There Is An Alternative to Neoliberal Monetary Austerity
by Prof. Michael Hudson
Global Research Canada, March 4, 2012
2,181 Italians pack a Sports Arena to learn Modern Monetary Theory:
The Economy doesn’t Need to suffer Neoliberal Austerity
Michael Hudson
I have just returned from Rimini, Italy, where I experienced one of the most amazing spectacles of my academic life. Four of us associated with the University of Missouri at Kansas City (UMKC) were invited to lecture for three days on Modern Monetary Theory (MMT) and explain why Europe is in such monetary trouble today – and to show that there is an alternative, that the enforced austerity for the 99% and vast wealth grab by the 1% is not a force of nature.
Stephanie Kelton (incoming UMKC Economics Dept. chair and editor of its economic blog, New Economic Perspectives), criminologist and law professor Bill Black, investment banker Marshall Auerback and me (along with a French economist, Alain Parguez) stepped into the basketball auditorium on Friday night. We walked down, and down, and further down the central aisle, past a packed audience reported at over 2,100. It was like entering the Oscars as People called out our first names. Some told us they had read all of our economics blogs. Stephanie joked that now she understood how the Beatles felt. There was prolonged applause – all for an intellectual rather than a physical sporting event.
With one difference, of course: Our adversaries were not there. There was much press, but the prevailing Euro-technocrats (the bank lobbyists who determine European economic policy) hoped that the less discussion of possible alternatives to austerity, the easier it would be to force their brutal financial grab through.
All the audience members had contributed to raise the funds to fly us over from the United States (and from France for Professor Alain Parguez), and treat us to Federico Fellini’s Grand Hotel on the Rimini beach. The conference was organized by reporter Paolo Barnard, who had studied MMT with Randall Wray and realized that there was plenty of demand in Italian mass culture for a discussion of what actually was determining the living conditions of Europe. His aim was to show that the emerging financial elite hopes to use this crisis as their opportunity to carve out personal fiefdoms by privatizing the public domain of the governments they have seduced, bribed or coerced into unnecessary debt. Instead of using a central bank to finance their deficits, governments are told to dump these assets under distress conditions at fire sale prices.
So governments end up beholden to bondholders and Eurocrats drawn from neoliberal ranks.
Paolo and his enormous support staff of translators and interns provided us an opportunity to give an approach to monetary and tax theory and policy that until recently was almost unheard of in the United States. Just one week earlier the Washington Post published a review of MMT (followed by a long discussion in the Financial Times . But the theory remains grounded primarily at the UMKC’s economics department and the Levy Institute at Bard College, with which most of us are associated.
The basic thrust of our argument is that just as commercial banks now create credit electronically on their computer keyboards (creating a bank account credit for borrowers in exchange for their signing an IOU at interest), so governments can create their own money. They can reclaim this proper function without incurring needless interest-bearing debt to private bondholders or from banks that create credit by electronic fiat. Government computer keyboards can provide nearly free credit creation to finance spending.
Once the money is created by government, the crucial difference is that governments spend it (at least in principle) to promote long-term growth and employment, invest in public infrastructure, research and development, provide health care and other basic economic functions. Banks have a more short-term time frame and narrowly self-interested motivation. Some 80% of their loans are mortgages against real estate. Banks lend against collateral in place, and the economy’s largest assets are land and buildings. Although banks loans also are used to finance leveraged buyouts and corporate takeovers, most new fixed capital investment by corporations is financed out of retained earnings, not bank credit.
And contrary to popular belief, the stock market has ceased to be a source of such financing. Textbook diagrams still depict it as raising money for new capital investment. Unfortunately, it has been turned into a vehicle to buy out companies on credit (e.g., with high interest junk bonds), replacing equity with debt (“taking a company private” from its stockholders). Inasmuch as interest payments are tax-deductible – on the pretense that they are a necessary cost of doing business – corporate income-tax payments are lowered. And what the tax collector relinquishes is available to be paid out to the bankers and bondholders who get rich by loading the economy down with debt.
The upshot is that the flow of corporate earnings is not used for productive investment, but is diverted to the financial sector – not only to pay interest and penalties to banks, but for stock buybacks intended to support stock prices and hence the value of stock options that managers of today’s financialized companies give themselves.
Welcome to the post-industrial economy, financial style. Industrial capitalism has passed through a series of stages of finance capitalism, from Pension-Fund capitalism via Globalized Dollarization and the Bubble Economy to the Negative Equity stage, foreclosure time, debt deflation, and austerity – and now what looks like debt peonage in Europe, above all for the PIIGS: Portugal, Ireland, Italy, Greece and Spain. (The Baltic countries of Latvia, Estonia and Lithuania have been plunged so deeply into debt that their populations are emigrating to find work and flee debt-burdened real estate. The same has plagued Iceland since its bank rip-offs collapsed in 2008.)
Why aren’t economists describing these phenomena? The answer is a combination of political ideology and analytic blinders. As soon as the Rimini conference ended on Sunday evening, for instance, Paul Krugman’s Monday, February 27 New York Times column, “What Ails Europe?” blamed the euro’s problems simply on the inability of countries to devalue their currencies. He rightly criticized the Republican Party line that blames social welfare spending for the Eurozone’s problems, and also criticized putting the blame on budget deficits. http://www.nytimes.com/2012/02/27/opinion/krugman-what-ails-europe.html?hp
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