personal bankruptcy laws that free individuals from debt, that free corporations from debt, but the idea of clean slates has only recently been developed on an economy wide scale. You had it for instance in the Brady Plan for Latin American third-world debt in the 1980s after Mexico said it couldn’t pay, but right now there is enormous resistance to applying that kind of a write-down to today’s situation. The problem is that not having a debt breakdown means debt deflation, and the debt deflation means a shrinking economy, and if the economic structure is not changed, there’s no way of getting out of the economic problem that you have.
[8:30] And the problem is that there’s not only the real problem of the debt overhang that was mentioned, there’s a problem of economic theory, and the illusion that all debts can be paid. The illusion that banks lend only to customers only for projects that are going to enable the customers to actually repay the loan; the bankers make a calcuation of what the customer can repay. But that’s not what happens at all.
[Watch for a wonderful smile at 9:30-9:36 --lambert]
[9:00] Back in the 1960s, I was Chase Manhattan Bank’s balance of payments analyst, and my job was to focus on the Latin American countries: Argentina, Brazil, and Chile, and my job was to calculate how much of a balance of payments surplus they could generate, and the idea of the bank marketing department was the entire economic surplus could be used to pay debt service to the seven major Americam banks.
[9:40] And pretty quickly we found out that there wasn’t any surplus to pay the banks, and there was an international department that got very upset because he said “Look, I get promoted for making loans, and the real estate guys are making all the loans, you’re telling us they can’t afford to repay!” And he took it up to David Rockefeller, we went across the street to the Federal Reserve bank, and the Federal Reserve bank said “It’s in America’s interest to make these loans to Latin America. Mr. Hudson, according to your calculations, Britain can’t afford to replay any more.” “That’s right. I don’t see any way in which it can get the money to repay the debt.” And the Federal Reserve man said “Ah! But did you take into account the fact that the US Treasury is always going to lend Britain the money to pay? We will never let it go down.” I said, “Well, that’s a deus ex machina from outside the system. Yes, you can lend them the money to repay.”
[10:30] And since David Rockefeller was a very good American citizen he believed in doing what the government wanted him to do, and took the lead on lending to our client in Latin America.
[10:42] The problem here is the economic models that we use. They don’t built debt into the economic models. They really don’t built the surplus into economic models in the sense that classical economists did.
Oh, and this is interesting:
[11:30] I want to get into the possible remedies for all of this. The basic approach to remedies I think was put forth about three hundred years ago in the state of New York when it was still a colony of England. And that’s something that’s still on the books of New York law, the fraudulent conveyance principle.
[11:52] British sharpies would come over and make loans to– they wanted to get into their own hands the rich farmlands of upstate New York. They would make loans to farmers that would be more than they could repay, and at that time you could ask for repayment of the debt whenever you wanted. So the British creditors would ask for payment before the crop was in.
[12:14] So the colony passed the fraudulent conveyance law. And that law said that if a lender makes a loan to a debtor that cannot be repaid in the reasonable course of business, the loan is declared null and and canceled.
I find the focus on history and real operations — as opposed to diagrams — very refreshing. Don’t you?
Hudson’s paper is very rich. Listen to the whole thing!

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