My Talk With Michael Hudson, Part 1

Michael Hudson and Michael Hudson are often mistaken for each other. Along with sharing a name, they share an interest in the creative ways that some people help themselves to other people's money. Michael Hudson the economist -- author of such books as Super Imperialism -- teaches at the University of Missouri-Kansas City. In 2006, he wrote a prescient cover story for Harper's entitled "The New Road to Serfdom: An illustrated guide to the coming real estate collapse." Michael W. Hudson the reporter is a staff writer at the Center for Public Integrity, a nonprofit news organization. He's been credited with being far ahead of the media pack in exposing subprime lenders' methods. He's the author of the new book, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America, and Spawned a Global Crisis.

This is Part 1 of an edited transcript of an email conversation between the two Michael Hudsons.

Michael W. Hudson, reporter:

First of all, let me apologize for all the confusion that the publication of my book has caused. I've lost count of the magazines and Web sites have identified me as you, and vice versa. I am not trying to assume your identity. I swear.

I first became aware of the "Will-the-real-Michael-Hudson-please-stand-up?" problem in the spring of 2006. I started getting compliments from friends and colleagues for your Harper's piece about the coming real estate bust. I pushed aside the unworthy impulse to simply say, "Thanks," and explained that I hadn't written the story. A different Michael Hudson, an economist, had written it.

Besides the fact that there was another Michael Hudson out there writing a Harper's cover story I wished I'd written, the thing that struck me was your willingness to go beyond a "what-goes-up-must-come-down" analysis of the housing run-up. You came right out and declared that "this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests."

I was also intrigued by the way you questioned not only the sustainability but also the ideology of the housing boom, noting how going into debt -- taking on a huge mortgage -- had become defined as an "investment," as a path to not only wealth but freedom as well.

As I reported on the mortgage market, one thing that fascinated me was how the impresarios of the housing boom used the idea of the American dream to clear the way. They talked about homeownership as if nothing else mattered. Even Ameriquest, the most notorious of the subprime sharks, called itself "Proud Sponsor of the American Dream" and described its mission as "helping people achieve their homeownership dreams and financial freedom." There was one problem: Ameriquest almost never made home purchase mortgages. It was a refi shop. In 2004, one quarter of 1 percent of its loans went for home purchases. Rather than promoting home ownership, Ameriquest's loans increased the odds that borrowers would end up in foreclosure, by ratcheting up the amount of debt they owed on their homes.

The rhetoric worked well, though, on Democrats who worried about minority access to credit as well as on Republicans who embraced George W. Bush's "ownership society." Some conservatives have pushed the talking point that liberal Democrats "forced" bankers to make subprime loans. The lenders made these loans, however, not because government required them to do so, but because they were wildly profitable. What the homeownership spiel did, though, was give the mortgage lenders a fig leaf they could hide behind. Whenever somebody suggested tougher rules on home loans, the mortgage industry painted it as an assault on homeownership and equal opportunity.

Michael Hudson, economist:

I first heard of you about a decade ago. A Norwegian economist greeted me at a German economics conference and telling me that he had just bought my latest book. He then proudly held up your first book on consumer debt, Merchants of Misery, and suggested I autograph it.

The next year there was a third Michael Hudson at the same conference, giving an article on Georg Simmel's Philosophy of Money. The offprints were mailed to me by mistake. I began to wonder if there was something in the numerology of names that led to three Michael Hudsons all dealing with money and credit.

I never heard of the third MH again, but I began reading your articles, especially after you joined the Wall Street Journal. While you were dealing with the abuses on the ground level, I was dealing with the economy-wide debt level. I'm on the economics faculty at the University of Missouri at Kansas City. UMKC is the main alternative to the Chicago School monetarists. Where the Chicago Schoolers speak of "money" and relate it to consumer prices, I focus on credit and relate it to asset prices. I popularized my academic articles for Harpers in 2006, explaining how real estate prices were determined by how much a bank would lend. Lower interest rates, slower amortization rates ("interest-only loans"), lower down payments and easier credit terms enabled millions of Americans to take on huge debts today with the hope of reaping huge capital gains sometime in the future -- or simply to avoid having to pay more as home prices rose beyond their means.

Your articles showed how the mortgage brokers and other pilot fish for Wall Street increased debt pyramiding by outright fraud. These sleight-of-hand lending practices at the local level were enabled by junk economics at the highest level. Alan Greenspan became a Bubblemeister, applauded by CNBC and the media for convincing them that prices bid up by debt leveraging was "wealth creation."

This wealth creation really was debt creation. That's what was bidding up real estate prices -- just as was the case with leveraged buyouts bidding up stock prices during the takeover wave. And a rising proportion of this debt was "empty" debt, without any corresponding real value. Much of it simply represented hope that real estate prices would rise all the more. And much of it was based on fictitious income statements, fictitious appraisals, fictitious mortgages filled in by crooks -- thousands of people all involved in financial crime. As my UMKC colleague Bill Black has noted, not a single major player has been indicted in the recent financial scandals -- except for the one person who walked into a police station with his hands up and surrendered (Bernie Madoff).