Economist Michael Hudson on the Obama-Geithner bank bailout: "The Oligarchs’ Escape Plan"

[brentspeak]

A few months old, but no less relevant.

http://www.globalresearch.ca/index.php?context=va&aid=12328

Finance Capitalism Hits a Wall

The Oligarchs’ Escape Plan – at the Treasury’s Expense

By Dr. Michael Hudson

February 17, 2009

The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course. Finance capitalism is in a state of collapse, and a new wave of credit cannot revive it. A quarter to a third of U.S. real estate has fallen into Negative Equity, so no banks will lend to them. The United States cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. The economy has hit a debt wall and is falling into Negative Equity, where it may remain for as far as the eye can see until there is a debt write-down.

Mr. Obama’s “recovery” plan based on infrastructure spending will make real estate fortunes for well-situated landlords along the new public transport routes, but there is no sign of cities sharing in this price gain by levying a windfall property tax. Their mayors would rather keep the cities broke than to tax real estate and finance. The aim is to re-inflate property markets to enable owners to pay the banks, not help the public sector break even. State and local pension plans will remain underfunded while more corporate pension plans go broke.

One would think that politicians would be willing to realize that debts that can’t be paid, won’t be. But the debts are being kept on the books, continuing to extract interest to pay the creditors that have made the bad loans. The resulting debt deflation threatens to keep the economy in depression until a radical shift in policy occurs – a shift to save the “real” economy, not just the financial sector and the wealthiest 10% of American families.

There is no sign that Mr. Obama’s economic advisors, Treasury officials and heads of the relevant Congressional committees recognize the need for a write-down. After all, they have been placed in their positions precisely because they do not understand that debt leveraging is a form of economic overhead, not real “wealth creation.” But their tunnel vision is what makes them “reliable” to Wall Street, which doesn’t like surprises. And the press prefixes each new pessimistic statistic with the labels “surprising” and “unexpected.” It’s safe to be surprised; suspicious to have expected bad news and to be a “premature doomsayer.” One must have faith in the system above all. And the system was the Greenspan Bubble. That is why “Ayn Rand Alan” was put in charge in the first place.

The government is trying to recover the happy Bubble Economy years by getting debt growing again, in the hope of re-inflating real estate and stock market prices. After all, everyone loved the Bubble Years as long as they lasted. Using debt leverage to bid up the book-price of fictitious capital assets, they were the Golden Age of finance capital’s world. Voters thought they had a chance to become millionaires, and the Bubble made Wall Street richer than ever before – while almost doubling the share of wealth held by the wealthiest 1% of America’s families. For Washington policy makers, they are synonymous with “the economy” – at least the economy for which national policy is being formulated these days.

The Obama-Geithner plan to restart the Bubble Economy’s debt growth so as to inflate asset prices by enough to pay off the debt overhang out of new “capital gains” cannot possibly work. But that is the only trick these ponies know. We have entered an era of asset-price deflation, not inflation. Economic data charts throughout the world have been plunging vertically downward since last autumn. U.S. consumer prices experienced their fastest plunge since the Great Depression of the 1930s, along with consumer “confidence,” international shipping, real estate and stock market prices, oil and the exchange rate for British sterling. The global economy is falling into depression, and cannot recover until debts are written down.

Instead of taking steps to do this, the government is doing just the opposite. It is proposing to take bad debts onto the public-sector balance sheet, printing new Treasury bonds to give the banks – bonds whose interest charges will have to be paid by taxing labor and industry...