In part two of the series, Bill picks up the story of the S&L fraud of the ’80s, when bankers were charged and went to jail – unlike what has happened since. Bill Black joins Paul Jay on theAnalysis.news
Hi, I’m Paul Jay. Welcome back to theAnalysis.news. Please don’t forget the donate button and subscribe button on YouTube. Be back in a second.
So, this is a continuation of my discussion with Bill Black about what he calls control fraud, sort of the modern history of financial fraud in the United States. Once again, Bill Black is an American lawyer, academic, author, and a former bank regulator, which we’ve been talking about, with expertise in white-collar crime, public finance regulation, and other topics in law and economics. He’s the author of the book The Best Way to Rob a Bank is to own one.
He’s an associate professor at the University of Missouri, Kansas City in Economics and Law. Thanks for joining us again, Bill.
So, if you haven’t watched part one, you should, because there is a compelling story of the massive banking fraud that took place during the Reagan administration and we’re kind of continuing on that conversation. I’ll kind of pick up where we left off with this question. A lot of people actually did go to jail. A lot of senior banking executives went to jail as a result of you and your team’s work and others who were investigating and prosecuting. Yet when we get to the 07 08 crash and another massive banking fraud, the executives do not fear in any way being charged with fraud, going to jail. They were quite right not to fear it because none of them did. So, bring us back to this next chapter of the S&L investigation you were involved with when people do start going to court and going to jail and getting punished, but it didn’t seem to change anything.
Well, it actually changed an enormous amount of stuff, but nothing works forever. When they abandoned the things we did, then you get exactly what you talked about, but they didn’t have to abandon everything that worked. So, what worked? We embarrassed the Department of Justice into prosecuting, and they came up with something clever that was actually good for the world and it was called the Top 100 project. You had to fight for which cases were the top priorities, which caused the most harm, which ones do we have evidence where we can get convictions, et cetera. So, it was a very serious process. Led to the top 100 list, and that was roughly 300 institutions, roughly 600 individuals. Virtually everybody on the top 100 list was prosecuted and we got over 90 percent conviction rate against the most elite defendants.
So let me just ask one quick question. This took place after Reagan had left office, and it’s now Bush one? In other words, a lot of these people who were Reagan’s friends start getting prosecuted when Reagan is no longer president.
Correct. This occurs under President Bush, the first. Right. These people have the best criminal defense lawyers in the world, America still does something right, and the firm will spend money like water to try to keep them out of prison because they control the firm as well. So, a lot of their legal work is free. We still managed to get that success rate and again, against the most elite folks, and in that era the sentencing guidelines were weaker, but we still got over 80 percent of them getting prison terms. So, we didn’t just convict them, which in itself is a big deal, getting that on their record, but we actually sent them to prison in the overwhelming bulk of those cases. This was so successful that it completely changed the political dynamics.
Our biggest disadvantage, of course, is money, political contributions, and lobbying, which I told you the extraordinary success, a majority of the House of Representatives, five U.S. senators, the Speaker of the House, the ability to prevent. Ed Gray was not able to get a single piece of helpful legislation during his entire term in office. Zero during this crisis, but when we did these convictions, a couple of things happen. First, it was no longer a business page story alone, it was a front-page news story alone. It was a front-page news story because in part of the political counterattack on us. So, once it became a story of political corruption of the Keating Five intervening and removing our jurisdiction, Speaker Wright demanding that gay senior regulators, be fired and such.
The business press was extremely hostile to us, but general reporters, political reporters, hey, we were bringing them a great story, and the nature of narrative is they have bad guys. The bad guys were the executives and their political cronies. That kind of needed a good guys in the story, and they looked around and said, oh, my God, we’re going to have to use regulators as good guys, during this period when regulators were demonized. There’s just an absolute norm by both parties. For a very brief time, regulators became kind of the heroic folks holding back these forces of evil that were ripping you off. We really went after that. We didn’t just make criminal referrals and get these cases. We, and I in particular, collectively spent thousands of hours explaining to the media what the fraud schemes were, who was hurt, how they used political connections. That pays off eventually. If you establish credibility with them, that you’re telling them the truth and that we would explain it in English and in vibrant English so that they could actually have good copy and such. So, there were many more substantive stories explaining the nature of the rip-off. Being Texas, there were all kinds of stuff, including, providing prostitutes to the top state regulator in Texas of savings and loans on a regular basis and doing so on the sister ship to the presidential yacht. Texas had the sister ship to the presidential yacht parked to the Potomac as its lobbying platform, complete with the speaker of the House and prostitutes and such. Well, you tell those stories, and the world starts to perceive all of this a lot differently, and the numbers that they’re ripping them off are so big. Both how much money is going to the top executives, but also how much immense loss to the public in all of this.
Collectively about one hundred and fifty billion dollars, but then Keating unintentionally did us a further service. Our problem, both in law and in PR, was that there’s not much identifiable individual victims and we know that statistics don’t move people. Narrative moves people. People that can identify with. Victims they can identify with, which, of course, every lawyer knows. As a prosecutor, you present the victim if they’re alive and the jurors relate to that type of thing. But deposit insurance means nobody gets a bill, that says you’re going to have to pay two-thousand dollars because of the screw-up at Lincoln Savings. So, the taxpayers don’t really know directly what’s happening. Keating decided to rip off uninsured people. Because of a regulatory crackdown, he couldn’t rip off the insured people quite as much for a while, and so he targeted uninsured people to sell worthless junk bonds of his holding company out of the branches of the savings and loan, so the people would think it was safe. On top of that, he decided to target this good Catholic, alleged good Catholic retirement communities in California and did this to tens of thousands of people. Now, they suffered real losses, and now we had over thirty thousand identifiable victims. So, we could go and look among them as to who had the best narrative.
OK, let me just make sure that our viewers are following. These are people who do not have their junk bonds insured by the federal government as other people with savings accounts did. So, when they lost, they lost.
They lost personally and there was no insurance fund to bail them out, and they lost a much bigger portion of their savings, often all of their savings, because they get a bait and switch operation. Lincoln Savings Insured Entity would advertise for, fully insured certificates of deposit. The type of thing where it’s a two-year term, so you get a slightly higher interest rate. People would call in from the retirement community and say, hey, I’m interested. Then comes the switch now that you baited them. Oh, if you’re interested in a higher yield, why not look at the bonds of our holding company? They’re backed entirely by all the assets of Lincoln Savings, and they pay a higher interest rate. So that’s how the basic game worked, right. They discovered that 18-year-old boys were the ideal folks, because disproportionately the people living still in these very elderly communities were women.
Eighteen-year-old boys are trying to sell the stuff?
Not trying, succeeding. They had contests. Bond buster T-shirts. Weekly rewards.
Was Keating the only one doing this or was some of these other SNL types?
Keating was the only one doing this particular one. At the end of the year, at the Christmas party, they did a skit mocking the elderly victims of all of this. They were 18-year-old boys, they don’t know anything about finance, there’s no training. They’re lied to by Keating’s executives. So, a number of them put their grandmothers in this as well, and mothers. So, it’s a mixed thing, but as I say, this gives us over thirty-thousand people we can choose in the story. So, we led with the woman who was, I think, in her early 60s, who explained to the nice young eighteen-year-old that she was trying to save for a wheelchair accessible van because her daughter was in a terrible accident and was a quadriplegic, institutionalized, and the only sort of real joy she still had in life was driving down the coast road in California, where you can actually smell the ocean and such. The nice young eighteen-year-old man boy who, by the way, were picked to be clean-shaven, well-dressed, and exceptionally polite. That was their key training. In other words, they were the grandson they all wish they had.
I was about to say the perfect grandson.
All of this stuff is very carefully planned and scripted. They literally use scripts. Then they have entrepreneurs innovate, find even better ways to rip people off, and then they revise the script in a sort of a quasi-evolutionary struggle. So, she tells a nice young man about this and he says, well, then you should put all of your retirement in the bonds of the holding company. So, you lead with a witness like that. It’s all over, because for the first time, there was a human face on the victims, and the human face was your grandmother. Again, the super Catholic who famously gave a million dollars of our money, not his to Sister Teresa, even ripped off a convent through the sale of these worthless bonds. So, these are people who are depraved, in psychology terms, it’s a dark triad. They combine psychopathy, Machiavellianism. And extreme narcissism, so that changed things enormously. Those hearings, because who watches C-SPAN disproportionately? Older Americans. Who was targeted? Older Americans.
When you say $100 billion of public money went to bail this out, what would that be in today’s dollars.
$225 billion. It was $150 billion. Actually, it would be at least $300 billion. It’s big but let me give you a preview of what’s going to come. The loss of GDP out of the great financial crisis, the best estimate is $41.7 trillion. The American kind of trillion, which is a thousand billion, not the Brits type of thing. It’s staggeringly different scale of these things. It was terrible. It was widely considered the worst financial scandal in U.S. history, but it didn’t even cause a mild recession, most economists think.
We started this segment with you saying out of these convictions, some things were put in place, and the reason we get this crash, the big fraud in 07, 08, is these things were removed. So, what are these things that were put in place that were removed?
