Wednesday, April 20, 2016

Michael Hudson — Fix our debt addiction to fix our economy

As an economic process, financialization makes money through debt leverage — taking on debt to pay for things that will increase income or the value of assets: for instance, taking out a loan for education or a mortgage on a property to open a store. But instead of using credit to finance tangible industrial investment that expands production, banks have been lending to those who want to buy property already in place — mainly real estate, stocks and bonds already issued — and to corporate raiders — those who buy companies with high-interest bonds. The effect often leaves a bankrupt shell of a company, or at least enables corporate raiders to threaten employees with bankruptcy that would wipe out their pension funds or employee stock ownership plans if they do not agree to replace defined benefit pensions with riskier contribution schemes.
The dynamic is more extractive than productive. Corporate financial managers, for example, can raise their company’s stock price simply by buying back shares from investors — financing the move by borrowing money. But in addition to raising debt-to-equity ratios, these short-term tactics “bleed” companies, forcing them to cut back on research, development and projects that require long lead times to complete. Corporate managers are paid by how much they can raise their companies’ stock prices in the short run. When earnings are diverted to pay dividends or buy back shares, growth slows. But by that time, today’s managers will have taken their money and bonuses and run.…
Fix our debt addiction to fix our economy
Michael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and Guest Professor at Peking University


Autumn Cote said...

I really liked an article you wrote.

Would you be OK if I shared one of your articles with the community? I can provide more information about Writer Beat or answer any question, but better than anything I can say in words, please take a look at the site.

If yes, just give me an "OK": and I'll handle the rest (there is no fee).


Matt Franko said...

"threaten employees with bankruptcy that would wipe out their pension funds or employee stock ownership plans if they do not agree to replace defined benefit pensions with riskier contribution schemes."

I would challenge him on his assertion that defined contribution is "riskier" than defined benefit...

and also, defined benefit plans assume a non-zero risk free rate... so if you advocate for permanent ZIRP you are putting both the defined benefit and contribution plans into jeopardy and acting just like the "banksters" you think you are operating against...

Matt Franko said...

"Guest Professor at Peking University"

Must not be getting his message across:

"Soros: China's debt-fueled economy resembles U.S. in 2007-08"

nivekvb said...

The problem is, the whole system is rotten, it needn't be as bad as this. Pension funds are scamming investors. Too many hidden costs, and when the Tories, yes, the Tories, tried to introduce more transparency, the City of London ganged up on them and the Tories then backed down.

I'm sure pension companies are just as bad in the US, probably worse, considering its ruthless type of vulgar capitalism.

It's to bring in very high quality state run pension schemes run on the MMT principle. Leaving them to predatory capitalism is to risky.

If there was actually a democracy in the US, things wrong be so much better for ordinary people. Many of the over class need to be put on trail for treason.

nivekvb said...

' It's is time to bring in', it should have said. I love this little mobile phone I use, but it's difficult to see mistakes on it.