Wednesday, October 5, 2016

Book Review - Killing The Host, By Michael Hudson

A Review Of "Killing The Host" By Michael Hudson
Michael Hudson is probably one of the best economists in the world; too bad few Americans besides those who read fringe sites such as Unz Review andCounterpunch know of him. Aside from his wealth of knowledge, what makes Hudson’s voice so refreshing is that he is a radical in the truest sense of the word: he gets to the root of economics.
In his book Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy, he certainly leaves no stone unturned when exploring the roots of the chaos, avarice, hypocrisy, and overall bullshit that characterize today’s globalized world. What makes Killing the Host such an edifying book is Hudson’s main contention that the FIRE economy – finance, insurance, and real estate – cripples the “real” economy and is slowly reducing most of us to debt bondage.
While most leftist economists and other economic populists know that something is rotten with the state of the American (and global) economy, many tend to reduce today’s malaise to a few bad practices: obscene CEO to worker pay disparities, the decline of unions, no progressive taxation, a low minimum wage, and the bailout of Wall Street over Main Street. A common lament is that wages have lagged behind an unprecedented level of productivity. But otherwise, the economy is fundamentally prosperous and innovative; we just need more fairness.
The problem with that line of thinking is that it doesn’t address the existential issue plaguing the economy: the fact that a lot of so-called “productivity” is completely fictitious. The old system of Industrial Capitalism – hiring labor, investing in plants and equipment, and creating real wealth backed by tangible goods and services – has been eclipsed by the re-emerging dominance of a parasitic neofeudal class. In fact, Hudson’s book makes it crystal clear that these new elites are the foundation of most of our economic woes, and that the 2008 crash was not just a typical crash; the crash and its aftermath can be directly attributed to financial parasites slowly bleeding us dry over a span of decades.
So who exactly are these parasites, in what manner do they obtain their income, and how are they crippling the economy? In 440 pages of text, Michael Hudson marshals his knowledge of history, finance – he’s a former Wall Street analyst – and classical political economy to answer these questions in ways that will simultaneously delight and infuriate anyone of conscience. Killing the Host has so many relevant points that I’m going to do something unprecedented and divide this post into various bolded sections. Without further ado, here’s another one of my book reviews. I’ll start with why Hudson brands the new one percent parasites.
Unearned Income by Another Name
When most Americans conceive of unearned income, they think of either welfare cheats or trust fund brats living off of daddy’s money. However, the kind of unearned income Michael Hudson describes takes the form of “economic rent.” In simple terms, it’s income that is either “earned” unproductively or far exceeds the actual value of services one renders. To give you a few examples, I’ll briefly analyze land rent, monopoly price gouging, and usury.
With property ownership, the income a property owner collects from rising land values has little to do with his own efforts. More often than not, property values rise on account of public investment in infrastructure, or banks lending money against property and bidding up real estate value (as I’ll discuss more in the next section). Regardless, such income is seldom earned productively.
Monopolists are a perfect illustration of those who charge prices in excess of actual costs of production. American WIFI is a perfect example of such price gouging, with Americans paying an arm and leg for crappy internet service. All of that extra cash that cable behemoths such as Comcast pocket is rentier income. The high prices of patented prescription drugs are another good example.
Last but not least, much of the income reaped by banks is pure rent seeking. While one can argue for or against the merits of usury, few can assert that lending money and charging interest in any way requires genuine hard work or industriousness. Debtors, not banks, are the ones actually doing the work and filling banks’ coffers. Hudson also points out that the fees banks charge for their services are overpriced, and have more to do with exorbitant management pay and other shenanigans than any actual value provided by financial institutions.
