Ruling on Behalf of Wall Street's "Super Rich": The
Financial End Time has Arrived

By Prof. Michael Hudson

Global Research, November 16, 2010

www.globalresearch.ca/PrintArticle.php?articleId=21947

Now that President Obama is almost celebrating his
bipartisan willingness to renew the tax cuts for the
super-rich enacted under George Bush ten years ago, it
is time for Democrats to ask themselves how strongly
they are willing to oppose an administration that looks
like Bush-Cheney III. Is this what they expected by Mr.
Obama's promise to rise above partisan politics - by
ruling on behalf of Wall Street, now that it is the
major campaign backer of both parties?

It is a reflection of how one-sided today's class war
has become that Warren Buffet has quipped that "his"
side is winning without a real fight being waged. No
gauntlet has been thrown down over the trial balloon
that the president and his advisor David Axelrod have
sent up over the past two weeks to extend the Bush tax
cuts for the wealthiest 2% for "just" two more years.
For all practical purposes the euphemism "two years"
means forever - at least, long enough to let the
super-rich siphon off enough more money to bankroll
enough more Republicans to be elected to make the tax
cuts permanent.

Mr. Obama seems to be campaigning for his own defeat!
Thanks largely to the $13 trillion Wall Street bailout
- while keeping the debt overhead in place for
America's "bottom 98%" - this happy 2% of the
population now receives an estimated three quarters
(~75%) of the returns to wealth (interest, dividends,
rent and capital gains). This is nearly double what it
received a generation ago. The rest of the population
is being squeezed, and foreclosures are rising.

Charles Baudelaire quipped that the devil wins at the
point where he manages to convince the world that he
doesn't exist. Today's financial elites will win the
class war at the point where voters believe it doesn't
exist - and believe that Mr. Obama is trying to help
them rather than shepherd them into debt peonage as the
economy settles into debt deflation.

We are dealing with shameless demagogy. The financial
End Time has arrived, but Mr. Obama's happy-talk
pretends that "two years" will get us through the
current debt-induced depression. The Republican plan is
to make more Congressional and Senate gains in 2012 as
Mr. Obama's former supporters "vote with their
backsides" and stay home, as they did earlier this
month. So "two years" means forever in politician-talk.
Why vote for a politician who promises "change" but is
merely an exclamation mark for the Bush-Cheney policies
from Afghanistan and Iraq to Wall Street's Democratic
Leadership Council on the party's right wing? One of
its leaders, after all, was Mr. Obama's Senate mentor,
Joe Lieberman.

The second pretense is that cutting taxes for the
super-rich is necessary to win Republican support for
including the middle class in the tax cuts. It is as if
the Democrats never won a plurality in Congress. (One
remembers George W. Bush with his mere 50+%, pushing
forward his extremist policies on the logic that: "I've
got capital, and I'm using it." What he had, of course,
was Democratic Leadership Committee support.) The
pretense is "to create jobs," evidently to be headed by
employment of shipyard workers to build yachts for the
nouveau riches and sheriff's deputies to foreclose on
the ten million Americans whose mortgage payments have
fallen into arrears. It sounds Keynesian, but is more
reminiscent of Thomas Robert Malthus's lugubrious claim
(speaking for Britain's landed aristocracy) that
landlords would keep the economy going by using their
rental income (to be protected by high agricultural
tariffs) to hire footmen and butlers, tailors and
carriage-makers.

It gets worse. Mr. Obama's "Bush" tax cut is only Part
I of a one-two punch to shift taxes onto wage earners.
Congressional economists estimate that extending the
tax cuts to the top 2% will cost $700 to $750 billion
over the next decade or so. "How are we going to go out
and borrow $700 billion?" Mr. Obama asked Steve Croft
on his Sixty Minutes interview on CBS last week.