OK, so just to fill in one loop before I get there, I noted that the key thing was changing the politics. It wasn’t just the prosecutions. It was our civil suits which were not against the bank. They were against the executives. A huge change from the great financial crisis and our enforcement actions, which were overwhelmingly against the individuals again. Once we did that, we again followed the same policy of putting it in plain English because we were drafting those, not the Justice Department, and explaining them in plain English and the importance. The combination of all these things is you got a story when there was an indictment, you got a story when the trial began, you got a story when key evidence occurred. This was regional and local and national news often, and you got a story when you got a conviction, and you got a story when they went to the prison. Drumbeat type stuff. As a result, the politicians, as soon as we filed the civil action before any proof began rushing to return political contributions. The advantage we had turned jujitsu like into a liability. We knew we had one when one particularly sleazy member of the House, totally cynical, began wearing a pin, literally six inches in diameter that said jail the SNL crooks.
Huh? Who was that?
He was…I’m blanking. He was swept up in the postal scandal and had to resign in disgrace [Dan Rostenkowski]
What happened to Keating?
So, we eventually were able to get a conviction of Keating as well. We also did a removal on prohibition actions and brought huge civil suits against him, but also against all the major entities that contributed to his effort, like the outside auditors and such.
Did Keating go to jail?
Keating went to jail.
For how long?
I think three years, three and a half years type of thing. Just a footnote, but as a criminologist, I don’t want people to rot in prison. In fact, I want relatively shorter sentences. I’m not just talking about white-collar types. I think over incarceration is a major problem. Here’s the key thing, among the key things, to my knowledge, not a single person that we successfully prosecuted in the savings loan debacle appeared in any future thing like the great financial crisis. I’ve asked prosecutors who are more familiar with the Enron era, and they believe the same thing, that nobody that they prosecuted in the Enron era showed up again.
Now we get to the great financial crisis. So first, what people need to know is a great financial crisis is really the third act of the savings and loan debacle. In 1990, where all good financial frauds began Orange County, California, our examiners identify a novel. Think of this. They’ve never seen this before and they get it right away. They say this doesn’t make sense unless they’re engaged in fraud in essentially the same way we’ve seen in the savings and loan debacle, but they’re using a new fraud ammunition. The fraud ammunition in the second phase of the debacle was commercial real estate. Commercial real estate, you might think of it, as wholesale as opposed to retail home loans, more like retail. Much, much smaller. Commercial real estates are often $100 million a pop. It’s actually easier to run scams in commercial real estate. But this new system in Orange County was using home loans. The key thing it was doing – they weren’t called this yet in the industry, they wouldn’t be called this for something like five or six years – was what we now call liar’s loans, where you don’t verify the borrower’s income.
There was a new element and that was predation. Targeting blacks and Latinx folks. Now, big commercial loans, $100 million a pop, they aren’t making those to people of color all that much, right? So, it had lots and lots of problems, but racial and ethnic predation wasn’t on the list of that problem, but this new scheme did, and therefore it overwhelmingly used, and this is an incredibly critical thing that almost nobody talks about, loan brokers. Using loan brokers. There are two Nobel Prize winners in economics, George Akerlof and Paul Romer, who wrote one of the most important economic studies ever, “Looting: The Economic Underworld of Bankruptcy for Profit” in 1993, using as their primary example exactly what we’ve been talking about.
They worked with us and said, you folks are right. The other economists are wrong about this honest gambling stuff, and they even adopted the same language as the sure thing and such. Akerlof gets the Nobel Prize in 2001. Romer gets it in 2018, so this is not exactly chopped liver, right. In that article, which they published in 1993, they said explicitly loan brokers are terrible and everybody has known for years that they’re terrible. They have perverse incentives to do terrible things. What do they give you if you’re running the kind of fraud schemes I’ve been talking about? This accounting control fraud or looting. They give you plausible deniability. The really dirty trick things the loan broker does instead of your employees, and you go they promised me they wouldn’t do things like that.
This is how it worked, you created enormous incentives and the loan brokers key in the first fraud, first deceit. The Financial Crisis Inquiry Commission, the inevitable commission to look at the causes of the great financial crisis quotes, and indeed you can hear they’ve got the full tape recording of the interview, the key guy who trained people. He said, our fundamental deceit, which we organized everything to get you to deceive you about is that we work for you. The borrower. Our interests are directly antagonistic to you. We screw you, that’s how we make money. That is the business plan of a loan broker. Screw customer, paragraph one. Paragraph two, repeat endlessly.
So just to understand, they are giving mortgages to people.
No, loan broker can’t give a mortgage, they’re a middleman.
OK, they’re brokering a mortgage for a mortgage company, a bank.
For a bank.
For a bank, and they know the person will never be able to keep up with the payments. So whatever equity the person has, they’re going to lose.
Yes, but equity is not the issue. That’s one of the leading myths that people focus on equity. So, a very poor person might have $2000 in equity. Sure, they’ll be happy to steal the $2000, but that’s not where the money is. We haven’t discussed the second part of fraud in the loan underwriting process. I didn’t do it in the first segment either, but what the critical fraud was to massively inflate the appraisal. So how do you massively inflate appraisals? They do it in a really elegant fashion to use the concept of elegance in mathematics that old people like me were taught right. I tell you what the number needs to be, I tell you what the purchase price is. I tell you, hey, there’s a rush on this. Give me an oral estimate of value. You give me the oral estimate, let’s say that the sales price was $200,000 and the oral estimate is $190,000. I tell you, don’t bother you complete your work. Probably a stiff you on your feet, too. In fact, we have surveys that indicate that was the norm about 68 percent of the time in those circumstances, but what I sure as hell do is blackball you going forward. So, you blackball the most ethical people so that you can select the least ethical appraisers who are willing to be extorted. So, it’s an outright extortion racket, which, by the way, is a federal felony. Just like when the loan broker fills in a false income number that’s a federal felony. So, it is incredibly bizarre since we have good evidence on how incredibly common this became in the great financial crisis to do both of those things, to extort appraisers, to inflate appraisals and to massively inflate the borrower’s income, that economists still go fraud.
Excerpt from The Con
“The first question the task force set out to answer was how so many houses all over the city were selling at prices much higher than they were really worth. The appraisal was not only, you know just a little beneath or a little above, it was thousands, tens of thousands above. Then the government appraisers would go out with us and they would appraise some and say, you know there’s just no way. This this is total. This is total falsification here. The first appraiser to actually come clean we had been looking for payoffs and we could not find any payoffs and he explained to us that it was actually repeat business.
He worked with others in a systematic way to commit a series of crimes, just like the mob. I think there’s no question when it comes to the grander and bigger national conspiracies to sell people loans that they shouldn’t have been sold and then to package those loans into securities that could have been proven by hard work and a commitment to see the investigation through, to take this on the same way that we did in Akron. Unfortunately, all the federal investigations and I’m aware of stopped at the level of the mortgage broker. Or maybe they threw in an appraiser who provided a false appraisal of the property, but they never used the opportunity to move up the chain to get to the folks that were actually the masterminds of this conspiracy.
Frankly, what should have happened in 2010 is some CEO should have gone off to jail. And RICO is a statement basically saying this is a criminal enterprise and we’re going after this for what it really is. It’s a criminal enterprise. It isn’t a lone actor. It isn’t one or two bad apples in the barrel. This is a whole barrel of bad apples, coconspirators working together to inflict damage on our society.
So, I think RICO makes a very, very dramatic statement. I mean, you have to have a visible deterrent for bad behavior. There has to be some price to pay for criminal behavior, otherwise, we’re in total chaos. You can’t just apply that to violent crimes and that type of crime genre. You’ve got to apply it to the most sophisticated criminals in the world who are white collar criminals. They’re deterrable, in my view, because they don’t like to go to jail. You take a violent career criminal, and they live in jail. They thrive in jail some of them. White collar criminals don’t want to go to jail. So, deterrence does have its effect in the world of financial crimes and white-collar crime.
This is the early 90s. Now, the brokers making his fee and the higher the appraisal and the more the loan, the bigger his fee. What’s in it for the banks at this stage?
The bankers. The question is never what is in it for the bank, because this is looting. What’s in it for the bank? That’s the remember the title “looting the economic underworld of bankruptcy for profit.” So, what’s in it for the bank? Bankruptcy eventually, many years later. What’s in it for the banker? That’s the profit part of that title. So always ask the right question in that regard, but we haven’t yet even mentioned the largest source of income to the borrower, to the loan broker.
