Michael Hudson and Robert Kuttner from Democracy Now

Friday, February 13, 2009

Robert Kuttner and Michael Hudson on the Obama Administration’s $789 Billion Economic Stimulus Package and $2.5 Trillion Bank Recovery Plans

Both the House and Senate are set to vote today on the $789 billion economic stimulus package. The vote follows weeks of political wrangling that culminated in compromise legislation struck on Wednesday. The final size of the package is less than what both the House and Senate originally passed and far smaller than what many economists say is needed. But it still marks the nation’s largest economic rescue program since Franklin Roosevelt launched the New Deal. [includes rush transcript]
Guests:

Michael Hudson, Distinguished Research Professor at University of Missouri, Kansas City. A former Wall Street economist, he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire. His latest article, “Obama’s Awful Financial Recovery Plan,” is online at counterpunch.org

Robert Kuttner, Journalist and economist. He is the co-founder and co-editor of The American Prospect magazine, as well as a Distinguished Senior Fellow of the think tank Demos. His latest book is called Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.

JUAN GONZALEZ: Both the House and Senate are set to vote today on the $789 billion economic stimulus package. The vote follows weeks of political wrangling that culminated in compromise legislation struck on Wednesday. The final size of the package is less than what both the House and Senate originally passed and far smaller than what many economists say is needed. But it still marks the nation’s largest economic rescue program since Franklin Delano Roosevelt launched the New Deal.

The final bill includes $507 billion in spending programs and $282 billion in tax relief. Independent Senator Joseph Lieberman hailed it as a bipartisan achievement.

SEN. JOSEPH LIEBERMAN: We came a long way in a relatively short time to achieve something big and urgently necessary for our country and our people. And when I say “we,” I mean the President, the House, the Senate, members of both political parties. Everybody gave something in these negotiations to achieve something bigger for our country and our people.

JUAN GONZALEZ: House Democrats have voiced criticism that the final legislation more closely resembles the less-expensive measure approved by the Senate. $20 billion in education funding was cut, along with $30 billion for state governments to prevent reductions in social services to the poor and unemployed. But some key boosts to social programs were preserved, including a $20 billion allotment for food stamps.

Most Republican lawmakers have opposed the stimulus. The partisan divide extended to the White House Thursday, when Senator Judd Gregg of New Hampshire withdrew his nomination as Commerce Secretary. The Republican, Gregg, cited what he called “irresolvable conflicts” with the economic stimulus plan.

SEN. JUDD GREGG: Well, I want to begin by thanking the President for considering me for the position of Secretary of Commerce. This was truly a great honor, and I had felt that I could bring some very positive and instructive things to this administration and was looking forward to that. However, as we proceeded down the road here since the nomination was made, it’s become clear to me that—you know, I’ve been my own person for thirty years. I’ve been a governor, and I’ve been a congressman, I’ve been a senator, made my own decisions, stood for what I believe in. You know I’m a fiscal conservative, as everybody knows, fairly strong one.

And it just became clear to me that it would be very difficult, day in and day out, to serve in this cabinet or any cabinet, for that matter, and be a part of a team and not be able to be 100 percent with the team, 110 percent with the team. You know, you can’t have a blocking back who only pulls off every second or third play.

JUAN GONZALEZ: Gregg is Obama’s second Commerce pick to withdraw from nomination, following New Mexico Governor Bill Richardson.
Meanwhile, more federal aid for the nation’s banking system is likely on the horizon. In a new report, New York University economist Nouriel Roubini estimates financial firms stand to lose up to $3.6 trillion on troubled loans and devalued assets. Echoing other economists, Roubini concludes the US banking system is “effectively insolvent.”

AMY GOODMAN: For more on the economy, we’re joined now by two guests. Here at the firehouse studio, Michael Hudson, Distinguished Research Professor at University of Missouri, Kansas City. A former Wall Street economist, he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire. His latest article, “Obama’s Awful Financial Recovery Plan.” It’s online at counterpunch.org.

Joining us from Washington, D.C., Robert Kuttner, journalist and economist, co-founder and co-editor of The American Prospect magazine, as well as Distinguished Senior Fellow at the think tank Demos. His latest book is called Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.

Michael Hudson, let’s begin with you here in New York. Why do you think that Obama’s financial recovery plan is “awful”?