It was a rhetorical question. The President has
appointed a bipartisan commission (right-wingers on
both sides of the aisle) to "cure" the federal budget
deficit by cutting back social spending - to pay yet
more bailouts to the economy's financial wreckers. The
National Commission on Fiscal Responsibility and Reform
might better be called the New Class War Commission to
Scale Back Social Security and Medicare Payments to
Labor in Order to Leave more Tax Revenue Available to
Give Away to the Super-Rich. A longer title than the
Deficit-Reduction Commission used by media friendlies,
but sometimes it takes more words to get to the heart
of matters.

The political axiom at work is "Big fish eat little
fish." There's not enough tax money to continue
swelling the fortunes of the super-rich pretending to
save enough to pay the pensions and related social
support that North American and European employees have
been promised. Something must give - and the rich have
shown themselves sufficiently foresighted to seize the
initiative. For a preview of what's in line for the
United States, watch neoliberal Europe's fight against
the middle and working class in Greece, Ireland and
Latvia; or better yet, Pinochet's Chile, whose
privatized Social Security accounts were quickly wiped
out in the late 1970s by the kleptocracy advised by the
Chicago Boys, to whose monetarist double-think Mr.
Obama's appointee Ben Bernanke has just re-pledged his
loyalty.

What is needed to put Mr. Obama's sell-out in
perspective is the pro-Wall Street advisors he has
chosen - not only Larry Summers, Tim Geithner and Ben
Bernanke (who last week reaffirmed his loyalty to
Milton Friedman's Chicago School monetarism), but by
stacking his Deficit Reduction Commission with
outspoken advocates of cutting back Social Security,
Medicare and other social spending. Their ploy is to
frighten the public with a nightmare of $1 trillion
deficit to pay retirement income over the next half
century - as if the Treasury and Fed have not just
given Wall Street $13 trillion in bailouts without
blinking an eye. President Obama's $750 billion tax
giveaway to the wealthiest 2% is mere icing on the cake
that the rich will be eating when the bread lines get
too long.

To put matters in perspective, bear in mind that
interest on the public debt (that Reagan-Bush
quadrupled and Bush-Obama redoubled) soon will amount
to $1 trillion annually. This is tribute levied on
labor - increasing the economy's cost of living and
doing business - paid for losing the fight for economic
reform and replacing progressive taxation with
regressive neoliberal tax policy. As for military
spending in the Near East, Asia and other regions
responsible for much of the U.S. balance-of-payments
deficit, Congress will always rise to the occasion and
defer to whatever foreign threat is conjured up
requiring new armed force.

It's all junk economics. Running a budget deficit is
how modern governments inject the credit and purchasing
power needed by economies to grow. When governments run
surpluses, as they did under Bill Clinton (1993-2000),
credit must be created by banks. And the problem with
bank credit is that most is lent, at interest, against
collateral already in place. The effect is to inflate
real estate and stock market prices. This creates
capital gains - which the "original" 1913 U.S. income
tax treated as normal income, but which today are taxed
at only 15% (when they are collected at all, which is
rarely in the case of commercial real estate). So
today's tax system subsidizes the inflation of
debt-leveraged financial and real estate bubbles.

The giveaway: the Commission's position on tax
deductibility for mortgage interest

The Obama "Regressive Tax" commission spills the beans
with its proposal to remove the tax subsidy for high
housing prices financed by mortgage debt. The proposal
moves only against homeowners - "the middle class" -
not absentee owners, commercial real estate investors,
corporate raiders or other prime bank customers.

The IRS permits mortgage interest to be tax-deductible
on the pretense that it is a necessary cost of doing
business. In reality it is a subsidy for debt
leveraging. This tax bias for debt rather than equity
investment (using one's own money) is largely
responsible for loading down the U.S. economy with
debt. It encourages corporate raiding with junk bonds,
thereby adding interest to the cost of doing business.
This subsidy for debt leveraging also is the
government's largest giveaway to the banks, while
causing the debt deflation that is locking the economy
into depression - violating every precept of the
classical drive for "free markets" in the 19th-century.
(A "free market" meant freedom from extractive rentier
income, leading toward what Keynes gently called
"euthanasia of the rentier." The Obama Commission
endows rentiers atop the economy with a tax system to
bolster their power, not check it - while shrinking the
economy below them.)

