Source – michael-hudson.com
–“…The Federal Reserve is keeping the interest rates low so that it will pay people to bid against each other to borrow cheap money…So that’s the story from New York. The function of the central bank is to keep the commercial banks afloat so that they won’t lose so much money on their real estate portfolio that they end up wiping out the net worth, the stockholder’s equity”
Dream House, Nightmare Mortgage: Carry on! – By Michael Hudson
An interview with Australia’s Renegade Economists.
Karl: Listeners, it’s time to discuss with Professor Michael Hudson, the author of ‘The Bubble and Beyond’, ‘Forgive Them Their Debts’, ‘Super Imperialism’ and so many others. We’re lucky to have Michael with us yet again to continue our series of interviews and, Michael, here we are where, in Australia at least, we’ve made it through COVID, America is still being whacked by it. But our central banks, they’ve really put a lot of pressure on society, it seems like the mainstream economy is struggling, but Wall Street’s powering ahead and sitting behind that, of course, is the real estate market, which is also booming.
Yes, society’s economic fragility, it’s been weighed down by high land prices and record high debts, but central banks have taken the easy road and cut interest rates significantly. It seems like they only cut interest rates when the market’s faltering, but if property prices keep heading northwards, they won’t increase rates, they’re fine about that. This macroeconomic fragility, it’s undermining our resilience and it feels like central banks have nowhere else to go. Where do you see the role of central banks heading?
Professor Michael Hudson: You’re saying “our resilience”. Who is the “we” here? For the central bank, the “we” is their clients, the commercial banks, and their role in real estate is to keep the interest rates low so that this will support real estate prices, create a loan market for banks – and remember, 80 percent of bank loans in the United States and England, and probably Australia, are mortgage loans. So the function of central banks is to support the loan market for commercial banks. When you say “our”, you may be a real estate speculator, but if you’re part of the 99 percent, that’s not part of the “our” that the central bank are after. The “our” is the one percent. So you can say when the central banks say “we”, that’s the one percent. That’s the banks, the creditors, the bondholders of the banks and the stockholders of the banks. So for them, their business plan is to make real estate prices higher and higher so that anybody who wants to buy a home is going to have to borrow more and more and more from the bank and pay more and more interest in order to get a home or, if you’re a real estate speculator, to buy a home to rent out, because rental prices are going up.
Well, right now, certainly in America and in New York City, commercial prices are pretty far down. The prices that are going up are home prices. There have been so many office buildings close down. Today I had only the second trip into Manhattan that I’ve had in the last year, both trips were to the dentist, and because I wanted to buy a baseball magazine, I went out of my way. I went to Grand Central Terminal at 42nd Street and I knew that there used to be a big magazine store there where I could get my baseball annual to follow the White Sox coming up. Imagine my disappointment when not only was the magazine store closed, but all the stores in Grand Central are closed. So then I walked down toward Fifth Avenue and I found the restaurants were closed, the stores were closed, even the big steakhouse, which is a big corporate expensive restaurant, was closed. Walked down Tenth Avenue, most of the places were closed, boarded up. Finally, I found a Barnes & Noble store where I was able to get my baseball magazine, but all the rest of the Fifth Avenue was all closed down, Maddison Avenue closed down, just like here in Queens that are closed, and there was hardly anybody on the subway. And the reason everybody’s closed is nobody’s going into Manhattan. I felt like I was walking out here into Queens Park walking down Fifth Avenue. Everything was deserted where it’s usually very crowded. You know, on Fifth Avenue in the forties going to my dentist’s office, there was just hardly anybody there.
I have friends of mine, one friend has a commercial building in The Bronx, part of New York City, and he’s trying to sell it. It’s rented out, nobody is wanting to buy it and they say, “We’re all waiting for the big crash. We’re waiting for June”. In June in America the moratorium on rent arrears and debt arrears, mortgage arrears all expires. 50,000 New Yorkers are going to be kicked out of their houses or their apartments onto the street. Presumably, they’re going to finally be riding the subway, so they’ll get someone in the subway again. So there have been a lot of private capital companies that have formed in the last six months and they’ve all loaded up on private capital, they’re all waiting to come in and buy buildings at distressed prices. Homeowners that have lost their jobs, couldn’t pay the mortgage, they’re going to be foreclosed on, sold at a distressed price. Commercial buildings are going to be sold at a distressed price. The restaurants, as you know, have all been closed, all sorts of office buildings have been closed. So everybody’s waiting for the big crash. The Federal Reserve is keeping the interest rates low so that it will pay people to bid against each other to borrow cheap money and at least to try to buy the bank foreclosures at a good rate and bail out the landlords at a good rate and the landlords find that they can’t make payments because they’re finally able to begin to evicting the 50,000 tenants again.
