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Reply #103: First Steps in Reforming the U.S. Financial and Tax System By Michael Hudson [View All]

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Nov-30-11 10:09 AM
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103.  First Steps in Reforming the U.S. Financial and Tax System By Michael Hudson
http://www.counterpunch.org/2011/11/18/first-steps-in-r... /

The Occupy Wall Street movement has many similarities with what used to be called the Great Awakening periods in America. Such periods always begin by realizing how serious the problem is. So diagnosis is the most important tactic. Diagnosing the problem mobilizes power for a solution. Otherwise, solutions will seem to come out of thin air and people wont understand why they are needed, or even the problems that solutions are intended to cure. The basic problem today is that nearly everyone is in debt. This is the problem in Europe too. There are Occupy Berlin meetings, the Greek and Icelandic protests, Spains Indignant demonstrations and similar ones throughout the world. When debts reach todays proportions, a basic economic principle is at work: Debts that cant be paid; wont be. The question is, just how are they not going to be paid? People with student loans are not permitted to declare bankruptcy to get a fresh start. The government or collection agencies dock their salaries and go after whatever property they have. Many peoples revenue over and above basic needs is earmarked to pay the bankers. Typical American wage earners pay about 40 percent of their wages on housing whose price is bid up by easy mortgage credit, and another 10 to 15 percent for credit cards and other debt service. FICA takes over 13 per cent, and federal, local and sales taxes another 15 percent or so. All this leaves only about a quarter of many peoples paychecks available for spending on goods and services. This is what is causing todays debt deflation. And Wall Street is supporting it, because it extracts income from the bottom 99% to pay the top 1%.

Half a century ago most economists imagined that the problem would be people saving too much as they got richer. Saving meant non-spending. But the problem has turned out to be just the opposite: debt. Overall, salaries have not risen in decades, so many people have borrowed just to break even. Instead of an era of free choice, very little of their income is available for discretionary spending. It is earmarked to pay the financial, insurance and real estate sectors, not the real production and consumption economy. And now repayment time has arrived. People are squeezed. So when Americas saving rate recently rose from zero to 3 percent of national income, it takes the form of people paying down the debts...Many people thought that the way to get rich faster was to borrow money to buy homes and stocks they expected to rise in price. But this has left the economy financially strapped. People are feeling depressed. The tendency is to blame themselves. I think that the Occupy Wall Street movement, at least here in New York, is like what has occurred in Greece and also in the Arab Spring. People are coming together, and at first they may simply watch whats going on. Onlookers may come by to see what its all about. But then they think, Wait a minute! Other people are having the same problem Im having. Maybe it is not really my fault. So they begin to see that all these other people who have a similar problem in not being able to pay their debts; they realize that they have been financially crippled by the banks. It is not that they have done something wrong or are sore losers, as Herman Cain says. Theres something radically wrong with the system.

Fifty years ago an old socialist told me that revolutions happen when people just get tired of being afraid. In todays case the revolution may grow nearer when people get over being depressed and stop blaming themselves. They come to think that we are all in this together and if this is the case, there must be something wrong with the way the economy is organized....Gradually, observers of Occupy Wall Street begin to feel stronger. There is positive peer pressure to reinforce their self-confidence. What they intuitively feel is that the Reagan-Clinton-Bush-Obama presidencies have squeezed their lives. The economy has become untracked. Whats basically wrong is that the financial system is running the government. For years, Republicans and Democrats have both said that a strong government, careful regulation and progressive taxation are markers on the road to serfdom. The politicians and neoliberal economists who write their patter say, Lets take planning out of the hands of government and put it in the free market. But every market is planned by someone or other. If governments step aside, then planning passes into the hands of the bankers, because of their key role in allocating credit.

The problem is that they have not created credit to finance industrial investment and employment. They have lent for speculation on asset price inflation, using debt leveraging to bid up housing prices, stock and bond prices, and foreign exchange rates. They have convinced borrowers that they can get rich on rising housing prices. But this merely makes new homebuyers go deeper into debt to buy a home. And when banks say that rising stock and bond prices are good for the economy, this price rise lowers the dividend or interest yield. This means that pension funds and individuals have to save much more for retirement. Instead of improving their life, it makes them work harder and borrow more just to stay in place. The banking systems alternative to the road to serfdom thus turns out to be a road to debt peonage. This financial engineering turns out to be worse than government planning. The banks have taken over the Federal Reserve and Treasury and put their lobbyists in charge men such as Tim Geithner and the others with ties to Rubinomics dating from the Clinton administration, and especially to Goldman Sachs and other giant Wall Street firms.

MUCH MORE AT LINK...TODAY'S MUST READ

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) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. He can be reached via his website, mh@michael-hudson.com
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