Table 7.11 of the National Income and Product Accounts
(NIPA) reports that total monetary interest paid in the
U.S. economy amounted to $3,240 billion in 2009.
Homeowners paid just under a sixth of this amount ($572
billion) on the homes they occupied. Mr. Obama's
commission estimates that removing the tax credit on
this interest would yield the Treasury $131 billion in
2012.

There is in fact a good logic for stopping this tax
credit. The mortgage-interest tax deduction does not
really save homeowners money. It is a shortsighted
illusion. What the government gives to "the homeowner"
on one hand is passed on to the mortgage banker by "the
market" process that leads bidders for property to
pledge the net available rental value to the banks in
order to obtain a loan to buy the home (or an office
building, or an entire industrial company, for that
matter.) "Equilibrium" is achieved at the point where
whatever rental value the tax collector relinquishes
becomes available to be capitalized into bank loans.

This means that what appears at first as "helping
homeowner" afford to pay mortgages turns out merely to
enable them to afford to pay more interest to their
bankers. The tax giveaway uses homebuyers as
"throughputs" to transfer tax favoritism to the banks.

It gets worse. By removing the traditional tax on real
estate, state, local and federal governments need to
tax labor and industry more, by transforming the
property tax onto income and sales taxes. For banks,
this is transmuting tax revenue into gold - into
interest. And as for the home-owning middle class, it
now has to pay the former property tax to the banker as
interest, and also to pay the new taxes on income and
sales that are levied to make up for the tax shift.

I support removing the tax favoritism for debt
leveraging. The problem with the Deficit Commission is
that it does not extend this reform to the rest of the
economy - to the commercial real estate sector, and to
the corporate sector.

The argument is made that "The rich create jobs." After
all, somebody has to build the yachts. What is missing
is the more general principle: Wealth and income
inequality destroy job creation. This is because beyond
the wealthy soon reach a limit on how much they can
consume. They spend their money buying financial
securities - mainly bonds, which end up indebting the
economy. And the debt overhead is what is pushing
today's economy into deepening depression.

Since the 1980s, corporate raiders have borrowed
high-interest "junk bond" credit to take over companies
and make money by stripping assets, cutting back
long-term investment, research and development, and
paying out depreciation credit to their financiers.
Financially parasitized companies use corporate income
to buy back their stock to support its price - and
hence, the value of stock options that financial
managers give themselves - and borrow yet more money
for stock buybacks or simply to pay out as dividends.
When the process has run its course, they threaten
their work force with bankruptcy that will wipe out its
pension benefits if employees do not agree to
"downsize" their claims and replace defined-benefit
plans with defined-contribution plans (in which all
that employees know is how much they pay in each month,
not what they will get in the end). By the time this
point has been reached, the financial managers have
paid themselves outsized salaries and bonuses, and
cashed in their stock options - all subsidized by the
government's favorable tax treatment of debt
leveraging.

The attempted raids on McDonalds and other companies in
recent years provide object lessons in this destructive
financial policy of "shareholder activists." Yet Mr.
Obama's Deficit Reduction Commission is restricting its
removal of tax favoritism for debt leveraging only for
middle class homeowners, not for the financial sector
across the board. What makes this particularly absurd
is that two thirds of homeowners do not even itemize
their deductions. The fiscal loss resulting from tax
deductibility of interest stems mainly from commercial
investors.

If the argument is correct (and I think it is) that
permitting interest to be tax deductible merely "frees"
more revenue to pay interest to banks - to capitalize
into yet higher loans - then why isn't this principle
even more applicable to the Donald Trumps and other
absentee owners who seek always to use "other peoples'
money" rather than their own? In practice, the "money"
turns out to be bank credit whose cost to the banks is
now under 1%. The financial-fiscal system is siphoning
off rental value from commercial real estate
investment, increasing the price of rental properties,
commercial real estate, and indeed, industry and
agriculture.

