As this interview is very long, I've split it into two sections.

I think LeRoy will do a double take on the bit about Rubin. Granted, this is a left perspective.

********** Getting to the Heart of America's Economic Crisis

By MIKE WHITNEY

Mike Whitney: Before John Kennedy took office, anyone making an income of over $200,000 was taxed at a rate of 93 per cent. Corporations also paid a much higher percentage of the total tax burden than they do today. The higher tax rates on the wealthy never hurt Gross Domestic Product (GDP) which was consistently over 4% during these years, and the middle class flourished in a way that was unprecedented in world history. Why don't we return to the "redistributive" policies which worked so well in the past? Do you think "progressive taxation" is crucial for maintaining democracy and establishing greater equity among the people?

Michael Hudson: I think you¹re framing the tax problem too narrowly. At issue is not simply the tax rate on the income that's being taxed ­ at present, mainly wages, followed by profits. Classical economists focused first and foremost on WHAT should be taxed. From the Physiocrats through Adam Smith and John Stuart Mill to socialists such as Ferdinand Lasalle and America's Progressive Era reformers, they concluded that the main source of taxation should be unearned income, defined as land rent, monopoly rent, other forms of economic rent (income extracted without playing a necessary role in production) and capital gains on these rent-yielding assets, mainly land sites.

As matters stand today, you could raise the income tax to 100% and still not capture the actual cash-flow revenue of real estate, monopolies, and multinationals who use transfer pricing to manipulate their income and expense statements to show no reportable taxable income at all. So the first concern should be what kind of revenue to tax. Owning a real estate rental property is like owning an oil well in the days of the depletion allowance. In addition to charging off interest as a tax-deductible expense (rather than a financing choice), owners pretend that their buildings are depreciating, despite the fact that property prices have risen almost steadily.

So in most years no taxable income is reported at all. Real estate owners don't even have to pay a tax on capital gains ­what Mill called the unearned increment if they plow back their sales proceeds into buying even more assets. And this is just what the great majority of wealth-holders do. They keep on trading and accumulating, tax-free. The situation is much the same with companies taken over by corporate raiders. Paying interest to junk bond holders absorbs what formerly were taxable earnings paid out as dividends. This is what really is crippling the U.S. tax system and de-industrializing the economy.

When Kennedy became president, one of the first things he did was to pass the Investment Tax Credit. This gave industrial companies a credit for making tangible capital investment. Real estate got in on the ride too, but the idea was to use the tax system as an incentive to spur investment and employment so as to keep industrializing America.

Fast forward to today. The tax system favors speculative gains and absentee ownership. Ironic as it may sound, really wealthy people prefer not to make any income at all. They prefer to focus on total returns, which they take in the form of capital gains. This is why hedge fund billionaires pay a much lower tax than their secretaries. Real estate is still our largest sector ­most of its market price consisting of the land's site value ­ rather than industry and other means of production. Given the existing loopholes, I would prefer not to tax corporate profits or even income at all, if the government could tax the free lunch of economic rent at its source. The discussion of WHAT to tax therefore should take precedence over how highly to tax the scant income that wealthy people are obliged to declare from the FIRE sector ­ finance, insurance and real estate.

Perhaps the best way to frame the issue is to call this a re-industrialization discussion. Obviously, the more regressive the tax system is, the more poverty and inequality there will be. And as Aristotle said, democracy is the political stage immediately preceding oligarchy. That's what the economy is now evolving into.

MW: Why are Democrats so squeamish about taxing the people who have benefited most from our system? Do you see any sign that liberals will join the fight against the far-right ideologues who have dominated the economic debate for 30 years?

Michael Hudson: The short explanation as to why Democrats haven't taxed wealth is the power of lobbyists whom the special interests hire and the public relations think tanks they employ to promote Junk Economics. Most wealth is gained by special tax privileges these days, and the financial sector is the largest contributor to political campaigns, followed by real estate. The Democrats traditionally have been based in the large cities. As Thorstein Veblen pointed out in Absentee Ownership, urban politics is essentially a real-estate promotion project.

A century ago the tax issue was at the forefront of American politics. Reformers fought hard to enact the income tax ­ just the opposite of today's attempt to abolish it. The reason was that the first income tax fell mainly on the wealthy, and specifically on real estate, mining and monopolies, which were the main sources of wealth then, just as they are today.