Keeping this in mind, remember how I said that much of today’s productivity is an illusion? Well, as Hudson notes, this illusion is conjured up by lumping in economic rent with more productive forms of income. The national income product accounts (NIPA) and other measures of economic output do their part to promote this fantasy that rentier income is somehow productive:
“Instead of treating rentier overhead as a charge against production and consumption, today’s NIPA depict rent extracting activities as producing a ‘product.’ FIRE sector revenue appears as a cost of producing an equivalent amount to Gross Domestic Product (GDP), not as unearned income or ’empty’ pricing. And neither the NIPA nor the Federal Reserve’s flow-of-funds statistics recognize how the economy’s wealthiest financial layer makes its fortunes by land-price gains and other ‘capital’ gains. A cloak of invisibility thus is drawn around how FIRE sector fortunes are amassed.”
Such lax accounting reflects the triumph of neoliberalism and its insistence that everyone earns what they’re worth. As Libertarian deity Milton Friedman once put it, there’s “no such thing as a free lunch.” But of course, that’s nonsense, and it’s not how classical economists viewed such matters. Old-school economists and intellectuals such as Adam Smith, Francois Quesnay, and many others took great pains to separate earned from unearned income, and productive labor from unproductive rent seeking. As Hudson explains, their notion of a “free market” was far different from the one embraced by today’s online Randroids:
“The classical reform program of Adam Smith and his followers was to tax the income deriving from privileges that were the legacy of feudal Europe and its military conquests, and to make land, banking and monopolies publicly regulated functions. Today’s neoliberalism turns the [free market’s] original meaning on its head. Neoliberals have redefined ‘free markets’ to mean an economy free for rent-seekers, that is, ‘free’ of government regulation or taxation of unearned rentier income (rents and financial returns)…This original critique of landlords, bankers, and monopolists has been stripped out of the current political debate in favor of what is best characterized as trickle-down junk economics.”
Junk economists like to justify their slash-and-burn policies by citing higher “growth.” But as the classical reformers envisioned, regulating rentiers and publicly subsidizing key infrastructure would foster a healthier business climate, allowing for genuine growth. Otherwise, failure to bring the rentier class to heel would result in labor bearing the tax burden, which retards industry. That was exactly what happened to 16th century Spain, which decayed in spite of its massive influx of precious metals:
“Spain might have used the vast inflows of silver and gold from its New World conquests to become Europe’s leading industrial power. Instead, the bullion it looted from the New World flowed right through its economy like water through a sieve. Spain’s aristocracy of post-feudal landowners monopolized the inflow, dissipating it on luxury, more land acquisition, money lending, and more wars of conquest. The nobility squeezed rent out of the rural population, taxed the urban population so steeply as to impose poverty everywhere, and provided little of the education, science and technology that was flowering in northern European realms more democratic and less stifled by their landed aristocracy. The ‘Spanish Syndrome’ became an object lesson for what to avoid. It inspired economists to define the various ways in which rentier wealth – and the tax and war policies it supported – blocked progress and led to the decline and fall of nations.”
The moral of the story is that an economy actually has to produce something of value in order to thrive. But at least the Spanish aristocracy possessed real markers of wealth such as gold and silver. Today’s oligarchs, by contrast, create fake wealth by manipulating real estate and stocks. But the deleterious effects of the “Spanish Syndrome” are no less severe. Equally severe is runaway asset-price inflation.
Banks and the other kind of inflation
We all know that any kind of inflation is bad – or so financial elites tell us. However, they don’t have any principled objections to inflation; they simply hate inflation when it’s the result of increased wages for workers. They also fear inflation since it would reduce the value of their assets. Speaking of assets, our elites most certainly do not object to asset-price inflation. In fact, the business model of most banks depends on this specific form of inflation.
Since we’re talking about banks, another common one percent lie is that big banks are necessary to stimulate growth, and that without bailouts and other pro-banker measures, the economy would have collapsed. Banks are depicted as allocating necessary credit to fuel economic output. But as Hudson convincingly argues, most major banks do not issue loans to stimulate real growth. Rather, their goal is to bid up asset prices and collect the rent:
“Most bank loans are not to create new means of production but are made against real estate, financial securities or other assets already in place. The main source of gain for borrowers since the 1980s has not derived from earnings but seeing the real estate, stocks or bonds they have bought on credit rise as a result of asset-price inflation – that is, to get rich from the debt-leveraged Bubble Economy…The objective of most lending is to extract interest charges by attaching debt to real estate rent, corporate profits and personal income streams, turning them into a flow of interest charges.”