Alas, the Obama administration has backed the
Geithner-Bernanke policy that "the economy" cannot
recover without saving the debt overhead. The reality
is that it is the debt overhead that is destroying the
economy. So we are dealing with the irreconcilable fact
that the Obama position threatens to lower living
standards from 10% to 20% over the coming few years -
making the United States look more like Greece, Ireland
and Latvia than what was promised in the last
presidential election.

Something has to give politically if the economy is to
change course. More to the point, what has to give is
favoritism for Wall Street at the expense of the
economy at large. What has made the U.S. economy
uncompetitive is primarily the degree to which debt
service has been built into the cost of living and
doing business. Post-classical "junk economics" treats
interest and fees as payment for the "service" for
providing credit. But interest (like economic rent and
monopoly price extraction) is a transfer payment to
bankers with the privilege of credit creation. The
beneficiaries of providing tax favoritism for debt are
the super-rich at the top of the economic pyramid - the
2% whom Mr. Obama's tax giveaway will benefit by over
$700 billion.

If the present direction of tax "reform" is not
reversed, Mr. Obama will shed crocodile tears for the
middle class as he sponsors the Deficit Reduction
Commission's program of cutting back Social Security
and revenue sharing to save states and cities from
defaulting on their pensions. One third of U.S. real
estate already is reported to have sunk into negative
equity, squeezing state and local tax collection,
forcing a choice to be made between bankruptcy, debt
default, or shifting the losses onto the shoulders of
labor, off those of the wealthy creditor layer of the
economy responsible for loading it down with debt.

Critics of the Obama-Bush agenda recall how America's
Gilded Age of the late 19th century was an era of
economic polarization and class war. At that time the
Democratic leader William Jennings Bryan accused Wall
Street and Eastern creditors of crucifying the American
economy on a cross of gold. Restoration of gold at its
pre-Civil War price led to a financial war in the form
of debt deflation as falling prices and incomes
received by farmers and wage labor made the burden of
paying their mortgage debts heavier. The Income Tax law
of 1913 sought to rectify this by only falling on the
wealthiest 1% of the population - the only ones obliged
to file tax returns. Capital gains were taxed at normal
rates. Most of the tax burden therefore fell on
finance, insurance and real estate (FIRE) sector.

The vested interests have spent a century fighting
back. They now see victory within reach, by
perpetuating the Bush tax cuts for the wealthiest 2%,
phasing out of the estate tax on wealth, the tax shift
off property onto labor income and consumer sales, and
slashing public spending on anything except more
bailouts and subsidies for the emerging financial
oligarchy that has become Mr. Obama's "bipartisan"
constituency.

What we need is a Futures Commission to forecast just
what will the rich do with the victory they have won.
As administered by President Obama and his designated
appointees Tim Geithner and Ben Bernanke, their policy
is financially and fiscally unsustainable. Providing
tax incentives for debt leveraging - for most of the
population to go into debt to the rich, whose taxes are
all but abolished - is shrinking the economy. This will
lead to even deeper financial crises, employer defaults
and fiscal insolvency at the state, local and federal
levels. Future presidents will call for new bailouts,
using a strategy much like going to military war. A
financial war requires an emergency to rush through
Congress, as occurred in 2008-09. Mr. Obama's
appointees are turning the U.S. economy into a
Permanent Emergency, a Perpetual Ponzi Scheme requiring
injections of more and more Quantitative Easing to to
rescue "the economy" (Mr. Obama's euphemism for
creditors at the top of the economic pyramid) from
being pushed into insolvency. Mr. Bernanke's helicopter
flies only over Wall Street. It does not drop monetary
relief on the population at large.

"The Wurst of Obama: He's Carving the Middle Class into
Sausage Filler as a Super-Meal for the Rich."

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