Loan brokers gets two fees potentially. One fee is a percentage of the deal. So, as you say, if I can induce people to buy homes at overpriced levels, way in excess of market value, I get more money as part of my standard cut, but the second one goes much more to this predation, the really nastiest aspects. So, the loan broker every day, sometimes multiple times a day, gets what’s called a term sheet from the bank that he works for and the term sheet says these are the terms on which we’re willing to make the loans. There’s a lot of wink, wink, nod, nod, but let’s just stay with those forms. You are forbidden to show the term sheets to the borrower by contract. Your contract as a loan broker. All right, so this is definitely designed to make the world opaque, to maximize predation, and by the way the same scam exists in car financing. So, you should never get your car financing from the auto place that sells you. So, the form says we’re willing if they have the following characteristics, to make the loan at nine percent, however if you can induce them to overpay, and they agree to pay a 10 percent interest rate, then we will pay you a kickback. Of course, the bigger you inflate, are successful in inflating, the bigger your kickback, so your interests are completely contrary to that of the borrower as loan broker. And how often were they able to induce people to overpay? Almost exactly 50 percent of the time where we have data. Which is to say they all typically would and that this thing that I’ve just described, the kickback is statistically bigger. In fact, it’s materially bigger than your regular fee. Even only succeeding half the time it is. This is where the real money was, in screwing your customer.
At this stage of this don’t people have to be making payments for them to make their money? Does the broker get a front-loaded chunk of dough for signing the person?
Let me now explain accrual accounting to you. So, under generally accepted accounting principles and the international financial reporting system, firms use what’s called accrual accounting. This this is your credit card, that they counted as an asset as soon as you use your credit card, even though you haven’t paid them because you’ve undertaken an obligation. So, I think what you were getting at are the exploding rate ARMs [adjustable-rate mortgages] that will develop years after this. So, we’re starting in 1990 now. We’re going to go forward to about 2004ish when exploding rate ARMs start. By the way, they discovered originally that consumers hated them, and didn’t want them, and so they engineered an entire campaign to figure out how to sell this. So, the idea of blaming this on the homeowners is also bullshit. OK, exploding rate ARMs is you start out with a rate, sometimes you start out with an even super teaser rate that might be as low as 1 percent. Then you qualify the borrower on the basis of that absurdly low rate. So, at that really low rate, of course, your monthly payments wouldn’t have to be as big, and so you would have sufficient income to repay it at 1 percent. But it’s not going to be one percent. It’s going to be 1 percent literally for one month of a 30-year mortgage, and then there’s a second rate and that rate might be three percent and the three percent you pay for, then it gets complex, but let’s say two to three years and ignore the complexity. Then at year three-ish to five-ish, the rate will explode, and it’ll be 6 percent. Which is roughly you’re going to double the monthly payment.
This dramatic increase in mortgage fraud cases was the canary in the mine. It was the warning. This was money chasing people. This was not somebody looking for a loan. It was all designed to maximize profits for all of the different players. The person who sold you alone made more money if they sold you a higher rate loan. They were sold a lot. They’re selling to their very clients these loans that they know are a disaster. I lost my home not because of money, because of fraud. I don’t believe Addie Polk took out the mortgage on her home. I don’t believe she signed any documents. They just generated all this junk, took home huge bonuses, and then when it collapsed, they said, oh, not us. This notion that the financial crisis was there wasn’t fraud and there wasn’t crime is absolutely wrong. It’s dead.
All right, let me see if I’m understanding this. So, the broker and the banker who’s on the bank side of this, they’re getting fees based on a promise of payment that they all know is bullshit, that it will never actually get paid because they never qualified the loaner of having the money to pay this, but their fees are based on a projection that’s fantasy.
You were fine until the they’ll never be able to because it’s a little more complicated than that, of course, but you’ll like it. Stick with me. OK, the point is that even when you’re paying 1 percent in cash, instead of what will be the fully amortized rate of 6 percent in the hypothetical I just gave, you get to for accounting purposes, treat it as six percent, because they’re on the hook for the six percent and so you get to recognize currently as income the difference? Even when you’re paying the one percent you get to count it as six percent.
Baseball has been very, very good to me.
Haha. All right answer.
In the trade, this is referred to as phantom interest, and so places like Countrywide, near the end, roughly a third of all their income was phantom interest. Now, the reason I intervened about will they ever pay it back is you’re missing one central dynamic. If this fraud scheme simply collapsed within months, it wouldn’t be anywhere near as lucrative, and so they make it far more lucrative. Now, one of the reasons they come in with the exploding rate ARMs is part of the process of delaying default because you only have to get, much less cash up front. So, your default will occur later, but the second and far bigger one is the strategy of just paying an incredible amount of money to loan brokers, and that’s the key thing people need to understand. Wall Street is brilliant about one thing. It’s not cheap when it comes to bribing people. Right, they are quite willing to kick off significant amount of money. So, again, the testimony of this guy who trained the loan brokers for much of the nation is that the quintessential prior job to being a loan broker was flipping burgers?
They wanted people who know nothing about finance. That had never had a professional job and professional mentoring about what it means to be someone who serves a customer, because that would all just get in the way. What they wanted was your income in the United States flipping burgers full time would have been somewhere around $17,500, if you got some overtime type stuff. The average loan broker got $150,000 the first year if they survived. So, in a single deal with what we call a jumbo, a really large mortgage like in California, $600,000 or $800,000 mortgage, you could through the kickback and the regular fee, get more money than you had made the entire year before flipping burgers. Just one of those deals.
They must be trying to identify sociopaths.
That’s exactly what they’re identifying. What they do and this is in the books, they hire 30 and you come back a month later and one is left. They put them in to a dog-eat-dog contest. Then they keep doing it until they have staffs and as I say, then they develop scripts and then they find better ways and they improve the scripts, or they create more sophisticated scripts about this is how we approach women of this age. This is how we approach black males of this age group type of thing. This is what works best. The loan brokerage account. The United States is notorious for not having branch banks in the poor neighborhoods. So, loan brokers, sometimes they had no office other than their home, but usually they’re in storefront places, in poor places. They’re of the neighborhood, and again, this guy that trained folks explains that his model, that he trained people that blacks should screw blacks and Latinx should screw Latinx, and you have to be a capitalist first. That’s a quote from him. It’s not some screed by a Marxist publication, and this is a guy who loves the “free market” explaining all of this.
Just let me add that when this broke in Baltimore, Wells Fargo was involved. They got hold of some of the internal emails of Wells Fargo and they were out and out racist, the way you’re talking about, overtly targeting black people and then talking about the people in the most racist, derogatory terms and in fact, wouldn’t even try to sell some of these liar loans, as you say, to white people. They were explicitly told, don’t sell to white people. It’s just for black people.
Yeah. So, I mean, this was just hardcore stuff and to skip forward, as you’ve mentioned, I’ve been very active in The Con. Well, The Con tells the story of the great financial crisis for the first time. It’s the first documentary treatment that actually tells the truth about these things and with a real emphasis on this form of predation, but also the liar’s loans and the fraud and the looting nature of it. So almost every documentary presentation about the great financial crisis is just absolute nonsense. It has nothing to do with what actually happened in many cases. Some of them are fun, but they don’t really relate to the substance.
OK, Bill, so we’re going to end this segment and we’re going to show a clip from the film The Con. I introduced this in part one. Bill was an adviser and is in this film The Con, and they’ve very generously given us some clips we can show. So, I’m going to end this segment with a clip from The Con and then we’ll do a part a Part three with Bill and continue the story. So, thanks for now, Bill, and thank you for joining me on theAnalysis.news, and we’re going to end with a clip from The Con.
Excerpt from The Con
Addie Polk was specifically targeted for who she was because she was living in a poor area. She didn’t have any direct descendants. She was widowed, and she was a minority. You can go in mostly poor minority neighborhoods and you would have people canvasing the neighborhood, knocking on doors, putting fliers in your mailbox saying we can help you. We can get that roof fixed. We can get you new windows. Sometimes they would have information on your house, but you didn’t give them. They would just look up your house. That was commonplace. “The weak, the meek and the ignorant are our best targets.” That’s the words they put on paper to describe those folks. So that has meant that the quintessential victim, if you wanted a single face that face, would be of an elderly black woman. That’s the quintessential victim of predation in the financial sphere.
Keep in mind, when you had all of these little mortgage companies, these people had to find their victims because they had to keep things going into the pipeline. They had to keep up a certain number. It started in the inner city, but like anything else, when it was getting good and the money was in, then it branched out and everybody became fair game. This is why we have to stop seeing each other by color, because if it starts over there, it’s going to come over here sooner or later. As a result, it’s now a national problem because everybody knows somebody who lost their home. The system said that poor and minorities are disposable. The system says that that was simply the cost of doing business. The mortgage company said after Addie shot herself, we’ll forgive the loan. You should have never made the loan. You should never have made the loan. We’ll forgive the loan, but she shot herself already, people can say all lives matter. I say black lives matter not because white lives don’t matter, but because traditionally when something like this occurs, no one comes to help. Black Lives Matter, Addie Polk matters. Anyone else who has lost their home, who have lost their life, they matter. I hope, I pray that we can come to some sort of common ground. That people need protection from those who are seeking to make profit. People need protection.
This year has held many things, among them bold claims of artificial intelligence breakthroughs. Industry commentators speculated that the language-generation model GPT-3 may have achieved “artificial general intelligence,” while others lauded Alphabet subsidiary DeepMind’s protein-folding algorithm—Alphafold—and its capacity to “transform biology.” While the basis of such claims is thinner than the effusive headlines, this hasn’t done much to dampen enthusiasm across the industry, whose profits and prestige are dependent on AI’s proliferation.