On account of this dynamic, a vicious cycle emerged in the years leading up to the housing crisis. Due to stagnant wages and years of financial elites aggressively touting the benefits of homeownership, Americans took out mortgage loans with the hope that they could live off of their rising property values; in other words, they indebted themselves in order to enjoy rentier income. Since assets are worth whatever banks will lend against them, more mortgage loans increased property values – obliging newcomers to borrow greater sums of money (and assume even more debt) just to enter the housing market. On and on it went, until a break in the chain of payments inevitably burst the bubble.
Outside of housing, banks issue loans for another dubious purpose: corporate raiding. One of the more infamous corporate raiders, Carl Icahn (who’s now euphemistically called an “activist shareholder”), made much of his fortune from debt-leveraged buyouts. In layman’s terms, Icahn would temporarily assume debt by borrowing large amounts of money from banks – all at the low interest rate of 3%. He then used his new funds to purchase large numbers of corporate shares. With his new status as a major shareholder, he bullied companies into temporarily inflating share prices through stock buybacks and other forms of financial engineering. With his newfound stock wealth, Icahn always emerged from his raiding endeavors a winner. Companies that had to cut funding for hiring, production, and research – ultimately leading to their dissolution or at best stagnation – were not so lucky.
Since a significant bulk of banking serves predatory functions and seeks rentier income, Hudson asserts that rather than being an integral part of the economy, modern finance makes claims on the economy. Instead of helping industry grow strong, they demand pounds of flesh. That’s why, contrary to It’s a Wonderful Life, Harry Bailey does not represent the average banker. Unfortunately, housing bubbles and corporate raiding are the least problematic aspect of finance. Finance’s primary negative function is to leave less money in the pockets of people who actually buy goods and services.
Debt Deflation
It’s no great revelation that the US is a consumer based economy; it needs people to spend money on crap. There’s only one problem: most people have less and less money to spend! As Hudson explains, the tribute exacted by the FIRE sector is sucking most of us dry:
“Labor (‘consumers’) and industry are obliged to pay a rising proportion of their income in the form of rent and interest to the Financial and Property sector for access to property rights, savings and credit. This leaves insufficient wages and profits to sustain market demand for consumer goods and investment in the new means of production (capital goods). The main causes of economic austerity and polarization are rent deflation (payments to landlords and monopolists) and debt deflation (payments to banks, bondholders and other creditors).”
That quote above is the essence of Killing the Host. The primary argument of Hudson’s book is that Americans are so weighed down by debt that the US economy is suffering from a chronic lack of demand. Young millennials in particular are plagued by debt deflation, and most are in no position to make major consumer purchases. This lack of demand gives businesses fewer incentives to invest in production and hire labor; in turn, people enjoy even less economic opportunity and have even less money to spend. This cycle is one of debt deflation following asset inflation, which always crashes in the end.
Since much ink has been spilled about Wall Street malfeasance and the 2008 crash, I won’t delve too much into it here. However, the most important takeaway from the book regarding the recession is that all of the debt accumulated prior to the collapse remained on the books; that alone doomed any real recovery. Worse, the massive bailout money afforded to banks was not used to revive businesses and consumer spending. Rather, that money was lent out once again for the purpose of bidding up asset prices. Rinse and repeat.
Some might assert that in a capitalist market economy, shit happens and that our current debt deflation will end once the economy recovers. However, as Hudson documents, debt deflation has endured for decades and rears its ugly head even during supposedly good times – the Clinton years being exhibit A. Putting aside the fact that the late 90s prosperity was a mirage sustained by a stock bubble, that era featured one of the most curious phenomena in history: what the odious Alan Greenspan called “traumatized worker” effect. Despite low unemployment and a relatively solid job market, wages remained stagnant, inequality soared, outsourcing became a fad, and most workers accepted it with a sullen smile.