MICHAEL HUDSON: Because it’s not leading to recovery at all. It’s now up to $12 trillion. It’s a giveaway to the banks, to the creditors, without a single penny for actual debt reduction. And I had thought that at least half a percentage point, $50 billion, was going to be to write down troubled mortgage debtors, but it turns out that not a penny of mortgage debt is going to be written down. When the banks have lent more money than a mortgage owes, with 38 percent, the government is going to create its own debt to come in and make up the difference, so the debt is going to continue to grow exponentially, and it’s way beyond the ability of the economy to pay. If people have to pay the amount of debt that they have now, there won’t be any money to buy goods and services, companies will not sell as much, they’ll invest less, they’ll hire less, and they’ll continue to downsize.

And what’s happened is that this is the greatest transfer of wealth really in American history. It’s doubled the American debt. The closest parallel I can think of is William the Conqueror’s conquest of England. He came with a military band, conquered the land and imposed taxes over the whole land, basing it all on the Domesday Book, what—the rent could be squeezed out. In this case, the rip-off has been non-military. The bankers have done insider dealing to get the government to give them or guarantee them $12 trillion of bad loans they’ve made, many of them fraudulent.

And then they’re trying to blame the poor for all this, as if the poor are somehow exploiting the rich by taking out more loans than they can pay. Yesterday, Senator McCain said—he warned that all of this debt was going to be paid by the future generation, and we’re exploiting them. But that’s not how to think of it at all. When you have a debt that goes to a future generation, you have taxpayers paying to bondholders, just like in the nineteenth century you had the western states paying to the eastern states. So what you’ve done is given $12 trillion to the richest one percent—or ten percent of the population, and you’ve indebted the economy and the government to them for the next hundred years. You’ve created a new class of ruling families.

And Obama has—by doing this, he’s broken with every president in history. Whenever the debts have exceeded the ability to pay, they’ve been written down to the ability to pay, either through bankruptcy or through conscious government write-down. But instead of writing down the debts, he says the creditors are not going to lose money, despite what Mr. Roubini said. They may have lost money, but they will be made whole by the government. And that’s crazy. That’s why every economic chart you see, there will be a gradual rise and then a sudden collapse. Everything is turned into a vertical fall. Prices, international shipping, employment, profits, they’ve all hit a wall. And there’s no way that the economy can recover when people have to pay interest and amortization instead of buying goods and services, or companies will have to pay their junk bond holders instead of investing in new equipment.

JUAN GONZALEZ: Let me ask Robert Kuttner—I don’t know if your analysis is as pessimistic of the recovery package. But also, I’d like to ask you why, if everyone agrees that the heart of the original trigger for this crisis was the mortgage crisis, is the—the helping out of homeowners continues to be pushed back in the response to it?

ROBERT KUTTNER: Well, my analysis is somewhat different from Mr. Hudson’s analysis. I don’t think this adds up to $12 trillion, and we can have a little debate about that. But I do think that the plan does not go nearly far enough and, in some respects, is just completely wrongheaded.

I think you have to divide what needs to be done into three areas. Number one, we need to refinance mortgages directly so that aid goes directly to homeowners, and the banks and the bondholders who profited from these Mafia loans take the hit, and homeowners stay in their homes. That’s what Roosevelt did in the ’30s with the Home Owners’ Loan Corporation, where the government refinanced mortgages directly. So that’s the first big problem. They haven’t done anything, and the approach they’re taking, when they do get around to it, is wrong, because it bails out bondholders and bankers rather than homeowners.
Secondly, the stimulus is too small by about a factor of three. Just to take one example, state and local governments are going to be out of revenues to the tune of $400 to $500 billion over the next two years. The money in the stimulus package, about $140 billion. So, you know, these are layoffs of teachers and police and fire and cuts in programs that are completely needless. All the government has to do is write a check, and state and local services can continue.

The biggest problem of all is the Geithner plan to try and bring hedge funds and private equity companies with loans from the Federal Reserve as a way of propping up banks. It’s resuscitating the same system that got us into this mess. It’s totally wrongheaded. All of the economists who I respect, from Joe Stiglitz to Paul Krugman to Nouriel Roubini, all argue that, sooner or later, we’re going to have to nationalize the banks, clean out the bad assets, make the bad actors take a hit, replace corrupt management, and clean the slate so that we start out with new—with viable banks that can get the credit system operating again. And the longer we defer that with more pyramid schemes financed by the Fed or the Treasury or the taxpayers, the deeper the hole is.