It was against this backdrop that Google fired Timnit Gebru, our dear friend and colleague, and a leader in the field of artificial intelligence. She is also one of the few Black women in AI research and an unflinching advocate for bringing more BIPOC, women, and non-Western people into the field. By any measure, she excelled at the job Google hired her to perform, including demonstrating racial and gender disparities in facial-analysis technologies and developing reporting guidelines for data sets and AI models. Ironically, this and her vocal advocacy for those underrepresented in AI research are also the reasons, she says, the company fired her. According to Gebru, after demanding that she and her colleagues withdraw a research paper critical of (profitable) large-scale AI systems, Google Research told her team that it had accepted her resignation, despite the fact that she hadn’t resigned. (Google declined to comment for this story.)
Google’s appalling treatment of Gebru exposes a dual crisis in AI research. The field is dominated by an elite, primarily white male workforce, and it is controlled and funded primarily by large industry players—Microsoft, Facebook, Amazon, IBM, and yes, Google. With Gebru’s firing, the civility politics that yoked the young effort to construct the necessary guardrails around AI have been torn apart, bringing questions about the racial homogeneity of the AI workforce and the inefficacy of corporate diversity programs to the center of the discourse. But this situation has also made clear that—however sincere a company like Google’s promises may seem—corporate-funded research can never be divorced from the realities of power, and the flows of revenue and capital.
This should concern us all. With the proliferation of AI into domains such as health care, criminal justice, and education, researchers and advocates are raising urgent concerns. These systems make determinations that directly shape lives, at the same time that they are embedded in organizations structured to reinforce histories of racial discrimination. AI systems also concentrate power in the hands of those designing and using them, while obscuring responsibility (and liability) behind the veneer of complex computation. The risks are profound, and the incentives are decidedly perverse.
The current crisis exposes the structural barriers limiting our ability to build effective protections around AI systems. This is especially important because the populations subject to harm and bias from AI’s predictions and determinations are primarily BIPOC people, women, religious and gender minorities, and the poor—those who’ve borne the brunt of structural discrimination. Here we have a clear racialized divide between those benefiting—the corporations and the primarily white male researchers and developers—and those most likely to be harmed.
Take facial-recognition technologies, for instance, which have been shown to “recognize” darker skinned people less frequently than those with lighter skin. This alone is alarming. But these racialized “errors” aren’t the only problems with facial recognition. Tawana Petty, director of organizing at Data for Black Lives, points out that these systems are disproportionately deployed in predominantly Black neighborhoods and cities, while cities that have had success in banning and pushing back against facial recognition’s use are predominately white.
Without independent, critical research that centers the perspectives and experiences of those who bear the harms of these technologies, our ability to understand and contest the overhyped claims made by industry is significantly hampered. Google’s treatment of Gebru makes increasingly clear where the company’s priorities seem to lie when critical work pushes back on its business incentives. This makes it almost impossible to ensure that AI systems are accountable to the people most vulnerable to their damage.
Checks on the industry are further compromised by the close ties between tech companies and ostensibly independent academic institutions. Researchers from corporations and academia publish papers together and rub elbows at the same conferences, with some researchers even holding concurrent positions at tech companies and universities. This blurs the boundary between academic and corporate research and obscures the incentives underwriting such work. It also means that the two groups look awfully similar—AI research in academia suffers from the same pernicious racial and gender homogeneity issues as its corporate counterparts. Moreover, the top computer science departments accept copious amounts of Big Tech research funding. We have only to look to Big Tobacco and Big Oil for troubling templates that expose just how much influence over the public understanding of complex scientific issues large companies can exert when knowledge creation is left in their hands.
Gebru’s firing suggests this dynamic is at work once again. Powerful companies like Google have the ability to co-opt, minimize, or silence criticisms of their own large-scale AI systems—systems that are at the core of their profit motives. Indeed, according to a recent Reuters report, Google leadership went as far as to instruct researchers to “strike a positive tone” in work that examined technologies and issues sensitive to Google’s bottom line. Gebru’s firing also highlights the danger the rest of the public faces if we allow an elite, homogenous research cohort, made up of people who are unlikely to experience the negative effects of AI, to drive and shape the research on it from within corporate environments. The handful of people who are benefiting from AI’s proliferation are shaping the academic and public understanding of these systems, while those most likely to be harmed are shut out of knowledge creation and influence. This inequity follows predictable racial, gender, and class lines.
As the dust begins to settle in the wake of Gebru’s firing, one question resounds: What do we do to contest these incentives, and to continue critical work on AI in solidarity with the people most at risk of harm? To that question, we have a few, preliminary answers.
First and foremost, tech workers need a union. Organized workers are a key lever for change and accountability, and one of the few forces that has been shown capable of pushing back against large firms. This is especially true in tech, given that many workers have sought-after expertise and are not easily replaceable, giving them significant labor power. Such organizations can act as a check on retaliation and discrimination, and can be a force pushing back against morally reprehensible uses of tech. Just look at Amazon workers’ fight against climate change or Google employees’ resistance to military uses of AI, which changed company policies and demonstrated the power of self-organized tech workers. To be effective here, such an organization must be grounded in anti-racism and cross-class solidarity, taking a broad view of who counts as a tech worker, and working to prioritize the protection and elevation of BIPOC tech workers across the board. It should also use its collective muscle to push back on tech that hurts historically marginalized people beyond Big Tech’s boundaries, and to align with external advocates and organizers to ensure this.
We also need protections and funding for critical research outside of the corporate environment that’s free of corporate influence. Not every company has a Timnit Gebru prepared to push back against reported research censorship. Researchers outside of corporate environments must be guaranteed greater access to technologies currently hidden behind claims of corporate secrecy, such as access to training data sets, and policies and procedures related to data annotation and content moderation. Such spaces for protected, critical research should also prioritize supporting BIPOC, women, and other historically excluded researchers and perspectives, recognizing that racial and gender homogeneity in the field contribute to AI’s harms. This endeavor would need significant funding, which could be achieved through a tax levied on these companies.
Finally, the AI field desperately needs regulation. Local, state, and federal governments must step in and pass legislation that protects privacy and ensures meaningful consent around data collection and the use of AI; increases protections for workers, including whistle-blower protections and measures to better protect BIPOC workers and others subject to discrimination; and ensures that those most vulnerable to the risks of AI systems can contest—and refuse—their use.
This crisis makes clear that the current AI research ecosystem—constrained as it is by corporate influence and dominated by a privileged set of researchers—is not capable of asking and answering the questions most important to those who bear the harms of AI systems. Public-minded research and knowledge creation isn’t just important for its own sake, it provides essential information for those developing robust strategies for the democratic oversight and governance of AI, and for social movements that can push back on harmful tech and those who wield it. Supporting and protecting organized tech workers, expanding the field that examines AI, and nurturing well-resourced and inclusive research environments outside the shadow of corporate influence are essential steps in providing the space to address these urgent concerns.
Yves here. Get a cup of coffee. Another meaty chat with Michael Hudson, who focuses here on the role of finance in rent extraction.
An important theme here that Hudson has stressed before is the mistaken perception of home “ownership”. Only about 1/3 of homes in America are owned free and clear. For the rest, the banks, or mortgage trusts, hold a senior position as mortgage lenders. And over the decades, they have become far less accommodating when homeowners are late even on a single payment. Even worse, insiders have reported that mortgage servicers will even hold payments to assure that they are late, which typically leads to compounding charges that virtually assure a foreclosure. Borrowers also face Kafkaesque obstacles to clearing up errors when they unquestionably paid on time.
To put it another way, as Josh Rosner put it in the early 2000s. “A home with no equity is a rental with debt.” That can be generalized to homes with little equity.
Radical Imagination host Jim Vrettos interviews Professor Michael Hudson, Economist, Wall St. Analyst, Political Consultant, Commentator and Journalist; who offers his views in the way finance works
Welcome, welcome once again to the Radical imagination. I’m your host, Jim Vrettos. I’m a sociologist who’s talked at John Jay College of Criminal justice and Yeshiva University here in New York. Our guest today, on the Radical Imagination, is one of only eight economists named by the Financial Times who foresaw the credit crisis and ensuing great recession erupting in 2008. It was conventional wisdom at the time to say that no one saw the gravity of the crisis coming, including almost every leading economist and financier in the world.
In fact, many had seen it coming. It was seen by everyone except economists from Wall Street; as our guest put it. They were ignored by an establishment according to then, the Federal Reserve chairman Alan Greenspan that watched with innocent quote-unquote shock disbelief as its whole intellectual edifice collapsed in the summer of 2007.
Official models missed the crisis not because the conditions were so shockingly unusual, they missed it by design because the world they lived in was not a world of how finance really works. They missed it because their mathematical models made it impossible to warn against a debt-deflation recession.
Their innocent model worlds were worlds where debt simply did not exist. It’s a world that most of our economic policymakers still live in, and it’s no wonder that everyday people see most economists far removed from their practical economic concerns and interests their everyday concrete reality. Our guest today is an internationally renowned economist who’s followed a much different path of interest and concern.
