KILLING THE HOST: How Financial Parasites and Debt Destroy the Global Economy
by Michael Hudson
(ISLET, Kansas City)
Paperback: 440 pages
Reviewed by David James
In 1720, at the height of the South Sea Bubble, the British Parliament debated the proposition that bankers should be sewn into a sack with poisonous snakes and thrown into the Thames. They perhaps concluded that it would be too dangerous for the snakes, which did not deserve to be put into such low company.
Little has changed in the subsequent 300 years. As was graphically illustrated in September 2008, when the world came within hours of a collapse of money itself, bankers remain the most dangerous people on earth. They are, as Michael Hudson implies in Killing the Host, parasites who, when sufficiently powerful, lay waste to every other part of society.
It is not a new message. The admonition against usury is thousands of years old. But the general understanding of the problem is much poorer than in previous times, largely because post-industrial economies have become so financialised there is a general acceptance that it is an inevitable part of the fabric of society.
Indeed, in an environment in which economic and financial statistics dominate the news, there is an increasing tendency to think that finance is society. Thus, at a time when we are exceptionally vulnerable to the predations of the finance sector – it is now the largest “industry” in the Australian economy – we have the weakest understanding of what is happening. It does not bode well.
Hudson’s central argument, which is extensively supported by historical and contemporary analysis, is that a financial oligarchy has replaced democracy. The battle in the 18th and 19th centuries to broaden ownership and remove feudalism’s dominant rent extractors – aristocracy, bankers and monopolies – has been reversed. Banks are now dominant extractors of value, parasites, returning everyone else to a new form of serfdom:
“Today’s banks and money managers are diverting savings away from financing productive enterprise, while finding their major loan market in rent extraction at the expense of economic growth.” (p102)
The dimensions of this change are poorly appreciated because of the depth of the trickery, or unconscious deception, that has been used to validate the takeover. Take, for example, financial “de-regulation”, which has dominated public policy since at least the era of Margaret Thatcher in Britain and Ronald Reagan in the United States (although the latter was not a simple proponent).
Financial “de-regulation” is, unambiguously, nonsense. Money is rules. You cannot “de-regulate” rules. So, when bankers and financial lobbyists mounted their campaign for financial “de-regulation”, what they were really doing was saying that they wanted governments to stop being in charge of the rules, allowing the finance sector to take over. It was, quite literally, a bid to become our rulers, and it succeeded:
“Financial sector advocates have sought to control democracies by shifting tax policy and bank regulation out of the hand of elected representatives to nominees from the world’s financial centres … the objective of finance capitalism is not capital formation, but acquisition of rent-yielding privileges for real estate, resources and monopolies.” (p34)
The depths of the dissimulation were demonstrated by the false claim that deregulation would lead to fewer and simpler rules. In fact, deregulation unleashed the derivatives market, whereby financiers made up a blizzard of new rules that became so complex that no one understood them. When this began to collapse in 2007, the uncertainty nearly destroyed money itself.
Bankers are not just re-imposing a form of serfdom on rich, or formerly rich, countries. When it comes to developing economies bankers are killers – of nations and of people.
The combination of globalisation and financial deregulation was supposed to result in a flow of capital into the developing world as investors sought to invest in countries with a comparative advantage of cheap and enthusiastic workers. In fact, capital flows have gone the other way.
Hudson explains: “Just as mortgage lenders view rental income as a flow to be turned into payment of interest, international banks view the hard currency earnings of foreign countries as potential revenue to be capitalised into loans and paid as interest. The implicit aim of bank marketing departments – and of creditors in general – is to attach the entire economic surplus for payment of debt service.” (p3)
John Perkins, in his book (recently updated), Confessions of an Economic Hit Man, describes the consequences of putting bank usury before people in poor countries: “Over the past three decades, 60 of the world’s poorest countries have paid $US550 billion in principal and interest on loans of $US540 billion, yet they still owe a whopping $US523 billion on those same loans. The cost of servicing that debt is more than these countries spend on health or education and is 20 times the amount they receive annually in foreign aid.