You asked the question, why we’re not doing it right. The problem is political. On the one hand, Obama has hired a lot of Bob Rubin’s protégés, who aren’t even advocating the right policy. On the other hand, the Republicans are stonewalling him across the board. And so people like Susan Collins, senator from Maine, who are pretty conservative get to block this thing. The only way to end this blockage is for Obama to go to the country and to become a lot more radical, because the times demand radical solutions.

AMY GOODMAN: We’re talking to economists Robert Kuttner and, here in New York, Michael Hudson. We’ll be back with them in a minute.

AMY GOODMAN: Our guests are two economists. Robert Kuttner joins us from Washington, D.C. His latest book is Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency. Michael Hudson is also with us. He’s here in New York. He has also written many books. His latest article, though, is “Obama’s Awful Financial Recovery Plan.” Juan?

JUAN GONZALEZ: Yeah, Michael Hudson, I’d like to ask you—Robert Kuttner just mentioned the whole issue of the Obama administration attempting to bring in private equity firms to help bail out the system. But isn’t part of the problem of these private equity funds, hedge funds, that they are even less transparent than your average corporation, which at least is filing SEC reports and has boards of directors and has to respond to shareholders to some degree? These are even more of the problem of lack of transparency that we’ve had in the financial system generally.

MICHAEL HUDSON: Well, AIG insurance company has been given $135 billion by the US government to pay hedge fund bets that it was on the wrong side of. Now, to invest in a hedge fund, you have to sign a document with the Securities and Exchange Commission saying you have over a million dollars to lose, and you can lose all your money, and it’s not going to affect your life, that you can take the risk, and you’ll be OK if you lose it all. That’s what you have to do to get a hedge fund.
These are the people who Obama is rescuing, not the people who have less than a million dollars and who really have risked their life in buying the houses, the homes, and losing their jobs. He’s protecting the people who could lose all their money, and they’d function, and not protecting the people who actually need help. That’s the irony of all this.

'And it’s almost unprecedented that someone who was elected with an overwhelming mandate for change should then feel that he has to depend on Republicans, whereas you had George Bush come in with maybe a half a percentage point victory and say he has a mandate to make the most sweeping changes in history. There’s a complete disconnect there.

AMY GOODMAN: So how does he get it passed in the Senate then?

MICHAEL HUDSON: How did—

AMY GOODMAN: How would he get his plan passed in the Senate then, if he doesn’t bring some Republicans on board?

MICHAEL HUDSON: A president is able to use a bully pulpit. He had a lot of public—enormous public support. He could have gone to the people, like Roosevelt did, and said, “Here is my plan, and I’m going to protect the workers and American industry who are productive. I’m not going to support the extractive sector.” And instead, he talked as if he was supporting labor, he talked as if he was supporting industry, but all the money he’s been given—has been given to essentially Wall Street and, as Mr. Kuttner said, to Mr. Rubin’s protégés.

And if you want to see a kind of scenario where this is leading, you can look at what Mr. Rubin did in Russia and the Baltic countries and the post-Soviet economies. Right now, they’re all broke, and there’s no visible means of support. And in a way, you could say that countries like Latvia represent a foretaste of what we will be moving towards if the program isn’t drastically inverted to help the actual economy instead of the financial claims on the economy. Finance is extracting the income from the economy, not producing it, and they’re the people who are getting the benefit and getting the guarantees.

AMY GOODMAN: What’s a zombie bank?

MICHAEL HUDSON: Well, it’s very funny. A zombie bank is supposed to be a bank that has negative equity. And the word “zombie” comes basically from parasitology. Everybody—people often say the financial sector is a parasite extracting. But a parasite does more than that. It doesn’t just take nourishment from the host; it takes over the host’s brain, so the host thinks it’s actually part of the host’s body and, in fact, it’s its child, and it nurtures it. And the financial sector represents itself as being part of the economy. Mr. Geithner, two days ago, said that we can’t have a recovery of the economy without making the banks healthy and whole and profitable. And that’s just the wrong thing.

