[DEBATE] : (Fwd) Michael Hudson on 'nationalisation'

[Patrick Bond]

www.counterpunch.org

What "Nationalize the Banks" and the "Free Market" Really Mean in
Today's Looking-Glass World
The Language of Looting

By MICHAEL HUDSON

"Banking shares began to plunge Friday morning after Senator Dodd, the
Connecticut Democrat who is chairman of the banking committee, said in
an interview with Bloomberg Television that he was concerned the
government might end up nationalizing some lenders “at least for a
short time.” Several other prominent policy makers – including Alan
Greenspan, the former chairman of the Federal Reserve, and Senator
Lindsey Graham of South Carolina – have echoed that view recently.”

--Eric Dash, “Growing Worry on Rescue Takes a Toll on Banks,” The New
York Times, February 20, 2009

How is it that Alan Greenspan, free-market lobbyist for Wall Street,
recently announced that he favored nationalization of America’s banks
and indeed, mainly the biggest and most powerful? Has the old disciple
of Ayn Rand gone Red in the night? Surely not.

The answer is that the rhetoric of “free markets,” “nationalization” and
even “socialism” (as in “socializing the losses”) has been turned into
the language of deception to help the financial sector mobilize
government power to support its own special privileges. Having
undermined the economy at large, Wall Street’s public relations think
tanks are now dismantling the language itself.

Exactly what does “a free market” mean? Is it what the classical
economists advocated – a market free from monopoly power, business
fraud, political insider dealing and special privileges for vested
interests – a market protected by the rise in public regulation from the
Sherman Anti-Trust law of 1890 to the Glass-Steagall Act and other New
Deal legislation? Or is it a market free for predators to exploit
victims without public regulation or economic policemen – the kind of
free-for-all market that the Federal Reserve and Security and Exchange
Commission (SEC) have created over the past decade or so? It seems
incredible that people should accept today’s neoliberal idea of
“market freedom” in the sense of neutering government watchdogs, Alan
Greenspan-style, letting Angelo Mozilo at Countrywide, Hank Greenberg at
AIG, Bernie Madoff, Citibank, Bear Stearns and Lehman Brothers loot
without hindrance or sanction, plunge the economy into crisis and then
use Treasury bailout money to pay the highest salaries and bonuses in
U.S. history.

Terms that are the antithesis of “free market” also are being turned
into the opposite of what they historically have meant. Take today’s
discussions about nationalizing the banks. For over a century
nationalization has meant public takeover of monopolies or other sectors
to operate them in the public interest rather than leaving them so
special interests. But when neoliberals use the word “nationalization”
they mean a bailout, a government giveaway to the financial interests.

Doublethink and doubletalk with regard to “nationalizing” or
“socializing” the banks and other sectors is a travesty of political and
economic discussion from the 17th through mid-20th centuries. Society’s
basic grammar of thought, the vocabulary to discuss political and
economic topics, is being turned inside-out in an effort to ward off
discussion of the policy solutions posed by the classical economists and
political philosophers that made Western civilization “Western.”

Today’s clash of civilization is not really with the Orient; it is with
our own past, with the Enlightenment itself and its evolution into
classical political economy and Progressive Era social reforms aimed at
freeing society from the surviving trammels of European feudalism. What
we are seeing is propaganda designed to deceive, to distract attention
from economic reality so as to promote the property and financial
interests from whose predatory grasp classical economists set out to
free the world. What is being attempted is nothing less than an attempt
to destroy the intellectual and moral edifice of what took Western
civilization eight centuries to develop, from the 12th century Schoolmen
discussing Just Price through 19th and 20th century classical economic
value theory.

Any idea of “socialism from above,” in the sense of “socializing the
risk,” is old-fashioned oligarchy – kleptocratic statism from above.
Real nationalization occurs when governments act in the public interest
to take over private property. The 19th-century program to nationalize
the land (it was the first plank of the Communist Manifesto) did not
mean anything remotely like the government taking over estates, paying
off their mortgages at public expense and then giving it back to the
former landlords free and clear of encumbrances and taxes. It meant
taking the land and its rental income into the public domain, and
leasing it out at a user fee ranging from actual operating cost to a
subsidized rate or even freely as in the case of streets and roads.

