Jussi: So welcome all and welcome Michael. Good to have you here again. How are you?
Hudson: It’s good to be back.
Jussi: Our pleasure as usual. Let me just introduce you shortly first. I think most people know quite a lot about you. I’ll make it short. You have been an advisor to governments, warned correctly about the debt crisis in Latin America and the great financial crisis 2008. You worked on Wall Street as an economist. One of your assignments was to calculate how much it was possible to indebt Latin American countries so all their export income was used to pay interest on loans. Another way to put it, how much can you put these countries in debt. As an associate at Harvard you led research into four thousand years of the history of debt, money and the economy, and published five volumes of colloquia on this history. Also you have written nine books on modern economic relations.
Last time you showed us that big financiers historically have acted to write the rules for their benefit. We call that financialization. For that to succeed, finance must influence our way of thinking, mainly with regard to how we view money, debt and value. Today we will go into value and price theory.
But before that, I think we could do a short summary of last time. You gave us a long-term view of money, debt and the economy. starting from Sumer and Babyloni to today. You showed that there have been thousands of years of power struggles with financial interests wanting to take control of a society and the economy, and it goes on today.
If you look at this picture we can simplify this by dividing history into two parts: First from Sumer until Rome. That’s the green part in the picture. During that time, debt jubilees by palaces to whom most debts were owed were common. Money and credit systems a tool to develop society. Local authorities used bookkeeping to keep track of transactions and to record debt and credit. And rulers used debt jubilees to cancel personal debt in order to preserve self-sustainability in society.
Then we jump over to the reddish parts here on the screen: from Rome to today. There we have the change and suddenly private financiers are in power due to their financial wealth. Money is viewed as wealth, a commodity and scarce. Debt is sacrosanct, otherwise no creditor will give loans and the economy will fail without financing. This made it possible to use private debt as an instrument to grab land from others as long as you can enforce it.
And you were also into, from your Canadian experience and a few other things, that government debt in your own currency is not the problem. High private debt or government debt in foreign currency is a cause for crisis. We also have had Steve Keen here and he showed this clearly, even though common thinking seems to be the other way around. I tried to make that short, is there anything you like to add on that Michael?
Hudson: That’s basically it. You mentioned that financiers write the rules for their own benefit. These rules are called constitutions and bodies of law. Pro-financial laws have been the distinguishing feature of Western civilization since classical antiquity. That represented a sharp break from earlier Near Eastern practice. Greece and Rome didn’t have kings, at least after the kings were overthrown by Rome’s oligarchy early in its history. So the elites succeeded in blocking the tradition of Near Eastern monarchies cancelling personal debts and preventing an oligarchic financial class from emerging.
That is what makes Western civilization so different from everything that went before. Because without kings, without strong central government, or what the Greeks called tyrants, the oligarchy gained control, and managed democracy by a number of political tricks. Like the pro-boule in Athens, the Roman Senate could decide what the public assembly was allowed to discuss. Rome’s oligarchic constitution let everybody vote, but a rich landowner’s vote counted for hundreds of times more than the vote of most people. It was much like the United States today, where the donor class’s campaign contributions to U.S. politicians far overshadow what most voters want. The political rules in the United States reflect the donor class rather than democracy, just as in ancient Rome.
Jussi: Okay so Rome was the cradle for what we see today.
Financialization’s business plan: Privatizing rents and paying them as interest and fees
Jussi: Okay, thanks. Let’s discuss financialization. Can you tell us a bit about what it is, what is its business plan, and what foundation does it stand on? How is it played out in today’s world? I think you said a bit about it, but please tell us more.
Hudson: Financialization requires going into debt in order to get basic needs – housing for instance. Instead of paying rent to the landlords, like you did ever since feudalism through the 19th century, housing now is bought on credit. So the rent that used to be paid to landlords is now paid to the banks as interest. Renters pay interest, and over the course of a 30-year mortgage the banks end up receiving more money and interest than the seller receives when he or she sells the property. So the idea of paying rent as interest for a loan to get property is how commercial real estate investors as well as homeowners operate.
This debt leveraging goes right throughout the economy. Instead of funding pensions or healthcare on a pay-as-you-go basis as they do in most of Europe, current income has to be set aside in advance and invested in the financial markets – in stocks and bonds, or in just plain financial gambling. The hope is to make money financially. But the way that the financial sector makes money involves exploiting labor. So labor obtains its pensions by financing the exploitation of labor in order go get financial returns to pay its pensions. That’s what Marx called an internal contradiction.
The financialization process is basically anti-labor. Inasmuch as the policy aim of financialization is privatization, it wants to become the government. Financialization wants the banks to be the government and allocate credit and resources, not democratically elected officials. So financialization and libertarian free markets aim at centralizing control in the hands of banks. You have a more centralized control under financialization than you do under democracy or even many state-run economies that are controlled by the financial sector.
That sector uses this control to force the state to sell off its public enterprises, railroads, pension plans, it’s healthcare and all of this, and to privatize education, healthcare and other basic social utilities. Financial charges, management charges and stock buybacks are built into the cost of providing these basic needs. So financialization sharply increases the cost of the economy and it increases the cost of the economy in the form of rents, interest and financial charges paid to the Finance, Insurance and Real Estate FIRE sector – the FIRE sector, in a way that ends up shrinking the economy and preventing its ability to pay the debts. So financialization leads to crises, because its business plan is to get all the money for itself and impoverish the economy. But by impoverishing the economy, it does what Rome did, it leads to austerity and a Dark Age.