President of the Institute for the Study of Long-Term Economic Trends, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire. He is the chief economic adviser to Rep. Dennis Kucinich.
In the largest loss since the crash of 1987, the Dow Jones Industrial Average fell over seven percent on Thursday, closing below 9,000 for the first time in five years. Over the past six trading days, the Dow has plummeted over 2,200 points, or about 21 percent. Earlier today, global stock values fell in trading as fears grow of a worldwide recession. [includes rush transcript]
JUAN GONZALEZ: In the largest loss since the crash of 1987, the Dow Jones Industrial Average fell over seven percent on Thursday, closing below 9,000 for the first time in five years. Over the past six trading days, the Dow has plummeted more than 2,200 points, or about 21 percent. Earlier today, global stock values plummeted in trading as fears grew of a worldwide recession.
On Saturday, President Bush plans to host an emergency meeting with finance leaders from Britain, Italy, Germany, France, Canada and Japan.
AMY GOODMAN: Michael Hudson is the president of the Institute for the Study of Long-Term Economic Trends, professor of economics at the University of Missouri, Kansas City, and author of Super-Imperialism: The Economic Strategy of American Empire. He is also the chief economic adviser to Congress member Dennis Kucinich, joining us now on the phone.
Welcome to Democracy Now! What about this latest news?
MICHAEL HUDSON: Well, what upsets the Europeans and the foreigners is that the US plan has done nothing at all about the debt crisis itself. It’s bailed out the creditors, but not a penny of the actual debts, the subprime mortgage debts, are addressed. Without any of the media knowing, the Federal Reserve over the last few months has given $850 billion of cash for trash already. This is what the $700 billion discussion in Congress was supposed to be about, but the Fed, without anyone knowing, has already been exchanging these securities. And the securities essentially have been swapped by the US bankers to their pals and not done anything at all to write down the actual subprime debts. There’s a big attempt to blame the victim now. And if you add up all of the subprime bad loans and defaults, that’s altogether $1 trillion. So far, the government has given away $6 trillion already to Wall Street. That’s much more than any of the subprime debt. And the volume of derivative trade has been estimated at $450 trillion, an unbelievable amount. So nobody has any idea about how much money is at stake.
And what really triggered a lot of this was the way in which Lehman went bankrupt. The day — and this has not been discussed either in America, but it’s all over the European press. The day before Lehman went bankrupt, it basically looted all of its foreign offices. For instance, in England, it emptied out the English account of a few billion dollars, leaving the English employees only with the money they — the little cards they had to use in the vending machines. No salaries were paid. The London office was closed down immediately. And the next day, Lehman used the money that it took from London to pay its closest associates to redeem the derivative trades that it had done. So the English bankers came out and said, in England, we have an ethic: it’s lend to the person, not against the asset. And they’ve come to the conclusion that the American bankers — well, we won’t say “crooks,” but let’s say they’re cronies who deal among themselves and are willing to screw the foreigner.
And this has created such a mistrust abroad that Europeans and Asians and OPEC country investors are simply pulling their money out of the US, because they don’t have a clue as to the solvency of the banks. We’re seeing the end result of the Alan Greenspan deregulatory revolution, where he said markets are all self-regulating. Right now, you’re seeing the markets self-regulate themselves. And the result is a wipeout of the American pyramiding.
JUAN GONZALEZ: Well, Michael Hudson, the amazing thing about the crisis is how it keeps — it’s almost like a forest fire that keeps breaking out in different parts of the economy, now obviously spreading to General Motors and the other automobile companies. And David Weiss, the chief economist of Standard & Poor’s, said, “I’ve never seen a panic like this. I’ve seen stock markets drop, but not an overall panic.” Your sense of the continued spread of this?
MICHAEL HUDSON: It’s all connected. I’ll tell — the reason for General Motors going down isn’t so much because of a shortage of car sales, although that’s a large part of it, but General Motors has a huge pension fund. That’s its main problem. And with the stock market going down, that puts the pension fund way behind even more. And the problem that General Motors faces is insolvency, because of all of the pensions, which are really wage deferrals that it’s negotiated over the years. So that’s part of it.
Also, nobody can now get credit for new cars, not only here, but in Europe, too. In England, for instance, the September 1st is the day that the new licenses for autos go into effect, so people defer buying automobiles until September 1st, so they can show they have this year’s model. One auto place near where I live in London had sold ninety-five cars, Porsches, last year; it sold one this year. General Motors sales in Europe and its affiliates abroad are way down. And here, the auto paper is facing rising defaults, and nobody — all of a sudden, nobody is able to borrow from the banks, because no matter how much money the government is going to be giving the banks, with these trillions of dollars, the banks are not lending them out.
And the reason the banks are not lending them out to car buyers and homeowners and other people are that the population is already loaned up. 40 percent of American income is spent now on rent, and about 15 to 20 percent on interest payments. And without addressing the debt problem, no matter how much money the banks have, they are not going to lend money to somebody who can’t afford to take on any more debt. And most people in America right now cannot afford to meet the bank’s standards for taking on any more debt. So none of this money that’s being given away has any effect at all on real people and purchasing power and cars and goods and services. It’s all to settle debt pyramiding among the banks and Wall Street institutions themselves.
JUAN GONZALEZ: And out of the meetings that are coming up this weekend, the emergency meeting at the White House of key leaders of — financial leaders, as well as of the IMF fund, meeting in Washington, do you expect any kind of major change? Because it seems that, at least here, the US government is going — veering from one solution to another with no one seeming to know quite what to do to stem the continuing losses.
MICHAEL HUDSON: It would be very nice if it were veering from one solution to another, but it really has only a single line of solution, and that is to bail out the Wall Street banks. There’s — nobody is suggesting here, nobody is suggesting in Europe, write down the debts of the debtors, rewrite — nobody is suggesting to rewrite the bankruptcy law. Nobody is suggesting to reintroduce progressive taxation. They’re not even suggesting a closing down of all of the tax gimmicks that make so many companies tax-free. So they’re actually following a very narrow, single-minded approach to only make the creditors whole on their losses, don’t do anything about the debts, and so nothing at all they’re going to be talking about this weekend is going to be addressing the economic slowdown or the recession. And for that reason, we’re going to get worse.
AMY GOODMAN: Michael Hudson, what do you suggest that workers do about your 401(k)s, about their savings?
MICHAEL HUDSON: Well, even on CNBC, Jim Kramer said that it’s time to put your money in cash. This is not really a buying opportunity when it goes down. The only thing they can do is put their money in like a Vanguard Treasury or money market fund. Every stock adviser that I know has their money out of the stock market now, because none of us can tell what’s happening. None of us know. It’s the unknown. And why would you want to take a risk in this? At least you can preserve what you have.
AMY GOODMAN: Michael Hudson, I want to thank you for being with us, president of the Institute for the Study of Long-Term Economic Trends, distinguished research professor of economics at the University of Missouri.