Michael Hudson on How Banks Really Make Money

Executive Summary

• About Michael Hudson
• Hudson on Monopolies, Banks, and Landlords
• The Present Political Intellectual Environment

Introduction

In the modern Sarah Palin / Milton Friedman US culture, Michael Hudson is a Communist because he opposes the consolidation of power and the mistreatment of the non-elite. These ideas can get you kicked out of the nicer cocktail parties in this country.

About Michael Hudson

In an era when most economists are content to teach pro-corporate economics for their university salary or work for one of the major financial institutions churning out lies, Michael Hudson provides a perspective not often seen. He makes the corrupt furious with his assessments of how poorly the current economic system treats the vast majority that works within it. He uses a device that is simply appalling to most economists…..history.

The Present Political Intellectual Environment

In the present environment, the less you know about history, the better according to those that think that economics is primarily about interest rates and investment banking. However, here is the things, history shows a different path for the development of economic thought. Adam Smith did not hold a position in economics, but one in moral philosophy. Frank Knight, the great University of Chicago Economist (before UC became completely corrupted by corporate money) wrote on topics such as ethics and skepticism. No economist could think of publishing on these topics now. Economists instead push out one overly mathematical paper after another that has less and less relevance to the real economy and is primarily concerned with the fictitious economy.

One of the most influential professors at The University of Chicago, Frank Knight, could not even hold a position at his old university today. He would be considered to populist, not sufficiently mathematical, and bad for fundraising.

Below is an excerpt from an interview with Michael Hudson that is very illuminating.

Hudson on Monopolies, Banks, and Landlords

MH: Well, classical economics was all about the free lunch. Look at Ricardian rent theory. That’s all about the free lunch. The role of modern economic theory — I should call it post-modern economic theory and statistics is to pretend that the banks, the landlords and the monopolies actually earn their income instead of extracting it from the (productive) economy.
BF: Your book is really an antidote to the dominant Chicago school of free marketeers. What is the meaning of “free market” these days, as understood on Wall Street?
MH: It’s exactly the opposite of what Adam Smith, and Ricardo and the classical economists defined as a free market. Classical economics defined a free market as one that is free of overhead charges, free of unnecessary charges of production, free of watered stock. Today a free market means that predators are free to extort any price from the public, they are free to deregulate, free to lie to consumers, free to exploit, free to load any company they want down with debt, and basically lead (us) to a world of debt peonage… So the whole concept of freedom has been turned upside down by the Chicago school and by the Bush administration.
In fact if you’re wealthy in today’s economy, you don’t make any money at all, because it’s all a (tax deductible) cost. Corporations don’t seem to make any money because they seem to have everything as an expense. For instance interest payments are the largest item that the IRS permits corporations to take off as an expense of doing business. But it’s not an expense of doing business at all, it’s a function of what outside raiders and corporate junk bond holders have paid to buy up the company, and instead of doing business, they’re carving them (companies) up, closing them down, stopping their long term research and other projects, and doing just the opposite of what’s needed for an industrial economy. That’s why the book deals primarily with what the financial sector, which is not part of the economy at all, nor is the property sector part of the economy. They are a completely separate consumption process, more in the character of a parasite, than of (producing) actual goods and services….
The National Income and Product Accounts treat everyone who earns an income as producing a service. So if you’re taking money out of an ATM machine, and I’m holding a gun, saying “your money or your life” then I’m giving you the service of your life for the money you’re taking out. This is the opposite of what classical economics is all about.
A century ago when the classical economists, Adam Smith, John Stuart Mill, in the reform era, tried to say look, there are some incomes that are not earned. Rent is not earned, it’s an excess price. Interest is not earned, it’s a monopoly price. Monopoly profits aren’t earned, they’re extortionate. All this was viewed (by classical economists) as something that government regulators should get rid of, either by not permitting it in price, or by holding the monopolies in the public domain, or by the land itself being either nationalized or taxed. The classical economists divided almost the entire economy into productive and unproductive labor, into wealth, and overhead, into real income and costs. This threatened the vested interests with taxing away their free lunch, so you have an anti-classical reaction that is epitomized by the Chicago school of anti-government, anti-tax people whose leader, Milton Friedman, said there’s no such thing as a free lunch.
“…a free market means that predators are free to extort any price from the public, they are free to deregulate, free to lie to consumers, free to exploit, free to load any company they want down with debt…”
BF: Why is today’s understanding so different?
MH: Because hundreds of millions of dollars have been spent to mislead people and to endow business schools and universities to stop teaching the history of economic thought, to stop teaching the classical economists, and essentially to brainwash students, so that those with a sense of realism simply drop out of the field of economics and go into some other field.
Milton Freidman’s Insane Idea Regarding Market Efficiency
BF: Acolytes of the Chicago school claim that there’s no such thing as a free lunch, but they don’t mean what people usually think they mean. What do they really mean?
MH: They say that everybody “earns” what they get, so that if you’re an executive, let’s say you’re the CountryWide executive who paid himself $125 million last year, while the company went bankrupt, he provided the service of adding wealth. All of the rich people, Donald Trump is worth what he gets, anybody who owns property and inherits it is worth what he gets, anybody with a trust fund earns what he gets, so that nothing’s free, and nothing should be taxed, because if everybody earns what they get then the government is just taking things away. Therefore nothing should be taxed because everything is perfectly in balance.
What Banks do By Michael Hudson
MH: Banks lend 70% of their money for mortgage credit. There’s a myth in the textbooks that banks lend money to finance industry. No bank lends money to finance industry. They lend against collateral that’s already in place. They land against real estate, that’s mortgage loans, the 70%. They’ll make loans to corporate raiders. They’ll make loans to brokerage houses to buy stocks that have already been issued. And they’ll lend money to other governments, and they’ll lend for speculation, for derivatives trade. These are all things that governments do not spend money on. Governments spend money doing what governments do, bombing people, military spending is the best, paying off their political constituencies, also a little bit of welfare, social security and health care, and some infrastructure spending.
BF: Now the banks tend to invest their money in assets that already exist, not really investing in new research and development, or new industry.
MH: No, capital formation, research and development are financed almost entirely out of the retained earnings of corporations. To the extent that the banks lend money to outside raiders to take over these companies, the money that used to be spent on capital formation and long term research and development have to be spent to repay the banks. So the effect of bank lending is actually to crowd out research and development spending, and new capital formation

References

https://www.michael-hudson.com/interviews/080715FictitiousEconomy1.html