The deep problem is an absence of economic philosophy of how the economy works as an overall system. Without distinguishing what kind of investment and wealth-seeking we want, it's hard to define a fiscal policy. The idea of a flat tax, for instance, is that all income is equally worthwhile ­ except that the flat tax avoids taxing property or cash flow that FIRE-sector lobbyists have managed to get the IRS to counts as costs. So it is not only value-free, it is explicitly anti-labor. You can find it applied most purely in the former Soviet countries such as the Baltic States.

I don't see the tax issue being discussed by Congress, except by anti-government tax cutters. And I don't see a realistic discussion beginning until people define just what progressive taxation means. It has to start with defining some kinds of income and investment as more economically productive than others. This would end the tax subsidies for debt leveraging and financial speculation.

MW: How should Obama approach the issue of "debt relief" for the victims of the housing boondoggle who are now losing their homes in record numbers? African Americans were particularly hurt by the subprime fiasco. Is there a way to minimize the losses of people who were trapped in a banker's scam?

Michael Hudson: Foreclosures are an age-old problem, so there is a broad repertory of ways to deal with them. In my mind the most effective law is New York State's law of Fraudulent Conveyance. On the books back when New York was a colony, it was retained when New York joined the United States. The problem was that rapacious English creditors sought to grab New York's rich upstate farmland. Their ploy was to lend mortgage money to farmers who pledged their land as collateral. Then they would foreclose ­ sometimes before the crop was in and farmers simply lacked the liquidity to pay. Other lenders would lend too much for the borrowers to pay back when the loan was suddenly called in ­ as could be done back then. So New York passed a law ruling that if a creditor made a loan without having a realistic idea of how the debtor was to pay it back, the transaction would be deemed to be fraudulent and the debt would be declared null and void.

In the 1980s, companies brought this defense against corporate raiders using junk bonds as their weapon of choice. Targeted companies claimed that they would be forced to downsize radically or even have their assets stripped to the point of bankruptcy. I thought that Third World countries that borrowed from the large New York banks should have raised this defense, as the only way they could pay was by either borrowing the interest, or (as matters turned out) stripped their assets by privatizing their public domain to raise the dollars.

Today, fraudulent bank loans such as Countrywide is accused of making would be prime examples of junk mortgages that should be annulled. But the mayor of Cleveland went further. He brought public nuisance charges against banks whose mortgage lending has led to foreclosures leaving homes vacant. They're being stripped by robbers and used as crack houses. Junk mortgage lenders should be liable to pay the clean-up costs of the debt pollution they've created.

MW: That sounds pretty radical.

Michael Hudson: But that's where the law itself is moving. Just last week, on June 26 after attorneys general in California, Illinois and Connecticut brought fraud charges against Countrywide, the Wall Street Journal quoted a California law professor spelling out that if the states can persuade the courts to grant restitution, it could be a staggering blow against Countrywide, requiring it to give back its profit on all those loans and conceivably give back houses on which it has foreclosed. Financial fraud is a serious matter. The remedies have long been on the books.

MW: Is there a less radical way to keep people in homes which may be too expensive for their incomes or should we be looking for other alternatives?

Michael Hudson: The answer depends on how you define homes as being too expensive. If you're talking about the mortgage's interest-rate jumps and amortization payments being too high to be afforded, then one way to keep them there is a partial write-down of the mortgage loan. Treasury Secretary Paulson already has endorsed a step that remains market-based: to assess what a realistic market price for the property would be, and write down the mortgage to that price.

The problem comes from homes that are WAY too expensive. This might be the result of a sudden expensive health problem, in which case they probably will have to move, as the United States doesn't have European-style health insurance and prefers to blame the victim for having gotten sick or injured. But if the lender knowingly made a bad loan in the first place and the buyer does have to move because their income is insufficient to begin with, they should get some relocation compensation at the very least, and the full legal remedy for fraud at best.

MW: Is their a viable alternative to "free trade" or will American workers continue to face persistent job losses, lower living standards and a "race to the bottom?

Michael Hudson: The reason U.S. labor has lost its competitiveness is not simply a race to the bottom. To see why U.S. exports are being priced out of world markets, you need to look not only at the take-home pay of workers, but also at what employers are not investing to raise capital productivity, and what they don't get from government in the form of basic infrastructure support.

One reason why employers have not invested as much in raising the productivity of their plant and equipment is that they are saddled with having to pay out more of their cash flow as interest to bondholders and banks, and dividends to assuage shareholder activists, the new euphemism for financial raiders.

