Michael Hudson: As long as finance is left in private hands, you're going to have austerity and America ending up looking like Greece and Ireland.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.
There's been a debate about what to do about banks that are too big to fail, too big to prosecute, too big to regulate. And the debate goes that the big banks should be broken up, or some people are suggesting the only real solution is public banking, banks that are big, of scale, and have public interest mandates, publicly owned.
Now weighing in on this debate and joining us in the studio is Michael Hudson. Michael was a Wall Street financial analyst, and he's now a distinguished research professor of economics at the University of Missouri-Kansas City. His recent books are The Bubble and Beyond and Finance Capitalism and Its Discontents.
Thanks for joining us again.
MICHAEL HUDSON, RESEARCH PROF., UMKC: Thank you.
JAY: So what's your take? Break up the banks vs. public banking.
HUDSON: Well, for one thing, in your very first question you left out the point that Elizabeth Warren has made earlier this week: too big to fail means too big to jail.
JAY: I said too big to prosecute, but yeah.
HUDSON: Okay. Too big to jail. When you had the head of the Justice Department for finance last week saying, well, we can't prosecute the banks, 'cause if we did, they already are so insolvent that we'd essentially have to take over the banks, and if we fined them, they wouldn't have any reserves left, and we'd have to make them into public banks, and that would be socialism, well, the fact is that 200 years ago, when the Industrial Revolution was taking off, all of the bank reformers in England, in France (the Saint-Simonians), in Germany, they all believed that industrial capitalism was going to develop banking. And instead of banking being predatory, as it had been for thousands of years, instead of banks lending against real estate and assets and foreclosing and putting people in debtors prisons, for the first time in history banks were going to begin to make loans to actually create new means of production, to create industry, to finance factories and equipment that weren't already there. And this is what happened in Germany, it's what happened in central Europe with the Reichsbank. Leading up to World War I, you had the German banks working with the German government almost as semi public entities--along with the military and industrial complex, to be sure, but you had banking taking industrial form.
World War I changed everything. You had a reversion to the English-Dutch-American kind of banking that was called merchant banking. Banks would make loans to ship goods that are already produced, or they'd make loans against real estate. So today you have 80 percent of bank loans in America and England and Scandinavia are all loans for real estate. So, essentially the function of the financial sector has been simply to load down the economy with debt without helping the economy grow.
What you really want is for banks, instead of loading the economy down with debt, to be able to finance economic growth instead of just eating into growth as an overhead.
Well, suppose that the government were to do what Sheila Bair, head of the FDIC, recommended her agency do in 2008. When Citibank went under, Bank of America, she said, look, we're in the business of taking over banks. It's not really socialism. It's what we do. When a bank is insolvent, the government takes it over.
Now, imagine what America government, the public sector, could have done with Citibank and Bank of America. These were the two largest mortgage holders in America.
What actually happened was that President Obama said, gee, I hope the banks write down the mortgages to what people can afford so that we can take off again. Instead, Citibank, Bank of America that bought Countrywide Financial refused to write the loans down. And so what you have now is 10 million Americans in the foreclosure process or already losing their homes. What you're having is the banks having a predatory process. And all of a sudden, the banks are part of the problem, not part of the solution.
JAY: Isn't this, like, inevitable? What I mean by that is if you go back to the early 20th century where banks start to play this role of lending money to create new means of production--and it's a massive need for this, with big industrialization, with tens of thousands of workers in one factory. They need large amounts of capital. As banks become more and more powerful, don't they then find that it starts becoming more profitable manipulating the stock market, speculating? And you get this whole period, up to the '29, '30 crash, where you have so much banking is parasitical. And then the whole thing replays itself out again over and over again. But isn't it inherent that as long as you have private banking so powerful, it will be also parasitical?
HUDSON: This is--the key word that you just said is private banking. Yes. If the government would have taken over Citibank, it would not have done the kind of things that Citibank did. The government would not have used its depositors' money and borrowed money to gamble with. It wouldn't have done casino capitalism. It wouldn't have played the derivatives market. It wouldn't have made corporate takeover loans.
Suppose the government ran a bank. It would make loans for long-term purposes to serve the economy and help the economy grow, which is what governments are supposed to do.
That's not what banks are supposed to do. Banks are supposed to make money. And, unfortunately, they can make money most easily, as you point out, by being parasitic, not by being productive.
So if you want banking to play the productive role of financing infrastructure, of financing growth, then the only way of doing this is for the government to run the banks. Some recognition of this has come by real estate lobbyists, mainly from Wall Street, saying, ah, we need a public-private partnership. The partnership is where the private sector basically will screw the public sector.
JAY: Yeah, they make the profit; the public can take the risk.
HUDSON: Yeah, takes all the loss. So that won't work. A public-private partnership really means you're leaving banking in the hands of the private sector. And the last time that was tried was in the educational loans system, where the government underwrote all of the education loans made by the banks. And you see the problem now with the defaults there. You would find that in a vaster scale.
The problem is that infrastructure shouldn't be funded by banking. If you fund road-building and other bridge fixing up with a private partnership, then you're going to have to charge money for the bridges, you're going to have to charge money for the roads, you're going to turn America's roads into toll roads, you'll turn the bridges into toll bridges, and all of a sudden you're going to increase the cost of living, increase the cost of doing business, all to squeeze out the money for the people who run the toll booths to these roads, to pay the banks for the money they borrow to buy the privatization of the roads, and you're going to end up looking like England looked up after Margaret Thatcher and her Labour Party and Tony Blair. The financialization of the economy is going to end up cannibalizing the industrial sector. And that's already happened.
So instead of what textbooks describe is industrial capitalism of the cartoons, where the banker will give money to the industrialist to build a factory and happy workers are coming in, the banker gives money to the corporate raider who buys the factory that's already there, lays off half the labor force, works the remainder more deeply, takes the pension fund for himself, replaces it with a defined contribution program instead of defined benefit, so all you know is what's--is docked from your paycheck every month, not what comes out. And the role of private banking is predatory finance, takeover loans, shrinking employment, worse working conditions. And they call that rising wealth creation because the wealth is being sucked up to the top. And when they talk about wealth creation, they mean wealth to the 1 percent, not prosperity for the [crosstalk]
JAY: And the rest of the economy gets paralyzed.
HUDSON: So as long as that kind of finance is left in private hands, you're going to have austerity and America ending up looking like Greece and Ireland.
And imagine how different it would have been if the government would have taken over Citibank and the big banks and said, okay, we're going to make loans now and extend credit to our own economy to build bridges and roads, like they do in China, for instance. And we don't have to charge interest. We're providing the credit for it. We don't have to pay executive salaries. We don't have to make finance into the ripoff system it's become.
JAY: Thanks very much for joining us, Michael.
And thank you for joining us on The Real News Network.