So that’s the story from New York. The function of the central bank is to keep the commercial banks afloat so that they won’t lose so much money on their real estate portfolio that they end up wiping out the net worth, the stockholder’s equity.
Karl: Our eviction moratorium expires next week, so we have a raft of welfare cutbacks, along with the eviction moratorium. There’s also new rental tenancy laws that are scaring property investors. So we’ve got this dysfunctional rental market that’s oversupplied and rents are falling, but in the housing market everyone’s battling to try and get their little Australian dream going, with a backyard, that’s not an apartment. The survival skills are on show as people battle each other to try and find “the great Australian dream”, if it still exists at all.
Michael: Why not call it “the great Australian nightmare”, the debt nightmare?
Michael: What kind of a dream are we talking about? Don’t give them the euphemism. Get your own colloquialism or whatever you call it.
Karl: Yes, well, it’s a dream house with a nightmare mortgage, that’s for sure. A lot of these problems have built up because society has no flexibility anymore. There’s no resilience, we don’t have savings beyond one or two weeks, and so the role of high land prices has really thrown a straitjacket on society. For me, I just wonder whether central banks have become more enamoured to the political process, they’re more into short term political fixes, on keeping the music going, rather than recognising this pressure that high land and mortgage prices place on society. Here we are in eastern Australia, I’m lucky that my state’s survived, but we had incredible bushfires at the start of last year, the pandemic wiped things out, and now a “once in 100 year” flood that’s come through and wiped out most of the surrounds to Sydney. They’re really feeling it up there and I’m sure there’s going to be a lot of pain. But yes, this role of the central banks, there’s been talk about a change in monetary policy and a new era is coming through under this sort of “great reset” banner. Where do you sit on the role they’re playing?
Michael: Well, in America we have a “100 year” flood every five years now and that’s probably going to be for Australia also, because there’s a shift in extreme weather as the counterpart for global warming. So there are going to be a lot of floods. It’s going to be very expensive to buy housing insurance, flood insurance, and even if you buy the insurance, they don’t pay. You have to sue the company and usually, as soon as you sue an insurance company in America, they immediately charge off the value of your suit as if it’s an expense so they don’t have to pay income tax and then they try to stall for five years and, in the five years, make enough money off raising rates and speculation that they earn enough so that it won’t cost them a penny, they end up paying you something, after you pay your lawyer. I had to pay my lawyer over $50,000 to try to recover from an insurance company on a burglary. They don’t pay, it’s very frustrating.
The insurance industry is part of the financial sector, the FIRE sector. Finance, insurance and real estate is a symbiotic sector and they’re all making money. You talked about resilience, the financial sector lives in the short term. For them, resilience is until the end of the year or maybe it’s only a week. They’re only concerned about one year, as are politicians, because then there’s going to be another election. The timeframe is very short term, so the way in which the financial, real estate and insurance sector are organised is not resilient for the economy at large. It’s very resilient if you’re a billionaire and you’re a bank or an insurance company making money without actually having to produce anything. But if you’re part of labour or business capital, it’s not resilient at all and, obviously, if you look at how much Australia is paying for its housing, that’s the ideal of America.
America wants to be like Australia. They want housing prices to be just as high because this would be a bonanza for the banks here. By the time the bankers retire, they’ll be able to take huge stock options with them and bonuses, they’ll be able to live very well and they’ll leave a devastated economy in their wake. So if you have any question, why is it that Australia is growing so much and not the United States, England or Australia, except for its housing prices? This is it, living in the short run is a completely different philosophy. It’s a predatory extractive rent-seeking philosophy. Living in the long run is more like industrial engineering more than financial engineering. So you have two different philosophies and Australians have gone with the rent-seeking philosophy very heavily. That’s why it doesn’t like China, because China is trying to keep prices low. I’m working with them as much as I can advocating a land tax and making quite a bit of progress there. You have really Western civilisation as opposed to Eurasia, it’s like they’re going in different directions because of the dynamic you’re talking about.
Karl: The Chinese-American relationship opened up again in Alaska recently. Do you feel that’s sitting at the heart, underpinning the debates? Sure, there might be smoke and mirrors over various tariffs and so forth, but do you think it’s really about this role of land price and debt and the sort of invisible chains that places around society’s neck, versus the Chinese option of avoiding that and working together as a community somewhat? Who knows what sort of “Big Brother” payoff they have to live with there, but how is China keeping in check their real estate prices? I know they’ve got a couple of good policies there.
