She smiles

I like Michael Hudson. I think he's interesting. Dirk Bezemer too. I agree with a lot of what these guys say. But if I agreed with everything they say, then I would have no need to write -- no need to point out things that smell fishy.

So... as Tom Mathias says to Mared Rhys: "You ready?"


Bezemer & Hudson: Finance is not the economy: Reviving the conceptual distinction. A damn long article.

From the Abstract:

Conflation of real capital with finance capital is at the heart of current misunderstandings of economic crisis and recession. We ground this distinction in the classical analysis of rent and the difference between productive and unproductive credit. We then apply it to current conditions, in which household credit — especially mortgage credit — is the premier form of unproductive credit.

So it's my fault, is it? I bought a house. By definition -- by their definition, not mine -- that was "unproductive".

I have trouble with their story already, and I didn't even get out of the Abstract.

It's a dangerous thing when one group of people points to another group of people and says those are the bad people. Economic activity requires cooperation.


"How did we get so indebted," they ask, "without real wage and living standards rising, while cities, states, and entire nations are falling into default?"

Good question. My answer is simple: Economic policy encourages credit use and discourages the repayment of debt. That's how we got so indebted.

Bezemer and Hudson's answer is less Occam than mine:

The last quarter century’s macro-monetary management, and the theory and ideology that underpinned it, was lauded by leading macroeconomists ... Oliver Blanchard, Ben Bernanke, Gordon Brown, and others credited their own monetary policies for the remarkably low inflation and stable growth ... But it was precisely this period from the mid-1980s to 2007 that saw the fastest and most corrosive inflation in real estate, stocks, and bonds since World War II.

Nearly all this asset-price inflation was debt-leveraged. Money and credit were not spent on tangible capital investment to produce goods and non-financial services, and did not raise wage levels.

There ya go: unproductive debt. It comes with a story, but the moral of their story is "unproductive debt".


"This financial expansion," they write,

This financial expansion took the form more of rent extraction than of profits on production (Bezemer and Hudson 2012) — a fact missed in most analyses today (for a proposal, see Kanbur and Stiglitz 2015). This blind spot results from the fact that balance sheets, credit, and debt are missing from today’s models.

Well, far as I'm concerned, they are right but they quickly lose focus. "... a fact missed in most analyses today." Irrelevant. "This blind spot results from the fact that balance sheets, credit, and debt are missing from today’s models." Beyond irrelevant.

The trick is to simplify, not amplify.

"This financial expansion took the form more of rent extraction than of profits on production". Yeah, I know. I looked at that. (Time to update that old post. None of the graphs seem to work now.) The way I figured it, if you take the financial profits of nonfinancial corporations and put them with the profits of financial corporations, you get about $3 in financial profit for every dollar of profit on production. That's not good.

But I don't know why they call it "rent". The payment to finance is interest.


Bezemer and Hudson:

To explain how the bubble economy’s debt creation leads to debt deflation, we distinguish between two sets of dynamics: current production and consumption (GDP), and the Finance, Insurance and Real Estate (FIRE) sector.

Yup. But

It is as if there are “two economies,” which are usually conflated. They must be analyzed as separate but interacting systems, with real estate assets and household mortgage debt at the center of the bubble economy.

There it is again. See it? They are saying: You, it's you people with mortgages that are the problem... And you other guys, who want mortgages, you're part of the problem.

That's not how I see it. As I see it, policy is the problem.

In section three, therefore, we examine the significance of household debt. In today’s “rentier economy” this represents not real wealth, but a debt overhead.

Maybe. Maybe household debt has different "significance" in "today's 'rentier economy'" than it did in the economy before the 1980s. I don't know about the "significance" of debt. I focus on the cost of debt.

In section four, we discuss the pathologies arising from this overhead: loss of productivity and investment, with rising inequality and volatility.

And now we arrive at the crux of the matter. In section four, Bezemer and Hudson discuss the problems arising from the "debt overhead". But don't we know about that already?

People who already know debt is a problem already know about about "pathologies" arising from excessive debt. We don't need schooling in that. We need to talk about how we got into the mess. Because you're not going to be able to get out of the mess unless you know how you got into it. I mean, for example, if Bezemer and Hudson do not realize that the growth and excessive accumulation of debt was a direct result of policies that favor credit use and debt maintenance, then they are not likely to reach conclusions that call for a change in those policies.

Simplify.


In Hinterland, on Nexflix, s2e3, near the end, they've wrapped things up and they're ready to leave the scene. DCI Mathias walks over to the car, opens the door, looks at DI Rhys and says, "You ready?"

She smiles, just the slightest smile.