Michael Hudson is a distinguished research professor of economics at the University of Missouri, Kansas City, a researcher at the Levy Economics Institute at Bard College, a former Wall Street analyst; political consultant to governments on finance and tax policy, a popular commentator sought after speaker and journalist.
He identifies himself as a Marxist economist. But his interpretation of Karl Marx that differs in most other major Marxists. He believes parasitical forms of finance have warped the political economy of modern capitalism. History has regressed back to a neo- feudal system. He’s also a contributor to the Hudson report, a weekly economic and financial news podcast produced by Left Out.
His many books include Killing the Host, J is for Junk Economics,The Bubble and Beyond, Super Imperialism, and “… and Forgive Them Their Debts.” Michael has devoted his entire scientific career to the study of debt —both domestic and foreign, loans and mortgages, and interest payments.
In 2006 he argued that debt deflation would shrink the real economy, drive down real wages and push our debt-ridden economy into a Japan-style stagnation or worse. And just for reference, the typical American household now carries an average debt of over $137,000 up from $50,000 or so in 2000. The average American has about $38,000 in personal debt, excluding home mortgages.
The average credit card debt per U.S. household is $8,500, and outstanding student loans are at an all-time high, in 2019, of $1.41 trillion, a 33 percent spike since 2014, and a 6 percent increase from 2018. Only 23 percent of the population say they carry no debt. As Hudson presciently puts it, debts grow and grow, and the more they grow, the more they shrink the economy.
When you shrink the economy, you shrink the ability to pay the debts. So, it’s an illusion that the system can be saved. The question is, how long are people going to be willing to live in this illusion? Every day people have to face reality. Our economic policymakers urgently need to get it too.
So welcome Michael to The Radical Imagination. Thank you very, very much for coming here and being with us. Your work is so interesting; it’s so new and different. You’re a Marxist economist and yet…
[Michael] I’m a classical economist…
[Jim] You are classical, ok.
[Michael] Marx was the last great classical economist. Classical economics basically runs from the French Physiocrats through Adam Smith via John Stuart Mill to Marx.
[Jim] Along with Ricardo.
[Michael] Yes, they were all talking about the rentiers. In their time the landed aristocracy were the main rent recipients. But Adam Smith also talked about monopoly rent. And finance was the major monopoly. And today, the role of the landlords played in the 19th century of stifling industrial capitalism is being played by the banks and the rest of the financial sector. Right now the collectors of land rent, which was the main focus of the labor theory of value to isolate what was unnecessary, is being paid to the banks as mortgage interest.
[Michael] So, we no longer have a small privileged private landlord class when you have 80 percent of the European population and two thirds of the American population being homeowners. However, they have to pay the equivalent of the rental value of their housing to the bank, in the form of mortgage interest.
[Jim] To the banks, right!
[Michael] My analysis follows from classical economics, as did Marx’s analysis. So Marx is simply the last great classical economist. They were all talking about how industrial capitalism sought to free itself from unnecessary costs of production, and hence how its political fight was against the landlord class and other rent extractors. Where Marx went beyond his predecessors was in looking at the laws of motion of industrial capitalism. He saw these as leading toward socialism. Later, Rosa Luxemburg said that if it’s not towards socialism, it will be toward barbarism.
[Jim] So capitalism would evolve into the possibility of socialism.
[Jim] Did he foresee the sort of predatory financial system that you worked out?
[Michael] No one described it better in his time than Marx, in Volume III of Capital.
[Jim] Volume III. Ok!
[Michael] Marx analyzed the “real” economy’s circular flow between employers and wage labor buying the products they produced. But then, in Volume III, he said that rentier debt claims by the financial sector was a separate dynamic, independent from the economy of production and consumption. This industrial capitalist economy is wrapped in a financial sector composed of debt and property claims. These are external to the economy. They slow it and ultimately cause a crash. Marx was one of the first to talk about business cycles of about 11 years and the internal contradictions that led to a market collapse. He pointed out that the financial sector had different mathematics of growth – the mathematics of compound interest. These are exponential and inherently unsustainable. In Volume III of Capital and also of his Theories of Surplus Value– which was Marx’s history of economic thought and the theories leading up to him – he collected everything from Martin Luther to other analyses pointing out that debts grew so rapidly at compound interest that it is impossible to pay them.
[Jim] You have a great chart where you talk about compound interest, a penny that was invested at 5% interest from Christ’s time to 1776.
[Michael] Richard Price was an actuarial accountant. He calculated that a penny saved that at the time of Jesus’s birth at 5% interest would become a solid sphere of gold extending from the sun out to the planet of Jupiter.
[Michael] Obviously, many people did save pennies at the time of Christ, and the annual interest rate then in Rome was 8 1/3%, one twelfth per year. But of course nobody has a sphere of gold extending out to Jupiter. That’s because debts that can’t be paid, won’t be.
That’s basically my motto: Debts, that can’t be paid, won’t be paid, because there’s no way of paying out of current income that grows much more slowly, tapering off.
[Michael] So debts have to be written down. It usually takes the form of a financial crash. Nobody before Marx explained crashes in terms of the financial claims growing and causing a break in the chain of payments. The actual break could be a result of fraud or embezzlement, or a bad crop, because crashes happened in the autumn when the crops were moved and there was a drain of money from the banks to pay for moving the crop and paying the harvesters. But at least a crash wiped out debts, and then the debt buildup could begin all over again.
[Jim] But in pre-industrial civilizations that didn’t occur did it? We want to play a short little clip from your book, “… and Forgive Them Their Debts,” in which you talk about the debt phenomenon in primitive or pre-industrial civilizations, very different than what we’ve experiencing today, correct?
[Michael] That’s right. You mentioned the Financial Times report of the economists who did see the crash coming. I was the only one who actually made a chart showing why the break had to come. The Financial Time review was by Dirk Bezemer, who showed the chart that I published in a Harper’s magazine, based on an earlier paper I’d given at the University of Missouri at Kansas City for one of our Minsky Conferences.
[Jim] Let’s play this. It’s a two-minute clip on what you talking about, and debt within pre-industrial societies.
[Michael] Economists don’t talk much about religion or society, or how these concerns shape markets. Theologians for their part act as if religion is all about heaven and sex, so debt is left out. Yet it used to be at the core of Judaism, Christianity, and earlier Near Eastern religion.
[Host] Why is that? If religious leaders are interested in social justice, as Jesus was, it you have to talk about economics.
[Michael] I think part of the reason is that when they translated the Bible into English, German and the vernacular, they didn’t know what many of the words originally meant, like deror (for the Jubilee Year), or how to distinguish between “sin” and “debt” as originally a reparations payment for sin. They didn’t understand that most of the Bible was redacted by the returnees from the Babylonian captivity, who brought back this concept of debt cancellation, “andurarum” – Clean Slate. The Hebrew word was “deror.” In the Bible, you’ll have other words or terms for the Clean Slate, the Jubilee year of Leviticus 25, such as “Year of the Lord” in Jesus’s first sermon.
They didn’t realize that the word “gospel” was the “good news.” That good news was that there was going to be a debt cancellation. They didn’t realize that the Ten Commandments were very largely about debt; that “one shall not covet the neighbor’s wife,” that means you don’t make a loan to the guy so he has to pledge his wife as a debt slave to her so that you can have your way with her.
[Jim] But ordinarily that just gets translated as adultery.
[Michael] Yes, but they didn’t realize that the vehicle for this immorality was largely debt bondage. “Thou shalt not take the Lord’s name in vain” meant that a creditor couldn’t swear that so-and-so owes you money if he didn’t. All of this had to do with fact that the great destabilizing factor in society in the first millennium BC was debt beyond the ability to be paid, leading to bondage of the debtor, and ultimately forfeiture of land to wealthy creditors eager to grab it and do as Isaiah accused, join plot to plot and house to house until there were no more people left in the land.
[Jim] “No more people left in the land.” This is an incredible narrative. Please flesh out the narrative so that we can understand what was going on at that time.
[Michael] In order to explain the dynamics of debt in early times, you have to explain how the overall economic system worked as part of the social system. Most people ran into debt not by borrowing, but simply by not being able to pay the taxes or other payment obligations that accrued. These debts weren’t the result of loans. Most personal debts in Sumer and Babylonia were owed to the palace, so when the crops failed or there was a military fighting they couldn’t pay what they owed to the bureaucracy of tax collectors or for public services.
[Jim] Who were working for the palace.
[Michael] Yes. The rulers had a choice at this point: Either they could let the debtor fall into bondage when he couldn’t pay the tax collectors or the palace. If that happened, he’d owe the crop surplus to the creditor, not the palace.
He owed his payment in labor. That was the scarce resource in antiquity. He’d owe his labor to the creditor, so he couldn’t serve in the army, or do corvee work to build infrastructure or palace walls.