U.S. corporate philosophy has been more driven by knee-jerk ideology than by enlightened self-interest. General Motors has pointed out that it has to pay enormous health care costs that its foreign competitors don't. Some sixty years belatedly it's finally discovered that socialized medicine is more efficient that health care privatized by predatory financial and insurance operators. Government services don't build in interest rate costs, dividends, exorbitant management remuneration, stock options and legal fees. All this absorbs a big part of the corporate expense for its work force ­ without raising labor's living standards in the process.

Meanwhile, educating doctors, dentists and nurses is much less costly abroad. Here, they emerge from medical school with hundreds of thousands of dollars in debt, and then have to take on more debt to set up their offices, then they need to buy expensive liability insurance. Once they get on an HMO schedule, they usually have to wait for a year or so to actually get paid. Meanwhile, they have to hire their own full-time bookkeepers just to deal with the HMOs. Doctors, dentists and nurses are being put on rations.

Most of all, the price of labor reflects the high cost of housing here ­mainly the cost of carrying a home mortgage ­ plus non-mortgage debt. Labor doesn't benefit from these costs. And as matters have turned out, industry hasn't benefited either. It's the price the U.S. economy as a whole is paying for having become financialized and privatized in a dysfunctional way.

MW: You have said that the financial crisis is analogous to a "boa constrictor wrapping itself around the economy and slowly strangling it." Would you elaborate on that?

Michael hudson: I was referring to debt deflation. As the debt overhead grows exponentially, it siphons off more and more money from being spent on production and consumption. For the financial sector, this is applauded as being the miracle of compound interest. The volume of loans keeps on growing by purely mathematical principles, without much regard for the economy's ability (or inability) to generate a large enough surplus to pay. More and more wages, corporate profits and tax revenues have to be earmarked to pay creditors. These creditors then turn around and lend out their flow of debt service to yet new borrowers. This involves finding more and more risky markets, while the debt becomes heavier and heavier.

To pay the carrying charges on these debts, wage earners cut back consumption while debt-wracked companies cut back on new capital investment, research and development. State, local and federal governments also pay interest on their deficits by cutting back on spending to maintain infrastructure or improve services. These cutbacks shrink the domestic market, leading to lower investment and hiring. All this is applauded as the magic of the marketplace in allocating resources. But it's the financial sector that is doing the applauding, not industry.

MW: Does that mean that there will be sudden jolts to the system like a major bank--perhaps Citigroup or Merrill---keeling over and sending the stock market crashing?

Michael Hudson: The economy reaches a Ponzi stage where banks lend their customers the interest to keep payments current. More and more mortgage loans have been structured this way in recent years. When creditors stop making these loans, there's a break in the chain of payments and defaults spread, crashing markets.

MW: Is the dollar doomed, or can the US lower its dual-deficits (fiscal and trade deficits) and continue to attract foreign capital in the future? And if the recession takes hold, business slows and unemployment rises, would that strengthen the dollar?

Michael Hudson: I assume that by doom you mean that the dollar will continue to sink against foreign currencies, while price inflation eats away at what wages will buy. The idea that a worse economy will be self-curing is IMF anti-labor ideology and Chicago School propaganda. This is indeed what Nobel Economic Prizes are given for, I grant you. But it's Junk Economics. A falling dollar threatens to become self-reinforcing. For starters, dollar-denominated stocks, bonds and real estate are worth less and less in terms of euros, sterling or other harder and foreign currencies. This doesn't provide much incentive for foreigners to invest here. And if we go into a recession (not to speak of depression), there will be even fewer profitable opportunities to invest.

Meanwhile, U.S. import dependency will continue to rise as the economy de-industrializes ­ that is, as it is further financialized. U.S. overseas military spending will throw yet more dollars onto the world's foreign exchange markets. So a weak economy here does NOT mean that the dollar will strengthen; it means we have a bad investment climate! Austerity will make us more dependent on foreign countries. For a foretaste, just look at what has happened when the IMF has imposed austerity plans on Third World debtors. And remember, last time when Robert Rubin was given a free hand, in reforming Russia under Clinton, the result was industrial collapse and bankruptcy.

MW: Wouldn't it be better for the world if there were no "reserve currency" at all and the value of money was simply dependent on economic strength and balanced budgets? As long as there is an "international currency," like the dollar, there will be an Empire, because the paper money of one country (US) dominates all others. Is democracy really possible without greater parity between the world's currencies?