While progressives such as Mark Ames of Going Postal fame contend that the cultural legacy of the Reagan Revolution – specifically the dramatic change in employer/worker relations – played a key role in engendering worker helplessness, the role of debt can’t be discounted. Quoting Greenspan, Hudson explains why workers failed to share in the fruits (however temporary) of the 90s:
“A major reason, Chairman Greenspan pointed out, was that workers were afraid to go on strike or even to complain about working conditions for fear of losing their paychecks, defaulting on their mortgage and falling behind on their monthly credit card bills and seeing their interest rates explode as their credit ratings declined.”
Since so many Americans have to spend a large chunk of money on mortgages and interest payments, they’re just one bad break away from being swamped by debt – and their bosses know it. This is why no “recovery” (real or imagined) will create a healthy economy so long as debt deflation continues to foster a general sense of insecurity.
Fortunately, from a global perspective, Americans are some of the luckier ones. Weaker countries such as Ireland, Latvia, Greece, and Argentina have not been so fortunate. For these benighted lands, debt has reduced them to traumatized nations.
Privatizing Nations
While conflating personal and government debt is fatuous, the effects of debt deflation are no less inimical to sovereign states. The treatment meted out to debtor nations by the financialized bureaucracy known as the European Union should serve as a cautionary tale about the perils of debt deflation, austerity, and dependence on private creditors.
The harrowing ordeals of Ireland, Latvia, and Greece, demonstrate that there’s no “union” in European Union. Without getting into the gory details of the aforementioned nations’ predicaments, the short story is that each accumulated large debts. Unfortunately for them, the European Central Bank (ECB) and European Commission (EC) refused to help them in earnest, insisting on the EU rule that no member nation’s taxpayers should subsidize another member. As Hudson notes, such callousness “makes the European Union different from a true political union such as the United States. It is ‘every country for itself.’ It is as if each state in the United States had to be self-sustaining, with no tax revenue raised in any given state (say, New York) to be spent in other states.”
Unfortunately, EU states cannot be truly self-sufficient since they are deprived of one of the most fundamental prerogatives of nations: creating their own money supply. Therefore, when times get tough, Eurozone countries cannot monetize deficits, but must instead rely on loans from distant financial bureaucrats in the ECB. The only problem is, these technocratic loan sharks don’t mess around; failure to pay unrealistic debts prompts demands for austerity. Austerity, with its public spending cuts and a steeper tax burden on the majority, only exacerbates debt deflation – rendering debtor nations even poorer and less able to service debt!
When austerity predictably fails to resolve the matter, creditors insist on privatization selloffs. Greece in particular risks having its public domain transferred to private foreign bondholders. Myriad state-owned enterprises and infrastructure, ranging from public gas to even islands, are up for sale. As Hudson explains, the ultimate goal of financial rentiers is to create a tollbooth economy – leading to economic death by a thousand fees. Sensing this long-term coma, around 10% of each debtor nation’s population has opted to emigrate; to compound the matter, young and well educated people disproportionately comprise that 10%. Needless to say, such human losses will only further weaken those economies.
Still, regardless of the damage wrought by debt (personal or nationwide), there remains this notion that all debts must be repaid in full. If debtors suffer, it serves them right for behaving irresponsibly. However, as Hudson reveals, such harsh moral standards are seldom applied to wayward creditors and bondholders.
Risk Without Repercussions
Despite the consistent focus on debtor responsibility, it takes two to tango. By that, I mean that creditors also have an obligation to issue loans in a responsible manner. After all, why do we pay bankers for their services? Presumably, bankers are compensated because they know how to assess a prospective borrower’s creditworthiness – enabling them to allocate credit to those who use it most efficiently. But of course, in practice, banks (and other financiers) frequently make bad loans or purchase junk bonds. When their risky bets fail, they then demand that governments and international agencies act as their personal debt collectors. Few people tell financiers to suck it up and accept their losses. One particularly recalcitrant and irresponsible financier, hedge fund manager Paul Singer, embodies this form of reckless finance.