So rulers canceled these personal debts to regain control over agrarian labor and its crop surplus. Every new ruler who took the throne in Sumer and Babylonia started the reign with an amnesty, a Clean Slate to start from a position of balance in Year One. During their subsequent reign, if the crops failed or if there was a military conflict, the ruler would cancel consumer debts (but not commercial debts among businessmen for foreign trade or similar enterprise). That’s in the laws of Hammurabi, cancelled Babylonian debts four times. It’s obvious that if you’re at war or if the crops are hurt, cultivators can’t pay the loans.
What early modern scholars could not believe, until our Harvard group began to compile the economic history of antiquity, that canceling such debts actually was what maintained stability. We began our Harvard group in the 1990’s , and we’ve published five colloquia volumes of the origins of economic enterprise in the ancient Near East, on land tenure, urbanization, debt, and debt cancellation.
Our researches showed that as soon as you had interest-bearing debts (mainly in the commercial sphere), you had debt cancellation for the personal agrarian debts. Business debts were not canceled because the merchants were also citizens, so no matter what, all citizens had their designated self-support land. So only the barley debts were canceled; not the personal debts. We showed that rulers canceled the debts because number one, they were canceling debts owed to themselves. It’s politically easy to forgive a debt if it’s owed to you. But it’s more difficult if there is an oligarchy and debts are owed to private creditors.
Canceling crop debts was what maintained economic stability without mass bankruptcy, which would have meant that a lot of debtors would have ended up as bond servants to their creditors. It also maintained demographic staility, because otherwise, debtors would have run away and joined another community. Many did run away after Babylonia fell in 1600 BC. Four centuries later we find them joining the hapiru, which many people connected to the Hebrews. They were sort of gangs of laborers who also would do a little bit of piracy or serve as mercenaries. Their own groups were very egalitarian, just as pirates were egalitarian in their own ranks in the 18thcentury West.
With the hapiru you find for the first time an ideology saying that they were not going to let themselves fall into debt to the rich or to landlords. Their ranks were joined by fugitives walking out. Of course, that’s how Rome came to be settled under its “kings,” and what the Roman commoners did 594 BC after the kings were overthrown. The oligarchy took over, and tried to reduce the Roman population to bondage. You had numerous Secessions of the Plebs, for instance, again when the oligarchy broke its word by 449 BC.
[Jim] the aim was to forgive all the debts, just as in the Bible, right?
[Michael] When the Bible really was edited and put together by the Jews who were coming back from Babylonia, they brought back with them many Babylonian practices.
[Jim] So, they had learned from that experience . . .
[Michael] At that time all the Near Eastern kingdoms, even the Neo-Assyrian and Neo-Babylonian empires had rulers who continued to proclaim Clean Slates.
[Jim] The Persians and so on. But that tradition didn’t survive into modern times, although it became a tradition within the old Judaism.
[Michael] And also the original preachings of Jesus. Leviticus 25 projected the practice all the way back to the commandments of Moses. But there’s not very much documentation of Judaism after the compilation of the Jewish Bible, because the Judeans didn’t write on clay tablets, they wrote on perishable materials that haven’t survived. The little that did survive was the sacred library of Jerusalem, which became the Dead Sea Scrolls. When the Romans came, they took the library and they put it in pots. We now have many of these scrolls. One was a midrash, a collection of all of the biblical passages about debt cancellation, including those of the prophets.
[Michael] So we know that by the time of Jesus, there was an active popular demand for another Jubilee. But meanwhile, within Judaism itself, the wealthiest families became the rabbinical school. Luke’s description of Jesus in the New Testament said that the Pharisees loved money. They became the rabbinical school of Hillel. Luke said that Jesus went back to the temple in his hometown to give a sermon, and unrolled the scroll of Isaiah to read the passage about the Year of the Lord – meaning the Jubilee Year – and said, that he had come to proclaim this year. That was his destiny.
Early translators of the Bible just read “the Year of the Lord” without realizing that this meant the Jubilee Year, deror, a debt cancellation. Luke immediately says a lot of families got very angry and chased Jesus out of town. They didn’t like his message. The Pharisees in particular got upset, and complained to the Roman that Jesus wanted to be King. Well, the reason they said was that they knew that Rome hated kingship. Roman tradition as written by Livy and by Dionysius and Halicarnassus described Servius as cancelling the debts, and most other kings of trying to keep the oligarchy in its place. Rome grew by making itself a haven for immigrants, whom they attracted precisely by keeping the oligarchy in its place.
[Jim] But they also had an empire. . .
[Michael] We are talking before the eighth to sixth centuries BC. But then the oligarchs took over and throughout the rest of Roman history down to the empire, the great fear was that somebody would do what the kings did: cancel the debts and redistribute the land to the poor. Julius Caesar was killed for “seeking kingship,” meaning that the Senate worried that he was going to cancel the debts after decades of civil warfare over this issue and the assassination of Catiline and other advocates of debt cancellation.
[Jim] And people will be free from their economic bondage
[Michael] Yes. Even many rich people were behind Catiline, who led the revolt a generation before Caesar, who actually seems to have been an early sponsor of Catiline. We’re talking about 62 to 64 BC; Caesar was killed in 44 BC.
So to make a long story short, what made the West “Western” was that it was the first society notto cancel the debts. It was to prevent this that oligarchies opposed a central authority. We don’t find any sign of debt in Greece and Rome until about 750 B.C. It was brought by near Eastern traders, along with standardized calendrically based weights and measures, ritual and religious practices. They set up temples as trading vehicles. For thousands of years, traders had set up local temples to act as a sort of Chamber of Commerce, to negotiate trade. In Greece, and Rome at that time there were chieftainships, which began to adopt the patronage practices of extending loans to the population, and then taking the payment and labor.
These dependency relationships are what made Western civilization different from what went before. There was no palatial economy, no state authority to override the oligarchy, cancel debts, redistribute land or liberate citizens who had been reduced to bondage as a result of their debt.
[Jim] You’re talking about the Middle Ages as well, feudalism?
[Michael] No, I’m talking about Greece and Rome in contrast to the Near Eastern mixed economies that were palatial as well as private. There was much private mercantile enterprise in Sumer. Its foreign trade was largely left to private enterprise (with the palace being a major customer, to be sure), so, these were mixed economies, as the five volumes that our Harvard group published have shown.
[Jim] This is all contained in your book “… and Forgive Their Debts.”
[Jim] So this is what is crucial to understanding lending, foreclosure and redemption from the Bronze Age finance to the Jubilee.
[Jim] This is a fascinating history. Can we bring it up to date, including issues of militarization and empire and imperialism in the 20thcentury, World Wars I and II? What are some of the things that occurred, the inception of the World Bank and the IMF? How did America control and attempt to defend its empire by using debt leverage?
[Michael] Already in Greece and Rome there was a linkage between debt and militarization. A Greek general, Tacticus in the third century BC, wrote a book of military tactics. He said that if you want to conquer a town, the way to take it over is to promise to cancel the debts. The population will come over to your side. And conversely, he said, if you’re defending a town, cancel the debts and they’ll support you against the attacker. So that was one of the reasons that debts tended to be canceled by one group or another. It’s what Coriolanus did, and then he went back on his word in Rome. That’s what Zedekiah did in Judea. Well, today it’s different. Here you have the imposition of a military force – really NATO – to enforce debt collection, not only from individuals but on debt entire countries. The job of the World Bank and IMF is to impose such heavy debt service on countries, and indeed to impose it in dollars, that countries have to earn these dollars to pay their debts. They can’t simply print the money to pay these debts like America can do. They have to obtain dollars by steadily lowering the price of their labor. But as yet there is no debt revolt.
[Jim] Because, when we went off the gold standard the American dollar became all powerful.
[Jim] And we control 75% of the gold reserves?
[Michael] By the end of World War II, we controlled 75%, right.
[Jim] These are tremendous transformations in the world economy. The IMF and World Bank have supposedly developed through the UN for development, but as you argue, it’s more to create dependency.
[Michael] The World Bank is effectively part of the Defense Department. Their heads are usually former Secretaries of Defense, from John J McCloy, the first president, to McNamara and subsequent heads. What the United States discovered is that you don’t need to go to war to control other countries. If you can have them accept the assumption that all debts should be paid, they will voluntarily submit to austerity, which is class warfare against their own labor force. They will continue to devalue their currency …
[Jim] And create puppet governments that will support that as surrogates.
[Michael] Yes. What the free market boys at the University of Chicago discovered is that you can’t have a pro-financial free market – free of government regulation and its own public infrastructure and credit system – unless you’re prepared to assassinate everyone who wants a strong government. When they went to Chile and supported Pinochet, U.S. officials provided a list of who had to be killed –
- land reformers,
- labor leaders,
- socialists, and
- especially economics professors.
They closed down every Economics Department in the country, except for the one at Catholic University, the right wing economics department teaching Chicago School neoliberalism. So, you have to be totalitarian in order to impose a free market pro-financial style – which, under today’s circumstances, means pro-US.
[Jim] It’s occurring across Latin America, right?