Michael Hudson: Exchange rates are independent of political systems. That being said, oligarchic economies tend to go bust as a result of shifting the tax burden off real estate, monopolized and privatized infrastructure, and onto labor and industry. This makes them uncompetitive. For instance, the military-industrial complex operates on a cost-plus basis rather than a cost-minimizing basis. The question therefore is whether they can extort foreign tribute from other countries by enough to compensate. Spain couldn't do this from the New World after 1492, and Rome earlier simply destroyed Asia Minor and other imperial appendages.

Can the United States succeed better today? Dollar hegemony looks like the only way it can pull it off. By definition, a reserve currency is a loan from one government to another. This ends up becoming taxation without representation. It's inherently inequitable.

There are two reasons for central banks to hold dollars. One is for stabilization purposes to prevent currency raids such as occurred in Asia in 1997. The other is that keeping dollar receipts in the form of dollar-loans back to the United States holds down the price of their own currencies, and hence the price of their exports. This effect also could be achieved by imposing a floating tariff against imports from countries whose currencies are depreciating, with the money provided as a subsidy to exporters. But foreign countries aren't yet ready for this great a quantum political leap out of the American financial empire.

Regarding tax policy, there's not really a need for balanced budgets. Starting with the greenbacks during the Civil War years, the United States has demonstrated that governments don't have to raise taxes to spend money. They can simply print it. That's what the commercial banking system does, after all. In either case, the money is created spontaneously. The Treasury and Federal Reserve created $1 trillion in bailout credit for the financial sector in April alone ­ while making the hypocritical asymmetrical claim that Social Security will be broke in 40 years because of ITS trillion-dollar deficit. Iraq added another trillion or so.

The moral is that economic strength consists of the ability to create credit that fuels economic growth. But the privatized banking sector is crippling this strength in the United States these days. Instead of creating credit to fund industrial capital formation, the banking system is lending to bail out bad financial pyramiding.

MW: Do you see the growth of the financial sector as a positive development, or not?

Michael Hudson: Its behavior has become antithetical to the development of industrial capitalism. 19th century reformers inspired by Henri St. Simon in France sought to reorganize finance from debt financing to equity financing. But today's economy is going in just the opposite direction. It's replacing stocks with bonds and loans by banks and buyout funds, creating debt that is not being used to build up the productive capacity to pay back this debt with its interest charges. The result is what classical economists called unproductive debt.

MW: The financial sector seems less inclined to lend to develop useful products and enterprises. It prefers to repackage other people's debt (like mortgage-backed securities) and market them to gullible investors. Are the investment banks responsible for the massive expansion of credit and debt presently destroying the middle class and ruining the country?

Michael Hudson: That's what's happening. But a major reason why savings are flowing into these banks because the tax laws make it more profitable to debt leverage than to invest in industrial capital. The tax system has shaped a market where it pays more to speculate than to invest in building up new means of production. The financial sector has been deregulated on the logic that whatever makes the most money is the most efficient. The product that banks are selling is debt, and help in corporate takeovers, mergers and acquisition. Credit is a product that's almost free to create. Its main cost of production is the lobbying expense to buy Congressional support.

MW: So we're back to politics. What do you know about Barack Obama's economics advisors? Should we expect a repeat of Bill Clinton's "Rubinomics", where Wall Street got everything they asked for and American workers got NAFTA, currency deregulation, the repeal of Glass Steagall and other "trickle down" policies? Is there any hope that Obama may chart a new coarse and move in a progressive direction? What policies should President Obama enact to rekindle the American dream and breath some life into the battered middle class?

Michael Hudson: I'm not in any position to speak about what Mr. Obama will do. As for, economic advisors, their role in a political campaign usually is not so much to shape policy as to mobilize their constituency to support the candidate. The role of Mr. Rubin and his associates, at least at present, is therefore to round up Wall Street support. What influence such advisors will have after next January is yet to be seen. It probably will depend on the circumstances.

I can only hope that Mr. Obama will not pull a Tony Blair New Labor turnabout and revert to Clinton's pro-Wall Street, anti-labor type of policy. If that really were to happen, it would cause such disillusionment that it could fracture the Democratic Party irreparably.