“In addition, World Bank projects have brought untold suffering to some of the planet’s poorest people. In the past 10 years alone, such projects have forced an estimated 3.4 million people out of their homes; the governments in these countries have beaten, tortured, and killed opponents of World Bank projects.”
A similar pattern has been seen with the recent bank crisis in Greece. The International Monetary Fund played its usual role of “hit man”, imposing the rules of banking on a country unable to pay. The message is that the financial system comes first, countries second.
It has been a continuously repeated and was especially evident in 2007–08 when trillions were expended on bailing out the banks (the U.S. Federal Reserve’s own audit of the bailout was $US16 trillion, the equivalent of America’s annual GDP).
So effective has been the takeover of the finance sector, it is now able to hold even the world’s most powerful government to ransom.
One exception, it might be added, was Labor under Kevin Rudd. As former Treasury head Ken Henry has observed, Rudd understood the global financial crisis very well, and argued for an extremely aggressive “cash splash” in 2008. This went against the global trend of governments enthusiastically supporting serfdom.
Instead of giving the money to the banks, he gave the money to the people. It worked. In the Christmas period, when every other developed economy in the world was tanking, Australian retail spending rose, keeping the economy out of recession.
In this deeply sick era of financialisation, the Rudd government’s strategy goes either unnoticed, is dismissed as “naïve”, or is demonised as profligate (especially by the then Opposition). In fact, it was courageous and effective.
The lesson is simple, and Hudson explains it in great detail. If you want to spark economic growth, give money to the people, never to the banks. They will simply put it in their bottomless pockets. Later, of course, the banks blackmailed Rudd into giving them a guarantee. But at the crucial moment he was exceptionally decisive.
What, then, should be done about banks? Sacks and snakes are perhaps a bit archaic, no matter how appealing. The choice, as Hudson explains, is between finance capitalism and industrial capitalism.
In the longer term, it is not really a choice. Lord Adair Turner, former head of Britain’s Financial Services Authority and author of Between the Debt and the Devil: Money, Credit, and Fixing Global Finance, notes that in 1950, private credit relative to GDP across all the developed economies was about 50 per cent. By 2007, the level had risen to 170 per cent relative to GDP.
Once debt rises to that level, Turner says, it never goes away. It simply “shifts around the global economy and the attempt for people to get out of debt, what we call deleveraging, drives companies to cut investment and households to cut consumption; and that drives economies into this post-crisis malaise.”
Turner estimates, supporting Hudson’s analysis, that in the developed world only about 15 per cent of bank lending funds new capital and investment. The majority of lending either fuels consumption – which obviously has some limits as people run out of the capacity to repay – or a “competition between businesses and households for the ownership of real estate assets that already exist”. Hence the property (or rather land) binge in Australia and much of the developed world.
Investing in land is, of course, inherently unproductive. It is the epitome of finance capitalism, as opposed to industrial capitalism.
Not all banks are ruinous. As Hudson explains, there are 4,500 banks in America that do the right thing. The problem is the half-dozen mega-banks run as “control frauds”. The same applies in Europe and Australia.
Nevertheless, there is little doubt that, because of the arithmetic of compound interest, which always outpaces economic growth, the debt bubble will be burst and this time governments won’t have the means to bail out the banks. What is likely to happen is some form of debt forgiveness, which Hudson points out is the common pattern in history, dating back as far as Bronze Age Mesopotamia.
The country most likely to start is Japan, which has completely unsustainable debt of over 250 per cent of GDP and has been groaning under its yoke for more than a quarter of a century.
Hudson lays down 10 reforms that are necessary for what he calls the fight for the 21st century. These are: writing down debt to the level where it can be paid; taxing economic rent to stop it being capitalised into interest payments; revoking the tax deductibility of debt; creating public banks; funding government deficits by central banks, not bondholders; making social security payments out of the General Budget so it is protected; keeping natural monopolies in the public domain; taxing capital gains at higher levels; creating legislation that criminalises irresponsible lending; and reviving classical theories of economics (as opposed to the now dominant neo-classical economic doctrines).
These classical theories, which include the ideas of Adam Smith, have better ideas of economic value and rent theory.
These things are unlikely to happen, but they are possible. When the bankers inevitably bring on their next disaster, there will still hopefully be some options left available.