Years before the Eurozone crisis, Argentina was the delinquent debtor nation, having accumulated large debts during its military dictatorship of 1976-1983. One of the recurring arguments of Killing the Host is that debts that cannot be paid will not be paid – Argentina being no exception. In 2001, Argentina was on the verge of defaulting, which prompted the International Monetary Fund (IMF) to refinance Argentina’s debts – a classic case of robbing Peter to pay Paul. Unsurprisingly, the IMF’s refinancing was a spectacular failure. However, a few glorified gamblers hedge fund managers such as Paul Singer saw a golden opportunity. Taking advantage of Argentina’s debt crisis, Singer started buying discounted Argentine bonds. His aim was to be compensated for the full face value of his purchased bonds, which was $250 million dollars (he had only spent $49 million).
I confess I’m no math expert, but the difference is rather significant. Naturally, Singer sued Argentina in a New York federal court, demanding full face value repayment (along with interest, legal fees, other damages, etc). The U.S. held jurisdiction on account of international bonds being issued in American dollars, as well as Argentina’s military dictatorship agreeing to settle payment disputes under New York’s laws.
Despite 92 percent of Argentina’s bondholders having already agreed to a debt writedown, Thomas Griesa (the presiding judge) ruled in 2014-15 that all other bondholders would have to wait their turns until Singer’s hedge fund was fully repaid. Putting aside the ominous geopolitical implications of the ruling – legalizing financial plunder of sovereign nations, undermining negotiations and agreements between debtor nations and the majority of its bondholders, and the loss of American credibility – Judge Griesa’s decision was essentially a reward for Paul Singer’s risky behavior.
Even though the discounted prices of Argentina’s bonds reflected a high risk of default, Singer refused to accept any losses. He basically wanted to have his cake and eat it too, which wasn’t lost on Argentina’s central bank governor, Mario Blejer. Hudson quotes Blejer, who rightly argues that the likes of Singer want to profit from risk without, well, the risk (emphasis mine):
“They cannot renege on the potential cost when the risk of default becomes a reality. Default, in this context, is…a legitimate, if unfortunate, part of the game. It is not consistent to benefit from a risk-taking premium and insist on full payment in all circumstances. The legal protection extended to bondholders by Judge Griesa goes against the very nature of risk-taking. If all holdouts are eventually paid in full, the entire price-setting mechanism in sovereign bond markets is rendered inconsistent.”
Basically, Blejer is saying that creditors and bondholders must also assume responsibility for their actions. Otherwise, any of us could be financiers if we could simply lend money at will, make risky purchases, and then have Uncle Sam strong-arm debtors into paying us back. That’s why Hudson persuasively opines that any lending made without a realistic expectation of repayment is by definition predatory. As radical as this may sound, creditors are also at fault for excessive debts. Therefore, their claims should not come at the expense of societies, as they too often do. Fortunately, there are ways to rein in predatory finance.
A Way Forward
Lest one think that Killing the Host is purely pessimistic, Hudson offers several remedies for our current malaise. for starters, Hudson recommends annulling unpayable debts. That may sound like crazy talk, but history is replete with examples of debt forgiveness. In many ways, old civilizations had a far more mature understanding of debt’s destructive role than today’s modern economists:
“The problem of debts growing faster than the economy has been acknowledged by practically every society…That is why early Christianity and Islam took the radical step of banning the charging of interest altogether, even for commercial loans. It is why Judaism placed the Jubilee Year’s debt cancellation at the core of Mosaic Law, based on a Babylonian practice extending back to 2000 BC, and to the Sumerian tradition in the millennium before that.”
Despite not having fancy econometrics charts at their disposal, the ancients instinctively grasped that untrammeled finance destroys economies. There’s no reason why we can’t revive this simple wisdom and keep bankers in line.