I hope the opposite will happen, and I¹m doing what I can to help bring that about. But regarding politicians, I can only speak for my friend Dennis Kucinich. He has asked me to organize a Roosevelt-type Brains Trust of economic and political advisors to develop a program to re-industrialize America and save it from succumbing to the kind of polarization that was known as the Spanish Syndrome after the 16th century, and the Roman Empire syndrome before that: an economy where the wealthy magnates made themselves tax-free, shifted the burden onto labor and industry, and withdrew into their estates as economies lapsed back into localized subsistence production.

So all this has happened before, again and again. There is no automatic guarantee of progress. It has to be steered. Right now the only parties steering it are the large financial institutions on behalf of their wealthy clients. Hardly by surprise, their attitude is anti-labor.

I think economic circumstances will help impel Mr. Obama to make a swing back toward more classically progressive economic and tax policies. And I can't think of any other candidate who is in as good a position to force Congress to go along with his reforms. He can come out and back candidates willing to oppose the more recalcitrant Democratic Congressmen and Senators.

MW: On CBS "60 Minutes", Alan Greenspan admitted that he supported the invasion of Iraq. That's hardly surprising, since it is difficult to imagine that a nation can trudge off to war without the support of the banking establishment. How much of a role do the major financial institutions and corporate giants actually play in determining foreign policy? Is there something particular to our economic system (or our financial institutions?) that drives us to war over and over again?

Michael Hudson: I don't think the invasion of Iraq was a result of a financial sector decision. As for Mr. Greenspan, he's a public relations specialist, not a global strategist. I think that banks just try to maneuver as best they can in any given political system. But as a sector, they rarely support wars.

When I was at Chase Manhattan in the mid-1960s, Wall Street was not pushing the Vietnam War. Chase's CEO, George Champion, said it was fiscally irresponsible. It set in motion an inflation that led to a steady 35-year downturn in the bond market.

Think of it. Thirty-five years of rising interest rates, from 1945 to 1980, pushing down bond prices. Bonds always have been the key more than stocks. The rise in interest rates meant that the price of existing, lower-rate bonds went down steadily. And that was the result of the war's balance-of-payments deficit and Pres. Johnson's guns and butter approach encouraged by Junk Economics at the hands of faux-Keynesians such as Gardner Ackley, Johnson's Chairman of the Council of Economic Advisors.

The moral is that you can't really have a grab for empire ­and the wars that go with it ­and at the same time have a booming economy.

Something has to give, as we're seeing now. The remarkable thing is that people are not relating America's attempt to create a unipolar empire with the spreading economic polarization and financial squeeze that's going on. Industry for its part is losing out to finance, but simply has sought to make money by financializing itself.

MW: Paul Harris wrote a terrific article in the UK Guardian, "Welcome to Richistan, USA" in which he discusses the huge wealth-disparity in America today. He says:

"America's super-rich have returned to the days of the Roaring Twenties. As the rest of the country struggles to get by, a huge bubble of multi-millionaires lives almost in a parallel world. The rich now live in their own world of private education, private health care and gated mansions. They have their own schools and their own banks. They even travel apart - creating a booming industry of private jets and yachts. Their world now has a name, thanks to a new book by Wall Street Journal reporter Robert Frank which has dubbed it 'Richistan'.

In 1985 there were just 13 US billionaires. Now there are more than 1,000. In 2005 the US saw 227,000 new millionaires being created. One survey showed that the wealth of all US millionaires was $30 trillion, more than the GDPs of China, Japan, Brazil, Russia and the EU combined. The rich have now created their own economy for their needs, at a time when the average worker's wage rises will merely match inflation and where 36 million people live below the poverty line."

So here's my question: The middle class is being squeezed like never before while the chasm between rich and poor gets bigger and bigger. Do you think we are we approaching a crisis phase in this inequality gap, or am I being an alarmist?

Michael Hudson: For a crisis to occur, there needs to be at least two opposing forces or trends. The worst problem about America's present quandary is that there seems to be no force opposing financial polarization. Without a counterforce, without an opposition to the financial Counter-Enlightenment that's taking place, economic horizons will continue to shrink here.

We're indeed entering a Two Economy society. John Edwards picked up the theme and almost the same wording that British Prime Minister Benjamin Disraeli made popular in the late 19th century. He created Britain's Conservative Party in its modern form, recruiting compassionate conservatives known as Young England. Much like the socialists decrying the unfairness of the market economy in the brutal form it took in Britain. Their dream was to make industrialization compatible with a more socially minded morality. Disraeli's major political adversary was not socialism but liberal free-market ideals that urged nations to compete by lowering their wages ­ what today is called a race to the bottom. His welfare legislation was highlighted by the public health system introduced from 1874 to 1881 and promoted under his motto Sanitas sanitatum, Health, all is health. Compare that to today's conservatives!