[Michael] Yes. A free market means libertarianism and totalitarian government. What the Chicago boys and the so-called New Institutional Economics school calls the rule of contracts. You have the history of Western civilization now being taught almost everywhere as if what created civilization was the rule of contracts, not canceling the debts. So, you’ve created an inside-out view of history. Its aim is to deny the fact that the only way that you can prevent the kind of economic slowdown that we’re having in America now is to write down the debts. If you don’t write down the debts, you’re internal market will shrink and you’re going to end up looking like Greece, or like France with all the riots that they are having there, or like the other countries that are rioting because they don’t want to be turned into a Neo-feudal society.
[Jim] This seems to be occurring in Puerto Rico as well. So what becomes more profitable for American economy is the military and the armaments that we ship and use in all these adventurers wars that we have in the 800 hundred US military bases around the world.
[Michael] The difference is that in the past when you had militarism, you actually had to fight a war. Soldiers had to go in. You know the old joke about wine that’s being sold in an auction. It’s a hundred-year-old bottle and is very, very expensive. A rich guy buys it and pours it out to impress his friends, but it tastes like vinegar. He complains to the auction house, but is told, “Oh, that’s not wine for drinking! That’s for trading!” That’s what most U.S. arms are for: not really to use. You’re never again going to get Americans to be drafted and go into the army to actually, use them. These arms are not for fighting; they’re for making profits. Seymour Melman explained that in Pentagon Capitalism.
[Jim] The permanent war economy.
[Michael] That’s right. Meaning more profits for the military industrial complex. You don’t actually use the arms. You just pay to produce them and throw them away. It’s like what Keynes talked about, building pyramids in order to create domestic purchasing power.
[Jim] And you can’t, as Melman tried to do, use economic conversion to more civilian uses. That never happened.
[Michael] Seymour Melman explained that the U.S. government decided to make a different kind of a contract with the arms manufacturers. It’s called cost-plus. As he summarized it, the government guarantees them a profit, but to prevent monopoly rents, they determined the prices to be paid at, say, ten percent over the actual cost of production. This led the arms-makers to see that if their profits were going to rise in keeping with the cost of production, they wanted as high of a cost of production as possible.
So, the engineers working on the American military industrial complex aimed at maximizing costs. That’s how we got toilet seats that cost $650.
Countries that don’t have Pentagon capitalism, like Russia or China, are able to produce weaponry that outshines America. Even broke Iran, can make missiles that apparently get right through the U.S. defenses in Syria and Iraq, because they don’t have cost-plus. They’re trying to be efficient, not just to have an excuse for making money via a cost-plus contract.
[Jim] How do we turn this around? You’ve made the connections to show that everyday people and their lives are profoundly impacted by the unreal world that the financial predators are creating.
[Michael] Reality isn’t the aim of their economic models. For instance, just today I saw Paul Krugman on Democracy Now. He said that the reason we’re in a depression is because President Obama did not run a large enough budget deficit! He’s a Keynesian, but goes so far as to insist that debt has no role to play in deflating the economy. That’s largely because Krugman serves in effect as a bank lobbyist – not only here, but in Iceland and other countries. To me, the current economic squeeze is that Obama didn’t let the banks collapse. He kept the bad he debts on the books instead of treating them as bad loans to be absorbed by the banks that wrote the junk mortgages and lost in their speculative gambles.
[Jim] And ate the homeowners!
[Michael] Yes. He kept their bad, outrageously priced loans on the books and evicted 10 million families. He called them “the mob with pitchforks,” and Hillary called them “deplorables.” That shows you where the Democratic Party is at, and why it was so easy for Donald Trump to make a left wing run around the Democratic Party. That is how right wing Obama was. His legacy was Donald Trump, via Hillary Clinton.
[Jim] Krugman is the most well-known so-called Keynesian economist in the country, right?
[Michael] The reason he’s so well-popularized by the pro-financial class is precisely because he doesn’t understand money. So bank lobbyists love him and he’s popularized by the right-wing New York Times. He had a wonderful debate with Steve Keen that anybody can see on Google, where he says that it’s impossible for banks to create money and credit. He thinks that banks are savings banks, and they’re just relending deposits. Steve Keen explained what endogenous money is. That’s what we talk about in Modern Monetary Theory.
[Jim] And the Wall Street Journal.
[Michael] And the Washington Post. They go together. They don’t want economists to be popular who talk about debt and why the debts can’t be paid or the need for a debt write down. Krugman attacks Bernie Sanders as if he is an unbelievable radical for backing public medical care.
[Jim] On February 17, Krugman wrote a column “Have Zombies eaten Bloomberg’s and Buttigieg Brains?” He said “My book is arguing with zombies.” And one of the zombies is his obsession with public debt and the belief that we should be terribly scared of government debt, can’t do anything because of deficits. Eeek! And that’s the way Buttigieg talks. The very moment when mainstream economics, if you like centrist economics, has concluded that these debt worries, were way overblown. The president of American Economic Association gave this presidential address saying that debt is not nearly the problem people think it is. It’s not a constraint, and of course, Republicans have pulled off one of the greatest acts of policy hypocrisy in history – you know, the existential deficit threat. I don’t want to see a democratic centrist bring us into this deficit scaremongering. That would be a really bad thing that would block any kind of initiative.
So, what does the everyday person make of this debate? And what’s the attraction of Trump his message to people who feel that their real-world needs are being addressed?
[Michael] I think the reason people voted for Trump’s was mainly Hillary. She said that voters should vote for the lesser evil. There was no question who the “lesser evil” was. It was Donald Trump. Did you want World War III, or Donald Trump? It’s not a very nice choice, but Hillary’s viciously right-wing, especially where Russia is concerned. The Democratic National Committee and deep state are all about Russia, Russia, Russia! And calling Trump Putin’s puppet.
Then finally the Mueller report came out and found nothing there! So you can view the Democratic Party as the political arm of the military industrial complex and the banking complex.
[Jim] And Obama totally propped them up. But now, Bernie! What about him? The Democratic establishment is against him, and so is the Republican establishment.
[Michael] If the enemy of my enemy is my friend, then Bernie’s enemies are the Democratic Party establishment and the Democratic National Committee. So of course a lot of people are going to love him.
[Jim] Yup. He wants to cancel student debt! He is talking your language!
[Michael] If the student debt is not canceled, you’re going to have a generation of graduates unable to get the mortgage loans to buy homes, because they’re already paying their income to the banks.
[Jim] They’re living at home!
[Michael] That means that you’re going to have a shrinking economy. So of course you have to write down student debt, and also other forms of debt – credit card debt and other debt. The economy cannot recover if you don’t write down the debt overhead.
The good thing about writing down the debts is that you wipe out the savings on the other side of the balance sheet. Some 90 percent of the debts in America are owed to the wealthiest 10 Percent. So the problem is not only the debt; it’s all these savings of the One Percent! The world is awash in their wealth. If you don’t wipe out their financial claims – which are the basis of their wealth – they’re going to take you over and become the new financial Lords, just like the feudal landlords. The banks are the equivalent of the Norman invasion. and the conquering landlords that reduce the economy to a peonage!
[Jim] But the moral argument is made that they’re the best. They’ve survived, right? I’m playing devil’s advocate here. So they serve a purpose, don’’ they? Their wealth is a sign that the system is working.
[Michael] That’s not what Adam Smith and John Stuart Mill said, or Ricardo and the entire 19th century classical economic school. They said that economic rent is unearned income. So the aristocracy (“the best”) doesn’t earn it. It is a result of privilege, which almost always is inherited wealth or monopoly privilege, that is, the right to appropriate something that really should be public. Land ownership and mining should be public wealth, as are mineral resources in much of the world. Education should be public. People shouldn’t have to pay for it. The idea initially in the United States was that education should be free as a human right. Medical care is also, as Bernie says, a human right, as it is in a lot of the world. So America, which people used to think was the most progressive capitalist country, suddenly becoming the most neo-feudal economy.
[Jim] How about Max Weber and the Protestant ethic as the spirit of capitalism? The argument is made that those who are productive are rewarded by heaven, while those who are poor deserve it. Wealth was a sign that God had bestowed his grace on its owner.
[Michael] That sort of the patter talk a century ago hasn’t stood up very well. The wealthy claim to be wealthy because God loves them. If they can convince other people that God loves them and hates the rest of the people, they make God into the devil. They make him hate the working class, and make them dependent on this unnecessary class of parasites. That’s crazy! But that’s what happens if you let the wealthy take over religion. Of course, they’re going to say that religion justifies their wealth.
That’s what makes modern religion the opposite of the religion that I described in the Bronze Age. Upon taking the throne, rulers took a pledge to the gods to restore equity and cancel the debts. That included restoring lands that had been forfeited, giving it back to the defaulting debtors to re-establish order. That was the idea of religion back then. But today’s religion has become a handmaiden of wealth and privilege, and of “personal responsibility” to make people pay for education, health care, access to housing and other basic things that should be a public right.
[Jim] Which is what preoccupies the average American, when seventy percent of their earnings are going to these sorts of things, and for taxes and rent. I have a brief quote here from Martin Luther King, who I think represents the sort of religious tradition you’re advocating. He had been deeply influenced by the theologian, Walter Rauschenbusch and his 1907 book, Christianity and the Social Crisis.