We can’t have a recovery in the economy until we let the banks take the losses and we let the hedge funds essentially take their losses. There was no need to give $135 billion to AIG, which yesterday was raided by Britain’s office of serious crimes for financial fraud, when the US government refused to move against it for fraud. It’s paying the fraudsters instead of paying the victims, and then it’s blaming the victims as if somehow the bank’s a zombie instead of the bank turning the economy into a zombie economy run by insiders in Washington giving themselves what Bloomberg Financial said was $9 trillion two months ago and two days ago an added two-and-a-half trillion, which, to me, makes up $12 trillion, rounding off.

JUAN GONZALEZ: Robert Kuttner, I’d like to ask you—a couple of days ago, the top bankers in the country testified before Congress. I was struck that there was a similar type of testimony conducted by the top bankers in Britain recently before Parliament. The difference was that all of the British bankers are basically out of jobs. They were testifying after losing their jobs, whereas the American bankers, except for John Thain at Merrill Lynch, most of them still have their jobs. Your sense of how the banking CEOs are being dealt with in this country?

ROBERT KUTTNER: Well, they’re being coddled. I mean, if you look at Citigroup, the Treasury has put in $45 billion of direct equity capital into Citigroup. It’s guaranteed another $306 billion of toxic assets. You can buy all of Citigroup for about $25 billion. So the taxpayers effectively own it. What the government ought to do is exercise the rights of ownership, go in there, put a majority of public appointees on the board, get rid of existing management. I think in the case of Citigroup, the best thing you could do is break it up, because it is a zombie bank in the sense of it being insolvent. And most of the large banks are insolvent. Their debts exceed their capital. And what Geithner is doing, he’s trying to just disguise this by one more effort to double down using the same kind of financial razzle dazzle that got us into this trouble. So it would be much cleaner to put these banks into receivership.

And if that sounds radical, it is radical, but it’s important to keep in mind that the FDIC, which is the one agency that’s behaved responsibly in this whole mess, the FDIC does this every day of the week. If a bank that has FDIC insurance goes bust, the FDIC goes in, they shut the thing down, they fire incumbent management, the shareholders lose everything, they take it over as a publicly owned bank. The biggest case of this was a bank called IndyMac in California, one of the worst of the subprime malefactors. And the FDIC went in, and they took it over. They put 150 people in to run it. And now they’re gradually selling it back to private owners. So you could do this with the biggest banks, and I think you need to do it with the biggest banks. It does nothing but defer the day of reckoning and dig the hole deeper to pretend that an insolvent bank can somehow be kept on life supports with more and more infusions of taxpayer money.

AMY GOODMAN: Economist Michael Hudson?

MICHAEL HUDSON: Mr. Kuttner is quite right to single out Citibank and the large banks. What the newspapers call a subprime problem is really a big bank problem. Almost all of this negative equity is concentrated in four or five, maybe ten, of the very biggest banks.

And what have they done with the bailout money? They’ve gone and bought the small and healthy banks, infecting the small healthy banks with their philosophy of salesmanship. Now, on the way over here, at Heathrow Airport, they had the British investigation in Parliament on the BBC television in the lounge. And it turned out that the heads of every one of these British banks who were fired were salesmen. None of them were bankers. They were into just selling. And when I was on Wall Street, that was my experience. They had stopped doing research. They had stopped doing analysis. And what they wanted were people who could sell bonds and sell mutual funds. And the whole idea has turned into salesmanship.

For Citibank, their practice for years was what they called stretching the envelope. And what that means is breaking the law and daring the government to try to move against it, by saying, “If you move against this, if you close us down or prosecute us for stretching the envelope,” such as when Citibank bought—merged with the insurance company in violation of the Glass-Steagall Act, “then we’ll bring the whole economy down in a crisis.” And they’re holding the economy hostage in order to extract this money from the government. That’s the real problem. That’s what frightens the senators, and I’m sure that’s what frightens Mr. Obama, that these guys are threatening to wreck the economy if we don’t give them everything they want.

JUAN GONZALEZ: And, Robert Kuttner, from the perspective of ordinary Americans who are dealing with not only losses of jobs and the situation with the—so many homes now worth less than the mortgages that are out on them, I was struck recently by some of these major banks increasing the interest rates on their credit cards. Now, here you have interest rates in the United States at an all-time low, yet banks like Citibank are charging 21 percent interest on the credit card. They’re increasing the interest rates. How can ordinary Americans have an impact on trying to get the leaders in Washington and the Obama administration to change some course now in this—in their efforts to develop a rescue package?