In 1845, three years before the Communist Manifesto and the revolutions that swept across Europe in 1848, he addressed the horrors of unbridled laissez faire in a novel, Sybil, or The Two Nations. The subtitle referred to the rich and the poor, two nations between whom there is no intercourse and no sympathy, and Š who are not governed by the same laws. Although Disraeli placed his hopes in a morally regenerate aristocracy, he assigned the loftiest ideals to Sybil, the daughter of a factory worker. And when the novel's protagonist, Egremont, asks about conditions in British cities, a young stranger, dressed modestly in black, explains that although "men may be drawn into contiguity, they still continue virtually isolated. . . . In great cities men are brought together by the desire of gain. They are not in a state of co-operation, but of isolation, as to the making of fortunes. . . Christianity teaches us to love our neighbour as ourself; modern society acknowledges no neighbour.’ ‘Well, we live in strange times . . . society may be in its infancy,’ said Egremont . . . ‘but, say what you like, our Queen reigns over the greatest nation that ever existed.’ ‘Which nation?’ asked the younger stranger, ‘for she reigns over two. . . . Two nations; between whom there is no intercourse and no sympathy; who are as ignorant of each others habits, thoughts, and feelings, as if they were dwellers in different zones, or inhabitants of different planets; who are formed by a different breeding, are fed by a different food, are ordered by different manners, and are not governed by the same laws.’ ‘You speak of—’ said Egremont, hesitatingly. ‘THE Rich and THE Poor.’"

Disraeli depicted financial interests as the villain (popularizing the myth of the Jewish banker). His major political adversary was not socialism but liberal free-market ideals that urged nations to compete by lowering their wages – what today is called a race to the bottom. The Conservative Party’s economic compassion, however, was limited by the fact that it also was the party of landowners, above all those in the House of Lords who blocked the Liberal attempt to tax groundrent in 1909. The dichotomy is not merely between an elite and the masses, or between the vested interests and the downtrodden, the cultured and the great unwashed. It is something much more specific. These two nations, two cities, actually are two economies – Economy #1 (production and consumption) vs. financial and property-based Economy #2 which controls the economic surplus in the form of savings and investment. And the different characteristics of these two economies go far beyond the merely economic dimension. I cite this example to show what a true compassionate conservatism might be. It would be a good framework in which Pres. Obama might present his policies in ways that would maximize support from groups that used to be called liberal Republicans. Much of the business community might come on board if he balances his program well. In fact, it was a British Conservative banker, Geoffrey Gardiner, who drew my attention to Disraeli's novel. Charles Dickens Tale of Two Cities expressed the same idea of cities divided between the idle rich and those who had to work for a living. It is hard to imagine any politician writing such a novel today, although the socialist Michael Harrington popularized the theme in the 1960s in The Other America, and Democratic Vice-Presidential candidate Edwards campaigned in 2004 on the two Americas theme.

MW: How do we turn this trend around and push for changes to strengthen the middle class while providing a safety net for those who have slipped through the cracks? Do we need to rethink how we deal with people who are stuck in a cycle of grinding, unrelenting poverty?

Michael Hudson: The left wing focuses on people who have slipped through the cracks, the poor and the homeless, and ethnic and racial minorities. But the most serious problem lies at the economic core. Failure to restructure it and take control of finance will lead to excluding more and more people from participating in what you call a middle-class life.

As the Roman Empire polarized, the economy and its political wrapping were beyond saving. All that Christianity was able to do was provide charity on an individual basis. It could deal only with symptoms, not root causes. When the point has been reached where you can deal only with people who have slipped through the cracks, the long-term game is lost.

The problem is that the economic system as such is broken. So we're back to the beginning of this interview: What is needed is an alternative to the post-classical economics of the Chicago Boys and their fellow financial lobbyists.

Well, Hudson hit the seven ring, in my opinion. Not the bullseye; but so many seers have completely missed the target that Hudson is probably due a B-, if I mark on a curve.

Although he was purportedly just asking questions, Whitney still receives a somewhat higher score from me based on what I can take away from those questions.

All in all, it was an interesting piece. Thanks for making it available.