Nationalizing the banks along these lines would mean that the government
would supply the nation’s credit needs. The Treasury would become the
source of new money, replacing commercial bank credit. Presumably this
credit would be lent out for economically and socially productive
purposes, not merely to inflate asset prices while loading down
households and business with debt as has occurred under today’s
commercial bank lending policies.
How neoliberals falsify the West’s political history

The fact that today’s neoliberals claim to be the intellectual
descendants of Adam Smith make it necessary to restore a more accurate
historical perspective. Their concept of “free markets” is the
antithesis of Smith’s. It is the opposite of that of the classical
political economists down through John Stuart Mill, Karl Marx and the
Progressive Era reforms that sought to create markets free of extractive
rentier claims by special interests whose institutional power can be
traced back to medieval Europe and its age of military conquest.

Economic writers from the 16th through 20th centuries recognized that
free markets required government oversight to prevent monopoly pricing
and other charges levied by special privilege. By contrast, today’s
neoliberal ideologues are public relations advocates for vested
interests to depict a “free market” is one free of government
regulation, “free” of anti-trust protection, and even of protection
against fraud, as evidenced by the SEC’s refusal to move against Madoff,
Enron, Citibank et al.). The neoliberal ideal of free markets is thus
basically that of a bank robber or embezzler, wishing for a world
without police so as to be sufficiently free to siphon off other
peoples’ money without constraint.

The Chicago Boys in Chile realized that markets free for predatory
finance and insider privatization could only be imposed at gunpoint.
These free-marketers closed down every economics department in Chile,
every social science department outside of the Catholic University where
the Chicago Boys held sway. Operation Condor arrested, exiled or
murdered tens of thousands of academics, intellectuals, labor leaders
and artists. Only by totalitarian control over the academic curriculum
and public media backed by an active secret police and army could
“free markets” neoliberal style be imposed. The resulting privatization
at gunpoint became an exercise in what Marx called “primitive
accumulation” – seizure of the public domain by political elites backed
by force. It is a free market William-the-Conqueror or
Yeltsin-kleptocrat style, with property parceled out to the companions
of the political or military leader.

All this was just the opposite of the kind of free markets that Adam
Smith had in mind when he warned that businessmen rarely get together
but to plot ways to fix markets to their advantage. This is not a
problem that troubled Mr. Greenspan or the editorial writers of the New
York Times and Washington Post. There really is no kinship between their
neoliberal ideals and those of the Enlightenment political philosophers.
For them to promote an idea of free markets as ones “free” for political
insiders to pry away the public domain for themselves is to lower an
intellectual Iron Curtain on the history of economic thought.

The classical economists and American Progressives envisioned markets
free of economic rent and interest – free of rentier overhead charges
and monopoly price gouging, free of land-rent, interest paid to bankers
and wealthy financial institutions, and free of taxes to support an
oligarchy. Governments were to base their tax systems on collecting
the “free lunch” of economic rent, headed by that of favorable locations
supplied by nature and given market value by public investment in
transportation and other infrastructure, not by the efforts of landlords
themselves.

The argument between Progressive Era reformers, socialists, anarchists
and individualists thus turned on the political strategy of how best to
free markets from debt and rent. Where they differed was on the best
political means to achieve it, above all the role of the state. There
was broad agreement that the state was controlled by vested interests
inherited from feudal Europe’s military conquests and the world that was
colonized by European military force. The political question at the turn
of the 20th century was whether peaceful democratic reform could
overcome the political and even military resistance wielded by the Old
Regime using violence to retain its “rights.” The ensuing political
revolutions were grounded in the Enlightenment, in the legal philosophy
of men such as John Locke, political economists such as Adam Smith, John
Stuart Mill and Marx. Power was to be used to free markets from the
predatory property and financial systems inherited from feudalism.
Markets were to be free of privilege and free lunches, so that people
would obtain income and wealth only by their own labor and enterprise.
This was the essence of the labor theory of value and its complement,
the concept of economic rent as the excess of market price over socially
necessary cost-value.

Although we now know that markets and prices, rent and interest,
contractual formalities and nearly all the elements of economic
enterprise originated in the “mixed economies” of Mesopotamia in the
fourth millennium BC and continued throughout the mixed public/private
economies of classical antiquity, the discussion was so politically
polarized that the idea of a mixed economy with checks and balances
received scant attention a century ago.

Individualists believed that all that shrinking central governments
would shrink the control mechanism by which the vested interests
extracted wealth without work or enterprise of their own. Socialists saw
that a strong government was needed to protect society from the attempts
of property and finance to use their gains to monopolize economic and
political power. Both ends of the political spectrum aimed at the same
objective – to bring prices down to actual costs of production. The
common aim was to maximize economic efficiency so as to pass on the
fruits of the Industrial and Agricultural Revolutions to the population
at large. This required blocking the rentier class of interlopers from
grabbing the public domain and controlling the allocation of resources.
Socialists did not believe this could be done without taking the state’s
political and legal power into their own hands. Marxists believed that a
revolution was necessary to reclaim property rent for the public domain,
and to enable governments to create their own credit rather than borrow
at interest from commercial bankers and wealthy bondholders. The aim was
not to create a bureaucracy but to free society from the surviving
absentee ownership power of the vested property and financial interests.