Michael: A number of ways. They don’t have banks making heavy debt-leveraged loans like they have in the United States and, in fact, they’re talking about recapturing the land that’s been sold. It would take me a whole hour just to go into how different the Chinese real estate market is. It’s not like the Western market. China is still very largely rural. The countryside is very important. There’s a problem with local rural debt that is being solved by selling off land in order to finance local town budgets or district budgets. So it’s a completely different form of financing than we have here. The tendency in Australia and England and America is to think that they’re a rival: who’s going to produce iPhones and internet goods and Huawei 5G better? They’re not commercial rivals with the same system.
What’s really in rivalry is a different economic system. It’s a financialised system in the West, centred on real estate and on making money by increasing asset prices, so real estate, stocks and bonds, and for monopoly rent. In China, you have a whole different form of determination of land prices, because here the function of land is basically a location issue. It’s a rented location. You want to be able to have access to transportation, you want schools, you want parks. In the United States and in the West, these are increasingly privatised, ever since Margaret Thatcher and Ronald Reagan. In China, these things are provided as public utilities. So transportation is much less there than it costs in the West, education is much less, healthcare is much less. You have an economy, the same kind of economy that the United States and Germany were moving towards in the 19th century.
Actually, what China is doing is following the kind of industrialisation policy that America and Germany were pioneering in the 19th century. You want to minimise economic rent. You don’t want monopoly rent, you want controls on monopoly, and China is preventing monopolies from developing, as you’ve seen with the whole fight over Jack Ma’s companies. You don’t want transportation monopolies, you don’t want education monopolies forcing people into debt. You’re trying to avoid a debt-leveraged economy in China. Now, obviously, every economy needs credit, but China has kept the essence of money creation and credit in the public domain to be issued basically on an industrial engineering basis: what does the economy need in order to grow? There obviously are some companies in China that have not been able to meet their debt service.
When a company in China that is deemed socially desirable can’t pay its debts, the banks renegotiate the debt. They don’t want to foreclose. They don’t want to say, “Okay, we’re going to foreclose and sell you to one of our customers at a distressed price”. We’re going to try to keep you where you are. They don’t want to create a homeless population. The whole last 40 years has been fixing China from having the homeless population. It’s a conflict of economic systems, not a conflict within a given common economic system with the same kind of strategy.
Karl: Yes, and as more countries move away from the US Dollar, I mean, it’s been one of the most poignant statements you’ve made is how nations, such as Japan and China, buy US treasuries which help finance the US military imperial strategy such that they can afford to surround those countries with US bases. How is America planning for this continued battle and this move away from US treasuries as the weight of debt hangs over American society?
Michael: Oh, it’s another trick question. They’re not planning. How can you plan? There isn’t any plan. All you can do is postpone. All you can do is stall long enough for them to be out of office and take their money and run. There’s no planning. How on earth can you – in order to plan, you’d have to change the economy. You’d have to move it back to where it was a century ago, when industrial capitalism was trying to take off and they were trying to prevent monopolies. Right now, the monopolies have already gained control of the government, the rent-seeking monopolies, land rent, natural resource rent, the oil, gas and mining sectors, and monopoly rent. That’s where almost all the one-percenters made their money.
Karl: Yes, but what about US diplomacy? There have been some big challenges to the American kudos in the last four years. The roles of diplomats under Biden, have they been advised, “Look, we’ve got to build our relationships back up so these countries buy US treasuries”? What’s happening in that space?
Michael: They only have one plan: how to bomb the world. What they’re threatening is “do what we say, or we’re going to blow up the world” and other countries will either believe it or they’ll call their bluff. There’s no plan. What on earth does America have to offer? It can offer excess to the US market which, of course, will enable Europe or other countries to undersell American industry and create even more unemployment. America will look even more like a rust belt, as we call the Midwest. The plan is to take the money and run and to get by to the last drop as much as you can, leaving a bankrupt economy in the wake.
Michael: They’ll then take all the money and they’re going to move to New Zealand and buy bomb shelters and dig underground. So there’s going to be a whole one percent of America living underground in New Zealand, waiting for the world to blow up and troglodytes.
Karl: One of the things I’m watching as QE keeps pushing money into the system, all around the world governments are using various tools to do it, land prices, the share market, they’re all booming, but people are somehow finding a way to convince banks to lend them money. I feel that what’s coming up is 40/50-year mortgages, who knows if it will be at Japan’s level of 120-year type mortgages. Are those sorts of pressures starting to build in America and is any reform group talking about limiting them to 30 years?
Michael: You already had that in 2008. By 2008, banks were saying no amortisation mortgages, interest-only mortgages. The same thing is for student loans. For student loans, you can pay only the interest, no principle. Banks never want to be repaid the principle. They don’t want to be paid in 125 years, they want never to be repaid. They want the principle to go up and up so that all you’re doing is paying the added interest rates on the principle. And while the central bank rates to commercial banks might be at 0.1 percent, the interest rate on education loans is over 8 percent. For mortgage loans, depending on what ethnicity you are, it’s also anywhere between 4.5 and 7.5 percent, if you’re black. So we already have the perpetual no amortisation loans in America.
