STOCK MARKET WATCH -- Friday, 30 November 2012

[Demeter]

12. Michael Hudson on How Finance Capital Leads to Debt Servitude

http://www.nakedcapitalism.com/2012/09/michael-hudson-on-how-finance-capital-leads-to-debt-servitude.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

Q: How has the financial system evolved into the form of economic servitude that you call “debt peonage” in your book, implying a negation of democracy as well as free-market capitalism as classically understood?

A: The original hope of banking and finance capitalism in the 19th century was that banks would make productive loans to finance industry. The aim was for banks to do something new, that no economy had done in the past: make loans not merely to ship and market goods once they were produced, but to finance new capital investment by manufacturers and producers, as well as by the public sector to build infrastructure. The idea was for these investments to create profits out of which to pay the interest and the principal back to the lenders.

This was defined as productive lending. Nothing like it occurred in antiquity or in the post-feudal period. Investment always had been self-financed out of savings. Banks only entered the picture when it came to shipping and trading what had been produced.

As matters have turned out, banking has allied itself with real estate, mineral extraction, oil, gas and monopolies instead of with industry. So instead of getting a share of the profits, it has focused on lending against economic rent. This technical term is defined as unearned income. It is obtained by charging prices in excess of cost value. Economic rent has no counterpart in the cost of putting means of production in place. And land has no cost; it is provided by nature. The only “cost” is the price of buying the right to charge rent on it. This economic rent is created by special legal privilege or ownership rights to install tollbooths on roads, education systems and other basic needs. Owners aim to charge as they can, without regard for how this affects overall growth and balance.

Banks have the privilege of creating credit and charging for access to it. Most bank credit is extended to buy property or rent-seeking privileges already in place. Banks rarely are set up to evaluate new capital investment. Their time frame is notoriously short-term. It takes time to develop production facilities, mount a sales campaign and develop markets for new goods. It is easier simply to buy a privilege to extract charges without producing anything at all. This is what property rights are, along with special privileges such as charging interest without making a tangible investment. So banks back the kind of economy that makes money without new capital investment. The easiest way to do this is to make loans for real estate at increasingly debt-leveraged, bank-inflated prices. They call this a post-industrial “service” economy. It is simply a rentier tollbooth economy.

Classical economists from the Physiocrats down through the Progressive Era a century ago explained why land rent, subsoil natural resource rent and monopoly rent should have been the source of tax for cities, states and nations. That is the essence of classical economics. But instead of supporting productive industry by extending credit to increase tangible capital investment, the banking system has extended credit mainly (about 80 percent in the United States and most English-speaking countries) to buy real estate and load it down with debt. The result is that rental income is used to pay interest to the banks rather than to pay taxes. This forces governments to tax wages, profits and sales. That increases the cost of living and doing business, on top of the interest charge...MORE--IMPORTANT!

Read more at http://www.nakedcapitalism.com/2012/09/michael-hudson-on-how-finance-capital-leads-to-debt-servitude.html#GWKesZhwLyWVrezf.99