[Michael] Read it, so that so they can hear it.
[Jim] Here’s the main quote: “The gospel at its best deals with the whole man; not only his soul, but his body; not only the spiritual well-being, but his material well-being.” King wrote in an inspired passage, “any religion that professes to be concerned about the souls of men and is not concerned about the slums that damned them, the economic conditions that strangled them and the social conditions that crippled them is a spiritually moribund religion awaiting burial.”
[Michael] That’s right. Religion was about the whole economy. Not just a part of the economy. Today they’ve separated religion, as if only spiritual and has nothing to do with the economic organization of society. Religion used to be all about the economic organization of society. So, you’ve had a decontextualization of religion, taking away from analyzing society to justify the status quo by teaching that if things are the way they are, it’s because God wants it this way. That’s saying that God wants the wealthy and privileged to exploit you, especially by getting you into debt. And that’s just crap!
[Jim] And that gets us away from the classical tradition, which does try to see this as social.
[Michael] And that’s why Christian evangelicals hate Jesus so much.
[Jim] There you go! But we love Bernie! Can he win? We’ve only got about a minute to go …
[Michael] Of course he can.
[Jim] You think he will be able to withstand the onslaught that he’s going to get?
[Michael] A year ago I was pretty sure that the Democratic National Committee was going to put the super delegates in to sabotage any attempt that he was going to make to get the nomination. Now it’s clear that the Democratic Party will be torn apart, and this means the end of it if he’s not the nominee.
[Jim] All right! Well, from your mouth to God’s ears! Thank you, Michael. This has been so enlightening.
[Michael] Thank you.
[Jim] I’m so blessed that we are in the audience here too on the Radical Imagination. So happy to have had you here. I hope you’ll come back again. This is your most recent book, “… and Forgive Them Their Debts.” Thank you very much! This is Jim Vrettos for the Radical Imagination. See you next week. Thank you, Michael!
A water billing scandal in one of the country’s poorest cities reveals an overarching truism: Neoliberalism is a conduit for rampant inequality.
something that’s not about politics last
night was just so had it I can’t take it
I don’t want it I have read that expense
office all of them and the short stories
I can’t take it don’t want it but it’s
not like that was the first time do you
guys remember 2018 do you remember
Kansas the night of that primary it was
ridiculous or in 2016 California like
how long it took for the results like oh
it’s just where’s the way you and and
one of the things that made it even
worse was like I was tweeting about how
frustrated I was that people were just
sharing like like whatever they they
heard they don’t check it they don’t
Google it they just share it something
pops into their head it sounds good like
you have an inclination you want to
believe that something is true and so
people are gonna like and they’re gonna
retweet what says that they’re there
right like there was so much
misinformation and just people not
caring enough about the material to
actually Google it like like all the
stuff going around about the
like obviously there’s problems with the
app but like the people who were like
100% Budaj edge made the app I got it
and and look we have the disclosures
that were coming out and and responsible
people we’re talking about the
disclosures that they had paid that app
company okay now before you then take
that and say and thus he made the app
and presumably put in some sort of
backdoor where he could steal the
election do just a little bit of
googling like that company makes other
apps political canvassing apps things
for volunteers things that campaigns
would use and so the fact that he paid
money to that company does not mean that
he invested in the construction of that
app he could be buying one of the
political apps that they already have
and in fact it turns out that over the
past year I believe Klobuchar Biden and
Gillibrand all of them gave money to
this company presumably for one of the
political canvassing apps that they have
sold for some time you know how I found
out that stuff by googling for like 90
seconds it was super simple but I
noticed that when I started tweeting out
those I guess inconvenient truths nobody
cared like the people who were like no
no no Buddha judge definitely made the
app he stole this thing a hundred times
as many of retweets a hundred times as
many likes someone who’s like hey guys
you know pump the brakes first of all it
looks like Bernie’s Bernie’s still gonna
win second of all it looks like this
company actually has other apps nobody
cares about that stuff nobody’s
interested in that is really depressing
you know because media is a big thing
it’s not one thing it’s a lot of
different voices in a lot of different
forms but the fact that the people who
are trying to be accurate and reasonable
are always going to have to compete with
people who are just their thing is I’m
going to see what people want to hear
what they desperately want to believe is
true and I’m just gonna tell admit I’m
just gonna say that it’s true and nobody
ever tweets you know um you know I just
I want to apologize because I retweeted
something last night you know sort of in
the fervor of what was going on it turns
out that it was untrue I apologize if I
helped to misinform anyone in the future
I’m going to be
but more careful before I spread these
things and in particular I will not be
spreading the the people who were
spreading this misinformation I will be
more critical of them in particular
literally no one has ever said that you
spread things that are false nobody
cares nobody remembers even theirs the
incentives are all wrong on social media
and that is on top of all of the other
problems of last night that is so
incredibly frustrating I’m not having a
stroke down that’ll come later based on
diet have you seen the Saga comics I
have not just be reasonable like it’s
why I’m never gonna be a success
honestly there’s no there’s no reason
why would you why would you be
reasonable yeah nobody at nobody admits
that they’re wrong that’s where I don’t
know if you were watching the coverage
last night but I wanted to add on to
they were there every conversation they
were saying no one on TV in political
media ever pays any sort of price for
being dead wrong and I wanted to add on
say you’re right but it ain’t just TV
nobody in any form of media ever pays
any sort of price for being wrong not if
they were wrong in a way that reassured
their followers their audience that
things were gonna be okay who who ever
gets mad at a person for a horrible
prediction a prediction that when it was
made was obviously not true nobody cares
about that they want I want you to be
wrong in a way that makes me feel warm
and cozy I want you to tell me the sort
of things that are a verbal light
stroking of my head to make me feel a
little bit better that’s that’s all
really anyway the reason I talk about
this now is we were on night one we have
got a bunch of these nights to go and
unfortunately I don’t I don’t think that
any are gonna be as bad as Iowa but
there’s gonna be a lot of bad nights and
that’s really unfortunate okay everybody
I would love to talk longer but we do
have a show coming up and on it I’m
gonna be joined by Jordan you’ll as I am
every other Tuesday you know me also
were to talk about last night but also
author podcaster and founder of Vox Ezra
Klein is also going to be in studio to
talk about his book about polarization
which seems especially relevant this
both of last night and with the State of
the Union so should be an awesome
conversation there we’ve got so much
we’re gonna talk about I have read do
and I read the first one I wasn’t a huge
fan maybe I need to read more of them
but anyway thank you as always for
joining me this a little live live video
in ten minutes the full show starts so
definitely tune in there I’ll see you on
the other side
the 20 most prosperous districts are now held by Democrats, while Republicans represent 16 of the 20 least prosperous, measured by share of G.D.P. The accompanying chart illustrates their analysis.
.. The authors’ calculation of the contribution to the G.D.P. of every congressional district showed that Democratic districts produce $10.2 trillion of the nation’s goods and services and Republican districts $6.2 trillion.
This trend creates a significant dilemma for Trump and the Republican Party. Candidates on the right do best during hard times and in recent elections, they have gained the most politically in regions experiencing the sharpest downturn. Electorally speaking, in other words, Republicans profit from economic stagnation and decline.
Let’s return to John Austin of the Michigan Economic Center. In an email he describes this unusual situation succinctly: “A rising economic tide tends to sink the Trump tugboat,” adding
“Certainly more people and communities that are feeling abandoned, not part of a vibrant economy means more fertile ground for the resentment politics and ‘blaming others’ for people’s woes (like immigrants and people of color) that fuel Trump’s supporters.”
The small- and medium-sized factory towns that dot the highways and byways of Michigan, Indiana, Ohio and Wisconsin have lost their anchor employers and are struggling to fill the void. Many of these communities, including once solidly Democratic-voting, union-heavy, blue collar strongholds, flipped to Trump in 2016.
This pattern is not limited to the United States. There are numerous studies demonstrating that European and British voters who are falling behind in the global economy, and who were hurt by the 2008 recession and the subsequent cuts to the welfare state, drove Brexit as well as the rise of right-wing populist parties.
..In a July 2018 paper, “Did Austerity Cause Brexit?” Thiemo Fetzer, an economist at the University of Warwick in Coventry, England, argues that austerity policies adopted in the wake of the 2008 financial collapse were crucial both to voter support for the right-wing populist party UKIP in Britain and to voter approval of Brexit.
the EU referendum (Brexit) could have resulted in a Remain victory had it not been for a range of austerity-induced welfare reforms. These reforms activated existing economic grievances. Further, auxiliary results suggest that the underlying economic grievances have broader origins than what the current literature on Brexit suggests. Up until 2010, the UK’s welfare state evened out growing income differences across the skill divide through transfer payments. This pattern markedly stops from 2010 onward as austerity started to bite
.. The results here and in England reinforce the conclusion that the worse things get, the better the right does.
As a rule, as economic conditions improve and voters begin to feel more secure, they become more generous and more liberal. In the United States, this means that voters move to the left; in Britain, it means voters are stronger in their support for staying in the European Union.