Karl: Is there a battle going on between good money printing, the sort of limitations to commercial and small business lending that Josh Ryan-Collins and others have written about, and the bad printing, which is what we’ve been talking about? Is that sort of battle going on behind closed doors?
Michael: No, there’s no battle at all. The bad printing is one. The money is to be made in bad money, not in credit-worthy money. The banks are smart enough to realise if the game’s over. You can’t have good lending for business and productive lending without changing the whole structure of the economy. You could keep housing prices down very easily with what you’ve talked about, a land tax. A land tax would collect the rent to finance the public sector. You wouldn’t have to have an income tax. You wouldn’t have to have a sales tax. You wouldn’t have to have other taxes. You’d keep the price of housing down to the construction costs, not of rising land prices, but that wouldn’t make money for the one percent.
Australia believes that the beneficiaries of the economy should be the one percent. Economists have something they call revealed preference: what is it that Australian voting reveals about what they want? They want higher housing prices, they want lower wages, they want lower lifespans, and they want income to be more concentrated so the wealthy people can run the economy and the Australians think that they’ll do a better job. But what they don’t realise is the one percent does a better job in making money for itself at the expense of the 99 percent. So the Australians have a view of the economy that is sort of more science fiction than scientific.
Karl: Yes, well, it seems like there aren’t many nations, many thinkers even, around the world that can critique trickledown economics and recognise that it’s really trickle-up economics. And yes, this FIRE sector sits at the heart of what we’re talking about.
Michael: But that’s not talked about in the media. The media don’t talk about it. You’re not going to see it, I bet, on Sky TV. You and I are talking and I don’t know how many viewers you have, but it’s not like Sky TV, that you were good enough to get me on when you brought me to Australia.
Karl: Yes, well, let’s hope something changes. It seems like Rupert Murdoch’s going to hang on for another decade or so and I don’t have too much faith in his sons to open up the information flow to alternative perspectives. What are you seeing really coming up in the next six months or so, as these eviction moratoriums and bad debts and so forth start to really weigh down on society?
Michael: Nobody can tell. Nobody that I know can tell even how far the stock market is going to go up. To us, wait a minute, where’s the reality underlying this? Nobody I know can really tell. All they can do is follow the crowd and hope to be allowed in a hurry when they see the crash. And there’s no way of knowing when a crash comes because somewhere there’s a break in the chain of payments and that causes a disaster, but there’s no way of knowing when the disaster comes.
Australia is willing to act as a victim and do pretty much whatever the United States and Britain (which does everything the United States tells it to do) tells it to do. So the United States is going to put its own interests first, England’s interests second, and Australia is going to be pretty far down the line. It’s a country that lets itself be victimised. So I don’t know what the forecast for Australia is. You never know how much and how deeply people can be victimised until they fight back. All you can do is squeeze and squeeze and squeeze and maybe some day somebody will fight back, but that point has not arrived either in America or England or Australia yet. So there’s no reasonable forecast, except things are just going to get tighter and tighter and tighter and all the income will be more and more concentrated in the top one percent.
Karl: Yes, well, it kinds of feels like the climate reality is sinking in here and the economic costs of that are starting to weigh down on government. So it’s going to be very interesting to see whether these natural disasters, these, in a way, planned disasters, such as COVID, that big pharma knew was coming down the pipeline, they knew a pandemic was going to hit but, somehow, they wound back R&D and now they’ve got a bonanza on their hands. But the combination of disaster capitalism and environmental cataclysms puts society on edge and that’s where that flexibility is needed and what we’re struggling with. Michael, any concluding comments to round up another interview?
Michael: I’ve never been so unable to forecast the future as I have now, because you keep expecting people to act in their self-interest, that’s the assumption underling all political theory, but people are not building in their self-interest, they’re not actin gin their self-interest. The whole economy seems to be self-destructing and you and I are talking about this happening and I talk with a number of other people and I put the interviews on the website we’re the webmaster for. There are a few good sites, like Naked Capitalism, that talk about it, but all we can do is watch and say my heavens, how long can it go on? And nobody knows when it will stop.
Karl: Well there we have Professor Michael Hudson from michael-hudson.com and as you listen to that conversation, you become aware that society is so busy playing the Monopoly board game that they don’t really cotton on to the fact that they’re being played by monopolists through so many different channels. I hope you guys can check out the show notes and our work at prosper.org.au to tighten your handle on this forgotten knowledge of calling the wealthiest people on the planet to account by using the economic wisdom that’s been developed over thousands of years. Don’t believe that the neoconomists we have running the show these days are the only version of economics.