All this history of economic thought has been as thoroughly expunged
from today’s academic curriculum as it has from popular discussion. Few
people remember the great debate at the turn of the 20th century: Would
the world progress fairly quickly from Progressive Era reforms to
outright socialism – public ownership of basic economic infrastructure,
natural monopolies (including the banking system) and the land itself
(and to Marxists, of industrial capital as well)? Or, could the liberal
reformers of the day – individualists, land taxers, classical economists
in the tradition of Mill, and American institutionalists such as Simon
Patten – retain capitalism’s basic structure and private property
ownership? If they could do so, they recognized that it would have to be
in the context of regulating markets and introducing progressive
taxation of wealth and income. This was the alternative to outright
“state” ownership. Today’s extreme “free market” idea is a dumbed-down
caricature of this position.

All sides viewed the government as society’s “brain,” its forward
planning organ. Given the complexity of modern technology, humanity
would shape its own evolution. Instead of evolution occurring by
“primitive accumulation,” it could be planned deliberately.
Individualists countered that no human planner was sufficiently
imaginative to manage the complexity of markets, but endorsed the need
to strip away all forms of unearned income – economic rent and the rise
in land prices that Mill called the “unearned increment.” This involved
government regulation to shape markets. A “free market” was an active
political creation and required regulatory vigilance.

As public relations advocates for the vested interests and special
rentier privilege, today’s “neoliberal” advocates of “free” markets seek
to maximize economic rent – the free lunch of price in excess of
cost-value, not to free markets from rentier charges. So misleading a
pedigree only could be achieved by outright suppression of knowledge of
what Locke, Smith and Mill really wrote. Attempts to regulate “free
markets” and limit monopoly pricing and privilege are conflated with
“socialism,” even with Soviet-style bureaucracy. The aim is to deter the
analysis of what a “free market” really is: a market free of unnecessary
costs: monopoly rents, property rents and financial charges for credit
that governments can create freely.

Political reform to bring market prices in line with socially necessary
cost-value was the great economic issue of the 19th century. The labor
theory of intrinsic cost-value found its counterpart in the theory of
economic rent: land rent, monopoly price gouging, interest and other
returns to special privilege that increased market prices purely by
institutional property claims. The discussion goes all the way back to
the medieval churchmen defining Just Price. The doctrine originally was
applied to the proper fees that bankers could charge, and later was
extended to land rent, then to the monopolies that governments created
and sold off to creditors in an attempt to extricate themselves from debt.

Reformists and more radical socialists alike sought to free capitalism
of its egregious inequities, above all its legacy from Europe’s Dark Age
of military conquest when invading warlords seized lands and imposed an
absentee landlord class to receive the rental income, which was used to
finance wars of further land acquisition. As matters turned out, hopes
that industrial capitalism could reform itself along progressive lines
to purge itself of its legacy from feudalism have come crashing down.
World War I hit the global economy like a comet, pushing it into a new
trajectory and catalyzing its evolution into an unanticipated form of
finance capitalism.

It was unanticipated largely because most reformers spent so much effort
advocating progressive policies that they neglected what Thorstein
Veblen called the vested interests. Their Counter-Enlightenment is
creating a world that would have been deemed a dystopia a century ago –
something so pessimistic that no futurist dared depict a world run by
venal and corrupt bankers, protecting as their prime customers the
monopolies, real estate speculators and hedge funds whose economic rent,
financial gambling and asset-price inflation is turned into a flow of
interest in today’s rentier economy. Instead of industrial capitalism
increasing capital formation we are seeing finance capitalism strip
capital, and instead of the promised world of leisure we are being drawn
into one of debt peonage.

The financial travesty of democracy

The financial sector has redefined democracy by claiming claims that the
Federal Reserve must be “independent” from democratically elected
representatives, in order to act as the bank lobbyist in Washington.
This makes the financial sector exempt from the democratic political
process, despite the fact that today’s economic planning is now
centralized in the banking system. The result is a regime of insider
dealings and oligarchy – rule by the wealthy few.

The economic fallacy at work is that bank credit is a veritable factor
of production, an almost Physiocratic source of fertility without which
growth could not occur. The reality is that the monopoly right to create
interest-bearing bank credit is a free transfer from society to a
privileged elite. The moral is that when we see a “factor of production”
that has no actual labor-cost of production, it is simply an
institutional privilege.

