My Talk With Michael Hudson, Part 2

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 is the author of such books as Super Imperialism. Michael W. Hudson the reporter is a staff writer at the Center for Public Integrity and author of a new book, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America, and Spawned a Global Crisis.

This is Part 2 of an edited transcript of an email conversation between the two Michael Hudsons. See Part 1 here.

Michael W. Hudson, reporter:

Getting people to load up on debt required not only crooked tactics, but also changing their attitudes about debt. First, the finance industry stopped calling it debt. Debt meant you were in the hole. You owed. Calling it credit removed the stigma of going into deficit and instead replaced it with a sense that you were being conferred an admirable distinction. As a consumer attorney once told me, nobody wants to eat a horse mackerel. Call it tuna fish, and it sounds much tastier.

In the 1950s and '60s, the finance industry worried about ministers preaching about the evils of debt. It began offering seminars and educations materials to the clergy. "When the ministers stopped telling the people that credit was a sin," a former industry lobbyist recalled, "they began to realize that this really was a way of life." Then there were the TV commercials that slyly suggested -- even as they denied it -- that having a credit card could make you happier, smarter, sexier.

By the Reagan years, the finance industry was inundating American homeowners with advertising campaigns designed to encourage them to borrow against their homes to take dream vacations or pay their children's college tuition. One print ad showed a couple beaming in front of their home: "We just discovered $50,000 hidden in our house!" A former Citibank executive later recalled in the New York Times: "Calling it a 'second mortgage,' that's like hocking your house. But call it 'equity access,' and that sounds more innocent."

Michael Hudson, economist:

The marketeers did their jobs well. Throughout most of history, people tried to steer free of debt, above all when it came to "mortgaging the homestead." This is the first time in history when people imagined that the way to get rich and rise in the world was to run into debt, not stay out of it. There is a belief that rising housing prices make people -- and the economy -- richer. But what they actually do is raise the access price for housing to new buyers. This obliges them to take on a lifetime of debt. And that raises their cost of living. All this makes economies with highly financialized real estate markets less competitive in world markets.

My first real job on Wall Street was as an economist at the Savings Banks Trust Company from 1962 to '64. (It was at this point that I changed my given name, Huckleberry -- my father's favorite book had been Huckleberry Finn -- and took the name Michael. Somehow Huck Hudson didn't sound weighty enough for someone working in the capital of high finance.) Savings Bank Trust was the "central" commercial bank for New York State's savings banks. My job was charting deposit statistics and tracing how they were recycled into mortgage loans. It became clear to me that most deposits grew simply by accruing quarterly interest - and hence, growing at an exponential rate. The more savings grew, the more was lent out as home mortgages - and the banks' receipt of interest was recycled continually.

Instead of imagining that real estate prices rose simply out of inertia or because of the rising population density (the "man/land ratio" as it was called), I saw the exponentially rising credit/land ratio as being more important.

What I learned on Wall Street wasn't anything like what I'd been taught in my graduate economics courses at New York University. My "money and banking" course had been taught by an abstract professor who taught economics as if it were science fiction about a parallel universe. He followed the usual academic tendency to teach students MV=PT, relating the money supply only to consumer prices (and wages). Nobody even today relates money and credit to asset prices. That amazes me, because it is the core of "wealth creation" Alan-Greenspan-style -- loading the economy down with debt to inflate asset prices.

What surprised me somewhat more was that followers of Henry George likewise had little interest in understanding the dynamics that bid up property prices. In 1994 I was hired to become research director of the Henry George School of Social Science here in New York. My main job was to create a set of national income and product accounts (NIPA) statistics, IRS statistics and Federal Reserve flow-of-funds statistics to explain the role of real estate rent and capital gains. (In economic terms, "rent" is not the monthly payment from tenants to landlords, but rather the wealth that one accumulates simply by owning something.) These statistics showed that, for homeowners, most net rental income was absorbed by mortgage interest.

That wasn't something "Georgists" wanted to hear. Most members of the board were in their 80s or 90s, because the sect was dying out. I was a couple of decades too young to pal around with them. I had known of Henry George only that he popularized the Single Tax on land and, in the 19th century, had spoken out against economic inequality -- not that he had moved far to the right of the political spectrum, or that his followers were mainly von Misians and the school was basically a feeder into the Ayn Rand "objectivist" cult that had been an early training ground for Alan Greenspan. They didn't want to hear about finance, largely because George had treated the economy as if it operated on barter -- and whatever errors or shortcomings he had, they felt obliged to adopt them. They still focused on rising population density as explaining real estate prices, and told me that they were uninterested in statistical analysis. As a result, I left there pretty quickly.

Michael W. Hudson, reporter:

My first job out of college was as a reporter at the Roanoke Times, a daily newspaper in the mountains of Virginia. It was the mid-1980s. I covered the police and courts beat. I spent my days talking to cops, prosecutors and defense attorneys. Many evenings I did what one old-time newsman once called "foot-in-the-door" reporting -- showing up at the homes of victims and suspects of crimes and trying to get them talk to me and tell their sides of the story.

Later, I began investigating big bureaucracies, such as Virginia's juvenile prison system. I learned that in large institutions the best sources of information generally didn't come from the top. Often the people in charge didn't know what was going on, or they had a vested interest in putting a happy face on things. I found better information by talking with low- and middle-level folks working in the trenches.

This experience, I think, prepared me for reporting on the rise of the subprime mortgage industry, from the end of George H.W. Bush's term in office through George W. Bush's second term. I talked to dozens, then hundreds, of former mortgage workers who described how their employers were using "boiler room" sales tactics to peddle mortgages with Rube Goldberg-like structures designed to obscure their true nature. I saw it more as a police story rather than a market or economic story. This was not a case of a few bad practices thriving around the margins, as the free market corrected itself. Fraud had become central to the mortgage market and its explosive growth.

By tracing the practices on the ground to the financiers who were bankrolling them, I could see that lots of people on Wall Street knew, or should have known, what was going on. As far back as 2003, a civil trial in Southern California had unearthed information about the relationship between Lehman Brothers and a subprime lender called First Alliance Mortgage Co. In 1995, a Lehman vice president who checked out the lender wrote a memo describing the lender as a financial "sweat shop" specializing in "high pressure sales for people who are in a weak state," a place where employees checked their "ethics at the door."

This didn't bother Lehman much. Over the next few years, it helped First Alliance raise hundreds of millions of dollars to bankroll its lending.