ROBERT KUTTNER: Well, ordinary Americans should be kicking and screaming. There should be ceilings on what banks can charge on credit cards, like they were in the old days when you had usury laws.

You know, banking, done properly, is very simple. Someone applies for a loan; a loan officer assesses the credit worthiness of that borrower, puts an interest rate on the loan. And the banking system is almost like a public utility. It’s not a big drain on the real economy. It supplies capital and credit to the real economy. And when you get these exaggerated, convoluted schemes that are bets on bets on bets, you create the kind of leverage that then comes crashing down when you have something like subprime. So I think the historic task of this administration is a radical simplification of the banking system so that the banking system doesn’t need to charge 23 and 30 percent on credit cards to try and recoup the loss that it made gambling on subprime bonds.

AMY GOODMAN: I want to ask about the stimulus package. It’s supposed to be voted on today. It is the nation’s largest economic rescue program since FDR. Is it big enough? And talk about the Judd Gregg, as well, Michael Hudson, the [inaudible]—
MICHAEL HUDSON: Well, in any rescue program, the first question is, who’s being rescued? And who’s being rescued are apparently the very wealthy, not the people who one would think is being rescued. And then, how are they being rescued? They’re being rescued by making the lower income brackets pay to the higher income brackets. So this sort of turns everything, the usual Progressive Era idea, upside-down. It’s a regressive idea. And it almost makes you wonder whether America is becoming a failed economy. Mr. Kuttner was right, quite right, when he said you have to transform banking. And if you don’t transform banking along the lines that he and I seem to agree on, then the economy will fail. It’s that serious.

AMY GOODMAN: Robert Kuttner, your response to the economic stimulus plan? Do you think it’s big enough?

ROBERT KUTTNER: I think it’s important that Mr. Hudson and I and your listeners and viewers keep straight the difference between the banking rescue and the stimulus package, which are two very different pieces of legislation. I think it was a real political blunder to put them forward in the same week, because people tend to confuse them.

The banking rescue put forward by Mr. Geithner is a complete disaster. The problem with the stimulus package is not that it helps the wrong people. For the most part, it helps the right people. But it’s too small by a factor of about two-thirds, because the stimulus package is about two-and-a-half percent of GDP per year for two years. The economy is declining at the rate of about five percent of GDP. I mentioned before the state and local government figures, where state and local government is out about three times the revenue that the stimulus package is going to replace. So I think some of the things in the stimulus package are absolutely admirable: down payments on high-speed rail, on clean energy, on infrastructure repair, on food stamps, on unemployment compensation, on public health. But the problem is, even though $789 billion is a huge amount of money, given the scale of this collapse, it’s too small to do the job.

And I think in order to have any effect of any significance, they’re going to have to come back again by April, May, June, maybe as part of the budget process, and put even more money into it. And it is going to take an incredible persuasion job by the chief executive to persuade the American people that you need to spend another trillion, another trillion and a half. And you need to recapitalize the banks, but to do it right, by nationalizing them, but that’s going to take more money, too. And if you think of the controversy that he faced in getting a $789 billion package through Congress, imagine what’s going to happen when he comes back and says, “By the way, we need another trillion and a half.” And he has to be damn sure that that money doesn’t go to bankers, that it goes to ordinary Americans.

AMY GOODMAN: What about Judd Gregg? What’s the politics of this, Robert Kuttner?

ROBERT KUTTNER: Well, this was a miscalculation, a blunder. I think it’s an example of Obama’s excessive tendency to bend over backwards to be bipartisan. And, you know, sometimes when you bend over backwards, things happen that you can’t repeat in family broadcasting. And I think that’s what the Republicans are doing to Mr. Obama. So he’s going to have to do this with Democrats, and he’s going to have to make it embarrassing for Republicans to block him.

Republican senators and congressmen have people—and congresswomen have people in their districts who are hurting, too, just as much as Democratic legislators have people who are hurting. If he goes to the country, the way he did in Elkhart the other day or the way he did in Peoria, and spins out a narrative that ties the suffering of ordinary people to the failed policies that we need to reverse, he can really move public opinion. And he’s got to resolve to do that, and he’s got to think much bigger.