So this brings us to the most recent debate about “nationalizing” or
“socializing” the banks. The Troubled Asset Relief Program (TARP) so far
has been used for the following uses that I think can be truly deemed
anti-social, not “socialist” in any form.

By the end of last year, $20 billion was used to pay bonuses and
salaries to financial mismanagers, despite the plunge of their banks
into negative equity. And to protect their interests, these banks
continued to pay lobbying fees to persuade legislators to give them yet
more special privileges.

While Citibank and other major institutions threatened to bring the
financial system crashing down by being “too big to fail,” over $100
billion of TARP funds was used to make them even bigger. Already
teetering banks bought affiliates that had grown by making irresponsible
and outright fraudulent loans. Bank of America bought Angelo Mozilo’s
Countrywide Financial and Merrill Lynch, while JP Morgan Chase bought
Bear Stearns and other big banks bought WaMu and Wachovia.

Today’s policy is to “rescue” these giant bank conglomerates by enabling
them to “earn” their way out of debt – by selling yet more debt to an
already over-indebted U.S. economy. The hope is to re-inflate real
estate and other asset prices. But do we really want to let banks “pay
back taxpayers” by engaging in yet more predatory financial practices
vis-à-vis the economy at large? It threatens to maximize the margin of
market price over direct costs of production, by building in higher
financial charges. This is just the opposite policy from trying to bring
prices for housing and infrastructure in line with technologically
necessary costs. It certainly is not a policy to make the U.S. economy
more globally competitive.

The Treasury’s plan to “socialize” the banks, insurance companies and
other financial institutions is simply to step in and take bad loans off
their books, shifting the loss onto the public sector. This is the
antithesis of true nationalization or “socialization” of the financial
system. The banks and insurance companies quickly got over their initial
knee-jerk fear that a government bailout would occur on terms that would
wipe out their bad management, along with the stockholders and
bondholders who backed this bad management. The Treasury has assured
these mismanagers that “socialism” for them is a free gift. The primacy
of finance over the rest of the economy will be affirmed, leaving
management in place and giving stockholders a chance to recover by
earning more from the economy at large, with yet more tax favoritism.
(This means yet heavier taxes shifted onto consumers, raising their
living costs accordingly.)

The bulk of wealth under capitalism – as under feudalism –always has
come primarily from the public domain, headed by the land and formerly
public utilities, capped most recently by the Treasury’s debt-creating
power. In effect, the Treasury creates a new asset ($11 trillion of new
Treasury bonds and guarantees, e.g. the $5.2 trillion to Fannie and
Freddie). Interest on these bonds is to be paid by new levies on labor,
not on property. This is what is supposed to re-inflate housing, stock
and bond prices – the money freed from property and corporate taxes will
be available to be capitalized into yet new loans.

So the revenue hitherto paid as business taxes will still be paid – in
the form of interest – while the former taxes will still be collected,
but from labor. The fiscal-financial burden thus will be doubled. This
is not a program to make the economy more competitive or raise living
standards for most people. It is a program to polarize the U.S. economy
even further between finance, insurance and real estate (FIRE) at the
top and labor at the bottom.

Neoliberal denunciations of public regulation and taxation as
“socialism” is really an attack on classical political economy – the
“original” liberalism whose ideal was to free society from the parasitic
legacy of feudalism. A truly socialized Treasury policy would be for
banks to lend for productive purposes that contribute to real economic
growth, not merely to increase overhead and inflate asset prices by
enough to extract interest charges. Fiscal policy would aim to minimize
rather than maximizing the price of home ownership and doing business,
by basing the tax system on collecting the rent that is now being paid
out as interest. Shifting the tax burden off wages and profits onto rent
and interest was the core of classical political economy in the 18th and
19th centuries, as well as the Progressive Era and Social Democratic
reform movements in the United States and Europe prior to World War I.
But this doctrine and its reform program has been buried by the
rhetorical smokescreen organized by financial lobbyists seeking to muddy
the ideological waters sufficiently to mute popular opposition to
today’s power grab by finance capital and monopoly capital. Their
alternative to true nationalization and socialization of finance is debt
peonage, oligarchy and neo-feudalism. They have called this program
“free markets.”

Michael Hudson is a former Wall Street economist. A Distinguished
Research Professor at University of Missouri, Kansas City (UMKC), he is
the author of many books, including Super Imperialism: The Economic
Strategy of American Empire (new ed., Pluto Press, 2002) He can be
reached via his website, mh at michael-hudson.com