I'll have more to say about it tomorrow (probably). For now: I agree with Hudson that the central problem is the growing power of the FIRE (finance, insurance, real estate) sector of the economy, at the expense of the actually productive (industrial) sector. I also note that Hudson repeatedly refers back to the ideas of the original classical economists--I am predisposed to like him for that reason alone. As he says, the key question is WHAT should be taxed. My eyebrows were raised, though, by the following section in Part I of the interview:

MW: Is there a less radical way to keep people in homes which may be too expensive for their incomes or should we be looking for other alternatives?

Michael Hudson: The answer depends on how you define homes as being too expensive. If you're talking about the mortgage's interest-rate jumps and amortization payments being too high to be afforded, then one way to keep them there is a partial write-down of the mortgage loan. Treasury Secretary Paulson already has endorsed a step that remains market-based: to assess what a realistic market price for the property would be, and write down the mortgage to that price.

LeRoy: Assessing 'what a realistic market price for the property would be' is exactly what the markets are struggling with right now!! Who knows how much further home prices will fall? Business Week has a cover story in the most recent issue, warning that the threat of a free-fall in the housing market is growing: "The Home Price Abyss" is the title of the cover story. Scary reading. The idea of 'partial write-downs of mortgage loans' angers me: it has the effect of rewarding ignorant people who made dumb financial decisions...and punishes renters like me, who avoided buying during the housing bubble precisely because we understood what was going on. Such a scheme (for that is what it is) would make it much more difficult to obtain a mortgage loan in the future. Might as well emigrate, in that event. My question is: when will Angelo Mozilo, CEO of Countrywide Financial, which was at the heart of the sub-prime mortgage fiasco, be indicted? Once again, America has seen an almost unbelievable epidemic of corporate crime and financial chicanery---all of it, or very nearly all, stemming from the FIRE sector, which seems to attract crooks like honey attracts bears.

More tomorrow.

I agree he's on a slippery slope here trying to identify when people should be legitimately bailed out of what would normally be considered a bad financial decision. Here I'm more attuned to the sentiments of Spengler--which I posted here at this site, but nobody has responded to it. It is more intellectually consistent--and I would think also more legally consistent--to treat one contract like another, and not grant favoritism to certain groups who are perceived "victims". Favoritism is one big reason why we're in such a mess today. It is due to the tax favoritism that malinvestments such as housing occur in the first place. Revoking financial contracts is another form of ad hoc favoritism, and potentially adds to the deficit. It is another band-aid, like the stimulus package and the bank bailouts, and like the proposed gas tax holiday. If the economy were sensibly managed, we wouldn't need all these ad hoc adjustments which compound the problem.

The financial planners and politicians should learn from Hippocrates: first do no harm.

Here we see genuine economics!

Mr. Spengler didn't seem to have all his ducks in a row. For Instance, he says "Investors turn away from falling equity markets and buy inflation hedges, pushing oil and commodity prices up further.", and then follows it, two lines later, with the observation that "Blaming "speculators" for rising oil prices is cheap demagoguery." Is he, at that point, calling himself a cheap demagogue? If he understands that there is a difference between an investor and a speculator, then he misuses "investor" in the first line. If not, then he must equate them and thus contradict himself in those two lines.

Being an older than you, I may have a different interpretation of the terms. Here is the way I learned it, although not verbatim: an investor places funds in a business with the intent of receiving a share of the profits proportional to his investments. A speculator purchases a share of a business with the intent of reselling that share at a higher price, or altenatively, mimics selling a share of the business with the intent of later buying an equivalent share at a lower price. Put another way, what is important to the investor is the success of the business in producing and marketing its product; whereas the speculator treats the business itself as the product. My personal position is that the investors contribute to the health of an economy while the speculators attempt to exploit its weaknesses. The first is a sane economy; the second is not. Sadly, when caught in an insane economy, we all become speculators because our interest as investors is subverted by the actions of the speculators.

You answered your own question elegantly in the last sentence of this post. We are all speculators now because the market has forced us to be. The things I've lost out most on have been things I wanted to believe in (and still do) like solar. When I got in and got out, I usually made money. It's a rotten, counter-productive system which leads to "malinvestments" again.

I don't see the logical contradiction in what Spengler is saying. One speculates on commodities because that's the only game left in town. They are not to be blamed. The government is.

But even here, some speculations are simply immoral, like water, tobacco, and food staples with no substitutes. I myself own stock in some energy companies including oil, but I figure if oil gets too pricey, that's inducement to turn to things like wind and solar.