Friday, August 5, 2011

Michael Hudson Explains the Debt Ceiling "Debate"

Michael Hudson has written a very interesting, very informative article looking into the origin of "debt ceiling" legislation, its historical use, and the situation in the US. He points out some vary strange facts and provides an interpretation that I find to be compelling:
To begin with the most obvious question: If governments run up their debt in the process of carrying out programs that Congress already approved, why would Congress have yet another option to stop the government from following through on these authorized expenditures, by refusing to raise the debt ceiling?

The answer is obvious when one looks at why this fail-safe check was introduced in almost every country of the world. ...


It seems remarkable that Mr. Obama’s major focus on the debt ceiling is to warn that Social Security funding must be cut back, along with that of Medicare and other social programs. He went to far as to say that despite the fact that FICA wage set-asides have been invested in Treasury securities for over half a century, the government might not send out checks this week.

A radical double standard is at work for democracies. Wall Street investors certainly had no such worry. In fact, interest rates on long-term Treasury bonds actually have gone down over the past month, and especially over the last week. So institutional debt holders obviously expected to get paid. Only the Social Security savers were to be stiffed – or was Mr. Obama simply trying to threaten them, so as to depict himself as a hero coming in to save their Social Security by negotiating a Grand Bargain?

Wall Street had it right. There was no real crisis. Authorization to raise the public debt ceiling is not a proper occasion to discuss long-term tax policy. Since 1962 – just as the Vietnam War was starting to escalate – it has been raised 74 times. This averages out to about once every eight months. It is like going to a Notary Public – just to make sure that the President is not doing something wrong. Mr. Obama could have asked for a limited vote just on this, without riders. Never before have riders such as this been attached. And even more remarkably, there was no attempt to impose a rider restricting the Obama Administration from spending any more funds on Libya, without getting an official Congressional declaration of war.

Mr. Obama could have invoked the 14th Amendment to pay. He could have taken the proposal made by Scott Fullwiler and other UMKC economists for the Treasury to issue a few $1 trillion coins and pay the Fed for Treasury securities, to retire. But Mr. Obama steered right into the debate, turning it into a discussion of how to cut back Social Security and Medicare in the emerging U.S. class war, rather than over extending the Oil War to North Africa.

The first great victory for the financial sector in America’s domestic class war was the Bush “temporary” tax cuts on the wealthy. This aggression was not undone in order to restore budget balance. No temporary tax cuts were revoked, no loopholes closed. The burden of balancing the budget was pushed even further onto the Democratic Party’s own base: urban labor, racial and ethnic minorities, the Eastern and Western seaboards. Yet the Democrats split 95/95 on the vote to raise the debt ceiling by slashing social spending on their major voting constituency.

Voting constituency, but not campaign contributors. That looks like the key to how the debt crisis has unfolded. Although leading Democrats such as Maxine Walters Waters, Dennis Kucinich, Henry Waxman, Barney Frank, Edolphus Towns, Charles Rangel and Jerrold Nadler opposed it (and on the Republican side, Ron Paul, Michele Bachmann and Ben Quayle), much of the principled opposition has come from traditional Republicans. Nixon Assistant Treasury Secretary Paul Craig Roberts accused the deal as being too right-wing and favoring the wealthy to a degree threatening to bring on depression.

The essence of classical free market economics was to restrict Executive power – in an epoch when war-making power was the major abuse of national interests. Just as the lower house of bicameral legislatures had taken over the power to commit nations to permanent national debt – rather than royal debts that died with the kings, as were the norm before the 16th century – so parliaments asserted their rights to block warfare.

But now that finance is the new form of warfare – domestically, not externally – where is the power to constrain Treasury and Federal Reserve power to commit taxpayers to bail out financial interests at the top of the economic pyramid? The Fed and other central banks claim that their political “independence” is a “hallmark of democracy.” It seems to be rather a transition to financial oligarchy. And now that finance has joined with the oil industry, major monopolies and privatizers of the public domain, the need for some kind of Congressional oversight is as necessary as was parliamentary power over military spending in times past.

No discussion of this basic principle was voiced in the debt-ceiling debate. Even critics who voted (ostensibly) reluctantly – so as to provide plausible deniability to what no doubt will be their later condemnations of the deal when election time comes around – acted as if they were saving the economy. The reality is that there is now little hope of rebuilding infrastructure as the president promised. Cutbacks in federal revenue sharing will hit cities and states hard, forcing them to sell off yet more land, roads and other assets in the public domain to cover their budget deficit as the U.S. economy sinks further into depression. Congress has just added fiscal deflation to debt deflation, slowing employment even further.
Go read the whole article. Go find out why the debt ceiling was introduced in 1917 as the US entered WWI.

Michael Hudson points out the very strange fact that Social Security recipients were being told that their safeguarded debt with the US government wasn't safe while Wall Street was assured that its government debt was very, very safe. That's a two-tier system. The ultra-rich get special treatment. Their money is "more safe" than that of the bottom 90%. All the while Obama was talking of "shared sacrifice" and his "balanced" approach. It is all lies.

I think Hudson's worry of a "financial oligarchy" is well founded. Ultimately "the parliament" -- democracy -- is the only real tool that the people have to fight back against the financial oligarchy. Ignore the crazies calling for "revolution" and blood in the streets. As long as the democracy is functioning use it. If democracy is extinguished (like Hitler did in 1933), then taking to the streets is truly the only option left. But right now, the fight in the US has to focus on 2012 and the elections.

Meanwhile... here is more Michael Hudson:

Part 1:

Part 2:

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