There’s also no reason why we can’t redirect banking activities into more productive endeavors. Post-unification Germany’s industrial banking experiment is a good example. Under their system, rather than lending money at interest (ie. creating debt), banks would fund businesses and in turn be issued a company’s stock; that way, finance and industry would rise or fall together, which gave banks an incentive to foster economic growth and refrain from predatory rent seeking. Despite being short-lived – German industrial banking died off after WWI – nothing is stopping us from emulating Germany’s example.
Of course, I understand that banking can’t be confined to aiding business. People still need loans to buy homes, cars, and other goods. To serve these ends, Hudson recommends a nationalized, public banking system that provides basic credit. Not only would public banking significantly reduce the obscene bonuses and fees of a Goldman Sachs, but public banks would also have the power to annul unpayable debts – as palaces and temples did back in ancient Mesopotamia.
Nations are capable of reforming banking without throwing the baby out with the bathwater. As of now, we simply lack the political will and courage to do what is necessary. We have also lost the knowledge and insight of our forebears, making it difficult for people to know what exactly they’re resisting. But thanks to the visionary work of Michael Hudson, we now have a way.
Killing the Host is easily one of the best books on economics of our time, although Michael Hudson will never enjoy the approbation he deserves. Then again, as the book lays bare, few people in our neoliberal age actually get what they “deserve.” Predatory financial parasites such as Carl Icahn and Paul Singer sure as hell don’t deserve their unproductive (or should I say destructive?) fortunes. Likewise, property owners don’t deserve the rentier income that they reap solely on account of possessing land. Monopolists also don’t deserve the income that they “earn” from price gouging in an uncompetitive market.
Indeed, as should be abundantly clear by now, there is no such thing as a “free market,” and people are not paid what they’re naturally “worth.” What people are paid and what activities are deemed valuable are politically determined. So too are our notions of debt and responsibility. There is no iron historical law that all debts must be paid in full; even the ancient Mesopotamians saw the wisdom of annulling debts for the sake of societal harmony. We would do well to heed this ancient wisdom, lest the American economy continue to be weighed down by debt deflation – dying a slow but steady death. Small wonder that financial parasites have done everything in their power to remove this historical knowledge from public consciousness.
Speaking of history, what makes this book especially gratifying is the way Hudson uses the arguments of traditional capitalists to demolish neoliberal nonsense. Reviving old theories of price and labor value, as well as the distinction between earned income and rents, will do far more to discredit our amoral and inefficient economic order than any liberal appeals to fairness. Rather than demanding progressive taxation and modest redistribution after the fact, a far better pursuit is to ensure that the rich don’t become so rich to begin with by nipping rentier income in the bud.
Just to be clear, ridding ourselves of financial and rentier parasites will not usher in an economic utopia. Even under a purely industrial system, economic problems will abound. Giants such as Apple will continue to offshore profits, companies like Chipotle will keepstealing their workers’ wages, and other big businesses will still gobble up subsidies while fulminating against any kind of government regulation. Class divisions will remain a serious issue.
However, for all of its injustices and flaws, Industrial Capitalism creates real wealth, and economic rightists are somewhat correct when they insist that one cannot speak of redistribution without actually having something to distribute. That’s why railing against “the rich” without recognizing the differences between a Paul Singer and a Steve Jobs will only compound our current problems, and further legitimize neoliberal junk economics. As sociopathic as the late Steve Jobs and current CEO Tim Cook may be, Apple creates a product that adds value to peoples’ lives. Heck, I’m writing this post with a Macbook Air.
Today’s Finance Capitalism, by contrast, is utterly hollow and produces no real wealth. No amount of financial engineering and asset-price manipulation, no matter how cleverly done, can substitute for productive activities that raise peoples’ standard of living. Not to mention that until we remove this financial rot, tackling the aforementioned problems of Industrial Capitalism will become all the more difficult.
Unless we take action soon, the party will eventually end, and it will be the host (ie. people like you and me) who’s left cleaning up the mess.
Michael Hudson

From Occident Invicta (September 11, 2016)

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